<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SYSTEM SOFTWARE ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-3144515
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
500 WEST MADISON STREET, 32ND FLOOR
CHICAGO, ILLINOIS 60661
(312) 641-2900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. JOSEPH J. SKADRA
CHIEF FINANCIAL OFFICER
SYSTEM SOFTWARE ASSOCIATES, INC.
500 WEST MADISON STREET, 32ND FLOOR
CHICAGO, ILLINOIS 60661
(312) 641-2900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DOUGLAS R. NEWKIRK, ESQ. WILLIAM J. GRANT, JR., ESQ.
SACHNOFF & WEAVER, LTD. WILLKIE FARR & GALLAGHER
30 SOUTH WACKER DRIVE, 29TH FLOOR 153 EAST 53RD STREET
CHICAGO, ILLINOIS 60606 NEW YORK, NY 10022
(312) 207-1000 --------------- (212) 821-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Subordinated
Notes................. $103,500,000 100% $103,500,000 $31,364
- --------------------------------------------------------------------------------
Common Stock, $.0033 par
value (including
Purchase Rights)...... (3) None None None
- --------------------------------------------------------------------------------
</TABLE>
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(1) Includes $13,500,000 principal amount of Notes to be offered upon exercise
of the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457.
(3) The Common Stock (plus an indeterminate number of shares of Common Stock
issuable as a result of the antidilution provision of the Notes) is
issuable upon conversion of the Notes. Pursuant to Rule 457(i) under the
Securities Act of 1933, no registration fee is required for the Common
Stock because it will be issued for no additional consideration.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
$90,000,000 SUBJECT TO COMPLETION,
DATED JULY 14, 1997
[LOGO OF SSA]
[ ]% Convertible Subordinated Notes due 2002
-----------
The Notes to be issued by System Software Associates, Inc. ("SSA" or the
"Company") will be convertible at any time, unless previously redeemed, into
Common Stock, $.0033 par value per share (the "Common Stock"), of the Company
at a conversion price of $[ ] per share, subject to adjustment under
certain conditions. The Company's Common Stock is traded on the Nasdaq National
Market under the symbol "SSAX." On July 11, 1997, the last sale price of the
Common Stock as reported on the Nasdaq National Market was $7.25 per share.
Interest on the Notes will be payable semiannually on February 15 and August 15
of each year, commencing February 15, 1998.
The Notes will not be redeemable at the option of the Company prior to August
1, 2000. Thereafter, the Notes will be redeemable at the option of the Company,
in whole or in part, at any time and from time to time, at the redemption
prices set forth herein, plus accrued interest. Upon a Change in Control, as
defined herein, holders of Notes will have the right, subject to certain
conditions and restrictions, to require the Company to purchase all or part of
their Notes at the principal amount thereof plus accrued and unpaid interest.
See "Description of Notes."
The Notes will be unsecured and subordinate in right of payment to all
existing and future Senior Indebtedness, as defined herein, of the Company and
are effectively subordinate to all obligations of the subsidiaries of the
Company. The Indenture relating to the Notes does not restrict the incurrence
of Senior Indebtedness or other indebtedness of the Company or its
subsidiaries. See "Description of Notes--Subordination of Notes." As of June
30, 1997, the Company had approximately $86.0 million of Senior Indebtedness,
of which up to $83.8 million is expected to be repaid from the net proceeds to
the Company from the sale of the Notes and from a $47.0 million private
placement of junior, subordinated promissory notes and warrants by the Company
expected to close on or prior to the closing of the offering of the Notes. See
"Description of the Private Offering." The Company intends to apply to list the
Notes on the Nasdaq National Market under the symbol "SSAXH."
-----------
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.............. % % %
- -------------------------------------------------------------------------------
Total(4).............. $90,000,000 $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) See "Underwriting" for information relating to indemnification of the
Underwriters.
(3) Before deducting expenses payable by the Company estimated at $ .
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $13,500,000 principal amount of Notes on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------
The Notes are offered by several Underwriters, subject to prior sale, when,
as and if delivered to and accepted by them, and subject to the right of the
Underwriters to reject any order in whole or in part. It is expected that
delivery of the Notes will be made at the offices of Alex. Brown & Sons
Incorporated, Baltimore, Maryland on or about August , 1997.
Alex. Brown & Sons
Incorporated
THE DATE OF THIS PROSPECTUS IS AUGUST , 1997
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "intend" and "expect" and similar
expressions are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors." Prospective investors should consider carefully
these factors in addition to the other information set forth in this
Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE COMMON
STOCK ISSUABLE UPON THE CONVERSION OF THE NOTES. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING THE MARKET PRICE OF THE NOTES OR THE COMMON STOCK, OR BOTH, THE
PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriter's over-allotment option and all references to years or periods
therein are references to the Company's fiscal years ending October 31 or the
applicable periods therein.
THE COMPANY
System Software Associates, Inc. (the "Company" or "SSA") is a leading
provider of cost-effective business enterprise information systems to the
industrial sector worldwide. SSA's BPCS (Business Planning and Control System)
Client/Server product line provides business process re-engineering and
integration of an enterprise's operations, including multi-mode manufacturing
processes, supply chain management and global financial solutions. The BPCS
Client/Server product line delivers scaleability, interoperability and
reconfigurability in a comprehensive product suite to meet changing market
demands. The distributed object computing architecture ("DOCA") of BPCS
Client/Server provides the benefits of next generation technology in conformity
with industry standards. The Company markets, sells and services its products
to large- and intermediate-sized industrial sector firms through its own world-
wide sales organization and, to a lesser extent, through a network of over 100
independent software companies ("Affiliates") and major systems integrators.
The Company's BPCS Client/Server product line was initially developed for the
IBM AS/400. In 1993, the Company commenced a major development initiative to
create a version of its BPCS Client/Server product line for the Unix operating
system in an effort to address the non-AS/400 market. In late 1994, SSA began a
major effort to re-architect its product line for the client/server, object-
based environment. This effort resulted in the initial shipments of Version 6.0
of the BPCS Client/Server product line in April 1996. Since then, the Company
has released several upgrades, including the general release of the BPCS
Client/Server product line in September 1996, which have significantly improved
the performance and scaleability of the product while continuing to enhance
functionality. The Company believes that the most recent release of Version 6.0
offers high levels of functionality and performance and that the flexibility of
its DOCA architecture represents a significant advantage when compared to other
enterprise software applications. The BPCS Client/Server product line now
operates across a broad array of platforms, and the Company's Unix version of
the product operates on both Informix and Oracle databases. The BPCS
Client/Server product line has been installed in over 8,500 client sites
worldwide, the substantial majority of which comprise the Company's installed
base of AS/400 customers. The Company believes that it is the leading vender of
enterprise resource planning ("ERP") software for customers on the AS/400. The
target marketplace for the BPCS Client/Server product line is large- and
intermediate-sized industrial sector firms.
THE RECAPITALIZATION
Simultaneously with or prior to the issuance of the Notes offered hereby, the
Company intends to issue and sell $47.0 million in principal amount of junior,
subordinated promissory notes (the "Junior Notes"), together with associated
stock purchase warrants (the "Warrants"), in a private placement (the "Private
Offering") to a group of institutional investors including Bain Capital and JMI
Equity Fund III, L.P. (collectively, the "Private Investors"). The closing of
the offering of Notes is conditioned on the successful completion of the
Private Offering. The issuance and sale of the Junior Notes and the Warrants
together with the issuance and sale of the Notes offered hereby are referred to
collectively herein as the
3
<PAGE>
"Recapitalization." The aggregate net proceeds to the Company from the
Recapitalization are expected to be approximately $131.7 million ($144.7
million if the Underwriters' over-allotment option is exercised in full). The
Recapitalization is designed to increase the Company's liquidity to enable it
to further the development, marketing and sale of its recently released Version
6.0 BPCS Client/Server product line. In connection with the Private Offering,
the Company's Board of Directors will be expanded from four to seven members,
with two of the new directors to be selected by the Private Investors in their
sole discretion, and a third new, independent director to be mutually selected
by the Private Investors and the current Board members. In addition, the
Company has agreed to recruit and hire a new Chief Operating Officer/President.
In addition, the Company intends to enter into a new credit facility for up to
$30.0 million (the "New Credit Facility").
4
<PAGE>
THE OFFERING
Securities Offered.............. $90,000,000 aggregate principal amount of
% Convertible Subordinated Notes due 2002
(the "Notes") ($103,500,000 principal amount
if the over-allotment option is exercised in
full).
Interest Payment Dates.......... February 15 and August 15 of each year,
beginning February 15, 1998.
Maturity Date................... August 1, 2002.
Conversion...................... Convertible at the option of the holder of
each Note, in whole or in part, into shares
of Common Stock, $0.0033 par value per share,
of the Company (the "Common Stock") at any
time, unless previously redeemed or
repurchased, at a conversion price of $
per share, subject to adjustment in certain
events. See "Description of Notes--Conversion
of Notes."
Optional Redemption............. The Notes are not redeemable at the option of
the Company prior to August 1, 2000.
Thereafter, the Notes are redeemable at the
option of the Company, in whole or in part at
any time, at the prices specified herein,
together with accrued and unpaid interest.
See "Description of Notes--Redemption of
Notes at the Option of the Company."
Repurchase at Option of Holders
Upon a Change in Control ......
In the event that a Change in Control (as
defined herein) occurs, each holder of a Note
may require the Company to repurchase all or
a portion of such holder's Notes at 100% of
the principal amount thereof plus accrued and
unpaid interest to the purchase date. See
"Description of Notes--Redemption of Notes at
the Option of Holders Upon a Change in
Control."
Subordination................... The Notes are subordinate to all existing and
future Senior Indebtedness (as defined
herein) of the Company and effectively
subordinated to all liabilities of the
Company's subsidiaries. See "Description of
Notes--Subordination of Notes." As of June
30, 1997, approximately $86.0 million of
Senior Indebtedness was outstanding.
Following the Recapitalization and the
application of the net proceeds therefrom, it
is expected that approximately $2.1 million
of Senior Indebtedness will be outstanding,
assuming that the holder of the Existing
Subordinated Debt elects repayment in lieu of
conversion into Common Stock. In addition,
under the New Credit Facility, the Company
will be able to incur up to approximately
$30.0 million in additional Senior
Indebtedness. See "Use of Proceeds" and
"Capitalization." The Indenture (as defined
herein) will not restrict the incurrence of
additional Senior Indebtedness or other
indebtedness by the Company or by any of its
subsidiaries (with the exception of certain
restrictions on the terms of the Junior
Notes). See "Description of Notes."
5
<PAGE>
Use of Proceeds................. The Company will use approximately $71.8
million of the net proceeds of the
Recapitalization to repay all amounts
outstanding under (1) its multi-bank credit
facility (the "Existing Credit Facility"),
under which approximately $46.0 million in
principal was outstanding as of June 30, 1997
and (2) the Company's Senior Secured Notes
due November 1, 1997 (the "Senior Notes"),
under which approximately $25.8 million in
principal was outstanding on June 30, 1997.
In addition, upon the closing of the
Recapitalization, the Company intends to give
notice to the holder of the Company's $12.0
million floating rate convertible note due
2000 (the "Existing Subordinated Debt") to
redeem such debt at 100% of the principal
amount thereof on the thirtieth day following
such notice. The Company may not be required
to apply $12.0 million of the net proceeds of
the Recapitalization to repay the Existing
Subordinated Debt if the holder of the
Existing Subordinated Debt elects prior to
the redemption date to convert the Existing
Subordinated Debt into Common Stock in lieu
of such repayment. See "Use of Proceeds." The
remaining net proceeds of the
Recapitalization will be used by the Company
for general corporate purposes, including but
not limited to, capital expenditures and
increasing working capital.
Trading......................... The Company intends to apply to list the
Notes on the Nasdaq National Market under the
symbol "SSAXH". The Company's Common Stock is
traded on the Nasdaq National Market under
the symbol "SSAX."
Risk Factors.................... An investment in the Notes involves a high
degree of risk. See "Risk Factors" for a
discussion of certain factors that should be
considered in evaluating an investment in the
Notes.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, APRIL 30,
---------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees........... $178.5 $187.9 $229.7 $250.0 $226.7 $100.0 $130.2
Client services and
other................. 50.3 75.5 94.6 124.1 114.1 59.1 60.0
------ ------ ------ ------ ------ ------ ------
Total revenues........ 228.8 263.4 324.3 374.1 340.8 159.1 190.2
Costs and expenses...... 187.8 227.3 307.9 333.0 399.6 169.2 191.0
------ ------ ------ ------ ------ ------ ------
Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (10.1) (0.8)
Income (loss) before
income taxes and
minority interest...... 41.6 35.7 15.4 40.9 (51.4) (10.9) (7.8)
Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $ (6.9) $ (5.0)
Earnings (loss) per
share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $(0.16) $(0.12)
Weighted average common
and equivalent shares
outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 42.6
Ratio of earnings to
fixed charges (1)...... 15.3 10.4 3.7 6.5 -- (2) -- (2) -- (2)
Pro forma ratio of
earnings to fixed
charges (3)............ -- (3) -- (3)
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1997
-------------------
AS
ACTUAL ADJUSTED (4)
------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents..... $20.4 $67.8
Working capital.......... 8.5 120.0
Intangibles:
Software costs, net..... 93.2 93.2
Cost in excess of net
assets of acquired
businesses, net........ 21.3 21.3
----- -----
Total intangibles........ 114.5 114.5
Total assets............. 382.4 427.6
Short-term borrowings and
Senior Notes payable.... 71.8 --
Long-term obligations.... 14.1 [ ]
Total stockholders'
equity.................. 113.7 [ ]
</TABLE>
- --------
(1) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges) by fixed charges (interest expense and the portion of rental
expense which represents interest).
(2) Actual earnings (loss) available for fixed charges of ($51.4 million),
($10.9 million), and ($7.8 million) were inadequate to cover fixed charges
of $12.7 million, $5.2 million and $11.5 million for the year ended October
31, 1996, and the six months ended April 30, 1996 and April 30, 1997,
respectively.
(3) The pro forma ratio of earnings (loss) to fixed charges assumes the
Recapitalization and use of proceeds, as described herein, occurred on
November 1, 1995 for the ratio for the year ended October 31, 1996, and on
November 1, 1996 for the ratio for the six months ended April 30, 1997. In
addition, the ratios assume the interest rate on the Notes of 7.5%, the net
proceeds to the Company invested in interest bearing accounts averaging
5.0% interest on an annual basis and the estimated fair value of the
Warrants of [$ ], which value will be amortized as interest expense over
the term of the Junior Notes. Pro forma earnings (loss) available for fixed
charges of [$ ] and [$ ] were inadequate to cover pro forma fixed
charges of [$ ] and [$ ] for the year ended October 31, 1996 and
the six months ended April 30, 1997, respectively.
(4) Adjusted to reflect the Recapitalization, the application of the estimated
net proceeds therefrom (assuming that, following notice by the Company to
redeem the Existing Subordinated Debt, the holder of the Existing
Subordinated Debt does not elect prior to the redemption date to convert
such debt into Common Stock in lieu of repayment), after deducting
underwriting discounts and commissions and other estimated expenses of the
Recapitalization, the estimated fair value of the Warrants as [$ ] and
the writeoff of deferred charges and fees related to the Existing
Subordinated Debt, Existing Credit Facility and Senior Notes.
This Prospectus includes product names, trade names and trademarks of System
Software Associates, Inc. and its subsidiaries and other companies. BPCS(R),
BPCS Client/Server(TM), DOCA(TM) and AgileLink 2000(TM) are trademarks of the
Company.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating an investment in the
Notes offered by this Prospectus:
NET LOSSES; UNCERTAINTY OF FUTURE RESULTS
Although the Company had an operating profit for the quarter ended April 30,
1997, the Company has experienced operating and net losses in 1996 and in the
six months ended April 30, 1997. There can be no assurance that the Company
will not continue to incur operating and net losses. The Company's future
operating results will depend upon a number of business factors, including the
other factors discussed in these "Risk Factors," as well as general economic
conditions. Furthermore, prior to a given year or other fiscal period, the
Company hires sales and product development personnel and makes other fixed
cost decisions which will result in increased expenses in such year or other
period, based upon anticipated revenues for such year or other period. Due to
the seasonality and concentration of the Company's revenues at the end of
fiscal periods (particularly the fourth quarter) and the Company's cost
structure, if revenue targets are not met, any or all of the Company's
businesses, operating results and financial condition could be materially
adversely affected. See "--Variability of Quarterly Operating Results;
Seasonality."
LEVERAGE
In connection with the Recapitalization, the Company will incur
approximately $138.4 million of additional indebtedness, resulting in a ratio
of the Company's total debt to equity (expressed as a percentage) of
approximately [ ]% as of April 30, 1997, on a pro forma basis (after giving
effect to the Recapitalization and the application of $83.8 of the proceeds
therefrom to repay borrowings under the Company's Existing Credit Facility and
Senior Notes, and assuming repayment of the Existing Subordinated Debt).
Annual interest expense on this debt is estimated to be approximately $[ ]
million, including an estimated annual value of $[ ] million of non-cash
interest representing the amortization of the value assigned to the Warrants.
The Company will also be able to incur up to approximately $30.0 million in
additional indebtedness under the New Credit Facility. See "Description of the
Private Offering." In addition, as of the date hereof, the Company has
guaranteed or is directly liable for payments under capital leases payable
over lease terms ranging from one to three years and aggregating approximately
$2.1 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could (i) adversely affect its
ability to obtain additional financing, (ii) make it more vulnerable to
general economic and market conditions, industry downturns and competitive
pressures, (iii) impair its ability to fund research and development and
respond to technological changes, and (iv) result in the dedication of a
significant amount of any cash generated from operating activities to the
payment of debt service and other financing obligations, thereby reducing
funds available for operations, its existing markets and future business
opportunities. The Company's ability to meet its debt service and other
obligations will be dependent on the Company's future performance which will
be subject to financial, business and other factors affecting operations of
the Company, many of which are beyond its control.
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment in full to
all existing and future Senior Indebtedness (as defined herein) of the
Company. As a result of such subordination, in the event of the Company's
liquidation or insolvency, payment default with respect to Senior
Indebtedness, a covenant default with respect to Senior Indebtedness, or upon
acceleration of the Notes due to an event of default, the assets of the
Company will be available to pay obligations on the Notes only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes then
outstanding.
8
<PAGE>
The Notes are obligations exclusively of the Company. Since the operations
of the Company are partially conducted through subsidiaries, the cash flow and
the consequent ability of the Company to service debt, including the Notes,
are partially dependent upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon loans or other payments of funds by
those subsidiaries to, the Company. See "--Risks From International
Operations." The payment of dividends and the making of loans and advances to
the Company by its subsidiaries may be subject to statutory or contractual
restrictions, are dependent upon the earnings of those subsidiaries and are
subject to various business considerations. Any right of the Company to
receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in
which case the claims of the Company would still be subordinate to any
security interests in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that held by the Company.
As of June 30, 1997, the Company had approximately $85.9 million of
indebtedness and other liabilities that would have constituted Senior
Indebtedness, including approximately $46.0 million of borrowings outstanding
under the Existing Credit Facility, approximately $26.0 million of Senior
Notes and $12.0 million under the Existing Subordinated Debt. The Company
intends to use a portion of the proceeds from the Recapitalization to repay
all amounts outstanding under the Senior Notes and the Existing Credit
Facility. In addition, upon closing of the Recapitalization, the Company
intends to give notice to the holder of approximately $12.0 million of
Existing Subordinated Debt to redeem such debt, which debt will either be
redeemed by the Company with proceeds from the Recapitalization or converted
into Common Stock at the option of the holder of such debt. See "Use of
Proceeds." In connection with the Recapitalization, the Company expects to
enter into the New Credit Facility under which the Company may incur up to
$30.0 million in Senior Indebtedness. A substantial portion of existing Senior
Indebtedness is secured by a lien on substantially all the assets of the
Company and the stock of certain of its subsidiaries and the New Credit
Facility may be secured to a similar extent. The Indenture does not prohibit
or limit the incurrence of Senior Indebtedness or the incurrence of other
indebtedness and other liabilities by the Company or its subsidiaries. The
incurrence of additional indebtedness and other liabilities by the Company or
its subsidiaries could adversely affect the Company's ability to pay its
obligations on the Notes. To the extent permitted by the terms of the Warrants
and the Junior Notes, the Company expects from time to time to incur
additional indebtedness and other liabilities, including Senior Indebtedness,
and also expects that its subsidiaries will from time to time incur additional
indebtedness and other liabilities. See "Description of Notes--Subordination
of Notes."
PAYMENT OF JUNIOR NOTES PRIOR TO NOTES UNDER CERTAIN CIRCUMSTANCES; TERMS
FAVORABLE TO HOLDERS OF JUNIOR NOTES AND WARRANTS
Although the Junior Notes are legally subordinate in right of payment to the
Notes, the terms of the Junior Notes permit the payment of the Junior Notes
prior to the Notes at the option of the Company at any time after the first
anniversary of the issuance of the Junior Notes; provided that (i) such
payments are made by the Company with the proceeds of the issuance of (y) debt
having a lower interest rate than the Junior Notes and a maturity date not
earlier than the maturity date of the Notes or (z) equity capital and (ii) the
average trading price of the Common Stock during the 60 trading days
immediately preceding the second business day prior to the date of repurchase
is at least 130% of the Conversion Price (as defined herein). Such refinancing
debt would likely constitute Senior Indebtedness under the Indenture, and
therefore be senior in right of payment to the Notes.
The Indenture contains limited covenants restricting the activities of the
Company. The Purchase Agreement relating to the Junior Notes, on the other
hand, contains significant covenants which restrict the actions of the
Company, including, but not limited to, the ability of the Company to incur
additional
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indebtedness (other than the Notes, the New Credit Facility and certain other
de minimus exceptions), to pay dividends or make other payments with respect
to the Company's capital stock, and to enter into transactions with
affiliates. See "Description of the Private Offering--Junior Note Covenants."
Such covenants will give the Private Investors the ability to control certain
actions of the Company, as well as the ability to negotiate terms, in
circumstances that may not be available to the holders of the Notes. The
holders of the Junior Notes may also have significant leverage over the
Company in the event of a breach, or the threat of a potential breach, by the
Company of the covenants contained in the Purchase Agreement for the Junior
Notes, because such breach may constitute a default under the Purchase
Agreement, but not necessarily an Event of Default under the Indenture absent
an acceleration of the Junior Notes by the holders thereof.
COMPETITION
The ERP application software market is highly competitive, rapidly changing,
and significantly affected by new product introductions and other market
activities of industry participants. The Company's BPCS Client/Server product
line is targeted at the market for open systems, client/server ERP software
solutions, and the IBM AS/400 ERP market. The Company's current and
prospective competitors offer a variety of products and solutions to address
these markets. The Company's primary competition comes from a large number of
independent software vendors and other sources including (i) companies
offering products that run on AS/400 and other mid-range computers, including
J.D. Edwards and JBA, and (ii) companies offering products that run on Unix-
based systems in a client/server environment such as Oracle Corporation
(Oracle), Baan Company N.V. (Baan) and SAP AG. The Company also faces
competition from a variety of other vendors of ERP software, including QAD. In
addition, the Company faces indirect competition from suppliers of custom-
developed business application software that have focused mainly on
proprietary mainframe- and minicomputer-based systems with highly customized
software, such as the systems consulting groups of major accounting firms and
systems integrators. The Company also faces indirect competition from
internally developed, proprietary systems developed by the internal MIS
departments of large organizations.
Some of the Company's competitors have longer operating histories, greater
financial, technical, marketing and other resources than the Company, greater
name recognition, and a larger installed base of customers in the Unix-based,
client/server ERP market. Further, because the Company's product runs on
relational database management systems (RDBMS) and Oracle has the largest
market share for RDBMS software, Oracle may have a competitive advantage in
selling its application products to its RDBMS customer base. Furthermore, as
the client/server computing market develops, companies with significantly
greater resources than the Company could attempt to increase their presence in
the ERP market by acquiring or forming strategic alliances with competitors of
the Company.
In the market for client/server ERP systems, the Company and its customers
rely on a number of systems consulting and systems integration firms for
implementation and other customer support services, as well as recommendations
of the Company's product during the evaluation stage of the purchase process.
Many of these third parties have similar, and usually more established,
relationships with the Company's principal competitors. If the Company is
unable to develop and retain effective, long-term relationships with a
sufficient number of these third parties, the Company's competitive position
could be materially adversely effected. See "--New Entrant into Complex Sales
Environment."
The Company believes that its future strength will depend in part on its
ability to expand sales of the BPCS Client/Server product line. Many of the
Company's competitors currently offer applications products for client/server
systems. There can be no assurance that the Company will be able to compete
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successfully with existing or new competitors or that competition will not have
a material adverse effect on the Company's business, operating results or
financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's revenues and operating results have varied, sometimes
substantially, from quarter to quarter. The Company anticipates that its
revenues in general, and its license fee revenues, in particular, will continue
to fluctuate and will be relatively difficult to forecast due to a number of
reasons, many of which are beyond the Company's control. The factors affecting
these fluctuations include (i) delays in sales due to the relatively long sales
cycles for the Company's BPCS Client/Server product line; (ii) the size, timing
and complexity of individual license transactions; (iii) customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors; (iv) market acceptance of new or enhanced
versions of the Company's product and products that operate with the Company's
product; (v) the timing of the introduction of new product functionality by the
Company or its competitors; (vi) customer cancellation of major planned
software implementation programs; (vii) changes in operating expenses; (viii)
the publication of opinions about the Company, its products and technology by
industry analysts; (ix) foreign currency exchange rate fluctuations; (x)
changes in pricing policies by the Company or its competitors; (xi) delays in
localizing the Company's product for new markets; and (xii) general economic
factors.
A significant portion of the Company's revenue in any quarter may be derived
from a limited number of large, non-recurring license sales which may cause
significant variations in quarterly license fees. The Company also believes
that the purchase of its product is relatively discretionary and generally
involves a significant commitment of a customer's capital resources. Therefore,
a downturn in any potential customer's business could result in order
cancellations which could have a significant adverse impact on the Company's
revenue and quarterly results. Moreover, declines in general economic
conditions could precipitate significant reductions in corporate spending for
information technology, which could result in delays or cancellations of orders
for the Company's product line.
The Company has experienced a seasonal pattern in its operating results, with
the fourth quarter typically having the highest revenues and operating results.
The Company believes that fourth fiscal quarter revenues are positively
impacted by the Company's sales compensation plans. This factor, which the
Company believes is common in the computer software industry, typically results
in first quarter revenues in any year being lower than revenues in the
immediately preceding fourth quarter. In addition, the Company's European
operations generally provide lower revenues during the summer months as a
result of the generally reduced economic activity in Europe during such time.
This seasonal factor could materially adversely affect third quarter revenues.
The Company has also historically recognized a substantial portion of its
revenue from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in a particular quarter. If sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the Company
is unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, a lost or delayed sale could have a
material adverse effect on the Company's quarterly operating results. To the
extent that significant sales occur earlier than expected, operating results
for subsequent quarters may be adversely affected. The Company has also
historically operated with little backlog because its products are generally
shipped as orders are received. As a result, revenue from license fees in any
quarter is substantially dependent on orders booked and shipped in that
quarter.
Based upon the factors described above, the Company believes that its
quarterly revenue and operating results are likely to vary significantly in the
future, that period-to-period comparisons of its results of operations are not
necessarily meaningful and that, as a result, such comparisons should not be
relied upon as indications of future performance. Moreover, although the
Company's revenue has
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generally increased in recent periods, there can be no assurance that the
Company's revenue will grow in future periods, at past rates or at all, or that
the Company will be profitable on a quarterly or annual basis. In future
periods, the Company's operating results may be below the expectations of stock
market analysts and investors. In such event, the price of the Common Stock
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results."
RISKS ASSOCIATED WITH LENGTHY SALES CYCLE
Because the license of the Company's BPCS Client/Server product line
generally involves a significant capital commitment by the customer (ranging
from approximately $100,000 to tens of millions of dollars), the sales cycle
associated with a customer's purchase of BPCS Client/Server product line is
generally lengthy (with a typical duration between three and 18 months), varies
from customer to customer and is subject to a number of significant risks over
which the Company has little or no control. These risks include customers'
budgetary constraints, timing of budget cycle, concerns about the introduction
of new products by the Company or its competitors and general economic
downturns which can result in delays or cancellations of information systems
investments. Due in part to the strategic nature of the BPCS Client/Server
product line, potential customers are typically cautious in making product
acquisition decisions. The decision to license the BPCS Client/Server product
line generally requires the Company to provide a significant level of education
to prospective customers regarding the uses and benefits of the BPCS
Client/Server product line, and the Company must frequently commit substantial
presales support resources. The Company is also sometimes reliant on third
parties for implementation and systems integration services, which may cause
sales cycles to be lengthened or result in the loss of sales. The uncertain
outcome of the Company's sales efforts and the length of its sales cycles could
result in substantial fluctuations in operating results. If sales forecasted
from a specific customer for a particular quarter are not realized in that
quarter, then the Company is unlikely to be able to generate revenue from
alternative sources in time to compensate for the shortfall. As a result, and
due to the relatively large size of some orders, a lost or delayed sale could
have a material adverse effect on the Company's quarterly operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ADVERSE LEGAL PROCEEDINGS
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 state court action alleges damages to persons who
purchased the Company's Common Stock during the period from November 21, 1994
through January 7, 1997 arising from alleged violations of the Illinois
securities laws and associated statutory and common law. The federal actions
allege damages to persons who purchased the Company's Common Stock during the
period from August 22, 1994 through January 7, 1997 arising from alleged
violations of the federal securities laws and associated common laws. The
lawsuits name the Company and several of its officers and directors as
defendants, and allege violations of securities laws, fraud and negligence,
stemming from circumstances which resulted in the restatement of the Company's
financial statements for 1994 and 1995. See Note 2 of Notes to the Company's
Consolidated Financial Statements for the years ended October 31, 1994, 1995
and 1996. The complaints do not specify the amounts of damages sought.
The Company has executed a settlement agreement with the class plaintiffs in
the Illinois state court action titled Steinberg v. SSA, 97 CH 287 (the
"Settlement"). The Company has agreed to pay $1.7 million in cash and the
director and officer defendants collectively have agreed to contribute 100,000
shares of Common Stock. The presiding judge in the Illinois case granted
preliminary approval to the Settlement on June 27, 1997. A final hearing on the
Settlement is scheduled for September 5, 1997. There can be no
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assurance that the Settlement will be approved, nor can there be any assurance
that the Settlement, if approved, will legally bar the federal claims
described above. In addition, even if the Settlement bars the federal claims
described above, because the class period of the federal claim is slightly
larger than the class period of the state claim, the Settlement may not result
in the dismissal of the federal action. The failure to achieve a dismissal of
any of these actions or the failure to settle them on sufficiently
advantageous terms could have a material adverse effect on the business,
operating results and financial condition of the Company.
RAPID TECHNOLOGICAL CHANGE; PRODUCT ROLLOUT DELAYS
The market for the Company's software product is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and preferences, and
frequent new product introductions and enhancements. Customer requirements for
products can change rapidly as a result of innovations or changes within the
computer hardware and software industries, the introduction of new products
and technologies (including new hardware platforms and programming languages)
and the emergence, evolution or widespread adoption of industry standards. For
example, increasing commercial use of the Internet may give rise to new
customer requirements and new industry standards. The Company's future success
will depend upon its ability to continue to enhance its current product and to
develop and introduce new product functionality that keeps pace with
technological developments, satisfies increasingly sophisticated customer
requirements and achieves market acceptance. In particular, the Company must
continue to anticipate and respond adequately to advances in RDBMS software
and desktop computer operating systems such as Windows. There can be no
assurance that the Company will be successful in developing and marketing on a
timely and cost-effective basis fully functional product enhancements or new
product functionality that respond to technological advances by others, or
that its new product functionality will achieve market acceptance.
As a result of the complexities inherent in both the RDBMS and client/server
environments and the broad functionality and performance demanded by customers
for ERP products, major new product enhancements and new product functionality
can require long development and testing periods to achieve market acceptance.
The Company has, in the past, experienced delays, as is common throughout the
software industry, in the scheduled introduction of new and enhanced product
functionality. In addition, complex software programs such as those offered by
the Company may contain undetected errors or "bugs" when first introduced or
as new versions are released that are discovered only after the product has
been installed and used by customers. There can be no assurance that errors
will not be found in future releases of the Company's software, or that any
such errors will not continue to impair the market acceptance of the product
and adversely affect the Company's business, operating results and financial
condition.
Problems encountered by customers implementing new releases or with
performance of the Company's product can be expected to occur, given the
inherent complexities of its client/server based product. In April 1996, the
Company first introduced the early release of Version 6.0 of its BPCS
Client/Server product line to early adapter customers. Since that time, early
adopters of Version 6.0 have experienced difficulties in achieving full
functionality and performance with respect to some aspects of Version 6.0.
Since the initial release of Version 6.0 to early adopters, the Company has
spent a significant amount of time, effort and expense in intensive
collaborative efforts with the early adopters of Version 6.0 to increase
functionality and performance of the Version 6.0 product line. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
DEPENDENCE ON AS/400 USERS
Although the Company has developed new versions of its BPCS Client/Server
product line for the open systems marketplace, a substantial portion of the
Company's revenues relate to licenses of BPCS Client/Server for IBM AS/400
installations in the industrial sector. In fiscal 1996, over 75% of the
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Company's software license fee revenue was derived from the AS/400 market.
Therefore, even as the Company continues to innovate and market versions of
the BPCS Client/Server product line for the open systems environment, a
substantial portion of the Company's future revenues will be derived from and
will be dependent upon the continued widespread use of the AS/400 and the
continued support of IBM's AS/400 and proprietary DB/2 database system) by
IBM. There can be no assurance that the Company's customers will continue to
use or that IBM will continue to support the AS/400 and DB/2. The Company will
be required and intends to continue to devote substantial resources to
supporting its installed base of AS/400 customers and the versions of the BPCS
Client/Server product line used by them. In order to retain its AS/400
customers, the Company may be required to adapt its BPCS Client/Server product
line to conform to any changes made in the AS/400 operating system in the
future. The Company's inability to adapt to future changes in the AS/400
and/or DB/2 systems, or delays in doing so, could have a material adverse
effect on the Company's business, operating results and financial condition.
NEW ENTRANT INTO COMPLEX SALES ENVIRONMENT
The Company has only recently developed and begun to market its BPCS
Client/Server product line for Unix operating environments. The market for
open systems-based applications differs in many respects from the market for
AS/400-based applications, which historically had been the Company's exclusive
focus. Among other things, the Unix market is characterized by numerous
database vendors, hardware vendors, systems integrators and consultants, all
of whom can influence the purchase of enterprise applications such as those
marketed by the Company. There can be no assurance that the Company's sales
and marketing efforts will be successful in this highly complex sales
environment. The Company's future success will depend in part upon the
productivity of its sales and marketing force and the ability of the Company
to attract, integrate, train, motivate and retain new sales and marketing
personnel. Competition for sales and marketing personnel in the software
industry is intense. There can be no assurance that the Company's recent and
planned expenses and personnel decisions in sales and marketing will
ultimately prove to be successful or that the incremental revenue generated
will exceed the significant incremental costs associated with these efforts.
In addition, there can be no assurance that the Company's sales and marketing
organization will be able to compete successfully against the significantly
more extensive and better funded sales and marketing operations of many of the
Company's current and potential competitors. The Company's inability to
implement successful sales and marketing efforts in the Unix market could have
a material adverse effect on the Company's business, operating results and
financial condition.
In the Unix-based marketplace, the Company relies on a number of consulting
and systems integration firms to enhance its marketing, sales and customer
support efforts, particularly with respect to implementation and support of
its product as well as sales lead generation and assistance in the sales
process. As the Company continues to implement its strategy of focusing on the
licensing of its products in the Unix-based marketplace, the Company will
become increasingly dependent upon third-party implementation providers for
product implementation, end user training and sales support. Although the
Company seeks to maintain close relationships with these firms, many such
firms have similar, and in some cases more established, relationships with the
Company's principal competitors. There can be no assurance that these third-
party service firms will provide the level and quality of service required to
meet the needs of the Company's end users, nor can there be any assurance that
such service firms will recommend the Company's product when assisting their
clients in product selection decisions. Failure by the Company to maintain its
existing relationships with such third parties or the failure to maintain
their support for the Company's products, could materially and adversely
affect the Company's UNIX marketing efforts and could have a material adverse
affect on the Company's business, operating results and financial condition.
RISKS FROM INTERNATIONAL OPERATIONS
The Company currently operates directly and through its Affiliates in over
90 countries. In the fiscal year ended October 31, 1996 and in the six months
ended April 30, 1997, approximately 61% and 68%,
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respectively, of the Company's revenue was generated from sales outside of the
United States. The Company's operations are subject to risks inherent in
international business activities, including, in particular, general economic
conditions in each country, overlap of different tax structures, management of
an organization spread over various countries, exposure to currency
fluctuations, unexpected changes in regulatory requirements, compliance with a
variety of foreign laws and regulations, and longer accounts receivables
payment cycles in certain countries. Other risks associated with international
operations include import and export licensing requirements, trade restrictions
and changes in tariff rates. There can be no assurance that the geographic,
time zone, language and cultural differences between the Company's
international personnel and operations will not result in problems that
materially adversely affect the Company's business, operation results and
financial condition. The Company has in the past experienced and may continue
to experience operating losses in one or more regions of the world for one or
more periods. The Company's ability to manage such operational fluctuations and
the failure to sustain or increase international revenue could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company generates a significant portion of its revenues and expenses from
foreign operations in currencies other than United States dollars. As a result,
fluctuations in the values of the respective currencies in which the Company
generates revenue and incurs expense could materially adversely affect its
business, operating results and financial condition. While the Company may in
the future change its pricing practices, an increase in the value of the United
States dollar relative to foreign currencies could make the Company's products
more expensive and, therefore, less competitive in other markets. Fluctuations
in currencies relative to the United States dollar will affect period-to-period
comparisons of the Company's reported results of operations. Due to the
constantly changing currency exposures and the volatility of currency exchange
rates, there can be no assurance that the Company will not experience currency
losses in the future, nor can the Company predict the effect of exchange rate
fluctuations upon future operating results. The Company does not currently
undertake hedging transactions and has limited resources to cover its currency
exposure. The Company may choose to hedge a portion of its currency exposure in
the future as it deems appropriate. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INABILITY TO ENFORCE THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of the protections provided under
applicable copyright and trade secret laws, as well as on confidentiality
procedures and licensing arrangements, to establish and protect its rights in
its software. Despite the Company's efforts, it may be possible for
unauthorized third parties to copy certain portions of the Company's product or
to reverse engineer or obtain and use information that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position and could
have a material adverse effect on the Company's business, operating results and
financial condition.
CONTROL BY EXISTING STOCKHOLDER; POTENTIAL CONTROL BY PRIVATE INVESTORS
Roger E. Covey, Chairman and Chief Executive Officer of the Company,
currently beneficially owns approximately 31.3% of the Company's outstanding
Common Stock (approximately % on a fully-diluted basis after giving effect
to the Recapitalization). Accordingly, Mr. Covey may have the effective power
to influence significantly the outcome of matters submitted for stockholder
action, including the election of members of the Company's Board and the
approval of significant change in control transactions, and may be deemed to
have control over the management and affairs of the Company. This significant
equity interest in the Company may have the effect of making certain
transactions more difficult absent the support of Mr. Covey and may have the
effect of delaying or preventing a change in control of the Company.
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The Private Investors will have the right to elect two new directors to the
Board of Directors at their sole discretion and the Company will designate a
third new, independent director mutually acceptable to the Private Investors.
In addition, the holders of the Warrants will have the right under certain
circumstances, including upon certain events of default, to elect a majority
of the members of the Board and to control the voting of Mr. Covey's stock.
These rights will operate to give the holders of the Warrants effective
control over the management and affairs of the Company under certain
circumstances, will have the effect of making certain transactions more
difficult absent the consent of the holders of a majority of the outstanding
Warrants, and may have the effect of delaying or preventing a change in
control of the Company. See "Description of the Private Offering--Warrants--
Control Rights."
In addition, for so long as the Private Investors hold Warrants representing
the right to purchase in excess of 5% of the Company's outstanding Common
Stock, the Company may not take certain actions without the prior written
consent of the holders of a majority in number of the Warrants, including the
payment of dividends or any other distribution with respect to the Common
Stock, the incurrence of additional debt (other than the Notes, the Existing
Subordinated Debt, the New Credit Facility and certain other de minimus
exceptions) and certain other material transactions. See "Description of the
Private Offering--Common Stock Warrant Veto Rights; Covenants." In addition,
in the event of (i) the breach of any financial covenant or the occurrance of
any other material event of default under the Purchase Agreement, or (ii) the
failure of the Company to recruit a new Chief Operating Officer/President
mutually acceptable to the Company and the Private Investors, the Company may
not approve its annual budget or capital expenditure budget or expend any
amounts in excess of any budget without the consent of the holders of a
majority in number of the Warrants outstanding.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock and the Notes after the Offering may be
significantly affected by any or all of the factors cited herein in "Risk
Factors", including quarterly fluctuations in the Company's results of
operations, demand for the Company's product and services, the size, timing
and structure of significant licenses by customers, market acceptance of new
or enhanced versions of the Company's BPCS Client/Server product line, the
publication of opinions about the Company, its products and technology by
industry analysts, the entry of new competitors and technological advances by
competitors, delays in sales as a result of lengthy sales cycles, changes in
operating expenses, foreign currency exchange rate fluctuations, changes in
pricing policies by the Company or its competitors, customer order deferrals
in anticipation of product enhancements by the Company or its competitors, the
timing of the release of new or enhanced versions of the Company's BPCS
Client/Server product line, customer cancellation of major planned software
development programs, general economic factors and other factors, many of
which are beyond the Company's control. In future quarters, the Company's
operating results may be below expectations of public market analysts and
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to the Company's business,
the price of the Company's Common Stock would likely be immediately materially
adversely affected. In addition, the stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations,
as well as general economic, political and market conditions, such as
recessions or international currency fluctuations, may adversely affect the
market price of the Common Stock and the Notes.
ANTI-TAKEOVER CONSIDERATIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with an
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder. The Company has also
adopted a stockholders rights plan, which can have a significant anti-takeover
effect by inhibiting a potential offeror, the value of whose acquired shares
would be substantially diluted by the operation of the plan. Upon a Change in
Control as
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defined herein under "Description of Notes", the holders of the Notes may
require the Company to redeem the Notes at a price equal to 100% of the
principal amount thereof, plus accrued interest. Upon a Change in Control, the
Company will also be obligated to repay all principal and accrued interest
under the Junior Notes, and the holders of the outstanding Preferred Stock
Warrants (as defined herein) will have the right to exercise such Warrants to
purchase the New Preferred Stock and the right to elect a majority of the Board
of Directors, which in turn could induce the Company to exercise its right to
repurchase the Preferred Stock Warrants at an aggregate redemption price of
$117.5 million. See "Description of the Private Offering--Preferred Stock
Warrant and Control Rights." A change in control under similar circumstances
would most likely also constitute an event of default under the Company's New
Credit Facility. These provisions could serve to impede or prevent a change of
control or have a depressive effect on the price of the Company's Common Stock
and securities convertible or exchangeable into Common Stock, such as the
Notes.
LIMITATIONS ON REPURCHASE UPON A CHANGE IN CONTROL
In the event of a Change in Control, each Note holder may require the Company
to repurchase all or a portion of such holder's Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the repurchase date. If a
Change in Control were to occur, there can be no assurance that the Company
would have sufficient funds to pay the repurchase price for all Notes tendered
by the holders thereof. It is expected that the Company's repurchase of Notes,
absent a waiver, would constitute a default under the terms of the New Credit
Facility. In addition, the Company's repurchase of Notes as a result of the
occurrence of a Change in Control may be prohibited or limited by the holders
of Senior Indebtedness under the subordination provisions applicable to the
Notes, or be prohibited or limited by or create an event of default under, the
terms of other agreements relating to borrowings which constitute Senior
Indebtedness as may be entered into, amended, supplemented or replaced from
time to time. Failure of the Company to repurchase Notes at the option of the
Note holder upon a Change in Control would result in an Event of Default under
the Indenture. See "Description of Notes--Redemption of Notes at the Option of
Holders Upon a Change in Control."
ABSENCE OF TRADING MARKETS
Prior to this Offering, there has been no trading market for the Notes and
there can be no assurance that a trading market will develop or, if one does
develop, of its liquidity or whether it will be maintained. To the extent that
an active market does not develop for the Notes the market price and a holder's
ability to sell the Notes could be materially adversely affected.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $86.4 million ($99.4 million if the Underwriters' over-allotment
option is exercised in full), and the net proceeds from the Recapitalization
(which includes this Offering and the Private Offering) are estimated to be
approximately $131.7 million ($144.7 million if the Underwriter's over-
allotment option is exercised in full).
The Company will use a portion of the net proceeds of the Recapitalization
to repay all amounts outstanding under its Existing Credit Facility (which as
of June 30, 1997 were approximately $46.0 million) and under its Senior Notes
(which as of June 30, 1997 were approximately $25.8 million). In addition,
upon the closing of this Offering, the Company intends to elect to redeem all
amounts outstanding under its Existing Subordinated Debt (which as of June 30,
1997 were $12.0 million of principal) with the net proceeds of the
Recapitalization on the thirtieth day following such closing. The holder of
the Existing Subordinated Debt may elect prior to the redemption date,
however, to convert such debt into approximately 3.6 million shares of Common
Stock (based on a conversion price of $3.33 per share) in lieu of such
repayment. The Existing Subordinated Debt matures on March 31, 2000 and bears
interest at a floating rate (9.5% as of June 30, 1997). The Existing Credit
Facility and the Senior Notes currently bear interest at prime plus 2%, and
mature on November 1, 1997.
The Company expects to use the remainder of the net proceeds, which are
estimated to be approximately $47.4 million, together with existing resources,
to open new offices, retain additional skilled personnel in sales, pre-sales
and research and development, for several small acquisitions, and for other
working capital and general corporate purposes. The Company has no pending
agreements, understandings or pending negotiations regarding any proposed
acquisitions.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol SSAX. The following table shows the quarters' high and low closing
prices, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL 1997
FISCAL 1995 FISCAL 1996 (1)
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter................... $11.75 $ 8.17 $27.67 $18.63 $14.06 $10.00
Second Quarter.................. 18.92 11.50 25.63 20.25 10.88 4.13
Third Quarter................... 19.58 12.58 24.13 11.63 9.56 5.63
Fourth Quarter.................. 30.00 15.25 13.38 8.69
</TABLE>
--------
(1) Third Quarter through July 11, 1997
On July 11, 1997, the reported last sale price for the Common Stock was
$7.25.
Commencing in January 1991, the Company has paid an annual dividend on its
Common Stock. The following table lists the dividend paid per share of Common
Stock in each of the last three fiscal years:
<TABLE>
<CAPTION>
DIVIDEND
YEAR PER SHARE
---- ---------
<S> <C>
1994............................................................ $.08
1995............................................................ .08
1996............................................................ .10
</TABLE>
The Company does not currently anticipate that it will resume payment of an
annual dividend. Covenants in the purchase agreement relating to the Junior
Notes (the "Purchase Agreement"), the terms of the Warrants and in the
agreements and instruments governing the Existing Subordinated Debt prohibit
the payment of dividends upon equity securities of the Company. The Company
anticipates that the New Credit Facility will also restrict the payment of
dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company as of April 30, 1997 and as adjusted to give effect to the (i)
issuance and sale in the Recapitalization of the Notes, the Junior Notes and
the Warrants, (ii) the application of the estimated net proceeds from the
Recapitalization (assuming the over-allotment option is not exercised and the
Existing Subordinated Debt is redeemed because the holder of such debt does
not elect to convert the Existing Subordinated Debt into Common Stock). See
"Use of Proceeds." This information does not give effect to the possible
conversion of the Existing Subordinated Debt by the holder thereof into
approximately 3.6 million shares of Common Stock, which conversion right
arises as a result of the notice of redemption by the Company. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997
----------------
AS
ACTUAL ADJUSTED
------ --------
(IN MILLIONS)
<S> <C> <C>
Short term borrowings and current maturities of senior
notes payable............................................. $ 71.8 $ --
====== =======
Long Term Obligations:
Convertible subordinated notes, none issued actual, $90.0
million issued, as adjusted............................. $-- $ 90.0
Convertible subordinated promissory note................. 12.0 --
Junior subordinated promissory notes, none issued actual,
$48.4 million principal amount issued, as adjusted (1).. -- [ ]
Notes payable, obligations under capital leases and other
obligations............................................. 2.1 2.1
------ -------
Total Long Term Obligations.............................. 14.1 105.5
------ -------
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, 42,633,000 shares outstanding, actual and as
adjusted................................................ 0.1 0.1
Capital in excess of par value (2)....................... 42.8 [ ]
Retained earnings (3).................................... 73.5 64.1
Cumulative translation adjustment........................ (2.7) (2.7)
------ -------
Total Stockholders' Equity............................. 113.7 [ ]
------ -------
Total Capitalization................................... $127.8 $[ ]
====== =======
</TABLE>
- --------
(1) Less discount attributable to the estimated fair value of the Warrants of
[$ ] million.
(2) As adjusted includes the estimated fair value of the Warrants of [$ ]
million.
(3) As adjusted includes writeoff of deferred charges and fees related to the
Existing Subordinated Debt, the Existing Credit Facility and Senior Notes.
19
<PAGE>
SELECTED FINANCIAL DATA
The following data have been derived from the Consolidated Financial
Statements audited by Price Waterhouse LLP, independent accountants, for the
fiscal years ended October 31, 1995 and 1994, and audited by KPMG Peat Marwick
LLP, independent accountants, for the fiscal year ended October 31, 1996. The
data set forth below are qualified by reference to the consolidated balance
sheets at October 31, 1995 and 1996 and related consolidated statements of
operations, cash flows and changes in stockholders' equity for the three years
ended October 31, 1996 and the Notes thereto contained elsewhere in this
Prospectus. The consolidated financial data as of and for the six months ended
April 30, 1996 and 1997 are unaudited but have been prepared on the same basis
as the audited financial statements and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments necessary for
a fair presentation of the results of operations and financial condition for
such periods. The results of operations presented below are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees........... $178.5 $187.9 $229.7 $250.0 $226.7 $100.0 $ 130.2
Client services and
other................. 50.3 75.5 94.6 124.1 114.1 59.1 60.0
------ ------ ------ ------ ------ ------- -------
Total revenues....... 228.8 263.4 324.3 374.1 340.8 159.1 190.2
------ ------ ------ ------ ------ ------- -------
Costs and Expenses:
Cost of license fees... 47.2 51.4 60.7 64.9 66.9 25.6 33.0
Cost of client services
and other............. 31.6 43.5 57.2 76.8 89.0 41.4 47.1
Sales and marketing.... 56.7 63.8 90.8 87.6 103.8 45.2 43.9
Research and
development........... 16.5 23.0 35.1 40.2 54.4 23.4 26.9
General and
administrative........ 35.8 45.6 64.1 63.5 85.5 33.6 40.1
------ ------ ------ ------ ------ ------- -------
Total costs and
expenses............ 187.8 227.3 307.9 333.0 399.6 169.2 191.0
------ ------ ------ ------ ------ ------- -------
Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (10.1) (0.8)
------ ------ ------ ------ ------ ------- -------
Gain on sale of
available-for-sale
securities............. -- -- -- -- 13.1 -- --
Non-operating income
(expense), net......... 0.6 (0.4) (1.0) (0.2) (5.7) (0.8) (7.0)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes and
minority interest...... 41.6 35.7 15.4 40.9 (51.4) (10.9) (7.8)
Provision (benefit) for
income taxes........... 15.0 12.7 5.6 14.2 (18.6) (4.0) (2.8)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
minority interest...... 26.6 23.0 9.8 26.7 (32.8) (6.9) (5.0)
Minority interest....... -- 0.4 0.2 (0.1) -- -- --
------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $ (6.9) $ (5.0)
====== ====== ====== ====== ====== ======= =======
Earnings (loss) per
share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $ (0.16) $ (0.12)
====== ====== ====== ====== ====== ======= =======
Weighted average common
and equivalent shares
outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 42.6
====== ====== ====== ====== ====== ======= =======
Ratio of earnings to
fixed charges (1)...... 15.3 10.4 3.7 6.5 -- (2) -- (2) -- (2)
Pro forma ratio of
earnings to fixed
charges (3)............ -- (3) -- (3)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, 1997
---------------------------------- -------------------
AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED (4)
------ ------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 23.4 $ 57.6 $ 60.2 $ 57.1 $ 38.1 $ 20.4 $ 67.8
Working capital......... 49.5 91.2 87.3 92.3 70.3 8.5 120.0
Intangibles:
Software costs, net.... 16.8 27.3 49.3 59.0 82.8 93.2 93.2
Cost in excess of
assets of acquired
businesses, net....... 9.6 14.0 15.8 18.2 22.8 21.3 21.3
------ ------ ------ ------ ------ ------ ------
Total intangibles....... 26.4 41.3 65.1 77.2 105.6 114.5 114.5
Total assets............ 200.0 280.4 333.1 393.2 384.4 382.4 427.6
Short-term borrowings
and current maturities
of Senior Notes
payable................ -- -- -- 4.0 -- 71.8 --
Long-term obligations... 3.5 34.0 32.7 33.9 75.1 14.1 [ ]
Stockholders' equity.... 80.0 101.2 109.3 143.4 110.2 113.7 [ ]
</TABLE>
- -------
(1) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges) by fixed charges (interest expense and the portion of
rental expense which represents interest).
(2) Actual earnings (loss) available for fixed charges of ($51.4 million),
($10.9 million) and ($7.8 million) were inadequate to cover fixed charges
of $12.7 million, $5.2 million and $11.5 million for the year ended
October 31, 1996 and the six months ended April 30, 1996 and April 30,
1997, respectively.
(3) The pro forma ratio of earnings (loss) to fixed charges assumes the
Recapitalization and use of proceeds, as described herein, occurred on
November 1, 1995 for the ratio for the year ended October 31, 1996, and on
November 1, 1996 for the ratio for the six months ended April 30, 1997. In
addition, the ratios assume the interest rate on the Notes of 7.5%, the
net proceeds to the Company invested in interest bearing accounts
averaging 5.0% interest on an annual basis and the estimated fair value of
the Warrants of [$ ], which value will be amortized as interest
expense over the term of the Junior Notes. Pro forma earnings (loss)
available for fixed charges of [$ ] and [$ ] were inadequate to
cover pro forma fixed charges of [$ ] and [$ ] for the year ended
October 31, 1996 and the six months ended April 30, 1997, respectively.
(4)Adjusted to reflect the Recapitalization, the application of the estimated
net proceeds therefrom (assuming that, following notice by the Company to
redeem the Existing Subordinated Debt, the holder of the Existing
Subordinated Debt does not elect prior to the redemption date to convert
such debt into Common Stock in lieu of repayment), after deducting
underwriting discounts and commissions and other estimated expenses of the
Recapitalization, the estimated fair value of the Warrants as [$ ] and
the writeoff of deferred charges and fees related to the Existing
Subordinated Debt, Existing Credit Facility and Senior Notes.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section as well as those under the
caption "Risk Factors" appearing elsewhere in this Prospectus. The following
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company is a leading provider of cost-effective business enterprise
information systems to the industrial sector worldwide. The Company markets,
sells and services its products to large- and intermediate-sized industrial
sector firms primarily through its own world-wide sales organization and, to a
lesser extent, through a network of over 100 independent software companies,
which SSA refers to as its "Affiliates" and major systems integrators.
The Company classifies its revenue in two broad categories: license fees and
client services and other. License fee revenues are primarily derived from the
licensing of the Company's BPCS Client/Server product line. Client services and
other revenues are derived from implementation (installation), consulting,
training and other services, such as customization, modifications and Year 2000
software conversions.
SSA was founded as an MRP (Manufacturing Resource Planning) software company
supplying software for IBM midrange computers. The Company believes it is the
largest supplier of MRP software for IBM AS/400 installations. The Company is
presently concluding a transition phase, having first released the new object-
oriented version of its BPCS Client/Server product line, Version 6.0, to early
adopters in April 1996.
Certain difficulties attended the release of Version 6.0 of the BPCS
Client/Server product line and the Company's expansion of its product
development and marketing efforts beyond the IBM AS/400 platform and into the
open systems marketplace. License fees increased only slightly from 1994 to
1995, and decreased from 1995 to 1996. Some early adopters experienced
difficulties in achieving full functionality and performance with the early
release. The general release of Version 6.0 did not occur until September 1996.
In addition, the Company expended significant amounts across its organization
to build a new sales and marketing and client services infrastructure to
support the release of the open systems version of the BPCS Client/Server
product line. Thus, in 1996, the Company's cost of client services and other,
sales and marketing expense and research and development expense all increased
significantly over 1995 levels. Because these investments did not generate
contemporaneous increases in license fees, the Company reported an operating
loss of $58.8 million. As Version 6.0 improved in its functionality and
performance characteristics, license fees increased. For the first six months
of 1997, license fee revenues increased 30%, total revenues increased 20% and
the operating loss decreased to $0.8 million from $10.1 million when compared
to the same period in 1996.
The Company has expended over $200 million for research and development of
Version 6.0 of BPCS Client/Server. These expenditures, combined with the losses
from operations incurred in 1996 and 1997 to date, have seriously depleted the
Company's liquidity, and have led to increased borrowings under the Company's
Existing Credit Facility. The Recapitalization of which this Offering is a part
is expected to enhance the Company's liquidity.
21
<PAGE>
The Company includes software license fees, and any related commissions
earned by the Affiliates, in license fees and cost of license fees,
respectively. Software license fee revenues are recognized upon client
acceptance and delivery of the software to the end user, provided that no
significant vendor obligations remain and collectibility is probable. Revenue
and commissions from software maintenance and HelpLine agreements are deferred
and recognized ratably over the term of the contract. Client services revenues
are recognized as the services are performed. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, the Company expenses software
development costs as they are incurred until technological feasibility is
established, after which such costs are capitalized until the product is
available for general release to customers. The capitalized costs generally
include a portion of construction costs as well as costs incurred during final
product testing prior to full product release.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain information
from the Company's consolidated statements of operations as a percentage of
total revenues. The Company's results of operations and balance sheets for
1994 and 1995 have been restated with respect to several software contracts.
See Note 2 of Notes to Consolidated Financial Statements for the years ended
October 31, 1994, 1995 and 1996. The discussion below addresses the restated
financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
OCTOBER 31, APRIL 30,
------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License fees........................... 70.8% 66.8% 66.5% 62.9% 68.5%
Client services and other.............. 29.2 33.2 33.5 37.1 31.5
----- ----- ----- ----- -----
Total revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and Expenses:
Cost of license fees................... 18.7% 17.4% 19.6% 16.1% 17.3%
Cost of client services and other...... 17.7 20.5 26.1 26.0 24.8
Sales and marketing.................... 28.0 23.4 30.4 28.4 23.1
Research and development............... 10.8 10.7 16.0 14.7 14.1
General and administrative............. 19.8 17.0 25.1 21.1 21.1
----- ----- ----- ----- -----
Total costs and expenses............. 95.0 89.0 117.2 106.3 100.4
----- ----- ----- ----- -----
Operating income (loss).................. 5.0 11.0 (17.2) (6.3) (0.4)
----- ----- ----- ----- -----
Gain on sale of available-for-sale
securities.............................. -- -- 3.8 -- --
Non-operating income (expense), net...... (0.3) (0.1) (1.7) (0.5) (3.7)
----- ----- ----- ----- -----
Income (loss) before income taxes and
minority interest....................... 4.7 10.9 (15.1) (6.8) (4.1)
Provision (benefit) for income taxes..... 1.7 3.8 (5.5) (2.5) (1.5)
----- ----- ----- ----- -----
Income (loss) before minority interest... 3.0 7.1 (9.6) (4.3) (2.6)
Minority interest........................ 0.1 -- -- -- --
----- ----- ----- ----- -----
Net income (loss)........................ 3.1% 7.1% (9.6)% (4.3)% (2.6)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended April 30, 1997 Compared to the Six Months Ended April 30,
1996
Revenues
Total revenues increased 20% to $190.2 million for the first six months of
1997 over total revenues of $159.1 million recorded during the first six
months of fiscal 1996.
22
<PAGE>
License Fees. License fees increased 30% to $130.2 million in the first six
months of 1997, compared to $100.0 million in the corresponding prior period,
which reflected increasing market acceptance of Version 6.0, which was
released for general availability in the fourth quarter of 1996.
Client Services. Client services and other revenues increased 2% to $60.0
million in the first half of 1997, from $59.1 million in the first half of
1996. The $33.0 million of client services and other revenues in the second
quarter of 1997, the largest quarterly services revenues in the Company's
history, represented a 22% increase over the immediately prior quarter and an
8% increase over the second quarter of 1996. The increase in services revenues
is attributable to higher productivity of services personnel following
significant investments in training in open systems and object skills
accompanying the development and release of Version 6.0.
Costs and Expenses
Cost of License Fees. The principal components of cost of license fees are
commissions paid to independent Affiliates, hardware costs, amortization of
capitalized software costs and royalties paid to third parties. Cost of
license fees as a percentage of related revenues remained relatively constant
at 25% and 26% for the first six months of 1997 and 1996, respectively, due to
increased amortization expense of capitalized software development costs being
offset by decreased Affiliate commissions.
Cost of Client Services and Other. The principal components of cost of
client services and other are salaries and other direct employment costs paid
to the Company's client services personnel and amounts paid to independent
client services professionals. Cost of client services and other as a
percentage of related revenues was 79% for the first six months of 1997
compared to 70% during the corresponding prior year period. The higher costs
in 1997 resulted from lower productivity related to newly hired technical
professionals around the world, in particular those with open systems and
object skills, and from the allocation of technical personnel to perform
warranty work.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and other direct employment costs of the Company's sales and pre-
sales professionals, as well as marketing costs, which include advertising,
trade shows and production of sales brochures. Sales and marketing expenses as
a percentage of license fee revenues was 34% and 45% for the first six months
of 1997 and 1996, respectively. The decrease was due to increased productivity
of the Company's direct sales organization and decreased marketing
expenditures. In anticipation of the Company's introduction of its open
systems product, the Company hired a significant number of new sales and pre-
sale professionals with skills and experience in the open systems arena. In
late 1996 and early 1997, a number of these professionals who had not been
significantly productive were either terminated or left the Company. As a
result, the Company's sales and marketing expenses decreased in the first half
of 1997 over the corresponding prior period, even though license fees
increased 30% over the same periods.
Research and Development. Gross (total) research and development (R&D)
expenditures in the first six months of 1997 increased $8.6 million, or 21%,
to $48.8 million in the first six months of 1997 from $40.2 million in the
corresponding prior period. The increase was due to the Company's continuing
development of its distributed object computing technology and enhancements of
its existing product line.
23
<PAGE>
The Company capitalized $21.9 million of software development costs in the
first six months of 1997, as compared to $16.8 million in the first six months
of 1996. The capitalization ratio (capitalized software as a percentage of
gross R&D expenditures) in the first six months of 1996 and 1997 was 42% and
45%, respectively. The following table sets forth R&D expenditures and related
capitalized amounts for the first six months of 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERCENTAGE
APRIL 30, CHANGE
------------------ ----------
1997 VS.
1996 1997 1996
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Gross R&D expenditures........................ $ 40.2 $ 48.8 21%
Less amount capitalized....................... (16.8) (21.9) 30%
-------- --------
Net R&D costs................................. $ 23.4 $ 26.9 15%
======== ========
</TABLE>
General and Administrative. General and administrative expenses increased
$6.5 million to $40.1 million in the first half of 1997 from $33.6 million in
the first half of 1996 to support the Company's growth. These expenses include
increased facilities costs related to acquisitions and increased costs for
computer equipment.
Operating Income (Loss). The operating loss of $0.8 million in the first six
months of 1997 improved $9.3 million from the operating loss of $10.1 million
in the corresponding prior period, principally due to increased software
license fees and decreased sales and marketing expenses.
Non-Operating Income (Expense), Net. Non-operating expense consists
primarily of interest expense and fees related to the Company's Existing
Credit Facility and Senior Notes and other long-term obligations, less
interest income earned on invested cash. Non-operating expense of $7.0 million
in the first six months of 1997 increased $6.2 million over the corresponding
prior period due to higher borrowing levels under the Company's Existing
Credit Facility, higher interest rates applicable to the Existing Credit
Facility and the Senior Notes, interest on the Company's Existing Subordinated
Debt and reduced interest income related to lower cash balances.
Fiscal 1994 Compared to Fiscal 1995 and Fiscal 1996
Revenues
Revenues increased 15% from 1994 to 1995. All regions grew in 1995, with
particularly strong results in North America and Europe. Total revenues
decreased 9% from 1995 to 1996. North America recorded higher revenues in 1996
while the Company's other regions were flat to down.
License Fees. License fees increased 9% from 1994 to 1995 and decreased 9%
in 1996. In 1995, a small decline in AS/400 revenue was offset by sales of the
Company's open systems product, which was released in the second quarter of
1995. Despite the solid revenue growth in North America in 1996, a sharp
decline in the European region more than offset North America's favorable
results. North America license fees reflected growth in both the AS/400 and
Unix product lines.
Client Services. Client services revenues increased 31% in 1995 compared to
a decrease of 8% in 1996. The growth from 1994 to 1995 was related to the
increase in software revenues. The decline in 1996 was due to lower
productivity caused in part by allocation of resources to perform warranty
work and investments in training client services professionals. As a
percentage of total revenues, client services revenues increased slightly to
34% in 1996 from 33% in 1995.
24
<PAGE>
Costs and Expenses
Cost of License Fees. Cost of license fees as a percentage of license fee
revenues was 26%, 26%, and 30% in 1994, 1995, and 1996, respectively. The
increase in 1996 to 30% was primarily due to increased amortization expense of
capitalized software development costs and increased warranty costs.
Cost of Client Services and Other. Cost of client services and other as a
percentage of related revenues was 60%, 62%, and 78% in 1994, 1995, and 1996,
respectively. The increase in 1996 is primarily due to 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.
Sales and Marketing. Sales and marketing expenses as a percentage of license
fee revenues was 40%, 35%, and 46% in 1994, 1995, and 1996, respectively. The
favorable result from 1994 to 1995 was due to increased productivity of the
sales force and programs to reduce fixed expenses which began early in 1995.
The higher percentage in 1996 was primarily due to decreased revenue as
described above and increased expenditures to establish worldwide marketing
programs, and the development of vertical industry groups in support of the
Company's continuing move into the Unix open systems client/server market. In
addition, training programs for the sales force resulted in increased expenses
during the year.
Research and Development. Gross (total) R&D expenditures decreased 4% in
1995 versus an increase of 56% in 1996. The decline in 1995 from 1994 was
primarily due to expense reduction programs which began early in 1995 and
impacted R&D spending favorably by replacing contracted technical personnel
with employed technical personnel. Excluding the costs of contracted technical
personnel, remaining R&D expenditures increased 22% in 1995 when compared to
1994 due to increased employee costs for technical personnel. The 1996
increase was attributable to the Company's continuing development of its
distributed object computing technology and enhancement of its existing
products.
The Company capitalized $29.0, $21.6 and $41.9 million of software
development costs in fiscal 1994, 1995 and 1996, respectively. The
capitalization rate in 1994, 1995, and 1996 was 45%, 35%, and 44%,
respectively. The decrease from 1994 to 1995 was driven by a higher proportion
of R&D spending incurred to support and maintain existing products and the
completion of certain open systems products. The 1996 increase was due 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.
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
------------
YEAR ENDED OCTOBER 31, 1995 1996
------------------------- VS. VS.
1994 1995 1996 1994 1995
------- ------- ------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross R&D expenditures............... $ 64.1 $ 61.8 $ 96.3 (4%) 56%
Less amount capitalized.............. (29.0) (21.6) (41.9) (25%) 94%
------- ------- -------
Net R&D costs........................ $ 35.1 $ 40.2 $ 54.4 15% 35%
======= ======= =======
</TABLE>
General and Administrative. General and administrative expenses declined 1%
from 1994 to 1995 and increased 35% from 1995 to 1996. The increase in 1996
over 1995 was primarily due to new facilities to support the Company's
worldwide expansion, increased computer equipment rent and a $9.3 million
provision for doubtful accounts. The provision for doubtful accounts was $8.0,
$3.3, and $9.3 million for 1994, 1995, and 1996, respectively.
Operating Income (Loss). Operating income increased from $16.4 million in
1994 to $41.1 million in 1995, principally due to significantly higher total
revenues and lower aggregate sales and marketing
25
<PAGE>
expenses in 1995. The operating loss of $58.8 million in 1996 resulted
primarily from reduced total revenues and increases in every category of costs
and expenses. See "--Overview."
Non-operating Expense. In 1995, higher cash balances throughout the year and
higher interest rates on invested cash as well as a reduction in interest
bearing notes payable resulted in decreased net interest expense. The increase
in 1996 is due to higher borrowing levels under the Company's Existing Credit
Facility and increased fees and interest rates related to the Company's
renegotiation of its borrowing arrangements' terms and conditions in the
fourth quarter of 1996.
Income Taxes. The Company's effective tax expense (benefit) rate has
remained relatively constant at approximately 36% in 1994, 35% in 1995 and
(36%) in 1996. The benefit recorded in 1996 represents federal and state tax
refunds to be received in 1997 and amounts to be realized through future
utilization of net operating loss and tax credit carryforwards.
Impact of Inflation. To date, the Company has not experienced any
significant effect from inflation. The Company's major expenses have been
salaries and related costs incurred principally for product development and
enhancements, sales and marketing, and administration. The Company generally
has been able to meet increases in costs by increasing prices of its products
and services.
Foreign Currency Exposures. Sales outside of the United States account for
approximately 60% of the Company's total revenue. The Company's international
sales (with the exception of certain Latin American countries) are
predominately invoiced and paid in foreign currencies. Consequently, the
Company's revenues are impacted by the fluctuation of foreign currencies
versus the U.S. Dollar. The operating income impact of such fluctuations,
however, is offset to the extent expenses of the Company's international
operations are incurred and paid for in local currencies.
The Company generally minimizes the financial impact of foreign currency
exchange transactions through the use of foreign exchange forward contracts,
which generally mature within three months of origination (see Note 5 to the
Consolidated Financial Statements).
QUARTERLY RESULTS
The following table contains selected unaudited consolidated financial
results by quarter for the last eight fiscal quarters. In management's
opinion, this information reflects all adjustments (which consist only of
normal recurring adjustments) necessary to present the results fairly when
read in conjunction with the Consolidated Financial Statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees........... $57.3 $91.6 $ 48.1 $ 51.9 $ 45.2 $ 81.5 $ 65.1 $ 65.1
Client services and
other................. 32.4 31.1 28.5 30.6 27.1 27.9 27.1 33.0
----- ----- ------ ------ ------ ------ ------ ------
Total revenues.......... 89.7 122.7 76.6 82.5 72.3 109.4 92.2 98.1
Costs and expenses...... 81.3 99.4 77.0 92.1 106.4 124.1 96.8 94.2
----- ----- ------ ------ ------ ------ ------ ------
Operating income (loss). 8.4 23.3 (0.4) (9.6) (34.1) (14.7) (4.6) 3.9
Gain on sale of
available-for-sale
securities............. -- -- -- -- 3.6 9.5 -- --
Non-operating income
(expense), net......... (0.1) (0.1) (0.3) (0.5) (1.2) (3.7) (2.1) (4.9)
----- ----- ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes and
minority interest...... 8.3 23.2 (0.7) (10.1) (31.7) (8.9) (6.7) (1.0)
Provision (benefit) for
income taxes........... 3.0 7.9 (0.3) (3.7) (11.4) (3.2) (2.4) (0.4)
----- ----- ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 5.3 $15.3 $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6)
===== ===== ====== ====== ====== ====== ====== ======
Earnings (loss) per
share.................. $0.13 $0.35 $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01)
===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE>
The Company has experienced a seasonal pattern in its operating results,
with the fourth quarter typically having the highest revenues and operating
income. The Company believes that fourth quarter revenues are positively
impacted by the Company's sales compensation plans. This factor, which the
Company believes is common in the computer software industry, typically
results in first quarter revenues in any year being lower than revenues in the
immediately preceding fourth quarter. In addition, the Company's European
operations generally provide lower revenues during the summer months as a
result of the generally reduced economic activity in Europe during such time.
This seasonal factor could materially adversely affect third quarter revenues.
The Company has also historically recognized a substantial portion of its
revenue from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in a particular quarter. If sales forecasted from a
specific customer for a particular quarter are not realized in that quarter,
the Company is unlikely to be able to generate revenue from alternate sources
in time to compensate for the shortfall. As a result, a lost or delayed sale
could have a material adverse effect on the Company's quarterly operating
results. To the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. The
Company has also historically operated with little backlog because its
products are generally shipped as orders are received. As a result, revenue
from license fees in any quarter is substantially dependent on orders booked
and shipped in that quarter.
Based upon the factors described above, the Company believes that its
quarterly revenue and operating results are likely to vary significantly in
the future, that period-to-period comparisons of its results of operations are
not necessarily meaningful and that, as a result, such comparisons should not
be relied upon as indications of future performance. Moreover, although the
Company's revenue has generally increased in recent periods, there can be no
assurance that the Company's revenue will grow in future periods, at past
rates or at all, or that the Company will be profitable on a quarterly or
annual basis. In future periods, the Company's operating results may be below
the expectations of stock market analysts and investors. In such event, the
price of the Common Stock could be materially adversely affected.
CHANGE IN ACCOUNTING METHOD
During the fourth quarter of 1996, the Company changed its method of
accounting for reseller agreements so that revenue is recorded at the time of
sale to the end user. During the first three quarters of 1996, revenue from
reseller agreements had previously been recorded upon execution of the
reseller agreement and delivery of the software. The Company believes the
change in method is more conservative and provides a more meaningful
measurement of its operations. The change in accounting method affected the
first three quarters of 1996 as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1996 APRIL 30, 1996 JULY 31, 1996
------------------- ------------------- -------------------
AS AS AS
ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
License fees............ $59.3 $ 48.1 $ 71.5 $ 51.9 $ 48.2 $ 45.2
Client services and
other.................. 28.5 28.5 30.6 30.6 27.1 27.1
Total revenues........ 87.8 76.6 102.1 82.5 75.3 72.3
Income (loss) before
income taxes........... 4.5 (0.7) 0.4 (10.1) (29.9) (31.7)
Net income (loss)....... 2.9 (0.4) 0.3 (6.4) (19.1) (20.3)
Earnings (loss) per
share.................. $0.07 $(0.01) $ 0.01 $(0.15) $(0.44) $(0.47)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, and April 30, 1997, cash and equivalents totaled $38.1
million and $20.4 million, respectively. During 1996, cash and equivalents
declined $19.0 million and borrowing under the
27
<PAGE>
Company's Existing Credit Facility and Senior Notes on a net basis increased
by $42.4 million due to the operating loss in the current year, continued
significant investment in product development, payment of the Company's annual
dividend, which increased 25% over the prior year ($.10 per share versus $.08
in the prior year), tax payments related to the Company's profitability in
fiscal 1995, acquisitions of affiliates and increased operating expenses in
support of the Company's strategic move into the Unix open systems market. At
October 31, 1996, $46.4 million was outstanding under the Company's $50.0
million multi-bank line of credit. At October 31, 1995, there was no
outstanding balance. During 1996, the Company made its scheduled $4.0 million
repayment on its Senior Notes, leaving $26.0 million outstanding at October
31, 1996.
Cash and equivalents decreased $17.7 million from October 31, 1996 to April
30, 1997 and borrowings increased by $11.4 million on a net basis during the
same period. Cash usage was primarily due to continued significant investment
in product development, an operating loss for the first six months of 1997 and
interest payments. At April 30, 1997, $46.0 million was outstanding under the
Company's Existing Credit Facility and $25.8 million was outstanding on the
Company's Senior Notes. Outstanding letters of credit issued against the
Existing Credit Facility were $700 thousand and $1.2 million at April 30, 1997
and October 31, 1996, respectively. On March 27, 1997, the Company issued the
Existing Subordinated Debt for $12.0 million to a strategic investor to meet
anticipated cash requirements. Management believes that, based upon its
anticipated operating results, the proceeds of this Offering and the Private
Offering will provide sufficient liquidity to meet capital requirements for at
least the next 12 months.
28
<PAGE>
BUSINESS
The Company is a leading provider of cost-effective business enterprise
information systems to the industrial sector worldwide. The Company's BPCS
(Business Planning and Control System) Client/Server product line provides
business process re-engineering and integration of an enterprise's operations,
including multi-mode manufacturing processes, supply chain management and
global financial solutions. The BPCS Client/Server product line delivers
scaleability, interoperability and reconfigurability in a comprehensive product
suite to meet changing market demands. The distributed object computing
architecture ("DOCA") of BPCS Client/Server provides the benefits of next
generation technology in conformity with industry standards. The Company
markets, sells and services its products to large- and intermediate-sized
industrial sector firms through its own world-wide sales organization and, to a
lesser extent, through a network of over 100 Affiliates and major systems
integrators.
The BPCS Client/Server product line consists of over 50 integrated products
designed for manufacturing, supply chain management and financial applications,
as well as electronic commerce and application development tools. Historically,
the Company's software was primarily designed to operate on IBM AS/400
computers. BPCS Client/Server now operates across a broad array of platforms,
including Hewlett-Packard HP 9000, IBM AS/400, IBM RISC System/6000 and DEC
Alpha servers. The Company's Unix version of the BPCS Client/Server product
line software operates on both Informix and Oracle databases. The entire BPCS
Client/Server product line is available in English, and a significant portion
of the line is available in 19 other languages, including Chinese (simplified
and traditional), Dutch, French, German, Italian, Japanese, Korean, Portuguese,
Swedish and Spanish. The BPCS Client/Server product line has been designed to
meet localized regulatory policies and statutory requirements of many
countries.
The Company's BPCS Client/Server product line was initially developed for the
IBM AS/400, and until 1995, all of the Company's revenue was derived from BPCS
Client/Server product licenses and related services sold for use on the AS/400
platform and, to a lesser extent, earlier IBM midrange computers. In 1993, the
Company commenced a major development initiative to create a version of the
BPCS Client/Server product line for the Unix operating system in an effort to
address the non-AS/400 market. In late 1994, the Company began a major effort
to re-architect its product line for the client/server, object-based
environment. This effort resulted in the initial shipments of Version 6.0 of
the BPCS Client/Server product line in April 1996. Since then, the Company has
released several upgrades, including the general release of the BPCS
Client/Server product line in September 1996, which have significantly improved
the performance and scaleability of the product while continuing to enhance
functionality. The Company believes that the most recent release of Version 6.0
offers high levels of functionality and performance and that the flexibility of
its DOCA architecture represents a significant advantage when compared to other
enterprise software applications.
The BPCS Client/Server product line has been installed in over 8,500 client
sites worldwide, the substantial majority of which comprise the Company's
installed base of AS/400 customers. The Company believes that it is the leading
vendor of ERP software for customers on the AS/400. The target marketplace for
the BPCS Client/Server product line is large- and intermediate-sized industrial
sector firms in such diverse industries as pharmaceuticals, automotive,
electronics, consumer products, forest products, and food and beverages. The
Company's clients include leading firms in these industries.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY MANAGERS
The following table sets forth certain information concerning the Executive
Officers, Directors and other key managers of the Company as of June 30, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Roger E. Covey.......... 42 Chairman of the Board of Directors and
Chief Executive Officer
Riz Shakir.............. 40 Executive Vice President--Research and Development
Joseph J. Skadra........ 55 Vice President--Finance, Chief Financial Officer and Secretary
Paul Lavallee........... 43 President--Americas
Denis Bignold........... 52 President--Asia Pacific
Richard Morgan-Evans.... 50 President--Europe, Middle East, Africa
Andrew J. Filipowski.... 45 Director
John W. Puth............ 68 Director
William N. Weaver, Jr. . 62 Director
</TABLE>
Roger E. Covey, founded the Company and since November 1, 1994 has served as
Chief Executive Officer and Chairman of the Board of the Company, positions
which he also held from its inception in October 1981 until August 1991, at
which time he was elected as Vice-Chairman of the Board. From September 1,
1994 until October 31, 1994, he served as the Company's Vice President--
Research and Development. He holds a B.S. degree from the University of
Illinois and an M.B.A. and an M.A. in Chinese Art History, both from the
University of Chicago.
Riz Shakir, joined the Company as Area Vice President--Architecture in June
1994, and currently serves as Executive Vice President--Research and
Development. Prior to joining the Company, he was CEO of ASIC, a company
specializing in building custom enterprise software solutions based on Object
and Distributed Computing technologies. Mr. Shakir holds a B.Sc. degree from
Imperial College of Science and Technology in London.
Joseph J. Skadra, was appointed Vice President--Finance, Chief Financial
Officer and Secretary of the Company on August 24, 1994. He was employed by
Figgie International, Inc. from 1970 to 1994, where he held various operating
and financial positions at the Vice President level. His last position at
Figgie International was Senior Vice President, Finance and Controller. Mr.
Skadra holds a B.S. and a B.A. degree from Case Western Reserve University.
Paul Lavallee, was named as President--Americas in November 1996. Mr.
Lavallee joined the Company in May 1995 as the General Manager, Eastern United
States and became Area Vice President--North America in May 1996. Prior to
joining the Company, he was President of the Eastern Subsidiary of Effective
Management Systems, Inc., a supplier of ERP Systems and Manufacturing
Execution Systems for Unix and Windows/NT operating systems. Mr. Lavallee was
also a founder of ASE Systems (one of the Company's earliest and largest
Affiliates), an enterprise systems consulting and implementation firm which
was later acquired by the Company. Mr. Lavallee has a BS in Accounting from
Roger Williams College and an MBA from Providence College.
Denis Bignold, was appointed to his current position as President--Asia
Pacific in November 1996. Mr. Bignold joined the Company in 1989 to run the
Company's Pacific subsidiary and in 1992 became President, SSA Japan. He
worked as the Global General Manager for BPCS Plant Maintenance Division in
Minnesota from 1983 until late 1994 when he became Vice President of SSA Asia
Pacific. Immediately prior to joining the Company he was the General Manager
of Computer Power, the largest Australian-owned computer company.
30
<PAGE>
Richard Morgan-Evans, has been President--Europe, Middle East and Africa
since November 1996. Mr. Morgan-Evans joined the Company in 1987 as a Sales
Director and was also a founder director of SSA Europe. In 1988, he was named
SSA Europe's general manager and in October 1994 was appointed Vice President,
SSA Europe. Prior to joining the Company, he spent 12 years at IBM in Europe.
Andrew J. Filipowski, has been a Director of the Company since July 1996.
Mr. Filipowski has been President and Chief Executive Officer of PLATINUM
technology, inc., a provider of enterprise infrastructure software products,
since that company's founding in April 1987. Mr. Filipowski was a founder of
DBMS, Inc., a software products and services company and served as its
Chairman, President and Chief Executive Officer from 1979 until March 1987.
John W. Puth, has been a Director of the Company since his appointment in
April 1988. Since December 1987, Mr. Puth has served as President of J. W.
Puth Associates, an industrial consulting firm. From January 1983 through
December 1987, Mr. Puth was Chairman and President of Clevite Industries,
Inc., a manufacturer of industrial products. From October 1975 until January
1983, Mr. Puth was President and Chief Executive Officer of Vapor Corporation.
Mr. Puth is a director of Allied Products Corporation, Brockway, Standard
Holdings Corporation, A.M. Castle & Co., L.B. Foster Company, Lindberg
Corporation and USFreightways Corporation, as well as several privately-held
corporations. He holds a B.S. degree from Lehigh University.
William N. Weaver, Jr., has been a Director of the Company since December
1986 and its Assistant Secretary since March 1985. Mr. Weaver is a member of
the law firm of Sachnoff & Weaver, Ltd., an Illinois professional corporation,
which is counsel to the Company. Mr. Weaver has practiced law in the State of
Illinois since 1964 and serves as a director of USFreightways Corporation, as
well as several privately-held corporations. He holds an A.B. degree from
Oberlin College and a J.D. from John Marshall Law School.
The terms of the Private Offering provide that the size of the Company's
Board of Directors shall be increased from the current four members to seven
members, with two of the new directors to be selected by the Private Investors
in their sole discretion, and a third new, independent director to be
designated by the Company, subject to the approval of the Private Investors.
In addition, the Company has agreed to recruit and hire a new Chief Operating
Officer/President. See "Description of the Private Offering--Control Rights."
31
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued pursuant to an indenture (the "Indenture") to be
dated as of August , 1997 between the Company and First Chicago Trust
Company, as trustee (the "Trustee"). The terms of the Notes will include those
stated in the Indenture and those made a part of the Indenture by reference to
the Trust Indenture Act of 1939, as in effect on the date of the Indenture (the
"Trust Indenture Act"). The Notes will be subject to all such terms, and
prospective investors are referred to the Indenture and the Trust Indenture Act
for a statement of such terms.
The statements under this section relating to the Notes and the Indenture are
summaries of certain terms applicable to the Notes and the Indenture, and do
not purport to be complete and are qualified in their entirety by express
reference to the Indenture, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and the Trust
Indenture Act. Capitalized terms used herein and not otherwise defined shall
have the meanings specified in the Indenture. As used in this section, the term
"Company" refers only to System Software Associates, Inc., and not to any of
its subsidiaries.
GENERAL
The Notes will be general unsecured obligations of the Company, subordinate
in right of payment to certain other obligations of the Company, and
convertible into Common Stock of the Company as described below under the
heading "--Conversion of Notes." The Notes will be issued in denominations of
$1,000 principal amount, and will be limited to $90,000,000 aggregate principal
amount ($103,500,000 aggregate principal amount if the Underwriters' over-
allotment option is exercised in full). The Notes will bear interest from the
date of initial issuance, at the rate per annum shown on the cover page of this
Prospectus, payable semiannually on February 15 and August 15 of each year to
Holders of record at the close of business on February 1 and August 1 next
preceding each such interest payment date. The first interest payment date will
be February 15, 1998. Interest will be computed on the basis of a 360-day year
of twelve 30-day months. Principal of, and premium, if any, and interest on the
Notes will be payable at the office of the paying agent, which will initially
be the Trustee. The Notes will mature on August 1, 2002.
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. Notes may be presented
for conversion, exchange or registration of transfer at the office or agency
maintained by the Company, which shall initially be the corporate trust office
of the Trustee. No service charge is payable for any registration of transfer
or exchange of Notes; provided, however, the Company may require payment by a
Holder of a sum sufficient to cover any tax, assessment or other governmental
charge payable in connection with any such transfer or exchange.
Prior to this Offering, there has been no public trading market for the
Notes. Although the Company intends to apply to list the Notes on the Nasdaq
National Market, there can be no assurance that an active public market for the
Notes will develop or, if a public market develops, that the market price will
exceed the public offering price set forth on the cover page of this
Prospectus. If an active public trading market for the Notes does not develop,
the market prices and liquidity of the Notes may be adversely affected. Because
the Notes are convertible into Common Stock, the prices at which the Notes
trade in the market will likely be affected by the market price of the
Company's Common Stock.
CONVERSION OF NOTES
The Holder of any Note will have the right, exercisable at any time, subject
to prior redemption or repurchase, to convert the principal amount of such Note
(or any portion thereof
that is an integral multiple of $1,000) into shares of Common Stock of the
Company at the conversion price set forth on the cover page of this Prospectus,
subject to adjustment as described below (the "Conversion Price").
32
<PAGE>
The right to convert a Note called for redemption will terminate at the
close of business on the fifth Business Day preceding the Redemption Date for
such Debenture (unless the Company shall default in making the redemption
payment when due). A Note for which a Holder has exercised the option of such
Holder to require the Company to purchase the Note upon a Change in Control
(as defined herein) may be converted only if such Holder's repurchase notice
is withdrawn by a written notice of withdrawal delivered to the paying agent
prior to the close of business on the repurchase date in accordance with the
terms of the Indenture.
Upon conversion, no payment or adjustment will be made for accrued interest
on a converted Note or for dividends or distributions on shares of Common
Stock issued upon conversion of a Note, but if any Holder surrenders a Note
for conversion between the record date for the payment of an installment of
interest and the next interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date will be paid to
the registered Holder of such Note on such record date. In such event, such
Note, when surrendered for conversion, will be accompanied by delivery of a
check or draft payable in an amount equal to the interest payable on such
interest payment date on the portion so converted. No fractional shares will
be issued upon conversion of Notes. The Company will pay an amount of cash
based on the market price of the Common Stock on the trading day prior to the
date of conversion for any such fractional share interest.
The initial Conversion Price is subject to adjustment upon the occurrence of
certain events, including: (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the issuance to all or
substantially all holders of Common Stock of rights or warrants to subscribe
for or purchase Common Stock (or securities convertible into Common Stock) at
a price per share less than the then Current Market Price per share (as
defined in the Indenture); (iii) the subdivision or combination of the
outstanding Common Stock; (iv) the distribution to all holders of Common Stock
of shares of capital stock of the Company (other than Common Stock), evidences
of indebtedness or other assets; and (v) the distribution to all or
substantially all holders of Common Stock of rights or warrants to subscribe
for securities (other than those referred to in (ii) above). In the event of a
pro rata distribution to holders of Common Stock of rights to subscribe for
additional shares of the Company's capital stock (other than those referred to
in (ii) above), the Company may, instead of making any adjustment in the
Conversion Price, make proper provision so that each Holder of a Note who
converts such Note (or any portion thereof) after the record date for such
distribution and prior to the expiration or redemption of such rights shall be
entitled to receive upon such conversion, in addition to the shares of Common
Stock issuable upon conversion, an appropriate number of such rights. No
adjustment of the Conversion Price will be made until cumulative adjustments
to the Conversion Price as last adjusted amount to 5% or more. No adjustment
of the Conversion Price will be made for cash or dividend distributions paid
out of consolidated net income or retained earnings, or for shares issued
pursuant to a plan for reinvestment of dividends or interest paid out of
consolidated net income or retained earnings.
If the Company reclassifies or changes its outstanding Common Stock, or
consolidates with or merges into or sells or conveys all or substantially all
of the property or business of the Company as an entity to any person, or is a
party to a merger that reclassifies or changes its outstanding Common Stock,
the Notes will become convertible into the kind and amount of shares of stock
and other securities and property (including cash) which the Holders of the
Notes would have owned immediately after the transaction if the Holders had
converted the Notes immediately before the effective date of the transaction.
REDEMPTION OF NOTES AT THE OPTION OF THE COMPANY
The Notes may not be redeemed at the Company's option prior to August 1,
2000. Thereafter, the Notes may be redeemed at the option of the Company, in
whole or in part, at any time and from time to time, at the redemption prices
(expressed in percentages of principal amount) set forth below, together with
accrued interest to the date fixed for redemption.
33
<PAGE>
If redeemed during the 12 month period beginning August,
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000...........................................................
2001 and thereafter............................................
</TABLE>
Notice of redemption will be mailed at least 20 days prior to the redemption
date to each Holder of Notes to be redeemed at such Holder's registered
address. Interest shall cease to accrue on Notes or portions thereof called
for redemption on and after the redemption date.
If less than all the Notes are to be redeemed, the Trustee will, within 60
days prior to the redemption date, select Notes for redemption by lot or by a
method the Trustee considers fair and appropriate; provided that such method
is not prohibited by any stock exchange or market on which the Notes are then
listed. If any Note is to be redeemed in part only, a new Note or Notes in
principal amount equal to the unredeemed principal portion thereof will be
issued.
REDEMPTION OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control, each Holder will have the option,
subject to the terms and conditions of the Indenture, to require the Company
to purchase all or any part (provided that the principal amount must be $1,000
or an integral multiple thereof) of the Holder's Notes, on the date (the
"Repurchase Date") that is 30 business days after the date the Trustee gives
Holders of Notes notice (the "Company Notice") of the occurrence of the Change
in Control, for a purchase price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to, but excluding, the Repurchase
Date.
The Company covenants that, prior to the making of the notice to Holders
provided for below, but in any event within 30 days following any Change in
Control, the Company shall (i) repay in full all indebtedness under the
Company's New Credit Facility or offer to repay in full all such indebtedness
and to repay the indebtedness of each lender that has accepted such offer or
(ii) obtain the requisite consent under the Company's New Credit Facility to
permit the repurchase of the Notes pursuant to this covenant. The Company
shall first comply with the covenant in the preceding sentence before it shall
be required to repurchase the Notes pursuant to this covenant. Within 10 days
after any Change in Control requiring the Company to deliver the notice to
Holders provided for below, the Company shall so notify the Trustee and the
lenders under the Company's New Credit Facility.
On or before the 15th day after the occurrence of the Change in Control, the
Company or the Trustee shall mail to each Holder or cause to be mailed the
Company Notice, setting forth, among other things, the terms and conditions
of, and the procedures required for exercise of, the Holder's right to require
the purchase of such Holder's Notes. To exercise the repurchase right, a
Holder must deliver written notice of such exercise to the Trustee on or
before the 30th day after the date of the Company Notice, specifying the Notes
with respect to which the right of repurchase is being exercised. Such notice
of exercise may be withdrawn by the Holder by a written notice of withdrawal
delivered to the paying agent at any time prior to the close of business on
the Repurchase Date.
A "Change in Control" shall be deemed to have occurred at such time after
the original issuance of the Debentures as
(a) any Person (other than the Company, any subsidiary of the Company, or
any entity Controlled (as defined herein) by the foregoing, or any employee
benefit plan of the Company or any such subsidiary) is or becomes the
beneficial owner, directly or indirectly, through a purchase or other
acquisition transaction or series of transactions (other than a merger or
consolidation involving the Company), of shares of capital stock of the
Company entitling such Person to exercise in excess of 50% of the total
voting power of all shares of capital stock of the Company entitled to vote
generally in the election of directors;
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(b) there occurs any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the
Company, or any sale or transfer of the assets of the Company as, or
substantially as, an entirety to another Person (other than (i) any such
transaction pursuant to which the holders of the Common Stock immediately
prior to such transaction have, directly or indirectly, shares of capital
stock of the continuing or surviving corporation immediately after such
transaction which entitle such holders to exercise in excess of 50% of the
total voting power of all shares of capital stock of the continuing or
surviving corporation entitled to vote generally in the election of
directors and (ii) any merger (1) which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock or (2) which is effected solely to change the
jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Common
Stock solely into shares of common stock and separate series of common
stock carrying substantially the same relative rights as the Common Stock);
or
(c) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the two-year period immediately preceding such change
(together with any other director whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of at least a majority of the directors then
in office either who were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office;
provided, however, that a Change in Control shall not be deemed to have
occurred if either (a) the Closing Price per share of the Common Stock for any
five (5) Trading Days within the period of ten (10) consecutive Trading Days
ending immediately before the Change in Control shall equal or exceed 105% of
the Conversion Price in effect on each such Trading Day, or (b) (i) at least
95% of the consideration (excluding cash payments for fractional shares) in
the transaction or transactions constituting the Change in Control consists of
shares of common stock with full voting rights traded on a national securities
exchange or quoted on the Nasdaq National Market (or which will be so traded
or quoted when issued or exchanged in connection with such Change in Control)
(such securities being referred to as "Publicly Traded Securities") and as a
result of such transaction or transactions the Notes become convertible solely
into such Publicly Traded Securities and (ii) the consideration in the
transaction or transactions constituting the Change in Control consists of
cash, Publicly Traded Securities or a combination of cash and Publicly Traded
Securities with an aggregate fair market value (which, in the case of Publicly
Traded Securities, shall be equal to the average Closing Price of such
Publicly Traded Securities during the ten (10) consecutive Trading Days
commencing with the sixth Trading Day following consummation of the
transaction or transactions constituting the Change in Control) which is at
least 105% of the Conversion Price in effect on the date immediately preceding
the date of consummation of such Change in Control. The term "Controlled"
shall mean ownership or control of more than 50% of the voting power of such
entity.
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which may then be applicable, and will file
Schedule 13E-4 or any other Schedule required thereunder and otherwise comply
with all federal and state securities laws in connection with any offer by the
Company to purchase Debentures at the option of the Holders upon a Change in
Control.
The Holders' redemption right upon the occurrence of a Change in Control
could, in certain circumstances, make more difficult or discourage a potential
takeover of the Company, and, thus, removal of incumbent management. See "Risk
Factors--Anti-takeover Considerations." The Change in Control redemption
right, however, is not the result of management's knowledge of any specific
effort to accumulate shares of Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation or otherwise.
Instead, the Change in Control purchase feature is a standard term contained
in other similar debt offerings and the terms of such feature have resulted
from negotiations between the Company and the Underwriters.
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The Indenture does not permit the Company's Board of Directors to waive the
Company's obligation to purchase Notes at the option of a Holder in the event
of a Change in Control. The Company could, however, in the future, enter into
certain transactions, including highly leveraged recapitalizations, that would
not constitute a Change in Control and would, therefore, not provide the
Holders with the protection of requiring the Company to repurchase the Notes.
The holders of Junior Notes and Warrants will be subordinate in right of
payment to the holders of the Notes upon a Change in Control under the
Indenture or the Purchase Agreement. The right to require the Company to
repurchase Notes as a result of the occurrence of a Change in Control,
however, could create an event of default under then existing Senior
Indebtedness (as defined herein) of the Company, as a result of which any
repurchase could, absent a waiver or prior payment in full of the Senior
Indebtedness, be blocked by the subordination provisions of the Notes. See "--
Subordination of Notes." Failure by the Company to repurchase the Notes when
required will result in an Event of Default with respect to the Notes whether
or not such repurchase is permitted by the subordination provisions described
below.
SUBORDINATION OF NOTES
The Notes will be subordinate and junior in right of payment to the extent
set forth in the Indenture to all existing and future Senior Indebtedness of
the Company, whether outstanding on the date of the Indenture or thereafter
incurred. Upon any payments or distribution of assets of the Company in any
dissolution, winding-up, liquidation or reorganization of the Company (whether
in an insolvency or bankruptcy proceeding or otherwise), all amounts due or to
become due upon all Senior Indebtedness or to the Trustee shall first be paid
in full before any payment is made on or in respect of the Notes.
Upon the occurrence of an Event of Default with respect to the failure to
pay any principal of, premium, if any or interest on any Senior Indebtedness
when due (whether on stated maturity, acceleration or otherwise), no payment
or distribution shall be made to the Trustee or any Holder of Notes in respect
of the Notes unless and until (i) the amount of such Senior Indebtedness then
due shall have been paid in full or (ii) such default shall have been cured or
waived or shall have ceased to exist. Upon the occurrence of a non-payment
Event of Default with respect to Senior Indebtedness and following receipt by
the Trustee of a written notice of default (a "Payment Blockage Notice") from
a representative of the holders of such Senior Indebtedness or the Company, no
payment or distribution may be made to the Trustee or any Holder of Notes in
respect of the Notes for a period of up to 179 days from the date of such
Payment Blockage Notice, unless and until (i) the amount of such Senior
Indebtedness shall have been paid in full or (ii) such default shall be cured
or waived or shall have ceased to exist.
The subordination provisions described herein will not prevent the
occurrence of any Event of Default (as defined in the Indenture). As a result
of these subordination provisions, in the event of the insolvency of the
Company, Holders of the Notes may recover less ratably than general creditors
of the Company.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) on or in connection
with, and all fees, costs, expenses and other amounts accrued or due on or in
connection with, Indebtedness of the Company, whether outstanding on the date
of this Indenture or thereafter created, incurred, assumed, guaranteed or in
effect guaranteed by the Company (including all deferrals, renewals,
extensions or refundings of, or amendments, modifications or supplements to,
the foregoing), unless in the case of any particular Indebtedness the
instrument creating or evidencing the same or the assumption or guarantee
thereof expressly provides that such Indebtedness shall not be senior in right
of payment to the Notes or expressly provides that such Indebtedness is "pari
passu" with or "junior" to the Notes. Notwithstanding the foregoing, the term
Senior Indebtedness shall not include any Indebtedness of the Company to any
subsidiary of the Company or amounts payable with respect to the Junior Notes,
the Warrant or the New Preferred Stock.
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The principal amount of Senior Indebtedness outstanding at June 30, 1997 was
approximately $86.0 million. Upon completion of the Recapitalization, of which
this Offering forms a part, it is estimated that the principal amount of Senior
Indebtedness outstanding will be approximately $2.2 million. See "Use of
Proceeds." In addition, the Company may incur up to $30.0 million of additional
Senior Indebtedness under the New Credit Facility. The Indenture will not limit
the amount of additional indebtedness, including Senior Indebtedness, which the
Company can create, incur, assume or guarantee, nor will the Indenture limit
the amount of indebtedness which any subsidiary can incur.
The Notes are obligations exclusively of the Company. Because approximately
6% of the Company's revenues are generated by its subsidiaries, the cash flow
of the Company and the consequent ability of the Company to service its debt,
including the Notes, are dependent upon the earnings of the Company's
subsidiaries (and the distribution of those earnings to the Company, whether
through the payment of dividends, loans or other funds by those subsidiaries to
the Company). The Company's subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts
due pursuant to the Notes or to make any funds available therefor, whether in
dividends, loans or other payments. In addition, the payment of dividends and
the making of loans and advances to the Company by its subsidiaries may be
subject to statutory or contractual restrictions and other business
considerations. See "Risk Factors--Leverage" and "--Subordination."
MERGER AND CONSOLIDATION
The Company may consolidate with or merge with or into any other corporation,
and the Company may transfer its property and assets substantially as an
entirety to any person, provided: (i) either the Company is the resulting or
surviving corporation, or the successor corporation is a domestic corporation
and the successor expressly assumes, by supplemental indenture executed and
delivered to the Trustee, payment of the principal of and interest on the Notes
and performance and observance of every obligation of the Company under the
Indenture, and (ii) immediately before and immediately after giving effect to
such transaction, no default or Event of Default shall have occurred and be
continuing.
COVENANTS
The Indenture will contain limited covenants restricting the activities of
the Company. See "Risk Factors--Payment of Junior Notes Prior to Notes Under
Certain Circumstances; Terms Favorable to Holders of Junior Notes." The
Indenture will, however, provide that the Company shall not adopt any plan of
liquidation which provides for, contemplates or the effectuation of which is
preceded by, (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company otherwise than substantially as
an entirety and (ii) the distribution of all the proceeds of such sale, lease,
conveyance or other disposition and of the remaining assets of the Company,
unless the Company makes provisions for satisfaction of the Company's
obligation to pay principal and interest on the Notes.
The Indenture will also provide that, without the consent of at least a
majority in principal amount of the Notes then outstanding, the Company shall
not amend, modify or alter the terms of the Junior Notes, the Warrants or the
New Preferred Stock in any way that will (i) increase the amount of cash
interest payable on any Junior Notes or advance the dates on which such cash
interest is payable, (ii) advance the final maturity date of any Junior Notes,
or (iii) otherwise be materially adverse to the interests of the Holders of the
Notes as holders of debt securities of the Company. The Indenture will also
prohibit the optional prepayment of the Junior Notes by the Company prior to
the maturity of the Notes unless (i) such payments are made by the Company with
the proceeds of the issuance of (y) debt having a lower interest rate than the
terms of the Junior Notes and a maturity date not earlier than the maturity
date of the Notes or (z) equity capital and (ii) the average trading price of
the Common Stock during the 60 trading days immediately preceding the second
business day prior to the date of the repurchase is at least
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130% of the Conversion Price (as defined herein). The Indenture will also
prohibit the Company from exercising its right to repurchase the Preferred
Stock Warrant for so long as any Notes are outstanding.
EVENTS OF DEFAULT; NOTICE AND WAIVER
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization) occurs and is continuing, the Trustee
or the Holders of at least 25% in principal amount of the Notes then
outstanding may declare all unpaid principal of and accrued interest to the
date of acceleration on the Notes then outstanding to be due and payable
immediately; except that in the case of an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization, all unpaid
principal of and accrued interest on the Notes then outstanding shall become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders of Notes. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power conferred on it.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding may on behalf of the Holders of all Notes waive any past Default or
Event of Default and its consequences (except a Default or an Event of Default
in the payment of principal or interest on the Notes or arising with respect to
the conversion rights of the Holders).
The term "Event of Default" when used in the Indenture will mean any one of
the following: (i) failure of the Company to pay interest for 30 days or
principal when due; (ii) failure of the Company to comply with any of its other
agreements contained in the Notes or the Indenture for 30 days after notice,
other than the failure of the Company to comply with (x) the restrictions on
liquidation, consolidation, merger or transfer of all or substantially all of
its assets, (y) the restrictions on modifying the terms of the Junior Notes,
Warrants or New Preferred Stock without the consent of the requisite Holders or
repurchasing the Preferred Stock Warrant, or (z) the provisions regarding the
conversion of the Notes, each of which shall constitute a default upon such
notice without the passage of time; (iii) default by the Company with respect
to its obligation to pay principal of or interest on certain other indebtedness
aggregating more than $10 million, or the acceleration of such indebtedness
under the terms of the instruments evidencing such indebtedness, which has not
been withdrawn within 10 days from the date of such default; and (iv) certain
events of bankruptcy, insolvency or reorganization of the Company or any
subsidiary.
The Indenture will provide that the Trustee shall, within 90 days after the
occurrence of any default (the term "default" to include the events specified
above without grace or notice) known to it, give to the Holders of Notes notice
of such default; provided that, the Trustee may withhold from Holders notice of
a Default or an Event of Default (except a Default or an Event of Default in
the payment of principal or interest) if the Trustee determines in good faith
that the withholding of such notice is in the interest of the Holders of the
Notes.
The Indenture will provide that no Holder of a Note may pursue any remedy
under the Indenture against the Company (except actions for payment of overdue
principal or interest or for the conversion of the Notes), unless (i) the
Holder gives to the Trustee written notice of a continuing Event of Default,
(ii) the Holders of at least 25% in principal amount of the outstanding Notes
make a written request to the Trustee to pursue the remedy, (iii) such Holder
or Holders offer to the Trustee indemnity satisfactory to the Trustee against
any loss, liability or expense, (iv) the Trustee does not comply with the
request within 60 days after receipt of the request and the offer of indemnity,
and (v) the Trustee shall not have received a contrary direction from the
Holders of a majority in principal amount of the outstanding Notes.
The Indenture will provide that the Company shall deliver to the Trustee
within 120 days after the end of each fiscal year of the Company, an Officer's
Certificate as to the signer's knowledge of the Company's compliance with all
conditions and covenants on its part contained in the Indenture and stating
whether or not the signer knows of any default or Event of Default. If such
signer knows of such a
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default or Event of Default, such certificate shall describe the default or
Event of Default and the efforts to remedy the same.
SATISFACTION AND DISCHARGE
The Company may terminate all of its obligations under the Indenture, other
than its obligation to pay the principal of and interest on the Notes and
certain other obligations (including its obligation to deliver shares of
Common Stock upon conversion of the Notes), at any time, by depositing with
the Trustee or a paying agent other than the Company, money or noncallable
U.S. Government Obligations sufficient to pay all remaining indebtedness on
the Debentures. The Indenture will be discharged and canceled upon payment of
all the Notes.
AMENDMENT AND WAIVER
Subject to the exceptions described below, the Company and the Trustee may
supplement the Indenture or the Notes with the consent of the Holders of a
majority in principal amount of the outstanding Notes. The Holders of a
majority in principal amount of the Notes then outstanding may (a) waive
compliance in a particular instance by the Company with any provision of the
Indenture or the Notes or (b) waive any past default or Event of Default under
the Indenture and its consequences, except (i) a default in the payment of
interest or premium, if any, on, or the principal of, the Notes, (ii) a
failure by the Company to convert any Notes into Common Stock, (iii) a default
in the payment of redemption or repurchase price or (iv) a default in respect
of a covenant or provisions which require the consent of the Holders of all
Notes then outstanding. See "--Events of Default; Notice and Waiver."
Notwithstanding the foregoing, without the consent of the Holder of each Note
affected thereby, the Company and the Trustee may not supplement the Indenture
or the Notes to (i) extend the fixed maturity of any Note, or reduce the rate
or extend the time of payment of interest thereon, or reduce the principal
amount thereof or premium, if any, thereon, or reduce any amount payable on
redemption thereof, or impair the right of any Holder of a Note to institute
suit for the payment thereof, or make the principal thereof or interest or
premium, if any, thereon payable in any coin or currency other than that
provided in the Notes, or modify the provisions of the Indenture with respect
to the subordination of the Notes in a manner adverse to the Holders of the
Notes in any material respect, or change the obligation of the Company to
repurchase any Note upon the occurrence of a Change in Control in a manner
adverse to the Holder of Notes, or impair the right to convert the Notes into
Common Stock in any material respect, or (ii) reduce the percentage of Notes
required to consent to any supplemental indenture.
CONCERNING THE TRUSTEE
First Chicago Trust Company will be the Trustee under the Indenture. The
Trustee has certain banking relationships with the Company.
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, if it acquires any conflicting
interest (as defined in the Indenture) and there exists a default with respect
to the Notes, it must eliminate such conflict or resign.
The Holders of a majority in principal amount of all outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy or power available to the Trustee,
provided that such direction does not conflict with any rule of law or with
the Indenture. The Indenture provides that in case an Event of Default shall
occur and be continuing, the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any of the Holders of Notes, unless such Holders shall have offered to the
Trustee indemnity satisfactory to the Trustee against any loss, liability,
expense or fee.
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DESCRIPTION OF THE PRIVATE OFFERING
JUNIOR NOTES
The Junior Notes will be issued pursuant to a Securities Purchase Agreement
(the "Purchase Agreement") between the Company and the Private Investors.
The statements under this section relating to the Junior Notes are summaries
of certain terms applicable to the Junior Notes and the Warrants, and do not
purport to be complete and are qualified in their entirety by express
reference to the Purchase Agreement, the Warrant Agreement (defined below) and
the Certificate of Designation relating to the New Preferred Stock (defined
below), a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part. Capitalized terms defined in the
Certificate of Designation shall have the same meanings herein.
General
The Junior Notes and the Warrants are being sold as units in the Private
Offering that is expected to close concurrently with this Offering. The Junior
Notes will be general unsecured obligations of the Company, subordinate in
right of payment to the Notes and the New Credit Facility and certain other
obligations of the Company. The Junior Notes will be in the aggregate
principal amount of $47.0 million and will bear interest at a rate of 12% per
annum for the first four years following the closing date, 14% per annum for
the fifth year, and thereafter at a rate of 16% per annum, in each case
computed on the basis of a 360-day year. Interest on the Junior Notes will
increase by 4% upon the occurrence and during the continuance of any payment,
redemption or other material default. Interest is payable quarterly in arrears
in cash, except that at the Company's option, in certain circumstances, the
Company may pay interest in the form of additional Junior Notes, of up to 6%
in years 1 through 4 and up to 3.5% in year and zero thereafter. The Junior
Notes will mature on August 1, 2003, and will not be prepayable at the option
of the Company until the first anniversary of the closing date as long as (i)
the Junior Notes are repaid from the proceeds of an equity offering or of a
debt financing having a lower effective cost than the Junior Notes and a
maturity date not earlier than the maturity date of the Junior Notes and (ii)
the average trading price of the Common Stock for the 60 days proceeding such
repayment is at least 30% above the Conversion Price.
Prepayment of the Junior Notes
After the first anniversary of the closing date, the Junior Notes may be
prepaid at the Company's election upon payment of a premium equal to 12% of
the principal amount repaid in the second year, 10% of the principal amount
repaid in the third year, and 6% of the principal amount repaid thereafter as
long as (i) the Junior Notes are repaid from the proceeds of an equity
offering or of a debt financing having a lower effective cost than the Junior
Notes and a maturity date not earlier than the maturity date of the Notes and
(ii) the average trading price of the Common Stock for the 60 trading days
immediately preceding the second business day prior to the date of repurchase
is at least 130% of the Conversion Price.
Junior Notes Covenants
The Junior Notes will require the Company to comply with various covenants,
including without limitation certain financial covenants based on achievement
of specified levels of EBITDA and revenues on a rolling twelve-month basis,
and restrictions on mergers, consolidations, sales of assets, liens,
transactions with affiliates, payment of dividends and redemption and
prepayment of debt, and limitations on the issuance of additional debt ranking
pari passu or senior to the Junior Notes (other than the Debentures and a
specified aggregate maximum amount under the New Credit Facility together with
other Senior Indebtedness).
Junior Notes Events of Default
Events of default under the Junior Notes include, without limitation,
payment defaults, covenant defaults, cross defaults to acceleration of other
significant indebtedness, bankruptcy, merger or Change In Control.
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Restrictions on Mr. Covey's Shares
The Purchase Agreement contains certain various restrictions on the voting
rights and transferability of shares of Common Stock held by Mr. Covey. Upon
and during the continuation of either (i) the breach of any financial covenant
or any other material event of default under the Junior Notes, or (ii) the
failure of the Company to recruit a new Chief Operating Officer/President
mutually acceptable to the Company and the Private Investors, Mr. Covey will
be required to vote his shares as directed by the Private Investors. The
Junior Notes also provide that Mr. Covey will grant a right of first refusal
to the Private Investors, subject to certain de minimis exceptions, with
respect to any transfer by him of equity securities of the Company (other than
certain specified transfers to charitable organizations and his children). Mr.
Covey will also permit the Private Investors to participate on a pro rata
basis in the sale by him of equity securities of the Company and the Private
Investors will permit Mr. Covey to participate in any public or private sale
of Company securities by them (in each case subject to certain exceptions).
WARRANTS
The Company will issue (i) a warrant to purchase Common Stock representing
19.9% of the Common Stock outstanding on the closing date (the "Common Stock
Warrant"), and (ii) a warrant to purchase a series of the Company's preferred
stock, par value $0.01 per share (the "New Preferred Stock") (the "Preferred
Stock Warrant", and together with the Common Stock Warrant, the "Warrants").
The following discussion of the terms and provisions of the Warrants is
qualified in its entirety by reference to that certain warrant agreement (the
"Warrant Agreement") between the Company, the Private Investors and
as warrant agent (the "Warrant Agent"). The Warrants will be
evidenced by warrant certificates in registered form. As of the closing date
of the Private Offering, it is expected that the Company will have
Warrants outstanding. The Warrants are being sold together with
the Junior Notes as units in the Private Offering which is expected to close
concurrently with this Offering.
Common Stock Warrant
The holder of the Common Stock Warrant is entitled to purchase shares of
Common Stock, at an exercise price equal to the lowest of (i) $ [85% of
the average closing price for the 30 trading days ending on the trading day
immediately preceding July [11], 1997, which average is $ ,] (ii) 85% of the
average closing price for the 30 trading days ending on the trading day
immediately preceding the date of issuance of the Junior Notes, (iii) or 85%
of the average closing price for the 30 trading days immediately following the
date of issuance of the Common Stock Warrant. The Common Stock Warrant is
exercisable at any time until the earlier of (x) ten years from the date of
the closing of the Private Offering, (y) the exercise of the Preferred Stock
Warrant or the Control Rights (as defined below) or (z) the repurchase of the
Preferred Stock and Control Rights by the Company following notice of exercise
by the holders. The Warrants are, upon issuance, immediately transferable
separately from the Junior Notes. The Common Stock Warrant contains provisions
that protect the holders thereof against dilution by adjustment of the
exercise price and the number of shares subject to such Common Stock Warrant
in certain events, such as stock dividends, stock splits, mergers, a sale of
all or substantially all of the Company's assets at less than market values,
sales of stock at below market price and other unusual events. Other than as
discussed below, the holders of the Warrants will not have any rights as a
stockholder of the Company unless and until such holder exercises the
Warrants.
Preferred Stock Warrant
The Preferred Stock Warrant is exercisable upon not less than thirty (30)
days prior written notice to the Company on or after September 1, 2003 or the
earlier event of any liquidation, Change in Control or bankruptcy of the
Company until ten years from the date of closing of the Private Offering or
the earlier exercise or expiration of the Common Stock Warrant.
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The New Preferred Stock issuable upon exercise of the Preferred Stock
Warrants will have an aggregate liquidation preference equal to $137.5 million
and will accrue aggregate cumulative dividends at a per annum rate equal to
21% of such liquidation preference, of which 7% will be payable in cash and
the remaining portion will be payable in the form of additional shares of New
Preferred Stock or (at the option of the Company) in cash. The aggregate
exercise price for the Preferred Stock Warrant will be $20.0 million. The
Private Investors will have the option to elect a "net exercise" pursuant to
which they would receive New Preferred Stock having an aggregate liquidation
preference equal to $117.5 million and would make no cash payment. The Company
will have the right during the thirty days following receipt of notice of
election to exercise the Preferred Stock Warrant and the Control Rights to
repurchase the Preferred Stock Warrant and the Control Rights from the Private
Investors at any time for $117.5 million (which will not be permitted by the
terms of the Notes so long as the Notes remain outstanding).
Control Rights
The Private Investors will be entitled to designate two directors in their
sole discretion and the Company will designate a third, new independent
director, subject to the approval of the Private Investors. The number of
directors of the Company will be fixed at seven. At any time after the earlier
of September 1, 2003 or the occurrence of certain triggering events (including
liquidation, change in control or bankruptcy), holders of the Preferred Stock
Warrants will have the right (upon at least thirty (30) days prior written
notice to the Company) to elect a majority of the Board of Directors (the
"Control Rights"). The Control Rights lapse on the first to occur of (i) ten
years from the date of the closing of the Private Offering, (ii) exercise of
the Common Stock Warrant or (iii) repurchase of the Preferred Stock Warrant by
the Company. Directors elected upon exercise of the Control Rights will not
vote on cash settlement of the Preferred Stock Warrant, subject to their
fiduciary duties.
Common Stock Warrant Veto Rights; Covenants
For so long as the original holders own Common Stock Warrants to purchase
more than 5% of the Company's outstanding Common Stock, the Company may not,
without the prior consent of holders of a majority of the Common Stock
Warrants, take certain actions, including (i) the declaration or payment of
any dividend or redemption of any securities; (ii) the incurrence of any debt,
subject to certain exceptions (including the Notes and the New Credit
Facility); (iii) entry into any merger or consolidation or sale, assignment,
lease or otherwise transfer any material portion of its assets; (iv) purchase
or acquisition of a material portion of the equity or assets of any other
business or entity; (v) entry into or amendment of any partnership or joint
venture; (vi) any assignment of the benefit of creditors; (vii) any material
change in the nature of the Company's business; or (viii) creation or transfer
of assets to any subsidiary of the Company.
For so long as the original holders own Common Stock Warrants to purchase
more than 5% of the Company's outstanding Common Stock, on or after the breach
of any financial covenant or other material event of default under the Junior
Notes, or the failure of the Company to recruit a new Chief Operating
Officer/President mutually acceptable to the Company and the Private
Investors, the Company may not, without the prior consent of holders of a
majority of the Common Stock Warrants, take certain actions, including without
limitations, (i) expand the size of the board of directors or create or expand
any committee of the board, (ii) elect, appoint or remove certain specified
officers of the Company, or (iii) approve or expand its annual budget and
related business plans.
Registration Rights
Warrant holders will be entitled to two demand registrations covering the
shares of Common Stock issuable upon exercise of the Common Stock Warrants and
unlimited piggyback registrations, subject to customary cutback provisions.
42
<PAGE>
DESCRIPTION OF COMMON STOCK
COMMON STOCK
The holders of the Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including election of directors, and, except
under certain circumstances, for the voting rights of the Warrants, and as
otherwise required by law or provided in any resolution adopted by the Board of
Directors with respect to any series of the preferred stock, the holders of
shares of Common Stock exclusively possess all voting power. The Certificate of
Incorporation does not provide for cumulative voting in the election of
directors, which means that the holders of a majority of the shares entitled to
vote at a meeting at which a quorum is present can elect all of the directors
then standing for election. Subject to any preferential rights of any
outstanding series of preferred stock or the New Preferred Stock, the holders
of Common Stock are entitled to such dividends as may be declared from time to
time by the Board of Directors from funds available therefor, and upon
liquidation are entitled to receive pro rata all assets of the Company
available for distribution to such holders. See "Price Range of Common Stock
and Dividend Policy." The holders of Common Stock have no preemptive rights and
no rights to convert their shares of Common Stock into any other security. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock issuable upon conversion of the Notes will be, upon
issuance, fully paid and nonassessable. As of June 30, 1997, 42,646,400 shares
of Common Stock were issued and outstanding and were held by approximately 451
holders of record.
RIGHTS PLAN
On April 27, 1988, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of Common
Stock (collectively, the "Voting Stock") payable to holders of record as of the
close of business on and generally to shares of Common Stock issuable under the
Company's stock option plans. One right will also attach to each share of
Common Stock issued by the Company subsequent to May 5, 1988 and prior to the
Distribution Date (as defined below). Each Right entitles the registered holder
to purchase, after the Distribution Date, from the Company one share of Common
Stock at a price of $47.00 (the "Purchase Price"). The description and terms of
the Rights are set forth in a Rights Agreement, dated as of December 1, 1988
(the "Rights Agreement"), between the Company and The First National Bank as
Rights Agent (the "Rights Agent"), as amended and supplemented. The Rights Plan
is set forth in full in the Rights Agreement and the description thereof herein
is qualified in its entirety by reference to such Rights Agreement.
In general, the Rights become exercisable or transferable only upon the
occurrence of certain events related to changes in ownership of the Voting
Stock. Each Right entitles its holder to purchase from the Company one share of
Common Stock, at a purchase price of $47.00 per Share, subject to adjustment.
The Rights will separate from the Voting Stock and become exercisable or
transferable on a distribution date (the "Distribution Date"), which will occur
on the earlier of (i) a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of securities representing 20% or more of the Voting Stock
of the Company or (ii) 10 days following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer that would
result in a person or group of related persons becoming the beneficial owner of
at least 30% of the outstanding Voting Stock. Upon the occurrence of these or
certain other events related to changes in the ownership of the Voting Stock,
each holder of a Right (other than those owned by the Acquiring Person or
persons purchasing from the Acquiring Person) would be entitled to purchase
shares of the Voting Stock, or an acquiring corporation's common stock, having
a market value equal to two times the exercise value of the Right.
The Rights expire on the earliest of (i) December 1, 1998, (ii) consummation
of a merger transaction with a person or group who acquired Voting Stock
pursuant to transaction approved by a majority of the disinterested members of
the Company's Board of Directors, or (iii) redemption of the Rights. Subject to
certain conditions, the Rights may be redeemed by the Company's Board of
Directors at any time at a price of $0.01 per Right. The Rights are not
currently exercisable and trade together with the shares of Voting Stock
associated therewith.
43
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to holders of the Notes. This discussion is
based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations. This discussion does not
purport to deal with all aspects of federal income taxation that may be
relevant to a particular investor's decision to purchase the Notes, and it is
not intended to be wholly applicable to all categories of investors, some of
which, such as dealers in securities, banks, insurance companies, tax-exempt
organizations and non-United States persons, may be subject to special rules.
In addition, this discussion is limited to persons that purchase the Notes in
this Offering and hold the Notes as a "capital asset" within the meaning of
Section 1221 of the Code.
ALL PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE COMMON STOCK.
CONVERSION OF DEBENTURES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will likely result in
taxable gain (or loss), which will be capital gain (or loss), to the extent
that the amount of such cash exceeds (or is exceeded by) the portion of the
adjusted basis of the Note allocable to such fractional share. The adjusted
basis of shares of Common Stock received on conversion will equal the adjusted
basis of the Note converted, reduced by the portion of adjusted basis
allocated to any fractional share of Common Stock exchanged for cash. The
holding period of an investor in the Common Stock received on conversion will
include the period during which the converted Notes were held.
The conversion price of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes--Conversion of Notes." Section 305 of
the Code and the Treasury Regulations issued thereunder may treat the holders
of the Notes as having received a constructive distribution, resulting in
ordinary income (subject to a possible dividends received deduction in the
case of corporate holders) to the extent of the Company's current earnings and
profits as of the end of the taxable year to which the constructive
distribution relates and/or accumulated earnings and profits, if and to the
extent that certain adjustments in the conversion price that may occur in
limited circumstances (particularly an adjustment to reflect a taxable
dividend to holders of Common Stock) increase the proportionate interest of a
holder of Notes in the fully diluted Common Stock, whether or not such holder
ever exercises its conversion privilege. Moreover, if there is not a full
adjustment to the conversion price of the Notes to reflect a stock dividend or
other event increasing the proportionate interest of the holders of
outstanding Common Stock in the assets or earnings and profits of the Company,
then such increase in the proportionate interest of the holders of the Common
Stock generally will be treated as a distribution to such holders, taxable as
ordinary income (subject to a possible dividends received deduction in the
case of corporate holders) to the extent of the Company's current earnings and
profits as of the end of the taxable year to which the constructive
distribution relates and/or accumulated earnings and profit.
MARKET DISCOUNT
Investors acquiring Notes pursuant to this Prospectus should note that the
resale of those Notes may be adversely affected by the market discount
provisions of Sections 1276 through 1278 of the Code. Under the market
discount rules, if a holder of a Note purchases it at market discount (i.e.,
at a price below its stated redemption price at maturity) in excess of a
statutorily-defined de minimis amount and thereafter recognizes gain upon a
disposition or retirement of the Note, then the lesser of the gain recognized
or the portion of the market discount that accrued on a ratable basis (or, if
elected, on a constant interest
44
<PAGE>
rate basis) generally will be treated as ordinary income at the time of the
disposition. Moreover, any market discount on a Note may be taxable to an
investor to the extent of appreciation at the time of certain otherwise non-
taxable transactions (e.g. gifts). Any accrued market discount not previously
taken into income prior to a conversion of a Note, however, is likely to carry
over to the Common Stock received on conversion and be treated as ordinary
income upon a subsequent disposition of such Common Stock to the extent of any
gain recognized on such disposition. In addition, absent an election to include
market discount in income as it accrues, a holder of a market discount debt
instrument may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such debt instrument until the holder disposes of the debt
instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Each holder of Notes generally will recognize gain or loss upon the sale,
exchange, redemption, repurchase, retirement or other disposition of those
Notes measured by the difference (if any) between (i) the amount of cash and
the fair market value of any property received (except to the extent that such
cash or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary income)
and (ii) the holder's adjusted tax basis in those Notes (including any market
discount previously included in income by the holder). Each holder of Common
Stock into which the Notes are converted, in general, will recognize gain or
loss upon the sale, exchange, redemption, or other disposition of the Common
Stock measured under rules similar to those described in the preceding sentence
for the Notes. Special rules may apply to redemptions of Common Stock which may
result in different treatment. Any such gain or losses recognized on the sale,
exchange, redemption, repurchase, retirement or other disposition of a Note or
share of a Common Stock should be capital gain or loss (except as discussed
under "--Market Discount" above), and would be long-term capital gain or loss
if the Note or the Common Stock had been held for more than one year at the
time of the sale or exchange. An investor's initial basis in a Note will be the
cash price paid therefor.
BACK-UP WITHHOLDING
A holder of Notes or Common Stock may be subject to "back-up withholding"
from a reportable payment at a rate of 31% if, among other things, (i) the
holder fails to furnish a social security number or other taxpayer
identification number ("TIN") to the Company certified under penalties of
perjury within a reasonable time after the request therefor; (ii) the IRS
notified the Company that the TIN furnished by the holder is incorrect; (iii)
the IRS notifies the Company that backup withholding should be commenced
because the holder has failed to properly report interest or dividends; or (iv)
when required to do so, the holder fails to certify under penalties of perjury
that such holder is not subject to backup withholding or that the TIN provided
to the Company is correct. Reportable payments include interest payments,
dividend payments and, under certain circumstances, principal payments on the
Notes. A holder who does not provide the Company with its correct TIN also may
be subject to penalties imposed by the IRS. Any amount withheld from a payment
to a holder under the back-up withholding rules is creditable against the
holder's federal income tax liability, provided the required information is
furnished to the IRS. Back-up withholding will not apply, however, with respect
to payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemption from back-
up withholding is properly established.
The Company will report to the holders of Notes and Common Stock and to the
IRS the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to such payments.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representative,
Alex. Brown & Sons Incorporated, have severally agreed to purchase from the
Company the following respective principal amounts of Notes set forth opposite
their names below at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
----------- -----------
<S> <C>
Alex. Brown & Sons Incorporated............................... $
-----------
Total..................................................... $90,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase the entire principal amount of Notes offered hereby if any such Notes
are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of % of such offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of % of the public offering price of the Notes to certain other
dealers. After the initial offering of the Notes, the offering price and the
other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an
additional $13.5 million aggregate principal amount of Notes at the public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of additional Notes that the Notes
to be purchased by it shown in the above table bears to $90.0 million, and the
Company will be obligated, pursuant to the option, to sell such Notes to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Notes offered hereby. If
purchased, the Underwriters will offer such additional Notes on the same terms
as those on which the $90.0 million principal amount of Notes are being
offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock, or securities convertible into or exchangeable for such
stock, for a period of at least 90 days after the date of this Prospectus
without the prior written consent of the Representative, excepting securities
issued by the Company pursuant to the conversion of the Existing Subordinated
Debt or the grant or exercise of options pursuant to the Company's existing
stock option and purchase plans. The directors, executive officers and certain
stockholders of the Company have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of at least 90 days after
the date of this Prospectus without the prior written consent of the
Representative.
46
<PAGE>
The Notes are a new issue of securities with no established trading market.
The Company intends to apply to list the Notes on the Nasdaq National Market.
The Company has been advised by the Underwriters that the Underwriters plan to
make a market in the Notes as permitted by applicable laws and regulations.
The Underwriters are not obligated to make such a market and may discontinue
any market trading at any time without notice. No assurance can be given
therefore as to the liquidity of or trading markets for the Notes.
The Representative of the Underwriters makes a market in the Common Stock.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission (the "Commission") may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Notes and the Common Stock. As an exception to these rules, the Representative
is permitted to engage in certain transactions that stabilize the price of the
Notes and the Common Stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Notes and the
Common Stock.
If the Underwriters create a short position in the Notes in connection with
this Offering, i.e., if they sell a greater aggregate principal amount of
Notes than is set forth on the cover page of this Prospectus, the
Representative may reduce that short position by purchasing Notes in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases Notes
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Notes, it may reclaim the amount of the selling concession
from the Underwriters and selling group members who sold those Notes as part
of this Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Notes or the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representative will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. Passive market making may stabilize or maintain
the market price of the Common Stock and, consequently, the Notes, above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports and other
information with the Commission. The Common Stock is listed on the Nasdaq
National Market. For further information with respect to the Company,
reference is hereby made to such reports and other information which can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor,
47
<PAGE>
New York, New York 10048 and the Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006 or obtained by calling the Nasdaq
Public Reference Room Disclosure Group at (800) 638-8241. Copies of such
material may also be obtained at prescribed rates from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and on the Commission's Web site at
http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act with respect to the Notes offered hereby. In accordance with
the rules and regulations of the Commission, this Prospectus omits certain of
the information contained in the Registration Statement. Reference is hereby
made to the Registration Statement and related exhibits and the documents
incorporated herein by reference for further information with respect to the
Company and the Notes. Statements contained herein or incorporated herein by
reference concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
The Registration Statement, including the exhibits and schedules thereto, is
also available on the Commission's Web site at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents it has
previously filed with the Commission (File No. 0-15322) pursuant to the
Exchange Act:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996, as amended;
(b) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended January 31, 1997 and April 30, 1997;
(c) the Company's Proxy Statement for the Annual Meeting of Stockholders
held on May 28, 1997;
(d) the Company's Current Reports on Form 8-K filed November 8, 1996,
November 15, 1996, November 19, 1996, December 11, 1996, January 10, 1997
and April 30, 1997;
(e) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, declared effective February
12, 1987; and
(f) the description of the Company's Common Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A, filed May
18, 1988.
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of this Offering shall also be deemed
to be incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement incorporated or deemed to
be incorporated herein shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that any statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Neither the Company nor
the Underwriters will update this Prospectus for events occurring subsequent to
the date of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon written or oral request
of such person, a copy of any or all of the foregoing documents incorporated
herein by reference (other than exhibits to such documents, unless
48
<PAGE>
such exhibits are specifically incorporated by reference into such documents).
Requests for such documents should be made to the attention of the Investor
Relations Department at the principal executive offices of the Company, 500
West Madison, Chicago, Illinois 60661 or by telephone at (312) 641-2900.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Sachnoff &
Weaver, Ltd. ("S&W") and for the Underwriters by Willkie Farr & Gallagher.
William N. Weaver, Jr., a member of the Board of Directors, is a member of
S&W. S&W has acted and continues to act as counsel to the Company with regard
to certain matters and has received legal fees for services rendered in
connection therewith.
In consideration for Mr. Weaver's services as a director, the Company has
granted S&W options to purchase a total of 92,250 shares of the Company's
Common Stock. In addition to his pro rata interest in the shares underlying
such options, Mr. Weaver owns 300,000 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company as of October 31, 1996
and for the year then ended have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements as of October 31, 1995 and for the two
years then ended, included in this Prospectus have been so included in
reliance upon the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEARS ENDED OCTOBER 31, 1994, 1995 and 1996
Independent Auditors' Report (KPMG Peat Marwick LLP)..................... F-2
Report of Independent Accountants (Price Waterhouse LLP)................. F-3
Consolidated Balance Sheets as of October 31, 1995, as restated, and
1996.................................................................... F-4
Consolidated Statements of Operations for the years ended October 31,
1994 and 1995, as restated, and 1996.................................... F-6
Consolidated Statements of Cash Flows for the years ended October 31,
1994 and 1995, as restated, and 1996.................................... F-7
Consolidated Statements of Changes in Stockholders' Equity for the years
ended October 31, 1994 and 1995, as restated, and 1996.................. F-8
Notes to Consolidated Financial Statements............................... F-9
SIX MONTHS ENDED APRIL 30, 1996 and 1997
Consolidated Balance Sheets as of October 31, 1996 and April 30, 1997
(unaudited)............................................................. F-21
Consolidated Statements of Operations for the six month periods ended
April 30, 1996 and 1997 (unaudited)..................................... F-23
Consolidated Statements of Cash Flows for the six month periods ended
April 30, 1996 and 1997 (unaudited)..................................... F-24
Notes to Consolidated Financial Statements............................... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
System Software Associates, Inc.
We have audited the accompanying consolidated balance sheet of System
Software Associates, Inc. and its subsidiaries as of October 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of System
Software Associates, Inc. and its subsidiaries as of October 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 7, 1997, except as to
Notes 6, 7, and 11 which are
as of January 29, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
System Software Associates, Inc.
In our opinion, the accompanying consolidated financial statements listed in
the accompanying index present fairly, after the restatement described in Note
2, in all material respects, the financial position of System Software
Associates, Inc. and its subsidiaries at October 31, 1995, and the results of
their operations and their cash flows for each of the two years in the period
ended October 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated
financial statements of System Software Associates, Inc. and its subsidiaries
for any period subsequent to October 31, 1995.
/s/ Price Waterhouse LLP
Chicago, Illinois
January 7, 1997, except as to Notes 6, 7 and 11
which are as of January 29, 1997
F-3
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
---------------
1995
ASSETS RESTATED 1996
------ -------- ------
(IN MILLIONS,
EXCEPT SHARE
DATA)
<S> <C> <C>
Current Assets:
Cash and equivalents......................................... $ 57.1 $ 38.1
Accounts receivable, less allowance for doubtful accounts of
$12.5 and $16.5............................................. 184.6 163.6
Income taxes receivable...................................... -- 4.4
Deferred income taxes........................................ 7.0 10.1
Prepaid expenses and other current assets.................... 21.3 25.5
------ ------
Total current assets....................................... 270.0 241.7
------ ------
Property and Equipment:
Data processing equipment.................................... 30.9 37.3
Furniture and office equipment............................... 14.1 18.7
Leasehold improvements....................................... 7.8 9.0
Transportation equipment..................................... 2.8 2.3
------ ------
55.6 67.3
Less--Accumulated depreciation and amortization.............. 31.3 39.5
------ ------
24.3 27.8
------ ------
Other Assets:
Software costs, less accumulated amortization of $41.1 and
$61.1....................................................... 59.0 82.8
Cost in excess of net assets of acquired businesses, less
accumulated amortization of $6.0 and $8.7................... 18.2 22.8
Deferred income taxes........................................ -- 1.2
Investments in associated companies.......................... 16.5 2.2
Miscellaneous................................................ 5.2 5.9
------ ------
98.9 114.9
------ ------
Total Assets............................................... $393.2 $384.4
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
---------------
1995
LIABILITIES AND STOCKHOLDERS' EQUITY RESTATED 1996
------------------------------------ -------- ------
(IN MILLIONS,
EXCEPT SHARE
DATA)
<S> <C> <C>
Current Liabilities:
Current maturities of senior notes payable.................. $ 4.0 $ --
Accrued commissions and royalties........................... 28.7 26.3
Accounts payable and other accrued liabilities.............. 46.9 62.5
Accrued compensation and related benefits................... 23.5 23.8
Deferred revenue............................................ 61.7 58.8
Income taxes payable........................................ 12.9 --
------ ------
Total current liabilities................................. 177.7 171.4
------ ------
Long-Term Obligations......................................... 33.9 75.1
------ ------
Deferred Revenue.............................................. 27.3 27.7
------ ------
Deferred Income Taxes......................................... 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, 42,094,500 and 42,577,000 shares issued........ 0.1 0.1
Capital in excess of par value.............................. 26.1 32.8
Retained earnings........................................... 115.5 78.5
Unrealized gain on available-for-sale securities............ 2.5 --
Cumulative translation adjustment........................... (0.8) (1.2)
------ ------
Total stockholders' equity................................ 143.4 110.2
Commitments and Contingencies (Note 11)..................... -- --
------ ------
Total Liabilities and Stockholders' Equity................ $393.2 $384.4
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1994 1995
RESTATED RESTATED 1996
-------- -------- ------
(IN MILLIONS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Revenues:
License fees....................................... $229.7 $250.0 $226.7
Client services and other.......................... 94.6 124.1 114.1
------ ------ ------
Total revenues................................... 324.3 374.1 340.8
------ ------ ------
Costs and expenses:
Cost of license fees............................... 60.7 64.9 66.9
Cost of client services and other.................. 57.2 76.8 89.0
Sales and marketing................................ 90.8 87.6 103.8
Research and development........................... 35.1 40.2 54.4
General and administrative......................... 64.1 63.5 85.5
------ ------ ------
Total costs and expenses......................... 307.9 333.0 399.6
------ ------ ------
Operating income (loss).............................. 16.4 41.1 (58.8)
------ ------ ------
Gain on sale of available-for-sale securities........ -- -- 13.1
Non-operating income (expense), net.................. (1.0) (0.2) (5.7)
------ ------ ------
Income (loss) before income taxes and minority
interest............................................ 15.4 40.9 (51.4)
Provision (benefit) for income taxes................. 5.6 14.2 (18.6)
------ ------ ------
Income (loss) before minority interest............... 9.8 26.7 (32.8)
Minority interest.................................... 0.2 (0.1) --
------ ------ ------
Net income (loss).................................... $ 10.0 $ 26.6 $(32.8)
====== ====== ======
Earnings (loss) per share............................ $ 0.25 $ 0.63 $(0.76)
====== ====== ======
Weighted average common and equivalent shares
outstanding......................................... 40.5 42.2 43.0
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1994 1995
RESTATED RESTATED 1996
-------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).................................. $ 10.0 $ 26.6 $(32.8)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment....................................... 8.4 7.9 9.2
Amortization of other assets..................... 11.0 17.3 23.0
Provision for doubtful accounts.................. 8.0 3.3 9.3
Gain on sale of available-for-sale securities.... -- -- (13.1)
Deferred income taxes............................ 4.1 (2.6) (14.2)
Deferred revenue................................. 28.2 7.3 (2.5)
Minority interest................................ (0.2) 0.1 --
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable............................ (23.4) (32.3) 12.6
Prepaid expenses and other current assets...... (0.2) (0.3) (2.1)
Miscellaneous assets........................... -- (3.3) 2.4
Accrued commissions and royalties.............. (5.7) 0.3 (6.8)
Accounts payable and other accrued liabilities. 16.8 1.0 8.0
Accrued compensation and related benefits...... 5.6 1.8 --
Income taxes................................... (4.2) 12.2 (14.2)
------ ------ ------
Net cash provided by (used in) operating
activities.................................. 58.4 39.3 (21.2)
------ ------ ------
Cash Flows From Investing Activities:
Purchases of property and equipment................ (14.7) (5.3) (11.4)
Software costs..................................... (31.2) (25.1) (43.8)
Purchase of available-for-sale securities.......... -- (5.4) --
Investments and acquisitions, net of cash acquired. (1.2) (6.1) (4.5)
Proceeds from sale of available-for-sale
securities........................................ -- -- 23.2
Proceeds from sales of assets...................... 1.9 1.7 --
Other.............................................. (0.4) 0.3 (0.1)
------ ------ ------
Net cash flows used in investing activities.. (45.6) (39.9) (36.6)
------ ------ ------
Cash Flows From Financing Activities:
Principal payments under financing obligations..... (3.8) (3.5) (5.7)
Amount borrowed under line of credit, net.......... -- -- 46.4
Proceeds from exercise of stock options............ 0.5 4.1 2.1
Dividends paid..................................... (3.2) (3.2) (4.2)
------ ------ ------
Net cash provided by (used in) financing
activities.................................. (6.5) (2.6) 38.6
------ ------ ------
Effect of exchange rate changes on cash.............. (3.7) 0.1 0.2
------ ------ ------
Net increase (decrease) in cash and equivalents...... 2.6 (3.1) (19.0)
Cash and equivalents:
Beginning of year.................................. 57.6 60.2 57.1
------ ------ ------
End of year........................................ $ 60.2 $ 57.1 $ 38.1
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TREASURY TOTAL
COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK STOCK-
------------- EXCESS OF RETAINED FOR-SALE TRANSLATION ------------- HOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ADJUSTMENT SHARES AMOUNT EQUITY
------ ------ ---------- -------- ---------- ----------- ------ ------ --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance October 31,
1993................... 27.3 $0.1 $19.9 $85.0 $-- $(1.3) (0.4) $(2.5) $101.2
---- ---- ----- ----- ---- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.1 0.5 0.5
Tax benefit of stock
options exercised...... 0.3 0.3
Foreign currency
translation adjustment. 0.5 0.5
Dividends paid--$0.08
per share.............. (3.2) (3.2)
Net income.............. 10.0 10.0
---- ---- ----- ----- ---- ----- ---- ----- ------
Balance October 31,
1994, Restated......... 27.4 0.1 20.7 91.8 -- (0.8) (0.4) (2.5) 109.3
---- ---- ----- ----- ---- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.5 4.1 4.1
Tax benefit of stock
options exercised...... 2.8 2.8
Foreign currency
translation adjustment. -- --
Dividends paid--$0.08
per share.............. (3.2) (3.2)
Shares issued in
business combinations.. 0.2 (1.5) 0.3 0.4 2.5 1.3
Unrealized gain on
available-for-sale
securities............. 2.5 2.5
Net income.............. 26.6 26.6
Shares issued in three-
for-two split.......... 14.0
---- ---- ----- ----- ---- ----- ---- ----- ------
Balance October 31,
1995, Restated......... 42.1 0.1 26.1 115.5 2.5 (0.8) -- -- 143.4
---- ---- ----- ----- ---- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.3 2.1 2.1
Tax benefit of stock
options exercised...... 1.2 1.2
Foreign currency
translation adjustment. (0.4) (0.4)
Dividends paid--$0.10
per share.............. (4.2) (4.2)
Shares issued in
business combinations.. 0.2 3.4 3.4
Sale of available-for-
sale securities........ (2.5) (2.5)
Net loss................ (32.8) (32.8)
---- ---- ----- ----- ---- ----- ---- ----- ------
Balance October 31,
1996................... 42.6 $0.1 $32.8 $78.5 $ -- ($1.2) -- $ -- $110.2
==== ==== ===== ===== ==== ===== ==== ===== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of operations
System Software Associates, Inc. (the "Company" or "SSA") is a leading
provider of cost-effective business information systems to the industrial
sector worldwide. SSA's integrated product line BPCS (Business Planning and
Control System) provides business process reengineering and integration of all
operations, including configurable manufacturing processes, supply chain
management, and global finance solutions. SSA's object-oriented interoperable
tool set AS/SET (Application System/Solution Engineering Technology) allows
the production of platform independent client/server applications. The Company
supports its clients primarily through a worldwide network of branch offices.
The Company markets, sells, and services its products to intermediate size and
large companies through its own sales organization and a network of
approximately 90 independent software companies (the "Affiliates").
Principles of consolidation
The consolidated financial statements include the accounts of System
Software Associates, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Foreign currency translation
The functional currencies for substantially all of the Company's foreign
subsidiaries are their local currencies. The foreign subsidiaries' balance
sheets are translated at the year end rates of exchange and their results of
operations at weighted average rates of exchange for the year. Translation
adjustments resulting from this process are recorded directly in stockholders'
equity and will be included in the determination of net income (loss) only
upon sale or liquidation of the subsidiaries, which is not contemplated at
this time. Foreign exchange transaction losses aggregating $0.8 million, $0.7
million, and $0.4 million are included in general and administrative expenses
for 1994, 1995, and 1996, respectively.
Revenue recognition
The license fees generated and related commissions earned by the independent
Affiliates are included in license fees and cost of license fees,
respectively. Software license fees are recognized upon client acceptance and
delivery of the software product to the end user. Revenues and commissions
from software maintenance and HelpLine agreements are deferred and recognized
ratably over the term of the contract. Client services revenues are recorded
when such services are provided. Concentrations of credit risk with respect to
accounts receivable are limited due to a large customer base and its
geographic dispersion.
The principal components of cost of license fees are commissions paid to
independent Affiliates, hardware costs, amortization of capitalized software
costs, and royalties paid to third parties. The principal components of cost
of client services and other are salaries paid to the Company's client
services personnel and amounts paid to independent client services
professionals. Accrued Affiliate and salesman commissions are not paid until
the related accounts receivable balances have been collected.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
various methods over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the life of the
assets or related leases. Gains or losses resulting from sales or retirements
are recorded as
F-9
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incurred, at which time related costs and accumulated depreciation are removed
from the accounts. Maintenance and repairs are charged to expense as incurred.
Depreciation and amortization of property and equipment was $8.4 million, $7.9
million, and $9.2 million in 1994, 1995, and 1996, respectively.
Software costs
Purchased software is capitalized and stated at cost. The Company capitalizes
software development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86. Amortization of capitalized costs is computed on a
straight line basis using an estimated useful life of five years or in
proportion to current and anticipated revenues, whichever provides the greater
amortization. Capitalized software costs are summarized as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------
1995 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Purchased software........................................ $ 8.7 $ 9.5
Internally developed software............................. 91.4 134.4
------ ------
100.1 143.9
Less--Accumulated amortization............................ (41.1) (61.1)
------ ------
Net capitalized software costs.......................... $ 59.0 $ 82.8
====== ======
</TABLE>
Amortization of capitalized software costs charged to cost of license fees
aggregated $9.2 million, $14.9 million, and $20.0 million during 1994, 1995,
and 1996, respectively.
Research and development
Research and development expenses, principally the design and development of
software products (exclusive of costs capitalized under SFAS No. 86), are
expensed as incurred.
Cost in excess of net assets of acquired businesses
The excess of cost over the fair value of the net identifiable assets of
acquired businesses is amortized on a straight-line basis, typically over a
seven-year period. Amortization expense was $1.8 million, $2.2 million, and
$2.7 million in 1994, 1995, and 1996, respectively.
Fair value of financial instruments
The fair value of cash and equivalents, receivables, accounts and income
taxes payable, and accrued expenses approximates their carrying values. The
fair value of forward contracts was not significant at October 31, 1995 and
1996. It was not practical to determine the fair value of short-term borrowings
and Senior Notes at October 31, 1996 as the Company was not in compliance with
certain covenants at that date, or the fair value of investments in associated
companies at October 31, 1996 as there are no quoted market prices for these
investments.
Earnings per share
Earnings per share for 1994 and 1995 have been computed using the weighted
average number of common shares and common share equivalents outstanding during
the periods. Weighted average shares outstanding have been adjusted to reflect
as outstanding, for such periods, all shares issuable under stock
F-10
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options using the treasury stock method and the November 28, 1995 three-for-two
stock split. The loss per share for 1996 has been computed using only the
weighted average number of shares outstanding.
Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Statements of cash flows
For purposes of reporting cash flows, the Company considers highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Interest income earned on cash equivalents aggregated $1.8
million, $2.0 million, and $1.1 million during 1994, 1995, and 1996,
respectively. Supplemental information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1994 1995 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Leases capitalized......................................... $1.9 -- $0.6
Liabilities assumed in connection with investments and
acquisitions.............................................. $1.9 $8.7 $1.2
Shares issued in business combinations..................... -- $1.3 $3.4
Cash paid during the year for:
Interest................................................... $3.1 $2.2 $4.0
Income taxes............................................... $3.4 $5.0 $9.5
</TABLE>
NOTE 2--RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS
The Company has restated its consolidated financial statements for the years
ended October 31, 1994 and 1995 for revenues from software contracts entered
into during those periods.
In the third quarter of 1994, the Company entered into a software license
contract for $10.1 million. Due to problems identified during the
implementation of certain of the software products, a dispute arose. This
dispute was settled in fiscal 1996. The investigation surrounding the dispute
identified that certain uncertainties existed as of October 31, 1994 which made
the collectibility of the revenue uncertain at that date. Accordingly, the
fiscal 1994 consolidated financial statements have been restated to reverse the
revenue and certain of the costs associated with the contract. The impact of
these adjustments on the Company's consolidated financial results as originally
reported is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1994
---------------------------------------
AS ORIGINALLY
REPORTED AS RESTATED
-------------------- ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total Revenue................... $ 334.4 $ 324.3
Income Before Income Taxes and
Minority Interest.............. $ 23.8 $ 15.4
Net Income...................... $ 15.4 $ 10.0
Earnings Per Share.............. $ 0.38 $ 0.25
Stockholders' Equity............ $ 114.7 $ 109.3
</TABLE>
F-11
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fiscal 1995 restatement reflects the reversal of revenues for three
contracts entered into during that year. During the third quarter of 1995, the
Company recognized $5.0 million in revenues from the final two installment
payments of a four installment payment contract. Subsequently, it was
determined that such revenue was recorded prior to the completion of
contractual terms which would allow for the revenue to be recognized. During
the third and fourth quarters of fiscal 1995, the Company entered into
reseller agreements of $10.0 and $5.0 million, respectively. Subsequently, the
Company determined that the payment terms for the contracts were not fixed.
Accordingly, the fiscal 1995 consolidated financial statements have been
restated to reverse the revenue and certain of the costs associated with the
contracts. The impact of these adjustments on the Company's consolidated
financial results as originally reported is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1995
--------------------------------------
AS ORIGINALLY
REPORTED AS RESTATED
------------------- ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total Revenue.................... $ 394.4 $ 374.1
Income Before Income Taxes and
Minority Interest............... $ 52.4 $ 40.9
Net Income....................... $ 34.1 $ 26.6
Earnings Per Share............... $ 0.81 $ 0.63
Stockholders' Equity............. $ 156.3 $ 143.4
</TABLE>
NOTE 3--BUSINESS COMBINATIONS:
During the past three years the Company has expanded its global coverage and
strengthened its product offerings through various acquisitions.
The following table summarizes all acquisitions which were accounted for
under the purchase method and, accordingly, resulted in allocations of the
purchase prices to the net assets acquired based upon their estimated fair
values as of the acquisition dates. The accompanying consolidated statements
of operations reflect the results of operations of the acquired companies
since the acquisition dates. Proforma results of operations are not presented
as the acquisitions were not significant. These transactions typically
involved the Company acquiring a majority interest or additional interest in
an existing independent Affiliate.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. SSA DAT GmbH (49%) (a) . SSA Ontario Corporation . NofTek NW, Inc.
. Ocean Information Systems . SSA Services Pty., Ltd. (b) (SSA Northwest) (c)
Sdn Bhd (SSA Malaysia) . BPCS Division of Exigent . Castillo Informatica
. SSA Italia (20%) (a) Computer Group (SSA Iberica) (c)
. Certain assets of Transtech, . Vector Systems Analysis
Inc. . SSA North Central (c)
- ------------------------------------------------------------------------------------------------------------------
Aggregate
consideration $2.7 $6.5 $8.0
- ------------------------------------------------------------------------------------------------------------------
Goodwill $2.3 $6.3 $7.2
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquired the remaining 49% of SSA Germany and a 20% interest in SSA
Italia in 1994.
(b) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA
Australia and New Zealand) in 1995.
(c) Acquired the remaining interests of 90% in SSA Northwest, 27% in SSA
Iberica and 81% in SSA North Central in 1996.
F-12
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, the Company issued 586,000 shares of common stock, with an
aggregate fair value of $21.9 million, for all outstanding common stock of
three companies: Softwright Systems Limited, a leading provider of business
object technology and systems in Europe specializing in object technology,
multimedia, and other leading edge applications, and two of the Company's
independent affiliates, SSA Northeast and Priority Systems, Inc. The
combinations were accounted for as poolings of interest. The results of
operations were included in the Company's consolidated financial statements
from the dates of combinations, as the operations for all periods prior to the
combinations were not material in relation to the Company's consolidated
financial statements.
NOTE 4--INVESTMENTS IN ASSOCIATED COMPANIES:
In July 1995, the Company entered into a strategic alliance relationship with
Harbinger Corporation pursuant to which the Company sold its EDI software
assets (net book value of $2.3 million) to Harbinger and was granted a license
by Harbinger to market and sell AS/400, Unix, and PC-based EDI software
products (there was no gain or loss recognized on the sale). Minimum royalties
amounting to $1.4 million and $5.8 million were accrued in 1995 and paid by the
Company to Harbinger during 1996. The Company received as consideration 550,000
shares of Harbinger Common Stock and 4,000,000 shares of Harbinger Zero Coupon
Preferred Stock. The Zero Coupon Preferred Stock vests at the rate of up to
1,000,000 shares per year beginning in 1997 based upon achieving certain
performance targets, and must be redeemed by Harbinger upon vesting for $1.00
per share in cash or, at the option of the Company, an equivalent amount of
Harbinger Common Stock. In August 1995, the Company purchased an additional
450,000 shares of Harbinger Common Stock. At October 31, 1995, the investment
in Harbinger Corporation Common Stock was classified as available-for-sale and
reported at its fair value of $14 million. The adjustment to fair value in 1995
generated a $2.5 million unrealized gain, net of $1.4 million deferred tax and
was excluded from earnings and reported in a separate component of
shareholders' equity. During 1996 the Company sold all of its shares of
Harbinger Common Stock. The proceeds from the sales were $23.2 million, which
resulted in a gain of $8.4 million, net of $4.7 million in taxes.
The Company also owns minority interests in several of its affiliates and
accounts for these investments under the cost method if the Company owns less
than 20% and the equity method if ownership is more than 20% of each associated
company. The Company does not exercise control over the operations of these
companies.
NOTE 5--FINANCIAL INSTRUMENTS:
The Company uses forward exchange contracts for the primary purpose of
reducing its exposure to fluctuations in foreign currency exchange rates. The
instruments are employed to manage transactional exposure. While these
financial instruments are subject to the risk that market rates may change
subsequent to the acquisition of the financial instrument, such changes would
generally be offset by opposite effects on the items being managed. The
Company's financial instruments typically mature within three months of
origination and are transacted at rates which reflect the market rate at the
date of the contract.
As of October 31, 1996, the Company had forward contracts for the purchase
and sale of European and other currencies, with purchases totaling $3.2 million
and sales totaling $26.8 million. These contracts matured on or before November
5, 1996.
NOTE 6--LINE OF CREDIT:
At October 31, 1995 the Company had a $50 million, multi-bank line of credit
which was to mature in June, 1997. At the option of the Company, borrowings
under the agreement bore interest at the Prime Rate or LIBOR plus a margin. The
margin on LIBOR ranged from 3/4% to 3%, and was based on the
F-13
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
cumulative amount borrowed and the leverage ratio of the Company at the time
of the borrowings. Certain of the Company's majority-owned subsidiaries were
eligible to borrow under the agreement, either in U.S. or local currency.
Available borrowings were reduced by outstanding letters of credit, and 10% of
the face amount of outstanding foreign currency hedge contracts once the
Company's total foreign currency hedges exceed $50 million. The Company was
required to pay a commitment fee equal to 1/8% of the unused portion of the
commitment. The agreement contained covenants that were essentially the same
as those of the senior notes described in Note 7, and also included a covenant
based on the Company's quick ratio.
As a result of operating losses during 1996, the Company was unable to
maintain compliance with certain of the financial covenants within the
agreement and technical defaults occurred. The Company obtained waivers of the
defaults through February 1, 1997, and in January 1997 amended certain terms
and conditions of the agreement whereby all defaults were waived and the
maturity date on the line of credit was extended to November 1, 1997. Other
significant provisions of the amendment include the following: Additional
borrowings and new letters of credit are precluded and the line of credit is
to be collateralized with substantially all of the Company's domestic assets
and a portion of the stock of certain of the Company's foreign subsidiaries.
Upon delivery of the collateral, the interest rate on outstanding borrowings
changes from the current default rate of prime +2% to prime +1% (increasing to
Prime +3% upon a subsequent default), and letter of credit fees will be 2% per
annum (3% upon a subsequent default). The existing financial covenants have
been replaced with covenants that require the Company to maintain and report a
weekly minimum cash balance, maintain a minimum net worth and limit its
quarterly capital expenditures. Additionally, the Company has agreed to issue
warrants at fair market value at the time of issuance to the banks to purchase
an aggregate of 500,000 shares of the Company's common stock. The warrants
will be freely transferable and can be exercised at any time within five years
of the issue date. The Company is required to make a mandatory prepayment pro-
rata to the banks and Senior Noteholders of 100% of the proceeds of any debt
or equity offering up to the amount of unpaid indebtedness outstanding to the
banks and the Noteholders.
At October 31, 1996, borrowings under the line of credit of $46.4 million
were classified as long-term. Outstanding letters of credit issued against the
line of credit at October 31, 1996 were $1.2 million. The weighted average
interest rate on outstanding borrowings during 1996 was 7.78%. There were no
borrowings under the line of credit during 1995 and 1994, except for $10
million borrowed and repaid in October 1994.
NOTE 7--LONG-TERM OBLIGATIONS:
Long-term obligations consist of the followings:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------
1995 1996
----- -----
(IN
MILLIONS)
<S> <C> <C>
Multi-bank line of credit (see Note 6)....................... $ -- $46.4
Senior Notes payable......................................... 30.0 26.0
Notes payable and other obligations.......................... 9.8 1.2
Obligations under capital leases............................. 1.7 3.6
----- -----
41.5 77.2
Less--Current maturities..................................... 7.6 2.1
----- -----
$33.9 $75.1
===== =====
</TABLE>
F-14
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At October 31, 1996, Senior Notes payable consisted of $4 million senior
notes and $22 million senior notes originally due September 15, 1997 and
September 15, 1998, respectively, with the original interest rates of 6.23% and
6.69%, respectively. The notes contained covenants including minimum net worth,
fixed charge coverage and leverage ratios.
As a result of operating losses during 1996, the Company was unable to
maintain compliance with the fixed charge financial covenant of the notes and
technical defaults occurred. The Company obtained waivers of the defaults
through February 1, 1997, and in January 1997 amended certain terms and
conditions of the Senior Notes whereby all defaults were waived and the
maturity dates were changed to November 1, 1997. Under an intercreditor
arrangement with the Company's banks and as described in Note 6, the notes have
been collateralized with certain of the Company's assets and mandatory
prepayments are required from the proceeds of any debt or equity offering.
Interest due on the notes was changed from semi-annual to monthly payment
dates. Upon delivery of collateral, the interest rates on each of the notes
changes from the current default rates of 8.23% and 8.69%, respectively, to
prime +1% (increasing to prime +3% upon a subsequent default). The existing
financial covenants have been amended to be the same as the new covenants
contained in the Company's line of credit described in Note 6. Additionally,
the Senior Noteholders will be issued warrants to purchase 275,000 shares of
the Company's common stock under the same terms as the warrants issued to the
banks as described in Note 6. At October 31, 1996, the Senior Notes of $26
million were classified as long-term.
At October 31, 1996, notes payable and other obligations consist of
commitments made in connection with investments and acquisitions which mature
as follows: $0.6 million in 1997, and $0.6 million in 1998.
Capital lease obligations represent the present value of future payments
under leases for transportation and data processing equipment. The recorded
cost of these assets aggregated $5.6 million and $5.6 million at October 31,
1995 and 1996, respectively; accumulated amortization thereon aggregated $3.3
million and $3.4 million, respectively. Amortization of assets under capital
leases is included in depreciation and amortization expense.
The following is a schedule of future minimum lease payments under capital
lease obligations, together with the present value of minimum lease payments at
October 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, (IN MILLIONS) AMOUNT
------------------------------------- ------
<S> <C>
1997............................................................... $1.8
1998............................................................... 1.6
1999............................................................... 0.6
2000............................................................... 0.1
----
Total minimum lease payments....................................... 4.1
Less--Amount representing interest................................. 0.5
----
Present value of minimum lease payments............................ 3.6
Less--Current maturities........................................... 1.5
----
$2.1
====
</TABLE>
Interest expense was $2.8 million, $2.2 million, and $4.7 million during
1994, 1995, and 1996, respectively.
F-15
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES:
Deferred income taxes arise from temporary differences between the income tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements.
Pretax income (loss) from continuing operations was taxed in the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1994 1995 1996
----------------------
(IN MILLIONS)
<S> <C> <C> <C>
Domestic.......................................... $ 7.7 $ 31.4 $ (57.6)
Foreign........................................... 7.7 9.5 6.2
------ ------ --------
$ 15.4 $ 40.9 $ (51.4)
====== ====== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
1994 1995 1996
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal........................................... $(4.9) $ 8.9 $ (8.3)
State............................................. 0.1 0.7 (2.8)
Foreign........................................... 6.3 7.2 5.3
----- ----- ------
1.5 16.8 (5.8)
----- ----- ------
Deferred:
Federal........................................... 4.7 (2.8) (11.5)
State............................................. 0.4 (0.1) (0.8)
Foreign........................................... (1.0) 0.3 (0.5)
----- ----- ------
4.1 (2.6) (12.8)
----- ----- ------
$ 5.6 $14.2 $(18.6)
===== ===== ======
</TABLE>
In addition to taxes incurred on foreign operations, the Company is subject
to and includes foreign taxes on net remittances from foreign Affiliates as a
component in its provision for foreign income taxes. No domestic provision has
been recorded for unremitted earnings of foreign subsidiaries as it is
anticipated that any U.S. income taxes on distributions of earnings not
permanently reinvested will be offset by foreign tax credits.
A reconciliation of taxes based on the federal statutory rate and the
Company's actual provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
1994 1995 1996
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax at the federal statutory rate........... $ 4.5 $14.3 $(18.0)
State income taxes, net of federal benefit......... 0.1 0.6 (1.3)
Foreign Sales Corporation, net..................... (0.4) (0.1) --
Foreign operating losses........................... 1.7 0.6 (0.3)
Research and development tax credit................ (2.1) (1.3) (1.2)
Meals and entertainment............................ 0.1 0.4 1.1
Other, net......................................... 1.7 (0.3) 1.1
----- ----- ------
$ 5.6 $14.2 $(18.6)
===== ===== ======
</TABLE>
F-16
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net deferred tax balance is comprised of (asset) liability:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31,
-------------
1995 1996
----- ------
(IN
MILLIONS)
<S> <C> <C>
Revenues (net of commissions) recognized for tax purposes in
advance of financial reporting............................. $(3.2) $ (3.3)
Capitalization of software costs for financial reporting
purposes................................................... 15.6 24.7
Provision for doubtful accounts............................. (3.7) (5.0)
Rent expense for financial reporting purposes............... (1.6) (1.4)
Expense recognized for financial reporting purposes in
advance of tax............................................. (1.2) (3.0)
Deferred gain............................................... (1.7) (1.6)
Unrealized equity gain...................................... 1.4 --
Domestic credit carryforwards............................... (1.4) (1.4)
Foreign carryforwards....................................... (4.0) (3.6)
Foreign tax credit carryforwards............................ -- (11.0)
Research and development credit carryforwards............... -- (2.6)
Domestic net operating loss carryforwards................... -- (11.7)
Valuation allowance......................................... 3.2 8.3
Other, net.................................................. (0.5) 0.3
----- ------
$ 2.9 $(11.3)
===== ======
</TABLE>
At October 31, 1996, the Company has approximately $6.0 million of foreign
net operating loss carryforwards, $31.1 million of domestic net operating loss
carryforwards, and $15.0 million of tax credit carryforwards. At October 31,
1995 and October 31, 1996, the Company recorded valuation allowances related
to these items of $3.2 million and $8.3 million, respectively. The Company
recognizes certain deferred tax assets based upon Management's assessment that
these assets will "more likely than not" be recognized in the future in
accordance with SFAS 109, "Accounting for Income Taxes". This assessment is
based primarily on estimates of future operating results.
Of the $6.0 million of foreign net operating loss carryforwards, $3.0
million expire in varying amounts through the fiscal year ending October 31,
2003 and $3.0 million may be carried forward indefinitely. The $31.1 million
in domestic net operating loss carryforwards expire on October 31, 2011. The
$15.0 million of tax credit carryforwards expire in varying amounts through
the fiscal year ending October 31, 2011.
During 1994, 1995, and 1996 certain employees disposed of shares acquired
through the exercise of stock options that allowed the Company to record
additional compensation expense for tax purposes measured as the difference
between the fair value of the stock and the option price at the date of
exercise. The aggregate tax benefit to the Company of $0.3 million, $2.8
million, and $1.2 million, respectively, has been credited to capital in
excess of par value.
NOTE 9--STOCKHOLDERS' EQUITY:
The Company has certain stock option plans and a long-term incentive plan
under which options to purchase shares of the Company's common stock, stock
appreciation rights, restricted stock, and cash awards may be granted to key
employees and non-employees of the Company and its Affiliates. The plans
provide that an aggregate of 6,356,250 common shares be available for grant,
subject to adjustments for
F-17
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock splits, stock dividends, mergers, or other changes in capitalization.
Options become exercisable in varying periods (typically 5 years) and are
priced by the Board of Directors, but may not be less than 50% of the fair
market value of the shares at the date of grant. All options granted during
1994, 1995, and 1996 were granted at fair market value.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
AVAILABLE OPTION PRICE
FOR GRANT UNEXERCISED EXERCISABLE PER SHARE
---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, October 31, 1993.. 1,199,362 1,258,760 428,688 $ 1.38 -- 24.75
---------- ---------- -------- ---------------
Granted.................... (571,500) 571,500 11.75 -- 16.75
Becoming exercisable....... 280,293 4.64 -- 24.75
Cancelled.................. 54,900 (54,900) 6.00 -- 15.13
Exercised.................. (97,900) (97,900) 2.89 -- 12.38
---------- ---------- -------- ---------------
Balance, October 31, 1994.. 682,762 1,677,460 611,081 1.38 -- 24.75
---------- ---------- -------- ---------------
Granted.................... (498,000) 498,000 12.25 -- 27.13
Becoming exercisable....... 338,367 6.00 -- 24.75
Cancelled.................. 154,467 (154,467) 6.00 -- 19.67
Exercised.................. (497,946) (497,946) 1.56 -- 19.50
Reflect three-for-two stock
split..................... 169,615 761,524 225,751
---------- ---------- -------- ---------------
Balance, October 31, 1995.. 508,844 2,284,571 677,253 0.92 -- 18.09
---------- ---------- -------- ---------------
Granted.................... (1,468,001) 1,468,001 9.81 -- 24.08
Becoming exercisable....... 393,822 4.00 -- 18.08
Cancelled.................. 1,384,237 (1,384,237) (191,211) 4.00 -- 24.08
Exercised.................. (275,906) (275,906) 1.93 -- 13.89
---------- ---------- -------- ---------------
Balance, October 31, 1996.. 425,080 2,092,429 603,958 $ 0.92 -- 13.89
========== ========== ======== ===============
</TABLE>
During 1988, the Board of Directors approved a stockholder rights plan
designed to deter coercive takeover tactics and to prevent an acquiror from
gaining control of the Company without offering a fair price to all of the
Company's stockholders. At that time, the Company declared a distribution of
one right for each share of common stock outstanding (effected as a stock
dividend) to stockholders of record as of May 5, 1988, and generally to shares
issuable under the Company's stock option plans. Each right entitles the
registered holder to purchase from the Company one share of common stock at a
purchase price of $47. Each right is exercisable ten days after the acquisition
of 20% or more of the Company's voting stock, or the commencement of a tender
or exchange offer under which the offeror would own 30% or more of the
Company's stock.
In the event of a proposed takeover satisfying certain additional conditions,
the rights could be exercised by all holders other than the takeover bidder at
an exercise price of half of the current market price of the Company's common
stock. This would have the effect of significantly diluting the holdings of the
takeover bidder. These rights expire on May 3, 1998.
F-18
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--FOREIGN INFORMATION:
Information regarding geographic areas for the years ended October 31, 1994,
1995, and 1996 is as follows:
<TABLE>
<CAPTION>
EUROPE
UNITED STATES MIDDLE EAST OTHER ELIMINATIONS TOTAL
------------- ----------- ------ ------------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year Ended October 31,
1994
Sales to unaffiliated
customers............ $155.5 $119.4 $ 82.6 $(33.2) $324.3
Operating income...... $ 14.0 $ 1.9 $ 0.5 $ 16.4
Identifiable assets... $199.1 $101.4 $ 84.0 $(51.4) $333.1
====== ====== ====== ====== ======
Year Ended October 31,
1995
Sales to unaffiliated
customers............ $173.7 $148.1 $ 92.0 $(39.7) $374.1
Operating income...... $ 28.5 $ 9.3 $ 3.3 $ 41.1
Identifiable assets... $225.2 $130.2 $ 87.3 $(49.5) $393.2
====== ====== ====== ====== ======
Year Ended October 31,
1996
Sales to unaffiliated
customers............ $164.9 $113.8 $ 95.0 $(32.9) $340.8
Operating loss........ $(17.4) $(26.6) $(14.8) $(58.8)
Identifiable assets... $234.9 $ 98.6 $107.2 $(56.3) $384.4
====== ====== ====== ====== ======
</TABLE>
The sales and operating income (loss) amounts reflected above include
intercompany royalties.
United States sales by geographical areas during the years ended October 31,
1994, 1995, and 1996 are as follows:
<TABLE>
<CAPTION>
FOREIGN
---------------------------------
EUROPE ASIA CANADA
UNITED STATES MIDDLE EAST PACIFIC LATIN AMERICA TOTAL
------------- ----------- ------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year Ended October 31,
1994................... $119.1 $16.6 $9.9 $9.9 $155.5
Year Ended October 31,
1995................... $147.3 $14.3 $5.4 $6.7 $173.7
Year Ended October 31,
1996................... $143.1 $13.0 $4.3 $4.5 $164.9
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company leases its office space and certain equipment under noncancelable
operating leases that expire at various dates through 2015. Rent expense under
such leases aggregated approximately $9.0 million, $15.7 million, and $24.1
million during 1994, 1995, and 1996, respectively. Minimum annual rental
commitments under noncancelable operating leases for periods subsequent to
October 31, 1996 are as follows: $23.1 million in 1997, $17.8 million in 1998,
$12.5 million in 1999, $9.9 million in 2000, $8.6 million in 2001, and $42.3
million in 2002 and thereafter.
In January 1997, class action lawsuits were filed in state court in Illinois
and in the federal court in Chicago, Illinois against the Company and certain
of its officers. The federal actions allege damages to persons who purchased
the Company's common stock during the period August 22, 1994 through January 7,
1997 arising from alleged violations of the federal securities laws and
associated common laws. The state court action alleges damages to persons who
purchased the Company's common stock during the period November 21, 1994
through January 7, 1997 arising from alleged violations of the Illinois
securities laws and associated common and statutory law. Although the outcome
of these proceedings cannot be determined with certainty, management intends to
defend the actions vigorously, and, in consultation with its legal counsel,
believes that the allegations are without merit and that the final outcomes
should not have a material adverse effect on the Company's operations or
financial position.
The Company is also subject to other legal proceedings and claims which arise
in the normal course of business. Although the outcome of these proceedings
cannot be determined with certainty, management believes that the final
outcomes of these proceedings should not have a material adverse effect on the
Company's operations or financial position.
F-19
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
On November 20, 1995, the Company filed an action against Owens-Illinois
("Owens") in Illinois state court seeking damages based on Owens' failure to
make payments required under a July 29, 1994, contract (the "Contract")
between the parties. On the same day the Company filed suit against Owens,
Owens filed a lawsuit in Illinois state court for recision of the Contract and
for damages. On April 18, 1996, the Company and Owens jointly announced that
they had settled the lawsuits and, as a result, both lawsuits were dismissed.
Terms of the settlement were not disclosed.
In late November, 1995, two class action suits were filed in the federal
court in Chicago, Illinois, against the Company and certain of its officers,
alleging damages to persons who purchased the Company's common stock during
the period August 21, 1995 through November 22, 1995. The plaintiffs
subsequently dismissed each of these suits voluntarily, without liability to
the Company.
On February 22, 1991, a class action lawsuit was filed in the federal court
in Chicago, Illinois, against the Company, its Chairman and Chief Executive
Officer, and its former Chief Financial Officer. On July 2, 1993, after a two
week trial, the jury returned a verdict in favor of all defendants on all
counts. On August 10, 1994, the 7th Circuit Court in Chicago affirmed the jury
verdict.
F-20
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents................................. $ 38.1 $20.4
Accounts receivable, less allowance for doubtful
accounts of $16.5 and $16.5......................... 163.6 163.6
Income taxes receivable.............................. 4.4 3.3
Deferred income taxes................................ 10.1 12.5
Prepaid expenses and other current assets............ 25.5 34.6
------ ------
Total current assets............................... 241.7 234.4
------ ------
PROPERTY AND EQUIPMENT:
Data processing equipment............................ 37.3 39.0
Furniture and office equipment....................... 18.7 17.5
Leasehold improvements............................... 9.0 9.6
Transportation equipment............................. 2.3 1.7
------ ------
67.3 67.8
Less--Accumulated depreciation and amortization...... 39.5 42.3
------ ------
Total property and equipment....................... 27.8 25.5
------ ------
OTHER ASSETS:
Software costs, less accumulated amortization of
$61.1 and $74.3..................................... 82.8 93.2
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $8.7 and $10.3..... 22.8 21.3
Deferred income taxes................................ 1.2 1.5
Investments in associated companies.................. 2.2 1.5
Miscellaneous........................................ 5.9 5.0
------ ------
Total other assets................................. 114.9 122.5
------ ------
Total Assets....................................... $384.4 $382.4
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-21
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
senior notes payable................................ $ -- $ 71.8
Accrued commissions and royalties.................... 26.3 25.7
Accounts payable and other accrued liabilities....... 62.5 60.2
Accrued compensation and related benefits............ 23.8 17.9
Deferred revenue..................................... 58.8 50.3
------ ------
Total current liabilities.......................... 171.4 225.9
------ ------
Long-Term Obligations................................ 75.1 14.1
------ ------
Deferred Revenue..................................... 27.7 28.7
------ ------
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, 42,577,000 and 42,633,000 shares issued. 0.1 0.1
Capital in excess of par value....................... 32.8 42.8
Retained earnings.................................... 78.5 73.5
Cumulative translation adjustment.................... (1.2) (2.7)
------ ------
Total stockholders' equity......................... 110.2 113.7
------ ------
Total Liabilities and Stockholders' Equity......... $384.4 $382.4
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-22
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues:
License fees............................................. $ 100.0 $ 130.2
Client services and other................................ 59.1 60.0
-------- --------
Total revenues......................................... 159.1 190.2
-------- --------
Costs and Expenses:
Cost of license fees..................................... 25.6 33.0
Cost of client services and other........................ 41.4 47.1
Sales and marketing...................................... 45.2 43.9
Research and development................................. 23.4 26.9
General and administrative............................... 33.6 40.1
-------- --------
Total costs and expenses............................... 169.2 191.0
-------- --------
Operating income (loss).................................... (10.1) (0.8)
Non-operating income (expense), net........................ (0.8) (7.0)
-------- --------
Income (loss) before income taxes.......................... (10.9) (7.8)
Provision (benefit) for income taxes....................... (4.0) (2.8)
-------- --------
Net income (loss).......................................... $ (6.9) $ (5.0)
======== ========
Earnings (loss) per share.................................. $ (0.16) $ (0.12)
======== ========
Dividends per share........................................ $ 0.10 $ --
======== ========
Weighted average common shares outstanding................. 43.1 42.6
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................ $ (6.9) $ (5.0)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization of property and equipment.. 4.1 4.5
Amortization of other assets............................. 10.7 15.6
Provision for doubtful accounts.......................... (0.7) --
Deferred income taxes.................................... (0.4) (2.7)
Deferred revenue......................................... (2.8) (5.3)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................... 9.3 (4.1)
Prepaid expenses and other current assets.............. (3.6) (0.3)
Miscellaneous assets................................... 1.1 0.9
Accrued commissions and royalties...................... (7.4) (0.3)
Accounts payable and other accrued liabilities......... (11.6) (1.8)
Accrued compensation and related benefits.............. (4.7) (5.1)
Income taxes........................................... (11.7) 1.1
-------- --------
Net cash used in operating activities................ (24.6) (2.5)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment...................... (5.3) (1.5)
Software costs........................................... (18.5) (23.6)
Investments and acquisitions, net of cash acquired....... (3.6) --
-------- --------
Net cash flows used in investing activities.......... (27.4) (25.1)
-------- --------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit, net.. 20.3 (0.4)
Principal payments under other financing obligations..... (1.5) (1.2)
Proceeds from exercise of stock options.................. 2.0 0.2
Net proceeds from convertible subordinated promissory
note.................................................... -- 12.0
Dividends paid........................................... (4.2) --
-------- --------
Net cash provided by financing activities............ 16.6 10.6
-------- --------
Effect of exchange rate changes on cash.................... (0.1) (0.7)
-------- --------
Net decrease in cash and equivalents................. (35.5) (17.7)
Cash and equivalents:
Beginning of year...................................... 57.1 38.1
-------- --------
End of period.......................................... $ 21.6 $ 20.4
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<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, 1996, 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 elsewhere in this
Prospectus.
NOTE 2--LONG-TERM OBLIGATIONS
On March 27, 1997, the Company issued a convertible subordinated promissory
note to a strategic investor in the amount of $12 million, bearing interest at
the prime rate plus 1% and convertible into common stock of the Company at the
lesser of $3.33 per share or 80% of the fair market value of the stock at the
time of conversion. The loan is due in three years and is not convertible
during the first year, except in the event of prepayment. The convertible
subordinated promissory note has a beneficial conversion feature because the
fair market value of the Company's stock was in excess of its per share
conversion price at the issuance date. The value of the beneficial conversion
feature of $8.9 million was reflected as an increase in additional paid in
capital and other current assets and will be amortized as interest expense over
the one year period beginning the date of issuance.
NOTE 3--LEGAL PROCEEDINGS
In January 1997, class action lawsuits were filed in state court in Illinois
and in the federal court in Chicago, Illinois against the Company and certain
of its officers. The federal actions allege damages to persons who purchased
the Company's common stock during the period August 22, 1994 through January 7,
1997 arising from alleged violations of the federal securities laws and
associated common laws. The state court action alleges damages to persons who
purchased the Company's common stock during the period November 21, 1994
through January 7, 1997 arising from alleged violations of the Illinois
securities laws and associated common and statutory law. Although the outcome
of these proceedings cannot be determined with certainty, management intends to
defend the actions vigorously, and, in consultation with its legal counsel,
believes that the allegations are without merit and that the final outcomes
should not have a material adverse effect on the Company's operations or
financial position.
The Company is also subject to other legal proceedings and claims which arise
in the normal course of business. Although the outcome of these proceedings
cannot be determined with certainty, management believes that the final
outcomes of these proceedings should not have a material adverse effect on the
Company's operations or financial position.
F-25
<PAGE>
[Inside back cover--Chart Re: Product Architecture?]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRIT-
ER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY THE SECURITIES DESCRIBED HEREIN BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUM-
STANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPEC-
TUS.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 18
Price Range of Common Stock and Dividend Policy........................... 18
Capitalization............................................................ 19
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 29
Management................................................................ 30
Description of Notes...................................................... 32
Description of the Private Offering....................................... 40
Description of Common Stock............................................... 43
Certain Federal Income Tax Considerations................................. 44
Underwriting.............................................................. 46
Available Information..................................................... 47
Incorporation of Certain Documents by Reference........................... 47
Legal Matters............................................................. 48
Experts................................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$90,000,000
[LOGO OF SSA]
[ ]% Convertible Subordinated Notes due 2002
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
August , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting discounts and commissions) payable in
connection with the issuance and distribution of the Notes pursuant to the
Prospectus contained in this Registration Statement.
<TABLE>
<S> <C>
SEC filing fee for Registration Statement....................... $ 31,364
NASD filing fee................................................. 10,850
Nasdaq listing fee.............................................. 10,000*
Accountants fees and expenses................................... 125,000*
Blue Sky fees and expenses...................................... 10,000*
Legal fees and expenses......................................... 180,000*
Printing and engraving.......................................... 120,000*
Miscellaneous expenses.......................................... 12,786
--------
Total....................................................... $500,000
========
</TABLE>
- --------
*Estimated Amount
All of the expenses listed above will be borne by the Registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-laws of the Registrant provide that the Registrant shall indemnify
its officers and directors to the fullest extent permitted by applicable law.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in
general, that each director and officer of a corporation may be indemnified
against expenses (including attorneys' fees, judgments, fines and amounts paid
in settlement) actually and reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceedings in
which he is involved by reason of the fact that he is or was a director or
officer if he acted in good faith and in a manner that he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he had no reasonable cause to
believe that his conduct was unlawful. If the legal proceeding, however, is by
or in the right of the corporation, the director or officer may not be
indemnified in respect of any claim, issue or matter as to which he shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the company unless a court determines otherwise.
The Certificate of Incorporation of the Registrant, as amended to date,
provides that the personal liability of the directors of the Registrant shall
be eliminated to the fullest extent permitted by applicable law. The DGCL
permits a corporation's certificate of incorporation to provide that no
director of the corporation shall be personally liable to the corporation or
its stockholders for monetary damages for any breach of his fiduciary duty as
a director; provided, however, that such provision shall not apply to any
liability of a director (1) for any breach of a director's duty of loyalty to
the corporation or its stockholders, (2) for acts or omissions that are not in
good faith or involve intentional misconduct or a knowing violation of the
law, (3) under Section 174 of the DGCL or (4) for any transaction from which
the director derived an improper personal benefit.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1 Underwriting Agreement
3.1 Certificate of Incorporation*
3.2 By-laws of the Company*
3.3 Certificate of Designations for Class A Preferred*
4.1 Form of Indenture between the Company and First Chicago Trust
Company, as Trustee*
4.2 Form of Debenture (included in Exhibit 4.1)*
5 Opinion of Sachnoff & Weaver, Ltd. regarding the legality of the
securities being registered
12 Statement re: computation of ratios
23.1 Consent of Price Waterhouse LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Sachnoff & Weaver, Ltd. (included in Exhibit 5)
24 Powers of attorney (included on the signature page of this
Registration Statement)
25 Statement of eligibility of trustee*
99.1 Junior Notes Purchase Agreement between the Company and certain
Private Investors*
99.2 Warrant Agreement among the Company, First Chicago Trust Company, as
Warrant Agent and certain Private Investors*
</TABLE>
- --------
* To be filed by Amendment
ITEM 17. UNDERTAKINGS.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
the indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON JULY 14, 1997.
System Software Associates, Inc.
/s/ Joseph J. Skadra
By___________________________________
Joseph J. Skadra, Vice President
and Chief Financial Officer
THE UNDERSIGNED OFFICERS AND DIRECTORS OF SYSTEM SOFTWARE ASSOCIATES, INC.,
HEREBY SEVERALLY CONSTITUTE AND APPOINT JOSEPH J. SKADRA AND DOUGLAS R.
NEWKIRK, AND EACH OF THEM SINGLY, OUR TRUE AND LAWFUL ATTORNEYS AND AGENTS,
WITH FULL POWER TO THEM, AND EACH OF THEM, TO SIGN FOR US AND IN OUR NAMES IN
THE CAPACITIES INDICATED BELOW, THE REGISTRATION STATEMENT ON FORM S-3 FILED
HEREWITH AND ANY AND ALL PRE-EFFECTIVE AND POST-EFFECTIVE AMENDMENTS TO SAID
REGISTRATION STATEMENT, AND GENERALLY TO DO ALL SUCH THINGS IN OUR NAMES AND
ON OUR BEHALF IN OUR CAPACITIES AS OFFICERS AND DIRECTORS TO ENABLE SYSTEM
SOFTWARE ASSOCIATES, INC. TO COMPLY WITH THE PROVISIONS OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND ALL REQUIREMENTS OF THE SECURITIES AND EXCHANGE
COMMISSION, HEREBY RATIFYING AND CONFIRMING OUR SIGNATURES AS THEY MAY BE
SIGNED BY OUR SAID ATTORNEYS, OR ANY OF THEM, TO SAID REGISTRATION STATEMENT
AND ANY AND ALL AMENDMENTS THERETO.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Roger E. Covey Chief Executive Officer and July 14, 1997
____________________________________ Chairman of the Board of
Roger E. Covey Directors (Principal
Executive Officer)
/s/ Joseph J. Skadra Chief Financial Officer, July 14, 1997
____________________________________ Vice President--Finance
Joseph J. Skadra and Secretary (Principal
Financial and Accounting
Officer)
/s/ Andrew J. Filipowski Director July 14, 1997
____________________________________
Andrew J. Filipowski
/s/ John W. Puth Director July 14, 1997
____________________________________
John W. Puth
/s/ William N. Weaver, Jr. Director July 14, 1997
____________________________________
William N. Weaver, Jr.
</TABLE>
II-3
<PAGE>
Exhibit 1
WF&G DRAFT
----------
7/7/97
------
$90,000,000
SYSTEM SOFTWARE ASSOCIATES, INC.
___% Convertible Subordinated Debentures Due 2002
UNDERWRITING AGREEMENT
August __, 1997
ALEX. BROWN & SONS INCORPORATED
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
System Software Associates, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") $90,000,000 aggregate principal amount of its __% Convertible
Subordinated Debentures due 2002 (the "Firm Debentures"). The respective amounts
of the Firm Debentures to be so purchased by the several Underwriters are set
forth opposite their names in Schedule I hereto. The Company also proposes to
sell at the Underwriters' option up to an additional $13,500,000 aggregate
principal amount of such debentures (the "Option Debentures") as set forth
below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Debentures set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option
Debentures if you elect to exercise the over-allotment option in whole or in
part for the accounts of the several Underwriters. The Firm Debentures and the
Option Debentures (to the extent the aforementioned option is exercised) are
herein collectively called the "Debentures."
The Debentures are to be issued pursuant to the provisions of an Indenture
dated as of August ___, 1997 (the "Indenture") between the Company and First
Chicago Trust Company, as trustee (the "Trustee").
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. Representations and Warranties of the Company. The Company represents
and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-3 (File No. 333-_____) with
respect to the Debentures and the shares of Common Stock of the Company,
$.0033 par value per share (the "Common Stock"), issuable upon conversion
of the Debentures has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended, (the
"Act") and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission under the Act. The Company has complied with
the conditions for the use of Form S-3. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
(meeting the requirements of the Rules and Regulations) contained therein
and the exhibits, financial statements and schedules, as finally amended
and revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration Statement filed by
the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (i) the form of prospectus
first filed by the Company with the Commission pursuant to Rule 424(b), or
(ii) the last preliminary prospectus included in the Registration Statement
filed prior to the time it becomes effective or filed pursuant to Rule
424(a) under the Act that is delivered by the Company to the Underwriters
for delivery to purchasers of the Debentures, together with the term sheet
or abbreviated term sheet filed with the Commission pursuant to Rule
424(b)(7) of the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein, as to the date of such Preliminary Prospectus or Prospectus, as
the case may be, and, in the case of any reference herein to any
Prospectus, also shall be deemed to include any documents incorporated by
reference therein, and any supplements or amendments thereto, filed with
the Commission after the date of filing of the Prospectus under Rules
424(b) or 430A, and prior to the termination of the offering of the
Debentures by the Underwriters.
-2-
<PAGE>
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When the Registration Statement
becomes effective and at all times subsequent thereto up to and at the
Closing Date (hereinafter defined) and any later date on which Option
Debentures are to be purchased, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will conform in all
material respects to the requirements of the Act and the Rules and
Regulations, and (ii) neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which made, not misleading; provided,
however, that none of the representations and warranties contained in this
subparagraph shall apply to information contained in or omitted from the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon, and in conformity with, (i) written
information furnished to the Company by any Underwriter, directly or
through you, specifically for use in the preparation thereof or (ii) that
part of the Registration Statement which constitutes the statement of
Eligibility and Qualification of the Trustee (Form T-1) under the Trust
Indenture Act of 1939, as amended.
(c) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own, lease and operate
their properties and conduct their business as described in the
Registration Statement; except for the pledge of stock of certain
subsidiaries of the Company pursuant to the Amended and Restated Secured
Credit Agreement, dated as of February 28, 1997 (the "Amended and Restated
Credit Agreement"), among the Company, Bank of America National Trust and
Savings Association and the other financial institutions party thereto, the
Company owns all of the voting stock of its subsidiaries free and clear of
all liens, charges and encumbrances; the Company and each of its
subsidiaries have taken all necessary or required actions in order to
qualify to do business in each of the several jurisdictions in which the
Company and its subsidiaries owns or leases property or conducts business,
except where the failure to take any such actions, in the aggregate, would
not have a material adverse effect on the business, condition (financial or
otherwise), properties or prospects of the Company and its subsidiaries (a
"Material Adverse Effect"); the Company and each of its subsidiaries hold
all licenses, certificates and permits from foreign, state, federal and
other regulatory authorities which are material to the conduct of their
respective businesses, all of which
-3-
<PAGE>
are valid and in full force and effect; the Company and each of its
subsidiaries are not (i) in violation of their respective charter or By-
laws or (ii) except as set forth in the Prospectus, in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement bond, debenture, note agreement or other evidence of indebtedness
or in any other material lease, contract, joint venture or other agreement
or instrument to which the Company or any subsidiary is a party or by which
they or any of their properties may be bound or (iii) in violation of any
law, order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign.
(d) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Debentures to be issued and sold by the Company have been duly
authorized and, when issued and paid for as contemplated herein, will be
validly issued and outstanding, and valid and binding obligations of the
Company, enforceable in accordance with their terms and will be entitled to
the benefits of the Indenture; the shares of Common Stock of the Company
issuable upon conversion of the Debentures have been duly authorized and
reserved for issuance upon such conversion, and when issued upon conversion
in accordance with the terms of the Indenture, will have been validly
issued and will be fully paid and non-assessable. No person or entity holds
a right to require, or participate in, the registration under the Act of
the Debentures or shares of Common Stock of the Company issuable upon
conversion of the Debentures. No person or entity has any preemptive or
other right of participation or first refusal with respect to any of the
Debentures or the Common Stock to be issued upon conversion thereof or the
issue or sale thereof by the Company.
Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental
body necessary in connection with the execution and delivery by the Company
of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or may be necessary to qualify the Debentures for public offering
by the Underwriters under state securities or Blue Sky laws) has been
obtained or made and is in full force and effect. No approval or
authorization of any shareholder is required for the issuance and sale of
the Debentures by the Company or in order for the Company to consummate the
transactions described in the Registration Statement.
-4-
<PAGE>
(e) The Debentures and the authorized capital stock of the Company
conform with the statements concerning them set forth and incorporated by
reference in the Registration Statement.
(f) The historical consolidated financial statements of the Company
and its subsidiaries, together with the related notes and schedules,
included in the Registration Statement present fairly the financial
position and the results of operations and cash flows of the Company and
its consolidated subsidiaries, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been prepared
in accordance with generally accepted principles of accounting ("GAAP"),
consistently applied throughout the periods involved, and all adjustments
necessary for a fair presentation of results for such periods have been
made. The pro forma financial statements set forth in the Registration
Statement fairly present the information required to be presented therein,
and such statements meet the requirements of the Act and have been prepared
in accordance with GAAP consistently applied throughout the periods
involved. The summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the financial statements
presented therein. The Company and its subsidiaries have no material
contingent obligations which are not disclosed in the Company's financial
statements which are included in the Registration Statement.
(g) The Company has full corporate power and authority to enter into
this Agreement and the Indenture and to perform its obligations hereunder
and thereunder (including to issue, sell and deliver the Debentures and the
Common Stock upon conversion thereof). This Agreement and the Indenture
have been duly authorized, executed and delivered by the Company and are
legal, valid and binding agreements on the part of the Company enforceable
in accordance with their respective terms, except as rights to indemnity
and contribution which may be limited by applicable law and except as
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights; the performance of this Agreement
and the Indenture and the consummation of the transactions contemplated
herein and therein will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any other material lease, contract,
joint venture or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the property of the Company or
any of its subsidiaries is bound, or (ii) the Company's or any of its
subsidiaries' charters or By-laws,
-5-
<PAGE>
or (iii) any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of
its subsidiaries or over the properties of the Company or any of its
subsidiaries.
(h) Except as set forth in the Prospectus, there is no pending or, to
the Company's knowledge, threatened action, suit, claim or proceeding
against the Company, any of its subsidiaries or any of their respective
officers, directors, properties, assets or rights before any court or
governmental agency or body or otherwise which, if adversely determined,
would reasonably be expected to have a Material Adverse Effect or adversely
affect the consummation of the transactions contemplated hereby or the
Recapitalization; and there are no contracts or documents of the Company or
any of its subsidiaries which are required to be described in the
Prospectus or to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations which have not been accurately
described in all material respects in the Prospectus and/or filed as
exhibits to the Registration Statement.
(i) KPMG Peat Marwick LLP and Price Waterhouse LLP, who have examined
certain of the consolidated financial statements, together with the related
schedules and notes of the Company, filed with the Commission as a part of
the Registration Statement, are independent accountants within the meaning
of the Act and the Rules and Regulations.
(j) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may be
otherwise stated in the Prospectus, there has not been (i) any material
adverse change in the condition (financial or otherwise), business,
properties or prospects of the Company and its subsidiaries, (ii) any
transaction which is material to the Company and its subsidiaries, except
transactions in the ordinary course of business, (iii) any obligation which
is material to the Company and its subsidiaries, direct or contingent,
incurred by the Company or its subsidiaries, except obligations incurred in
the ordinary course of business, (iv) any change which is material to the
Company and its subsidiaries in the capital stock or outstanding
indebtedness of the Company or its subsidiaries, or (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or its subsidiaries.
(k) Except as set forth in the Registration Statement, (i) the Company
and its subsidiaries have good and marketable title to all properties and
assets described in the Prospectus as owned by them, free and clear of any
liens, charges, encumbrances or restrictions, other than the liens granted
pursuant to the Amended and Restated Credit Agreement and such liens,
charges, encumbrances or
-6-
<PAGE>
restrictions that are not significant in relation to the business of the
Company and its subsidiaries when taken in the aggregate, and (ii) the
material agreements to which the Company and its subsidiaries are a party
are valid and enforceable by the Company and its subsidiaries (as
applicable), except as enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights and, to the
Company's knowledge, the other contracting party or parties thereto are not
in material breach or material default under any of such agreements.
(l) The Company and its subsidiaries have filed all necessary foreign,
federal and state income and franchise tax returns and have paid all taxes
shown thereon as due, and the Company has no knowledge of any tax
deficiency which has been or might be asserted against the Company or its
subsidiaries which could reasonably be expected to have a Material Adverse
Effect; to the Company's knowledge, all tax liabilities are adequately
provided for on the books of the Company and its subsidiaries.
(m) The Company and its subsidiaries maintain insurance of the types
and in amounts generally deemed adequate for their respective business and
consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real
and personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect.
(n) To the Company's knowledge, no labor disturbance by the employees
of the Company and its subsidiaries exists or is imminent.
(o) The Company and its subsidiaries own, or possess adequate rights
to use, all material patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other rights described or referred to in the
Prospects as owned or used by it or which are necessary for the conduct of
their businesses; neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names, copyrights,
contractual franchises, authorizations or other rights which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would reasonably be expected to have a Material Adverse Effect.
-7-
<PAGE>
(p) Neither the Company nor, to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Debentures.
(q) The Company is not, and after giving effect to the issuance of the
Debentures will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the Company is not, nor
will be subject to regulation under said Act.
(r) Upon the execution and delivery of the Indenture by the parties
thereto, the Indenture will be duly qualified under, and conform to the
requirements of, the Trust Indenture Act of 1939, as amended.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income
Securities Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
2. Purchase, Sale and Delivery of the Firm Debentures. On the basis of
the representations, warranties and covenants herein contained, and subject to
the conditions herein set forth, the Company agrees to sell to the Underwriters
and each Underwriter agrees, severally and not jointly, to purchase the
principal amount of Firm Debentures set forth opposite the name of each
Underwriter in Schedule I hereof at a purchase price of ___% of their principal
amount, plus interest, if any, subject to adjustments in accordance with Section
9 hereof.
Payment for the Firm Debentures to be sold hereunder is to be made in New
York Clearing House funds by certified or bank cashier's checks drawn to the
order of the Company for the Firm Debentures against delivery of such Firm
Debentures to the Representatives for the several accounts of the Underwriters.
-8-
<PAGE>
Such payment and delivery are to be made at the offices of Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m.,
Baltimore time, on the third business day after the date of this Agreement, or
at such other time and date not later than five business days thereafter as you
and the Company shall agree upon, such time and date being herein referred to as
the "Closing Date." (As used herein, "business day" means a day on which the
New York Stock Exchange is open for trading and on which banks in New York are
open for business and not permitted by law or executive order to be closed.)
The Firm Debentures will be delivered in such denominations and in such
registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Debentures at the price set forth in the first paragraph of this Section 2. The
option granted hereby may be exercised in whole or in part but only once and at
any time upon written notice given within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Debentures as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Debentures are to be registered and the time and date at which such
Option Debentures are to be delivered. The time and date at which the Option
Debentures are to be delivered shall be determined by the Representatives but
shall not be earlier than three nor later than 10 full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the notice
of exercise shall set the Closing Date as the Option Closing Date. The
principal amount of Option Debentures to be purchased by each Underwriter shall
be in the same proportion to the total principal amount of Option Debentures
being purchased as the principal amount of Firm Debentures being purchased by
such Underwriter bears to $75,000,000, adjusted by you in such manner as to
avoid fractional debentures. The option with respect to the Option Debentures
granted hereunder may be exercised only to cover over-allotments in the sale of
the Firm Debentures by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Debentures shall be
made on the Option Closing Date in New York Clearing House funds by certified or
bank cashier's check drawn to the order of the Company for the Option Debentures
to be sold by it against delivery of the Option
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Debentures at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore
Street, Baltimore, Maryland.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Debentures as soon as the
Representatives deem it advisable to do so. The Firm Debentures are to be
initially offered to the public at 100% of their principal amount, plus
interest, if any. The Representatives may from time to time thereafter change
the public offering price and other selling terms. To the extent, if at all,
that any Option Debentures are purchased pursuant to Section 2 hereof, the
Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Debentures in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the
Rules and Regulations is followed, the Company will (A) prepare and timely
file with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, (B) not
file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations and (C) file on a timely basis all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Debentures by the
Underwriters.
(b) The Company will advise the Representatives promptly when the
Registration Statement or any post-effective amendment thereto shall have
become effective; of the receipt of any comments from the Commission; of
any request of the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, or
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or
of the institution or threatened institution of any proceedings
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<PAGE>
for that purpose, and the Company will use its best efforts to prevent the
issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) The Company will cooperate with the Representatives in endeavoring
to qualify the Debentures for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Debentures.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives, at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may be reasonably requested),
including documents incorporated by reference therein, and of all
amendments thereto, as the Representatives may reasonably request.
(e) The Company will comply to the best of its ability with the Act
and the Rules and Regulations and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution
of the Debentures as contemplated in this Agreement and the Prospectus. If
during the period in which a prospectus is required by law to be delivered
by an Underwriter or dealer any event shall occur as a result of which, in
the judgment of the Company or in the reasonable opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
existing at the time the Prospectus is
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delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will either (i) prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus or (ii) prepare and file with the Commission an appropriate
filing under the Exchange Act which shall be incorporated by reference in
the Prospectus so that the Prospectus as so amended or supplemented will
not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information (including similar documents,
reports and information with respect to significant subsidiaries, as that
term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements) furnished by the Company to its
stockholders generally or filed with any securities exchange pursuant to
the requirements of such exchange or with the Commission pursuant to the
Act or the Exchange Act.
(h) No offering, sale, short sale or other disposition of any Common
Stock of the Company or other securities convertible into or exchangeable
for Common Stock or derivative of Common Stock will be made for a period of
90 days after the date of this Agreement, directly or indirectly, by the
Company otherwise than hereunder or with the prior written consent of Alex.
Brown & Sons Incorporated, except that the Company may, without such
consent, (i) issue the Preferred Stock and Warrants in connection with the
Recapitalization (as defined in the Prospectus), (ii) issue shares to
directors pursuant to the Company's restricted stock plan, (iii) grant
options pursuant to its option plans described in the Prospectus, and (iv)
issue shares upon the exercise of options and warrants or the conversion of
securities outstanding on the date of this Agreement and described in the
Prospectus.
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<PAGE>
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Debentures and the Common Stock issuable upon conversion
thereof on The Nasdaq National Market.
(j) The Company has caused each officer and director of the Company to
furnish to you, on or prior to the date of this Agreement, a letter or
letters, in form and substance satisfactory to the Representatives,
pursuant to which each such person shall agree not to offer, sell, sell
short or otherwise dispose of any shares of Common Stock or other capital
stock of the Company, or any other securities convertible, exchangeable or
exercisable for shares of Common Stock or derivative of shares of Common
Stock owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 90 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated ("Lockup Agreements").
(k) The Company will apply the net proceeds from the sale of the
Debentures and the other transactions contemplated by the Recapitalization
for the purposes set forth in the Prospectus.
(l) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder and has in the past
conducted and will in the future conduct its affairs in such a manner as to
ensure that the Company was not and will not be an "investment company"
within the meaning of said Act and such rules and regulations.
(m) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. Costs and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of
counsel for the Company, the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, all documents incorporated by reference in the
foregoing, this Agreement, the Master Agreement Among Underwriters, the
Underwriters' internal Selling Memorandum, the Underwriters' Questionnaire, the
Invitation Letter, the Power of Attorney, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees and expenses (including legal fees
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<PAGE>
and disbursements) incident to securing any required review by NASD of the terms
of the sale of the Debentures (and the shares of Common Stock into which they
are convertible); the listing fee of the Nasdaq System and the expenses,
including the fees and disbursements of counsel for the Underwriters, incurred
in connection with the qualification of the Debentures (and the shares of Common
Stock into which they are convertible) under State securities or Blue Sky laws.
Any transfer taxes imposed on the sale of the Debentures to the several
Underwriters will be paid by the Company. The Company shall not, however, be
required to pay for any of the Underwriters' expenses (other than those related
to qualification under State securities or Blue Sky laws and NASD review) except
that, if this Agreement shall not be consummated because the conditions in
Section 6 hereof are not satisfied, or because this Agreement is terminated by
the Representatives pursuant to Section 11 hereof, or by reason of any failure,
refusal or inability on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on their part to be performed, unless such failure to satisfy said
condition or to comply with said terms is due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for the
reasonable out-of-pocket expenses, including fees and disbursements of counsel
for the Underwriters, incurred in connection with investigating, marketing and
proposing to market the Debentures or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to any
of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Debentures.
6. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Debentures on the Closing Date and the
Option Debentures, if any, on the Option Closing Date are subject to the
accuracy, as of the Closing Date or the Option Closing Date, as the case may be,
of the representations and warranties of the Company contained herein, and to
the performance by the Company of the covenants and obligations hereunder and to
the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a
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<PAGE>
Federal or state court of competent jurisdiction shall have been issued as
of the Closing Date which would prevent the issuance of the Debentures.
(b) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date or the Option Closing Date, as the case may be,
there shall not have occurred any downgrading, nor shall any notice have
been given of (A) any intended or potential downgrading or (B) any review
of possible change that does not indicate the direction of a possible
change, in the rating accorded any of the Debentures by any "nationally
recognized statistical rating organization," as such term is defined for
purposes of Rule 436(g)(2) of the Rules and Regulations.
(c) The Representatives shall have received on the Closing Date and on
the Option Closing Date, if any, the opinion of Sachnoff & Weaver, Ltd.,
counsel for the Company, dated the Closing Date or the Option Closing Date,
as the case may be, addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) Each of the Company and its subsidiaries incorporated in the
United States (the "U.S. Subsidiaries") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation;
(ii) The Company and each of its U.S. Subsidiaries have the requisite
corporate power to own, lease and operate their respective businesses as
described in the Prospectus; and the Company and each of its subsidiaries
are duly qualified to do business as a foreign corporation and are in good
standing in all jurisdictions in the United States in which the Company and
its subsidiaries are required to be qualified, except where the failure so
to qualify would not reasonably be expected to have a Material Adverse
Effect;
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; and the issued and
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and nonassessable, and have
not been issued in violation of any preemptive right or, to such counsel's
knowledge, right of first refusal;
(iv) Except as described in or contemplated by the Prospectus, to the
knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or
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<PAGE>
rights of any character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such stock;
and except as described in the Prospectus, to the knowledge of such
counsel, no holder of any securities of the Company or any other person has
the right, contractual or otherwise, which has not been satisfied or
effectively waived, to cause the Company to sell or otherwise issue to
them, or to permit them to underwrite the sale of, shares of Common Stock
or other securities of the Company or the right to have any shares of
Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company;
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto and document incorporated by reference therein comply
as to form in all material respects with the requirements of the Act or the
Exchange Act, as applicable and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements and related schedules therein). The conditions for the
use of Form S-3, set forth in the General Instructions thereto, have been
satisfied;
(vi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in the
Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all
material respects;
(vii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the Investment Company
Act of 1940, as amended;
(viii) The Indenture (i) has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company, and, assuming due authorization, execution and
delivery by the Trustee, is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms and (ii) has
been duly qualified under, and conforms to the requirements of, the Trust
Indenture Act of 1939, as amended;
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<PAGE>
(ix) The Company has full corporate power and authority to enter
into this Agreement and the Indenture and to issue, sell and deliver to the
Underwriters the Debentures to be issued and sold by it hereunder;
(x) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except
insofar as indemnification and contribution provisions may be limited by
applicable law or equitable principles, and except as enforceability may be
limited by bankruptcy, reorganization, moratorium or similar laws affecting
the enforceability of creditors' rights generally;
(xi) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or, to
such counsel's knowledge, are contemplated under the Act;
(xii) The terms and provisions of the Debentures and capital stock
of the Company conform in all material respects to the descriptions thereof
contained in the Registration Statement and Prospectus, and the information
in the Prospectus under the captions "Description of Debentures,"
"Description of Preferred Stock," and "Description of Common Stock," has
been reviewed by such counsel and is correct in all material respects;
(xiii) The performance of the Company's obligations under the
Indenture and this Agreement and the consummation of the transactions
contemplated herein and by the Recapitalization will not result in the
breach or violation of any of the terms and provisions, or constitute a
default under, (a) any indenture, mortgage, deed of trust, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, or any
material lease, contract, joint venture or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the
property of the Company or any of its subsidiaries is bound, (b) the
Company's or any of its subsidiaries' charters or by-laws, (c) any
applicable statute, rule or regulation or (d) to such counsel's knowledge,
any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company, any of its subsidiaries or over any
of their respective properties or operations;
(xiv) No authorization, approval or consent of any governmental
authority or agency is necessary in connection
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with consummation of the transactions herein contemplated, except such as
have been obtained under the Act or such as may be required under state or
other securities or Blue Sky laws or by the NASD in connection with the
purchase and distribution of the Debentures by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened of a character that are required to be
disclosed in the Registration Statement by the Act or the applicable Rules
and Regulations, other than those disclosed therein;
(xvi) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently in breach of, or in default under, any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness or any other material lease, joint venture,
contract, agreement or instrument to which the Company or any of its
subsidiaries is a party or by which any of their respective property is
bound;
(xvii) The Debentures, assuming they are in the form of the specimen
received by such counsel, are in due and proper form; the Debentures,
including the Option Debentures, if any, to be sold by the Company pursuant
to this Agreement have been duly authorized and when executed and
authenticated in accordance with the provisions of the Indenture and
delivered and paid for as contemplated by this Agreement will be validly
issued and outstanding, and valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms and will be
entitled to the benefits of the Indenture; the shares of Common Stock of
the Company issuable upon conversion thereof in accordance with the terms
of the Indenture will have been validly issued and will be fully paid and
non-assessable; and no preemptive rights of shareholders exist with respect
to any of the Debentures (including the shares of Common Stock issuable
upon conversion thereof) or the issue and sale thereof; and
(xviii) Upon delivery of certificates for the Debentures to be sold
by the Company under this Agreement and the payment therefor as
contemplated by this Agreement, valid marketable title to the Debentures
represented thereby will have been acquired by the Underwriters, free and
clear of all security interests, liens, encumbrances, claims or equities
whatsoever, assuming for the purpose that the Underwriters purchased the
same in good faith without notice of any adverse claims.
In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel
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<PAGE>
which caused them to believe that, either at the time the Registration Statement
became effective or at the Closing Date or Option Closing Date, as the case may
be, the Registration Statement or the Prospectus (except as to financial
statements, financial data and supporting schedules contained therein, as to
which such counsel need express no opinion) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the States of Illinois or
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company and of government
officials, in which case their opinion is to state that they are so doing and
that they have no knowledge of any material misstatement or inaccuracy in such
opinions, representations or certificate. Copies of any opinion, representation
or certificate so relied upon shall be delivered to you, as Representatives of
the Underwriters, and to Underwriters' counsel.
(d) The Representatives shall have received from Willkie Farr &
Gallagher, counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (v), (viii), (x), (xi) and (xvii) of Paragraph
(b) of this Section 6. In rendering such opinion Willkie Farr & Gallagher
may rely as to all matters governed other than by Delaware or Federal laws
on the opinion of counsel referred to in Paragraph (b) of this Section 6.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that the Registration Statement, as of
the time it became effective under the Act (but after giving effect to
changes incorporated pursuant to Rule 430A under the Act), contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus or any amendment or supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and
the Registration Statement and the Prospectus, or any amendment or
supplement thereto, as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading (except that such counsel need express
no view as to financial statements, schedules and other financial
information included therein). With respect to such
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<PAGE>
statement, Willkie Farr & Gallagher may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(e) The Representatives shall have received at or prior to the Closing
Date from Willkie Farr & Gallagher a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Debentures
under the state securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(f) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of KPMG Peat Marwick LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Principal Financial and Accounting
Officer of the Company to the effect that, as of the Closing Date or the
Option Closing Date, as the case may be, each of them severally represents
as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or
are, to such officer's knowledge, contemplated by the Commission.
(ii) Such officer does not know of any litigation instituted or
threatened against the Company of a character required to be disclosed in
the Registration Statement which is not so disclosed; such officer does not
know of any material contract required to be filed as an exhibit to the
Registration Statement which is not so filed; and the representations and
warranties of the Company contained in
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Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be.
(iii) Such officer has carefully examined the Registration Statement
and the Prospectus and, in such officer's opinion, as of the effective date
of the Registration Statement, the statements contained in the Registration
Statement, including any document incorporated by reference therein, were
true and correct in all material respects, and such Registration Statement
and Prospectus or any document incorporated by reference therein did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading and, in such officer's
opinion, since the effective date of the Registration Statement, no event
has occurred which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth in such
supplement or amendment.
(h) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties contained herein and related matters as the Representatives may
reasonably have requested.
(i) The Firm Notes and Option Notes, if any, and the Common Stock
issuable upon conversion thereof, have been approved for designation upon
notice of issuance on The Nasdaq National Market.
(j) All filings required to have been made pursuant to the Rules and
Regulations under the Act have been made.
(k) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective adverse change in
or affecting the condition, financial or otherwise, of the Company or the
earnings, business affairs, properties, management or business prospects of
the Company whether or not arising in the ordinary course of business.
(l) The Company shall have delivered to you the Lockup Agreements.
(m) The transactions contemplated by the Private Offering (as defined
in the Prospectus).
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representatives and to Willkie Farr &
Gallagher, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the
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<PAGE>
Underwriters hereunder may be terminated by the Representatives by notifying the
Company of such termination in writing or by telegram at or prior to the Closing
Date or the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company. The obligations of the
Company to sell and deliver the Debentures required to be delivered as and when
specified in this Agreement are subject to the conditions that at the Closing
Date or the Option Closing Date, as the case may be, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and in
effect or proceedings therefor initiated or threatened.
8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages or liabilities
to which such Underwriter or such controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
or incorporated by reference in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter and each such controlling person upon demand for
any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding and expenses reasonably incurred
in responding to a subpoena or governmental inquiry whether or not such
Underwriter or controlling person is a party to the related action or
proceeding; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement, or omission or
alleged omission made or incorporated by reference in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for use
in the preparation thereof. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the
Registration Statement, and each person, if
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<PAGE>
any, who controls the Company within the meaning of the Act, against any
losses, claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained or incorporated by reference in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made or incorporated by reference in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay
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<PAGE>
as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the fees and
expenses of the counsel retained by the indemnified party in the event (i)
the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed to
assume the defense and employ counsel acceptable to the indemnified party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceeding in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent (which
consent shall not be unreasonably withheld) but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss
or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action or proceeding, of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative
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<PAGE>
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Debentures. If, however, the allocation
provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Debentures
purchased by such Underwriter and, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
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<PAGE>
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Debentures and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Debentures which such Underwriter has agreed to purchase and pay
for on such date (otherwise than by reason of any default on the part of the
Company), you, as Representatives of the Underwriters, shall use reasonable
efforts to procure within 24 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as may be
agreed upon and upon the terms set forth herein, the Firm Debentures or Option
Debentures, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 24 hours you, as such Representatives, shall
not have procured such other Underwriters, or any others, to purchase the Firm
Debentures or Option Debentures, as the case may be, agreed to be purchased by
the defaulting Underwriter or Underwriters, then (a) if the aggregate principal
amount of Firm Debentures or Option Debentures, as the case may be, with respect
to which such default shall occur does not exceed 10% of the Firm Debentures or
Option Debentures, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective principal
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<PAGE>
amount of Firm Debentures or Option Debentures, as the case may be, which they
are obligated to purchase hereunder, to purchase the Firm Debentures or Option
Debentures, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate principal amount of
Firm Debentures or Option Debentures, as the case may be, with respect to which
such default shall occur exceeds 10% of the Firm Debentures or Option
Debentures, as the case may be, covered hereby, the Company or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 24-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as Representatives,
may determine in order that the required changes in the Registration Statement
or in the Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 101 Federal Street, 15th Floor, Boston, Massachusetts 02110,
Attention: [________]; with a copy to Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to
the Company, to System Software Associates, Inc., 500 West Madison Street, 32nd
Floor, Chicago, Illinois 60661, Attention: Roger E. Covey, Chief Executive
Officer.
11. Termination. This Agreement may be terminated by you by notice to the
Company as follows:
(a) At any time prior to the earlier of (i) the time the Debentures
are released by you for sale by notice to the Underwriters, or (ii) 11:30
a.m. on the first business day following the date of this Agreement;
(b) At any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the condition, financial or otherwise, of the Company and
its subsidiaries taken as a whole or the earnings, business affairs,
properties,
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<PAGE>
management, assets, rights, operations or business prospects of the Company
and its subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (ii) any outbreak or escalation of hostilities
or declaration of war or national emergency after the date hereof or other
national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States would, in your reasonable judgment, make the offering
or delivery of the Debentures impracticable or inadvisable, (iii)
suspension of trading in securities on the New York Stock Exchange, the
American Stock Exchange or Nasdaq or limitation on prices (other than
limitations on hours or number of days of trading) for securities on either
such Exchange or Nasdaq, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of
any court or other governmental authority which in your reasonable opinion
materially and adversely affects or will materially and adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either Federal or New York State authorities, (vi) the taking
of any action by any Federal, State or local government or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States or (vii) the suspension of trading of the Company's Common Stock on
Nasdaq; or
(c) As provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company, as
to any obligation of the Underwriters to purchase the Option Debentures, upon
the occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 9 of this
Agreement.
12. Successors. This Agreement has been and is made solely for the
benefit of the Underwriters and the Company and their respective successors,
executors, administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Debentures merely because of such purchase. No purchaser of Debentures
from any Underwriter shall be deemed a successor or assign merely because of
such purchase.
13. Information Provided by Underwriters. The Company and the
Underwriters acknowledge and agree that the only information furnished or to be
furnished by any Underwriter to the Company for inclusion in any Prospectus or
the Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
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<PAGE>
Underwriters), information provided in connection with Item 502(d) of Regulation
S-K under the Act and information under the caption "Underwriting" in the
Prospectus.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers and (c) delivery of and payment for the
Debentures under this Agreement. The other covenants of the Company in this
Agreement shall remain in full force and effect regardless of (a) any
investigation made by or on behalf of any Underwriter or controlling person and
(b) delivery of any payment for the Debentures under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms. It is understood that your acceptance
of this letter on behalf of each of the Underwriters is pursuant to the
authority set forth in a form of Agreement among Underwriters, the form of which
shall be submitted to the Company for examination, upon request, but without
warranty on your part as to the authority of the signers thereof.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
Very truly yours,
SYSTEM SOFTWARE ASSOCIATES, INC.
By:______________________________
Roger E. Covey
Chief Executive Officer
The foregoing Underwriting
Agreement is hereby confirmed and
accepted as of the date first
above written.
ALEX. BROWN & SONS INCORPORATED
As Representatives of the several
Underwriters listed on Schedule I
By: ALEX. BROWN & SONS INCORPORATED
By:________________________________
Authorized Officer
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Principal Amount
of Firm
Debentures
Underwriter to be Purchased
- ----------- ------------------
Alex. Brown & Sons Incorporated.......
Total............................... $90,000,000
<PAGE>
EXHIBIT 5
[S & W letterhead]
August , 1997
System Software Associates, Inc.
500 West Madison Street
32nd Floor
Chicago, Illinois 60661
Re: Registration Statement on Form S-3 ("Registration Statement")
Gentlemen and Ladies:
We have acted as counsel for System Software Associates, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing of
a registration statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Registration Statement relates to the Company's public offering
(the "Offering") of up to $103,500,000 principal amount of the Company's %
Convertible Subordinated Notes (the "Notes"), and the shares of the Company's
common stock, par value $0.0033 per share, which may be issued upon conversion
of the Notes (the "Conversion Shares"). In connection with this opinion, we
have relied as to matters of fact, without investigation, upon certificates of
public officials and others and upon affidavits, certificates and written
statements of directors, officers and employees of, and the accountants and
transfer agent for, the Company. We have also examined originals or copies,
certified or otherwise identified to our satisfaction, of such instruments,
documents and records as we have deemed relevant and necessary to examine for
the purpose of this opinion, including (a) the Registration Statement, (b) the
Certificate of Incorporation of the Company, as amended, (c) the By-Laws of
the Company, (d) resolutions adopted by the Board of Directors of the Company
in connection with the Offering, (e) the form of Indenture between the Company
and First Chicago Trust Company, as Trustee, relating to the Notes (the
"Indenture"), (f) the form of Note attached as Exhibit A to the form of
Indenture, and (g) the form of Underwriting Agreement between the Company and
Alex. Brown & Sons Incorporated as representative of the several Underwriters.
We have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all the documents submitted to us as certified or photostatic copies and
the authenticity of the originals of such latter documents.
Based upon and subject to the foregoing, we advise you that, in our opinion:
(1) The $103,500,000 in principal amount of Notes covered by the
Registration Statement (including the up to $13,500,000 in principal amount
of Notes issuable upon exercise of the Underwriters' over-allotment
option), when issued by the Company pursuant to the Indenture, will be
legally issued and binding obligations of the Company under the terms of
the Indenture, except (i) as enforceability may be limited by the effects
of bankruptcy, insolvency, reorganization, receivership, moratorium and
other similar laws affecting the rights and remedies of creditors
generally; (ii) as enforceability may be limited by the effects of general
principles of equity, whether applied by a court of law or equity; (iii) as
rights to indemnity or contribution under the same may be limited by
federal or state securities laws or the public policy underlying such laws;
and (iv) that we express no opinion as to the waiver of the defense of
usury; and
(2) The Conversion Shares, when issued by the Company upon the conversion
of outstanding Notes in accordance with their terms and the terms of the
Indenture, will be validly issued, fully paid and non-assessable.
<PAGE>
Our opinions expressed above are limited to the General Corporation Law
of the State of Delaware and the laws of the State of Illinois, and we do
not express any opinion concerning any other laws. This opinion is given as
of the date hereof and we assume no obligation to advise you of changes
that may hereafter be brought to our attention.
We hereby consent to the filing of this opinion as an exhibit to the above-
referenced Registration Statement and the reference to this firm under the
caption "Legal Matters" in the Prospectus constituting a part of such
Registration Statement. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission.
Very truly yours,
<PAGE>
Exhibit 12
STATEMENT re: Computation of Ratios
<TABLE>
<CAPTION>
Pro Forma
---------------------------
Year Six Months
Six Months Ended Ended
Ended April 30, October 31, April 30,
---------------
1992 1993 1994 1995 1996 1996 1997 1996 1997
Fixed charges: -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense $ 0.9 $ 1.1 $ 2.8 $ 2.2 $ 4.7 $ 1.3 $ 7.3 $[ ] $[ ]
Approximate portion of rental
expense representative of an
interest factor (1/3 of rent expense) 2.0 2.7 3.0 5.2 8.0 3.9 4.2 8.0 4.2
------------------------------------------------------------------------------------------
Total fixed charges 2.9 3.8 5.8 7.4 12.7 5.2 11.5 [ ] [ ]
Income (loss) before income taxes
and minority interest 41.6 35.7 15.4 40.9 (51.4) (10.9) (7.8) (62.5) (12.1)
------------------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest and total
fixed charges $44.5 $39.5 $21.2 $48.3 $(38.7) $ (5.7) $ 3.7 $[ ] $[ ]
Ratio of earnings to fixed charges 15.3 10.4 3.7 6.5 (3.0) (1.1) 0.3 [ ] [ ]
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated January 7, 1997, except
as to Notes 6, 7 and 11, which are as of January 29, 1997, relating to the
consolidated financial statements of System Software Associates, Inc. as of
October 31, 1995 and for the two years then ended which appears in such
Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
Price Waterhouse LLP
Chicago, Illinois
July 11, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 7, 1997, except as to
Notes 6, 7, and 11 which are as of January 29, 1997, relating to the
consolidated balance sheet of System Software Associates, Inc. and
subsidiaries as of October 31, 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
included herein and to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Chicago, Illinois
July 11, 1997
