<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-31271
PROSPECTUS
$120,000,000
[SSA LOGO]
7% 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 $18.06 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 September 8, 1997, the last sale price of the
Common Stock as reported on the Nasdaq National Market was $14.75 per share.
Interest on the Notes will be payable semiannually on March 15 and September
15 of each year, commencing March 15, 1998. The Notes have been approved for
listing on the Nasdaq SmallCap Market under the symbol "SSAXG." The Notes will
be represented by a Global Security registered in the name of a nominee of The
Depository Trust Company, as Depository, and will be available for purchase in
denominations of $1,000 and any integral multiple thereof.
The Notes will not be redeemable at the option of the Company prior to
September 20, 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 will 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 August
31, 1997, the Company had approximately $83.9 million of Senior Indebtedness,
of which $68.8 million is expected to be repaid from the net proceeds to the
Company from the sale of the Notes offered hereby.
-----------
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-----------
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 DISCOUNTS
PRICE TO PUBLIC (1) (2) PROCEEDS TO COMPANY (3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note... 100% 3% 97%
- -------------------------------------------------------------------------------
Total (4).. $120,000,000 $3,600,000 $116,400,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) See "Underwriting" for a description of Representative's Warrants and
indemnification arrangements with the Underwriters.
(3) Before deducting estimated expenses of $750,000 payable by the Company.
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional $18,000,000 principal amount of Notes on the terms set
forth above solely to cover over-allotments, if any. If all such Notes are
purchased, the total Price to Public, Underwriting Discounts and Proceeds
to Company will be $138,000,000, $4,140,000 and $133,860,000,
respectively. See "Underwriting."
-----------
The Notes are offered by the several Underwriters, subject to prior sale,
receipt and acceptance by them and subject to the right of the Underwriters to
reject any order in whole or in part and certain other conditions. It is
expected that delivery of the Notes will be made in book-entry form through
the facilities of The Depository Trust Company on or about September 12, 1997.
Delivery of Notes, if any, in certificated form will be made on or about such
date at the office of Lazard Freres & Co. LLC in New York, New York.
The activities of the Representatives are being jointly coordinated.
HAMBRECHT & QUIST LAZARD FRERES & CO. LLC
September 8, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Securities
and Exchange Commission (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, 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 of 1933, as amended (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.
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."
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.
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 (i) no exercise of the
Underwriters' over-allotment option and (ii) the issuance of 10,000 shares of
Series A Preferred Stock and the Private Warrants in the Private Offering
described below. All references to years or periods herein are references to
the Company's fiscal years ending October 31 or the applicable periods therein.
THE COMPANY
System Software Associates, Inc. ("SSA" or 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 scalability, 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 primarily through its
own world-wide sales organization and, to a much lesser extent, through a
network of over 100 independent software companies ("Affiliates"). The Company
has strategic relationships with major computer hardware manufacturers, such as
IBM, Hewlett Packard and Digital Equipment; supply chain management software
companies, such as i2 and Manugistics; and major systems integrators, such as
CAP Gemini and the Big Six consulting firms.
The Company's BPCS product line was initially developed for the IBM AS/400,
and until 1995, most of the Company's revenues were derived from BPCS 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 its BPCS 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. These efforts resulted in the
initial release of Version 6.0 in April 1996 and the general release of Version
6.0 in September 1996. The Company has continued to release upgrades of Version
6.0 which have significantly improved the performance and scalability 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.
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 BPCS product line
has been installed at over 8,500 clients and over 25,000 sites in over 70
countries. The Company believes that it is the leading vendor of enterprise
resource planning ("ERP") software for customers on the AS/400 platform. The
target marketplace for the BPCS Client/Server product line is large- and
intermediate-sized industrial sector firms.
On August 29, 1997, the Company agreed, pursuant to a Securities Purchase
Agreement (the "Securities Purchase Agreement"), to issue 10,000 shares of
newly-designated Series A Preferred Stock and warrants to purchase 600,000
shares of Common Stock (the "Private Warrants") to an institutional investor
(the "Private Investor") in a private placement (the "Private Offering"). The
Series A Preferred Stock and Private Warrants will be issued to the Private
Investor in exchange for a promissory note and warrants issued to the Private
Investor for $10.0 million in cash on August 27, 1997. The Private Offering
will close upon satisfaction of certain closing conditions but in no event
later than the closing of this Offering.
3
<PAGE>
THE OFFERING
Securities Offered.............. $120,000,000 aggregate principal amount of 7%
Convertible Subordinated Notes due 2002 (the
"Notes") ($138,000,000 principal amount if
the Underwriters' over-allotment option is
exercised in full).
Interest Payment Dates.......... March 15 and September 15 of each year,
beginning March 15, 1998.
Maturity Date................... September 15, 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 $18.06
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 September 20, 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 a price
equal to 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 August
31, 1997, approximately $83.9 million of
Senior Indebtedness was outstanding.
Following this Offering and the application
of the net proceeds therefrom, approximately
$15.1 million of Senior Indebtedness will be
outstanding. 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. The terms of the Series A
Preferred Stock, however, will prohibit the
Company from incurring in excess of $40.0
million in additional Senior Indebtedness
without the consent of the holders of a
majority of the outstanding shares of Series
A Preferred Stock. See "Risk Factors--
Subordination of Notes."
4
<PAGE>
Use of Proceeds................. The Company will use approximately $68.8
million of the net proceeds of the Offering
to repay all principal outstanding under (1)
its multi-bank credit facility (the "Existing
Credit Facility"), under which approximately
$44.1 million in principal was outstanding as
of August 31, 1997 and (2) the Company's
Senior Secured Notes due November 1, 1997
(the "Senior Notes"), under which
approximately $24.7 million in principal was
outstanding as of August 31, 1997. The
remaining net proceeds of this Offering will
be used by the Company for general corporate
purposes, including, but not limited to,
capital expenditures and increasing working
capital. See "Use of Proceeds."
Book Entry...................... The Notes will be represented by a Global
Security registered in the name of a nominee
of The Depository Trust Company, as
Depository, and will be available for
purchase in denominations of $1,000 and any
integral multiple thereof.
Sinking Fund.................... None.
Trading......................... The Notes have been approved for listing on
the Nasdaq SmallCap Market under the symbol
"SSAXG." 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.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------- ----------------
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 $145.2 $213.4
Client services and
other................. 50.3 75.5 94.6 124.1 114.1 86.2 91.6
------ ------ ------ ------ ------ ------ ------
Total revenues.......... 228.8 263.4 324.3 374.1 340.8 231.4 305.0
Costs and expenses...... 187.8 227.3 307.9 333.0 399.6 275.5 295.9(1)
------ ------ ------ ------ ------ ------ ------
Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (44.1) 9.1
Income (loss) before
income taxes and
minority interest...... 41.6 35.7 15.4 40.9 (51.4) (42.5) (2.5)
Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $(27.1) $ (1.6)
Earnings (loss) per
share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $(0.63) $(0.04)
Weighted average common
and equivalent shares
outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 43.7
Ratio of earnings to
fixed charges (2)...... 15.3 10.4 3.7 6.5 -- (3) -- (3) -- (3)
Pro forma ratio of
earnings to fixed
charges (4)............ -- (4) -- (4)
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
----------------------
ACTUAL AS ADJUSTED (5)
------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents................................... $32.1 $84.5
Working capital, excluding short-term borrowings and
Senior Notes payable.................................. 82.6 135.2
Intangibles:
Software costs, net................................... 95.9 95.9
Cost in excess of net assets of acquired businesses,
net.................................................. 20.6 20.6
----- -----
Total intangibles...................................... 116.5 116.5
Total assets........................................... 395.0 451.2
Short-term borrowings and Senior Notes payable......... 71.8 --
Long-term obligations.................................. 13.5 132.6
Redeemable Series A Preferred Stock.................... -- 9.2
Total stockholders' equity............................. 115.8 116.2
</TABLE>
- --------
(1) Includes a special charge of $1.7 million in the third quarter of 1997, in
connection with the Settlement of the Illinois class action. See "Risk
Factors--Legal Proceedings."
(2) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes and
fixed charges) by fixed charges (interest expense, the portion of rental
expense which represents interest and Series A Preferred Stock dividends).
(3) Actual earnings (loss) available for fixed charges of ($36.7) million,
($34.2) million and $15.7 million were inadequate to cover fixed charges of
$14.7 million, $8.3 million and $18.2 million for the year ended October
31, 1996, and the nine months ended July 31, 1996 and July 31, 1997,
respectively.
(4) The pro forma ratio of earnings (loss) to fixed charges assumes the Private
Offering and this Offering 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 nine months ended July 31, 1997.
Assumes that the interest rate on the Notes is 7.0%, the net proceeds to
the Company from the Private Offering and this Offering are invested in
interest bearing accounts averaging 5.0% interest on an annual basis and
the estimated fair values of the Representative's Warrants and the Private
Warrants are $0.9 million and $0.8 million, respectively. Pro forma
earnings (loss) available for fixed charges of $(36.7) million and $15.7
million were inadequate to cover pro forma fixed charges of $27.1 million
and $31.0 million for the year ended October 31, 1996 and the nine months
ended July 31, 1997, respectively.
(5) Adjusted to reflect the Private Offering and this Offering and the
application of the estimated net proceeds from the Private Offering and
this Offering. Assumes that the estimated fair values of the
Representative's Warrants and the Private Warrants are $0.9 million and
$0.8 million, respectively. Also assumes that approximately $2.0 million
($1.3 million, after tax) in deferred charges and fees related to the
Existing Credit Facility and Senior Notes are written off or paid upon
repayment of such indebtedness in connection with the Private Offering and
this Offering.
6
<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; POTENTIAL FUTURE CHARGES
Although the Company had net income for the quarter ended July 31, 1997, the
Company has experienced operating and net losses in 1996 and a net loss in the
nine months ended July 31, 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
business, operating results and financial condition could be materially
adversely affected. See "--Variability of Quarterly Operating Results;
Seasonality." Since the initial release of version 6.0 of BPCS Client/Server,
the Company has performed services for certain early adopter clients for which
it has not been compensated (or has been only partially compensated) in order
to insure such clients' successful implementation of BPCS Client/Server. In
addition, in connection with certain implementations, the Company has
experienced delays in payments of license fees owed and, in certain
circumstances, has incurred settlement costs. The Company has established
reserves related to warranty services and accounts receivable which the
Company believes are adequate at present. The Company periodically reviews the
adequacy of these reserves in light of its experience and, as such, may adjust
the level of these and other reserves in the fourth quarter of 1997 and in
future quarters. Charges related to increases in reserves could have a
material adverse affect on the results of operations of the Company for the
quarter in which they are taken.
In connection with the Private Offering and this Offering, the Company will
be required to write off certain deferred charges and pay certain fees related
to the Existing Credit Facility and the Senior Notes, which would result in a
charge in the fourth quarter of 1997 of approximately $2.0 million.
Additionally, the Company believes that it may have to pay Bain Capital, Inc.
("Bain") a "break-up" fee of up to $3.0 million and reimburse Bain for Bain's
expenses, limited to $250,000, in connection with a private offering with
which the Company elected not to proceed. See "--Legal Proceedings."
LEVERAGE
Assuming the closing of the Private Offering and this Offering and the
application of the net proceeds from the Private Offering and this Offering,
on a pro forma basis as of July 31, 1997, the ratio of the Company's total
debt to equity (including the Series A Preferred Stock outstanding as equity)
(expressed as a percentage) would have been 114%. Annual dividends on the
Series A Preferred Stock issued in the Private Offering will be $1.2 million.
Annual interest expense on the Notes will be $8.4 million. Approximately $15.1
million in Senior Indebtedness will remain outstanding immediately following
this Offering.
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
7
<PAGE>
to financial, business and other factors affecting operations of the Company,
many of which are beyond its control.
SUBORDINATION OF NOTES
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, a 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. In such event, there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding.
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.
Following the Private Offering and this Offering and the application of the
net proceeds therefrom, approximately $15.1 million of Senior Indebtedness
will be outstanding, including $12.0 million under the Company's floating rate
convertible note due 2000 (the "Existing Convertible Note") and approximately
$3.1 million in capital lease obligations payable over lease terms ranging
from one to three years. See "Use of Proceeds." The Company will be permitted
under the terms of the Series A Preferred Stock to incur up to approximately
$40.0 million in additional Senior Indebtedness without the consent of the
holders of a majority of the outstanding shares of Series A Preferred Stock.
The Existing Credit Facility and the Senior Notes are secured by a lien on
substantially all the assets of the Company and the stock of certain of its
subsidiaries and future Senior Indebtedness 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 Series A Preferred Stock, 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."
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 both 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
8
<PAGE>
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. and SAP AG. The Company also faces competition from a variety of other
vendors of ERP software, including QAD Inc. 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 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 affected. 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
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 hardware platforms, operating
systems and RDBMS with which the Company's products operate; (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 revenues 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
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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
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
revenues 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 revenues 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, revenues
from license fees in any quarter are substantially dependent on orders booked
and shipped in that quarter.
Based upon the factors described above, the Company believes that its
quarterly revenues 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 revenues have generally increased in recent periods, there can be no
assurance that the Company's revenues 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 and the Notes 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 resources to presales support. 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
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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."
LEGAL PROCEEDINGS
On August 20, 1997, the Company terminated its engagement of the prior
underwriter of this Offering, and concurrently elected not to proceed with its
private offering of securities to a group of private investors led by Bain. On
August 27, 1997, Bain filed a complaint in the Superior Court of Massachusetts
against the Company, Roger E. Covey and Hambrecht & Quist LLC, one of the
Representatives of the Underwriters in this Offering. The complaint seeks
damages from the Company in excess of $117.5 million for alleged breach of
contract, breach of the implied covenant of good faith and fair dealing,
misrepresentation and unfair and deceptive business acts and practices. The
Company denies Bain's allegations and intends to vigorously defend itself
against Bain's lawsuit. The Company believes, based upon the advice of its
counsel, that pursuant to its terms letter with Bain, liability, if any, would
be limited to reimbursement of Bain's expenses, capped at $250,000, and
payment of a "break-up" fee of up to $3.0 million. Any charge related to such
expenses and "break-up" fee would likely be recorded in the Company's fourth
fiscal quarter in 1997. There can be no assurance that this action will not
have a material adverse impact on the operating results and financial
condition of the Company.
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. In the quarter ended July 31, 1997, the Company
recorded a $1.7 million charge related to the Settlement. 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 30,
1997. There can be no 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 entire 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.
SEC INVESTIGATION
Since October 1995, the Company has been the subject of a private
investigation by the Securities and Exchange Commission. The Company believes
the inquiry relates to its revenue recognition policies. The investigation is
ongoing and the Company presently has no basis for determining when it is
likely to conclude. In January 1997, the Company restated its fiscal 1994
financial statements to reverse $10.1 million in revenues
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from a software contract originally recognized in the third quarter of fiscal
1994. In addition, the Company restated its fiscal 1995 financial statements
to reverse $15.0 million in revenues from two related Latin American reseller
agreements originally recognized in the third and fourth quarters of fiscal
1995, and $5.0 million in revenues originally recognized in the third quarter
of fiscal 1995 from the last two installments of a four-installment contract.
See Note 2 to the Company's Consolidated Financial Statements for the years
ended October 31, 1994, 1995 and 1996. Commencing with the fourth quarter of
1996, the Company adopted a more conservative method of accounting for
reseller agreements under which revenue will not be recorded under such
contracts until software is sold to the end user. The adoption of this new
method of accounting resulted in the reversal of approximately $33.8 million
in revenues recognized in the first three quarters of fiscal 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Change in Accounting Method." The Company is unable to predict at
this time the scope or consequences to the Company of the Commission's
investigation, or whether the actions taken by the Company that are described
above address the issues being investigated by the Commission. There can be no
assurance that such investigation would not have a material adverse effect on
the business, financial condition or results of operations of the Company.
RAPID TECHNOLOGICAL CHANGE; PRODUCT ROLLOUT DELAYS
The market for the Company's software products 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 line
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 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 introduced the first release of Version 6.0 of its BPCS Client/Server
product line to early adopter customers. These early adopters of Version 6.0
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 such early adopters
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."
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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
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 platform and proprietary DB/2 database
system. 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 systems
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.
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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 nine months
ended July 31, 1997, approximately 61% and 67%, respectively, of the Company's
total revenues were 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 INVESTOR
Roger E. Covey, Chairman and Chief Executive Officer of the Company,
currently beneficially owns approximately 31.1% of the Company's outstanding
Common Stock (approximately 23.8% on a fully-diluted basis after giving effect
to the Private Offering and this Offering, and assuming conversion into Common
Stock of the Notes, the Existing Convertible Note and the Series A Preferred
Stock and the exercise of the Private Warrants, the senior lenders' Warrants
and the Representative's Warrants). 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
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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.
For so long as at least 2,500 shares of Series A Preferred Stock remain
outstanding, the Company may not take certain actions without the prior written
consent of the holder(s) of a majority of the outstanding shares of Series A
Preferred Stock, including the payment of dividends or any other distribution
with respect to the Common Stock, the incurrence of additional debt (other than
the Notes, up to $40.0 million in additional Senior Indebtedness and certain
other exceptions), the entering into of any merger, consolidation, sale,
assignment, lease or transfer of any material portion of the Company's assets
and certain other material transactions. See "Description of the Private
Offering--Series A Preferred Stock--Series A Preferred Stock Covenants." The
Private Investor also has the right either to designate one new member of the
Company's Board of Directors or one observer who may attend board meetings. The
terms of the Series A Preferred Stock may have the effect of making certain
transactions more difficult absent the support of the holders of the Series A
Preferred Stock or the redemption of the Series A Preferred Stock.
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
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 and unpaid interest. Upon a Change in
Control, the Company will also be obligated to pay dividends on the Series A
Preferred Stock at an annual rate equal to 14% multiplied by the then-
applicable Liquidation Price (as defined below) for the Series A Preferred
Stock. See "Description of the Private Offering--Series A Preferred Stock--
Liquidation Preference
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and Dividends." A Change in Control under similar circumstances would most
likely also constitute an event of default under any new bank credit facility
to be entered into by the Company (the "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 Noteholder may under certain
circumstances 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 Noteholder 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.
COMMON STOCK AVAILABLE FOR RESALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market after this
Offering could adversely affect the prevailing market price of the Common
Stock, which, in turn, could adversely affect the market price of the Notes.
The directors and executive officers of the Company have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock beneficially owned by
them for a period of 90 days after the effective date of the Registration
Statement without the prior written consent of the Representatives (as defined
herein). Roger E. Covey, Chairman and Chief Executive Officer of the Company,
currently beneficially owns 13,284,750 shares of Common Stock, representing
approximately 31.1% of the Company's outstanding stock as of July 31, 1997.
Beginning 90 days after the effective date of the Registration Statement, Mr.
Covey's Common Stock will be available for sale during any three-month period
under Rule 144(e) under the Securities Act without restriction up to an amount
equal to the greater of (i) 1% of the Company's outstanding shares of Common
Stock (426,526 as of July 31, 1997) or (ii) the average weekly trading volume
of the Common Stock reported on a national securities exchange during the four
calendar weeks preceding the filing of a notice of sale with the SEC (for
example, approximately 10,090,000 for the four weeks ended August 29, 1997).
On the 45th day following the date of this Prospectus, the holder of the
Existing Convertible Note will have the right to require the Company to
convert such debt into approximately 3.6 million shares of Common Stock.
Promptly following the closing of the Offering, the Company has agreed to file
a registration statement on Form S-3 to register under the Securities Act the
3.6 million shares issuable upon conversion of the Existing Convertible Debt.
Pursuant to an agreement between such holder and the Representatives, 1.2
million of such shares will generally be available for sale in the public
market beginning 45 days after the date of this Prospectus and the
approximately 2.4 million remaining shares will generally be available for
sale in the public market beginning 90 days after the date of this Prospectus.
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USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $115.7 million ($133.2 million if the Underwriters' over-
allotment option is exercised in full). The Company will use approximately
$68.8 million of the net proceeds of the Offering to repay all amounts
outstanding under its Existing Credit Facility (which as of August 31, 1997,
were approximately $44.1 million) and under its Senior Notes (which as of
August 31, 1997, were approximately $24.7 million). 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 $46.9 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 high and low closing prices of
the Common Stock for the Company's fiscal quarters, 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 16.19 8.06
</TABLE>
--------
(1) Fourth Quarter through September 8, 1997
On September 8, 1997, the last reported sale price for the Common Stock was
$14.75.
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............................................................ $0.08
1995............................................................ 0.08
1996............................................................ 0.10
</TABLE>
The Company does not currently anticipate that it will resume payment of an
annual dividend on its Common Stock. Covenants in the terms of the Series A
Preferred Stock and the Existing Convertible Note prohibit or restrict 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 by the Company.
17
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company as of July 31, 1997 and as adjusted to give effect to the Private
Offering and this Offering and the application of the estimated net proceeds
from the Private Offering and this Offering (assuming the Underwriters' over-
allotment option is not exercised). See "Use of Proceeds." 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>
JULY 31, 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 promissory note................. $ 12.0 $ 12.0
Convertible subordinated notes, none issued actual,
$120.0 million issued, as adjusted (1).................. -- 119.1
Notes payable, obligations under capital leases
and other obligations................................... 1.5 1.5
------ ------
Total Long Term Obligations............................ 13.5 132.6
------ ------
Redeemable Series A Preferred Stock, convertible, 10,000
shares issued and outstanding, as adjusted (2)............ -- 9.2
Stockholders' Equity:
Preferred Stock, $.01 par value, 100,000 shares
authorized,
none issued or outstanding; 10,000 shares issued as
Series A Preferred Stock, as adjusted................... -- --
Common Stock, $.0033 par value, 250,000,000 shares
authorized, 42,652,000 shares outstanding, actual and as
adjusted................................................ 0.1 0.1
Capital in excess of par value (3)....................... 42.8 46.7
Retained earnings (4).................................... 76.9 73.4
Cumulative translation adjustment........................ (4.0) (4.0)
------ ------
Total stockholders' equity............................. 115.8 116.2
------ ------
Total capitalization................................... $129.3 $258.0
====== ======
</TABLE>
- ---------------------
(1) Less discount attributable to the estimated fair value of the
Representative's Warrants of $0.9 million.
(2) Less discount attributable to the estimated fair value of the Private
Warrants of $0.8 million.
(3) As adjusted includes the estimated fair value of the Private Warrants and
the Representative's Warrants of $0.8 million and $0.9 million,
respectively, and the beneficial conversion feature of the Series A
Preferred Stock into Common Stock of $2.2 million.
(4) As adjusted includes write-off or payment of approximately $2.0 million
($1.3 million, after tax) in deferred charges and fees related to the
Existing Credit Facility and Senior Notes which will occur upon the
repayment of such indebtedness in connection with the Private Offering and
this Offering, and a reduction to reflect the estimated fair value of $2.2
million of the beneficial conversion feature of the Series A Preferred
Stock into Common Stock.
18
<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 nine months
ended July 31, 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>
NINE MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31,
------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------- -------
(IN MILLIONS, EXCEPT RATIOS AND 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 $145.2 $ 213.4
Client services and
other................. 50.3 75.5 94.6 124.1 114.1 86.2 91.6
------ ------ ------ ------ ------ ------- -------
Total revenues....... 228.8 263.4 324.3 374.1 340.8 231.4 305.0
------ ------ ------ ------ ------ ------- -------
Costs and expenses:
Cost of license fees... 47.2 51.4 60.7 64.9 66.9 43.4 52.4
Cost of client services
and other............. 31.6 43.5 57.2 76.8 89.0 64.9 71.8
Sales and marketing.... 56.7 63.8 90.8 87.6 103.8 71.3 66.2
Research and
development........... 16.5 23.0 35.1 40.2 54.4 38.3 39.0
General and
administrative........ 35.8 45.6 64.1 63.5 85.5 57.6 64.8
Special charge......... -- -- -- -- -- -- 1.7
------ ------ ------ ------ ------ ------- -------
Total costs and
expenses............ 187.8 227.3 307.9 333.0 399.6 275.5 295.9(1)
------ ------ ------ ------ ------ ------- -------
Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (44.1) 9.1
------ ------ ------ ------ ------ ------- -------
Gain on sale of
available-for-sale
securities............. -- -- -- -- 13.1 3.6 --
Non-operating income
(expense), net......... 0.6 (0.4) (1.0) (0.2) (5.7) (2.0) (11.6)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes and
minority interest...... 41.6 35.7 15.4 40.9 (51.4) (42.5) (2.5)
Provision (benefit) for
income taxes........... 15.0 12.7 5.6 14.2 (18.6) (15.4) (0.9)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
minority interest...... 26.6 23.0 9.8 26.7 (32.8) (27.1) (1.6)
Minority interest....... -- 0.4 0.2 (0.1) -- -- --
------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $ (27.1) $ (1.6)
====== ====== ====== ====== ====== ======= =======
Earnings (loss) per
share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $ (0.63) $ (0.04)
====== ====== ====== ====== ====== ======= =======
Weighted average common
and equivalent shares
outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 43.7
====== ====== ====== ====== ====== ======= =======
Ratio of earnings to
fixed charges (2)...... 15.3 10.4 3.7 6.5 -- (3) -- (3) -- (3)
Pro forma ratio of
earnings to fixed
charges (4)............ -- (4) -- (4)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31, 1997
---------------------------------- -------------------
AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED (5)
------ ------ ------ ------ ------ ------ ------------
<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 $ 32.1 $ 84.5
Working capital,
excluding short term
borrowings and Senior
Notes payable.......... 49.5 91.2 87.3 96.3 70.3 82.6 135.2
Intangibles:
Software costs, net.... 16.8 27.3 49.3 59.0 82.8 95.9 95.9
Cost in excess of
assets of acquired
businesses, net....... 9.6 14.0 15.8 18.2 22.8 20.6 20.6
------ ------ ------ ------ ------ ------ ------
Total intangibles....... 26.4 41.3 65.1 77.2 105.6 116.5 116.5
Total assets............ 200.0 280.4 333.1 393.2 384.4 395.0 451.2
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 13.5 132.6
Redeemable Series A
Preferred Stock........ -- -- -- -- -- -- 9.2
Total stockholders'
equity................. 80.0 101.2 109.3 143.4 110.2 115.8 116.2
</TABLE>
- -------
(1) Includes a special charge of $1.7 million in the third quarter of 1997, in
connection with the Settlement of the Illinois class action. See "Risk
Factors--Legal Proceedings."
(2) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes and
fixed charges) by fixed charges (interest expense, the portion of rental
expense which represents interest and Series A Preferred Stock dividends).
(3) Actual earnings (loss) available for fixed charges of ($36.7) million,
($34.2) million and $15.7 million were inadequate to cover fixed charges
of $14.7 million, $8.3 million and $18.2 million for the year ended
October 31, 1996 and the nine months ended July 31, 1996 and July 31,
1997, respectively.
(4) The pro forma ratio of earnings (loss) to fixed charges assumes the
Private Offering and this Offering 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 nine months ended July
31, 1997. Assumes that the interest rate on the Notes is 7.0%, the net
proceeds to the Company from the Private Offering and this Offering are
invested in interest bearing accounts averaging 5.0% interest on an annual
basis and the estimated fair values of the Representative's Warrants and
the Private Warrants are $0.9 million and $0.8 million, respectively. Pro
forma earnings (loss) available for fixed charges of $(36.7) million and
$15.7 million were inadequate to cover pro forma fixed charges of $27.1
million and $31.0 million for the year ended October 31, 1996 and the nine
months ended July 31, 1997, respectively.
(5) Adjusted to reflect the Private Offering and this Offering and the
application of the estimated net proceeds from this Offering and the
Private Offering. Assumes that the estimated fair values of the
Representative's Warrants and the Private Warrants are $0.9 million and
$0.8 million, respectively. Also assumes that approximately $2.0 million
($1.3 million, after tax) in deferred charges and fees related to the
Existing Credit Facility and Senior Notes are written off or paid upon
repayment of such indebtedness in connection with the Private Offering and
this Offering.
19
<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 early releases of the UNIX version of the
BPCS 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. See "Risk
Factors--Net Losses; Uncertainty of Future Results; Potential Future Charges."
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 and
client services revenues, the Company reported an operating loss of ($58.8)
million in 1996. As Version 6.0 improved in its functionality and performance
characteristics, license fees increased. For the first nine months of 1997,
license fee revenues increased 47%, total revenues increased 32% and operating
income improved $53.2 million to $9.1 million from an operating loss of
($44.1) million for the same period of 1996. A net loss for the first nine
months of 1997 of ($1.6) million improved $25.5 million from a net loss of
($27.1) million for the same period of 1996.
The Company has expended over $200 million for research and development
during the prior three fiscal years, principally for Version 6.0 of BPCS
Client/Server. These expenditures, combined with the losses from operations
incurred in 1996 and the first quarter of 1997, have seriously impaired the
Company's liquidity, and have led to increased borrowings under the Company's
Existing Credit Facility. The Private Offering and this Offering are expected
to enhance the Company's liquidity.
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
20
<PAGE>
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>
NINE MONTHS
FISCAL YEAR ENDED JULY
ENDED OCTOBER 31, 31,
------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License fees........................... 70.8% 66.8% 66.5% 62.7% 70.0%
Client services and other.............. 29.2 33.2 33.5 37.3 30.0
----- ----- ----- ----- -----
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 18.8 17.2
Cost of client services and other...... 17.7 20.5 26.1 28.0 23.5
Sales and marketing.................... 28.0 23.4 30.4 30.8 21.7
Research and development............... 10.8 10.7 16.0 16.6 12.8
General and administrative............. 19.8 17.0 25.1 24.9 21.2
Special charge......................... -- -- -- -- 0.6
----- ----- ----- ----- -----
Total costs and expenses............. 95.0 89.0 117.2 119.1 97.0
----- ----- ----- ----- -----
Operating income (loss).................. 5.0 11.0 (17.2) (19.1) 3.0
----- ----- ----- ----- -----
Gain on sale of available-for-sale
securities.............................. -- -- 3.8 1.6 --
Non-operating income (expense), net...... (0.3) (0.1) (1.7) (0.9) (3.8)
----- ----- ----- ----- -----
Income (loss) before income taxes and
minority interest....................... 4.7 10.9 (15.1) (18.4) (0.8)
Provision (benefit) for income taxes..... 1.7 3.8 (5.5) (6.7) (0.3)
----- ----- ----- ----- -----
Income (loss) before minority interest... 3.0 7.1 (9.6) (11.7) (0.5)
Minority interest........................ 0.1 -- -- -- --
----- ----- ----- ----- -----
Net income (loss)........................ 3.1% 7.1% (9.6)% (11.7)% (0.5)%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended July 31, 1997 Compared to the Nine Months Ended July 31,
1996
Revenues
Total revenues increased 32% to $305.0 million for the first nine months of
1997 over total revenues of $231.4 million recorded during the first nine
months of 1996.
License Fees. License fees increased 47% to $213.4 million in the first nine
months of 1997, compared to $145.2 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.
21
<PAGE>
Client Services. Client services and other revenues increased 6% to $91.6
million for the first nine months of 1997, from $86.2 million for the
corresponding period of 1996. The increase in services revenues is
attributable to an increase in the number of billable 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 for the first nine months of 1997 as a percentage of related
license fee revenues decreased to 25% from 30% for the first nine months of
1996. The decrease was primarily attributable to a higher mix of direct
channel revenues which have a lower associated cost of license fees than do
indirect channel revenues.
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 78% for the first nine months of 1997
compared to 75% during the corresponding prior year period. The moderately
higher costs in 1997 resulted from the allocation of technical personnel to
perform warranty work and from an increase in the number of newly hired
technical professionals around the world, in particular those with open
systems and object skills.
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 31% for the first nine months of 1997
compared to 49% during the corresponding prior year period. 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 nine months of 1997 over the corresponding prior
period, even though license fees increased 47% over the same periods.
Research and Development. Gross (total) research and development (R&D)
expenditures in the first nine months of 1997 increased $3.7 million, or 6%,
to $70.8 million in the first nine months of 1997 from $67.1 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.
The Company capitalized $31.8 million of software development costs in the
first nine months of 1997, as compared to $28.8 million in the first nine
months of 1996. The capitalization ratio (capitalized software as a percentage
of gross R&D expenditures) in the first nine months of 1996 and 1997 was 43%
and 45%, respectively. The following table sets forth R&D expenditures and
related capitalized amounts for the first nine months of 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERCENTAGE
JULY 31, CHANGE
------------------ ----------
1997 VS.
1996 1997 1996
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Gross R&D expenditures........................ $ 67.1 $ 70.8 6%
Less amount capitalized....................... (28.8) (31.8) 10%
-------- --------
Net R&D costs................................. $ 38.3 $ 39.0 2%
======== ========
</TABLE>
22
<PAGE>
General and Administrative. General and administrative expenses increased
$7.2 million to $64.8 million in the first nine months of 1997 from $57.6
million in the first nine months of 1996 to support the Company's growth.
These expenses include increased facilities and personnel costs related to
acquisitions and increased costs for computer equipment.
Special Charge. The special charge of $1.7 million in the third quarter of
the current year relates to the proposed settlement of the Company's class
action lawsuits. See Note 3 of Notes to Consolidated Financial Statements for
the period ended July 31, 1997.
Operating Income (Loss). Operating income of $9.1 million in the first nine
months of 1997 improved $53.2 million when compared to the operating loss of
($44.1) 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, Senior Notes, Existing Convertible Note and other long-term
obligations, and amortization of the value of the Existing Convertible Note's
beneficial conversion feature, less interest income earned on invested cash.
Non-operating expense of $11.6 million in the first nine months of 1997
increased $9.6 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 Convertible Note, amortization of the value
of the Existing Convertible Note's beneficial conversion feature 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 American 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.
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.
23
<PAGE>
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
FISCAL 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 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.
24
<PAGE>
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
-----------------------------------------------------------------------------
OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees........... $91.6 $ 48.1 $ 51.9 $ 45.2 $ 81.5 $ 65.1 $ 65.1 $83.2
Client services and
other................. 31.1 28.5 30.6 27.1 27.9 27.1 33.0 31.5
----- ------ ------ ------ ------ ------ ------ -----
Total revenues.......... 122.7 76.6 82.5 72.3 109.4 92.2 98.1 114.7
Costs and expenses...... 99.4 77.0 92.1 106.4 124.1 96.8 94.2 104.9
----- ------ ------ ------ ------ ------ ------ -----
Operating income (loss). 23.3 (0.4) (9.6) (34.1) (14.7) (4.6) 3.9 9.8
Gain on sale of
available-for-sale
securities............. -- -- -- 3.6 9.5 -- -- --
Non-operating income
(expense), net......... (0.1) (0.3) (0.5) (1.2) (3.7) (2.1) (4.9) (4.6)
----- ------ ------ ------ ------ ------ ------ -----
Income (loss) before
income taxes........... 23.2 (0.7) (10.1) (31.7) (8.9) (6.7) (1.0) 5.2
Provision (benefit) for
income taxes........... 7.9 (0.3) (3.7) (11.4) (3.2) (2.4) (0.4) 1.9
----- ------ ------ ------ ------ ------ ------ -----
Net income (loss)....... $15.3 $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6) $ 3.3
===== ====== ====== ====== ====== ====== ====== =====
Earnings (loss) per
share.................. $0.35 $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01) $0.08
===== ====== ====== ====== ====== ====== ====== =====
License fees........... 75% 63% 63% 63% 74% 71% 66% 73%
Client services and
other................. 25 37 37 37 26 29 34 27
----- ------ ------ ------ ------ ------ ------ -----
Total revenues.......... 100 100 100 100 100 100 100 100
Costs and expenses...... 81 101 111 147 113 105 96 91
----- ------ ------ ------ ------ ------ ------ -----
Operating income (loss). 19 (1) (11) (47) (13) (5) 4 9
Gain on sale of
available-for-sale
securities............. -- -- -- 5 9 -- -- --
Non-operating income
(expense), net......... 0 0 (1) (2) (3) (2) (5) (4)
----- ------ ------ ------ ------ ------ ------ -----
Income (loss) before
income taxes........... 19 (1) (12) (44) (7) (7) (1) 5
Provision (benefit) for
income taxes........... 7 0 (4) (16) (2) (2) 0 2
----- ------ ------ ------ ------ ------ ------ -----
Net income (loss)....... 12% (1%) (8%) (28%) (5%) (5%) (1%) 3%
===== ====== ====== ====== ====== ====== ====== =====
</TABLE>
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
25
<PAGE>
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
revenues 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 revenues 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 revenues 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 revenues have generally increased in recent periods, there can be no
assurance that the Company's revenues 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.
Additionally, the Company believes it may incur certain charges in the
upcoming quarters which may impact reported earnings. See "Risk Factors--Net
Losses; Uncertainty of Future Results; Potential Future Charges."
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
---------- -------- ---------- -------- ---------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<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>
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996 and July 31, 1997, cash and equivalents totaled $38.1
million and $32.1 million, respectively. During 1996, cash and equivalents
declined $19.0 million and borrowing under the Company's Existing Credit
Facility and Senior Notes on a net basis increased by $42.4 million due to the
operating loss, continued significant investment in product development,
payment of the Company's annual dividend, which increased 25% over the prior
year ($0.10 per share versus $0.08 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 $6.0 million from October 31, 1996 to July
31, 1997 and borrowings increased by $11.4 million on a net basis during the
same period. Cash usage was primarily for continued significant investment in
product development, an operating loss during the first three months of 1997
and interest payments. At July 31, 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 $0.6 million and $1.2 million at July 31, 1997
and October 31, 1996, respectively. On March 27, 1997, the Company issued the
Existing Convertible Note for $12.0 million to a strategic investor to meet
anticipated cash requirements.
The Company issued a promissory note and warrants to the Private Investor
for $10.0 million in cash on August 27, 1997, of which an aggregate of $1.9
million was paid to reduce principal under the Existing Credit Facility, $1.1
million was paid to reduce principal under the Senior Notes and a total of
$1.0 million was paid in fees to the holders of the Existing Credit Facility
and the Senior Notes. The remaining $6.0 million is available for working
capital requirements. The Company and the Private Investor have agreed to
exchange the promissory note and the warrants for 10,000 shares of Series A
Preferred Stock and the Private Warrants. See "Description of the Private
Offering".
Management believes that, based upon its anticipated operating results, the
proceeds of this Offering and the Private Offering, together with working
capital, will provide sufficient liquidity to meet the Company's capital
requirements for the foreseeable future.
27
<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
scalability, 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 primarily through its own world-wide sales
organization and, to a much lesser extent, through a network of over 100
independent software companies ("Affiliates"). The Company has strategic
relationships with major computer hardware manufacturers, such as IBM, Hewlett
Packard and Digital Equipment; supply chain management software companies,
such as i2 and Manugistics; and major systems integrators, such as CAP Gemini
and the Big Six consulting firms.
Effective information technology systems, capable of generating and
disseminating critical information throughout an extended enterprise, can be a
strategic resource for pursuing competitive advantage, allowing an
organization to respond more rapidly to changing market and customer needs.
Organizations rely on ERP systems to manage and integrate resources across the
entire enterprise, including component procurement, inventory management,
manufacturing control, sales management, supply chain management, finance and
other functions. The emergence of new computer and communications
technologies, the requirements for addressing Year 2000 system issues and new
developments in electronic commerce are creating demand for a new generation
of ERP applications that offer solutions with expanded functionality that can
be implemented faster with less risk and lower cost and that are designed to
accommodate future changes to all business processes.
The BPCS Client/Server product line consists of over 60 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 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 product line was initially developed for the IBM AS/400,
and until 1995, most of the Company's revenue was derived from BPCS product
licenses and related services sold for the 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 its BPCS
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. These
efforts resulted in the initial release of Version 6.0 in April 1996 and the
general release of the Version 6.0 in September 1996. The Company has
continued to release upgrades of Version 6.0 which have significantly improved
the performance and scalability 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 for more than 8,500
clients and more than 25,000 sites in over 70 countries 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 those industries.
28
<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 July 31, 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.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 B.S. in Accounting from
Roger Williams College and an M.B.A. 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 1993 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.
29
<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 Company intends to name a Chief Operating Officer. The Private Investor
has the right to designate either one new member of the Company's Board of
Directors or one observer who may attend board meetings. See "Underwriting."
The Company also intends to recruit a new, independent director.
30
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued pursuant to an indenture (the "Indenture") to be
dated as of September 12, 1997 between the Company and Harris Trust and
Savings Bank, 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 limited to $120,000,000
aggregate principal amount ($138,000,000 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 March 15 and September
15 of each year to Holders of record at the close of business on March 1 and
September 1 next preceding each such interest payment date, unless redeemed,
repurchased or converted earlier pursuant to the terms of the Indenture. The
first interest payment date will be March 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 through the
Depository (as defined below) or at the office of the paying agent, which will
initially be the Trustee. Interest payments for Notes that are not held
through the Depository will be mailed to each Holder's registered address. The
Notes will mature on September 15, 2002.
The Notes will initially be represented by a Global Security registered in
the name of a nominee of The Depository Trust Company, as Depository. See "--
Book Entry, Delivery and Form." 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 Notes have been approved for listing on the Nasdaq
SmallCap 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
31
<PAGE>
of $1,000) into shares of Common Stock of the Company at $18.06 per share,
subject to adjustment as described below (the "Conversion Price").
The right to convert a Note called for redemption will terminate at the
close of business on the Business Day immediately preceding the redemption
date for such Note (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.
Except as provided below, 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. If
any Holder surrenders a Note for conversion between the record date for the
payment of an installment of interest and the Business Day next preceding the
following 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, must 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 principal amount of the Note so converted. If a Note or
portion thereof is called for redemption and the Holder elects to convert such
Note after it has been called for redemption, the Holder will be entitled to
receive interest on such Note for the period from the last interest payment
date to the date of conversion. 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 (under formulae set
forth in the Indenture) 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 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 (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions paid exclusively in cash);
(v) dividends or other distributions consisting exclusively of cash (excluding
any cash portion of distributions referred to in clause (iv)) to all holders
of Common Stock to the extent that such distributions, combined together with
(A) all other such all-cash distributions made within the preceding 12 months
in respect of which no adjustment has been made plus (B) any cash and the fair
market value of other consideration payable in respect of any tender offers by
the Company for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then Current Market Price of
the Common Stock times the number of shares of Common Stock then outstanding)
on the record date for such distribution; (vi) the purchase of Common Stock
pursuant to a tender offer made by the Company or any of its subsidiaries to
the extent that the same involves an aggregate consideration that, together
with (X) any cash and the fair market value of any other consideration payable
in any other tender offer by the Company or any of its subsidiaries for Common
Stock expiring within 12 months preceding such tender offer in respect of
which no adjustment has been made plus (Y) the aggregate amount of any such
all-cash distributions referred to in clause (v) above to all holders of
Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 10% of the
Company's market capitalization on the expiration of such tender offer; and
(vii) payment in respect of a tender offer or exchange offer by a person other
than the Company or any subsidiary and in which, as of the closing date of the
offer, the Board of Directors is not recommending rejection of the offer. The
adjustment referred to in clause (vii) above will only be made if (i) the
tender offer or exchange offer is for an amount which increases that person's
ownership of Common Stock to more than 20% of the total shares of Common Stock
outstanding and (ii) the cash and value of any other consideration included in
such payment per share of Common Stock exceeds the
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Current Market Price per share of Common Stock on the business day next
succeeding the last date on which tenders or exchanges may be made pursuant to
such tender or exchange offer. The adjustment referred to in clause (vii)
above will not be made, however, if, as of the closing of the offer, the
offering documents with respect to such offer disclose a plan or an intention
to cause the Company to engage in a consolidation or merger of the Company or
a sale of the Company's assets, as an entirety or substantially as an
entirety.
In the event of a distribution which would trigger an adjustment referred to
in clauses (iv) or (v) where the consideration so distributed applicable to
one share of Common Stock is equal to or greater than the Current Market Price
of the Common Stock on the applicable record date, 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, the
appropriate amount of such consideration. No adjustment of the Conversion
Price will be made until cumulative adjustments to the Conversion Price as
last adjusted amount to 1% or more.
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination involving the Company or a sale or
conveyance to another person of the property and assets of the Company as an
entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or
been entitled to receive upon such reclassification, change, consolidation,
merger, combination, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance assuming that a holder
of Notes would not have exercised any rights of election as to the stock,
other securities or other property or assets receivable in connection
therewith.
The Company from time to time may, to the extent permitted by law, reduce
the Conversion Price of the Notes by any amount for any period of at least 30
days, in which case the Company shall give at least 15 days' notice of such
decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in
the Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for income tax purposes.
REDEMPTION OF NOTES AT THE OPTION OF THE COMPANY
The Notes may not be redeemed at the Company's option prior to September 20,
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, but excluding, the date fixed for redemption.
If redeemed during the twelve-month period beginning September 20,
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000........................................................... 103.50
2001 and thereafter............................................ 101.75
</TABLE>
Notice of redemption will be mailed at least 15, but not more than 60, 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.
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If fewer than all the Notes are to be redeemed, the Trustee will select
Notes (in principal amounts of $1,000 or integral multiples thereof) 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 days after the date the Company or 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. The Company
also covenants not to make any payment to the holders of the Series A
Preferred Stock arising due to a Change in Control until expiration of the
period of time in which a Holder may exercise its repurchase rights. 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, at the written request of the Company on or before the 10th day
after receipt of such request, the Trustee, shall mail or cause to be mailed
to each Holder 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 Notes as
(a) any Person (other than the Company, any subsidiary of the Company, or
any entity Controlled (as defined herein) by the foregoing, any current
officer of the Company, 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 35% of the total voting power of all shares of
capital stock of the Company entitled to vote generally in the election of
directors;
(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
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<PAGE>
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.
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.
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 right to require the Company to repurchase Notes as a result of the
occurrence of a Change in Control could create an event of default under then-
existing Senior Indebtedness 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 prohibited 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 (i) 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) or (ii) the
acceleration of the Notes because of an Event of Default (which acceleration
has not been rescinded in accordance with the terms of the Indenture), 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 upon 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 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 certain Designated Senior Indebtedness that
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<PAGE>
permits the holders of such Designated Senior Indebtedness to accelerate its
maturity, and following receipt by the Trustee of a written notice of default
(a "Payment Blockage Notice") from a representative of the holders of such
Designated 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 if the
maturity of such Designated Senior Indebtedness has not been accelerated,
unless and until 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 (as defined below) 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 Series A Preferred Stock. "Indebtedness" means (a) the principal of and
premium, if any, and interest on, and fees, costs, enforcement expenses and
other reimbursement or indemnity obligations in respect of, all indebtedness
or obligations of the Company for money borrowed (including purchase money
obligations with original maturities in excess of one year), (b) all
reimbursement obligations and other liabilities (contingent or otherwise) of
the Company with respect to letters of credit, bank guarantees or bankers'
acceptances, (c) all obligations and liabilities (contingent or otherwise) in
respect of capitalized lease obligations of the Company or obligations under
any lease or related document in which the Company is obligated to purchase
leased property, (d) all obligations of the Company (contingent or otherwise)
with respect to an interest rate or other swap, cap or collar agreement or
other similar instrument or agreement or foreign currency hedge, exchange,
purchase or similar instrument or agreement, (e) all direct or indirect
guaranties or similar agreements by the Company in respect of indebtedness,
obligations or liabilities of another Person of the kind described in clauses
(a) through (d), (f) any indebtedness or other obligations described in
clauses (a) through (d) secured by any mortgage, pledge, lien or other
encumbrance existing on property which is owned or held by the Company and (g)
any and all deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any indebtedness, obligation or liability of
the kind described in clauses (a) through (f).
Upon completion of this Offering, it is estimated that the principal amount
of Senior Indebtedness outstanding will be approximately $15.1 million. See
"Use of Proceeds." Under the terms of the Series A Preferred Stock, the
Company may incur up to approximately $40.0 million of additional Senior
Indebtedness without the consent of the holders of the Series A Preferred
Stock. 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.
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
36
<PAGE>
of, premium, if any, 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. The Indenture will 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 or substantially
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 Private Warrants or the Series A
Preferred Stock in any way that will (i) increase the amount of dividends
payable on the Series A Preferred Stock or advance the dates on which such
dividends are payable, (ii) advance the redemption date of the Series A
Preferred Stock to a date prior to the maturity date of the 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 redemption of the Series A Preferred Stock by the Company prior
to the maturity of the Notes unless (i) such payments are made by the Company
with the proceeds from the issuance of (y) Indebtedness subordinate to the
Notes and bearing interest at a rate equal to or lower than the dividend rate
on the Series A Preferred Stock and having a maturity date not earlier than
the maturity date of the Notes or (z) equity securities accruing dividends at
a rate equal to or lower than the Series A Preferred Stock and not redeemable
prior to the maturity date of the Notes 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 130% of the
Conversion Price.
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 or premium, if any, 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 Private Warrants or Series A Preferred Stock without the consent of the
requisite Holders, or redeeming the Series A Preferred Stock, 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 or
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<PAGE>
any Significant Subsidiary with respect to its obligation to pay principal of
or interest on Indebtedness aggregating more than $10.0 million, or the
acceleration of such Indebtedness of the Company under the terms of the
instruments evidencing such Indebtedness, which has not been withdrawn within
10 days from the date of such default; (iv) redemption of the Series A
Preferred Stock (other than as permitted in the manner described under "--
Covenants" above); (v) the entry by a court of competent jurisdiction of a
judgment, order or decree against the Company or any Significant Subsidiary in
an aggregate amount (excluding amounts covered by insurance) in excess of
$1,000,000, which judgment, order or decree remains undischarged, unstayed and
unsatisfied for a period of 60 consecutive days; and (vi) certain events of
bankruptcy, insolvency or reorganization of the Company or any Significant
Subsidiary.
The Indenture will provide that the Trustee shall, within 90 days after the
Trustee has knowledge of 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, unless such default shall have
been cured or waived before the giving of such notice; 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, premium,
if any, 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, premium, if any, 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 90 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 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 Indenture will be discharged and canceled upon payment or conversion of
all the Notes outstanding. At any time when all the Notes shall have become
due and payable, or are by their terms to become due and payable within one
year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, the
Company may terminate all of its obligations under the Indenture, other than
its obligation to pay the principal, premium, if any, and interest on the
Notes and certain other obligations (including its obligation to deliver
shares of Common Stock upon conversion of any Notes), by depositing with the
Trustee monies sufficient to pay at maturity or upon redemption all the
principal, premium, if any, and interest due on the Notes on such date of
maturity or redemption, and all other sums payable by the Company under the
Indenture.
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
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<PAGE>
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.
BOOK ENTRY, DELIVERY AND FORM
The Notes will be issued in denominations of $1,000 and integral multiples
thereof and will be issued only in fully registered form. Except under the
circumstances described below, the Notes will be issued in whole or in part in
the form of a Global Security that will be deposited with, or on behalf of,
The Depository Trust Company, New York, New York ("DTC"), or such other
depository as may be subsequently designated (the "Depository"), and
registered in the name of a nominee of the Depository.
So long as the Depository, or its nominee, is the registered owner of a
Global Security, such Depository or such nominee, as the case may be, will be
considered the sole owner of the Notes represented by such Global Security for
all purposes under the Indenture. Payments of principal of and premium, if
any, and any interest on the Notes represented by a Global Security will be
made to the Depository or its nominee, as the case may be, as the holder of
such Global Security. Except as set forth below, owners of beneficial
interests in a Global Security will not be entitled to have any of the
individual Notes represented by such Global Security registered in their
names, will not receive or be entitled to receive physical delivery of any
such Notes and will not be considered the Holders thereof under the Indenture,
including, without limitation, for purposes of consenting to any amendment
thereof or supplement thereto. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
If the Depository is at any time unwilling or unable to continue as
depository and a successor depository is not appointed, the Company will issue
individual certificated Notes in exchange for the Global Security in an
aggregate principal amount equal to the principal amount of the Global
Security. In such instance, an owner of a Note represented by a Global
Security will be entitled to physical delivery of individual certificated
Notes for the Note represented by such Global Security and to have such
certificated Notes registered in such owner's name. Individual certificated
Notes so issued will be issued as registered Notes in denominations of $1,000
and integral multiples thereof.
Any person having a beneficial interest in Notes evidenced by a Global
Security shall, as permitted by the terms of the Indenture, be entitled to
have its interest in the Global Security be exchanged for a certificated Note
upon written request to the Trustee and in accordance with the standing
instructions and procedures existing between the Trustee and the Depository.
DTC has confirmed to the Company, the Trustee and the Underwriters the
following information:
1. DTC will act as securities depository for the Global Security. The
Notes will be issued as fully-registered securities registered in the name
of Cede & Co. (DTC's partnership nominee). One fully-registered Global
Security will be issued for the Notes, in the aggregate principal amount of
such issue, and will be deposited with DTC.
2. DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal reserve system, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a
39
<PAGE>
"clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges in deposited securities through electronic computerized/book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of
its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
3. Purchases of Notes under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Note
("Beneficial Owners") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchase, but Beneficial Owners are expected
to receive written confirmations providing details of the transaction, as
well as periodic statements of their holdings, from the Direct or Indirect
Participant through which the Beneficial Owner entered into the
transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Notes, except in the event that
use of the book-entry system for the Notes is discontinued.
4. To facilitate subsequent transfers, all Notes deposited by
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Notes with DTC and their registration in
the name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Notes; DTC's records
reflect only the identity of the Direct Participants to whose accounts such
Notes are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
5. Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Beneficial Owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
6. Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, DTC's practice is to determine by lot the amount
of the interest of each Direct Participant in such issue to be redeemed.
7. Neither DTC nor Cede & Co. will consent or vote with respect to the
Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the
Company as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
8. Principal and interest payments on the Notes will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the date on
which interest is payable in accordance with their respective holdings
shown on DTC's records unless DTC has reason to believe that it will not
receive payment on such date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form
or registered in "street name", and will be the responsibility of such
Participant and not of DTC, the Underwriter or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to DTC is the responsibility of the
Company or the Trustee, disbursement of such payments to Direct
Participants shall be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners shall be the responsibility of Direct and
Indirect Participants.
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9. DTC may discontinue providing its services as securities depository
with respect to the Notes at any time by giving reasonable notice to the
Company and the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, certificated Notes are
required to be printed and delivered.
10. The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that
event, certificated Notes will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
None of the Company, the Trustee or any agent for payment on or registration
of transfer or exchange of the Global Security will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial interests in such Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial interests.
CONCERNING THE TRUSTEE
Harris Trust and Savings Bank will be the Trustee under the Indenture.
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
On August 29, 1997, the Company agreed to issue, pursuant to the Securities
Purchase Agreement, 10,000 shares of Series A Preferred Stock and 600,000
Private Warrants to the Private Investor in the Private Offering. The Series A
Preferred Stock and Private Warrants will be issued to the Private Investor in
exchange for a promissory note and warrants issued to the Private Investor for
$10.0 million in cash on August 27, 1997. The Private Offering will close upon
satisfaction of certain closing conditions but in no event later than the
closing of this Offering. The statements under this section are summaries of
certain terms applicable to the Series A Preferred Stock and the Private
Warrants, and do not purport to be complete and are qualified in their
entirety by express reference to the Securities Purchase Agreement, including
the exhibits thereto, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Capitalized terms
used herein shall have the same meanings specified in the Securities Purchase
Agreement.
SERIES A PREFERRED STOCK
Liquidation Preference and Dividends
The 10,000 shares of Series A Preferred Stock have an initial liquidation
preference of $1,000 per share, increasing to $3,500 per share on or after the
earliest of (i) August 22, 2003, (ii) a Change in Control and (iii) certain
bankruptcy events (such event, a "Trigger Event") (such liquidation preference
as from time to time in effect, the "Liquidation Price"). The Series A
Preferred Stock accrue dividends, payable quarterly in arrears, at an annual
rate of 12% of the Liquidation Price per share, which rate increases to 14% of
the Liquidation Price per share upon a Trigger Event. The annual dividend rate
will increase by 4% upon the occurrence and during the continuance of any
payment default or certain other material defaults under the Securities
Purchase Agreement.
Conversion of Series A Preferred Stock
Each share of Series A Preferred Stock is convertible at the holder's option
at any time into 80.4 shares of Common Stock (subject to proportional and
broad-based weighted average anti-dilution).
Redemption of Series A Preferred Stock
The Series A Preferred Stock may be redeemed at the option of the holders
thereof at any time (i) on or after August 31, 2003 or (ii) following the
occurrence and continuance of a Redemption Event (as defined below) at a
redemption price equal to the greater of $1,000 per share, plus accrued and
unpaid dividends, or the amount that such holder would have received had such
holder converted the Series A Preferred Stock into Common Stock immediately
prior to the liquidation of the Company. The Series A Preferred Stock may be
redeemed by the Company at any time after the occurrence of a Trigger Event at
a redemption price equal to $3,500 per share, plus accrued and unpaid
dividends.
Series A Preferred Stock Redemption Events
Upon the occurrence of certain events, including, without limitation,
payment defaults, covenant defaults in the Securities Purchase Agreement,
cross defaults to acceleration of other material indebtedness, bankruptcy and
a Change in Control (each, a "Redemption Event"), the holders of the Series A
Preferred Stock may require the Company to redeem their shares of Series A
Preferred Stock at a redemption price equal to the greater of $1,000 per
share, plus accrued and unpaid dividends or the amount that such holder would
have received had such holder converted the Series A Preferred Stock into
Common Stock immediately prior to the liquidation of the Company.
Series A Preferred Stock Covenants
For so long as at least 2,500 shares of Series A Preferred Stock are
outstanding, the Company must comply with various covenants, including,
without limitation, maintenance of fixed charge coverage ratios on a rolling
four-quarter basis and total debt to capital, and restrictions on mergers,
consolidations, sales of assets, liens, payment of dividends and other
distributions to, and redemptions of, other classes of equity and
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limitations on the issuance of additional debt (other than the Notes, up to
$40.0 million in additional Senior Indebtedness and certain other exceptions).
Transfer
The Series A Preferred Stock cannot be transferred by the Private Investor
until September 1, 1998.
Voting Rights of Series A Preferred Stock
The Series A Preferred Stock will not have any special voting rights, other
than as provided by law.
PRIVATE WARRANTS
Pursuant to the Securities Purchase Agreement, the Company will issue to the
Private Investor the Private Warrants to purchase 600,000 shares of Common
Stock. Each holder of a Private Warrant is entitled to purchase shares of
Common Stock at an exercise price equal to $15.125 per share. The Private
Warrants are exercisable at any time until August 22, 2007, but the Private
Warrants and the Common Stock issuable upon the exercise thereof cannot be
transferred by the Private Investor until September 1, 1998. Following such
anniversary, the Private Warrants and underlying Common Stock are immediately
transferable separately from the Series A Preferred Stock.
The Private Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price and the number of shares
subject to such Private Warrants in certain events, such as the issuance or
sale of equity securities by the Company at a price lower than the per share
exercise price of the Private Warrants, stock and cash dividends, stock
splits, mergers, a sale of all or substantially all of the Company's assets at
less than market values, and other customary anti-dilution events (including,
without limitation, the issuance of shares upon conversion of the Existing
Convertible Note).
REGISTRATION RIGHTS
The Company has agreed to register the Common Stock issuable upon conversion
of the Series A Preferred Stock, the Private Warrants and the Common Stock
issuable upon exercise of the Private Warrants on or before September 1, 1998.
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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 Series A Preferred
Stock, and as otherwise required by law or provided in any resolution adopted
by the Board of Directors with respect to any other series of 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 the Series A Preferred Stock or any other outstanding series of
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 July 31,
1997, 42,652,000 shares of Common Stock were issued and outstanding and were
held by approximately 451 holders of record.
RIGHTS PLAN
On April 26, 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 May 3, 1988 (the "Rights Agreement"), between the Company and The First
National Bank of Chicago, 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) May 3, 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.
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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
ISSUABLE UPON CONVERSION OF THE NOTES.
CONVERSION OF NOTES 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
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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 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. Under recently enacted legislation,
the maximum regular individual U.S. federal income tax rate on capital gains
is 20% for property held for more than 18 months and 28% for property held for
more than one year but not more than 18 months. Capital gains on the sale of
property held for one year or less are subject to U.S. federal income tax at
ordinary income rates. 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.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Hambrecht & Quist LLC and Lazard Freres & Co. LLC (the "Representatives"),
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>
Hambrecht & Quist LLC........................................ $ 60,000,000
Lazard Freres & Co. LLC...................................... 60,000,000
------------
Total.................................................... $120,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent accountants. The nature of the Underwriters' obligations is such
that they are committed to purchase all Notes offered hereby if any Notes are
purchased.
The Underwriters propose to offer the Notes directly to the public 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 1.8% of such
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of 0.25% of the public offering price to certain
other dealers. After the public offering of the Notes, the offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an
additional $18.0 million aggregate principal amount of Notes at the public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage of additional Notes which the principal amount of Notes to
be purchased by it shown in the above table bears to the principal amount of
Notes offered hereby. The Company will be obligated, pursuant to the option,
to sell such Notes to the Underwriters to the extent the option is exercised.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of Notes offered hereby.
The offering of the Notes is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the
right to reject any order for the purchase of Notes in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
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 Representatives, excepting the
securities issued in the Private Offering or the grant or exercise of options
pursuant to the Company's existing stock option and purchase plans. The
directors and executive officers 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 effective date of the Registration Statement without the prior
written consent of the Representatives. The holder of the Existing Convertible
Note has agreed not to offer, sell or otherwise dispose of 1.2 million shares
of Common Stock issuable upon conversion of the Existing Convertible Note for
a period of at least 45 days after the effective
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date of the Registration Statement, and for at least 90 days after the
effective date of the Registration Statement with respect to the approximately
2.4 million remaining shares issuable upon conversion of the Existing
Convertible Note.
The Notes are a new issue of securities with no established trading market.
The Notes have been approved for listing on the Nasdaq SmallCap Market. The
Company has been advised by the Underwriters that the Underwriters plan to make
a market in the Notes and Common Stock 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.
Until the distribution of the Notes is completed, rules of 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 Representatives are 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 Representatives may
reduce that short position by purchasing Notes in the open market. The
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described above. The Representatives may
also impose a penalty bid on certain Underwriters and selling group members.
This means that if the Representatives purchase Notes in the open market to
reduce the Underwriters' short position or to stabilize the price of the Notes,
they 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 Representatives 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.
In consideration of certain financial advisory services, the Company has
agreed to sell to Hambrecht & Quist LLC, one of the Representatives, for
nominal consideration, warrants to purchase from the Company 664,452 shares of
Common Stock (the "Representative's Warrants"). The Representative's Warrants
are initially exercisable at a price equal to $18.06 per share of Common Stock,
and may be exercised for a period of five years commencing on the first
anniversary of the date hereof. The Representative's Warrants provide for
adjustment in the number of shares of Common Stock issuable upon the exercise
thereof and in the exercise price of the Representative's Warrants as a result
of certain events, including subdivisions and combinations of the Common Stock.
The Company has agreed to file a shelf registration statement prior to the
first anniversary of the issuance of the Representative's Warrants to register
the shares of Common Stock issuable upon exercise of the Representative's
Warrants. The Representative's Warrants are not transferable prior to the first
anniversary of the date hereof.
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On or prior to the closing of this Offering, the Company will issue to the
Private Investor, an investment entity affiliated with Hambrecht & Quist LLC,
10,000 shares of Series A Preferred Stock and the Private Warrants in exchange
for a promissory note and warrants issued to the Private Investor for $10.0
million in cash on August 27, 1997. See "Description of the Private Offering."
In connection with the Private Offering, the Company has agreed, if requested
by the Private Investor, to nominate for election to the Company's Board of
Directors one person designated by the Private Investor. In the event the
Private Investor elects not to exercise such right, the Private Investor may
designate a person to receive all notices of meetings of the Company's Board
of Directors and all other correspondence and communications sent by the
Company to its Board of Directors and to attend all such meetings of the
Company's Board of Directors. As of the date hereof, the Private Investor has
not exercised its right to designate a member to serve on the Board of
Directors of the Company.
The Company has granted Hambrecht & Quist LLC a right of first refusal to
provide investment banking services to the Company for a period of three
years.
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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 20, 1996, December 12, 1996, January 10, 1997,
May 1, 1997, July 15, 1997, August 14, 1997 and August 21, 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 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, 32nd Floor, Chicago, Illinois 60661 or by telephone
at (312) 641-2900.
50
<PAGE>
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.
51
<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
NINE MONTHS ENDED JULY 31, 1996 and 1997
Consolidated Balance Sheets as of October 31, 1996 and July 31, 1997
(unaudited)............................................................. F-22
Consolidated Statements of Operations for the nine month periods ended
July 31, 1996 and 1997 (unaudited)...................................... F-24
Consolidated Statements of Cash Flows for the nine month periods ended
July 31, 1996 and 1997 (unaudited)...................................... F-25
Notes to Consolidated Financial Statements............................... F-26
</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)
<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
------ ------
Total property and equipment............................... 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
------ ------
Total other assets......................................... 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,
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 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 PER 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 Sys- SSA Services Pty., Ltd. (SSA Northwest) (c)
tems (b) Castillo Informatica
Sdn Bhd (SSA Malaysia) BPCS Division of Exigent (SSA Iberica) (c)
SSA Italia (20%) (a) Computer Group Vector Systems Anal-
Certain assets of ysis SSA North Cen-
Transtech, tral (c)
Inc.
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>
YEAR ENDED
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 ENDED 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>
YEAR ENDED
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>
UNITED EUROPE
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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-21
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
ASSETS 1996 1997
------ ----------- -----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and equivalents................................. $ 38.1 $ 32.1
Accounts receivable, less allowance for doubtful
accounts of $16.5 and $16.5......................... 163.6 169.9
Income taxes receivable.............................. 4.4 3.8
Deferred income taxes................................ 10.1 11.0
Prepaid expenses and other current assets............ 25.5 29.3
------ ------
Total current assets............................... 241.7 246.1
------ ------
Property and Equipment:
Data processing equipment............................ 37.3 39.7
Furniture and office equipment....................... 18.7 17.0
Leasehold improvements............................... 9.0 9.8
Transportation equipment............................. 2.3 1.5
------ ------
67.3 68.0
Less--Accumulated depreciation and amortization...... 39.5 43.5
------ ------
Total property and equipment....................... 27.8 24.5
------ ------
Other Assets:
Software costs, less accumulated amortization of
$61.1 and $81.6..................................... 82.8 95.9
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $8.7 and $11.0..... 22.8 20.6
Deferred income taxes................................ 1.2 1.5
Investments in associated companies.................. 2.2 1.5
Miscellaneous........................................ 5.9 4.9
------ ------
Total other assets................................. 114.9 124.4
------ ------
Total Assets....................................... $384.4 $395.0
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-22
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' OCTOBER 31, JULY 31,
EQUITY 1996 1997
----------------------------- ------------------ ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Short-term borrowings and current
maturities of senior notes
payable......................... $ -- $ 71.8
Accrued commissions and
royalties....................... 26.3 24.1
Accounts payable and other
accrued liabilities............. 62.5 63.0
Accrued compensation and related
benefits........................ 23.8 20.6
Deferred revenue................. 58.8 55.8
------------------ ------------------
Total current liabilities...... 171.4 235.3
------------------ ------------------
Long-Term Obligations............ 75.1 13.5
------------------ ------------------
Deferred Revenue................. 27.7 30.4
------------------ ------------------
Stockholders' Equity:
Preferred stock, $.01 par value,
100,000 shares authorized,
none issued or outstanding...... -- --
Common stock, $.0033 par value,
60,000,000 and 250,000,000
shares authorized, 42,577,000
and 42,652,000 shares issued.... 0.1 0.1
Capital in excess of par value... 32.8 42.8
Retained earnings................ 78.5 76.9
Cumulative translation
adjustment...................... (1.2) (4.0)
------------------ ------------------
Total stockholders' equity..... 110.2 115.8
------------------ ------------------
Total Liabilities and
Stockholders' Equity.......... $384.4 $395.0
================== ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------------------
1996 1997
------------------ ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues:
License fees......................... $ 145.2 $ 213.4
Client services and other............ 86.2 91.6
------------------ ------------------
Total revenues..................... 231.4 305.0
------------------ ------------------
Costs and Expenses:
Cost of license fees................. 43.4 52.4
Cost of client services and other.... 64.9 71.8
Sales and marketing.................. 71.3 66.2
Research and development............. 38.3 39.0
General and administrative........... 57.6 64.8
Special charge....................... -- 1.7
------------------ ------------------
Total costs and expenses........... 275.5 295.9
------------------ ------------------
Operating income (loss)................ (44.1) 9.1
Gain on sale of available-for-sale
securities............................ 3.6 --
Non-operating income (expense), net.... (2.0) (11.6)
------------------ ------------------
Income (loss) before income taxes...... (42.5) (2.5)
Provision (benefit) for income taxes... (15.4) (0.9)
------------------ ------------------
Net income (loss)...................... $ (27.1) $ (1.6)
================== ==================
Earnings (loss) per share.............. $ (0.63) $ (0.04)
================== ==================
Dividends per share.................... $ 0.10 $ --
================== ==================
Weighted average common and equivalent
shares outstanding.................... 43.1 43.7
================== ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
------------------
1996 1997
-------- --------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................ $ (27.1) $ (1.6)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization of property and equipment.. 6.5 6.8
Amortization of other assets............................. 16.8 26.0
Provision for doubtful accounts.......................... 3.5 3.3
Gain on sale of available-for-sale securities............ (3.6) --
Deferred income taxes.................................... (0.3) (1.2)
Deferred revenue......................................... 3.0 2.5
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................... (4.9) (14.1)
Prepaid expenses and other current assets.............. (4.8) 2.7
Miscellaneous assets................................... 1.5 1.0
Accrued commissions and royalties...................... (7.0) (1.7)
Accounts payable and other accrued liabilities......... (0.9) 0.3
Accrued compensation and related benefits.............. (5.1) (3.2)
Income taxes........................................... (23.0) 0.6
-------- --------
Net cash provided by (used in) operating activities.. (45.4) 21.4
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment...................... (8.5) (2.9)
Software costs........................................... (31.1) (33.7)
Investments and acquisitions, net of cash acquired....... (4.5) --
Proceeds from sale of available-for-sale securities...... 9.0 --
-------- --------
Net cash flows used in investing activities.......... (35.1) (36.6)
-------- --------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit, net.. 46.4 (0.4)
Principal payments under other financing obligations..... (1.5) (1.8)
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............ 42.7 10.0
-------- --------
Effect of exchange rate changes on cash.................... (0.1) (0.8)
-------- --------
Net decrease in cash and equivalents................. (37.9) (6.0)
Cash and equivalents:
Beginning of year...................................... 57.1 38.1
-------- --------
End of period.......................................... $ 19.2 $ 32.1
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-25
<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:
On August 20, 1997, the Company terminated its engagement of the prior
underwriter of this Offering, and concurrently elected not to proceed with its
private offering of securities to a group of private investors led by Bain
Capital, Inc. ("Bain"). On August 27, 1997, Bain filed a complaint in the
Superior Court of Massachusetts against the Company, Roger E. Covey and
Hambrecht & Quist LLC, one of the Representatives of the Underwriters in this
Offering. The complaint seeks damages from the Company in excess of $117.5
million for alleged breach of contract, breach of the implied covenant of good
faith and fair dealing, misrepresentation and unfair and deceptive business
acts and practices. The Company believes, based upon advice of its counsel,
that pursuant to its terms letter with Bain, the Company should have no
liability to Bain beyond reimbursement of Bain's expenses, limited to
$250,000, and payment of a "break-up" fee in the amount of $3.0 million. Any
charge related to such reimbursement of expenses and "break-up" fee would
likely be recorded in the Company's fourth fiscal quarter in 1997. Although
the Company denies Bain's allegations and intends to vigorously defend itself
against Bain's lawsuit, there can be no assurance that this action will not
have a material adverse impact on the Company.
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.
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. The Company recorded a
special
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
charge of $1.7 million in the third quarter of 1997 for the Settlement. There
can be no 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
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.
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-27
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Price Range of Common Stock and Dividend Policy........................... 17
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 28
Management................................................................ 29
Description of Notes...................................................... 31
Description of the Private Offering....................................... 42
Description of Common Stock............................................... 44
Certain Federal Income Tax Considerations................................. 45
Underwriting.............................................................. 47
Incorporation of Certain Documents by Reference........................... 50
Legal Matters............................................................. 51
Experts................................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$120,000,000
[SSA LOGO]
7% CONVERTIBLE SUBORDINATED NOTES DUE 2002
---------------
PROSPECTUS
---------------
HAMBRECHT & QUIST
LAZARD FRERES & CO. LLC
SEPTEMBER 8, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
