<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
System Software Associates, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Notes:
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
500 West Madison Street, 32nd Floor
Chicago, Illinois 60661
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 14, 1998
To the Stockholders of System Software Associates, Inc.:
The Annual Meeting of Stockholders of System Software Associates, Inc., a
Delaware corporation (the "Company"), will be held at the First National Bank
of Chicago, 57th Floor Meeting Room, One First National Plaza in Chicago, on
April 14, 1998 at 9:00 A.M. for the following purposes, as more fully
described in the accompanying Proxy Statement:
1. To elect six (6) directors to serve until the next annual meeting of
stockholders or until their successors are elected and qualified;
2. To consider and vote upon a proposal to approve the System Software
Associates, Inc. Qualified Employee Stock Purchase Plan; and
3. To consider and act upon such other business as may properly come
before the meeting or any adjournment thereof.
Stockholders of record of the Company's Common Stock, par value $0.0033 per
share, at the close of business on March 2, 1998, the record date fixed by the
Board of Directors, are entitled to notice of, and to vote at, the meeting,
also as more fully described in the Proxy Statement.
The Company's audited Financial Statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and certain other
information are contained for your reference either in the Annual Report
distributed with the Proxy Statement or in Annex A at the end of the Proxy
Statement.
All stockholders are cordially invited to attend the meeting. Those who
cannot attend are urged to sign, date and otherwise complete the enclosed
proxy and return it promptly in the envelope provided. Any stockholder giving
a proxy has the right to revoke it at any time before it is voted.
For the Board of Directors
Joseph J. Skadra
Secretary
Chicago, Illinois
March 17, 1998
----------------
YOUR VOTE IS IMPORTANT.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
----------------
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
----------------
500 WEST MADISON STREET, 32ND FLOOR
CHICAGO, ILLINOIS 60661
----------------
PROXY STATEMENT
----------------
Approximate date proxy material
first sent to stockholders:
March 17, 1998
----------------
The following information is provided in connection with the solicitation of
proxies for the Annual Meeting of Stockholders of System Software Associates,
Inc., a Delaware corporation (the "Company" or "SSA"), to be held on April 14,
1998, and adjournments thereof (the "Meeting"), for the purposes stated in the
Notice of Annual Meeting of Stockholders preceding this Proxy Statement.
GENERAL INFORMATION
SOLICITATION OF PROXIES
A form of proxy is being furnished herewith by the Company to each
stockholder and, in each case, such proxy is solicited on behalf of the Board
of Directors of the Company for use at the Meeting. The entire cost of
soliciting these proxies will be borne by the Company. Solicitation will be
made by mail, and may also be made by telephone or telegraph by directors,
officers and regular employees of the Company, but these persons will not be
separately compensated for such solicitation services. The Company may pay
persons holding shares in their names or the names of their nominees for the
benefit of others, such as brokerage firms, banks, depositories and other
fiduciaries, for costs incurred in forwarding proxy solicitation material to
their principals.
AUTHORITY CONFERRED BY PROXIES
Unless a contrary choice is specified in the proxy, each proxy duly executed
and returned by stockholders and received by the Company before the Meeting
will be voted FOR the election of all of the nominee-directors specified
herein and FOR the approval of the Company's Qualified Employee Stock Purchase
Plan. Where a contrary specification is indicated as provided in the proxy,
the shares represented by the proxy will be voted in accordance with the
specification made. Abstentions are considered as shares present and entitled
to vote but are not counted as affirmative votes cast on a given matter. A
broker or nominee holding shares registered in its name, or in the name of its
nominee, which are beneficially owned by another person and for which it has
not received instructions as to voting from the beneficial owner does not have
the discretion to vote the beneficial owner's shares with respect to the
proposal. Any broker or nominee "non-votes" with respect to the proposal will
not be considered as shares entitled to vote on that matter and will not be
considered by the inspector when counting votes cast on the matters. As to
other matters, if any, to be voted upon at the Meeting, the persons designated
as proxies in the accompanying form of proxy will take such action as they, in
their discretion, may deem advisable. The persons named as proxies were
selected by the Board of Directors and each of them is a director or officer
of the Company.
REVOCABILITY OF PROXIES
Execution of the enclosed proxy will not affect your right as a stockholder
to attend the Meeting and to vote in person. Any stockholder giving a proxy
has the right to revoke it at any time by: (i) a later dated proxy, duly
executed and delivered or presented at the Meeting; (ii) a written revocation
sent to and received by the Secretary of the Company prior to the Meeting; or
(iii) attendance at the Meeting and voting in person.
VOTING SECURITIES AND RECORD DATE
The Company's voting securities consist of one class of Common Stock, par
value $0.0033 per share (the "Common Stock"). The Company had outstanding
47,385,194 shares of Common Stock as of the close of
<PAGE>
business on March 2, 1998 (the "Record Date"). Only stockholders of record on
the books of the Company at the close of business on the Record Date will be
entitled to vote at the Meeting. Each share of Common Stock is entitled to one
vote. Representation at the Meeting by the holders of a majority of the shares
of Common Stock outstanding on the Record Date, either by personal attendance
or by proxy, will constitute a quorum.
SECURITY OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT
The following table sets forth information as of February 27, 1998 with
respect to the beneficial ownership of the Company's outstanding Common Stock
by each stockholder known by the Company to be the beneficial owner of more
than 5% of its Common Stock, each director, each executive officer discussed
under "Management Compensation" below, and all the directors and officers as a
group. Except as otherwise indicated, the stockholders have sole voting and
investment power with respect to shares beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------------ -------------------- --------
<S> <C> <C>
Roger E. Covey......................... 13,124,750(1) 27.7%
c/o System Software Associates
500 W. Madison Street, 32nd Floor
Chicago, Illinois 60661
Gardner Lewis Asset Management, L.P.... 4,213,124(2) 8.9%
285 Wilmington, W. Chester Pike
Chadds Ford, PA 19317
FMR Corp. ............................. 3,657,942(3) 7.7%
82 Devonshire Street
Boston, MA 02109
Hambrecht & Quist Group................ 3,393,452(4)(9) 6.7%
One Bush Street
San Francisco, CA 94104
Massachusetts Financial Services
Company............................... 2,423,663(5) 5.1%
500 Boylston Street
Boston, MA 02116
William N. Weaver, Jr.................. 347,250(6) *
John W. Puth........................... 189,313(7)(8) *
Riz Shakir............................. 113,669(7) *
William M. Stuek....................... 50,000(7) *
Andrew J. Filipowski................... 4,500(7) *
Casey G. Cowell........................ 0 *
Joseph J. Skadra....................... 0 *
Douglas P. Smith....................... 0(4)(9) *
All Officers and Directors as a Group
(nine persons)........................ 13,829,482(1)(6)(7)(8)(9) 29.1%
</TABLE>
- --------
*Less than 1%.
(1) Includes 800,000 shares held by the Tang Research Foundation, of which Mr.
Covey is a Director.
(2) According to a Report on the SEC's Schedule 13G, as of December 31, 1997
Gardner Lewis Asset Management has sole dispositive power for all
4,213,124 listed shares, and exercises sole voting power over 3,831,325
shares and shared voting power over 48,600 of such shares.
2
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(3) According to a Report on the SEC's Schedule 13G, as of December 31, 1997,
FMR Corp. has shared dispositive and voting power over all listed shares.
(4) According to a Report on the SEC's Schedule 13G, as of December 31, 1997,
Hambrecht & Quist Group ("H&Q") has shared dispositive and voting power
over all listed shares. Such shares are issuable upon conversion of the
shares of the Company's Series A Preferred Stock and the exercise of
certain warrants held by H&Q. Mr. Smith is an Advisory Director of
Hambrecht & Quist LLC ("H&Q LLC"), an indirect wholly owned subsidiary of
H&Q, and as such may have beneficial ownership of the listed shares. See
note (9) below.
(5) According to a Report on the SEC's Schedule 13G, as of December 31, 1997
Massachusetts Financial Services Company has sole dispositive and voting
power over all listed shares.
(6) Includes 47,250 unissued shares of the Company's Common Stock, subject to
a currently exercisable option held by Sachnoff & Weaver, Ltd., of which
Mr. Weaver is a member. Mr. Weaver disclaims beneficial ownership of all
but his pro rata portion of the shares covered by the option.
(7) Includes unissued shares of the Company's Common Stock, subject to options
exercisable within 60 days of February 27, 1998, as follows: Mr. Puth
47,250; Mr. Shakir 47,002; Mr. Stuek 50,000 and Mr. Filipowski 4,500.
(8) Includes 5,000 shares held by a family partnership, of which Mr. Puth is a
general partner.
(9) Mr. Smith's share holdings as indicated in the table exclude: (i)
1,404,000 shares issuable upon the conversion of shares of Series A
Preferred Stock held by H&Q SSA Investors, L.P., an entity of which Mr.
Smith is a limited partner and a member of H&Q LLC, the general partner
and; (ii) 1,989,452 shares issuable upon the exercise of certain warrants
held by H&Q LLC.
ITEM NO. 1--ELECTION OF DIRECTORS
The By-Laws of the Company currently provide that the Board of Directors
shall consist of seven directors to be elected at the annual meeting of
stockholders to hold office until the next annual meeting or until their
successors are elected and qualified. One of the current directors, John W.
Puth, has indicated to the Company that he does not wish to stand for re-
election. Accordingly, the Board has adopted a resolution amending the by-laws
to provide that, effective immediately prior to the Meeting, the size of the
Board of Directors shall be reduced to six directors. The proxies solicited by
and on behalf of the Board of Directors will be voted FOR the election of the
six nominees listed below, unless authority to do so is withheld as provided
in the proxy. All nominees are currently members of the Company's Board of
Directors. If for any reason one or more of the nominees should be unable to
serve or refuse to serve as a director (an event which is not anticipated),
the persons named as proxies will vote for another candidate or candidates
nominated by the Board of Directors, and discretionary authority to cast such
votes is included in the proxy. The nominees receiving the highest number of
votes of shares of Common Stock, up to the number of directors to be elected,
shall be elected.
NOMINEES
The Board of Directors has nominated for election the following individuals,
all of whom are currently directors:
ROGER E. COVEY, age 43, 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, 1991 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.
CASEY G. COWELL, age 45, has been Director of the Company since December
1997. Mr. Cowell is Vice Chairman of the Board of Directors of 3COM
Corporation. Mr. Cowell co-founded U.S. Robotics in 1976 and served as its
chairman and chief executive officer until its merger with 3COM in June 1997.
Mr. Cowell
3
<PAGE>
also serves on the boards of Mastering Computers, May & Speh, Northwestern
Memorial Corporation, the parent company of Northwestern Memorial Hospital,
and he is a trustee of the Illinois Institute of Technology. Mr. Cowell holds
a B.A. degree in economics from the University of Chicago.
ANDREW J. FILIPOWSKI, age 47, 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.
DOUGLAS P. SMITH, age 46, has been a Director of the Company since March
1998. Mr. Smith is an Advisory Director with Hambrecht & Quist LLC, the
Company's financial advisor. Prior to joining Hambrecht & Quist LLC, he was
the Chief Financial Officer and Head of Strategy for ComputerVision
Corporation. He also acted in senior executive capacities with Prime Computer
and Penn Central Corporation. He holds an M.A. in International Economics from
Northeastern University and a B.A. in Economics from Union College.
WILLIAM M. STUEK, age 55, was appointed President and Chief Operating
Officer of the Company on January 5, 1998. Prior to joining the Company, he
served in a variety of sales, marketing and operational management positions
with IBM Corporation. From 1996 through 1997, Mr. Stuek served as IBM's
General Manager of North American Operations, in which he oversaw all sales,
marketing, customer service/support, administrative operations, and
information technology. Before that, he was General Manager of North American
Sales and spent three years as General Manager of Product Sales for Europe,
Middle East and Africa. Mr. Stuek also served as Assistant General Manager of
IBM's Software Division and as General Manager of AS/400 Worldwide Marketing.
Mr. Stuek holds a B.S. degree from Colgate University.
WILLIAM N. WEAVER, JR., age 63, 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 ("S&W"), 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's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. All Directors hold office until the
next annual meeting of stockholders or until their successors are duly elected
and qualified.
COMMITTEES AND ATTENDANCE
The Board of Directors met nine (9) times during fiscal 1997. The Audit
Committee, consisting of directors John W. Puth, William N. Weaver and Andrew
J. Filipowski met one (1) time during fiscal 1997. The Audit Committee
oversees the activities of the Company's independent auditors. The
Compensation Committee met eight (8) times during fiscal 1997, including
actions taken by consent in connection with administration of the Company's
refinancings. This committee consisted of John W. Puth, Andrew J. Filipowski
and William N. Weaver. This Committee reviews and makes recommendations to the
Board of Directors with regard to the salaries, incentive compensation and
related benefits of corporate officers and other employees.
COMPENSATION OF DIRECTORS
The Company does not pay directors any cash consideration for serving on the
Board of Directors. In recognition of their continued board service, the
Company on December 16, 1994, adopted a policy pursuant to which every five
years, all non-employee directors shall be awarded an option under the
Company's existing
4
<PAGE>
stock option plans to purchase 22,500 shares, exercisable at the fair market
value of the Company's stock on the date of grant, such options to become
exercisable in equal portions on the first five anniversaries of the grant
date. The first award under this plan was granted on December 16, 1994, and is
exercisable at $4.63 per share. Pursuant to the same policy, Mr. Cowell was
awarded options to purchase 22,500 shares and an additional 13,500 shares
concurrently with his appointment to the Board of Directors in December 1997.
These options vest in five equal installments on the first five anniversaries
of his appointment, and are exercisable at $9.69 per share, the fair market
value of the Company's stock on the date of grant. In June 1997, Messrs.
Filipowski and Puth and S&W were awarded additional options to purchase
18,000, 36,000 and 36,000 shares, respectively, at $7.81, the fair market
value of the Company's stock on the date of the grant. Mr. Smith and the
Company determined to forego the automatic grant of stock options to Mr. Smith
as an outside director.
In consideration of this and earlier option grants, S&W agreed to waive its
fees for Mr. Weaver's time expended attending meetings of the Board of
Directors. Accordingly, neither Mr. Weaver nor S&W received any cash
compensation in consideration of Mr. Weaver's services as a director in fiscal
1997.
MANAGEMENT COMPENSATION
The table below discloses the compensation awarded by the Company during the
Company's last three fiscal years to the Chief Executive Officer and to each
of the other two executive officers as of the end of fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
FISCAL -------------------- -----------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SECURITIES UNDERLYING OPTIONS (#)
- --------------------------- ------ ---------- --------- ---------------------------------
<S> <C> <C> <C> <C>
Roger E. Covey, 1997 400,000 200,000 200,000
Chairman of the Board and 1996 400,000 -0- -0-
Chief Executive Officer 1995 342,917 127,000 150,000
Joseph J. Skadra, 1997 237,000 57,000 -0-
Vice President and 1996 229,000 47,000 5,000
Chief Financial Officer 1995 220,000 64,000 -0-
Riz Shakir, 1997 228,333 52,000 125,000
Executive Vice President 1996 211,250 43,000 30,000
of Research and Development
</TABLE>
EMPLOYMENT CONTRACTS
William M. Stuek, the Company's President and Chief Operating Officer, was
hired on January 5, 1998 for a term of five years. The terms of his engagement
are set forth in an employment agreement that includes the following: a base
salary of $500,000; bonuses of up to $300,000 annually if the Company achieves
specified quarterly and annual earnings targets and other management
objectives; options to purchase 300,000 shares of Common Stock in accordance
with the terms of the Company's Long-Term Incentive Plan, vesting over five
years; an engagement bonus of $1,583,250; and a one-time bonus of $5,000,000
if the Company's common stock equals or exceeds $50 for any 180 consecutive
day period. The employment agreement also has a non-competition and
confidentiality clause which is to apply throughout Mr. Stuek's employment and
for a period of one year thereafter.
Joseph J. Skadra, the Company's Chief Financial Officer, was hired in August
of 1994. The terms of his engagement include the following: a base salary of
$220,000 annually; bonuses to be awarded if the Company achieves quarterly and
annual earnings targets and if Mr. Skadra achieves specified personal
management objectives; and options to purchase 45,000 shares of Common Stock,
vesting over five years. If all of the Company's Common Stock is acquired and
Mr. Skadra does not become Chief Financial Officer of the acquiring firm, then
18,000 of the stock options will immediately vest, if they have not already.
5
<PAGE>
Riz Shakir, the Company's Executive Vice President of Research and
Development, was hired June 1, 1994 and was appointed to his current position
on November 1, 1996. The terms of his engagement include the following: a base
salary of $180,000 annually; bonuses to be awarded if the Company achieves
quarterly and annual earnings targets and if Mr. Shakir achieves specified
personal management objectives; and options to purchase 30,000 shares of
Common Stock, vesting over five years.
OPTION GRANTS IN FISCAL 1997
The following table provides further information on individual stock option
grants made in fiscal 1997 to the named executive officers. The table does not
reflect as additional grants options canceled and immediately reissued at
lower exercise prices. See "Ten-Year Option Repricings" below. The exercise
prices set forth in the table are net of all repricings.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
INDIVIDUAL GRANTS APPRECIATION(1)
-------------------------------------------- -----------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISES
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#)(2) 1997 ($/SH.) DATE 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Roger E. Covey.......... 200,000(3) 27.2% 7.81 06-13-07 982,333 2,489,426
Joseph J. Skadra........ -0- N.A. N.A. N.A. N.A. N.A.
Riz Shakir.............. 20,000 2.7% 4.63 01-14-07 58,173 147,421
20,000 2.7% 4.63 04-10-07 58,173 147,421
85,000 11.6% 8.06 08-04-07 430,856 1,091,873
</TABLE>
- --------
(1) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of certain options providing for
termination of the option following termination of employment or
nontransferability of the options and do not make any provision for taxes
associated with exercise. Because actual gains will depend, among other
things, on future performance of the Common Stock, the amounts reflected
in this table may not necessarily be achieved. For the actual historical
price performance of the Company's Common Stock over the last five fiscal
years, see the comparative table below under the caption "Stockholder
Return Performance Presentation."
(2) Options granted become exercisable ratably on the first five anniversaries
of the grant date.
(3) Options granted to replace options previously surrendered. See "Report on
Executive Compensation of the Compensation Committee of the Board of
Directors" below.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND OCTOBER 31, 1997 OPTION VALUES
The following table provides information on option exercises in fiscal 1997
by the named executive officers and the value of such officers' unexercised
stock options as of October 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES OCTOBER 31, 1997 (#) OCTOBER 31, 1997 ($)
ACQUIRED ON VALUE ------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Roger E. Covey.......... -0- N.A. -0- 200,000 -0- 787,400
Joseph J. Skadra........ -0- N.A. 19,000 22,000 135,375 156,750
Riz Shakir.............. -0- N.A. 30,002 169,998 213,764 919,006
</TABLE>
6
<PAGE>
TEN-YEAR OPTION REPRICINGS
The following table provides certain information on the repricing during
fiscal 1996 and 1997 of options held by certain of the executive officers. No
options had been repriced prior to fiscal 1996. Further explanation concerning
these repricings is included in the Report on Executive Compensation of the
Compensation Committee of the Board of Directors, below.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE LENGTH OF ORIGINAL
UNDERLYING OF STOCK AT EXERCISE PRICE OPTION TERM
OPTIONS TIME OF AT TIME OF NEW EXERCISE REMAINING AT DATE
REPRICED OR REPRICING OR REPRICING OR PRICE OF REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) ($) AMENDMENT
- ---- ---- ----------- ------------- -------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Roger E. Covey N.A. -0- N.A. N.A. N.A. N.A.
Joseph J. Skadra 08-26-96 5,000 9.81 16.13 9.81 9 years, 9 months
03-27-97 36,000 7.50 9.83 7.50 7 years, 5 months
03-27-97 5,000 7.50 9.81 7.50 9 years, 2 months
03-31-97 36,000 5.81 7.50 5.81 7 years, 5 months
03-31-97 5,000 5.81 7.50 5.81 9 years, 2 months
04-10-97 36,000 4.63 5.81 4.63 7 years, 4 months
04-10-97 5,000 4.63 5.81 4.63 9 years, 1 month
Riz Shakir 06-07-96 30,000 16.13 24.08 16.13 9 years, 5 months
08-26-96 30,000 9.81 16.13 9.81 9 years, 3 months
08-26-96 15,000 9.81 18.08 9.81 9 years, 6 months
03-27-97 30,000 7.50 9.83 7.50 7 years, 2 months
03-27-97 15,000 7.50 9.81 7.50 8 years
03-27-97 30,000 7.50 9.81 7.50 8 years, 8 months
03-27-97 20,000 7.50 11.50 7.50 9 years, 10 months
03-31-97 30,000 5.81 7.50 5.81 7 years, 2 months
03-31-97 15,000 5.81 7.50 5.81 8 years
03-31-97 30,000 5.81 7.50 5.81 8 years, 8 months
03-31-97 20,000 5.81 7.50 5.81 9 years, 10 months
04-10-97 30,000 4.63 5.81 4.63 7 years, 1 month
04-10-97 15,000 4.63 5.81 4.63 7 years, 11 months
04-10-97 30,000 4.63 5.81 4.63 8 years, 7 months
04-10-97 20,000 4.63 5.81 4.63 9 years, 9 months
</TABLE>
REPORT ON EXECUTIVE COMPENSATION OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS
The Compensation Committee of the Company's Board of Directors is
responsible for implementing specific executive compensation plans. The
Company operates in an industry that is highly competitive. The Company
believes that its ability to maintain and improve its competitive position is
dependent on its ability to attract highly qualified managerial personnel.
These personnel are customarily sought from companies much larger and with
greater financial resources than the Company, and the Company believes that
its ability to attract such personnel is enhanced by the Company's emphasis on
significant short-term and long-term performance incentives. The Company
accordingly operates in accordance with the following executive compensation
philosophy:
1. A significant portion of annual cash compensation should be determined by
quantitative performance measures.
For SSA executives, the performance-dependent portion of annual cash
compensation approximates 40% of base cash compensation. These quantitative
performance measures are tied directly to the SSA annual business plan. A
portion is based on quarterly earnings per share and another portion is based
on annual earnings per
7
<PAGE>
share. In addition, a variety of other quantitative measures besides earnings
per share are included in determining the bonus and future base compensation
for each executive. These other measures vary from executive to executive
depending on the strategic needs of the business, and tend to be directly
related to the executive's duties and the achievements of the specific
business unit for which the executive is responsible. The components are
reviewed and adjusted by the Compensation Committee on an annual basis. Based
on the Company's hiring experience and discussions with executive recruiting
firms, the Company believes that base cash compensation for key employees
(which approximates 70% of annual cash compensation) is at an industry
competitive level.
2. Compensation should provide incentives for both short-term and, more
importantly, for long-term performance.
Short-term performance is incentivized by the annual performance-determined
compensation mentioned above. Long-term performance is incentivized by the use
of stock options. Typically, options granted vest over a five-year period,
which is an appropriate long-term performance period. The Company's experience
is that it has no control over its short- or medium-term stock price, but
believes that over the long term the stock price should reflect growth of the
Company's earnings. The size of option grants is determined by reference to
all the facts and circumstances relating to the executive's compensation.
These include, without limitation, the executive's base salary, the cash
bonuses earned and potentially available, the size of all past option grants
to the executive, the timing of such prior grants, the remaining unvested
portion of past grants, the total shares subject to outstanding options held
by all key employees and the total remaining shares available for future
option grants.
3. The SSA standard for executive recruitment is to attempt to find and
recruit the best person in the world for a given executive position.
The compensation of Roger E. Covey, the Company's Chairman and Chief
Executive Officer, for services he rendered during fiscal 1997 was determined
pursuant to a compensation program adopted by the Committee in December 1994,
shortly after Mr. Covey resumed the position of Chairman and Chief Executive
Officer. At that time, the Committee reviewed the compensation packages of the
chief executives of comparable publicly-traded software companies, some of
which the Committee believes are included in the NASDAQ CDP index used in the
stock price performance chart below, as well as the compensation of the
Company's immediate past President and Chief Executive Officer. Based on the
review of comparable and historical compensation levels, the Company's
operating plan for fiscal 1995, and the services rendered and to be rendered
by Mr. Covey, the Committee adopted a compensation program consisting of base
salary, bonus and incentive and non-qualified options of the Company's Common
Stock, which options vest over a five year period following their grant. In
addition to the base salary and stock options discussed above, Mr. Covey's
compensation program provided that he would be awarded bonuses in specified
amounts if the Company achieved certain quarterly and annual per-share
earnings targets, product release targets and other quantitative measures. In
fiscal 1997, Mr. Covey received no raise in base salary from fiscal 1996, and
was awarded a $200,000 bonus based on his efforts in support of the Company's
refinancing, which closed in September 1997. In April 1997, Mr. Covey
surrendered to the Company his option to purchase 200,000 shares of the
Company's Common Stock to supply the Company's Long Term Incentive Option Plan
with additional shares in order to attract and retain key personnel.
Subsequently in June 1997, after the stockholders approved an amendment to the
Long Term Incentive Option Plan increasing its size, Mr. Covey was granted an
option to purchase 200,000 shares to become exercisable at $7.81 per share,
the Company's fair market value on the reissuance date.
On three occasions in fiscal 1997, the Board determined to reprice the
outstanding stock options of holders. The software industry is extremely
competitive and stock options are the major long-term compensation tool used
to attract, retain, motivate and reward key employees. During the second
quarter of fiscal 1997 the Company's stock price declined very sharply. Since
there was no reasonable expectation that the options would have the desired
effect, the Compensation Committee, in consultation with the Chief Executive
Officer, repriced the outstanding stock options of holders three times to the
Company's fair market value on the given repricing date. On April 10, 1997,
the final repricing occurred, at which time options having an exercise price
at or above $4.63 were repriced to become exercisable at $4.63 per share.
8
<PAGE>
The foregoing report has been furnished by Messrs. Filipowski, Puth and
Weaver, who currently constitute the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Compensation Committee of the Board of Directors
consisted of Andrew J. Filipowski, John W. Puth and William N. Weaver. None of
these persons was a current or former officer or employee of the Company or
any of its subsidiaries. Mr. Weaver is a member of S&W, which provides legal
services to the Company. See "Certain Relationships and Related Transactions."
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
The following graph presents a comparison of the cumulative total
stockholder return on the Company's Common Stock since October 31, 1992 with
the cumulative total return of the NASDAQ Computer and Data Processing Index
("NASDAQ CDP Index") and the Standard and Poor's 500 Composite Index.
Note: The stock price performance shown below is not necessarily indicative
of future price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
SYSTEM SOFTWARE ASSOCIATES, INC., S & P 500 AND NASDAQ CDP INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period SYSTEM SOFTWARE S&P NASDAQ CDP
(Fiscal Year Covered) ASSOCIATES, INC. 500 INDEX INDEX
- --------------------- ---------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-
10/31/92 $100 $100 $100
FYE 10/31/93 $100 $115 $112
FYE 10/31/94 $ 87 $119 $135
FYE 10/31/95 $217 $151 $205
FYE 10/31/96 $124 $187 $238
FYE 10/31/97 $125 $247 $321
</TABLE>
Assumes $100 invested on October 31, 1992 in System Software Associates,
Inc. Common Stock, NASDAQ CDP Index and S & P 500 Index.
9
<PAGE>
ITEM NO. 2--PROPOSAL TO APPROVE THE
SYSTEM SOFTWARE ASSOCIATES, INC.
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors has adopted the System Software Associates, Inc.
Qualified Employee Stock Purchase Plan (the "STOCK PURCHASE PLAN"). It was
adopted by the Board of Directors, subject to stockholder approval, on
September 29, 1997, effective October 1, 1997. If the requested stockholder
approval is received, the Stock Purchase Plan will read as set forth in Annex
B.
DESCRIPTION OF THE STOCK PURCHASE PLAN
The purpose of the Stock Purchase Plan is to enable eligible employees of
the Company and its affiliates to acquire a proprietary interest in the
Company by purchasing Common Stock through payroll deductions. A total of
2,000,000 shares of the Company's Common Stock will be made available for
purchase by employees upon the exercise of purchase rights granted under the
Stock Purchase Plan. The number of shares will be subject to appropriate
adjustment for stock dividends, stock splits, recapitalization, or similar
changes in the outstanding shares of Common Stock. As of March 13, 1998, the
market value of the 2,000,000 shares available for issuance under the Stock
Purchase Plan was $15,625,000. Approximately 1,000 employees are eligible to
participate in the Stock Purchase Plan.
The Stock Purchase Plan will be administered by a committee (the
"COMMITTEE") consisting of not less than two members of the Board of
Directors. The Committee will have full authority to interpret and administer
the Stock Purchase Plan, and correct any defect or omission or reconcile any
inconsistency in the Stock Purchase Plan, and its decisions will be final,
conclusive and binding upon all employees and all persons claiming under or
through any employee.
All employees of the Company and, if designated by the Board of Directors,
its affiliates, are eligible to participate in the Stock Purchase Plan. After
the initial effective date, an eligible employee may become a participant in
the Stock Purchase Plan effective the first day of the fiscal quarter
following the completion and filing with the Committee of an enrollment form
that authorizes deductions from the employee's paycheck, so long as the
enrollment form is delivered to the Committee on or before the last business
day prior to the first day of such fiscal quarter. A participant may elect to
have deductions made from his or her pay on each payday at a rate of not less
that 1% nor greater than 25% of the compensation that he or she is entitled to
receive. A request for a change in payroll deductions shall be effective as
soon as practicable after it is filed with the Committee.
The Common Stock to be sold under the Stock Purchase Plan may be (i) shares
acquired on the open market, (ii) treasury shares, and/or (iii) shares newly
issued for such purpose. The purchase price for shares of Common Stock to be
purchased with payroll deductions will be equal to 90% (or such other amount
as the Committee shall authorize, but in no event less than 85%) of the fair
market value of the Common Stock on the date on which a grant of a purchase
right under the Stock Purchase Plan is made or on the date on which the Common
Stock is purchased, whichever is less. If the limit on the number of shares of
Common Stock available to be purchased under the Stock Purchase Plan is
reached, then the last purchase of Common Stock shall be allocated among the
participants pro rata based upon the number of shares that would have been
purchased under the Stock Purchase Plan without this limitation. The fair
market value of the Common Stock on a given date shall generally be determined
by the Committee based upon the reported closing price of the Common Stock on
the Nasdaq National Market.
A participant may elect to withdraw his or her shares or any cash credited
to his or her account at any time. If a participant terminates his or her
employment or otherwise becomes ineligible to participate in the Stock
Purchase Plan, any unused payroll deductions will be returned to him or her. A
participant may terminate payroll deductions at any time by providing written
notice to the Committee. A participant may not then seek reentry in the Stock
Purchase Plan until six months have elapsed from the date his or her cessation
became effective.
10
<PAGE>
A participant may not be granted a purchase right under the Stock Purchase
Plan if he or she owns, immediately after the grant of the purchase right, 5%
or more of the voting power or value of all classes of stock of the Company or
any of its affiliates, or if purchase rights under the Stock Purchase Plan or
any other plans qualified under Section 423 of the Internal Revenue Code of
1986, as amended (the "CODE"), would result during any calendar year in the
purchase of shares having an aggregate fair market value of more than $25,000.
The Board of Directors may amend or terminate the Stock Purchase Plan at any
time, provided that no amendment shall, without stockholder approval, increase
the number of shares of Common Stock available for purchase under the Stock
Purchase Plan, change the class of eligible employees, permit payroll
deductions in excess of the current rate, or otherwise effect a change
inconsistent with Code Section 423.
FEDERAL INCOME TAX CONSEQUENCES
The following provides a general summary of the federal income tax
consequences of the Stock Purchase Plan. Although the Company believes the
following statements are correct based on existing provisions of the Code and
the legislative history, and administrative and judicial interpretations
thereof, no assurance can be given that legislative, administrative, or
judicial changes or interpretations will not occur that would modify such
statements.
The Stock Purchase Plan is designed to qualify as an employee stock purchase
plan under the provisions of Sections 421 and 423 of the Code. Neither the
grant nor the purchase of Common Stock under the Stock Purchase Plan will have
a tax impact on the participant or the Company. If an employee disposes of the
Common Stock acquired upon the purchase of his or her rights after at least
two years from the date of grant and one year from the date of purchase, then
the employee must treat as ordinary income the lesser of (i) the amount, if
any, by which the fair market value of the Common Stock at the time of
disposition exceeds the purchase price paid, or (ii) the amount, if any, by
which the fair market value of the Common Stock at the date of grant exceeds
the purchase price paid. Such recognition of compensation income upon
disposition shall have the effect of increasing the basis of the shares in the
employee's hands by an amount equal to the amount of compensation income
recognized. Any gain in addition to this amount will be treated as a long-term
capital gain. If an employee holds Common Stock at the time of his or her
death, the holding period requirements are automatically deemed to have been
satisfied and ordinary income will be realized by the estate, in the amount
discussed above, upon the sale or other disposition of the Common Stock. The
Company will not be allowed a deduction if the holding period requirements are
satisfied or deemed satisfied.
If an employee disposes of the Common Stock before the expiration of the
later of two years from the date of grant and one year from the date of
purchase, then the employee must treat as ordinary income the excess of the
fair market value of the Common Stock on the date of purchase over the
purchase price. Any additional gain will be treated as long-term or short-term
capital gain, depending upon how long the Common Stock was held after the date
of exercise. The Company may deduct an amount equal to the ordinary income
recognized by the employee.
The foregoing is only a summary of the effects of federal income taxation
upon the employee and the Company with respect to the shares purchased under
the Stock Purchase Plan. It does not purport to be complete and does not
discuss the income tax laws of any municipality, state, or foreign country in
which the employee may reside.
VOTE REQUIRED; DIRECTORS' RECOMMENDATION
Approval of the Stock Purchase Plan requires the affirmative vote of a
majority of the shares represented in person or by proxy at the Meeting. The
Board of Directors recommends a vote FOR approval of the Stock Purchase Plan.
The Board believes that adoption of the Stock Purchase Plan will promote the
interests of the Company and its stockholders by assisting the Company in
attracting, retaining and stimulating the performance of employees and by
aligning employees' interests, through their purchases of Common Stock, with
the interests
11
<PAGE>
of stockholders. The proxies solicited by and on behalf of the Board of
Directors will be voted FOR approval of the Stock Purchase Plan, unless a
contrary choice is specified in the proxy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William N. Weaver, Jr., a member of the Board of Directors, is a member of
the law firm of Sachnoff & Weaver, Ltd., an Illinois professional corporation.
Sachnoff & Weaver, Ltd. 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.
Joseph J. Skadra, the Company's Chief Financial Officer, has borrowed funds
from the Company commencing July 10, 1996. Amounts borrowed are represented by
a promissory note, and bear interest at 8.25% per annum. Mr. Skadra borrowed
the amounts for personal reasons. As of February 27, 1998, the amount owing,
including accrued interest, is $220,500, which constitutes the largest amount
which has been outstanding under such arrangements. Repayment of all amounts of
principal is due January 21, 2000. Interest is payable monthly in arrears.
STOCKHOLDER PROPOSALS
Stockholder proposals submitted for evaluation as to inclusion in the proxy
materials for the Company's next annual meeting of stockholders must be
received by the Company not later than September 30, 1998, at the Company's
principal executive offices at 500 West Madison Street, 32nd Floor, Chicago,
Illinois 60661.
INDEPENDENT PUBLIC ACCOUNTANTS
By the selection of the Company's management, the accounting firm of KPMG
Peat Marwick LLP, certified public accountants, serves as the Company's
independent public accountants. One or more representatives of KPMG Peat
Marwick LLP are expected to be present at the Meeting, with the opportunity to
make a statement if they desire to do so, and to be available to respond to
appropriate questions.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers and holders of 10% or more of the
Company's Common Stock, to file with the Securities and Exchange Commission
reports of ownership and changes in ownership on the SEC's Forms 3, 4 and 5.
Based solely on its review of the copies of such forms it has received, the
Company believes that all its officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during fiscal 1997.
ADDITIONAL INFORMATION
The audited Financial Statements of the Company for the fiscal year ended
October 31, 1997 are included in the attached Annex A to this Proxy Statement.
Annex A also contains information relating to the Company's change in
independent accountants.
A copy of the Company's Annual Report accompanies this Proxy Statement. The
Company's Annual Report to the Securities and Exchange Commission on Form 10-K
for the fiscal year ended October 31, 1997, as filed with the Commission, is
available without charge to any stockholder upon written request to Joseph J.
Skadra, Secretary, System Software Associates, Inc., 500 West Madison Street,
32nd Floor, Chicago, Illinois 60661. The
12
<PAGE>
exhibits filed with the Form 10-K are not included; however, copies of such
exhibits will be furnished, if requested, upon payment of the Company's
reasonable expenses in furnishing those materials.
OTHER MATTERS
Management is not aware of any other matters to be presented for action at
the Meeting. If any other matters are properly brought before the Meeting, it
is the intention of the persons named as proxies in the accompanying form of
proxy to vote the shares represented thereby in accordance with their best
judgment.
For the Board of Directors
Joseph J. Skadra
Secretary
Chicago, Illinois
March 17, 1998
13
<PAGE>
ANNEX A
SYSTEM SOFTWARE ASSOCIATES, INC.
GENERAL AND FINANCIAL INFORMATION
FISCAL YEAR 1997
----------------
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Stock Information......................................................... A-2
Financial Information..................................................... A-2
Selected Consolidated Financial Information............................... A-2
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... A-3
Independent Auditors' Report.............................................. A-10
Report of Independent Accountants......................................... A-11
Annual Consolidated Financial Statements.................................. A-12
Consolidated Balance Sheets as of October 31, 1997 and 1996............. A-12
Consolidated Statements of Operations for the Fiscal Years Ended October
31, 1997, 1996
and 1995............................................................... A-14
Consolidated Statements of Cash Flows for the Fiscal Years Ended October
31, 1997, 1996
and 1995............................................................... A-15
Consolidated Statements of Changes in Stockholders' Equity for the
Fiscal Years Ended October 31, 1997, 1996 and 1995..................... A-16
Notes to Consolidated Financial Statements.............................. A-17
Change in Certifying Accountants.......................................... A-31
</TABLE>
A-1
<PAGE>
STOCK INFORMATION
PRICE RANGE OF COMMON STOCK AND PUBLIC CONVERTIBLE SUBORDINATED NOTES
The Company's common stock is traded on the Nasdaq National Market under the
symbol SSAX. The following table shows each quarter's high and low closing
prices as reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW
----------- ---- --- ----------- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter $14.06 $10.00 First Quarter $27.67 $18.63
Second Quarter 10.88 4.13 Second Quarter 25.63 20.50
Third Quarter 9.56 5.63 Third Quarter 24.13 11.63
Fourth Quarter 16.38 8.06 Fourth Quarter 13.38 8.69
</TABLE>
At January 22, 1998 there were approximately 445 holders of record.
The Company's Public Convertible Subordinated Notes are traded on the Nasdaq
SmallCap Market under the symbol "SSAXG". The notes' high and low closing
prices during the fourth quarter of 1997 were $114.50 and $95.00,
respectively.
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE
DATA)
------------------------------------
1997 1996 1995 1994 1993
YEAR ENDED OCTOBER 31, ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total revenues............................ $430.5 $340.8 $374.1 $324.3 $263.4
Net income (loss)......................... 1.0 (32.8) 26.6 10.0 23.4
Net income (loss) available for common
stockholders............................. (1.4) (32.8) 26.6 10.0 23.4
Earnings (loss) per share of common stock. (0.03) (0.76) 0.63 0.25 0.57
Dividends declared per common share....... -- 0.10 0.08 0.08 0.08
<CAPTION>
1997 1996 1995 1994 1993
AT OCTOBER 31, ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total assets.............................. $475.4 $384.4 $393.2 $333.1 $280.4
Long-term obligations and Redeemable
Series A Preferred Stock................. 160.0 75.1 33.9 32.7 34.0
</TABLE>
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain information
from the consolidated statements of operations as a percentage of total
revenues and the percentage change of such items as compared to the prior
year.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES PERCENTAGE
YEAR ENDED INCREASE (DECREASE)
OCTOBER 31, OVER PRIOR PERIOD
--------------------- -----------------------
1997 1996
VERSUS VERSUS
1997 1996 1995 1996 1995
----- ----- ----- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
License fees............. 70.4% 66.5% 66.8% 33.7% (9.3%)
Client services and
other................... 29.6% 33.5% 33.2% 11.7% (8.1%)
----- ----- ----- --------- ----------
Total revenues......... 100.0% 100.0% 100.0% 26.3% (8.9%)
----- ----- ----- --------- ----------
Costs and expenses:
Cost of license fees..... 17.5% 19.6% 17.4% 12.6% 3.1%
Cost of client services
and other............... 22.8% 26.1% 20.5% 10.4% 15.9%
Sales and marketing...... 20.6% 30.4% 23.4% (14.7%) 18.5%
Research and development. 12.0% 16.0% 10.7% (5.0%) 35.3%
General and
administrative.......... 20.7% 25.1% 17.0% 4.0% 34.6%
Special charges.......... 1.1% -- -- * *
----- ----- ----- --------- ----------
Total costs and
expenses.............. 94.7% 117.2% 89.0% 2.0% 20.0%
----- ----- ----- --------- ----------
Operating income (loss).... 5.3% (17.2%) 11.0% 138.9% (243.1%)
----- ----- ----- --------- ----------
Gain on sale of available-
for-sale securities....... -- 3.8% -- * *
Non-operating income
(expense), net............ (4.9%) (1.7%) (0.1%) 273.7% *
----- ----- ----- --------- ----------
Income (loss) before income
taxes and minority
interest.................. 0.4% (15.1%) 10.9% 103.1% (225.7%)
Provision (benefit) for
income taxes.............. 0.1% (5.5%) 3.8% 103.2% (231.0%)
----- ----- ----- --------- ----------
Net income (loss) before
minority interest......... 0.3% (9.6%) 7.1% 103.0% (222.8%)
Minority interest.......... -- -- -- * *
----- ----- ----- --------- ----------
Net income (loss).......... 0.3% (9.6%) 7.1% 103.0% (223.3%)
Preferred dividends........ 0.6% -- -- * *
----- ----- ----- --------- ----------
Net income (loss) available
for common stockholders... (0.3%) (9.6%) 7.1% 95.7% (223.3%)
===== ===== ===== ========= ==========
</TABLE>
*not meaningful
REVENUES
Total revenues increased 26.3% from 1996 to 1997. All regions of the world,
the Americas, Europe/Middle East/Africa, and Asia Pacific, recorded increased
revenues in 1997. Total revenues decreased 9% from 1995 to 1996. The Americas
recorded higher revenues in 1996 while the Company's other regions were flat
to down.
License Fees. License fees increased 33.7% to $303.0 million in 1997
compared to $226.7 million in 1996, which reflected increasing market
acceptance of Version 6.0, which was released for general availability in the
A-3
<PAGE>
fourth quarter of 1996. License fees decreased 9% in 1996 when, despite solid
revenue growth in North America, a sharp decline in Europe/Middle East/Africa
more than offset North Americas favorable results.
Client Services. Client services and other revenues increased 11.7% to
$127.5 million in 1997 from $114.1 million in 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. Client
services revenues declined 8% in 1996 when compared to 1995 due to lower
productivity caused, in part, by allocation of resources to perform warranty
work and investments in training client services professionals.
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 in 1997, as a percentage of related license fee revenues,
decreased to 24.9% from 29.5% in 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. In 1995, cost of license
fees was 26%. The change from 1995 to 1996 was due primarily to increased
amortization expense related to capitalized software development costs and
increased warranty costs.
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 77.1% in 1997 compared to 78% in 1996. The
modest improvement is primarily attributable to increased productivity of
client services personnel and a reduction in warranty work. In 1995, cost of
client services and other was 61.9%. The increase from 1995 to 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
investment in training.
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, were 29.2% in 1997 compared to 45.8%
in 1996. The decrease was due to improved 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 1997 when compared to 1996 even though license fees
increased nearly 34% year over year. In 1995, sales and marketing expenses
were 35% of license fee revenues. The higher percentage in 1996 was primarily
due to decreased revenue and increased expenditures to establish worldwide
sales and marketing programs and the development of vertical industry groups
in support of the Company's move into the open systems client/server market.
Research and Development. Total research and development (R&D) expenditures
in 1997 decreased $3.2 million, or 3.3%, to $93.1 million from $96.3 million
in 1996. Research and development spending, related to the development of the
Company's new product line, based upon distributed object computing
technology, peaked during the last half of 1996 and has been declining since
as various projects related to such development wind down. Total research and
development expenditures in 1995 were $61.8 million. The 56% increase from
1995 to 1996 was due to the Company's continuing development of its
distributed object computing technology and enhancement of its existing
products.
The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86. The Company capitalized $41.4
A-4
<PAGE>
million of software development costs in 1997 compared to $41.9 million in
1996. The capitalization ratio (capitalized software costs as a percentage of
total R&D expenditures) was 44% for both 1997 and 1996. The capitalization
ratio was 35% in 1995. The increase in the capitalization ratio in 1996 was
due to construction and testing activities related to the Company's
distributed object computing architecture.
The following table sets forth total research and development expenditures
and related capitalized amounts for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER PERCENTAGE
31, CHANGE
---------------------- -------------
1997 1996
VERSUS VERSUS
1997 1996 1995 1996 1995
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total R&D expenditures................. $ 93.1 $ 96.3 $ 61.8 (3%) 56%
Less amount capitalized................ (41.4) (41.9) (21.6) (1%) 94%
------ ------ ------ ---- ---
Net R&D expenses..................... $ 51.7 $ 54.4 $ 40.2 (5%) 35%
====== ====== ====== ==== ===
</TABLE>
General and Administrative. General and administrative expenses increased
$3.4 million in 1997 to $88.9 million from $85.5 million in 1996 to support
the Company's growth. These expenses include increased facilities and
personnel costs related to acquisitions and increased costs for computer
equipment. When viewed as a percentage of total revenues, however, general and
administrative expenses were 20.7% in 1997 and 25.1% in 1996. In 1995, general
and administrative expenses totaled $63.5 million and 17% of total revenues.
The increase in 1996 over 1995 was primarily due to new facilities to support
the Company's worldwide expansion, increased computer equipment costs and an
increase in the provision for doubtful accounts. The provision for doubtful
accounts was $3.3 million, $9.3 million, and $3.3 million in 1997, 1996 and
1995, respectively.
Special Charges. Two special charges were recorded in 1997. A charge of $1.7
million was recorded in the third quarter of 1997 which relates to the
settlement of the Company's class action lawsuits. A special charge of $3.2
million was recorded in the fourth quarter of 1997 under the terms of an
agreement with an investment group led by Bain Capital which stipulated that
if the Company elected not to proceed with a private offering of securities to
the group, the Company could incur capped liability, if any, of a $3.0 million
break-up fee and expense reimbursement of up to $250 thousand (see Note 12 of
Notes to Consolidated Financial Statements).
Operating Income (Loss). Operating income of $22.9 million in 1997 improved
by $81.7 million when compared to the operating loss of $(58.8) million in
1996 principally due to increased software license fees and lower sales and
marketing expenses. Operating income was $41.1 million in 1995. The change in
operating income (loss) from 1995 to 1996 resulted from reduced total revenues
and an increase in every category of cost and expense in 1996.
Non-operating Income (Expense), Net. Non-operating expense, net consists
primarily of interest expense related to the Company's former Credit Facility,
Senior Notes, Convertible Note and other long-term obligations including the
current 7% Convertible Subordinated Notes issued during the fourth quarter of
1997, and amortization of the value of the former Convertible Note's
beneficial conversion feature, less interest income earned on invested cash.
Non-operating expense, net of $21.3 million in 1997 increased $15.6 million
over 1996 due to higher borrowing levels under the Company's former Credit
Facility, higher interests rates applicable to the former Credit Facility and
Senior Notes, interest on the Company's former Convertible Note, interest on
the current 7% Convertible Subordinated Notes issued during the fourth quarter
of 1997, amortization of the value of the former Convertible Note's beneficial
conversion feature and reduced interest income related to lower cash balances.
In 1995, non-operating expense, net was $200 thousand. The increase from 1995
to 1996 was due to higher borrowing levels under the Company's former Credit
Facility, and increased fees and interest rates related to the Company's
renegotiation of its former borrowing arrangements terms and conditions during
the fourth quarter of 1996.
A-5
<PAGE>
Income Taxes. The Company's effective tax rate has remained relatively
constant at approximately 36% in 1997, 1996 and 1995. The tax benefit recorded
in 1996 represents federal and state tax refunds received in 1997 and amounts
to be realized through future utilization of net operating loss and tax credit
carryforwards.
Net Income (Loss). In 1997, the Company recorded net income of $1.0 million
compared to a net loss of $(32.8) million in 1996 resulting primarily from
increased software license fee revenues and lower sales and marketing
expenses. In 1995, net income was $26.6 million. The decline from 1995 to 1996
was primarily due to lower software license fees and client services revenues
combined with increased expenses as explained above.
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 4 of Notes
to Consolidated Financial Statements).
ACQUISITIONS, MERGERS AND INVESTMENTS
The Company continues to expand its global coverage and strengthen its
product offerings through various acquisitions, mergers, and investments (see
Notes 2 and 3 of Notes to Consolidated Financial Statements).
During 1996, the Company acquired the remaining 81% and 90% of its domestic
affiliates SSA North Central and SSA Northwest, respectively, the remaining
27% of SSA Iberica in Spain and 100% of Vector Systems, a Canadian affiliate.
In addition, the Company purchased 25% of CS Controlling Software Systeme, a
German software development company.
During 1995, through stock for stock transactions, the Company combined with
three other companies: Softwright Systems Limited, a leading provider of
business 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. Also during
1995 the Company acquired the remaining 15% minority interest in its
Australian subsidiary, an additional 9% interest in its Affiliate, SSA North
Central, 10% of its Affiliate, SSA Northwest, the BPCS division of a
California Affiliate, Exigent Computer Group, 100% of its Canadian Affiliate,
SSA Ontario, and certain assets of Transtech, Inc., a consulting group.
In July 1995, the Company entered into a strategic alliance relationship
with Harbinger Corporation pursuant to which the Company sold its EDI software
assets to Harbinger and was licensed by Harbinger to market and sell AS/400,
Unix, and PC-based EDI software products. The Company received as
consideration 550,000 shares of Harbinger common stock. In August 1995, the
Company purchased an additional 450,000 shares of Harbinger common stock.
During 1996, the Company sold its shares of Harbinger common stock.
QUARTERLY RESULTS
The following table contains selected unaudited consolidated financial
results by quarter for 1997 and 1996. In management's opinion, this
information reflects all adjustments (which consisted only of normal recurring
A-6
<PAGE>
adjustments) necessary to present the results fairly when read in conjunction
with the Consolidated Financial Statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
QUARTER ENDED QUARTER ENDED
-------------------------------- --------------------------------
JANUARY APRIL JULY OCTOBER JANUARY APRIL JULY OCTOBER
31 30 31 31 31 30 31 31
------- ------ ------ ------- ------- ------ ------ -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 76.6 $ 82.5 $ 72.3 $109.4 $ 92.2 $ 98.1 $114.7 $125.6
Costs and expenses...... 77.0 92.1 106.4 124.1 96.8 94.2 104.9 111.7
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss). (0.4) (9.6) (34.1) (14.7) (4.6) 3.9 9.8 13.9
Gain on sale of
available-for-sale
securities............. -- -- 3.6 9.5 -- -- -- --
Non-operating income
(expense), net......... (0.3) (0.5) (1.2) (3.7) (2.1) (4.9) (4.6) (9.7)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (0.7) (10.1) (31.7) (8.9) (6.7) (1.0) 5.2 4.2
Provision (benefit) for
income taxes........... (0.3) (3.7) (11.4) (3.2) (2.4) (0.4) 1.9 1.5
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (0.4) (6.4) (20.3) (5.7) (4.3) (0.6) 3.3 2.7
------ ------ ------ ------ ------ ------ ------ ------
Preferred dividends..... -- -- -- -- -- -- -- 2.4
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)
available for common
stockholders........... $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6) $ 3.3 $ 0.3
====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per
share of common stock.. $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01) $ 0.08 $ 0.01
====== ====== ====== ====== ====== ====== ====== ======
</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 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, 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 comparison 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents at October 31, 1997 totaled $83.3 million. During 1997,
cash and equivalents increased $45.2 million. On September 12, 1997, the
Company successfully completed a public offering of 7% Convertible
Subordinated Notes due 2002, the gross proceeds of which were $138.0 million.
On August 27, 1997, the Company issued a promissory note and warrants to a
Private Investor for $10 million in cash. The
A-7
<PAGE>
Company and the Private Investor subsequently agreed to exchange the
promissory note and warrants for 10,000 shares of Series A Preferred Stock and
the Private Warrants (see Notes 7 and 8 of Notes to Consolidated Financial
Statements). The Company issued a Convertible Note for $12.0 million on March
27, 1997, to a strategic investor. Subsequent to October 31, 1997, the
strategic investor has elected to convert the note into approximately 3.6
million shares of the Company's Common Stock (see Note 13 of Notes to
Consolidated Financial Statements). From the proceeds of the various
financings described above, the Company repaid its former Credit Facility
($46.4 million) and Senior Notes ($26.0 million) as well as paid costs related
to its former and current borrowings. In 1997, the Company generated $9.6
million from operating activities and used $49.7 million for capital equipment
and software development costs.
The Company utilizes a combination of its own software and custom written
systems necessary for running a software company. SSA believes that there will
be no significant cost associated with ensuring year 2000 compliance of its
internal systems.
Management believes that based upon its anticipated operating results, cash
generated from operations, combined with current working capital and the
proceeds from the Company's various financings as described above, there is
sufficient liquidity to meet the Company's capital requirements for the
foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard for the quarter ended January 31, 1998. Early adoption of this
standard is not permitted. The primary requirements of this standard are: (i)
replacement of primary earnings per share with basic earning per share, which
eliminates the dilutive effect of options and warrants; (ii) use of an average
share price in applying the treasury method to compute dilution for options
and warrants for diluted earnings per share; and (iii) disclosure reconciling
the numerator and denominator of earnings per share calculations. The Company
plans to adopt this statement in fiscal year 1998. The effect of applying this
standard is not expected to be significant.
American Institute of Certified Public Accountants Statement of Position 97-
2, "Software Revenue Recognition" (SOP 97-2) was issued in October 1997. SOP
97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Therefore, SOP 97-2 will effect transactions entered
into by the Company beginning November 1, 1998. SOP 97-2 addresses various
aspects of the recognition of revenue on software transactions and supersedes
SOP 91-1, the policy currently followed by the Company. SOP 97-2 provides
guidance on software arrangements consisting of multiple elements, evidence of
fair value, delivery of elements, accounting for service elements, and
software arrangements requiring significant production, modification, or
customization of software. The Company is currently evaluating the impact this
statement will have on the Company's consolidated financial statements. The
Company anticipates that only minor modifications to its software arrangements
will be necessary to continue to recognize revenue on a basis consistent with
its current policies.
A-8
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
A-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
System Software Associates, Inc.
We have audited the accompanying consolidated balance sheets of System
Software Associates, Inc. and its subsidiaries as of October 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended October 31, 1997. 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 audits.
We conducted our audits 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 audits provide 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the two-year period ended October 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
December 8, 1997
A-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
System Software Associates, Inc.
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows of System Software Associates, Inc. and
its subsidiaries, listed in the accompanying index present fairly, in all
material respects, the results of operations, changes in stockholders' equity
and cash flows for the year 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 audit. We conducted our
audit 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 audit provides 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 paragraph 3 of Note 12 which is as of January
29, 1997
A-11
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
ASSETS 1997 1996
------ --------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current Assets:
Cash and equivalents..................................... $ 83.3 $ 38.1
Accounts receivable, less allowance for doubtful accounts
of $16.5 and $16.5...................................... 198.3 163.6
Income taxes receivable.................................. 1.5 4.4
Deferred income taxes.................................... 11.3 10.1
Prepaid expenses and other current assets................ 27.5 25.5
--------- ---------
Total current assets................................... 321.9 241.7
--------- ---------
Property and Equipment:
Data processing equipment................................ 42.0 37.3
Furniture and office equipment........................... 17.5 18.7
Leasehold improvements................................... 10.3 9.0
Transportation equipment................................. 1.3 2.3
--------- ---------
71.1 67.3
Less--Accumulated depreciation and amortization.......... 46.0 39.5
--------- ---------
25.1 27.8
--------- ---------
Other Assets:
Software costs, less accumulated amortization of $89.3
and $61.1............................................... 99.4 82.8
Cost in excess of net assets of acquired businesses, less
accumulated amortization of $11.8 and $8.7.............. 19.7 22.8
Deferred income taxes.................................... 3.9 1.2
Investments in associated companies...................... 1.6 2.2
Miscellaneous............................................ 3.8 5.9
--------- ---------
128.4 114.9
--------- ---------
Total Assets........................................... $ 475.4 $ 384.4
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-12
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ --------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current Liabilities:
Accrued commissions and royalties...................... $ 25.8 $ 26.3
Accounts payable and other accrued liabilities......... 60.6 62.5
Accrued compensation and related benefits.............. 24.7 23.8
Deferred revenue....................................... 49.3 58.8
--------- ---------
Total current liabilities............................ 160.4 171.4
--------- ---------
Long-Term Obligations.................................... 150.8 75.1
--------- ---------
Deferred Revenue......................................... 32.4 27.7
--------- ---------
Deferred Income Taxes.................................... 0.8 --
--------- ---------
Redeemable Series A Preferred Stock, $.01 par value,
convertible, 10,000 shares issued and outstanding
(liquidation preference of $10.0 million)............... 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.................... -- --
Common stock, $.0033 par value, 250,000,000 and
60,000,000 shares authorized, 42,868,000 and
42,577,000 shares issued.............................. 0.1 0.1
Capital in excess of par value......................... 48.5 32.8
Retained earnings...................................... 77.1 78.5
Cumulative translation adjustment...................... (3.9) (1.2)
--------- ---------
Total stockholders' equity........................... 121.8 110.2
Commitments and Contingencies (Note 12)................ -- --
--------- ---------
Total Liabilities and Stockholders' Equity........... $ 475.4 $ 384.4
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-13
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
----------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
License fees......................................... $303.0 $226.7 $250.0
Client services and other............................ 127.5 114.1 124.1
------ ------ ------
Total revenues..................................... 430.5 340.8 374.1
------ ------ ------
Costs and Expenses:
Cost of license fees................................. 75.3 66.9 64.9
Cost of client services and other.................... 98.3 89.0 76.8
Sales and marketing.................................. 88.5 103.8 87.6
Research and development............................. 51.7 54.4 40.2
General and administrative........................... 88.9 85.5 63.5
Special charges...................................... 4.9 -- --
------ ------ ------
Total costs and expenses........................... 407.6 399.6 333.0
------ ------ ------
Operating income (loss)................................ 22.9 (58.8) 41.1
------ ------ ------
Gain on sale of available-for-sale securities.......... -- 13.1 --
Non-operating income (expense), net.................... (21.3) (5.7) (0.2)
------ ------ ------
Income (loss) before income taxes and minority
interest.............................................. 1.6 (51.4) 40.9
Provision (benefit) for income taxes................... 0.6 (18.6) 14.2
------ ------ ------
Income (loss) before minority interest................. 1.0 (32.8) 26.7
Minority interest...................................... -- -- (0.1)
------ ------ ------
Net income (loss)...................................... 1.0 (32.8) 26.6
Preferred dividends.................................... 2.4 -- --
------ ------ ------
Net income (loss) available for common stockholders.... $ (1.4) $(32.8) $ 26.6
====== ====== ======
Earnings (loss) per share of common stock.............. $(0.03) $(0.76) $ 0.63
====== ====== ======
Weighted average common and equivalent shares
outstanding........................................... 42.7 43.0 42.2
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-14
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
----------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).................................... $ 1.0 $(32.8) $ 26.6
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment......................................... 9.3 9.2 7.9
Amortization of other assets....................... 40.8 23.0 17.3
Provision for doubtful accounts.................... 3.3 9.3 3.3
Gain on sale of available-for-sale securities...... -- (13.1) --
Deferred income taxes.............................. (3.1) (14.2) (2.6)
Deferred revenue................................... (2.8) (2.5) 7.3
Minority interest.................................. -- -- 0.1
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.............................. (42.9) 12.6 (32.3)
Income taxes..................................... 3.4 (14.2) 12.2
Prepaid expenses and other current assets........ (1.9) (2.1) (0.3)
Miscellaneous assets............................. 2.1 2.4 (3.3)
Accrued commissions and royalties................ (0.2) (6.8) 0.3
Accounts payable and other accrued liabilities... (1.0) 8.0 1.0
Accrued compensation and related benefits........ 1.6 -- 1.8
------ ------ ------
Net cash provided by (used in) operating
activities.................................... 9.6 (21.2) 39.3
------ ------ ------
Cash Flows From Investing Activities:
Purchases of property and equipment.................. (4.9) (11.4) (5.3)
Software costs....................................... (44.8) (43.8) (25.1)
Investments and acquisitions, net of cash acquired... -- (4.5) (6.1)
Purchase of available-for-sale securities............ -- -- (5.4)
Proceeds from sale of available-for-sale securities.. -- 23.2 --
Proceeds from sales of assets........................ -- -- 1.7
Other................................................ -- (0.1) 0.3
------ ------ ------
Net cash flows used in investing activities.... (49.7) (36.6) (39.9)
------ ------ ------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit,
net................................................. (46.4) 46.4 --
Repayment of Senior Notes Payable.................... (26.0) -- --
Proceeds from issuance of convertible subordinated
notes............................................... 150.0 -- --
Proceeds from issuance of Redeemable Series A
Preferred Stock..................................... 10.0 -- --
Proceeds from exercise of stock options.............. 1.6 2.1 4.1
Principal payments under other financing obligations. (2.7) (5.7) (3.5)
Dividends paid....................................... -- (4.2) (3.2)
------ ------ ------
Net cash provided by (used in) financing
activities.................................... 86.5 38.6 (2.6)
------ ------ ------
Effect of exchange rate changes on cash................ (1.2) 0.2 0.1
------ ------ ------
Net increase (decrease) in cash and equivalents........ 45.2 (19.0) (3.1)
Cash and equivalents:
Beginning of year.................................... 38.1 57.1 60.2
------ ------ ------
End of year.......................................... $ 83.3 $ 38.1 $ 57.1
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-15
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TREASURY
COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK TOTAL 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,
1994................... 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
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................... 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
Sales 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
---- ---- ----- ------ ----- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.3 1.6 1.6
Tax benefit of stock
options exercised...... 0.5 0.5
Foreign currency
translation adjustment. (2.7) (2.7)
Dividends--Redeemable
Series A Preferred
Stock ($20.00 per
share)................. (0.2) (0.2)
Issuance of warrants.... 2.5 2.5
Beneficial conversion
feature of convertible
subordinated note...... 8.9 8.9
Beneficial conversion
feature of Redeemable
Series A Preferred
Stock.................. 2.2 (2.2) --
Net income.............. 1.0 1.0
---- ---- ----- ------ ----- ----- ---- ----- ------
Balance October 31,
1997................... 42.9 $0.1 $48.5 $ 77.1 $ -- $(3.9) -- $ -- $121.8
==== ==== ===== ====== ===== ===== ==== ===== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-16
<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 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
(the "Affiliates"). The Company has strategic relationships with major
computer hardware manufacturers, such as IBM, Hewlett Packard and Digital
Equipment; advanced planning system software companies, such as i2; and major
systems integrators, such as CAP Gemini and the Big Six consulting firms.
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 gains (losses) aggregating $0.6
million, $(0.4) million, and $(0.7) million are included in general and
administrative expenses for 1997, 1996, and 1995, 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, as required by AICPA
Statement of Position 91-1, upon delivery and acceptance of the product by the
end user providing that no significant vendor obligations remain and
collection of the related receivable is probable. 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.
A-17
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 which
range from three to seven years. 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 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 $9.3 million, $9.2 million, and $7.9 million in
1997, 1996, and 1995, 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,
--------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Purchased software........................................ $ 10.6 $ 9.5
Internally developed software............................. 178.1 134.4
------ ------
188.7 143.9
Less--Accumulated amortization............................ (89.3) (61.1)
------ ------
Net capitalized software costs.......................... $ 99.4 $ 82.8
====== ======
</TABLE>
Amortization of capitalized software costs charged to cost of license fees
aggregated $28.2 million, $20.0 million, and $14.9 million during 1997, 1996,
and 1995, 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 $3.1 million, $2.7 million, and
$2.2 million in 1997, 1996, and 1995, respectively.
Fair value of financial instruments
The fair value of cash and equivalents, income taxes payable, receivables,
accounts payable and accrued expenses approximates their carrying values. The
fair value of public convertible subordinated notes using the quoted market
price on October 31, 1997 is $136.6 million. It was not practical to determine
the fair value of Redeemable Series A Preferred Stock, private convertible
subordinated promissory note, and investments in associated companies at
October 31, 1997 as there are no quoted market prices for these instruments.
Derivatives
The Company periodically enters into foreign currency contracts in order to
reduce the impact of certain foreign currency fluctuations. Unrealized gains
and losses on foreign currency contracts are recognized in each reporting
period in the consolidated statement of operations.
A-18
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-based compensation
The Company utilizes the intrinsic value based method of accounting for its
stock-based compensation agreements.
Earnings per share
The loss per share for 1997 and 1996 has been computed using only the
weighted average number of shares outstanding. Earnings per share for 1995 has
been computed using the weighted average number of shares outstanding plus
shares issuable under stock options using the treasury stock method. 1995
share amounts were adjusted for the November 28, 1995 three-for-two stock
split.
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. At October 31, 1997, the Company had $50.2 million invested in
money market funds, auction rate securities, commercial paper, and corporate
bonds. Interest income which is included in the Company's Consolidated
Statements of Operations in non-operating income (expense), net aggregated
$1.3 million, $1.1 million, and $2.0 million during 1997, 1996, and 1995,
respectively. Supplemental information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
---------------
1997 1996 1995
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Leases capitalized..................................... $ 1.7 $0.6 --
Liabilities assumed in connection with investments and
acquisitions.......................................... -- $1.2 $8.7
Shares issued in business combinations................. -- $3.4 $1.3
Issuance of common stock purchase warrants............. $ 2.5 -- --
Beneficial conversion features on issuance of note and
preferred stock....................................... $11.1 -- --
Cash paid during the year for:
Interest............................................... $ 8.0 $4.0 $2.2
Income taxes........................................... $ 2.4 $9.5 $5.0
</TABLE>
NOTE 2--BUSINESS COMBINATIONS:
During 1996 and 1995 the Company expanded its global coverage and
strengthened its product offerings through various acquisitions. The Company
made no acquisitions during 1997.
The following table summarizes all acquisitions in 1996 and 1995 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
A-19
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
. NofTek NW, Inc. (SSA Northwest) (a) . SSA Ontario Corporation
. Castillo Informatica (SSA Iberica) (a) . SSA Services Pty., Ltd. (b)
. Vector Systems Analysis . BPCS Division of Exigent
Computer Group
. SSA North Central (a) . Certain assets of Transtech, Inc.
- --------------------------------------------------------------------------------------------
Aggregate con- $8.0 $6.5
sideration
- --------------------------------------------------------------------------------------------
Goodwill $7.2 $6.3
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Acquired the remaining interests of 90% in SSA Northwest, 27% in SSA
Iberica and 81% in SSA North Central in 1996.
(b) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA
Australia and New Zealand) in 1995.
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 3--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.
A-20
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--FINANCIAL INSTRUMENTS:
Periodically, 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.
At October 31, 1997, the Company had no forward exchange contracts
outstanding. 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 5--LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------
1997 1996
------ -----
(IN
MILLIONS)
<S> <C> <C>
Public convertible subordinated notes....................... $137.1 $ --
Private convertible subordinated note....................... 12.0 --
Multi-bank line of credit................................... -- 46.4
Senior Notes payable........................................ -- 26.0
Notes payable and other obligations......................... 0.5 1.2
Obligations under capital leases............................ 3.4 3.6
------ -----
153.0 77.2
Less--Current maturities.................................... 2.2 2.1
------ -----
$150.8 $75.1
====== =====
</TABLE>
Public Convertible Subordinated Notes
On September 12, 1997, the Company issued $138.0 million principal amount of
convertible subordinated notes due September 15, 2002 bearing interest at 7%
(the "Public Notes"). Interest will be paid March 15 and September 15 of each
year, commencing March 15, 1998. The Public Notes are subordinated to all
existing and future indebtedness of the Company.
The Public Notes are convertible at the holders' option at any time into
shares of common stock of the Company at $18.06 per share, subject to
adjustments in certain events. The Public Notes are redeemable at the option
of the Company after September 20, 2000 in whole, or in part at any time
(103.5% beginning September 20, 2000 and 101.75% from September 20, 2001 and
thereafter) plus accrued and unpaid interest. In the event that a change in
control occurs, each holder of a Public Note may require the Company to
repurchase all or a portion of such holders Public Notes at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest to the
purchase date.
A substantial portion of the net proceeds from the sale of the notes was
used to fund the retirement of the Company's line of credit and Senior Notes
payable.
Private Convertible Subordinated Note
On March 27, 1997, the Company issued a convertible subordinated promissory
note (the "Private Convertible Subordinated Note") to a strategic investor in
the amount of $12.0 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%
A-21
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the fair market value of the stock at the time of conversion. The loan
maturity is three years, and the note is not convertible prior to October
1997, except in the event of prepayment. The Private Convertible Subordinated
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 date of
issuance. The value of the beneficial conversion feature of $8.9 million has
been reflected as an increase to capital in excess of par value and was
amortized as interest expense in 1997. The expense is included in the
Company's Consolidated Statement of Operations for the year ended October 31,
1997 in non-operating income (expense), net.
Line of Credit
Prior to its retirement in September 1997, the Company had a $50.0 million,
multi-bank line of credit which 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
cumulative amount borrowed and the leverage ratio of the Company at the time
of the borrowings. The Company was required to pay a commitment fee equal to
1/8% of the unused portion of the commitment. In addition, the agreement
contained certain covenants which the Company was unable to maintain
compliance with during 1996.
In March 1997, in satisfaction of certain amendments to the line, the
Company issued the line's bank group warrants to purchase an aggregate of
500,000 shares of the Company's common stock at an exercise price equal to
$10.32, the common stock's fair market value on the date of issuance. The
warrants are freely transferable and can be exercised at any time within the
five years of the issue date (see Note 8 of Notes to Consolidated Financial
Statements).
During September 1997, borrowings under the line of credit were fully repaid
from a combination of proceeds from the Series A Preferred Stock and the
Public Convertible Subordinated Note offerings. The weighted average interest
rate on outstanding borrowings during 1997 and 1996 were 10.38% and 7.78%,
respectively. Outstanding letters of credit issued against the line of credit
were $.5 million and $1.2 million as of October 31, 1997 and October 31, 1996,
respectively.
Senior Notes Payable
Prior to their retirement in September 1997, the Company had Senior Notes
payable consisting of $4 million senior notes and $22 million senior notes
originally due September 15, 1997 and September 15, 1998, respectively, with
original interest rates of 6.23% and 6.69%, respectively.
The notes contained covenants including minimum net worth, fixed charge
coverage and leverage ratios which, during 1996, the Company was unable to
maintain compliance with and technical defaults occurred. As a result, the
Senior Noteholders were 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 the line of credit note (see Note 8 of Notes to
Consolidated Financial Statements).
In September 1997, the Senior Notes payable were fully repaid from a
combination of proceeds from the Series A Preferred Stock and the Public
Convertible Subordinated Note offerings.
Note Payable and Other Obligations
At October 31, 1997, notes payable and other obligations consist of
commitments made in connection with investments and acquisitions which are due
in 1998.
Capital Lease Obligations
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 $6.5 million and $5.6 million at October 31,
1997 and 1996, respectively; accumulated amortization thereon aggregated $4.0
million and $3.4 million, respectively. Amortization of assets under capital
leases is included in depreciation and amortization expense.
A-22
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, (IN MILLIONS) AMOUNT
------------------------------------- ------
<S> <C>
1998............................................................... $2.3
1999............................................................... 1.1
2000............................................................... 0.5
----
Total minimum lease payments....................................... 3.9
Less--Amount representing interest................................. 0.5
----
Present value of minimum lease payments............................ 3.4
Less--Current maturities........................................... 1.7
----
$1.7
====
</TABLE>
Interest expense which is included in the Company's Consolidated Statements
of Operations in non-operating income (expense), net was $9.3 million, $4.7
million, and $2.2 million during 1997, 1996, and 1995, respectively.
NOTE 6--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,
--------------------
1997 1996 1995
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Domestic............................................. $ 4.0 $(57.6) $31.4
Foreign.............................................. (2.4) 6.2 9.5
----- ------ -----
$ 1.6 $(51.4) $40.9
===== ====== =====
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-------------------
1997 1996 1995
---- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................ $1.6 $ (8.3) $ 8.9
State.............................................. -- (2.8) 0.7
Foreign............................................ 2.1 5.3 7.2
---- ------ -----
3.7 (5.8) 16.8
---- ------ -----
Deferred:
Federal............................................ (2.9) (11.5) (2.8)
State.............................................. (0.2) (0.8) (0.1)
Foreign............................................ -- (0.5) 0.3
---- ------ -----
(3.1) (12.8) (2.6)
---- ------ -----
$0.6 $(18.6) $14.2
==== ====== =====
</TABLE>
A-23
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
--------------------------
1997 1996 1995
------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax at the federal statutory rate...... $ 0.5 $ (18.0) $ 14.3
State income taxes, net of federal benefit.... 0.2 (1.3) 0.6
Foreign operating losses...................... 2.9 (0.3) 0.6
Research and development tax credit........... (1.0) (1.2) (1.3)
Meals and entertainment....................... 0.7 1.1 0.4
Other, net.................................... (2.7) 1.1 (0.4)
------- -------- -------
$ 0.6 $ (18.6) $ 14.2
======= ======== =======
</TABLE>
The net deferred tax balance is comprised of (asset) liability:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenue (net of commissions) recognized for tax purposes
in advance of financial reporting...................... $ (6.9) $ (3.3)
Capitalization of software costs for financial reporting
purposes............................................... 33.7 24.7
Provision for doubtful accounts......................... (4.6) (5.0)
Rent expense for financial reporting purposes........... (1.1) (1.4)
Expense recognized for financial reporting purposes in
advance of tax......................................... (4.7) (3.0)
Deferred gain........................................... (1.6) (1.6)
Domestic credit carryforwards........................... (1.4) (1.4)
Foreign carryforwards................................... (8.1) (3.6)
Foreign tax credit carryforwards........................ (11.0) (11.0)
Research and development credit carryforwards........... (3.6) (2.6)
Domestic net operating loss carryforwards............... (15.0) (11.7)
Valuation allowance..................................... 13.1 8.3
Other, net.............................................. (3.2) 0.3
------ ------
$(14.4) $(11.3)
====== ======
</TABLE>
At October 31, 1997, the Company has approximately $25.0 million of foreign
net operating loss carryforwards, $40.0 million of domestic net operating loss
carryforwards, and $11.0 million of tax credit carryforwards and $5.0 million
of domestic tax credit carryforwards. At October 31, 1997 and October 31,
1996, the Company recorded valuation allowances related to those items of
$13.1 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 $25.0 million of foreign net operating loss carryforwards, $12.7
million expire in varying amounts through the fiscal year ending October 31,
2004 and $12.3 million may be carried forward indefinitely. Of the
A-24
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$40.0 million of domestic net operating loss carryforwards, $31.0 million
expire on October 31, 2011, and $9.0 million expire on October 31, 2012. The
$11.0 million of the foreign tax credit carryforwards expire in varying
amounts through the fiscal year ending on October 31, 2001. Of the $5.0
million of domestic tax credit carryforwards, $1.4 million expire in varying
amounts through the fiscal year ending on October 31, 2002, and $3.6 million
expire in varying amounts through the fiscal year ending on October 31, 2012.
During 1997, 1996, and 1995 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 $0.5 million, $1.2
million, and $2.8 million, respectively, has been credited to capital in
excess of par value.
NOTE 7--REDEEMABLE SERIES A PREFERRED STOCK
On August 29, 1997, the Company issued 10,000 shares of Series A Preferred
Stock and 600,000 common stock purchase warrants to a private investor for
$10.0 million. The 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
increases to 14% of the Liquidation Price per share upon a Trigger Event. The
dividend rate will increase by 4% per annum upon the occurrence and during the
continuance of any payment default or certain other material defaults as
described in the purchase agreement.
The Redeemable Series A Preferred Stock 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 date of issuance. The value of the beneficial
conversion feature of $2.2 million was recorded as an increase to capital in
excess of par value and a decrease to retained earnings (preferred dividend).
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).
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.
Upon the occurrence of certain events, including, payment defaults, covenant
defaults in the 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.
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 limitations
on the issuance of additional debt (other than the Public Convertible
Subordinated Notes, up to $40.0 million in additional senior indebtedness and
certain other exceptions). The Series A Preferred Stock cannot be transferred
by the private investor until September 1, 1998.
A-25
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--COMMON STOCK PURCHASE WARRANTS:
On March 4, 1997, the Company issued 775,000 shares of common stock purchase
warrants ("Warrants") as part of amendments to the Company's Line of Credit
and Senior Notes payable agreements. The Warrants are initially exercisable at
$10.32 per share and may be exercised for five years from the date of
issuance. The fair value of the warrants of $0.9 million was recorded as an
increase to capital in excess of par value and other current assets and is
being amortized over the term of the amendments.
On August 29, 1997, the Company issued 600,000 shares of common stock
purchase warrants (the "Private Warrants") to a private investor in connection
with the Company's issuance of Redeemable Series A Preferred 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 fair market value at the
date of issuance of the warrants. 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 until September 1,
1998. Following such anniversary, the Private Warrants and underlying Common
Stock are immediately transferable. The fair value of the warrants of $0.8
million was recorded as an increase to capital in excess of par value and a
decrease to Redeemable Series A Preferred Stock which is being accreted as
preferred dividends over six years beginning the date of issuance.
In consideration of certain financial advisory services performed during
1997, the Company agreed to sell to a financial advisor for a nominal amount
warrants to purchase from the Company up to 664,452 shares of Common Stock
(the "Financial Advisor Warrants"). The Financial Advisor Warrants are
initially exercisable at $18.06 per share and may be exercised for a period of
five years commencing on the first anniversary of the issuance of such
warrants. The fair value of the warrants of $0.9 million was recorded as an
increase to capital in excess of par value and a decrease to the Public
Convertible Subordinated Notes which is being accreted as interest expense
over five years beginning the date of issuance.
NOTE 9--STOCK OPTIONS:
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. In April 1997,
shareholders approved an amendment to the long-term incentive plan, increasing
the aggregate number of common shares to be available for grant to 4,500,000,
from a previous aggregate of 1,800,000, provided the aggregate number of
common shares which may be granted in an one calendar year, to any one key
employee, shall not exceed 200,000 shares. The stock option and long-term
incentive plans provide that an aggregate of 9,056,250 common shares be
available for grant, subject to adjustments for 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 1997, 1996, and 1995 were granted at
fair market value.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
Company's stock option plans been determined consistent with FASB Statement of
Financial Accounting Standards No. 123 ("FAS 123"), the Company's net income
(loss) available to common stockholders and earnings (loss) per share of
common stock would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS,
EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss) available for common
stockholders............................... As Reported $ (1.4) $(32.8)
Pro Forma $ (4.0) $(33.7)
Earnings (loss) per share of common stock... As Reported $(0.03) $(0.76)
Pro Forma $(0.09) $(0.78)
</TABLE>
A-26
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the stock option plans, the exercise price of each option equals the
market price of the Company's common stock on the date of grant. For purposes
of calculating the compensation cost consistent with FAS 123, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in fiscal 1997 and 1996: risk free interest rate of 6.3%; expected life
of 5.5 years; expected volatility of 53%; and no dividends are expected to be
paid.
The following is a summary of 1997, 1996, and 1995 stock option activity:
<TABLE>
<CAPTION>
AVAILABLE WEIGHTED AVERAGE
FOR GRANT UNEXERCISED EXERCISABLE EXERCISE PRICE
---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, October 31, 1994. 682,762 1,677,460 611,081 $ 7.08
---------- ---------- -------- ------
Granted................... (498,000) 498,000 9.23
Becoming exercisable...... 338,367 6.68
Cancelled................. 154,467 (154,467) 7.62
Exercised................. (497,946) (497,946) 5.93
Reflect three-for-two
stock split.............. 169,615 761,524 225,751
---------- ---------- -------- ------
Balance, October 31, 1995. 508,844 2,284,571 677,253 8.19
---------- ---------- -------- ------
Granted................... (1,468,001) 1,468,001 14.22
Becoming exercisable...... 393,822 7.52
Cancelled................. 1,384,237 (1,384,237) (191,211) 17.71
Exercised................. (275,906) (275,906) 7.64
---------- ---------- -------- ------
Balance, October 31, 1996. 425,080 2,092,429 603,958 8.04
---------- ---------- -------- ------
Authorized................ 2,700,000
Granted................... (3,105,569) 3,105,569 6.36
Becoming exercisable...... 403,679 4.27
Cancelled................. 1,995,296 (1,995,296) (106,289) 9.67
Exercised................. (290,698) (290,698) 5.77
---------- ---------- -------- ------
Balance, October 31, 1997. 2,014,807 2,912,004 610,650 $ 5.50
========== ========== ======== ======
</TABLE>
The weighted-average fair values of options granted during 1997 and 1996 are
$3.46 and $7.85, respectively.
The following table summarizes information about the stock options
outstanding as of October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------ ---------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE EXERCISE NUMBER EXERCISE
PRICES SHARES (YEARS) PRICE EXERCISEABLE PRICE
-------- --------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1 to 5 2,321,004 8.4 $ 5 610,450 $ 4
$6 to 10 552,000 9.5 8 200 10
$11 to 15 39,000 9.9 14 -- 14
--------- --- --- ------- ---
$1 to 15 2,912,004 8.6 $ 6 610,650 $ 4
========= === === ======= ===
</TABLE>
During 1988, the Board of Directors approved a stockholder rights plan
designed to deter coercive takeover tactics and to prevent an acquirer 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
A-27
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 offered 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.
NOTE 10--EMPLOYEE STOCK PURCHASE PLANS:
On October 1, 1997 the Company established Qualified and Non-Qualified
Employee Stock Purchase Plans ("Stock Purchase Plans") for all eligible U.S.
employees. An aggregate of 2.0 million shares of the Company's common stock
(subject to adjustments for stock splits, dividends or other relevant changes
in the Company's capitalization) may be sold pursuant to the Stock Purchase
Plans. The Stock Purchase Plans enable employees to purchase, through payroll
deductions, the Company's common stock at the lesser of 90% (subject to
adjustment, but not less than 85%) of the market value on the first day of
each month or the market value on the purchase date.
NOTE 11--FOREIGN INFORMATION:
Information regarding geographic areas for the years ended October 31, 1997,
1996, and 1995 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, 1997
Sales to unaffiliated
customers.................. $208.8 $160.3 $122.3 $(60.9) $430.5
Operating income............ $ 30.0 $(16.9) $ 9.8 $ 22.9
Identifiable assets......... $304.6 $118.5 $117.3 $(65.0) $475.4
====== ====== ====== ====== ======
Year Ended October 31, 1996
Sales to unaffiliated
customers.................. $164.9 $113.8 $ 95.0 $(32.9) $340.8
Operating income............ $(17.4) $(26.6) $(14.8) $(58.8)
Identifiable assets......... $234.9 $ 98.6 $107.2 $(56.3) $384.4
====== ====== ====== ====== ======
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
====== ====== ====== ====== ======
</TABLE>
The sales and operating income (loss) amounts reflected above include
intercompany royalties, which are eliminated.
A-28
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
United States sales by geographical areas during the years ended October 31,
1997, 1996, and 1995 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,
1997................... $151.6 $37.9 $14.7 $4.6 $208.8
Year Ended October 31,
1996................... $143.1 $13.0 $ 4.3 $4.5 $164.9
Year Ended October 31,
1995................... $147.3 $14.3 $ 5.4 $6.7 $173.7
</TABLE>
NOTE 12--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 $25.4 million, $24.1
million, and $15.7 million during 1997, 1996, and 1995, respectively. Minimum
annual rental commitments under noncancelable operating leases for periods
subsequent to October 31, 1997 are as follows: $21.6 million in 1998, $15.1
million in 1999, $11.9 million in 2000, $9.8 million in 2001, and $9.7 million
in 2002 and $43.8 million in 2003 and thereafter.
On August 20, 1997, the Company terminated its engagement of the managing
underwriter of its then-pending public offering of convertible notes and
concurrently elected not to proceed with its private offering of securities to
a group of private investors led by Bain Capital, Inc. (the "Bain Investors").
On August 27, 1997 in the Superior Court of Massachusetts, certain of the Bain
Investors filed a complaint against the Company, Roger E. Covey, the Company's
Chief Executive Officer, and Hambrecht & Quist LLC, one of the successor
representatives of the underwriters in the public offering. For the year ended
October 31, 1997, $3.2 million was recorded as a special charge in the
Company's Consolidated Statement of Operations related to this lawsuit. In
January 1998, the Company settled the Bain Investors' lawsuit (see Note 13
below).
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. 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 presiding judge in the Illinois case approved the
Settlement on September 30, 1997. Pursuant to the settlement, the Company paid
$1.7 million in cash and a director and officer defendant contributed 100,000
shares of Common Stock. The $1.7 million is recorded in the Company's
Consolidated Statement of Operations for the year ended October 31, 1997 as a
special charge. Certain individual objectors to the Settlement filed a Notice
of Appeal on October 17, 1997. There can be no assurance that the Settlement
will not be overturned or that it will legally bar the federal claims
described above. In addition, even if the Settlement bars the federal claims
as described above, because the class period of the federal claims is slightly
larger than the class period of the state claim and one defendant was named in
the federal action that was not a defendant in the State action, the
Settlement may not result in the dismissal of the entire federal action. The
failure to achieve a dismissal of either 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.
A-29
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED):
During January 1998 the $12.0 million convertible subordinated note was
converted into 3.6 million shares of common stock.
In January 1998, the Company settled the Bain Investors' lawsuit as
described in Note 12. Pursuant to the settlement, the Company paid the Bain
Investors approximately $3.65 million and issued to certain of the Bain
Investors warrants to purchase an aggregate of 300,000 shares of the Company's
Common Stock, which warrants are exerciseable at $9.6875 per share, the fair
market value as of the date of settlement.
A-30
<PAGE>
CHANGE IN CERTIFYING ACCOUNTANTS
1. NOVEMBER 8, 1996 FORM 8-K.
On November 8, 1996, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") containing the following
information (the "First November 8-K"):
In a letter dated November 1, 1996, System Software Associates, Inc. (the
"Company") dismissed Price Waterhouse LLP ("PW") as the Company's principal
independent accountant. The decision to dismiss PW was approved by the
Company's Board of Directors upon recommendation by the Company's Audit
Committee of the Board of Directors.
PW's reports on the Company's consolidated financial statements for each of
the fiscal years ended October 31, 1994 and 1995 did not originally contain an
adverse opinion or a disclaimer of opinion, nor were such reports qualified or
modified as to audit scope or accounting principles. However, in a letter
dated November 4, 1996, PW notified the Company that it was withdrawing its
opinions on the Company's consolidated financial statements for each of Fiscal
1994 and 1995. In a November 1 letter to the Company (received after the
Company had dismissed PW), PW advised the Company of PW's conclusion that
facts existed at the time of the initial recognition of revenue on three
contracts which, had they been known at the time, would have caused PW to
object to the Company's accounting position on such contracts. PW further
concluded that these were material matters which would have to be corrected
through restatement of the Company's fiscal 1994 and 1995 financial
statements.
With respect to fiscal 1994, PW advised the Company that the revenue
relating to one material contract should not have been recognized in fiscal
1994. With respect to fiscal 1995, PW advised the Company that revenue from
two Latin America contracts with one customer should not have been recognized
in 1995. In addition, PW advised the Company that income recognized from the
last two payments of a four installment payment contract executed in fiscal
1995, for which recognition had earlier been deemed by PW to be immaterial,
would become material as a result of the restatement relating to the two Latin
America contracts described above.
In PW's Report on 1995 Examination to the Company, dated February 27, 1996
(the "Report on 1995 Examination"), PW indicated that it expanded the scope of
its Fiscal 1995 audit in response to a variety of factors and events relating
to the Company's business evolution. However, PW's audit report on the
Company's fiscal 1995 financial statements did not contain an adverse opinion
or a disclaimer of opinion, nor was such report qualified or modified as to
accounting principles. Moreover, in the Report on 1995 Examination, PW advised
the Company's Board of Directors and Audit Committee that there were no
disagreements with the Company's management with respect to the fiscal 1995
financial statements.
At the August 21, 1996 meeting of the Audit Committee of the Company's Board
of Directors (the "August Meeting"), PW and the Company's management discussed
the applicable criteria for recognizing revenue on a contract executed in the
third quarter of fiscal 1996 and confirmed that revenue was not to be
recognized on that contract at that time. PW has informed the Company that
these discussions should be characterized as a "disagreement," however the
Company does not believe this characterization is accurate.
At the August Meeting, PW also advised the Company that PW would need to
expand its audit procedures for the Company's fiscal 1996 audit due to
weaknesses in the Company's internal controls relating to revenue recognition.
PW elaborated on these matters in an August 30, 1996 letter (the "August
Letter"), wherein PW informed the Company of what PW considered to be two
areas of "material weakness" where internal controls necessary for the Company
to develop reliable financial statements did not exist. All of the matters
recited in the August Letter had previously been raised by PW as
recommendations (but not as "material weaknesses") in the Report on 1995
Examination. The Company has been working diligently to address each of these
matters and the Company believes that at this time all of these matters have
either been completed or are in the process of completion. In its November 1
letter to the Company, PW acknowledged the Company's efforts to address these
matters. The Company believes that the measures being taken to address PW's
recommendations will eliminate the "material weaknesses" specified in PW's
August Letter.
A-31
<PAGE>
In its November 1 letter, PW advised the Company that the weaknesses in
internal controls and management's positions with respect to the fiscal 1994
and 1995 contracts discussed above had caused PW to believe that it was no
longer able to rely on management's representations and that significantly
expanded audit procedures would be required for future audit work. In
addition, PW advised the Company in its November 1 letter that it did not
intend to stand for reappointment as the Company's independent accountants in
connection with the examination of the Company's fiscal 1997 financial
statements.
Except for the matters described above, the Company is not aware of any
other "disagreements" between the Company and PW, or any other "reportable
events" as defined in Item 304 of Regulation S-K, during fiscal 1994 or 1995
or the interim period preceding the Company's dismissal of PW.
The Company's senior executive officers and members of the Audit Committee
of the Company's Board of Directors have participated in discussions with PW
concerning the specific contracts and internal controls matters described
above. However, PW has not discussed the contents or conclusions of its
November 1 letter with management or the Audit Committee.
The Company has authorized PW to respond fully to any and all inquiries made
by KPMG Peat Marwick LLP, which the Company has requested to become its
independent accountants, concerning the subject matter of each of the matters
described above.
The Company has provided PW with a copy of this Form 8-K and has requested
PW to furnish a letter addressed to the Securities and Exchange Commission
stating whether it agrees with the above statements. A copy of such letter
will be filed as an exhibit to an amendment to this Form 8-K pursuant to Item
304(a)(3) of Regulation S-K.
2. NOVEMBER 15, 1996 8-K AMENDMENT.
On November 15, 1996, the Company filed a Form 8-K/A with the SEC to amend
the First November 8-K by adding the following correspondence:
November 14, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
System Software Associates, Inc.
We have read the Company's Form 8-K dated November 1, 1996 and are in
agreement with the statements contained in Item 4 except that, due to a lack
of direct knowledge, Price Waterhouse LLP ("PW") is not in a position to
agree, disagree or comment upon the following statements: (1) the Company's
statement in the second paragraph of Item 4 that PW's November 1 letter was
"received after the Company had dismissed PW," and (2) the Company's statement
in the sixth paragraph of Item 4 that the Company believes its efforts to
address the material weaknesses in its internal controls "have either been
completed or are in the process of completion." Further, PW does not comment
on the contents of the press releases filed as Exhibits 20.1 and 20.2 to the
Company's Form 8-K.
Yours very truly,
/s/ Price Waterhouse LLP
Price Waterhouse LLP
A-32
<PAGE>
3. NOVEMBER 19, 1996 8-K.
On November 19, 1996, the Company filed a Current Report on Form 8-K, dated
November 12, 1996, containing the following information:
On November 12, 1996, the Company engaged KPMG Peat Marwick LLP ("KPMG") to
become the Company's new principal accountants. The decision to retain KPMG
was approved by the Company's Board of Directors upon recommendation by the
Company's Audit Committee of the Board of Directors.
On November 6, 1995, the Company had engaged KPMG to review the application
of accounting principles to a four-installment software contract executed by
the Company in 1995. However, this engagement was discontinued after a very
brief period without KPMG rendering any report, conclusion or advice as to
such contract.
On September 17, 1996, the Company engaged KPMG to review the Company's
internal controls, principally including those over the contracting process,
with the objective of providing observations and recommendations for improving
those controls, but not the rendering of any opinion. This particular
engagement is in process and no recommendations have been made to date.
The Company has requested KPMG to furnish a letter addressed to the
Commission stating whether KPMG agrees with the above statements. A copy of
such letter is filed as an exhibit hereto.
Exhibit 16.1 to November 19, 1996 Form 8-K
November 18, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
RE: System Software Associates, Inc.
We have read System Software Associates, Inc.'s statements under Item 4 of
its Form 8-K dated November 12, 1996, and we agree with such statements,
except that we are not in a position to agree or disagree with the Company's
statement that the decision to retain us was approved by the Company's Board
of Directors upon recommendation of the Company's Audit Committee of the Board
of Directors.
Very truly yours,
/s/ KPMG Peat Marwick LLP
A-33
<PAGE>
4. DECEMBER 11, 1996 8-K.
On December 11, 1996, the Company filed a Current Report on Form 8-K
containing the following information:
On December 4, 1996, the Company engaged Price Waterhouse LLP ("PW") to
audit the Company's financial statements for the fiscal years ended October
31, 1994 and 1995. The decision to retain PW was approved by the Company's
Board of Directors upon recommendation by the Company's Audit Committee of the
Board of Directors.
Prior to November 1, 1996, PW had been the Company's principal independent
accountants. On November 12, 1996 (as confirmed by letter dated November 25,
1996), the Company engaged KPMG Peat Marwick LLP as the Company's new
principal independent accountants, commencing with the audit of the Company's
financial statements for the fiscal year ended October 31, 1996.
Since the Company's dismissal of PW on November 1 (as described in the Form
8-K filed by the Company on November 8, 1996), the Company has not consulted
with PW on the application of accounting principles to any specific
transaction, as to the type of audit opinion that might be rendered on the
Company's financial statements or as to any matter that was the subject of a
dispute or a reportable event.
A-34
<PAGE>
ANNEX B
TEXT OF THE
SYSTEM SOFTWARE ASSOCIATES, INC.
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE
The purpose of the System Software Associates, Inc. Qualified Employee Stock
Purchase Plan is to provide eligible Employees of System Software Associates,
Inc. and its Affiliates with an opportunity to acquire a proprietary interest
in the Company through the purchase of Common Stock of the Company on a
payroll deduction basis. It is believed that participation in the ownership of
the Company will be to the mutual benefit of the eligible Employees and the
Company. It is intended that this Plan shall constitute an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code
of 1986, as amended. The provisions of the Plan shall, accordingly, be
construed so as to extend and limit participation in a manner consistent with
the requirements of Code Section 423.
2. DEFINITIONS
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this Plan, have the following meanings. Wherever
appropriate, words used in the singular shall be deemed to include the plural
and vice versa, and the masculine gender shall be deemed to include the
feminine gender.
(a) ACCOUNT means the funds accumulated with respect to an Employee as a
result of deductions from his paycheck for the purpose of purchasing Common
Stock under the Plan. The funds allocated to an Employee's Account shall
remain the property of the Employee at all times prior to the purchase of
the Common Stock, but may be commingled with the assets of the Company and
used for general corporate purposes. No interest shall be paid or accrued
on any funds accumulated in the Accounts of Employees.
(b) AFFILIATE means a corporation, as defined in Section 424(f) of the
Code, that is a parent or subsidiary of the Company, direct or indirect.
(c) BOARD means the Board of Directors of the Company.
(d) CODE means the Internal Revenue Code of 1986, as amended.
(e) COMMITTEE means the committee to which the Board delegates the power
to act under or pursuant to the provisions of the Plan, or the Board if no
committee is selected.
(f) COMMON STOCK means the shares of common stock of the Company, $.01
par value.
(g) COMPANY means System Software Associates, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of the Company.
(h) COMPENSATION means the compensation paid to an Employee by the
Company during a payroll period for federal income tax purposes, as
reported on an Employee's Form W-2 (or comparable reporting form) for
income tax withholding purposes.
(i) EFFECTIVE DATE means the date the Plan is adopted by, and made
effective by, the Board, subject to the limitations of Section 16.
(j) EMPLOYEE means any person who is employed by the Company or an
Affiliate.
(k) OFFERING DATE means the date on which the Committee grants Employees
the option to purchase shares of Common Stock.
(l) OFFERING PERIOD means the period between the Offering Date and the
Purchase Date.
(m) PURCHASE DATE means the date on which the Committee purchases the
shares of Common Stock, which date shall generally be the first business
day following the last day of each month.
(n) PARTICIPANT means an Employee who elects to participate in the Plan.
<PAGE>
(o) PLAN means the System Software Associates, Inc. Qualified Employee
Stock Purchase Plan.
3. ELIGIBILITY
All Employees of the Company and, if designated by the Board, any Affiliate,
who are employed by the Company and/or such designated Affiliate on the
Effective Date, shall be eligible to participate in the Plan on the Effective
Date. Subject to the enrollment limitations of Section 6, each other Employee
of the Company and/or a designated Affiliate shall be eligible to participate
on the first to occur of (i) the Offering Date coincident with or next
following the Employee's first day of employment, or (ii) the first day of any
fiscal year quarter coincident with or next following the Employee's first day
of employment.
4. ADMINISTRATION
The Plan shall be administered by the Committee, which shall consist of not
less than two (2) members of the Board. Subject to the provisions of the Plan,
the Committee shall be vested with full authority to make, administer, and
interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision, or action of the Committee in
connection with the construction, interpretation, administration, and
application of the Plan shall be final, conclusive, and binding upon all
Participants and any and all persons claiming under or through any
Participant. Notwithstanding anything to the contrary in the Plan, the
Committee shall have the discretion to modify the terms of the Plan with
respect to Participants who reside outside of the United States or who are
employed by a subsidiary of the Company that has been formed under the laws of
any foreign country, if such modification is necessary in order to conform
such terms to the requirements of local laws.
5. STOCK
(a) The Common Stock to be sold to Participants under the Plan may, at
the election of the Company, be either treasury shares, shares acquired on
the open market, and/or shares originally issued for such purpose. The
aggregate number of shares of Common Stock that shall be made available for
purchase under the Plan (and the Company's Employee Stock Purchase Plan,
which plan shall operate in tandem with the Plan) shall not exceed two
million (2,000,000) shares, subject to adjustment upon changes in
capitalization of the Company as provided in subparagraph (b) below. If the
total number of shares that otherwise would have been acquired under the
Plan on any Purchase Date exceeds the number of shares of Common Stock then
available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available in as nearly a uniform manner as shall be
practicable and as it shall determine to be equitable. In such event, the
payroll deductions to be made pursuant to the Participants' authorizations
shall be reduced accordingly, or refunded to the Participants, as the case
may be, and the Company shall give written notice of such reduction or
refund to each affected Participant.
(b) Appropriate adjustments in the aggregate number of shares of Common
Stock that shall be made available for purchase under the Plan shall be
made to give effect to any mergers, consolidations, acquisitions,
reorganizations, stock splits, stock dividends, or other relevant changes
in the capitalization of the Company occurring after the Effective Date.
The establishment of the Plan shall not affect in any way the right or
power of the Company to make adjustments, reclassifications,
reorganizations, or changes in its capital or business structure or to
merge, consolidate, dissolve, liquidate, sell, or otherwise transfer all or
any part of its business or assets. Adjustments under this Section 5 shall
be made in the sole discretion of the Committee, and its decision shall be
binding and conclusive.
(c) A Participant shall not have any interest in shares covered by his
authorized payroll deduction until shares of Common Stock are acquired for
his Account.
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6. PARTICIPATION
(a) After the Effective Date, each Employee may become a Participant in
the Plan by authorizing a payroll deduction on a form provided by the
Committee. Such authorization shall become effective on the first day of
the next fiscal year quarter following the delivery of the authorization
form to the Committee, provided (i) that the Employee is eligible under
Section 3 to participate in the Plan on such day and (ii) that the
authorization form is delivered to the Committee on or prior to 4:00 p.m.
C.S.T. on the last business day prior to the first day of such fiscal year
quarter.
(b) At the time an Employee files his authorization for a payroll
deduction, he shall elect to have deductions made from each paycheck that
he receives, such deductions to continue until the Participant withdraws
from the Plan or otherwise becomes ineligible to participate in the Plan.
Authorized payroll deductions shall be for a minimum of one percent (1%)
and a maximum of twenty-five percent (25%) of the Participant's
Compensation. The deduction rate so authorized shall continue in effect
through the Offering Period and each succeeding Offering Period except to
the extent such rate is changed in accordance with the following
guidelines:
(i) The Participant may at any time during any Offering Period,
reduce his rate of payroll deduction by filing an authorization form
with the Company; and
(ii) The Participant may, at any time during any Offering Period,
increase the rate of his payroll deduction by filing an authorization
form with the Committee. The Participant may not, however,, effect more
than one (1) such increase per Offering Period.
New deduction rates shall become effective as soon as practicable after the
authorization form is filed with the Committee.
(c) All Compensation deductions made for a Participant shall be credited
to his Account. Except as may otherwise be provided by the Committee under
Section 4, a Participant may not make any separate cash payment into his
Account.
7. PURCHASE OF SHARES
(a) On the date when a Participant's authorization form for a deduction
becomes effective, and on each Offering Date thereafter, he shall be deemed
to have been granted an option to purchase as many shares of Common Stock
as he will be able to purchase with the Compensation deductions credited to
his Account during the payroll periods within the applicable Offering
Period for which the Compensation deductions are made. In addition to the
foregoing, any cash dividends paid on shares of Common Stock held in his
Account shall be added to the Account, and used to purchase Common Stock as
otherwise provided herein.
(b) The purchase price for the shares of Common Stock to be purchased
with payroll deductions from the Participant shall be equal to the lesser
of ninety percent (90%) (or such other amount as the Committee shall
authorize, but in no event less than eighty-five percent (85%)) of (i) the
"fair market value" of a share of Common Stock on the Offering Date (or, if
later, on the date the Participant's authorization form becomes effective,
as set forth in Section 6), or (ii) the "fair market value" of a share on
the Purchase Date. However, if a Participant enters the Plan on other than
the Offering Date, the clause (i) amount shall in no event be less than the
fair market value per share of Common Stock on the Offering Date. Fair
market value shall be defined as the closing bid price of the Common Stock
on the largest national securities exchange on which such Common Stock is
listed at the time the Common Stock is to be valued. If the Common Stock is
not then listed on any such exchange, the fair market value shall be the
closing sales price if such is reported or otherwise the mean between the
closing "Bid" and the closing "Ask" prices, if any, as reported in the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") for the date of valuation, or if none, on the most recent trade
date thirty (30) days or less prior to the date of valuation for which such
quotations are reported. If the Common Stock is not then listed on any such
exchange or quoted in NASDAQ, the fair market value shall be the mean
between the average of the "Bid" and the average of the "Ask" prices, if
any, as reported in the National Daily Quotation Service for the date of
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<PAGE>
valuation, or, if none, for the most recent trade date thirty (30) days or
less prior to the date of valuation for which such quotations are reported.
If the fair market value cannot be determined under the preceding three
sentences, it shall be determined in good faith by the Committee.
8. TIME OF PURCHASE
From time to time, the Committee shall grant to each Participant an option
to purchase shares of Common Stock in an amount equal to the number of shares
of Common Stock that the accumulated payroll deductions to be credited to his
Account during the Offering Period may purchase at the applicable purchase
price. Each Offering Period shall be for a specified period of time to be
fixed by the Committee and shall be for no less than one month and no more
than twenty-seven (27) months' duration. Each Participant who elects to
purchase shares of Common Stock hereunder shall be deemed to have exercised
his option automatically on such date of purchase. Administrative and
commission costs on purchases shall be paid by the Company. The Committee
shall cause to be delivered periodically to each Participant a statement
showing the aggregate number of shares of Common Stock in his Account, the
number of shares of Common Stock purchased for him in the preceding Offering
Period, his aggregate Compensation deductions for the preceding Offering
Period, the price per share paid for the shares of Common Stock purchased for
him during the preceding Offering Period, and the amount of cash, if any,
remaining in his Account at the end of the preceding Offering Period.
A Participant may request delivery to him of the cash in his Account or of
the shares of Common Stock held in his Account at any time (subject to any
limitations imposed by Section 16(b) of the Securities Exchange Act of 1934),
and the delivery thereof shall be made at such regular time as the Company or
its transfer agent shall determine. If such delivery is required at a time
other than the normal transfer date set by the Company or its transfer agent,
the Participant requesting such transfer shall pay the costs thereof. All of
the cash deposits in his Account shall be paid to him promptly after receipt
of notice of withdrawal, without interest. Shares of Common Stock to be
delivered to a Participant under the Plan shall be registered in the name of
the Participant or, if the Participant so directs in writing to the Committee,
in the name of the Participant and such person(s) as may be designated by the
Participant, to the extent permitted by applicable law, and delivered to the
Participant as soon as practicable after the request for a withdrawal. If a
Participant wishes to sell the shares of Common Stock in his Account, he may
notify the Committee to sell the same, in lieu of a distribution of such
shares, in which event all commission costs incurred in connection with the
sale of the shares of Common Stock shall be borne by the Participant. The
Company shall pay administrative costs associated therewith other than costs
arising from a sale occurring at a time different from the prearranged dates
set by the Company or its transfer agent for making such sales.
9. CESSATION OF PARTICIPATION
A Participant may cease participation in the Plan at any time by notifying
the Committee in writing of his intent to cease his participation. If such
notice is received by the Committee the Company shall distribute to the
Participant all of his accumulated payroll deductions, without interest. If
any Participant ceases participation in the Plan, no further Compensation
deductions shall be made on his behalf after the effective date of his
cessation, except in accordance with a new authorization form filed with the
Committee as provided in Section 6. Upon ceasing participation in the Plan, a
Participant shall not be permitted to deliver an authorization form to reenter
the Plan until six (6) months have elapsed from the date his cessation becomes
effective.
10. INELIGIBILITY
An Employee must be employed by the Company or an Affiliate on the Purchase
Date in order to participate in the purchase for that Offering Period. If an
option expires without first having been exercised, all funds credited to the
Participant's Account shall be refunded without interest. If a Participant
becomes ineligible to participate in the Plan at any time, all Compensation
deductions made on behalf of the Participant that have not been used to
purchase shares of Common Stock shall be paid to the Participant within thirty
(30) days after the Committee determines that the Participant is not eligible
to participate in the Plan.
4
<PAGE>
11. DESIGNATION OF BENEFICIARY
A Participant may file a written designation of a beneficiary who shall
receive any shares of Common Stock (or remaining Compensation deductions)
credited to the Participant's Account under the Plan in the event of such
Participant's death prior to delivery to him of the certificates for such
shares (or remaining Compensation deductions). The designation of a beneficiary
may be changed by the Participant at any time by written notice given in
accordance with rules and procedures established by the Committee. Upon the
death of a Participant, and upon receipt by the Company of proof of the
identity and existence, at the Participant's death, of a beneficiary validly
designated by him under the Plan, the Company shall deliver such shares of
Common Stock (or remaining Compensation deductions) to such beneficiary. In the
event of the death of the Participant, and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
Participant's death, the Company shall deliver such shares (or remaining
Compensation deductions) to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed, the
Company, in its sole discretion, may deliver such shares (or remaining
Compensation deductions) to the Participant's spouse or to any one or more
dependents or relatives of the Participant, or to such other person or persons
as the Company may designate on behalf of the estate of such deceased
Participant.
12. TRANSFERABILITY
Neither Compensation deductions nor Plan contributions credited to a
Participant's Account nor any rights with regard to Plan participation or the
right to purchase shares of Common Stock under the Plan may be assigned,
transferred, pledged, or otherwise disposed of in any way by a Participant
other than by will or the laws of descent and distribution; provided, however,
that shares of Common Stock purchased on behalf of a Participant and left in
his Account shall be subject to his absolute control. Any attempted assignment,
transfer, pledge, or other disposition shall be void and without effect.
13. AMENDMENT OR TERMINATION
The Board may, without further action on the part of the stockholders of the
Company, at any time amend the Plan in any respect, or terminate the Plan,
except that it may not:
(a) Permit the sale of more shares of Common Stock than are authorized
under Section 5;
(b) Permit Compensation deductions at a rate in excess of the rate set
forth herein;
(c) Change the class of eligible Employees; or
(d) Effect a change inconsistent with Section 423 of the Code or the
regulations issued thereunder.
14. NOTICES
All notices or other communications by a Participant under or in connection
with the Plan shall be deemed to have been duly given when received in writing
by the Chief Financial Officer of the Company or when received in the form
specified by the Committee at the location and by the person designated by the
Committee for the receipt thereof.
15. LIMITATIONS
Notwithstanding any other provisions of the Plan:
(a) The Company intends that this Plan shall constitute an employee stock
purchase plan within the meaning of Section 423 of the Code. Any provisions
required to be included in the Plan under said Section, and under
regulations issued thereunder, are hereby included as though set forth in
the Plan at length.
(b) No Employee shall be entitled to participate in the Plan if,
immediately after the grant of an option hereunder, the Employee would own
stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or an Affiliate. For
purposes of this Section 15, stock ownership shall be determined under the
rules of Section 424(d) of the Code and stock that the Employee may
purchase under outstanding options shall be treated as stock owned by the
Employee.
5
<PAGE>
(c) No Employee shall be permitted to purchase Common Stock hereunder if
his right and option to purchase Common Stock under this Plan and under all
other employee stock purchase plans (as defined in Section 423 of the Code)
of the Company or any Affiliates would result in an entitlement to purchase
Common Stock in any one (1) calendar year in excess of a fair market value
of $25,000 (determined at the time of grant).
(d) All Employees shall have the same rights and privileges under the
Plan, except that the amount of Common Stock that may be purchased pursuant
to the Plan shall bear a uniform relationship to an Employee's
Compensation. All rules and determinations of the Committee shall be
uniformly and consistently applied to all persons in similar circumstances.
(e) Nothing in the Plan shall confer upon any Employee the right to
continue in the employment of the Company or any Affiliate or affect the
right that the Company or any Affiliate may have to terminate the
employment of such Employee.
(f) No Participant shall have any right as a stockholder unless and until
certificates for shares of Common Stock are issued to him or allocated to
his Account.
(g) Under any provision of the Plan that requires a computation of the
number of shares of Common Stock to be purchased, such number of shares of
Common Stock may be expressed as a whole number or as a fractional portion
of a whole number.
(h) The Plan is intended to provide shares of Common Stock for investment
and not for resale. The Company does not, however, intend to restrict or
influence any Participant in the conduct of his own affairs. A Participant,
therefore, may sell shares of Common Stock purchased under the Plan at any
time he chooses, subject to compliance with any applicable federal or state
securities laws or any applicable Company restriction or blackout period,
provided, however, that because of certain federal tax requirements, each
Participant shall agree, by entering the Plan:
(i) promptly to give the Company notice of any shares of Common Stock
disposed of within two (2) years after the Offering Date of the
applicable option, or within one (1) year of the Purchase Date, and the
number of such shares disposed of (a "disqualifying disposition");
(ii) that the Company may withhold, pursuant to Code (S)(S) 3102,
3301, and 3402, from his wages and other cash compensation paid to him
in all payroll periods following in the same calendar year, any
additional taxes the Company may become liable for in respect of
amounts includable in his income as additional compensation as a result
of a disqualifying disposition of Common Stock acquired under the Plan,
or as a result of the acquisition of Common Stock under the Plan; and
(iii) that he shall repay the Company any amount of additional taxes
the Company may become liable for in respect of amounts includable in
his income as additional compensation as a result of a disqualifying
disposition of Common Stock acquired under the Plan, or as a result of
the acquisition of Common Stock under the Plan, that cannot be
satisfied by withholding from the wages and other cash compensation
paid to him by the Company.
(i) This Plan is intended to comply in all respects with applicable law
and regulations, including with respect to Participants who are officers or
directors for purposes of Section 16 of the Securities Exchange Act of
1934, as amended from time to time, Rule 16b-3 of the Securities and
Exchange Commission. In case any one or more provisions of this Plan shall
be held invalid, illegal, or unenforceable in any respect under applicable
law and regulation (including Rule 16b-3), the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby and the invalid, illegal, or unenforceable provision
shall be deemed null and void; however, to the extent permitted by law, any
provision that could be deemed null and void shall first be construed,
interpreted, or revised retroactively to permit this Plan to be construed
in compliance with all applicable law (including Rule 16b-3), so as to
further the intent of this Plan. Notwithstanding anything herein to the
contrary, with respect to Participants who are officers and directors for
purposes of Section 16(b) of the Securities Exchange Act of 1934, as
6
<PAGE>
amended from time to time, and if required to comply with the rules
promulgated thereunder, such Participants shall not be permitted to direct
the sale of any Common Stock purchased hereunder until at six (6) months
have elapsed from the date of purchase, unless the Committee determines
that the sale of the Common Stock otherwise satisfies the then current Rule
16b-3 requirements.
16. EFFECTIVE DATE AND APPROVALS
The Plan shall become effective at a time when:
(a) the Plan has been adopted by the Board; and
(b) a registration statement on Form S-8 under the Securities Act of
1933, as amended, has become effective with respect to the Plan; and
(c) the Committee has notified the eligible Employees that they may
commence participation in the Plan; and
(d) the Plan is approved by the holders of a majority of the outstanding
shares of Common Stock of the Company, which approval must occur within the
period ending twelve (12) months after the date the Plan is adopted by the
Board. In the event such stockholder approval is not obtained, the Plan
shall terminate and have no further force or effect, and all amounts
collected from the Participants during any initial Offering Period(s)
hereunder shall be refunded.
Unless sooner terminated by the Board, or as set forth above, the Plan shall
terminate upon the earlier of (i) the tenth (10th) anniversary of the adoption
of the Plan by the Board, or (ii) the date on which all shares available for
issuance under the Plan shall have been sold under the Plan.
17. APPLICABLE LAW
All questions pertaining to the validity, construction, and administration of
the Plan shall be determined in conformity with the laws of Illinois, to the
extent not inconsistent with Section 423 of the Code and the regulations
thereunder.
7
<PAGE>
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P R O X Y
SYSTEM SOFTWARE ASSOCIATES, INC.
500 WEST MADISON STREET
CHICAGO, ILLINOIS 60661
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Roger E. Covey and Joseph J. Skadra as Proxies,
each of them with the power to appoint their substitutes, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock, $0.0033 par value per share, of System Software Associates, Inc.,
a Delaware corporation (the "COMPANY"), held of record by the undersigned on
March 2, 1998 at the Annual Meeting of Stockholders to be held on Tuesday,
April 14, 1998, or any adjournment thereof.
Election of Directors, Nominees:
Nominees are: Roger E. Covey, Casey G.
Cowell, Andrew J. Filipowski, Douglas P.
Smith, William M. Stuek, and William N.
Weaver, Jr.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT
VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
-------------
SEE REVERSE
SIDE
-------------
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. FOLD AND DETACH HERE .
<PAGE>
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[X] Please mark your votes as in this example. 4933
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO SELECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PROPOSED SLATE OF DIRECTORS.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ENTIRE SLATE.
- --------------------------------------------------------------------------------
1. Election of Directors
(see reverse)
FOR WITHHELD
[_] [_]
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------------------------------
2. Approval of the System Software Associates, Inc. Qualified Employee Stock
Purchase Plan
FOR AGAINST ABSTAIN
[_] [_] [_]
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournment thereof.
Change of Address/Comments on Reverse Side [_]
- --------------------------------------------------------------------------------
DATED: _________________________________, 1998
Please sign exactly as name appears at left. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If as a corporation,
please sign in full corporate name by President or other authorized officer. If
as a partnership, please sign in full partnership name by authorized person.
PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT JOSEPH J. SKADRA AT THE
COMPANY AT (312) 258-6000.
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Signature (if held jointly)
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
