<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-15322
SYSTEM SOFTWARE ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3144515
--------------------------------- ----------------------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
500 W. MADISON, 32ND FLOOR
CHICAGO, ILLINOIS 60661
-------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 258-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7% Convertible Subordinated Notes due 2002
Common Stock, par value $0.0033 per Share
(Title of class)
--------------
----------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on the
Nasdaq National Market on January 22, 1999, was $225,200,430.75.
At January 22, 1999, 47,752,228 shares of the registrant's Common Stock were
outstanding.
==============================================================================
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to executive officers is
set forth in Part I of this report, as originally filed. Information regarding
directors is set forth below.
CASEY G. COWELL, age 46, has been a Director of the Company since
December 1997. Mr. Cowell currently serves as Chairman and President of
Durandal, Inc. and is a Director 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 also serves on the Boards
of Chicago Public Library Foundation and Northwestern Memorial Corporation, a
parent company of Northwestern Memorial Hospital, and serves on the Board of
Trustees of the Illinois Institute of Technology and the University of Chicago.
Mr. Cowell holds a B.A. degree in Economics from the University of Chicago.
ANDREW J. FILIPOWSKI, age 48, 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 47, has been a Director of the Company since
March 1998. Mr. Smith is a Managing Director of Hambrecht & Quist LLC ("H&Q
LLC"), the Company's financial advisor. He previously served as an Advisory
Director of H&Q LLC. Prior to joining H&Q LLC in 1997, 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 56, was appointed Chairman and Chief Executive
Officer on April 7, 1998. He previously served as President and Chief Operating
Officer of the Company. Prior to joining the Company in January, 1998, he served
in a variety of sales, marketing and operational management positions during his
30-year tenure at IBM Corporation. While at IBM, Mr. Stuek served as General
Manager of North American Operations in 1996 and 1997 and prior to that was
General Manager of North American Sales, General Manager of Product Sales for
Europe, Middle East and Africa, and General Manager of Software. Mr. Stuek holds
a B.S. degree from Colgate University.
WILLIAM N. WEAVER, JR., age 64, 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.
LAWRENCE A. ZIMMERMAN, age 56, was hired on April 27, 1998 and was
appointed Executive Vice President and Chief Financial Officer on April 29,
1998. Prior to joining the Company, Mr. Zimmerman held many senior financial
management positions during his 32-year tenure at IBM Corporation. From 1996
through March 1998, he was Vice President of Finance for IBM's Server Group.
From 1994 to 1996, he was IBM's Vice President of Finance for Europe, the
<PAGE>
Middle East and Africa, and from 1991 to 1994, he was Vice President and
Corporate Controller. Mr. Zimmerman holds a M.B.A. from Adelphi University and a
B.S. degree from New York University.
The Company's executive officers are appointed by and serve at the discretion of
the Board of Directors. All Directors hold such office until the next annual
meeting of the stockholders or until their successors are duly elected and
qualified.
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 of its officers, directors and greater than ten
percent beneficial owners complied with all the filing requirements applicable
to them with respect to transactions during fiscal 1998, except that William N.
Weaver, Jr., Casey G. Cowell, Andrew J. Filipowski and Douglas P. Smith all
filed one late Form 4, Lorraine H. Fenton filed an untimely Form 3 and William
M. Stuek filed one late Form 4.
ITEM 11.
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 named executive officers as of the end of fiscal 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-term
------------------- Compensation Awards
Name and Principal Fiscal Other -------------------
Position Year Salary ($) Bonus ($) Compensation Securities Underlying Options (#)
------------------ ------ ---------- --------- ------------ ---------------------------------
<S> <C> <C> <C> <C> <C>
William M. Stuek, Chairman of the 1998 416,666 1,950,000 -0- 1,440,000
Board and Chief Executive Officer(1)
Lawrence A. Zimmerman, Executive 1998 154,545 87,500 44,515 (3) 200,000
Vice President and Chief
Financial Officer (2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-term
------------------- Compensation Awards
Name and Principal Fiscal Other -------------------
Position Year Salary ($) Bonus ($) Compensation Securities Underlying Options (#)
------------------ ------ ---------- --------- ------------ ---------------------------------
<S> <C> <C> <C> <C> <C>
Joseph J. Skadra, Vice President 1998 246,917 76,900 -0- 40,000
- - Finance and Controller (4) 1997 237,000 57,000 -0- -0-
1996 229,000 47,000 -0- 5,000
Roger E. Covey, Former Chairman 1998 231,250 638,000 -0- -0-
of the Board and Chief Executive 1997 400,000 200,000 -0- 200,000
Officer (5) 1996 400,000 - 0 - -0- -0-
Riz Shakir, Former Executive Vice 1998 204,166 197,500 -0- 9,897
President, Research and 1997 228,333 52,000 -0- 125,000
Development (6) 1996 211,250 43,000 -0- 30,000
</TABLE>
- -----------------------
(1) Mr. Stuek was appointed Chairman of the Board and Chief Executive
Officer on April 7, 1998. He had served as the Company's President and
Chief Operating Officer since January 5, 1998.
(2) Mr. Zimmerman was appointed Executive Vice President and Chief
Financial Officer on April 29, 1998.
(3) Of the $44,515, $31,457 represents housing expenses and $13,058
represents travel expenses.
(4) Mr. Skadra served as the Company's Vice President and Chief Financial
Officer until April 28, 1998.
(5) Mr. Covey resigned as Chairman of the Board and Chief Executive Officer
on April 6, 1998.
(6) Mr. Shakir resigned as Executive Vice President, Research and
Development on August 31, 1998.
Employment Contracts
William M. Stuek, the Company's Chairman of the Board and Chief
Executive Officer, entered into an Amended and Restated Employment Agreement
("Employment Agreement") with the Company on October 16, 1998, for a period of
four years and three months. The terms of his engagement include the following:
a base salary of $500,000; an incentive bonus up to $500,000; options to
purchase 200,000 shares of Common Stock in accordance with the terms of the
Company's Long Term Incentive Plan; options to purchase 1,240,000 shares of
Common Stock in accordance with a separate Option Agreement; and an engagement
bonus of $1,583,000. The Employment Agreement also has a non-compete and
confidentiality
<PAGE>
clause which is to apply throughout Mr. Stuek's employment and for a period of
one year thereafter.
Lawrence A. Zimmerman entered into an Employment Agreement in
connection with his initial hiring on April 27, 1998 and was appointed the
Company's Executive Vice President and Chief Financial Officer on April 29,
1998. The terms of his employment include the following: a base salary of
$300,000; an annual incentive bonus of up to $150,000 based on the achievement
of specified organizational and personal management objectives; reimbursement
for all reasonable and approved business expenses in connection with his
employment; and options to purchase 250,000 shares of Common Stock in accordance
with the Company's Long-Term Incentive Plan, of which 200,000 were granted in
April 1998 and 50,000 will be granted in fiscal 1999. Mr. Zimmerman also has a
confidentiality and non-competition agreement with the Company which is to apply
throughout his employment and for a period of one year thereafter.
Roger E. Covey, the Company's former Chairman of the Board and Chief
Executive Officer, resigned his positions on April 6, 1998, and thereafter
entered into an agreement with the Company on July 10, 1998, pursuant to which
he received $2,113,000 in consideration for his release against any and all
claims he may have had against the Company for compensation or otherwise. Also,
pursuant to the agreement, Mr. Covey surrendered his right to purchase 200,000
shares of Common Stock under the Company's Long-Term Incentive Plan.
Joseph J. Skadra, the Company's Vice President Finance and Controller,
entered into an Employment Agreement with the Company on August 27, 1998. The
terms of his employment include the following: a base salary of $250,000
annually; an annual bonus of up to $100,000 based on achievement of specified
organizational and management objectives; and options to purchase 30,000 shares
of Common Stock, vesting over four years. Mr. Skadra also has a confidentiality
agreement with the Company which is to apply throughout Mr. Skadra's employment
and for a period of one year thereafter.
Riz Shakir, the Company's former Executive Vice President, Research and
Development, resigned on August 31, 1998 and thereafter entered into a
Consulting Agreement and General Release with the Company, pursuant to which he
received $167,500, 50,522 shares of unregistered Company Common Stock and
$12,000 for earned but unused vacation pay in consideration for his release of
any and all claims against the Company. In consideration of his service as a
consultant, Mr. Shakir shall be compensated on a per assignment basis and
receive options to purchase 9,897 shares of Common Stock in accordance with the
Company's Long-Term Incentive Plan. In addition, as long as Mr. Shakir remains a
consultant to the Company, he will continue to vest in stock options previously
granted to him under the Company's Nonstatutory Stock Option Plan.
Option Grants in Fiscal 1998
<PAGE>
The following table provides further information on individual stock
option grants made in fiscal 1998 to the named executive officers. The table
does not reflect additional grants options canceled and immediately reissued at
lower exercise prices. See "Ten-Year Option Repricings" below. The exercise
prices set forth in the table are net of all repricings.
<TABLE>
<CAPTION>
Potential Realizable
Value
Individual Grants at Assumed Annual Rates
----------------- of Stock Price
Appreciation(1)
Number of Shares % of Total Options Exercise -----------------------
Underlying Options Granted to Employees Price Expiration
Name Granted (#) in Fiscal 1998 ($/Sh.) Date 5% ($) 10% ($)
- ---- ------------------ -------------------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
William M. 1,440,000 (2) 49.5% 4.00 4/05/08 3,622,433 9,179,957
Stuek
Lawrence A. 200,000 (3) 6.9% 7.125 4/27/08 896,175 2,271,083
Zimmerman
Joseph J. Skadra 10,000 (4) * 14.875 11/19/07 93,548 237,069
30,000 (5) 1.0% 5.5625 7/27/08 104,947 265,956
Roger E. Covey -0- N.A. N.A. N.A. N.A. N.A.
Riz Shakir 9,897 (6) * 4.625 7/31/99 2,101 4,195
* Less than 1%
- ------------------------
</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) 110,000 shares immediately vested upon the granting of the options and
the remaining options become exercisable ratably over a four-year
period.
<PAGE>
(3) One-fifth of the options granted became immediately exercisable on the
grant date and the remaining four-fifths become exercisable ratably on
the first four anniversaries of the grant date.
(4) Options granted become exercisable ratably on the first five
anniversaries of the grant date.
(5) Options granted become exercisable ratably on the first four
anniversaries of the grant date.
(6) Options vest as follows: 1,631 shares on 1/14/99, 2,266 shares on
3/14/99 and 6,000 on 6/1/99.
Aggregated Option Exercises in Fiscal 1998 and October 31, 1998 Option Values
The following table provides information on option exercises in fiscal
1998 by the named executive officers and the value of such officers' unexercised
stock options as of October 31, 1998.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
October 31, 1998 (#) October 31, 1998 ($)
--------------------------- ------------------------
Shares
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
(#)
<S> <C> <C> <C> <C> <C> <C>
William M. -0- N.A. 110,000 1,330,000 233,750 2,826,250
Stuek
Lawrence A. -0- N.A. 40,000 160,000 -0- -0-
Zimmerman
Joseph J. Skadra 19,000 95,000 10,000 52,000 15,000 34,875
Roger E. Covey -0- N.A. -0- -0- -0- -0-
Riz Shakir -0- N.A. 33,570 97,100 24,855 43,650
</TABLE>
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 August 19, 1998, adopted a resolution pursuant to which all non-
employee directors were awarded a discretionary option under the Company's
existing stock option plan to purchase 30,000 shares, exercisable at the fair
market value of the Company's stock on the date of grant, such option to become
exercisable in equal portions on the first and second anniversary of the grant
date.
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 and committees. Accordingly, neither Mr. Weaver nor S&W received any
cash compensation in consideration of Mr. Weaver's services as a director in
fiscal 1998.
<PAGE>
Ten-Year Option Repricings
The following table provides certain information on the repricing since
fiscal 1996 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
Underlying Market Price Length of Original
Options of Stock at Exercise Price Option Term
Repriced or Time of at Time of New Exercise Remaining at Date
Amended Repricing or Repricing or Price of Repricing or
Name Date (#) Amendment ($) Amendment ($) ($) Amendment
---- ---- ----------- -------------- -------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
William M. Stuek 10/16/98 300,000 4.00 9.3125 4.00 10 years
Lawrence A. N.A. -0- N.A. N.A. N.A. N.A.
Zimmerman
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 4.625 5.81 4.625 7 years, 4 months
04/10/97 5,000 4.625 5.81 4.625 9 years, 1 month
Roger E. Covey N.A. -0- N.A. N.A. N.A. N.A.
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 4.625 5.81 4.625 7 years, 1 month
04/10/97 15,000 4.625 5.81 4.625 7 years, 11 months
04/10/97 30,000 4.625 5.81 4.625 8 years, 7 months
04/10/97 20,000 4.625 5.81 4.625 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
<PAGE>
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 (or approximately 30% of
total annual 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 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
four-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 available in the market for a given executive position.
<PAGE>
As such, the total compensation scheme for SSA executive officers may
be above total compensation available at similarly sized firms when taking into
account the stock option portion of compensation.
During fiscal 1998, the Company had two Chief Executive Officers. Roger
E. Cover served as Chief Executive Officer until his resignation on April 6,
1998. William Stuek has served as Chief Executive Officer since April 7, 1998.
The compensation of Mr. Covey for services he rendered during fiscal 1998 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 to
purchase the Company's Common Stock, which options vested over a five-year
period following their grant. The annual base compensation paid to Mr. Covey was
roughly equivalent to that paid to the Company's immediate past Chief Executive
Officer. 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 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 Plan increasing its size, Mr. Covey was granted an option to purchase
200,000 shares to become exerciseable at $7.81 per share, the Company's fair
market value on the re-issuance date.
William Stuek was hired as Chief Operating Officer on January 5, 1998.
At that time, the Company and Mr. Stuek negotiated an employment contract which
provided for 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; an option 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; another option to purchase an additional 300,000 shares, to
have been granted upon Mr. Stuek's appointment as Chief Executive Officer; an
engagement bonus of $1,583,250; and a one-time bonus of $5,000,000 if the
Company's common stock price equals or exceeds $50 for any 180 consecutive day
period.
<PAGE>
Immediately following Mr. Covey's resignation, Mr. Stuek was appointed
President and Chief Executive Officer on April 7, 1998, and was elected Chairman
of the Company's Board of Directors on May 19, 1998. Following Mr. Stuek's
promotions, the Compensation Committee of the Board and Mr. Stuek began a
process of reviewing Mr. Stuek's compensation. As part of that process, the
committee reviewed a report on executive compensation prepared by a consulting
firm, Pearl Meyer & Partners, Inc. The Committee reviewed analysis provided by
the consulting firm of compensation paid to senior executives at certain other
software firms, including salary, bonus and stock option grants. Based on the
analysis, and negotiations between Mr. Stuek and the Committee, Mr. Stuek and
the Compensation Committee agreed to increase the amount of stock options
granted to Mr. Stuek and to amend and re-state his employment agreement, as of
October 16, 1998. The terms of the amended employment agreement are set forth in
the section titled "Employment Agreements" above.
As part of the amended compensation arrangements for Mr. Stuek, the
Committee and Mr. Stuek agreed to cancel his original option grant of 300,000
shares, and to issue in its place options to purchase a total of 1,440,000
shares (200,000 under the Long-Term Incentive Plan and 1.24 million outside of
the plan) at a $4.00 per share exercise price. The restated agreement also
canceled the one-time bonus of $5,000,000 and the additional grant of 300,000
shares Mr. Stuek was to have received upon his the upon appointment as CEO
(under the old agreement). The canceled options had an exercise price of
$9.3125; the replacement options had an exercise price of $4.00. The Committee
believed that the repricing of Mr. Stuek's initial option grant of 300,000
shares was appropriate because the financial performance of the Company had
deteriorated and the work of the new CEO (Mr.Stuek) was to turn the Company
around financially. The compensation, stock option grants and the exercise price
provided to Mr. Stuek were competitive with market rates for such work as
determined by Pearl Meyer & Partners, Inc.
On three occasions during 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 Mr. Covey, 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 $4.625 were repriced to become
exerciseable at $4.625 per share.
The foregoing report has been furnished by Messrs. Cowell, Smith and
Weaver, who currently constitute the Compensation Committee.
Comparison of Five-Year Cumulative Total Return Among
System Software Associates, Inc., NASDAQ CDP Index, and S & P 500
<TABLE>
<CAPTION>
Measurement Period SYSTEM SOFTWARE S&P NASDAQ CDP
(Fiscal Year Covered) ASSOCIATES, INC. 500 INDEX INDEX
- --------------------- ---------------- --------- ----------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Measurement Pt-
FYE 10/31/93 $100 $100 $100
FYE 10/31/94 $86 $104 $120
FYE 10/31/95 $216 $131 $184
FYE 10/31/96 $123 $163 $213
FYE 10/31/97 $124 $215 $287
FYE 10/31/98 $65 $263 $372
</TABLE>
Assumes $100 invested on October 31, 1993 in System Software Associates, Inc.
Common Stock, NASDAQ CDP Index and S & P 500 Index.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 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, and as of February 16, 1999 with respect to
each director, each current executive officer, 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>
Name and Address Amount and Nature of Beneficial Percent
of Beneficial Owner Ownership of Class (1)
------------------- ------------------------------- ------------
<S> <C> <C>
Roger E. Covey..................................... 9,675,250 (2) 20.3%
2225 N. Lakewood
Chicago, IL 60614
Gardner Lewis Asset Management, L.P................ 5,244,624 (3) 11.0%
285 Wilmington, W. Chester Pike
Chadds Ford, PA 19317
Paul Tudor Jones II................................ 3,661,800 (4) 7.7%
c/o Tudor Investment Corporation
600 Steamboat Road
Greenwich, CT 06830
Hambrecht & Quist Group............................ 3,393,452 (5) 7.1%
One Bush Street
San Francisco, CA 94104
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial Percent
of Beneficial Owner Ownership of Class (1)
------------------- ------------------------------- ------------
<S> <C> <C>
Putnam Investments, Inc. .......................... 2,932,732 (6) 6.1%
One Post Office Square
Boston, MA 02109
Massachusetts Financial Services Company........... 2,368,617 (7) 5.0%
500 Boylston Street
Boston, MA 02116
William M. Stuek................................... 492,333 (8) (9) *
William N. Weaver, Jr.............................. 358,950 (10) *
Riz Shakir......................................... 141,535 (8) *
Lawrence A. Zimmerman.............................. 90,000 (8) *
Casey G. Cowell.................................... 42,200 (8) *
Lorraine H. Fenton................................. 30,000 (8) *
Joseph J. Skadra................................... 12,000 (8) *
Andrew J. Filipowski............................... 9,600 (8) *
Douglas P. Smith................................... 0 (11) *
All Officers and Directors as a Group (ten persons) (2)(8) 22.7
10,851,868 (9)(10)
(11)
</TABLE>
- --------------------------------
* Less than 1%.
(1) Percentage of class based on the 47,772,276 shares of Common Stock
outstanding on February 16, 1999.
(2) According to a statement by Roger Covey, he does not personally own any
shares of the Company's Common Stock but is the beneficial owner of
9,075,250 shares held of record by the Xerxes Trust and 600,000 shares
held of record by the Tang Research Foundation, of which Mr. Covey is a
Director.
(3) According to a Report on the SEC's Schedule 13G, as of December 31,
1998, Gardner Lewis Asset Management has sole dispositive power for all
5,244,624 listed shares, and exercises sole voting power over 4,806,975
shares and shared voting power over 73,200 of such shares.
(4) According to a Report on the SEC's Schedule 13G, as of December 31,
1998, Paul Tudor Jones, II shares dispositive and voting power over all
3,661,000 shares and Tudor Investment Corporation ("TIC") shares
dispositive and voting power over 3,413,800 shares (or 7.1% of SSA's
Common Stock). The 13G Report indicates that TIC is the financial
advisor to five
<PAGE>
entities which also share dispositive and voting power over the total
of 3,413,800 shares; however, none of the five companies by itself is a
beneficial owner of more than 5% of SSA's Common Stock.
(5) 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 Hambrecht Quist LLC ("H&Q") and H&Q SSA
Investors L.P. Mr. Smith is a Managing Director of H&Q LLC, an
indirect wholly owned subsidiary of H&Q, and as such may have
beneficial ownership of the listed shares. See note (11) below.
(6) According to a Report on the SEC's Schedule 13G, as of December 31,
1998, Putnam Investments, Inc. ("PI") has shared voting power over
980,618 shares and shared dispositive power over 2,932,732 shares. PI
wholly owns two registered investment advisors; Putnam Investment
Management, Inc. which beneficially owns 733,925 shares and The Putnam
Advisory Company, Inc. which beneficially owns 2,198,807 shares of SSA
Common Stock. PI beneficially owns the SSA shares held by its two
subsidiaries.
(7) According to a Report on the SEC's Schedule 13G, as of December 31,
1998, Massachusetts Financial Services Company has sole dispositive
power over 2,368,617 shares and sole voting power over 1,366 shares.
(8) Includes unissued shares of Company's Common Stock, subject to options
exercisable within 60 days of February 16, 1999, as follows: Mr. Stuek
442,499; Mr. Shakir 42,569; Mr. Zimmerman 80,000; Mr. Cowell 7,200; Ms.
Fenton 30,000; Mr. Skadra 12,000; and Mr. Filipowski 9,600.
(9) Includes 49,834 shares of the Company's Common Stock issuable upon
conversion of 7% Convertible Notes held by Mr. Stuek.
(10) Includes 58,950 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 allocated portion of the shares covered by the option.
(11) 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 or upon the exercise of Common Stock purchase warrants,
all held by H&Q SSA Investors, L.P., an entity of which Mr. Smith is a
limited partner and of whose general partner, H&Q LLC, Mr. Smith is
also a member; and (ii) 1,989,452 shares issuable upon the exercise of
certain warrants held by H&Q LLC.
ITEM 13. 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.
Douglas P. Smith, a member of the Board of the Directors, is a
Managing Director of Hambrecht & Quist LLC. Hambrecht & Quist LLC has acted and
continues to act as a financial advisor to the Company with regard to certain
business matters of the Company and has received fees and warrants to purchase
the Company's Common Stock for its services rendered in connection therewith.
<PAGE>
Joseph J. Skadra, the Company's Chief Executive 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 March 5, 1999, the
amount owing, including accrued interest, is $237,451, 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, as amended, the registrant has caused this amendment to report to
be signed on its behalf by the undersigned thereunto duly authorized.
SYSTEM SOFTWARE ASSOCIATES
March 1, 1999 /s/ Lawrence A. Zimmerman
-------------------------------
Lawrence A. Zimmerman
Executive Vice President and
Chief Financial Officer
