-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2IpOVB4fSVBc6xFzFfSCOUBqrA7u58SAVtWpA8RvhB6IA+J2Eikg/0cr8cCpFW3 5icuR3AooGKeaIqLXDObHA== 0000950131-97-000470.txt : 19970131 0000950131-97-000470.hdr.sgml : 19970131 ACCESSION NUMBER: 0000950131-97-000470 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19970130 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSTEM SOFTWARE ASSOCIATES INC CENTRAL INDEX KEY: 0000808207 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 363144515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-15322 FILM NUMBER: 97514384 BUSINESS ADDRESS: STREET 1: 500 W MADISON ST 32ND FLR CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3126412900 10-K405/A 1 AMD #1 TO FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K/A AMENDMENT NO. 1 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended October 31, 1995 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (ZIP CODE) 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: 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. [X] 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 12, 1996, was $577,085,999. At January 12, 1996, 42,153,887 shares of the registrant's Common Stock were outstanding. DOCUMENT INCORPORATED BY REFERENCE The registrant's definitive proxy statement for the annual meeting of stockholders held on March 12, 1996, is incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS THE COMPANY System Software Associates, Inc. (the "Company" or "SSA") is a leading provider of cost-effective business enterprise information systems to the industrial sector worldwide. SSA's integrated product line BPCS (Business Planning and Control System) Client/Server provides business process re- engineering and integration of all operations, including multi-mode manufacturing processes, configurable supply chain management, and global financial solutions. SSA's object-oriented interoperable tool set allows the production of platform independent client/server applications. The Company supports its clients primarily through a worldwide network of branch offices. The Company markets, sells and services its products to intermediate size and large companies through its own sales organization and a network, as of December, 1995, of more than 90 independent software companies (the "Affiliates"). SSA has licensed approximately 100,000 software products in over 10,000 installations. THE BPCS PRODUCT LINE SSA's BPCS Client/Server product line consists of over 40 integrated products designed for manufacturing, distribution, financial, electronic data interchange, and toolset applications. Historically, the Company's software was primarily designed to run on IBM(TM) Application System/400 (AS/400(TM)) computers. In the quarter ended April 30, 1995, the Company began shipping a Unix version of BPCS designed for the IBM RS/6000 and the Hewlett-Packard HP 9000 platforms. The following products comprise the BPCS Client/Server product line, as of December 1995: Manufacturing Products Master Production Scheduling (MPS)--identifies future production and procurement actions which need to be taken in response to customer demand as well as day-to-day events, and ties overall business planning to detail operations. Material Requirements Planning (MRP)--identifies future production and procurement actions that are needed in response to day-to-day events, and ties overall business planning to detail operations. Capacity Planning (CAP)--allows production control to identify potential capacity bottlenecks and backlog problems so that adjustments can be made. Just in Time (JIT)--provides support for "just-in-time" and repetitive manufacturing techniques and support for make-to-schedule activities of process manufacturers. Manufacturing Data Management (MDM)--allows the definition and use of product structure and routing information for a wide variety of planning and costing needs. Advanced Process Industries (API)--contains features and functions essential to many process industry companies, including lot level potency, batch balancing, physical versus theoretical quantities, container control and tracking, campaign planning, reverse balancing, full notes subsystems, lot tracking and traceability. Configuration Management (CMS)--automates the configuration and order- entry processes that are executed relative to a customer request for a make-to-specification product. Shop Floor Control (SFC)--provides current status of jobs, work-in- process and production activity to permit performance evaluation, detailed planning and scheduling. 1 Quality Management System (QMS)--implements quality assurance and quality control functions; integrated with production, procurement and inventory control. Laboratory Management Systems (LMS)--provides enhanced capabilities to support the special requirements of quality assurance laboratories, including calculation of test results from multiple readings, laboratory equipment interface software, stability testing and laboratory resource planning. IWS Planner's Assistant (PLN)--distributed database client/server application which supports planners who handle master production schedules and material requirements plans. CIMPath(TM) (CIM)--allows for automatic data collection and updates from the plant floor or distribution center through a variety of scanners, magnetic card readers, hand held devices, voice input, scales and other devices. Multi-Facility Support (MFS)--allows configuration of BPCS applications and transmission of operational data across a network of server computers; supports centralized and decentralized operating functions. IWS Formulation Assistant (FRM)--distributed database client/server application to support chemists, laboratory managers and process engineers in the graphical definition of product and process formulations. Work Order Scheduling and Control (WSC)--automates the maintenance management information chain to ensure effective utilization, coordination and tracking of resources. Equipment Tracking (MST)--provides an extensive database describing all facets of plant and facility equipment including location and utilization history. Preventive Maintenance Tracking (PMC)--identifies and monitors preventive maintenance activities for maintenance-worthy items. Component Tracking (CRH)--a subset of the equipment hierarchy, synchronized with the equipment database that allows for identification of chronic repair problems and repair or replacement analysis for equipment components. Maintenance Cost Tracking (MCT)--a tool designed to track repair and maintenance for total maintenance cost analysis and management. Warranty Claims Tracking (WTS)--maximizes all warranty reimbursements by providing a comprehensive administrative system designed to provide positive control of all items covered by manufacturer and vendor warranties. MRO Parts Management (MPM)--provides comprehensive system designed to meet or exceed the requirements of purchasing and inventory control, minimizing the effort required to obtain positive control of purchasing inventory, maintenance and accounting functions. Supply Chain Management Products Customer Order Processing (ORD)--processes entry and fulfillment of customer orders; through automatic pricing and inventory allocation, decreases order fulfillment cycle times, reduces back orders and provides information for production and accounting projections; prints customer acknowledgments and shipping documents. Inventory Management (INV)--allows users to obtain information for planning and control of finished goods, work-in-process and raw material inventory and provides summary and detail analysis on demand for both accounting and production control purposes. 2 Warehouse Management System (WHM)--automates the warehouse distribution process, from receiving and putaway to picking and deployment. Distribution Resources Planning (DRP)--identifies demand on distribution centers and resulting impact on resupply facilities and presents transportation loading and scheduling information. Billing and Sales Analysis (BIL)--allows customer orders to be billed after shipment, with invoices printed and inventory, sales and accounting information maintained automatically. Forecasting (FOR)--provides for statistical forecasts of future customer sales. Purchasing (PUR)--links planning, requisitioning, receiving and inspection to inventory stocks to permit evaluation of vendors and purchasing performance; prints purchase orders and receiving documents. Promotions and Deals (PRO)--provides advanced functions for the management of marketing promotion programs. The impact of sophisticated promotions is reflected throughout BPCS from customer order processing through sales analysis, accounts receivable and general ledger. Sales Performance Management (SPM)--sales management tool, combines sales and order data with budget and planning information. User Performance Measurement (PRF)--provides feedback and accountability in several key management areas to allow executives to monitor performance of their business against plan. Release Management (RMS)--handles contracts, blanket orders, cumulative quantities, daily adjustments, and delivery sequence schedules. Financial Products Configurable Ledger (CLD)--provides user-defined financial reporting, allows for accumulation of financial information to support the accounting function and allows analysis of information for management decision-making. Accounts Payable (ACP)--provides for the control and processing of payables information. Accounts Receivable (ACR)--collects and disseminates cash flow information aimed at accelerating collection, assessing credit and reducing bad debt. Advanced Remittance Processing (ARP)--automatically applies receipts to invoices for bank "lockbox" processing, posts payments against invoices, reconciles payments to invoices. Credit and Deductions Management (CDM)--evaluates customer credit status to help credit and sales managers review customer credit-worthiness. Multiple Currencies (MLT)--provides multiple currency operations for the financial, purchasing, order processing, billing and sales applications. Configurable Currency Translation (CCT)--allows consolidation, reporting and analysis of multiple currency financial data. Enterprise Structures and Consolidations (ENT)--allows for extensive reporting and analysis of operating results, as well as consolidation features. Advanced Budgeting and Analysis (CBA)--allows users to perform extensive allocations and to establish and maintain unlimited budgets for each reporting unit. 3 Draft Management (CSH)--provides advanced features for handling bank drafts, letters of credit and notes receivable and payable. Fixed Assets (FXA) (U.S. and Canada only)--provides the ability to manage and control all types of property, plant and equipment. The book and tax accounting implications of all capital assets are addressed with maximum flexibility to allow for changes in depreciation regulations. Cost Accounting (CST)--provides control of purchasing and manufacturing costs. Electronic Data Interchange Products Integration Development Kernel (IDK)--an intelligent integration tool for developing trading-partner specific interfaces between an application database and EDI messages. Standards Compliance Kernel (SCK)--supports the translation and communication of EDI messages for national, international and user defined transaction sets. Advanced Networking Kernel (ANK)--communication software that supports value-added networks and/or trading partner direct connections. Supports communication set-up, connection type maintenance, network administration and system report retrieval functions. Workstation Network Kernel (WNK)--provides seamless workstation integration and supports other workstation communication and translation applications. EDIPath (EDI)--integrates the BPCS Client/Server product line with the BPCS EDI Standard Compliance Kernel translator and enables EDI messaging within the normal course of BPCS transaction processing. Retrieval Products User/Vision (USV)--an enterprise-wide client/server information retrieval solution for BPCS Client/Server. Includes pre-packaged reports and data models for the BPCS Client/Server repository. INTEROPERABLE TOOL SET PRODUCTS The Company's first toolset products were introduced in 1990. These products are collectively known as Object Development Workbench. IWS (Intelligent WorkStation)--multi-tasking workstation-based application definition facility that operates either detached from or attached to the server. IWS uses a Graphic User Interface (GUI). INT (Integrator)--provides integration between Gen/RPG and selected front end work-station based CASE tools. UCI (Upper CASE Integration)--controls and monitors the sharing of constructs between multiple developers and platforms. UCI acts as the librarian for design objects between server and IWS local microcomputer repositories. Gen/RPG--accelerates the process of design, generation and maintenance of application software for the AS/400 environment. Gen/HPUX--regenerates applications to run within Unix-based environments. Gen/AIX (Accelerated Implementation Methodology)--assures successful fast-path migration to the tools paradigm. RSD (Rapid Systems Development)--a rapid systems development methodology that enables information systems to be developed in shorter cycle times. 4 BPCS Client/Server software is designed to provide sufficient breadth of features and application flexibility to appeal to a wide variety of users. The Company's products have many user-defined functions to facilitate their operation in different business environments. The software is further designed to be customized to meet user needs. In addition, the products are designed to operate consistently with respect to data entry, information retrieval and general operation, which is intended to improve ease of use and shorten training time. The entire BPCS Client/Server product line is available in English, and a significant portion of the line is available in Arabic, Simplified Chinese, Traditional Chinese, Czech, Danish, Dutch, Finnish, French, German, Greek, Hebrew, Hungarian, Italian, Japanese, Korean, Polish, Portuguese, Russian, Spanish and Swedish. The products have also been designed to handle the most common international function requirements which differ from United States requirements (such as date formats and multiple currency operations). The financial products can be used to conform to the key financial, legal and regulatory requirements of major industrial countries, including the European Community. The Company's open systems strategy is based on an object-based architecture that runs on multiple hardware servers, including the IBM AS/400, Unix-based IBM RS/6000 and Hewlett-Packard HP 9000, and on Windows(TM) clients. The objective of this strategy is to create the industry's most extensive line of integrated, open, client/server enterprise software applications. The Company provides clients not only application software solutions but an interoperable tool set as well to develop and customize the solutions. SSA and its subsidiaries own or have fully paid licenses for all of its software product line listed above, other than the Electronic Data Interchange Products. License fees accounted for approximately 67%, 71% and 71% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKET AND CLIENT BASE The target marketplace for the BPCS Client/Server product line is industrial-sector firms with revenues of greater than $50 million per year. Larger companies are often looking for common systems across a number of installations that can be implemented and supported locally. The Company believes that its wide geographic sales and support network, coordinated by its major accounts team, enhances its ability to serve this market. For information regarding foreign source revenues, see Note 10 of Notes to Consolidated Financial Statements. DISTRIBUTION NETWORK The Company sells and supports its products through a distribution network consisting of branch offices and an Affiliate network of independent software and services firms. SSA's prime market is the world's major industrial sector enterprises. SSA's global Major Accounts sales force addresses this market via approximately 50 SSA offices worldwide, as of December, 1995. SSA's global Client Services organization provides implementation, HelpLine and support services. In addition to SSA resources, SSA works in partnership with its global Affiliate network, major consultancy companies, IBM and Hewlett-Packard in providing a full range of services to its global Major Account base. As of December, 1995, SSA had over 90 Affiliate Business Partners. The Affiliates are responsible in their respective territories for marketing and selling the Company's products and for providing the professional services required for implementation, such as education, project management and customization. The Company has retained direct sales rights in all locations, including those in which Affiliates also operate. SSA provides technical, application and sales training, marketing and technical support and emergency client service to the Affiliates. The Company works with each Affiliate to increase market penetration in its territory. 5 LICENSING In the United States and Canada, software sales are made pursuant to the Company's Software License Agreement (the "SLA") which is entered into by the client and SSA (not by the Affiliate). The gross amount of the software license fee is remitted to the Company and, if applicable, the Company then pays a commission to the Affiliate. In certain countries outside of the United States and Canada, the SLA is entered into by the client, the Company and the Affiliate. In most of those countries, the user pays the Affiliate, which in turn remits the license fees to the Company, net of its commission. Affiliates are not authorized to modify prices or contract terms without approval of the Company. SSA usually enters into individual, negotiated contracts with its Major Account clients. The SLA typically provides for either a single license fee to use the product in perpetuity on a single computer or licensing the products on the basis of the number of users. License fees for the BPCS modules described above typically range from $1,500 to $150,000 per product. The Company also charges annual on-going support fees to clients who desire upgrades after the initial HelpLine and maintenance period. Ongoing support is typically provided to clients under annual or multi-year maintenance agreements. Affiliates handle the installation of such upgrades and receive their standard commissions on maintenance fees received from their clients. All non-software license fee revenue associated with a software sale and implementation (such as professional services and hardware) is payable directly to the Affiliate that provides the services and equipment. CLIENT SERVICES The Company supports its clients through a worldwide client service network that consists, as of December, 1995, of over 700 direct support staff strategically located at SSA's regional headquarters and branch operations. HelpLine, the Company's international telephone support service, also supports subscribing SSA clients. Client services and other fees accounted for approximately 33% of revenues in fiscal 1995, 29% in fiscal 1994 and 29% in 1993. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The market for business application and tool set software is fragmented and intensely competitive. The Company estimates that a total of approximately 200 companies sell software products in the Company's core market, but of these only a handful offer fully integrated systems like SSA's BPCS Client/Server product line. Competition in SSA's industry is primarily conducted on the basis of sales ability, quality of the product, breadth of the product line and quality of the support. To date, there has been no significant price competition in this market, but that may become a factor in the future. PRODUCT DEVELOPMENT SSA spent $61.8 million on research and development activities in fiscal 1995, $64.1 million in fiscal 1994 and $37.3 million in fiscal 1993. The foregoing amounts include software development costs which were capitalized in accordance with Financial Accounting Standards No. 86. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Internally developed and purchased software amortization 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 greatest amortization. PROPRIETARY RIGHTS AND LICENSES SSA regards its application software as proprietary and attempts to protect it with copyrights, trade secret laws and restrictions on disclosure and transferring title. Despite these precautions, it may be possible for third parties to copy aspects of the Company's products or to obtain and use information which the Company regards 6 as trade secrets without authorization. Computer software generally cannot be patented and existing copyright laws afford only limited practical protection. In addition, the laws of some foreign countries do not protect the Company's proprietary rights in its products to the same extent as do the laws of the United States. STAFF As of December, 1995, SSA employed approximately 2,000 people. The Company's success is highly dependent on its ability to attract and retain qualified staff members. Competition for staff is intense in the software industry. None of the Company's staff members is subject to collective bargaining agreements, and SSA believes that its relations with its staff is good. EXECUTIVE OFFICERS OF THE REGISTRANT The Company's executive officers and their respective ages, as of January 15, 1996, were as follows: ROGER E. COVEY, age 41, founded the Company and served as President and Chairman of the Board of the Company from its inception in October 1981 until August 1991, at which time he was elected as Vice-Chairman of the Board. He was a student from August 1991 until he rejoined the Company in August 1994 as Vice President--Research & Development and was appointed Chairman of the Board and Chief Executive Officer in October 1994. Mr. Covey holds a B.S. degree from the University of Illinois, an M.B.A. from the University of Chicago, and an M.A. in Chinese Art History from the University of Chicago. TERENCE H. OSBORNE, age 57, joined the Company as General Manager, Europe in 1987, and currently serves as President and Chief Operating Officer. Prior to joining the Company, he was employed by IBM from 1961 to 1987, where he held vice-presidential positions in both the United States and Europe. These included appointments as IBM General Manager for Southern Europe and IBM Vice President-Marketing for Europe. Mr. Osborne holds a B.Sc. degree from London University. TERRY E. NOTARI, age 57, began serving as the Company's Vice President- Strategic Markets on October 31, 1989, served as Vice President-Asia, Pacific, Latin America until October 1994, and currently serves as Vice President-North America. From July 1960 through June 1987, he worked for IBM and beginning in September 1977 through June 1987, he was a Vice President of IBM, with responsibility in sales, marketing, personnel, communications, business practices and governmental affairs for various IBM divisions/groups both in the United States and internationally. During 1987 and 1988, he was the Deputy Staff Director for the Commission on the Bicentennial of the United States Constitution in Washington D.C. Mr. Notari holds a B.S.C. from Loyola University. RIZ SHAKIR, age 40, joined the Company as Area Vice President--Architecture in June 1994, and currently serves as Vice President--Architecture & Technology. Prior to joining the Company, he was CEO of ASIC, a company specializing in building custom enterprise software solutions based on Object and Distributed Computing technologies. Mr. Shakir holds a B.Sc. degree from Imperial College of Science and Technology in London. JOSEPH J. SKADRA, age 54, was appointed Vice President and Chief Financial Officer on August 24, 1994. He was employed by Figgie International, Inc. from 1970 to 1994, where he held various operating and financial positions at the Vice President level. His last position at Figgie International was Senior Vice President, Finance and Controller. Mr. Skadra holds a B.S.B.A. degree from Case Western Reserve University. ITEM 2. PROPERTIES The Company's principal administrative, marketing and technical facilities are located in Chicago, Illinois and consist, as of December, 1995, of approximately 133,000 square feet of occupied or committed space, subject to a lease terminating in August, 2008, with the option to extend to approximately 183,000. See Note 11 of Notes to Consolidated Financial Statements. The Company also leases office space for its regional headquarters and branch offices. 7 ITEM 3. LEGAL PROCEEDINGS In January, 1997, class action lawsuits were filed in state court in Illinois and in the federal court in Chicago, Illinois against the Company and certain of its officers. The federal actions allege damages to persons who purchased the Company's common stock during the period August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The state court action alleges damages to persons who purchased the Company's common stock during the period November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated common and statutory law. Although the outcome of these proceedings cannot be determined with certainty, management intends to defend the actions vigorously, and, in consultation with its legal counsel, believes that the allegations are without merit and that the final outcomes should not have a material adverse effect on the Company's operations or financial position. The Company is also subject to other legal proceedings and claims which arise in the normal course of business. Although the outcome of these proceedings cannot be determined with certainty, management believes that the final outcome of these proceedings should not have a material adverse effect on the Company's operations or financial position. On November 20, 1995, the Company filed an action against Owens-Illinois ("Owens") in Illinois state court seeking damages based on Owens' failure to make payments required under a July 29, 1994 contract (the "Contract") between the parties. On the same day the Company filed suit against Owens, Owens filed a lawsuit in Illinois state court for recission of the Contract and for damages. On April 18, 1996, the Company and Owens jointly announced that they had settled the lawsuits and, as a result, both lawsuits were dismissed. Terms of the settlement were not disclosed. In late November, 1995, two class action suits were filed in the federal court in Chicago, Illinois, against the Company and certain of its officers, alleging damages to persons who purchased the Company's common stock during the period August 21, 1995 through November 22, 1995. The plaintiffs subsequently dismissed each of these suits voluntarily, without liability to the Company. On February 22, 1991, a class action lawsuit was filed in the federal court in Chicago, Illinois, against the Company, its Chairman and Chief Executive Officer, and its former Chief Financial Officer. On July 2, 1993, after a two week trial, the jury returned a verdict in favor of all defendants on all counts. On August 10, 1994, the 7th Circuit Court in Chicago affirmed the jury verdict. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK INFORMATION PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the Nasdaq National Market under the symbol SSAX. The following table shows the quarters' high and low closing prices, as reported by NASDAQ, and reflects the three-for-two common stock split referred to in Note 9 to the Consolidated Financial Statements.
FISCAL 1995 HIGH LOW - ----------- ------ ------ First Quarter........... $11.75 $ 8.17 Second Quarter.......... 18.92 11.50 Third Quarter........... 19.59 12.59 Fourth Quarter.......... 30.00 15.25
FISCAL 1994 HIGH LOW - ----------- ------ ----- First Quarter........... $11.17 $8.83 Second Quarter.......... 11.67 9.00 Third Quarter........... 10.75 8.50 Fourth Quarter.......... 10.33 7.67
At January 12, 1996 there were approximately 370 holders of record. On November 28, 1995, the Board of Directors of the Company approved the sixth consecutive annual dividend payable to the stockholders of record at the close of business on December 28, 1995, in the amount of $0.10 per share (post split). The dividend is payable January 10, 1996. In each of fiscal 1995 and 1994 the Company declared and paid dividends in the amounts of $0.08 per share (post split). ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA) -------------------------------------- 1995 1994 RESTATED RESTATED 1993 1992 1991 YEAR ENDED OCTOBER 31, -------- -------- ------ ------ ------ Operating revenues....................... $374.1 $324.3 $263.4 $228.8 $146.0 Net income............................... 26.6 10.0 23.4 26.6 15.4 Earnings per share....................... 0.63 0.25 0.57 0.66 0.39 Dividends declared per common share...... 0.08 0.08 0.08 0.08 0.07 1995 1994 RESTATED RESTATED 1993 1992 1991 AT OCTOBER 31, -------- -------- ------ ------ ------ Total assets............................. $393.2 $333.1 $280.4 $200.0 $149.8 Long-term obligations.................... 33.9 32.7 34.0 3.5 2.5
- -------- Notes: Fiscal 1992 results included a non-recurring benefit of $0.13 per share ($10.4 million of revenue) related to the adoption of mandatory revenue recognition procedures (SOP 91-1). 9 ITEM 7. 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 income as a percentage of total revenues and the percentage change of such items as compared to the prior year.
PERCENTAGE OF TOTAL PERCENTAGE REVENUES INCREASE YEAR ENDED OCTOBER 31, (DECREASE) ----------------------- -------------- 1995 1994 1995 1994 VERSUS VERSUS RESTATED RESTATED 1993 1994 1993 -------- -------- ----- ------ ------ Revenues: License fees......................... 66.8% 70.8% 71.3% 8.8% 22.3% Client services and other............ 33.2 29.2 28.7 31.2 25.3 ----- ----- ----- ----- ----- Total revenues..................... 100.0% 100.0% 100.0% 15.4% 23.1% ----- ----- ----- ----- ----- Costs and expenses: Cost of license fees................. 17.4% 18.7% 19.5% 6.9% 18.1% Cost of client services and other.... 20.5 17.7 16.5 34.3 31.5 Sales and marketing.................. 23.4 28.0 24.2 (3.5) 42.3 Research and development............. 10.7 10.8 8.8 14.5 52.6 General and administrative........... 17.0 19.8 17.3 (0.9) 40.6 ----- ----- ----- ----- ----- Total costs and expenses........... 89.0 95.0 86.3 8.2 35.5 ----- ----- ----- ----- ----- Operating income....................... 11.0 5.0 13.7 150.6 (54.6) ----- ----- ----- ----- ----- Non-operating expense, net............. 0.1 0.3 0.2 * * ----- ----- ----- ----- ----- Income before income taxes and minority interest.............................. 10.9 4.7 13.5 165.6 (56.9) Provision for income taxes............. 3.8 1.7 4.8 153.6 (55.9) ----- ----- ----- ----- ----- Income before minority interest........ 7.1 3.0 8.7 172.4 (57.4) Minority interest...................... -- 0.1 0.2 * * ----- ----- ----- ----- ----- Net income............................. 7.1% 3.1% 8.9% 166.0% (57.3)% ===== ===== ===== ===== =====
- -------- *not meaningful Revenues Total revenues increased 15% from 1994 to 1995 following a growth rate of 23% from 1993 to 1994. All regions grew in 1995, with particularly strong results in Europe. License fees grew 9% in 1995 compared to 22% in 1994 due to a slight decline in AS/400 revenues offset by sales of the Company's open systems product, which was released in the second quarter of 1995. Client services revenues grew 31% in 1995 and 25% in 1994. As a percentage of total revenues, client services revenues increased to 33% in 1995 from 29% in 1994. These percentages are in line with the Company's target of generating 70% of revenues from licenses and 30% from services. Cost of Revenues Cost of license fees includes commissions paid to Affiliates, hardware costs, amortization of capitalized software costs, and royalties paid to third parties. Cost of license fees as a percentage of license fee revenues has remained relatively constant, at 26%, 26%, and 27% in 1995, 1994, and 1993, respectively. Cost of client services and other includes salaries and other direct employment costs paid to the Company's client services professionals and amounts paid to independent client services professionals. Cost of client services and other as a percentage of the related revenues was 62%, 60%, and 58% in 1995, 1994, and 1993, respectively. 10 The increase over the three year period relates primarily to costs of training and educating existing professionals as well as costs related to increasing the number of professionals around the world to support the worldwide customer base. Sales and Marketing Sales and marketing expenses include salaries, commissions, and other direct employment costs of the Company's sales and business consulting (pre-sales) professionals, as well as marketing costs, which include advertising, trade shows, and production of sales brochures. Sales and marketing as a percentage of license fee revenues was 35%, 40%, and 34% in 1995, 1994, and 1993, respectively. The favorable result in 1995 was primarily due to increased productivity of the sales force and programs to reduce fixed expenses which began early in 1995. The prior year reflected costs of increasing sales personnel in support of the Company's geographic expansion. Research and Development Gross (total) research and development (R&D) expenditures decreased 4% in 1995 versus an increase of 72% in 1994. The 1995 decrease was attributable to the Company's expense reduction programs which began early in 1995 and impacted R&D spending favorably by replacing contracted technical personnel with employed technical personnel. Excluding the costs of contracted technical personnel, remaining R&D expenditures increased 22% in 1995 when compared to 1994 due to increased employee costs for technical personnel. The Company capitalizes software development costs once technological feasibility is established, in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The Company capitalized $21.6 million of software development costs in fiscal 1995 as compared to $29.0 million and $14.3 million in 1994 and 1993, respectively. The capitalization rate (capitalized software costs as a percentage of gross R&D) in 1995, 1994, and 1993 was 35%, 45%, and 38%, respectively. The 1995 decrease in capitalized software was driven by a higher proportion of R&D spending incurred to support and maintain existing products and the completion of certain open systems products. The following table sets forth R&D costs and related capitalized amounts for the periods indicated.
YEAR ENDED OCTOBER PERCENTAGE 31, CHANGE ---------------------- ------------- 1995 1994 VERSUS VERSUS 1995 1994 1993 1994 1993 ------ ------ ------ ------ ------ (in millions) Gross R&D costs........................... $ 61.8 $ 64.1 $ 37.3 (4%) 72% Less amount capitalized................... (21.6) (29.0) (14.3) ------ ------ ------ --- --- Net R&D costs........................... $ 40.2 $ 35.1 $ 23.0 15% 53% ====== ====== ====== === ===
General and Administrative General and administrative expenses declined 1% from 1994 to 1995 following a 41% increase from 1993 to 1994. This expense category includes a provision for doubtful accounts of $3.3 million in 1995, $8.0 million in 1994, and $2.7 million in 1993. General and administrative expenses as a percentage of total revenues declined in 1995 to 17% from 20% in 1994 and 17% in 1993. Non-operating Expense Non-operating expense consists primarily of interest expense related to the Company's $30 million senior notes and other long-term obligations less interest income earned on invested cash. In 1995, higher cash balances throughout the year and higher interest rates on invested cash as well as a reduction in interest bearing notes payable resulted in decreased net interest expense. Income Taxes The Company's effective tax rate has remained relatively constant at approximately 35% in 1995 and 36% in 1994 and 1993. 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 11 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 US 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 minimizes the financial impact of foreign currency exchange transactions through the use of foreign exchange forward contracts, which generally mature within three months of origination (see Note 5 to the Consolidated Financial Statements). 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 3 and 4 to the Consolidated Financial Statements). 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, multi-media, 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. In August, the Company purchased an additional 450,000 shares of Harbinger common stock. During 1996, the Company sold its shares of Harbinger common stock. In 1994, the Company acquired its Malaysian Affiliate, one of the leading application software providers in that country, the remaining 49% of SSA-DAT GmbH, and the remaining 20% of SSA Italia, its direct operations in Germany and Italy, respectively. 12 QUARTERLY RESULTS The following table contains selected unaudited consolidated financial results by quarter for 1995 and 1994. In management's opinion, this information reflects all adjustments (which consisted only of normal recurring adjustments) necessary to present the results fairly when read in conjunction with the Consolidated Financial Statements and related notes included elsewhere herein.
FISCAL 1994* FISCAL 1995* ----------------------------- ----------------------------- QUARTER ENDED (UNAUDITED) QUARTER ENDED (UNAUDITED) ----------------------------- ----------------------------- JANUARY APRIL JULY OCTOBER JANUARY APRIL JULY OCTOBER 31 30 31 31 31 30 31 31 ------- ----- ----- ------- ------- ----- ----- ------- (in millions, except per share data) Revenues................ $66.4 $72.0 $76.1 $109.8 $77.4 $84.3 $89.7 $122.7 Costs and expenses...... 64.5 68.1 76.3 99.0 74.4 77.9 81.3 99.4 ----- ----- ----- ------ ----- ----- ----- ------ Operating income (loss). 1.9 3.9 (0.2) 10.8 3.0 6.4 8.4 23.3 Non-operating income (expense), net......... (0.2) (0.1) (0.1) (0.6) (0.1) 0.1 (0.1) (0.1) ----- ----- ----- ------ ----- ----- ----- ------ Income (loss) before income taxes and minority interest...... 1.7 3.8 (0.3) 10.2 2.9 6.5 8.3 23.2 Provision (benefit) for income taxes........... 0.7 1.4 (0.2) 3.7 1.1 2.2 3.0 7.9 ----- ----- ----- ------ ----- ----- ----- ------ Income (loss) before minority interest...... 1.0 2.4 (0.1) 6.5 1.8 4.3 5.3 15.3 Minority interest....... 0.2 0.2 0.1 (0.3) -- (0.1) -- -- ----- ----- ----- ------ ----- ----- ----- ------ Net income (loss)....... $ 1.2 $ 2.6 $ -- $ 6.2 $ 1.8 $ 4.2 $ 5.3 $ 15.3 ===== ===== ===== ====== ===== ===== ===== ====== Earnings per share...... $0.03 $0.07 $ -- $ 0.15 $0.05 $0.10 $0.13 $ 0.35 ===== ===== ===== ====== ===== ===== ===== ======
- -------- * Restated. See Note 2 to Consolidated Financial Statements. Historically, the Company's business, like many other companies in its industry, has experienced the highest revenues in the fourth quarter of each year and a subsequent revenue decline in the first quarter of the following year. The Company attributes the fourth quarter revenue peak to increased year end sales efforts and, in certain cases, to sales incentives, which come into effect late in the year. The Company expects these quarterly trends to continue, and that its operating results will peak in the fourth quarter of each year and decline from that level in the first quarter of the following year. In addition, it is becoming increasingly difficult to predict and to rely on historical trends in the Company's quarterly results given the effects of the demand for open-systems products, the growing significance of Major Account sales, and the related uncertainty of the sales cycle. The Company operates with relatively little backlog and a substantial majority of its software license fee revenues in each quarter results from sales efforts culminated in that quarter. As a result, if near-term demand for the Company's products weakens or if significant anticipated sales in any quarter do not close when expected, the Company's revenues and earnings for that quarter would be adversely affected. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents at the end of 1995 were $57.1 million, down slightly from $60.2 million at the end of 1994 due to increased working capital requirements to fund the Company's growth and an increased level of business acquisitions and investments. Additionally, the Company acquired several software products which were previously licensed. Net cash provided from operations was $39.3 million in 1995, $58.4 million in 1994, and $31.2 million in 1993. Net cash provided by operations in 1995 was exceeded by funds used for product development and enhancement, capital expenditures, acquisitions, payment of the Company's annual dividend, and principal payments under long- term obligations. In June 1995, the Company increased its bank line of credit to $50 million from $20 million. At October 31, 1995 and 1994, no amounts were outstanding under the line of credit. This added capacity is in line with the Company's overall growth. The Company's business is not capital intensive. The Company primarily leases its premises. In addition, the Company has leasing facilities in place for certain computer equipment and automobiles. Capital expenditures relate primarily to smaller computers, leasehold improvements, office furniture and fixtures, and some automobiles. Currently, the Company's commitments for capital expenditures are not significant. 13 At October 31, 1996, cash and equivalents totaled $38.1 million. During 1996, cash and equivalents declined $19.0 million and borrowing under the Company's bank line of credit and Senior Notes on a net basis increased by $42.4 million due to the operating loss in the current year, continued significant investment in product development, payment of the Company's annual dividend which increased 25% over the prior year ($.10 per share versus $.08 in the prior year), tax payments related to the Company's profitability in fiscal 1995, acquisitions of affiliates and increased operating expenses in support of the Company's strategic move in to the Unix open systems market. At October 31, 1996, $46.4 million was outstanding under the Company's $50.0 multi-bank line of credit. At October 31, 1995, there was no outstanding balance. During 1996, the Company made its scheduled $4.0 million repayment on its Senior Notes, leaving $26.0 million outstanding at October 31, 1996. Based on the financial results for 1996, the Company was in technical default of certain financial covenants contained in its $50.0 million bank line of credit and its Senior Notes. The Company obtained waivers of the defaults through February 1, 1997, and in January 1997 amended certain terms and conditions of both the bank line agreement and the Senior Notes whereby all defaults were waived and the maturity dates were changed to November 1, 1997. Also, pursuant to the amendments, additional borrowings and new letters of credit under the bank line of credit are precluded, the Senior Notes and bank line of credit are to be collateralized with substantially all of the Company's domestic assets and a portion of the stock of certain of the Company's foreign subsidiaries, mandatory prepayments are required out of the proceeds of any subsequent debt or equity offering, interest rates were increased and the financial covenants were changed as described in the Notes to Consolidated Financial Statements. The Company also agreed to issue 500,000 and 275,000 warrants at fair market value at the time of issuance to purchase shares of the Company's common stock to the banks and Senior Note holders, respectively. Management believes that, with an anticipated return to profitability in the next fiscal year, cash generated from operations combined with current working capital will provide sufficient liquidity to meet ordinary capital requirements through the end of the 1997 fiscal year. The Company is presently exploring the possiblity of a public or private sale of debt or equity securities to refinance existing debt and fund an accelerated growth strategy for the Company's new version of its client/server software product. RECENTLY ISSUED ACCOUNTING STANDARDS SFAS No. 121, "Accounting for Long-Lived Assets" was issued in 1995. Implementation of SFAS No. 121 is required in the fiscal year commencing November 1, 1996. SFAS No. 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill relating to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS No. 121 is not expected to have a significant impact on the Company's Consolidated Financial Statements. SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in 1995. Implementation is required in the fiscal year commencing November 1, 1996. SFAS No. 123 established financial accounting and reporting standards for stock based employee compensation plans. The Company is currently evaluating the impact this statement will have on the Company's Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules of the Company are annexed to this Report as pages F-2 through F-20. An index to such materials appears on page F-1. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to the directors of the Company is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting held on March 12, 1996. Information regarding executive officer is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting held on March 12, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting held on March 12, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting held on March 12, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The financial statements and schedules filed as part of this report are listed in the accompanying Index to Financial Statements and Schedules. The exhibits filed as part of this report are listed in the accompanying Index to Exhibits. The Company will furnish a copy of any exhibit listed to requesting stockholders upon payment of the Company's reasonable expenses in furnishing those materials. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYSTEM SOFTWARE ASSOCIATES, INC. January 29, 1997 /s/ Joseph J. Skadra ___________________________________ Joseph J. Skadra, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Roger E. Covey Chief Executive Officer and January 29, 1997 ____________________________________ Chairman of the Board of Roger E. Covey Directors (Principal Executive Officer) /s/ Joseph J. Skadra Chief Financial Officer, January 29, 1997 ____________________________________ Vice President-Finance and Joseph J. Skadra Secretary (Principal Financial and Accounting Officer) /s/ Andrew J. Filipowski Director January 29, 1997 ____________________________________ Andrew J. Filipowski /s/ John W. Puth Director January 29, 1997 ____________________________________ John W. Puth /s/ William N. Weaver, Jr. Director January 29, 1997 ____________________________________ William N. Weaver, Jr. /s/ Dr. Willard I. Zangwill Director January 29, 1997 ____________________________________ Dr. Willard I. Zangwill
16 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE ---- (1) FINANCIAL STATEMENTS: Consolidated Balance Sheets as of October 31, 1995 (Restated) and 1994 (Restated)............................................................. F-2 Consolidated Statements of Income for the years ended October 31, 1995 (Restated), 1994 (Restated) and 1993................................... F-4 Consolidated Statements of Cash Flows for the years ended October 31, 1995 (Restated), 1994 (Restated) and 1993.............................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1995 (Restated), 1994 (Restated) and 1993............ F-6 Notes to Consolidated Financial Statements.............................. F-7 Report of Independent Accountants....................................... F-19 (2) FINANCIAL STATEMENT SCHEDULES: The following financial statement schedule is included herein: Schedule VIII--Valuation and Qualifying Accounts........................ F-20
All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. F-1 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ----------------- 1995 1994 ASSETS RESTATED RESTATED ------ -------- -------- (IN MILLIONS, EXCEPT SHARE DATA) Current Assets: Cash and equivalents....................................... $ 57.1 $ 60.2 Accounts receivable, less allowance for doubtful accounts of $12.5 and $10.2........................................ 184.6 152.9 Deferred income taxes...................................... 7.0 4.5 Prepaid expenses and other current assets.................. 21.3 20.0 ------ ------ Total current assets..................................... 270.0 237.6 ------ ------ Property and Equipment: Data processing equipment.................................. 30.9 27.5 Furniture and office equipment............................. 14.1 12.9 Leasehold improvements..................................... 7.8 7.3 Transportation equipment................................... 2.8 6.0 ------ ------ 55.6 53.7 Less--Accumulated depreciation and amortization.............. 31.3 26.1 ------ ------ 24.3 27.6 ------ ------ Other Assets: Software costs, less accumulated amortization of $41.1 and $26.2..................................................... 59.0 49.3 Cost in excess of net assets of acquired businesses, less accumulated amortization of $6.0 and $4.3................. 18.2 15.8 Investments in associated companies........................ 16.5 1.5 Miscellaneous.............................................. 5.2 1.3 ------ ------ 98.9 67.9 ------ ------ Total Assets............................................. $393.2 $333.1 ====== ======
The accompanying notes are an integral part of these statements. F-2 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ----------------- 1995 1994 LIABILITIES AND STOCKHOLDERS' EQUITY RESTATED RESTATED ------------------------------------ -------- -------- (IN MILLIONS, EXCEPT SHARE DATA) Current Liabilities: Current maturities of senior notes payable................. $ 4.0 $ -- Accrued commissions and royalties.......................... 28.7 26.2 Accounts payable and other accrued liabilities............. 46.9 44.0 Accrued compensation and related benefits.................. 23.5 20.9 Deferred revenue........................................... 61.7 55.6 Income taxes payable....................................... 12.9 3.6 ------ ------ Total current liabilities................................ 177.7 150.3 ------ ------ Long-Term Obligations........................................ 33.9 32.7 ------ ------ Deferred Revenue............................................. 27.3 30.3 ------ ------ Deferred Income Taxes........................................ 9.9 8.6 ------ ------ Minority Interest in Consolidated Subsidiaries............... 1.0 1.9 ------ ------ Stockholders' Equity: Preferred stock, $.01 par value, 100,000 shares authorized, none issued or outstanding Common stock, $.0033 par value, 60,000,000 shares authorized, 42,094,500 and 26,994,000 shares issued (net of treasury shares)....................................... 0.1 0.1 Capital in excess of par value............................. 26.1 20.7 Retained earnings.......................................... 115.5 91.8 Unrealized gain on available-for-sale securities........... 2.5 -- Cumulative translation adjustment.......................... (0.8) (0.8) ------ ------ 143.4 111.8 Less cost of common stock in treasury, 0 and 411,000 shares.. -- 2.5 ------ ------ Total stockholders' equity............................... 143.4 109.3 Commitments and Contingencies (Note 11).................. -- -- ------ ------ Total Liabilities and Stockholders' Equity............... $393.2 $333.1 ====== ======
The accompanying notes are an integral part of these statements. F-3 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED OCTOBER 31, ------------------------ 1995 1994 RESTATED RESTATED 1993 -------- -------- ------ (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues: License fees........................................ $250.0 $229.7 $187.9 Client services and other........................... 124.1 94.6 75.5 ------ ------ ------ Total revenues.................................... 374.1 324.3 263.4 ------ ------ ------ Costs and Expenses: Cost of license fees................................ 64.9 60.7 51.4 Cost of client services and other................... 76.8 57.2 43.5 Sales and marketing................................. 87.6 90.8 63.8 Research and development............................ 40.2 35.1 23.0 General and administrative.......................... 63.5 64.1 45.6 ------ ------ ------ Total costs and expenses.......................... 333.0 307.9 227.3 ------ ------ ------ Operating income...................................... 41.1 16.4 36.1 ------ ------ ------ Non-operating expense, net............................ 0.2 1.0 0.4 ------ ------ ------ Income before income taxes and minority interest...... 40.9 15.4 35.7 Provision for income taxes............................ 14.2 5.6 12.7 ------ ------ ------ Income before minority interest....................... 26.7 9.8 23.0 Minority interest..................................... (0.1) 0.2 0.4 ------ ------ ------ Net income............................................ $ 26.6 $ 10.0 $ 23.4 ====== ====== ====== Earnings per share.................................... $ 0.63 $ 0.25 $ 0.57 ====== ====== ====== Weighted average common and equivalent shares outstanding.......................................... 42.2 40.5 40.7 ====== ====== ======
The accompanying notes are an integral part of these statements. F-4 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, ----------------------- 1995 1994 RESTATED RESTATED 1993 -------- -------- ----- (IN MILLIONS) Cash Flows From Operating Activities: Net income.......................................... $26.6 $10.0 $23.4 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment........................................ 7.9 8.4 6.5 Amortization of other assets...................... 17.3 11.0 6.4 Provision for doubtful accounts................... 3.3 8.0 2.7 Deferred income taxes............................. (2.6) 4.1 1.1 Deferred revenue.................................. 7.3 28.2 6.8 Minority interest................................. 0.1 (0.2) (0.4) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable............................. (32.3) (23.4) (21.3) Prepaid expenses and other current assets....... (0.3) (0.2) (8.2) Miscellaneous assets............................ (3.3) -- -- Accrued commissions and royalties............... 0.3 (5.7) 3.8 Accounts payable and other accrued liabilities.. 1.0 16.8 0.6 Accrued compensation and related benefits....... 1.8 5.6 5.5 Income taxes payable............................ 12.2 (4.2) 4.3 ----- ----- ----- Net cash provided by operating activities..... 39.3 58.4 31.2 ----- ----- ----- Cash Flows From Investing Activities: Purchases of property and equipment................. (5.3) (14.7) (5.0) Software costs...................................... (25.1) (31.2) (15.1) Purchase of available-for-sale securities........... (5.4) -- -- Investments and acquisitions, net of cash acquired.. (6.1) (1.2) (3.0) Proceeds from sales of assets....................... 1.7 1.9 -- Other............................................... 0.3 (0.4) (1.3) ----- ----- ----- Net cash flows used in investing activities... (39.9) (45.6) (24.4) ----- ----- ----- Cash Flows From Financing Activities: Proceeds from issuance of senior notes.............. -- -- 30.0 Principal payments under long term obligations...... (3.5) (3.8) (2.5) Proceeds from exercise of stock options............. 4.1 0.5 1.0 Dividends paid...................................... (3.2) (3.2) (3.2) ----- ----- ----- Net cash provided by (used in) financing activities................................... (2.6) (6.5) 25.3 ----- ----- ----- Effect of exchange rate changes on cash............... 0.1 (3.7) 2.1 ----- ----- ----- Net increase (decrease) in cash and equivalents....... (3.1) 2.6 34.2 Cash and equivalents: Beginning of year................................... 60.2 57.6 23.4 ----- ----- ----- End of year......................................... $57.1 $60.2 $57.6 ===== ===== =====
The accompanying notes are an integral part of these statements. F-5 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED GAIN ON TREASURY TOTAL COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK STOCK- ------------- EXCESS OF RETAINED FOR-SALE TRANSLATION ------------- HOLDERS' SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ADJUSTMENT SHARES AMOUNT EQUITY ------ ------ ---------- -------- ---------- ----------- ------ ------ -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Balance October 31, 1992................... 26.8 $0.1 $18.5 $ 65.2 $-- $(1.3) (0.4) $(2.5) $ 80.0 Shares issued upon exercise of employee stock options.......... 0.2 1.0 1.0 Tax benefit of stock options exercised...... 0.4 0.4 Foreign currency translation adjustment. -- -- Dividends paid--$0.08 per share.............. (3.2) (3.2) Shares issued in Elke Corp. combination...... 0.3 (0.4) (0.4) Net income.............. 23.4 23.4 ---- ---- ----- ------- ---- ----- ---- ----- ------ Balance October 31, 1993................... 27.3 0.1 19.9 85.0 -- (1.3) (0.4) (2.5) 101.2 ---- ---- ----- ------- ---- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.1 0.5 0.5 Tax benefit of stock options exercised...... 0.3 0.3 Foreign currency translation adjustment. 0.5 0.5 Dividends paid--$0.08 per share.............. (3.2) (3.2) Net income.............. 10.0 10.0 ---- ---- ----- ------- ---- ----- ---- ----- ------ Balance October 31, 1994, Restated......... 27.4 0.1 20.7 91.8 -- (0.8) (0.4) (2.5) 109.3 ---- ---- ----- ------- ---- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.5 4.1 4.1 Tax benefit of stock options exercised...... 2.8 2.8 Foreign currency translation adjustment. -- -- Dividends paid--$0.08 per share.............. (3.2) (3.2) Shares issued in business combinations.. 0.2 (1.5) 0.3 0.4 2.5 1.3 Unrealized gain on available-for-sale securities............. 2.5 2.5 Net Income.............. 26.6 26.6 Shares issued in three- for-two split.......... 14.0 ---- ---- ----- ------- ---- ----- ---- ----- ------ Balance October 31, 1995, Restated......... 42.1 $0.1 $26.1 $ 115.5 $2.5 $(0.8) -- $ -- $143.4 ==== ==== ===== ======= ==== ===== ==== ===== ======
The accompanying notes are an integral part of these statements. F-6 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Nature of operations System Software Associates, Inc. (the "Company" or "SSA") is a leading provider of cost-effective business information systems to the industrial sector worldwide. SSA's integrated product line BPCS (Business Planning and Control System) provides business process reengineering and integration of all operations, including configurable manufacturing processes, supply chain management, and global finance solutions. SSA's object-oriented interoperable tool set AS/SET (Application System/Solution Engineering Technology) allows the production of platform independent client/server applications. The Company supports its clients primarily through a worldwide network of branch offices. The Company markets, sells, and services its products to intermediate size and large companies through its own sales organization and a network of approximately 90 independent software companies (the "Affiliates"). Principles of consolidation The consolidated financial statements include the accounts of System Software Associates, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Foreign currency translation The functional currencies for substantially all of the Company's foreign subsidiaries are their local currencies. The foreign subsidiaries' balance sheets are translated at the year end rates of exchange and their results of operations at weighted average rates of exchange for the year. Translation adjustments resulting from this process are recorded directly in stockholders' equity and will be included in the determination of net income only upon sale or liquidation of the subsidiaries, which is not contemplated at this time. Foreign exchange transaction losses aggregating $0.7 million, $0.8 million, and $1.3 million are included in general and administrative expenses for 1995, 1994, and 1993, respectively. Revenue recognition The license fees generated and related commissions earned by the independent Affiliates are included in license fees and cost of license fees, respectively. Software license fees are recognized upon client acceptance and delivery of the software product. 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 it geographic dispersion. The principal components of cost of license fees are commissions paid to independent Affiliates, hardware costs, amortization of capitalized software costs, and royalties paid to third parties. The principal components of cost of client services and other are salaries paid to the Company's client services personnel and amounts paid to independent client services professionals. Accrued Affiliate and salesman commissions are not paid until the related accounts receivable balances have been collected. Property and equipment Property and equipment are stated at cost. Depreciation is computed using various methods over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the assets or related leases. Gains or losses resulting from sales or retirements are recorded as incurred, at which F-7 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 $7.9 million, $8.4 million, and $6.5 million in 1995, 1994, and 1993, 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:
OCTOBER 31, -------------- --- 1995 1994 ------ ------ (IN MILLIONS) Purchased software.................................... $ 8.7 $ 6.9 Internally developed software......................... 91.4 68.6 ------ ------ 100.1 75.5 Less--Accumulated amortization........................ (41.1) (26.2) ------ ------ Net capitalized software costs...................... $ 59.0 $ 49.3 ====== ======
Amortization of capitalized software costs charged to cost of license fees aggregated $14.9 million, $9.2 million, and $5.9 million during 1995, 1994, and 1993, 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 market 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 $2.2 million, $1.8 million, and $0.8 million in 1995, 1994, and 1993, respectively. Earnings per share Earnings per share have been computed using the weighted average number of common shares and common share equivalents outstanding during the periods. Weighted average shares outstanding have been adjusted to reflect as outstanding, for each period presented, all shares issuable under stock options using the treasury stock method and the November 28, 1995 three-for- two stock split. F-8 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Statements of cash flows For purposes of reporting cash flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Interest income earned on cash equivalents aggregated $2.0 million, $1.8 million, and $0.7 million during 1995, 1994, and 1993, respectively. Supplemental information is as follows:
YEAR ENDED OCTOBER 31, -------------- 1995 1994 1993 ---- ---- ---- (IN MILLIONS) Non-cash investing and financing activities: Leases capitalized........................................ -- $1.9 $1.8 Liabilities assumed in connection with investments and acquisitions........................................... $8.7 $1.9 $1.2 Cash paid during the year for: Interest................................................ $2.2 $3.1 $0.9 Income taxes............................................ $5.0 $3.4 $5.3
NOTE 2--RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS The Company has restated its consolidated financial statements for the years ended October 31, 1995 and 1994 for revenues from software contracts entered into during those periods. In the third quarter of 1994, the Company entered into a software license contract for $10.1 million. Due to problems identified during the implementation of certain of the software products, a dispute arose. This dispute was settled in fiscal 1996. The investigation surrounding the dispute identified that certain uncertainties existed as of October 31, 1994 which made the collectibility of the revenue uncertain at that date. Accordingly, the fiscal 1994 consolidated financial statements have been restated to reverse the revenue and certain of the costs associated with the contract. The impact of these adjustments on the Company's consolidated financial results as originally reported is summarized below:
YEAR ENDED OCTOBER 31, 1994 ---------------------- AS ORIGINALLY AS REPORTED RESTATED ------------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Total Revenue...................................... $334.4 $324.3 Income Before Income Taxes and Minority Interest... $ 23.8 $ 15.4 Net Income......................................... $ 15.4 $ 10.0 Earnings Per Share................................. $ 0.38 $ 0.25 Stockholders' Equity............................... $114.7 $109.3
The fiscal 1995 restatement reflects the reversal of revenues for three contracts entered into during that year. During the third quarter of 1995, the Company recognized $5.0 million in revenues from the final two installment payments of a four installment payment contract. Subsequently, it was determined that such revenue was recorded prior to the completion of contractual terms which would allow for the revenue to be recognized. During the third and fourth quarters of fiscal 1995, the Company entered into reseller agreements of $10.0 and $5.0 million, respectively. Subsequently, the Company determined that the payment terms for the contracts were F-9 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) not fixed. Accordingly, the fiscal 1995 consolidated financial statements have been restated to reverse the revenue and certain of the costs associated with the contracts. The impact of these adjustments on the Company's consolidated financial results as originally reported is summarized below:
YEAR ENDED OCTOBER 31, 1995 ------------------- AS ORIGINALLY AS REPORTED RESTATED ---------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Total Revenue......................................... $394.4 $374.1 Income Before Income Taxes and Minority Interest...... $ 52.4 $ 40.9 Net Income............................................ $ 34.1 $ 26.6 Earnings Per Share.................................... $ 0.81 $ 0.63 Stockholders' Equity.................................. $156.3 $143.4
NOTE 3--BUSINESS COMBINATIONS: During the past three years the Company has expanded its global coverage and strengthened its product offerings through various acquisitions. The following table summarizes all acquisitions which were accounted for under the purchase method and, accordingly, resulted in allocations of the purchase prices to the net assets acquired based upon their estimated fair values as of the acquisition dates. The accompanying consolidated statements of income 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.
YEAR ENDED OCTOBER 31, - ------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------
. SSA Ontario Corporation .SSA DAT GmbH (49%) . SSA DAT GmbH (51%) . SSA Services Pty., Ltd. (15%) (a) (Germany) . Ocean Information Systems Sdn Bhd (SSA Malaysia) . BPCS Division of Exigent Computer Group . SSA de Mexico .SSA Italia (20%) (b) . Solid Beheer B.V. . Certain assets of Transtech, Inc. (50%)(c) - ------------------------------------------------------------------------------------------------------------- Aggregate consideration $6.5 $2.7 $5.4 - ------------------------------------------------------------------------------------------------------------- Goodwill $6.3 $2.3 $5.2 - -------------------------------------------------------------------------------------------------------------
(a) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA Australia and New Zealand) in 1995. (b) Acquired the remaining 20% interest in SSA Italia in 1994. (c) Represents the acquisition of the remaining 50% interest in Solid Beeher B.V. The original investment was accounted for under the equity method. 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, F-10 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Inc. In August 1993, the Company issued 300,000 shares of common stock, with an aggregate fair market value of $6.4 million, for all of the outstanding common stock of Elke Corp., a leading provider of software for tracking and managing the maintenance of equipment, facilities, and vehicles. The combinations were accounted for as poolings of interest. The results of operations were included in the Company's consolidated financial statements from the dates of combinations, as the operations for all periods prior to the combinations were not material in relation to the Company's consolidated financial statements. NOTE 4--INVESTMENTS IN ASSOCIATED COMPANIES: In July, 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 have been accrued and will be paid by the Company to Harbinger during the calendar year 1995 and calendar 1996, respectively. 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 as the Company owns less than 20% of each associated company and does not exercise significant influence over these companies operations. NOTE 5--FINANCIAL INSTRUMENTS: The Company uses forward exchange contracts for the primary purpose of reducing its exposure to fluctuations in foreign currency exchange rates. The instruments are employed to manage transactional exposure. While these financial instruments are subject to the risk that market rates may change subsequent to the acquisition of the financial instrument, such changes would generally be offset by opposite effects on the items being managed. The Company's financial instruments typically mature within three months of origination and are transacted at rates which reflect the market rate at the date of contract. As of October 31, 1995, the Company had forward contracts for the purchase and sale of European and other currencies, with purchases totaling $11.3 million and sales totaling $13.5 million. These contracts matured on or before November 2, 1995. NOTE 6--LINE OF CREDIT: At October 31, 1995 the Company had available a $50 million, multi-bank line of credit which was to mature in June, 1997. At the option of the Company, borrowings under the agreement bore interest at the Prime Rate or LIBOR plus a margin. The margin on LIBOR ranged from 3/4% to 3%, and was based on the cumulative amount borrowed and the leverage ratio of the Company at the time of the borrowings. Certain of the Company's majority owned subsidiaries were eligible to borrow under the agreement, either in U.S. or local currency. Available borrowings were reduced by outstanding letters of credit, and 10% of the face amount of outstanding F-11 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) foreign currency hedge contracts once the Company's total foreign currency hedges exceeded $50 million. The Company must pay a commitment fee equal to 1/8% of the unused portion of the commitment. The agreement contained covenants that were essentially the same as those of the $30 million Senior Notes described in Note 7, and also included a covenant based on the Company's quick ratio. As a result of operating losses during 1996, the Company was unable to maintain compliance with certain of the financial covenants within the agreement and technical defaults occurred. The Company obtained waivers of the defaults through February 1, 1997, and in January 1997 amended certain terms and conditions of the agreements whereby all defaults were waived and the maturity date was extended to November 1, 1997. Other significant provisions include the following: Additional borrowings and new letters of credit are precluded and the line of credit is to be collateralized with substantially all of the Company's domestic assets, and a portion of the stock of certain of the Company's foreign subsidiaries. Upon delivery of the collateral, the interest rate on outstanding borrowings changes from the current default rate of prime +2% to prime +1% (increasing to 3% upon a subsequent default) and letters of credit fees will be 2% per annum (3% upon a subsequent default). The existing financial covenants have been replaced with covenants that require the Company to maintain and report a weekly minimum cash balance, maintain a minimum net worth, and limit its quarterly capital expenditures. Additionally, the Company has agreed to issue warrants at fair market value at the time of issuance to the banks to purchase an aggregate of 500,000 shares of the Company's common stock. The warrants are freely transferable and can be exercised at any time within 5 years of the issue date. The Company is required to make a mandatory prepayment pro-rata to the banks and Senior Noteholders of 100% of the proceeds of any debt or equity offering up to the amount of unpaid indebtedness outstanding to the banks and the Senior Noteholders. At October 31, 1996, borrowings under the line of credit were $46.4 million. Outstanding letters of credit issued against the line of credit at October 31, 1996 were $1.2 million. There were no borrowings under the line of credit during 1995. With the exception of the $10 million borrowed and repaid in October, 1994, no other borrowings occurred under the Company's line of credit during 1994 and 1993. NOTE 7--LONG-TERM OBLIGATIONS: Long-term obligations consist of the following:
OCTOBER 31, ----------- 1995 1994 ----- ----- (IN MILLIONS) Senior Notes payable......................................... $30.0 $30.0 Notes payable and other obligations.......................... 9.8 3.9 Obligations under capital leases............................. 1.7 2.4 ----- ----- 41.5 36.3 Less--Current maturities..................................... 7.6 3.6 ----- ----- $33.9 $32.7 ===== =====
At October 31, 1995 and 1994, senior notes payable consisted of $4 million of senior unsecured 5.82% notes, $4 million of senior unsecured 6.23% notes, and $22 million of senior unsecured 6.69% notes originally due September 15, 1996, September 15, 1997, and September 15, 1998, respectively. Interest on the notes was payable semi-annually. The notes contained covenants including minimum net worth and fixed charge coverage and leverage ratios. As a result of operating losses during 1996, the Company was unable to maintain compliance with the fixed charge financial covenant of the notes and technical defaults occurred. The Company obtained waivers of the defaults through February 1, 1997, and in January 1997 amended certain terms and conditions of the Senior F-12 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Notes whereby all defaults were waived and the maturity dates were changed to November 1, 1997. Under an intercreditor arrangement with the Company's banks and as described in Note 6, the notes have been collateralized with certain of the Company's assets and mandatory prepayments are required from the proceeds of any debt or equity offering. Interest due on the notes was changed from semi-annual to monthly payment dates. Upon delivery of collateral, the interest rates on each of the notes changes from the current default rate of 8.23% and 8.69%, respectively, to prime +1% (increasing to Prime +3% upon a subsequent default). The existing financial covenants have been modified to be the same as the new covenants contained in the Company's line of credit described in Note 6. Additionally, the senior noteholders have been issued warrants to purchase 275,000 shares of the Company's common stock under the same terms as the warrants issued to the banks in Note 6. At October 31, 1995, notes payable and other obligations consist of commitments made in connection with investments and acquisitions which mature as follows: $2.9 million in 1996, $6.6 million in 1997, and $0.3 million in 1998. Capital lease obligations represent the present value of future payments under leases for transportation and data processing equipment. The recorded cost of these assets aggregated $5.6 million and $7.0 million at October 31, 1995 and 1994, respectively; accumulated amortization thereon aggregated $3.3 million and $3.7 million, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. The following is a schedule of future minimum lease payments under capital lease obligations, together with the present value of minimum lease payments at October 31, 1995:
YEAR ENDING OCTOBER 31, (IN MILLIONS) AMOUNT ------------------------------------- ------ 1996............................................................... $0.9 1997............................................................... 0.5 1998............................................................... 0.4 1999............................................................... 0.1 ---- Total minimum lease payments....................................... 1.9 Less--Amount representing interest................................. 0.2 ---- Present value of minimum lease payments............................ 1.7 Less--Current maturities........................................... 0.7 ---- $1.0 ====
Interest expense was $2.2 million, $2.8 million, and $1.1 million during 1995, 1994, and 1993, respectively. NOTE 8--INCOME TAXES: Effective November 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of this accounting change (from SFAS No. 96) on years prior to fiscal 1994 was not significant. Under SFAS No. 109, 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 from continuing operations was taxed in the following jurisdictions:
YEAR ENDED OCTOBER 31, ----------------- 1995 1994 1993 ----- ----- ----- (IN MILLIONS) Domestic........................................ $31.4 $ 7.7 $27.8 Foreign......................................... 9.5 7.7 7.9 ----- ----- ----- $40.9 $15.4 $35.7 ===== ===== =====
F-13 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes consists of the following:
YEAR ENDED OCTOBER 31, ------------------- 1995 1994 1993 ----- ----- ----- (IN MILLIONS) Current: Federal............................................ $ 8.9 $(4.9) $ 5.7 State.............................................. 0.7 0.1 0.4 Foreign............................................ 7.2 6.3 5.5 ----- ----- ----- 16.8 1.5 11.6 ----- ----- ----- Deferred: Federal............................................ (2.8) 4.7 1.4 State.............................................. (0.1) 0.4 0.3 Foreign............................................ 0.3 (1.0) (0.6) ----- ----- ----- (2.6) 4.1 1.1 ----- ----- ----- $14.2 $ 5.6 $12.7 ===== ===== =====
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:
YEAR ENDED OCTOBER 31, ------------------- 1995 1994 1993 ----- ----- ----- (IN MILLIONS) Income tax at the federal statutory rate............. $14.3 $4.5 $12.4 State income taxes, net of federal benefit........... 0.6 0.1 0.5 Foreign Sales Corporation, net....................... (0.1) (0.4) (1.1) Foreign operating losses............................. 0.6 1.7 1.2 Research and development tax credit.................. (1.3) (2.1) (1.2) Other, net........................................... 0.1 1.8 0.9 ----- ----- ----- $14.2 $ 5.6 $12.7 ===== ===== =====
The components of the deferred income tax provision are as follows:
YEAR ENDED OCTOBER 31, -------------------- 1995 1994 1993 ------ ----- ----- (IN MILLIONS) Revenues (net of commissions) recognized for tax purposes in advance of financial reporting....... $ 1.3 $ 1.6 $(1.3) Capitalization of software costs for financial reporting purposes............................... 0.4 6.2 3.5 Provision for doubtful accounts................... (0.8) (1.8) (0.1) Rent expense for financial reporting purposes..... -- (0.1) (0.5) Expense recognized for financial reporting purposes in advance of tax....................... (1.1) -- -- Deferred gain..................................... (1.7) -- -- Domestic credit carryforwards..................... (1.0) (0.4) -- Foreign carryforwards............................. (0.3) (2.4) (1.3) Valuation allowance............................... 0.6 1.3 1.3 Other, net........................................ -- (0.3) (0.5) ------ ----- ----- $(2.6) $ 4.1 $ 1.1 ====== ===== =====
F-14 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The net deferred tax balance is comprised of (asset) liability:
AS OF OCTOBER 31, ------------ 1995 1994 ----- ----- (IN MILLIONS) Revenues (net of commissions) recognized for tax purposes in advance of financial reporting.................................. $(3.2) $(4.5) Capitalization of software costs for financial reporting purposes........................................................ 15.6 15.2 Provision for doubtful accounts.................................. (3.7) (2.9) Rent expense for financial reporting purposes.................... (1.6) (1.6) Expense recognized for financial reporting purposed in advance of tax............................................................. (1.2) -- Deferred gain.................................................... (1.7) -- Unrealized equity gain........................................... 1.4 -- Domestic credit carryforwards.................................... (1.4) (0.4) Foreign carryforwards............................................ (4.0) (3.7) Valuation allowance.............................................. 3.2 2.6 Other, net....................................................... (0.5) (0.6) ----- ----- $ 2.9 $ 4.1 ===== =====
At October 31, 1995, the Company has approximately $8.7 million of foreign net operating loss carryforwards and $2.2 million of tax credit carryforwards. At October 31, 1995 and October 31, 1994, the Company recorded valuation allowances related to these items of $3.2 million and $2.6 million, respectively. Of the $8.7 million in foreign net operating loss carryforwards, $4.1 million expire in varying amounts through the fiscal year ending October 31, 2002, and $4.6 million may be carried forward indefinitely. The $2.2 million of tax credit carryforwards expire in varying amounts through the fiscal year ending October 31, 2000. During 1995, 1994, and 1993 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 $2.8 million, $0.3 million, and $0.4 million, respectively, has been credited to capital in excess of par value. NOTE 9--STOCKHOLDERS' EQUITY: The Company has certain stock option plans and a long-term incentive plan under which options to purchase shares of the Company's common stock, stock appreciation rights, restricted stock, and cash awards may be granted to key employees and non-employees of the Company and its Affiliates. The plans provide that an aggregate of 6,356,250 common shares be available for grant, subject to adjustments for stock splits, stock dividends, mergers, or other changes in capitalization. Options become exercisable in varying periods (typically five 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 1995, 1994, and 1993 were granted at fair market value. The option price per share at October 31, 1995 has been adjusted to reflect the three-for-two stock split. F-15 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a summary of stock option activity:
AVAILABLE OPTION PRICE FOR GRANT UNEXERCISED EXERCISABLE PER SHARE --------- ----------- ----------- ---------------- Balance, October 31, 1992.. 1,338,627 1,276,573 334,612 $ 1.38 -- $19.50 --------- --------- -------- ---------------- Granted.................... (189,665) 189,665 12.25 -- 24.75 Becoming exercisable....... 251,154 1.56 -- 19.50 Cancelled.................. 50,400 (50,400) 6.00 -- 10.97 Exercised.................. (157,078) (157,078) 2.77 -- 11.67 --------- --------- -------- ---------------- Balance, October 31, 1993.. 1,199,362 1,258,760 428,688 1.38 -- 24.75 --------- --------- -------- ---------------- Granted.................... (571,500) 571,500 11.75 -- 16.75 Becoming exercisable....... 280,293 4.64 -- 24.75 Cancelled.................. 54,900 (54,900) 6.00 -- 15.13 Exercised.................. (97,900) (97,900) 2.89 -- 12.38 --------- --------- -------- ---------------- Balance, October 31, 1994.. 682,762 1,677,460 611,081 1.38 -- 24.75 --------- --------- -------- ---------------- Granted.................... (498,000) 498,000 12.25 -- 27.13 Becoming exercisable....... 338,367 6.00 -- 24.75 Cancelled.................. 154,467 (154,467) 6.00 -- 19.67 Exercised.................. (497,946) (497,946) 1.56 -- 19.50 Reflect three-for-two stock split..................... 169,615 761,524 225,751 --------- --------- -------- ---------------- Balance, October 31,1995... 508,844 2,284,571 677,253 $ 0.92 -- $18.09 ========= ========= ======== ================
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 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 offerer 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. In November 28, 1995, the Board of Directors declared a three-for-two common stock split (to be effected as a stock dividend) for stockholders of record at December 15, 1995, to be effective December 27, 1995. The financial statements and relevant share and per share data included herein have been adjusted to reflect the stock split. The par value of the additional shares of common stock issued in connection with the stock split was credited to common stock and a like amount was charged to capital in excess of par value. F-16 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--FOREIGN INFORMATION: Information regarding geographic areas for the years ended October 31, 1995, 1994, and 1993 is as follows:
EUROPE UNITED STATES MIDDLE EAST OTHER ELIMINATIONS TOTAL ------------- ----------- ----- ------------ ------ (IN MILLIONS) Year Ended October 31, 1995 Sales to unaffiliated customers $173.7 $148.1 $92.0 $(39.7) $374.1 Operating income......... $ 28.5 $ 9.3 $ 3.3 $ 41.1 Identifiable assets...... $225.2 $130.2 $87.3 $(49.5) $393.2 ====== ====== ===== ====== ====== Year Ended October 31, 1994 Sales to unaffiliated customers $155.5 $119.4 $82.6 $(33.2) $324.3 Operating income......... $ 14.0 $ 1.9 $ 0.5 $ 16.4 Identifiable assets...... $199.1 $101.4 $84.0 $(51.4) $333.1 ====== ====== ===== ====== ====== Year Ended October 31, 1993 Sales to unaffiliated customers $127.1 $101.0 $56.1 $(20.8) $263.4 Operating income......... $ 27.5 $ 7.5 $ 1.1 $ 36.1 Identifiable assets...... $179.6 $ 90.9 $51.7 $(41.8) $280.4 ====== ====== ===== ====== ======
The sales and operating income amounts reflected above include intercompany royalties. United States sales by geographical areas during the years ended October 31, 1995, 1994, and 1993 are as follows:
FOREIGN --------------------------------- EUROPE ASIA CANADA UNITED STATES MIDDLE EAST PACIFIC LATIN AMERICA TOTAL ------------- ----------- ------- ------------- ------ (IN MILLIONS) Year Ended October 31, 1995................... $147.3 $14.3 $ 5.4 $ 6.7 $173.7 Year Ended October 31, 1994................... $119.1 $16.6 $ 9.9 $ 9.9 $155.5 Year Ended October 31, 1993................... $ 81.3 $15.3 $16.5 $14.0 $127.1
NOTE 11--COMMITMENTS AND CONTINGENCIES: The Company leases its office space and certain equipment under noncancelable operating leases that expire at various dates through 2015. Rent expense under such leases aggregated approximately $11.0 million, $9.0 million, and $8.2 million during 1995, 1994, and 1993, respectively. Minimum annual rental commitments under noncancelable operating leases for periods subsequent to October 31, 1995 are as follows: $13.0 million in 1996, $11.0 million in 1997, $9.6 million in 1998, $8.6 million in 1999, $7.7 million in 2000, and $36.1 million in 2001 and thereafter. In January, 1997, class action lawsuits were filed in state court in Illinois and in the federal court in Chicago, Illinois against the Company and certain of its officers. The federal actions allege damages to persons who purchased the Company's common stock during the period August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The state court action alleges damages to persons who purchased the Company's common stock during the period November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated common and statutory law. Although the outcome of these proceedings cannot be determined with certainty, management intends to defend the actions vigorously, and, in consultation with its legal counsel, believes that the allegations are without merit and that the final outcomes should not have a material adverse effect on the Company's operations or financial position. F-17 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. On November 20, 1995, the Company filed an action against Owens-Illinois ("Owens") in Illinois state court seeking damages based on Owens' failure to make payments required under a July 29, 1994 contract (the "Contract") between the parties. On the same day the Company filed suit against Owens, Owens filed a lawsuit in Illinois state court for recision of the Contract and for damages. On April 18, 1996, the Company and Owens jointly announced that they had settled the lawsuits and, as a result, both lawsuits were dismissed. Terms of the settlement were not disclosed. In late November, 1995, two class action suits were filed in the federal court in Chicago, Illinois, against the Company and certain of its officers, alleging damages to persons who purchased the Company's common stock during the period August 21, 1995 through November 22, 1995. The plaintiffs subsequently dismissed each of these suits voluntarily, without liability to the Company. On February 22, 1991, a class action lawsuit was filed in the federal court in Chicago, Illinois, against the Company, its Chairman and Chief Executive Officer, and its former Chief Financial Officer. On July 2, 1993, after a two week trial, the jury returned a verdict in favor of all defendants on all counts. On August 10, 1994, the 7th Circuit Court in Chicago affirmed the jury verdict. F-18 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of System Software Associates, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, after the restatement described in Note 2, in all material respects, the financial position of System Software Associates, Inc. and its subsidiaries at October 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of System Software Associates, Inc. and its subsidiaries for any period subsequent to October 31, 1995. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois January 7, 1997, except as to Notes 6, 7 and 11 which are as of January 29, 1997 F-19 SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
ADDITIONS BALANCE CHARGED DEDUCTIONS-- BALANCE AT TO COSTS WRITE-OFFS AT END BEGINNING AND AND OTHER OF OF PERIOD EXPENSES ADJUSTMENTS PERIOD --------- --------- ------------ ------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended October 31, 1995........ $10.2 $ 3.3 $(1.0) $12.5 Year ended October 31, 1994........ $ 5.0 $ 8.0 $(2.8) $10.2 Year ended October 31, 1993........ $ 6.5 $ 2.7 $(4.2) $ 5.0 ADDITIONS BALANCE CHARGED BALANCE AT TO COSTS AT END BEGINNING AND OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- --------- ------------ ------- ACCUMULATED AMORTIZATION OF SOFTWARE COSTS Year ended October 31, 1995........ $26.2 $14.9 -- $41.1 Year ended October 31, 1994........ $17.0 $ 9.2 -- $26.2 Year ended October 31, 1993........ $10.7 $ 6.6 $(0.3) $17.0 ADDITIONS BALANCE CHARGED BALANCE AT TO COSTS AT END BEGINNING AND OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- --------- ------------ ------- ACCUMULATED AMORTIZATION OF INTANGIBLES Year ended October 31, 1995........ $ 0.3 $ 0.2 -- $ 0.5 Year ended October 31, 1994........ $ 0.1 $ 0.2 -- $ 0.3 Year ended October 31, 1993........ -- $ 0.1 -- $ 0.1 ADDITIONS BALANCE CHARGED BALANCE AT TO COSTS AT END BEGINNING AND OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- --------- ------------ ------- ACCUMULATED AMORTIZATION OF COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES Year ended October 31, 1995........ $4.3 $ 2.2 $(0.5) $ 6.0 Year ended October 31, 1994........ $2.5 $ 1.8 -- $ 4.3 Year ended October 31, 1993........ $1.7 $ 0.8 -- $ 2.5
F-20 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE ------- -------------------------- ---- 3.1 Certificate of Incorporation, as amended to date................. (1) 3.2 By-Laws, as amended to date...................................... (2) 10.8 Incentive Stock Option Plan...................................... (3) 10.12 Office Lease Northwestern Atrium Center, Chicago, Illinois, dated July 1, 1987 (the "Chicago Lease")............................... (1) 10.15 Non-Qualified Stock Option Plan.................................. (4) 10.16 SSA Incentive Savings Plan effective May 1, 1986 as amended and restated November 1, 1988........................................ (5) 10.19 Letter to Terry E. Notari dated October 25, 1989................. (2) 10.24 Agreement dated August 27, 1990 between the Registrant and Ameritech Information Systems, Inc. ("Ameritech")................ (6) 10.25 Letter Agreement dated August 27, 1990 among the Registrant, Ameritech and Northwestern Atrium Center Associates L.P.......... (6) 10.29 Employment Agreement dated September 28, 1987 between System Software Associates, Ltd. and Terence H. Osborne................. (7) 10.30 Letter Agreement dated August 9, 1991 between the Registrant and Terence H. Osborne............................................... (7) 10.31 Long-Term Incentive Plan......................................... (7) 10.37 Note Agreement dated as of August 15, 1993....................... (8) 10.38 Letter Agreement dated August 12, 1994 between the Registrant and Joseph J. Skadra................................................. (9) 10.40 Credit Agreement dated as of June 19, 1995....................... (10) 10.41 Letter Agreement Re: Note Agreement Restatement dated January 29, 1997................................................. 10.42 Letter Agreement Re: Credit Agreement Restatement dated January 29, 1997................................................. 21.1 Subsidiaries of the Registrant................................... (10) 23.1 Consent of Price Waterhouse LLP, the Registrant's Independent Accountants...................................................... 27.1 Financial Data Schedule..........................................
- -------- (1) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1987 (File No. 0-15322). (2) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1989 (File No. 0-15322). (3) Incorporated by reference from the Registrant's Form S-1 Registration Statement effective February 12, 1987 (File No. 33-10920). (4) Incorporated by reference from the Registrant's Form S-8 Registration Statement filed on October 4, 1988 (File No. 33-24516). (5) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1988 (File No. 0-15322). (6) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1990 (File No. 0-15322). (7) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1991 (File No. 0-15322). (8) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1993 (File No. 0-15322). (9) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1994 (File No. 0-15322). (10) Incorporated by reference from the Registrant's Form 10-K Annual Report for the fiscal year ended October 31, 1995, as originally filed (File No. 0-15322). EX-10.41 2 LETTER AGMT RE: NOTE AGMT RESTATEMENT DTD 1-29-97 Exhibit 10.41 January 29, 1997 System Software Associates, Inc. 500 West Madison Street Chicago, Illinois 60661 Attention: Joseph Skadra, Chief Financial Officer Re: Extension and Amendment of Senior Note Agreement Ladies and Gentlemen: Reference is hereby made to the Note Agreement dated as of August 15, 1993, by and among System Software Associates, Inc. (the "Company") and Principal Mutual Life Insurance Company and Massachusetts Mutual Life Insurance Company (the "Holders") (as amended, the "Existing Note Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Existing Note Agreement. Reference is also hereby made to the Waiver and Second Amendment To Note Agreement, dated as of September 16, 1996, by and among the Company and the Holders (as amended, the "September Waiver") and the Waiver and Sixth Amendment To Note Agreement, dated as of January 7, 1997, by and among the Company and the Holders (the "January Waiver"). This letter memorializes our understanding and, when executed by you, our agreement, to amend and restate the Existing Note Agreement in its entirety in accordance with the terms and conditions set forth below: 1. The Company and the Holders hereby agree to execute and deliver at the earliest practicable date (but in any event on or prior to February 28, 1997) a definitive restatement of the Existing Note Agreement in a form and substance substantially in accordance with the Existing Note Agreement, with such changes as are necessary to (i) reflect the terms set forth in this letter agreement, and (ii) provide the Holders with rights and remedies (consistent with the terms of this letter agreement) that are no less favorable to the Holders than the rights and remedies of the Banks under the Definitive Bank Restatement (as defined below) (in the form so executed, the "Definitive Restatement"). 2. The obligation of the parties hereto to execute and deliver the Definitive Restatement shall be absolute and unconditional, subject only to the following: (a) the Company and the Banks (as defined in the January Waiver) shall have executed and delivered a definitive restated Credit Agreement, contemporaneously with the execution of the Definitive Restatement, substantially in the form attached hereto as Exhibit A, together with such changes as the Holders reasonably request that are not inconsistent with the terms of this letter agreement and the letter agreement of even date, herewith among the Banks and the Company (the "Definitive Bank Restatement"); (b) the Company shall have executed and delivered to each of the Holders a warrant to purchase shares of the Company's common stock substantially in the form of Exhibit B attached hereto (the "Warrants"), and for the respective share amounts set forth below: Principal Mutual: 185,096 shares. Mass. Mutual: 89,904 shares. (c) the Company shall have executed and delivered the Registration Rights Agreement substantially in the form of Exhibit C attached hereto; (d) no Event of Default (as defined in the Existing Note Agreement, subject to the operation of Section 8 of this letter agreement) shall have occurred on or after the date hereof and be continuing; and (e) the Company shall have paid to the Holders, in such proportions as they shall direct to the Company in writing, an aggregate amount in cash equal to $70,000, payable on January 31, 1997 (the "Equalization Payment"). 3. The Definitive Restatement shall contain the following terms and provisions: (a) The outstanding principal of the Notes shall be due on November 1, 1997. (b) From the date hereof through and including the date of delivery of the foreign subsidiary stock pledges and the other outstanding collateral documents contemplated by the January Waiver which have not been delivered as of the date hereof (the "Remaining Collateral Deliveries"), the interest rate on the outstanding principal balance of the Notes shall be set at a rate of Base Rate (as defined in the Credit Agreement) plus 2% per annum. From and after the date the Remaining Collateral Deliveries are made, the interest rate on the outstanding principal balance of the Notes shall be set at the non-Default rate of Base Rate plus 1% per annum, and a Default rate of Base Rate plus 3% per annum. The Company acknowledges that the Holders shall be entitled to the interest rates set forth herein regardless of when the Definitive Restatement is signed. (c) The Company shall be entitled to reduce (but not below zero) any Make-Whole Amount otherwise payable to the Holders under the Definitive Restatement by the full amount of the Equalization Payment received by the Holders. (d) The Company shall be required to make a mandatory prepayment, pro-rata to the Banks and the Holders, out of 100% of the proceeds of any debt or equity offering by the Company or any Subsidiary of $100 million or more, in an amount up to the unpaid principal, interest and other obligations then outstanding to the Banks and the Holders. Prior to the Company or any Subsidiary completing any debt or equity offering for less than $100 million, the Company must obtain the prior consent of the Banks and the Holders, which may be granted or withheld in their sole and absolute discretion. (e) The financial covenants in Sections 7.1, 7.2, and 7.3 of the Existing Note Agreement (the "Existing Financial Covenants") will be eliminated in their entirety and replaced with the following: (i) Cash: The Company will be required to maintain consolidated cash balances as of the end of any calendar week of not less than $6 million. (ii) Net worth: The Company will be required to maintain a consolidated net worth of at least $103 million at the end of any fiscal quarter. (iii) Expenditures: The Company may not incur consolidated capital expenditures plus capitalized software expenditures in excess of $16 million in any fiscal quarter. From and after the date hereof the Company shall comply with each of the foregoing covenants and failure to so comply shall constitute an Event of Default under the Existing Note Agreement. 4. The Company will be required to complete the Remaining Collateral Deliveries by no later than March 31, 1997. 5.(a) The Warrant exercise price shall be the average of the closing price of the Company's common stock for the 15 consecutive trading days preceding issuance of the Warrants or such other 15 day period as to which the Company and the Holders may mutually agree. 2 (b) The Warrant holders will agree to a 90 day lock-up (selling restriction) from the closing of any underwritten equity or convertible debt offering by the Company that results in principal repayments to the Banks and Holders. 6. The Holders hereby waive each of the Acknowledged Defaults (as defined in the January Waiver) and each of the following additional Events of Default under the Existing Note Agreement: (i) default under of the Existing Note Agreement arising out of the Company's recent change in accounting method for reseller agreements, (ii) default under the Existing Note Agreement due to the failure to give proper written notice of the recently filed litigation against the Company to the Holders in the manner required by the Existing Note Agreement, (iii) the default due to the Company's failure to timely comply with the collateral delivery requirements in Section 5.2 of the January Waiver, (iv) default under Section 8.1 of the Existing Note Agreement arising out of the Company's defaults under the Credit Agreement and the Bank Waiver (as each such term is defined in the January Waiver), and (v) default under Section 8.1 of the Existing Note Agreement arising out of the failure to timely notify the Holders of the defaults referenced in clauses (i) through (iv) hereof (collectively, together with the Acknowledged Defaults, the "Stated Defaults"). 7. In the event of any inconsistency between the terms of this letter agreement, on the one hand, and Sections 4.1 and 4.4(b) of the September Waiver and Sections 1.1(b) and 5.2 of the January Waiver, on the other hand, the terms of this letter agreement shall control, and said sections of the January Waiver and September Waiver shall no further force and effect unless this Agreement is hereafter terminated upon the occurrence of a new Event of Default. Subject to Section 8 of this letter agreement, any Event of Default by the Company after the date hereof under Section 8 of the Existing Note Agreement shall constitute an Event of Default under the Existing Note Agreement. 8. From the date hereof through and including the execution of the Definitive Restatement, the Holders hereby waive the Company's requirement to comply with the Existing Financial Covenants. 9. This letter agreement may be executed by facsimile signatures. The parties agree to exchange original signature pages hereto promptly after the date hereof via first-class mail. This letter agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same letter agreement. 3 If you are in agreement with the foregoing, please sign where indicated below and return an executed copy of this letter agreement to each of the undersigned at their respective addresses as set forth in the Existing Note Agreement. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ Mark A. Ahmed --------------------------------------- Title: Managing Director ------------------------------------ PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By: /s/ John Cleavenger --------------------------------------- Title: Counsel ------------------------------------ By: /s/ Kent T. Kelsey --------------------------------------- Title: Counsel ------------------------------------ ACCEPTED AND AGREED: SYSTEM SOFTWARE ASSOCIATES, INC. By: /s/ Joseph Skadra --------------------------------------- Title: Chief Financial Officer ------------------------------------ 4 EX-10.42 3 LETTER AGMT RE: CREDIT AGMT RESTATEMENT DTD 1-29-97 Exhibit 10.42 January 29, 1997 System Software Associates, Inc. 500 West Madison Street Chicago, Illinois 60661 Attention: Joseph Skadra, Chief Financial Officer Re: Extension and Amendment of Credit Facility Ladies and Gentlemen: Reference is hereby made to the Credit Agreement dated as of June 19, 1995, by and among System Software Associates, Inc. (the "Company"), System Software Associates Japan Limited Liability Company, L.L.C. ("SSAJLLC" and, together with the Company, the "Borrowers"), Bank of America National Trust and Savings Association, as Agent (the "Agent"), Bank of America Illinois, as a Bank ("BofA"), American National Bank and Trust Company of Chicago, as a Bank ("ANB" and, together with BofA, the "Banks") and Bank of America Illinois, as Letter of Credit Issuer (the "Issuing Bank") (as amended, the "Existing Credit Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the draft Amended and Restated Credit Agreement attached hereto as Exhibit A (the "Draft Restatement"). Reference is also hereby made to the Waiver and Amendment Agreement, dated September 16, 1996, by and among the Borrowers, the Banks, the Issuing Bank and the Agent (the "September Waiver") and the Waiver and Amendment Agreement, dated as of January 7, 1997, by and among the Borrowers, the Banks, the Issuing Bank and the Agent (the "January Waiver"). This letter memorializes our understanding and, when executed by you, our agreement, to amend and restate the Existing Credit Agreement in its entirety in accordance with the terms and conditions set forth below: 1. The Banks, the Agent, the Issuing Bank and the Borrowers hereby agree to execute and deliver at the earliest practicable date (but in any event on or prior to February 28, 1997) a definitive restatement of the Existing Credit Agreement, containing terms consistent with those set forth in this letter agreement and otherwise in a form and substance substantially in accordance with the Draft Restatement attached hereto (in the form so executed, the "Definitive Restatement"). 2. The obligation of the parties hereto to execute and deliver the Definitive Restatement shall be absolute and unconditional, subject only to the following: (a) the Company and the Noteholders (as defined in the Draft Restatement), contemporaneously with the execution of the Definitive Restatement, shall have executed and delivered a definitive restated Note Purchase Agreement substantially in the form of the existing Note Purchase Agreement, with such changes as are necessary to (i) reflect the terms of letter agreement of even date herewith among the Company and the Noteholders, a copy of which is attached hereto as Exhibit B, and (ii) provide the Noteholders with rights and remedies that are no more favorable to the Noteholders than the rights and remedies of the Banks under the Definitive Restatement, together with such other changes as are mutually acceptable to the Banks, the Company and Noteholders (the New Note Agreement); (b) the Company shall have executed and delivered to each of the Banks a warrant to purchase shares of the Company's common stock substantially in the form of Exhibit C attached hereto (the "Warrants"), and for the respective share amounts set forth below: Bank of America Illinois: 250,000 shares. American National Bank and Trust Company of Chicago: 250,000 shares. (c) the Company shall have executed and delivered the Registration Rights Agreement substantially in the form of Exhibit D attached hereto; and (d) no Event of Default (as defined in Article X of the Draft Restatement) shall have occurred on or after the date hereof and be continuing. 3. The Definitive Restatement shall contain the following terms and provisions: (a) The Revolving Termination Date shall be extended to November 1, 1997. (b) Upon delivery of the foreign subsidiary stock pledges and the other outstanding collateral documents contemplated by the January Waiver Agreement which have not been delivered as of the date hereof (the "Remaining Collateral Deliveries"), the interest rate on all the outstanding Loans shall be set at the non-Default rate of Base Rate plus 1% per annum, and a Default rate of Base Rate plus 3% per annum. There will be no LIBOR option. Upon completion of the fgRemaining Collateral Deliveries, the Letter of Credit fees shall be set at a Non-Default fee of 2% per annum and a Default fee of 4% per annum. (c) The Company shall be required to make a mandatory prepayment, pro-rata to the Banks and the Noteholders, out of 100% of the proceeds of any debt or equity offering by the Company or any Subsidiary of $100 million or more in an amount up to the unpaid principal, interest and other obligations ("Obligations") then outstanding to the Banks and the Noteholders. Prior to the Company or any Subsidiary completing any debt or equity offering for less than $100 million, the Company must obtain the prior consent of the Banks and the Noteholders, which consent shall be granted or withheld in their sole and absolute discretion. (d) The financial covenants in Article 9 of the Existing Credit Agreement will be eliminated in their entirety and replaced with the following: (i) Cash: The Company will be required to maintain consolidated cash balances as of the end of any calendar week of not less than $6 million. (ii) Net worth: The Company will be required to maintain a consolidated net worth of at least $103 million at the end of any fiscal quarter. 2 (iii) Expenditures: The Company may not incur consolidated capital expenditures plus capitalized software expenditures in excess of $16 million in any fiscal quarter. From and after the date hereof the Company shall comply with the each of the covenants in subparagraphs (i) through (iii) above and the failure to so comply shall constitute an Event of Default under the Existing Credit Agreement. (e) The Company will be required to complete the Remaining Collateral Deliveries by no later than March 31, 1997. (f) The Loans shall no longer revolve, and the Company shall no longer have the right to reborrow funds previously borrowed and repaid. The Issuing Bank shall not renew or issue any Letters of Credit. (g) Each Bank's Commitment shall be no more than the sum of Loans and the Dollar Equivalent amount of Letters of Credit currently owed to that Bank. No unused Commitment Fee shall be payable. (h) The Warrant exercise price shall be the average of the closing price of the Company's common stock for the 15 consecutive trading days preceding issuance of the Warrants, or such other 15 day period as to which the Company and the Banks may mutually agree. (i) The Warrant holders will agree to a 90 day lock-up (selling restriction) from the closing of any underwritten equity or convertible debt offering by the Company that results in principal repayments to the Banks and Noteholders. (j) To the extent that any make-whole payment is paid to the Noteholders under the New Note Agreement (a "Noteholder Payment"), the Company shall make a cash payment to the Banks, ratably in accordance with their then respective Commitments, in an aggregate amount equal to the product of (x) the Noteholder Payment, multiplied by (y) the result of a fraction, the numerator of which is the total Obligations then outstanding to the Banks and the denominator of which is the total Obligations then outstanding to the Noteholders. 4. The Agent, the Banks and the Issuing Banks hereby waive each of the Acknowledged Defaults (as defined in the January Waiver) and each of the following additional Events of Default under the Existing Credit Agreement: (i) default under Section 8.13 of the Existing Credit Agreement arising out of the Company's recent change in accounting method for reseller agreements, (ii) default under the Existing Credit Agreement due to the failure to give proper written notice of the recently filed litigation against the Company to the Agent and the Banks in the manner required by the Existing Credit Agreement, (iii) default due to the Company's failure to satisfy the covenants in Article 9 of the Existing Credit Agreement from the date of the January Waiver through and including the date hereof, (iv) the default due to the Company's failure to timely comply with the collateral delivery requirements in Section 4.3 of the January Waiver and the notice requirements in Annex A of the January Waiver, (v) default under Section 10.1 of the Existing Credit Agreement arising out of the Company's defaults under the Noteholder Agreement and the Noteholders Waiver (as each such term is defined in the January Waiver), and (vi) default under Section 10.1 of the Existing Credit Agreement arising out of the failure to timely notify the Banks and the Agents of the defaults referenced in clauses (i) through (v) hereof (collectively, together with the Acknowledged Defaults, the "Stated Defaults"). 5. Section 3.1 of the September Waiver and Section 1.2(c) and Article IV of the January Waiver are all hereby terminated and are of no further force and effect. Any Event of Default by the Company after the date hereof Under Article X of the Draft Restatement shall constitute an Event of Default under the Existing Credit Agreement. 3 6. From the date hereof through and including the execution of the Definitive Restatement, the Banks, the Issuing Bank and the Agent hereby waive the Company's requirement to comply with the covenants set forth in Article 9 of the Existing Credit Agreement. 7. This letter agreement may be executed by facsimile signatures. The parties agree to exchange original signature pages hereto promptly after the date hereof via first class mail. This letter agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same letter agreement. If you are in agreement with the foregoing, please sign where indicated below and return an executed copy of this letter agreement to each of the undersigned at their respective addresses as set forth in the Draft Restatement. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Dietmar Schiel ----------------------------------------- Title: Vice President -------------------------------------- BANK OF AMERICA, ILLINOIS, as a Bank By: /s/ Leslie Reuter ----------------------------------------- Title: Attorney-in-fact -------------------------------------- BANK OF AMERICA ILLINOIS, as Issuing Bank By: /s/ Leslie Reuter ----------------------------------------- Title: Attorney-in-fact -------------------------------------- AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: /s/ Darren M. Snyder ----------------------------------------- Title: Assistant Vice President -------------------------------------- ACCEPTED AND AGREED: SYSTEM SOFTWARE ASSOCIATES, INC. By: /s/ Joseph Skadra ------------------------------------ Title: Chief Financial Officer ---------------------------------- SYSTEM SOFTWARE ASSOCIATES JAPAN LIMITED LIABILITY COMPANY By: /s/ Joseph Skadra ------------------------------------ Title: Manager ---------------------------------- 4 EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (number 33-14621 and 33-24516) of System Software Associates, Inc. and in the Prospectus constituting part of the Registration Statement on Form S-3 (numbers 33-62207 and 33-64551) of System Software Associates, Inc. of our report dated January 7, 1997, except as to Notes 6, 7 and 11 which are as of January 29, 1997, appearing in page F-19 of this Form 10-K/A. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois January 29, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR OCT-31-1995 OCT-31-1995 57,100 0 197,100 12,500 0 270,000 55,600 31,300 393,200 177,700 0 100 0 0 143,300 393,200 374,100 374,100 0 333,000 100 0 200 40,800 14,200 0 0 0 0 26,600 .63 0
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