-----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, G/eXD3zcpNIMzFGh9YqPPF2aOfZq2Sxdv7s4Cth4KYlMBY7+JnDaAdRd7n4/G8Aa X4augUL5XfxpMWTZANX0Wg== 0000950131-98-001819.txt : 19980323 0000950131-98-001819.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950131-98-001819 CONFORMED SUBMISSION TYPE: DEFR14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980319 SROS: NONE 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: DEFR14A SEC ACT: SEC FILE NUMBER: 000-15322 FILM NUMBER: 98569031 BUSINESS ADDRESS: STREET 1: 500 W MADISON ST 32ND FLR CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3126412900 DEFR14A 1 DEFINITIVE NOTICE AND PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 System Software Associates, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------- (3) Filing Party: ------------------------------------------------------------------------- (4) Date Filed: ------------------------------------------------------------------------- Notes: SYSTEM SOFTWARE ASSOCIATES, INC. 500 West Madison Street, 32nd Floor Chicago, Illinois 60661 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 14, 1998 To the Stockholders of System Software Associates, Inc.: The Annual Meeting of Stockholders of System Software Associates, Inc., a Delaware corporation (the "Company"), will be held at the First National Bank of Chicago, 57th Floor Meeting Room, One First National Plaza in Chicago, on April 14, 1998 at 9:00 A.M. for the following purposes, as more fully described in the accompanying Proxy Statement: 1. To elect six (6) directors to serve until the next annual meeting of stockholders or until their successors are elected and qualified; 2. To consider and vote upon a proposal to approve the System Software Associates, Inc. Qualified Employee Stock Purchase Plan; and 3. To consider and act upon such other business as may properly come before the meeting or any adjournment thereof. Stockholders of record of the Company's Common Stock, par value $0.0033 per share, at the close of business on March 2, 1998, the record date fixed by the Board of Directors, are entitled to notice of, and to vote at, the meeting, also as more fully described in the Proxy Statement. The Company's audited Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and certain other information are contained for your reference either in the Annual Report distributed with the Proxy Statement or in Annex A at the end of the Proxy Statement. All stockholders are cordially invited to attend the meeting. Those who cannot attend are urged to sign, date and otherwise complete the enclosed proxy and return it promptly in the envelope provided. Any stockholder giving a proxy has the right to revoke it at any time before it is voted. For the Board of Directors Joseph J. Skadra Secretary Chicago, Illinois March 17, 1998 ---------------- YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. ---------------- SYSTEM SOFTWARE ASSOCIATES, INC. ---------------- 500 WEST MADISON STREET, 32ND FLOOR CHICAGO, ILLINOIS 60661 ---------------- PROXY STATEMENT ---------------- Approximate date proxy material first sent to stockholders: March 17, 1998 ---------------- The following information is provided in connection with the solicitation of proxies for the Annual Meeting of Stockholders of System Software Associates, Inc., a Delaware corporation (the "Company" or "SSA"), to be held on April 14, 1998, and adjournments thereof (the "Meeting"), for the purposes stated in the Notice of Annual Meeting of Stockholders preceding this Proxy Statement. GENERAL INFORMATION SOLICITATION OF PROXIES A form of proxy is being furnished herewith by the Company to each stockholder and, in each case, such proxy is solicited on behalf of the Board of Directors of the Company for use at the Meeting. The entire cost of soliciting these proxies will be borne by the Company. Solicitation will be made by mail, and may also be made by telephone or telegraph by directors, officers and regular employees of the Company, but these persons will not be separately compensated for such solicitation services. The Company may pay persons holding shares in their names or the names of their nominees for the benefit of others, such as brokerage firms, banks, depositories and other fiduciaries, for costs incurred in forwarding proxy solicitation material to their principals. AUTHORITY CONFERRED BY PROXIES Unless a contrary choice is specified in the proxy, each proxy duly executed and returned by stockholders and received by the Company before the Meeting will be voted FOR the election of all of the nominee-directors specified herein and FOR the approval of the Company's Qualified Employee Stock Purchase Plan. Where a contrary specification is indicated as provided in the proxy, the shares represented by the proxy will be voted in accordance with the specification made. Abstentions are considered as shares present and entitled to vote but are not counted as affirmative votes cast on a given matter. A broker or nominee holding shares registered in its name, or in the name of its nominee, which are beneficially owned by another person and for which it has not received instructions as to voting from the beneficial owner does not have the discretion to vote the beneficial owner's shares with respect to the proposal. Any broker or nominee "non-votes" with respect to the proposal will not be considered as shares entitled to vote on that matter and will not be considered by the inspector when counting votes cast on the matters. As to other matters, if any, to be voted upon at the Meeting, the persons designated as proxies in the accompanying form of proxy will take such action as they, in their discretion, may deem advisable. The persons named as proxies were selected by the Board of Directors and each of them is a director or officer of the Company. REVOCABILITY OF PROXIES Execution of the enclosed proxy will not affect your right as a stockholder to attend the Meeting and to vote in person. Any stockholder giving a proxy has the right to revoke it at any time by: (i) a later dated proxy, duly executed and delivered or presented at the Meeting; (ii) a written revocation sent to and received by the Secretary of the Company prior to the Meeting; or (iii) attendance at the Meeting and voting in person. VOTING SECURITIES AND RECORD DATE The Company's voting securities consist of one class of Common Stock, par value $0.0033 per share (the "Common Stock"). The Company had outstanding 47,385,194 shares of Common Stock as of the close of business on March 2, 1998 (the "Record Date"). Only stockholders of record on the books of the Company at the close of business on the Record Date will be entitled to vote at the Meeting. Each share of Common Stock is entitled to one vote. Representation at the Meeting by the holders of a majority of the shares of Common Stock outstanding on the Record Date, either by personal attendance or by proxy, will constitute a quorum. SECURITY OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT The following table sets forth information as of February 27, 1998 with respect to the beneficial ownership of the Company's outstanding Common Stock by each stockholder known by the Company to be the beneficial owner of more than 5% of its Common Stock, each director, each executive officer discussed under "Management Compensation" below, and all the directors and officers as a group. Except as otherwise indicated, the stockholders have sole voting and investment power with respect to shares beneficially owned by them.
AMOUNT AND NATURE OF PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS - ------------------------------------ -------------------- -------- Roger E. Covey......................... 13,124,750(1) 27.7% c/o System Software Associates 500 W. Madison Street, 32nd Floor Chicago, Illinois 60661 Gardner Lewis Asset Management, L.P.... 4,213,124(2) 8.9% 285 Wilmington, W. Chester Pike Chadds Ford, PA 19317 FMR Corp. ............................. 3,657,942(3) 7.7% 82 Devonshire Street Boston, MA 02109 Hambrecht & Quist Group................ 3,393,452(4)(9) 6.7% One Bush Street San Francisco, CA 94104 Massachusetts Financial Services Company............................... 2,423,663(5) 5.1% 500 Boylston Street Boston, MA 02116 William N. Weaver, Jr.................. 347,250(6) * John W. Puth........................... 189,313(7)(8) * Riz Shakir............................. 113,669(7) * William M. Stuek....................... 50,000(7) * Andrew J. Filipowski................... 4,500(7) * Casey G. Cowell........................ 0 * Joseph J. Skadra....................... 0 * Douglas P. Smith....................... 0(4)(9) * All Officers and Directors as a Group (nine persons)........................ 13,829,482(1)(6)(7)(8)(9) 29.1%
- -------- *Less than 1%. (1) Includes 800,000 shares held by the Tang Research Foundation, of which Mr. Covey is a Director. (2) According to a Report on the SEC's Schedule 13G, as of December 31, 1997 Gardner Lewis Asset Management has sole dispositive power for all 4,213,124 listed shares, and exercises sole voting power over 3,831,325 shares and shared voting power over 48,600 of such shares. 2 (3) According to a Report on the SEC's Schedule 13G, as of December 31, 1997, FMR Corp. has shared dispositive and voting power over all listed shares. (4) According to a Report on the SEC's Schedule 13G, as of December 31, 1997, Hambrecht & Quist Group ("H&Q") has shared dispositive and voting power over all listed shares. Such shares are issuable upon conversion of the shares of the Company's Series A Preferred Stock and the exercise of certain warrants held by H&Q. Mr. Smith is an Advisory Director of Hambrecht & Quist LLC ("H&Q LLC"), an indirect wholly owned subsidiary of H&Q, and as such may have beneficial ownership of the listed shares. See note (9) below. (5) According to a Report on the SEC's Schedule 13G, as of December 31, 1997 Massachusetts Financial Services Company has sole dispositive and voting power over all listed shares. (6) Includes 47,250 unissued shares of the Company's Common Stock, subject to a currently exercisable option held by Sachnoff & Weaver, Ltd., of which Mr. Weaver is a member. Mr. Weaver disclaims beneficial ownership of all but his pro rata portion of the shares covered by the option. (7) Includes unissued shares of the Company's Common Stock, subject to options exercisable within 60 days of February 27, 1998, as follows: Mr. Puth 47,250; Mr. Shakir 47,002; Mr. Stuek 50,000 and Mr. Filipowski 4,500. (8) Includes 5,000 shares held by a family partnership, of which Mr. Puth is a general partner. (9) Mr. Smith's share holdings as indicated in the table exclude: (i) 1,404,000 shares issuable upon the conversion of shares of Series A Preferred Stock held by H&Q SSA Investors, L.P., an entity of which Mr. Smith is a limited partner and a member of H&Q LLC, the general partner and; (ii) 1,989,452 shares issuable upon the exercise of certain warrants held by H&Q LLC. ITEM NO. 1--ELECTION OF DIRECTORS The By-Laws of the Company currently provide that the Board of Directors shall consist of seven directors to be elected at the annual meeting of stockholders to hold office until the next annual meeting or until their successors are elected and qualified. One of the current directors, John W. Puth, has indicated to the Company that he does not wish to stand for re- election. Accordingly, the Board has adopted a resolution amending the by-laws to provide that, effective immediately prior to the Meeting, the size of the Board of Directors shall be reduced to six directors. The proxies solicited by and on behalf of the Board of Directors will be voted FOR the election of the six nominees listed below, unless authority to do so is withheld as provided in the proxy. All nominees are currently members of the Company's Board of Directors. If for any reason one or more of the nominees should be unable to serve or refuse to serve as a director (an event which is not anticipated), the persons named as proxies will vote for another candidate or candidates nominated by the Board of Directors, and discretionary authority to cast such votes is included in the proxy. The nominees receiving the highest number of votes of shares of Common Stock, up to the number of directors to be elected, shall be elected. NOMINEES The Board of Directors has nominated for election the following individuals, all of whom are currently directors: ROGER E. COVEY, age 43, founded the Company and since November 1, 1994 has served as Chief Executive Officer and Chairman of the Board of the Company, positions which he also held from its inception in October 1981 until August 1991, at which time he was elected as Vice-Chairman of the Board. From September 1, 1991 until October 31, 1994, he served as the Company's Vice President--Research and Development. He holds a B.S. degree from the University of Illinois and an M.B.A. and an M.A. in Chinese Art History, both from the University of Chicago. CASEY G. COWELL, age 45, has been Director of the Company since December 1997. Mr. Cowell is Vice Chairman of the Board of Directors of 3COM Corporation. Mr. Cowell co-founded U.S. Robotics in 1976 and served as its chairman and chief executive officer until its merger with 3COM in June 1997. Mr. Cowell 3 also serves on the boards of Mastering Computers, May & Speh, Northwestern Memorial Corporation, the parent company of Northwestern Memorial Hospital, and he is a trustee of the Illinois Institute of Technology. Mr. Cowell holds a B.A. degree in economics from the University of Chicago. ANDREW J. FILIPOWSKI, age 47, has been a Director of the Company since July 1996. Mr. Filipowski has been President and Chief Executive Officer of PLATINUM technology, inc., a provider of enterprise infrastructure software products, since that company's founding in April 1987. Mr. Filipowski was a founder of DBMS, Inc., a software products and services company and served as its Chairman, President and Chief Executive Officer from 1979 until March 1987. DOUGLAS P. SMITH, age 46, has been a Director of the Company since March 1998. Mr. Smith is an Advisory Director with Hambrecht & Quist LLC, the Company's financial advisor. Prior to joining Hambrecht & Quist LLC, he was the Chief Financial Officer and Head of Strategy for ComputerVision Corporation. He also acted in senior executive capacities with Prime Computer and Penn Central Corporation. He holds an M.A. in International Economics from Northeastern University and a B.A. in Economics from Union College. WILLIAM M. STUEK, age 55, was appointed President and Chief Operating Officer of the Company on January 5, 1998. Prior to joining the Company, he served in a variety of sales, marketing and operational management positions with IBM Corporation. From 1996 through 1997, Mr. Stuek served as IBM's General Manager of North American Operations, in which he oversaw all sales, marketing, customer service/support, administrative operations, and information technology. Before that, he was General Manager of North American Sales and spent three years as General Manager of Product Sales for Europe, Middle East and Africa. Mr. Stuek also served as Assistant General Manager of IBM's Software Division and as General Manager of AS/400 Worldwide Marketing. Mr. Stuek holds a B.S. degree from Colgate University. WILLIAM N. WEAVER, JR., age 63, has been a Director of the Company since December 1986 and its Assistant Secretary since March 1985. Mr. Weaver is a member of the law firm of Sachnoff & Weaver, Ltd., an Illinois professional corporation ("S&W"), which is counsel to the Company. Mr. Weaver has practiced law in the State of Illinois since 1964 and serves as a director of USFreightways Corporation, as well as several privately-held corporations. He holds an A.B. degree from Oberlin College and a J.D. from John Marshall Law School. The Company's executive officers are appointed by, and serve at the discretion of, the Board of Directors. All Directors hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. COMMITTEES AND ATTENDANCE The Board of Directors met nine (9) times during fiscal 1997. The Audit Committee, consisting of directors John W. Puth, William N. Weaver and Andrew J. Filipowski met one (1) time during fiscal 1997. The Audit Committee oversees the activities of the Company's independent auditors. The Compensation Committee met eight (8) times during fiscal 1997, including actions taken by consent in connection with administration of the Company's refinancings. This committee consisted of John W. Puth, Andrew J. Filipowski and William N. Weaver. This Committee reviews and makes recommendations to the Board of Directors with regard to the salaries, incentive compensation and related benefits of corporate officers and other employees. COMPENSATION OF DIRECTORS The Company does not pay directors any cash consideration for serving on the Board of Directors. In recognition of their continued board service, the Company on December 16, 1994, adopted a policy pursuant to which every five years, all non-employee directors shall be awarded an option under the Company's existing 4 stock option plans to purchase 22,500 shares, exercisable at the fair market value of the Company's stock on the date of grant, such options to become exercisable in equal portions on the first five anniversaries of the grant date. The first award under this plan was granted on December 16, 1994, and is exercisable at $4.63 per share. Pursuant to the same policy, Mr. Cowell was awarded options to purchase 22,500 shares and an additional 13,500 shares concurrently with his appointment to the Board of Directors in December 1997. These options vest in five equal installments on the first five anniversaries of his appointment, and are exercisable at $9.69 per share, the fair market value of the Company's stock on the date of grant. In June 1997, Messrs. Filipowski and Puth and S&W were awarded additional options to purchase 18,000, 36,000 and 36,000 shares, respectively, at $7.81, the fair market value of the Company's stock on the date of the grant. Mr. Smith and the Company determined to forego the automatic grant of stock options to Mr. Smith as an outside director. In consideration of this and earlier option grants, S&W agreed to waive its fees for Mr. Weaver's time expended attending meetings of the Board of Directors. Accordingly, neither Mr. Weaver nor S&W received any cash compensation in consideration of Mr. Weaver's services as a director in fiscal 1997. MANAGEMENT COMPENSATION The table below discloses the compensation awarded by the Company during the Company's last three fiscal years to the Chief Executive Officer and to each of the other two executive officers as of the end of fiscal 1997: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS FISCAL -------------------- ----------------------------- NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SECURITIES UNDERLYING OPTIONS (#) - --------------------------- ------ ---------- --------- --------------------------------- Roger E. Covey, 1997 400,000 200,000 200,000 Chairman of the Board and 1996 400,000 -0- -0- Chief Executive Officer 1995 342,917 127,000 150,000 Joseph J. Skadra, 1997 237,000 57,000 -0- Vice President and 1996 229,000 47,000 5,000 Chief Financial Officer 1995 220,000 64,000 -0- Riz Shakir, 1997 228,333 52,000 125,000 Executive Vice President 1996 211,250 43,000 30,000 of Research and Development
EMPLOYMENT CONTRACTS William M. Stuek, the Company's President and Chief Operating Officer, was hired on January 5, 1998 for a term of five years. The terms of his engagement are set forth in an employment agreement that includes the following: a base salary of $500,000; bonuses of up to $300,000 annually if the Company achieves specified quarterly and annual earnings targets and other management objectives; options to purchase 300,000 shares of Common Stock in accordance with the terms of the Company's Long-Term Incentive Plan, vesting over five years; an engagement bonus of $1,583,250; and a one-time bonus of $5,000,000 if the Company's common stock equals or exceeds $50 for any 180 consecutive day period. The employment agreement also has a non-competition and confidentiality clause which is to apply throughout Mr. Stuek's employment and for a period of one year thereafter. Joseph J. Skadra, the Company's Chief Financial Officer, was hired in August of 1994. The terms of his engagement include the following: a base salary of $220,000 annually; bonuses to be awarded if the Company achieves quarterly and annual earnings targets and if Mr. Skadra achieves specified personal management objectives; and options to purchase 45,000 shares of Common Stock, vesting over five years. If all of the Company's Common Stock is acquired and Mr. Skadra does not become Chief Financial Officer of the acquiring firm, then 18,000 of the stock options will immediately vest, if they have not already. 5 Riz Shakir, the Company's Executive Vice President of Research and Development, was hired June 1, 1994 and was appointed to his current position on November 1, 1996. The terms of his engagement include the following: a base salary of $180,000 annually; bonuses to be awarded if the Company achieves quarterly and annual earnings targets and if Mr. Shakir achieves specified personal management objectives; and options to purchase 30,000 shares of Common Stock, vesting over five years. OPTION GRANTS IN FISCAL 1997 The following table provides further information on individual stock option grants made in fiscal 1997 to the named executive officers. The table does not reflect as additional grants options canceled and immediately reissued at lower exercise prices. See "Ten-Year Option Repricings" below. The exercise prices set forth in the table are net of all repricings.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE INDIVIDUAL GRANTS APPRECIATION(1) -------------------------------------------- ----------------- NUMBER OF % OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO OPTIONS EMPLOYEES EXERCISES GRANTED IN FISCAL PRICE EXPIRATION NAME (#)(2) 1997 ($/SH.) DATE 5% ($) 10% ($) - ---- ---------- ---------- --------- ---------- ------- --------- Roger E. Covey.......... 200,000(3) 27.2% 7.81 06-13-07 982,333 2,489,426 Joseph J. Skadra........ -0- N.A. N.A. N.A. N.A. N.A. Riz Shakir.............. 20,000 2.7% 4.63 01-14-07 58,173 147,421 20,000 2.7% 4.63 04-10-07 58,173 147,421 85,000 11.6% 8.06 08-04-07 430,856 1,091,873
- -------- (1) The potential realizable value columns of the table illustrate values that might be realized upon exercise of the options immediately prior to their expiration, assuming the Company's Common Stock appreciates at the compounded rates specified over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the option following termination of employment or nontransferability of the options and do not make any provision for taxes associated with exercise. Because actual gains will depend, among other things, on future performance of the Common Stock, the amounts reflected in this table may not necessarily be achieved. For the actual historical price performance of the Company's Common Stock over the last five fiscal years, see the comparative table below under the caption "Stockholder Return Performance Presentation." (2) Options granted become exercisable ratably on the first five anniversaries of the grant date. (3) Options granted to replace options previously surrendered. See "Report on Executive Compensation of the Compensation Committee of the Board of Directors" below. AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND OCTOBER 31, 1997 OPTION VALUES The following table provides information on option exercises in fiscal 1997 by the named executive officers and the value of such officers' unexercised stock options as of October 31, 1997.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE- UNEXERCISED OPTIONS AT MONEY OPTIONS AT SHARES OCTOBER 31, 1997 (#) OCTOBER 31, 1997 ($) ACQUIRED ON VALUE ------------------------------- -------------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ ------------ ------------- -------------- -------------- --------------- Roger E. Covey.......... -0- N.A. -0- 200,000 -0- 787,400 Joseph J. Skadra........ -0- N.A. 19,000 22,000 135,375 156,750 Riz Shakir.............. -0- N.A. 30,002 169,998 213,764 919,006
6 TEN-YEAR OPTION REPRICINGS The following table provides certain information on the repricing during fiscal 1996 and 1997 of options held by certain of the executive officers. No options had been repriced prior to fiscal 1996. Further explanation concerning these repricings is included in the Report on Executive Compensation of the Compensation Committee of the Board of Directors, below.
NUMBER OF SECURITIES MARKET PRICE LENGTH OF ORIGINAL UNDERLYING OF STOCK AT EXERCISE PRICE OPTION TERM OPTIONS TIME OF AT TIME OF NEW EXERCISE REMAINING AT DATE REPRICED OR REPRICING OR REPRICING OR PRICE OF REPRICING OR NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) ($) AMENDMENT - ---- ---- ----------- ------------- -------------- ------------ ------------------ Roger E. Covey N.A. -0- N.A. N.A. N.A. N.A. Joseph J. Skadra 08-26-96 5,000 9.81 16.13 9.81 9 years, 9 months 03-27-97 36,000 7.50 9.83 7.50 7 years, 5 months 03-27-97 5,000 7.50 9.81 7.50 9 years, 2 months 03-31-97 36,000 5.81 7.50 5.81 7 years, 5 months 03-31-97 5,000 5.81 7.50 5.81 9 years, 2 months 04-10-97 36,000 4.63 5.81 4.63 7 years, 4 months 04-10-97 5,000 4.63 5.81 4.63 9 years, 1 month Riz Shakir 06-07-96 30,000 16.13 24.08 16.13 9 years, 5 months 08-26-96 30,000 9.81 16.13 9.81 9 years, 3 months 08-26-96 15,000 9.81 18.08 9.81 9 years, 6 months 03-27-97 30,000 7.50 9.83 7.50 7 years, 2 months 03-27-97 15,000 7.50 9.81 7.50 8 years 03-27-97 30,000 7.50 9.81 7.50 8 years, 8 months 03-27-97 20,000 7.50 11.50 7.50 9 years, 10 months 03-31-97 30,000 5.81 7.50 5.81 7 years, 2 months 03-31-97 15,000 5.81 7.50 5.81 8 years 03-31-97 30,000 5.81 7.50 5.81 8 years, 8 months 03-31-97 20,000 5.81 7.50 5.81 9 years, 10 months 04-10-97 30,000 4.63 5.81 4.63 7 years, 1 month 04-10-97 15,000 4.63 5.81 4.63 7 years, 11 months 04-10-97 30,000 4.63 5.81 4.63 8 years, 7 months 04-10-97 20,000 4.63 5.81 4.63 9 years, 9 months
REPORT ON EXECUTIVE COMPENSATION OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS The Compensation Committee of the Company's Board of Directors is responsible for implementing specific executive compensation plans. The Company operates in an industry that is highly competitive. The Company believes that its ability to maintain and improve its competitive position is dependent on its ability to attract highly qualified managerial personnel. These personnel are customarily sought from companies much larger and with greater financial resources than the Company, and the Company believes that its ability to attract such personnel is enhanced by the Company's emphasis on significant short-term and long-term performance incentives. The Company accordingly operates in accordance with the following executive compensation philosophy: 1. A significant portion of annual cash compensation should be determined by quantitative performance measures. For SSA executives, the performance-dependent portion of annual cash compensation approximates 40% of base cash compensation. These quantitative performance measures are tied directly to the SSA annual business plan. A portion is based on quarterly earnings per share and another portion is based on annual earnings per 7 share. In addition, a variety of other quantitative measures besides earnings per share are included in determining the bonus and future base compensation for each executive. These other measures vary from executive to executive depending on the strategic needs of the business, and tend to be directly related to the executive's duties and the achievements of the specific business unit for which the executive is responsible. The components are reviewed and adjusted by the Compensation Committee on an annual basis. Based on the Company's hiring experience and discussions with executive recruiting firms, the Company believes that base cash compensation for key employees (which approximates 70% of annual cash compensation) is at an industry competitive level. 2. Compensation should provide incentives for both short-term and, more importantly, for long-term performance. Short-term performance is incentivized by the annual performance-determined compensation mentioned above. Long-term performance is incentivized by the use of stock options. Typically, options granted vest over a five-year period, which is an appropriate long-term performance period. The Company's experience is that it has no control over its short- or medium-term stock price, but believes that over the long term the stock price should reflect growth of the Company's earnings. The size of option grants is determined by reference to all the facts and circumstances relating to the executive's compensation. These include, without limitation, the executive's base salary, the cash bonuses earned and potentially available, the size of all past option grants to the executive, the timing of such prior grants, the remaining unvested portion of past grants, the total shares subject to outstanding options held by all key employees and the total remaining shares available for future option grants. 3. The SSA standard for executive recruitment is to attempt to find and recruit the best person in the world for a given executive position. The compensation of Roger E. Covey, the Company's Chairman and Chief Executive Officer, for services he rendered during fiscal 1997 was determined pursuant to a compensation program adopted by the Committee in December 1994, shortly after Mr. Covey resumed the position of Chairman and Chief Executive Officer. At that time, the Committee reviewed the compensation packages of the chief executives of comparable publicly-traded software companies, some of which the Committee believes are included in the NASDAQ CDP index used in the stock price performance chart below, as well as the compensation of the Company's immediate past President and Chief Executive Officer. Based on the review of comparable and historical compensation levels, the Company's operating plan for fiscal 1995, and the services rendered and to be rendered by Mr. Covey, the Committee adopted a compensation program consisting of base salary, bonus and incentive and non-qualified options of the Company's Common Stock, which options vest over a five year period following their grant. In addition to the base salary and stock options discussed above, Mr. Covey's compensation program provided that he would be awarded bonuses in specified amounts if the Company achieved certain quarterly and annual per-share earnings targets, product release targets and other quantitative measures. In fiscal 1997, Mr. Covey received no raise in base salary from fiscal 1996, and was awarded a $200,000 bonus based on his efforts in support of the Company's refinancing, which closed in September 1997. In April 1997, Mr. Covey surrendered to the Company his option to purchase 200,000 shares of the Company's Common Stock to supply the Company's Long Term Incentive Option Plan with additional shares in order to attract and retain key personnel. Subsequently in June 1997, after the stockholders approved an amendment to the Long Term Incentive Option Plan increasing its size, Mr. Covey was granted an option to purchase 200,000 shares to become exercisable at $7.81 per share, the Company's fair market value on the reissuance date. On three occasions in fiscal 1997, the Board determined to reprice the outstanding stock options of holders. The software industry is extremely competitive and stock options are the major long-term compensation tool used to attract, retain, motivate and reward key employees. During the second quarter of fiscal 1997 the Company's stock price declined very sharply. Since there was no reasonable expectation that the options would have the desired effect, the Compensation Committee, in consultation with the Chief Executive Officer, repriced the outstanding stock options of holders three times to the Company's fair market value on the given repricing date. On April 10, 1997, the final repricing occurred, at which time options having an exercise price at or above $4.63 were repriced to become exercisable at $4.63 per share. 8 The foregoing report has been furnished by Messrs. Filipowski, Puth and Weaver, who currently constitute the Compensation Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1997, the Compensation Committee of the Board of Directors consisted of Andrew J. Filipowski, John W. Puth and William N. Weaver. None of these persons was a current or former officer or employee of the Company or any of its subsidiaries. Mr. Weaver is a member of S&W, which provides legal services to the Company. See "Certain Relationships and Related Transactions." STOCKHOLDER RETURN PERFORMANCE PRESENTATION The following graph presents a comparison of the cumulative total stockholder return on the Company's Common Stock since October 31, 1992 with the cumulative total return of the NASDAQ Computer and Data Processing Index ("NASDAQ CDP Index") and the Standard and Poor's 500 Composite Index. Note: The stock price performance shown below is not necessarily indicative of future price performance. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG SYSTEM SOFTWARE ASSOCIATES, INC., S & P 500 AND NASDAQ CDP INDEX [PERFORMANCE GRAPH APPEARS HERE]
Measurement Period SYSTEM SOFTWARE S&P NASDAQ CDP (Fiscal Year Covered) ASSOCIATES, INC. 500 INDEX INDEX - --------------------- ---------------- --------- ---------- Measurement Pt- 10/31/92 $100 $100 $100 FYE 10/31/93 $100 $115 $112 FYE 10/31/94 $ 87 $119 $135 FYE 10/31/95 $217 $151 $205 FYE 10/31/96 $124 $187 $238 FYE 10/31/97 $125 $247 $321
Assumes $100 invested on October 31, 1992 in System Software Associates, Inc. Common Stock, NASDAQ CDP Index and S & P 500 Index. 9 ITEM NO. 2--PROPOSAL TO APPROVE THE SYSTEM SOFTWARE ASSOCIATES, INC. QUALIFIED EMPLOYEE STOCK PURCHASE PLAN The Board of Directors has adopted the System Software Associates, Inc. Qualified Employee Stock Purchase Plan (the "STOCK PURCHASE PLAN"). It was adopted by the Board of Directors, subject to stockholder approval, on September 29, 1997, effective October 1, 1997. If the requested stockholder approval is received, the Stock Purchase Plan will read as set forth in Annex B. DESCRIPTION OF THE STOCK PURCHASE PLAN The purpose of the Stock Purchase Plan is to enable eligible employees of the Company and its affiliates to acquire a proprietary interest in the Company by purchasing Common Stock through payroll deductions. A total of 2,000,000 shares of the Company's Common Stock will be made available for purchase by employees upon the exercise of purchase rights granted under the Stock Purchase Plan. The number of shares will be subject to appropriate adjustment for stock dividends, stock splits, recapitalization, or similar changes in the outstanding shares of Common Stock. As of March 13, 1998, the market value of the 2,000,000 shares available for issuance under the Stock Purchase Plan was $15,625,000. Approximately 1,000 employees are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan will be administered by a committee (the "COMMITTEE") consisting of not less than two members of the Board of Directors. The Committee will have full authority to interpret and administer the Stock Purchase Plan, and correct any defect or omission or reconcile any inconsistency in the Stock Purchase Plan, and its decisions will be final, conclusive and binding upon all employees and all persons claiming under or through any employee. All employees of the Company and, if designated by the Board of Directors, its affiliates, are eligible to participate in the Stock Purchase Plan. After the initial effective date, an eligible employee may become a participant in the Stock Purchase Plan effective the first day of the fiscal quarter following the completion and filing with the Committee of an enrollment form that authorizes deductions from the employee's paycheck, so long as the enrollment form is delivered to the Committee on or before the last business day prior to the first day of such fiscal quarter. A participant may elect to have deductions made from his or her pay on each payday at a rate of not less that 1% nor greater than 25% of the compensation that he or she is entitled to receive. A request for a change in payroll deductions shall be effective as soon as practicable after it is filed with the Committee. The Common Stock to be sold under the Stock Purchase Plan may be (i) shares acquired on the open market, (ii) treasury shares, and/or (iii) shares newly issued for such purpose. The purchase price for shares of Common Stock to be purchased with payroll deductions will be equal to 90% (or such other amount as the Committee shall authorize, but in no event less than 85%) of the fair market value of the Common Stock on the date on which a grant of a purchase right under the Stock Purchase Plan is made or on the date on which the Common Stock is purchased, whichever is less. If the limit on the number of shares of Common Stock available to be purchased under the Stock Purchase Plan is reached, then the last purchase of Common Stock shall be allocated among the participants pro rata based upon the number of shares that would have been purchased under the Stock Purchase Plan without this limitation. The fair market value of the Common Stock on a given date shall generally be determined by the Committee based upon the reported closing price of the Common Stock on the Nasdaq National Market. A participant may elect to withdraw his or her shares or any cash credited to his or her account at any time. If a participant terminates his or her employment or otherwise becomes ineligible to participate in the Stock Purchase Plan, any unused payroll deductions will be returned to him or her. A participant may terminate payroll deductions at any time by providing written notice to the Committee. A participant may not then seek reentry in the Stock Purchase Plan until six months have elapsed from the date his or her cessation became effective. 10 A participant may not be granted a purchase right under the Stock Purchase Plan if he or she owns, immediately after the grant of the purchase right, 5% or more of the voting power or value of all classes of stock of the Company or any of its affiliates, or if purchase rights under the Stock Purchase Plan or any other plans qualified under Section 423 of the Internal Revenue Code of 1986, as amended (the "CODE"), would result during any calendar year in the purchase of shares having an aggregate fair market value of more than $25,000. The Board of Directors may amend or terminate the Stock Purchase Plan at any time, provided that no amendment shall, without stockholder approval, increase the number of shares of Common Stock available for purchase under the Stock Purchase Plan, change the class of eligible employees, permit payroll deductions in excess of the current rate, or otherwise effect a change inconsistent with Code Section 423. FEDERAL INCOME TAX CONSEQUENCES The following provides a general summary of the federal income tax consequences of the Stock Purchase Plan. Although the Company believes the following statements are correct based on existing provisions of the Code and the legislative history, and administrative and judicial interpretations thereof, no assurance can be given that legislative, administrative, or judicial changes or interpretations will not occur that would modify such statements. The Stock Purchase Plan is designed to qualify as an employee stock purchase plan under the provisions of Sections 421 and 423 of the Code. Neither the grant nor the purchase of Common Stock under the Stock Purchase Plan will have a tax impact on the participant or the Company. If an employee disposes of the Common Stock acquired upon the purchase of his or her rights after at least two years from the date of grant and one year from the date of purchase, then the employee must treat as ordinary income the lesser of (i) the amount, if any, by which the fair market value of the Common Stock at the time of disposition exceeds the purchase price paid, or (ii) the amount, if any, by which the fair market value of the Common Stock at the date of grant exceeds the purchase price paid. Such recognition of compensation income upon disposition shall have the effect of increasing the basis of the shares in the employee's hands by an amount equal to the amount of compensation income recognized. Any gain in addition to this amount will be treated as a long-term capital gain. If an employee holds Common Stock at the time of his or her death, the holding period requirements are automatically deemed to have been satisfied and ordinary income will be realized by the estate, in the amount discussed above, upon the sale or other disposition of the Common Stock. The Company will not be allowed a deduction if the holding period requirements are satisfied or deemed satisfied. If an employee disposes of the Common Stock before the expiration of the later of two years from the date of grant and one year from the date of purchase, then the employee must treat as ordinary income the excess of the fair market value of the Common Stock on the date of purchase over the purchase price. Any additional gain will be treated as long-term or short-term capital gain, depending upon how long the Common Stock was held after the date of exercise. The Company may deduct an amount equal to the ordinary income recognized by the employee. The foregoing is only a summary of the effects of federal income taxation upon the employee and the Company with respect to the shares purchased under the Stock Purchase Plan. It does not purport to be complete and does not discuss the income tax laws of any municipality, state, or foreign country in which the employee may reside. VOTE REQUIRED; DIRECTORS' RECOMMENDATION Approval of the Stock Purchase Plan requires the affirmative vote of a majority of the shares represented in person or by proxy at the Meeting. The Board of Directors recommends a vote FOR approval of the Stock Purchase Plan. The Board believes that adoption of the Stock Purchase Plan will promote the interests of the Company and its stockholders by assisting the Company in attracting, retaining and stimulating the performance of employees and by aligning employees' interests, through their purchases of Common Stock, with the interests 11 of stockholders. The proxies solicited by and on behalf of the Board of Directors will be voted FOR approval of the Stock Purchase Plan, unless a contrary choice is specified in the proxy. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS William N. Weaver, Jr., a member of the Board of Directors, is a member of the law firm of Sachnoff & Weaver, Ltd., an Illinois professional corporation. Sachnoff & Weaver, Ltd. has acted and continues to act as counsel to the Company with regard to certain matters and has received legal fees for services rendered in connection therewith. Joseph J. Skadra, the Company's Chief Financial Officer, has borrowed funds from the Company commencing July 10, 1996. Amounts borrowed are represented by a promissory note, and bear interest at 8.25% per annum. Mr. Skadra borrowed the amounts for personal reasons. As of February 27, 1998, the amount owing, including accrued interest, is $220,500, which constitutes the largest amount which has been outstanding under such arrangements. Repayment of all amounts of principal is due January 21, 2000. Interest is payable monthly in arrears. STOCKHOLDER PROPOSALS Stockholder proposals submitted for evaluation as to inclusion in the proxy materials for the Company's next annual meeting of stockholders must be received by the Company not later than September 30, 1998, at the Company's principal executive offices at 500 West Madison Street, 32nd Floor, Chicago, Illinois 60661. INDEPENDENT PUBLIC ACCOUNTANTS By the selection of the Company's management, the accounting firm of KPMG Peat Marwick LLP, certified public accountants, serves as the Company's independent public accountants. One or more representatives of KPMG Peat Marwick LLP are expected to be present at the Meeting, with the opportunity to make a statement if they desire to do so, and to be available to respond to appropriate questions. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and officers and holders of 10% or more of the Company's Common Stock, to file with the Securities and Exchange Commission reports of ownership and changes in ownership on the SEC's Forms 3, 4 and 5. Based solely on its review of the copies of such forms it has received, the Company believes that all its officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 1997. ADDITIONAL INFORMATION The audited Financial Statements of the Company for the fiscal year ended October 31, 1997 are included in the attached Annex A to this Proxy Statement. Annex A also contains information relating to the Company's change in independent accountants. A copy of the Company's Annual Report accompanies this Proxy Statement. The Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended October 31, 1997, as filed with the Commission, is available without charge to any stockholder upon written request to Joseph J. Skadra, Secretary, System Software Associates, Inc., 500 West Madison Street, 32nd Floor, Chicago, Illinois 60661. The 12 exhibits filed with the Form 10-K are not included; however, copies of such exhibits will be furnished, if requested, upon payment of the Company's reasonable expenses in furnishing those materials. OTHER MATTERS Management is not aware of any other matters to be presented for action at the Meeting. If any other matters are properly brought before the Meeting, it is the intention of the persons named as proxies in the accompanying form of proxy to vote the shares represented thereby in accordance with their best judgment. For the Board of Directors Joseph J. Skadra Secretary Chicago, Illinois March 17, 1998 13 ANNEX A SYSTEM SOFTWARE ASSOCIATES, INC. GENERAL AND FINANCIAL INFORMATION FISCAL YEAR 1997 ---------------- CONTENTS
PAGE ---- Stock Information......................................................... A-2 Financial Information..................................................... A-2 Selected Consolidated Financial Information............................... A-2 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... A-3 Independent Auditors' Report.............................................. A-10 Report of Independent Accountants......................................... A-11 Annual Consolidated Financial Statements.................................. A-12 Consolidated Balance Sheets as of October 31, 1997 and 1996............. A-12 Consolidated Statements of Operations for the Fiscal Years Ended October 31, 1997, 1996 and 1995............................................................... A-14 Consolidated Statements of Cash Flows for the Fiscal Years Ended October 31, 1997, 1996 and 1995............................................................... A-15 Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended October 31, 1997, 1996 and 1995..................... A-16 Notes to Consolidated Financial Statements.............................. A-17 Change in Certifying Accountants.......................................... A-31
A-1 STOCK INFORMATION PRICE RANGE OF COMMON STOCK AND PUBLIC CONVERTIBLE SUBORDINATED NOTES The Company's common stock is traded on the Nasdaq National Market under the symbol SSAX. The following table shows each quarter's high and low closing prices as reported by Nasdaq.
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW ----------- ---- --- ----------- ---- --- First Quarter $14.06 $10.00 First Quarter $27.67 $18.63 Second Quarter 10.88 4.13 Second Quarter 25.63 20.50 Third Quarter 9.56 5.63 Third Quarter 24.13 11.63 Fourth Quarter 16.38 8.06 Fourth Quarter 13.38 8.69
At January 22, 1998 there were approximately 445 holders of record. The Company's Public Convertible Subordinated Notes are traded on the Nasdaq SmallCap Market under the symbol "SSAXG". The notes' high and low closing prices during the fourth quarter of 1997 were $114.50 and $95.00, respectively. FINANCIAL INFORMATION SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA) ------------------------------------ 1997 1996 1995 1994 1993 YEAR ENDED OCTOBER 31, ------ ------ ------ ------ ------ Total revenues............................ $430.5 $340.8 $374.1 $324.3 $263.4 Net income (loss)......................... 1.0 (32.8) 26.6 10.0 23.4 Net income (loss) available for common stockholders............................. (1.4) (32.8) 26.6 10.0 23.4 Earnings (loss) per share of common stock. (0.03) (0.76) 0.63 0.25 0.57 Dividends declared per common share....... -- 0.10 0.08 0.08 0.08 1997 1996 1995 1994 1993 AT OCTOBER 31, ------ ------ ------ ------ ------ Total assets.............................. $475.4 $384.4 $393.2 $333.1 $280.4 Long-term obligations and Redeemable Series A Preferred Stock................. 160.0 75.1 33.9 32.7 34.0
A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain information from the consolidated statements of operations as a percentage of total revenues and the percentage change of such items as compared to the prior year.
PERCENTAGE OF TOTAL REVENUES PERCENTAGE YEAR ENDED INCREASE (DECREASE) OCTOBER 31, OVER PRIOR PERIOD --------------------- ----------------------- 1997 1996 VERSUS VERSUS 1997 1996 1995 1996 1995 ----- ----- ----- --------- ---------- Revenues: License fees............. 70.4% 66.5% 66.8% 33.7% (9.3%) Client services and other................... 29.6% 33.5% 33.2% 11.7% (8.1%) ----- ----- ----- --------- ---------- Total revenues......... 100.0% 100.0% 100.0% 26.3% (8.9%) ----- ----- ----- --------- ---------- Costs and expenses: Cost of license fees..... 17.5% 19.6% 17.4% 12.6% 3.1% Cost of client services and other............... 22.8% 26.1% 20.5% 10.4% 15.9% Sales and marketing...... 20.6% 30.4% 23.4% (14.7%) 18.5% Research and development. 12.0% 16.0% 10.7% (5.0%) 35.3% General and administrative.......... 20.7% 25.1% 17.0% 4.0% 34.6% Special charges.......... 1.1% -- -- * * ----- ----- ----- --------- ---------- Total costs and expenses.............. 94.7% 117.2% 89.0% 2.0% 20.0% ----- ----- ----- --------- ---------- Operating income (loss).... 5.3% (17.2%) 11.0% 138.9% (243.1%) ----- ----- ----- --------- ---------- Gain on sale of available- for-sale securities....... -- 3.8% -- * * Non-operating income (expense), net............ (4.9%) (1.7%) (0.1%) 273.7% * ----- ----- ----- --------- ---------- Income (loss) before income taxes and minority interest.................. 0.4% (15.1%) 10.9% 103.1% (225.7%) Provision (benefit) for income taxes.............. 0.1% (5.5%) 3.8% 103.2% (231.0%) ----- ----- ----- --------- ---------- Net income (loss) before minority interest......... 0.3% (9.6%) 7.1% 103.0% (222.8%) Minority interest.......... -- -- -- * * ----- ----- ----- --------- ---------- Net income (loss).......... 0.3% (9.6%) 7.1% 103.0% (223.3%) Preferred dividends........ 0.6% -- -- * * ----- ----- ----- --------- ---------- Net income (loss) available for common stockholders... (0.3%) (9.6%) 7.1% 95.7% (223.3%) ===== ===== ===== ========= ==========
*not meaningful REVENUES Total revenues increased 26.3% from 1996 to 1997. All regions of the world, the Americas, Europe/Middle East/Africa, and Asia Pacific, recorded increased revenues in 1997. Total revenues decreased 9% from 1995 to 1996. The Americas recorded higher revenues in 1996 while the Company's other regions were flat to down. License Fees. License fees increased 33.7% to $303.0 million in 1997 compared to $226.7 million in 1996, which reflected increasing market acceptance of Version 6.0, which was released for general availability in the A-3 fourth quarter of 1996. License fees decreased 9% in 1996 when, despite solid revenue growth in North America, a sharp decline in Europe/Middle East/Africa more than offset North Americas favorable results. Client Services. Client services and other revenues increased 11.7% to $127.5 million in 1997 from $114.1 million in 1996. The increase in services revenues is attributable to an increase in the number of billable services personnel following significant investments in training in open systems and object skills accompanying the development and release of Version 6.0. Client services revenues declined 8% in 1996 when compared to 1995 due to lower productivity caused, in part, by allocation of resources to perform warranty work and investments in training client services professionals. COSTS AND EXPENSES Cost of License Fees. The principal components of cost of license fees are commissions paid to independent Affiliates, hardware costs, amortization of capitalized software costs and royalties paid to third parties. Cost of license fees in 1997, as a percentage of related license fee revenues, decreased to 24.9% from 29.5% in 1996. The decrease was primarily attributable to a higher mix of direct channel revenues which have a lower associated cost of license fees than do indirect channel revenues. In 1995, cost of license fees was 26%. The change from 1995 to 1996 was due primarily to increased amortization expense related to capitalized software development costs and increased warranty costs. Cost of Client Services and Other. The principal components of cost of client services and other are salaries and other direct employment costs paid to the Company's client services personnel and amounts paid to independent client services professionals. Cost of client services and other as a percentage of related revenues was 77.1% in 1997 compared to 78% in 1996. The modest improvement is primarily attributable to increased productivity of client services personnel and a reduction in warranty work. In 1995, cost of client services and other was 61.9%. The increase from 1995 to 1996 is primarily due to lower productivity related to newly hired technical professionals around the world, in particular those with open systems and object skills, allocation of resources to perform warranty work, and investment in training. Sales and Marketing. Sales and marketing expenses include salaries, commissions, and other direct employment costs of the Company's sales and pre- sales professionals, as well as marketing costs, which include advertising, trade shows, and production of sales brochures. Sales and marketing expenses, as a percentage of license fee revenues, were 29.2% in 1997 compared to 45.8% in 1996. The decrease was due to improved productivity of the Company's direct sales organization and decreased marketing expenditures. In anticipation of the Company's introduction of its open systems product, the Company hired a significant number of new sales and pre-sale professionals with skills and experience in the open systems arena. In late 1996 and early 1997, a number of these professionals who had not been significantly productive were either terminated or left the Company. As a result, the Company's sales and marketing expenses decreased in 1997 when compared to 1996 even though license fees increased nearly 34% year over year. In 1995, sales and marketing expenses were 35% of license fee revenues. The higher percentage in 1996 was primarily due to decreased revenue and increased expenditures to establish worldwide sales and marketing programs and the development of vertical industry groups in support of the Company's move into the open systems client/server market. Research and Development. Total research and development (R&D) expenditures in 1997 decreased $3.2 million, or 3.3%, to $93.1 million from $96.3 million in 1996. Research and development spending, related to the development of the Company's new product line, based upon distributed object computing technology, peaked during the last half of 1996 and has been declining since as various projects related to such development wind down. Total research and development expenditures in 1995 were $61.8 million. The 56% increase from 1995 to 1996 was due to the Company's continuing development of its distributed object computing technology and enhancement of its existing products. The Company capitalizes software development costs once technological feasibility is established, in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The Company capitalized $41.4 A-4 million of software development costs in 1997 compared to $41.9 million in 1996. The capitalization ratio (capitalized software costs as a percentage of total R&D expenditures) was 44% for both 1997 and 1996. The capitalization ratio was 35% in 1995. The increase in the capitalization ratio in 1996 was due to construction and testing activities related to the Company's distributed object computing architecture. The following table sets forth total research and development expenditures and related capitalized amounts for the periods indicated.
YEAR ENDED OCTOBER PERCENTAGE 31, CHANGE ---------------------- ------------- 1997 1996 VERSUS VERSUS 1997 1996 1995 1996 1995 ------ ------ ------ ------ ------ (IN MILLIONS) Total R&D expenditures................. $ 93.1 $ 96.3 $ 61.8 (3%) 56% Less amount capitalized................ (41.4) (41.9) (21.6) (1%) 94% ------ ------ ------ ---- --- Net R&D expenses..................... $ 51.7 $ 54.4 $ 40.2 (5%) 35% ====== ====== ====== ==== ===
General and Administrative. General and administrative expenses increased $3.4 million in 1997 to $88.9 million from $85.5 million in 1996 to support the Company's growth. These expenses include increased facilities and personnel costs related to acquisitions and increased costs for computer equipment. When viewed as a percentage of total revenues, however, general and administrative expenses were 20.7% in 1997 and 25.1% in 1996. In 1995, general and administrative expenses totaled $63.5 million and 17% of total revenues. The increase in 1996 over 1995 was primarily due to new facilities to support the Company's worldwide expansion, increased computer equipment costs and an increase in the provision for doubtful accounts. The provision for doubtful accounts was $3.3 million, $9.3 million, and $3.3 million in 1997, 1996 and 1995, respectively. Special Charges. Two special charges were recorded in 1997. A charge of $1.7 million was recorded in the third quarter of 1997 which relates to the settlement of the Company's class action lawsuits. A special charge of $3.2 million was recorded in the fourth quarter of 1997 under the terms of an agreement with an investment group led by Bain Capital which stipulated that if the Company elected not to proceed with a private offering of securities to the group, the Company could incur capped liability, if any, of a $3.0 million break-up fee and expense reimbursement of up to $250 thousand (see Note 12 of Notes to Consolidated Financial Statements). Operating Income (Loss). Operating income of $22.9 million in 1997 improved by $81.7 million when compared to the operating loss of $(58.8) million in 1996 principally due to increased software license fees and lower sales and marketing expenses. Operating income was $41.1 million in 1995. The change in operating income (loss) from 1995 to 1996 resulted from reduced total revenues and an increase in every category of cost and expense in 1996. Non-operating Income (Expense), Net. Non-operating expense, net consists primarily of interest expense related to the Company's former Credit Facility, Senior Notes, Convertible Note and other long-term obligations including the current 7% Convertible Subordinated Notes issued during the fourth quarter of 1997, and amortization of the value of the former Convertible Note's beneficial conversion feature, less interest income earned on invested cash. Non-operating expense, net of $21.3 million in 1997 increased $15.6 million over 1996 due to higher borrowing levels under the Company's former Credit Facility, higher interests rates applicable to the former Credit Facility and Senior Notes, interest on the Company's former Convertible Note, interest on the current 7% Convertible Subordinated Notes issued during the fourth quarter of 1997, amortization of the value of the former Convertible Note's beneficial conversion feature and reduced interest income related to lower cash balances. In 1995, non-operating expense, net was $200 thousand. The increase from 1995 to 1996 was due to higher borrowing levels under the Company's former Credit Facility, and increased fees and interest rates related to the Company's renegotiation of its former borrowing arrangements terms and conditions during the fourth quarter of 1996. A-5 Income Taxes. The Company's effective tax rate has remained relatively constant at approximately 36% in 1997, 1996 and 1995. The tax benefit recorded in 1996 represents federal and state tax refunds received in 1997 and amounts to be realized through future utilization of net operating loss and tax credit carryforwards. Net Income (Loss). In 1997, the Company recorded net income of $1.0 million compared to a net loss of $(32.8) million in 1996 resulting primarily from increased software license fee revenues and lower sales and marketing expenses. In 1995, net income was $26.6 million. The decline from 1995 to 1996 was primarily due to lower software license fees and client services revenues combined with increased expenses as explained above. Impact of Inflation. To date, the Company has not experienced any significant effect from inflation. The Company's major expenses have been salaries and related costs incurred principally for product development and enhancements, sales and marketing, and administration. The Company generally has been able to meet increases in costs by increasing prices of its products and services. Foreign Currency Exposures. Sales outside of the United States account for approximately 60% of the Company's total revenue. The Company's international sales (with the exception of certain Latin American countries) are predominately invoiced and paid in foreign currencies. Consequently, the Company's revenues are impacted by the fluctuation of foreign currencies versus the U.S. Dollar. The operating income impact of such fluctuations, however, is offset to the extent expenses of the Company's international operations are incurred and paid for in local currencies. The Company generally minimizes the financial impact of foreign currency exchange transactions through the use of foreign exchange forward contracts, which generally mature within three months of origination (see Note 4 of Notes to Consolidated Financial Statements). ACQUISITIONS, MERGERS AND INVESTMENTS The Company continues to expand its global coverage and strengthen its product offerings through various acquisitions, mergers, and investments (see Notes 2 and 3 of Notes to Consolidated Financial Statements). During 1996, the Company acquired the remaining 81% and 90% of its domestic affiliates SSA North Central and SSA Northwest, respectively, the remaining 27% of SSA Iberica in Spain and 100% of Vector Systems, a Canadian affiliate. In addition, the Company purchased 25% of CS Controlling Software Systeme, a German software development company. During 1995, through stock for stock transactions, the Company combined with three other companies: Softwright Systems Limited, a leading provider of business technology and systems in Europe specializing in object technology, multimedia, and other leading edge applications, and two of the Company's independent Affiliates, SSA Northeast and Priority Systems, Inc. Also during 1995 the Company acquired the remaining 15% minority interest in its Australian subsidiary, an additional 9% interest in its Affiliate, SSA North Central, 10% of its Affiliate, SSA Northwest, the BPCS division of a California Affiliate, Exigent Computer Group, 100% of its Canadian Affiliate, SSA Ontario, and certain assets of Transtech, Inc., a consulting group. In July 1995, the Company entered into a strategic alliance relationship with Harbinger Corporation pursuant to which the Company sold its EDI software assets to Harbinger and was licensed by Harbinger to market and sell AS/400, Unix, and PC-based EDI software products. The Company received as consideration 550,000 shares of Harbinger common stock. In August 1995, the Company purchased an additional 450,000 shares of Harbinger common stock. During 1996, the Company sold its shares of Harbinger common stock. QUARTERLY RESULTS The following table contains selected unaudited consolidated financial results by quarter for 1997 and 1996. In management's opinion, this information reflects all adjustments (which consisted only of normal recurring A-6 adjustments) necessary to present the results fairly when read in conjunction with the Consolidated Financial Statements and related notes included elsewhere herein.
FISCAL 1996 FISCAL 1997 QUARTER ENDED QUARTER ENDED -------------------------------- -------------------------------- JANUARY APRIL JULY OCTOBER JANUARY APRIL JULY OCTOBER 31 30 31 31 31 30 31 31 ------- ------ ------ ------- ------- ------ ------ ------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues................ $ 76.6 $ 82.5 $ 72.3 $109.4 $ 92.2 $ 98.1 $114.7 $125.6 Costs and expenses...... 77.0 92.1 106.4 124.1 96.8 94.2 104.9 111.7 ------ ------ ------ ------ ------ ------ ------ ------ Operating income (loss). (0.4) (9.6) (34.1) (14.7) (4.6) 3.9 9.8 13.9 Gain on sale of available-for-sale securities............. -- -- 3.6 9.5 -- -- -- -- Non-operating income (expense), net......... (0.3) (0.5) (1.2) (3.7) (2.1) (4.9) (4.6) (9.7) ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before income taxes........... (0.7) (10.1) (31.7) (8.9) (6.7) (1.0) 5.2 4.2 Provision (benefit) for income taxes........... (0.3) (3.7) (11.4) (3.2) (2.4) (0.4) 1.9 1.5 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss)....... (0.4) (6.4) (20.3) (5.7) (4.3) (0.6) 3.3 2.7 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends..... -- -- -- -- -- -- -- 2.4 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) available for common stockholders........... $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6) $ 3.3 $ 0.3 ====== ====== ====== ====== ====== ====== ====== ====== Earnings (loss) per share of common stock.. $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01) $ 0.08 $ 0.01 ====== ====== ====== ====== ====== ====== ====== ======
The Company has experienced a seasonal pattern in its operating results, with the fourth quarter typically having the highest revenues and operating income. The Company believes that fourth quarter revenues are positively impacted by the Company's sales compensation plans. This factor, which the Company believes is common in the computer software industry, typically results in first quarter revenues in any year being lower than revenues in the immediately preceding fourth quarter. In addition, the Company's European operations generally provide lower revenues during the summer months as a result of the generally reduced economic activity in Europe during such time. This seasonal factor could materially adversely affect third quarter revenues. The Company has also historically recognized a substantial portion of its revenues from sales booked and shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in license fees may not become evident until late in a particular quarter. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenues from alternate sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have a material adverse effect on the Company's quarterly operating results. To the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company, historically, operated with little backlog because its products are generally shipped as orders are received. As a result, revenue from license fees in any quarter is substantially dependent on orders booked and shipped in that quarter. Based upon the factors described above, the Company believes that its quarterly revenues and operating results are likely to vary significantly in the future, that period-to-period comparison of its results of operations are not necessarily meaningful and that, as a result, such comparisons should not be relied upon as indications of future performance. Moreover, although the Company's revenues have generally increased in recent periods, there can be no assurance that the Company's revenues will grow in future periods, at past rates or at all, or that the Company will be profitable on a quarterly or annual basis. In future periods, the Company's operating results may be below the expectations of stock market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents at October 31, 1997 totaled $83.3 million. During 1997, cash and equivalents increased $45.2 million. On September 12, 1997, the Company successfully completed a public offering of 7% Convertible Subordinated Notes due 2002, the gross proceeds of which were $138.0 million. On August 27, 1997, the Company issued a promissory note and warrants to a Private Investor for $10 million in cash. The A-7 Company and the Private Investor subsequently agreed to exchange the promissory note and warrants for 10,000 shares of Series A Preferred Stock and the Private Warrants (see Notes 7 and 8 of Notes to Consolidated Financial Statements). The Company issued a Convertible Note for $12.0 million on March 27, 1997, to a strategic investor. Subsequent to October 31, 1997, the strategic investor has elected to convert the note into approximately 3.6 million shares of the Company's Common Stock (see Note 13 of Notes to Consolidated Financial Statements). From the proceeds of the various financings described above, the Company repaid its former Credit Facility ($46.4 million) and Senior Notes ($26.0 million) as well as paid costs related to its former and current borrowings. In 1997, the Company generated $9.6 million from operating activities and used $49.7 million for capital equipment and software development costs. The Company utilizes a combination of its own software and custom written systems necessary for running a software company. SSA believes that there will be no significant cost associated with ensuring year 2000 compliance of its internal systems. Management believes that based upon its anticipated operating results, cash generated from operations, combined with current working capital and the proceeds from the Company's various financings as described above, there is sufficient liquidity to meet the Company's capital requirements for the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 128, "Earnings per Share," was issued in February 1997. The Company will be required to adopt the new standard for the quarter ended January 31, 1998. Early adoption of this standard is not permitted. The primary requirements of this standard are: (i) replacement of primary earnings per share with basic earning per share, which eliminates the dilutive effect of options and warrants; (ii) use of an average share price in applying the treasury method to compute dilution for options and warrants for diluted earnings per share; and (iii) disclosure reconciling the numerator and denominator of earnings per share calculations. The Company plans to adopt this statement in fiscal year 1998. The effect of applying this standard is not expected to be significant. American Institute of Certified Public Accountants Statement of Position 97- 2, "Software Revenue Recognition" (SOP 97-2) was issued in October 1997. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. Therefore, SOP 97-2 will effect transactions entered into by the Company beginning November 1, 1998. SOP 97-2 addresses various aspects of the recognition of revenue on software transactions and supersedes SOP 91-1, the policy currently followed by the Company. SOP 97-2 provides guidance on software arrangements consisting of multiple elements, evidence of fair value, delivery of elements, accounting for service elements, and software arrangements requiring significant production, modification, or customization of software. The Company is currently evaluating the impact this statement will have on the Company's consolidated financial statements. The Company anticipates that only minor modifications to its software arrangements will be necessary to continue to recognize revenue on a basis consistent with its current policies. A-8 [THIS PAGE INTENTIONALLY LEFT BLANK] A-9 INDEPENDENT AUDITORS' REPORT The Board of Directors System Software Associates, Inc. We have audited the accompanying consolidated balance sheets of System Software Associates, Inc. and its subsidiaries as of October 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended October 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of System Software Associates, Inc. and its subsidiaries as of October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended October 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Chicago, Illinois December 8, 1997 A-10 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of System Software Associates, Inc. In our opinion, the consolidated statements of operations, of changes in stockholders' equity and of cash flows of System Software Associates, Inc. and its subsidiaries, listed in the accompanying index present fairly, in all material respects, the results of operations, changes in stockholders' equity and cash flows for the year ended October 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of System Software Associates, Inc. and its subsidiaries for any period subsequent to October 31, 1995. /s/ Price Waterhouse LLP Chicago, Illinois January 7, 1997, except as to paragraph 3 of Note 12 which is as of January 29, 1997 A-11 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ------------------- ASSETS 1997 1996 ------ --------- --------- (IN MILLIONS, EXCEPT SHARE DATA) Current Assets: Cash and equivalents..................................... $ 83.3 $ 38.1 Accounts receivable, less allowance for doubtful accounts of $16.5 and $16.5...................................... 198.3 163.6 Income taxes receivable.................................. 1.5 4.4 Deferred income taxes.................................... 11.3 10.1 Prepaid expenses and other current assets................ 27.5 25.5 --------- --------- Total current assets................................... 321.9 241.7 --------- --------- Property and Equipment: Data processing equipment................................ 42.0 37.3 Furniture and office equipment........................... 17.5 18.7 Leasehold improvements................................... 10.3 9.0 Transportation equipment................................. 1.3 2.3 --------- --------- 71.1 67.3 Less--Accumulated depreciation and amortization.......... 46.0 39.5 --------- --------- 25.1 27.8 --------- --------- Other Assets: Software costs, less accumulated amortization of $89.3 and $61.1............................................... 99.4 82.8 Cost in excess of net assets of acquired businesses, less accumulated amortization of $11.8 and $8.7.............. 19.7 22.8 Deferred income taxes.................................... 3.9 1.2 Investments in associated companies...................... 1.6 2.2 Miscellaneous............................................ 3.8 5.9 --------- --------- 128.4 114.9 --------- --------- Total Assets........................................... $ 475.4 $ 384.4 ========= =========
See accompanying Notes to Consolidated Financial Statements. A-12 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, -------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------------------------------ --------- --------- (IN MILLIONS, EXCEPT SHARE DATA) Current Liabilities: Accrued commissions and royalties...................... $ 25.8 $ 26.3 Accounts payable and other accrued liabilities......... 60.6 62.5 Accrued compensation and related benefits.............. 24.7 23.8 Deferred revenue....................................... 49.3 58.8 --------- --------- Total current liabilities............................ 160.4 171.4 --------- --------- Long-Term Obligations.................................... 150.8 75.1 --------- --------- Deferred Revenue......................................... 32.4 27.7 --------- --------- Deferred Income Taxes.................................... 0.8 -- --------- --------- Redeemable Series A Preferred Stock, $.01 par value, convertible, 10,000 shares issued and outstanding (liquidation preference of $10.0 million)............... 9.2 -- --------- --------- Stockholders' Equity: Preferred stock, $.01 par value, 100,000 shares authorized, none issued or outstanding; 10,000 shares issued as Series A Preferred Stock.................... -- -- Common stock, $.0033 par value, 250,000,000 and 60,000,000 shares authorized, 42,868,000 and 42,577,000 shares issued.............................. 0.1 0.1 Capital in excess of par value......................... 48.5 32.8 Retained earnings...................................... 77.1 78.5 Cumulative translation adjustment...................... (3.9) (1.2) --------- --------- Total stockholders' equity........................... 121.8 110.2 Commitments and Contingencies (Note 12)................ -- -- --------- --------- Total Liabilities and Stockholders' Equity........... $ 475.4 $ 384.4 ========= =========
See accompanying Notes to Consolidated Financial Statements. A-13 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues: License fees......................................... $303.0 $226.7 $250.0 Client services and other............................ 127.5 114.1 124.1 ------ ------ ------ Total revenues..................................... 430.5 340.8 374.1 ------ ------ ------ Costs and Expenses: Cost of license fees................................. 75.3 66.9 64.9 Cost of client services and other.................... 98.3 89.0 76.8 Sales and marketing.................................. 88.5 103.8 87.6 Research and development............................. 51.7 54.4 40.2 General and administrative........................... 88.9 85.5 63.5 Special charges...................................... 4.9 -- -- ------ ------ ------ Total costs and expenses........................... 407.6 399.6 333.0 ------ ------ ------ Operating income (loss)................................ 22.9 (58.8) 41.1 ------ ------ ------ Gain on sale of available-for-sale securities.......... -- 13.1 -- Non-operating income (expense), net.................... (21.3) (5.7) (0.2) ------ ------ ------ Income (loss) before income taxes and minority interest.............................................. 1.6 (51.4) 40.9 Provision (benefit) for income taxes................... 0.6 (18.6) 14.2 ------ ------ ------ Income (loss) before minority interest................. 1.0 (32.8) 26.7 Minority interest...................................... -- -- (0.1) ------ ------ ------ Net income (loss)...................................... 1.0 (32.8) 26.6 Preferred dividends.................................... 2.4 -- -- ------ ------ ------ Net income (loss) available for common stockholders.... $ (1.4) $(32.8) $ 26.6 ====== ====== ====== Earnings (loss) per share of common stock.............. $(0.03) $(0.76) $ 0.63 ====== ====== ====== Weighted average common and equivalent shares outstanding........................................... 42.7 43.0 42.2 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. A-14 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ (IN MILLIONS) Cash Flows From Operating Activities: Net income (loss).................................... $ 1.0 $(32.8) $ 26.6 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment......................................... 9.3 9.2 7.9 Amortization of other assets....................... 40.8 23.0 17.3 Provision for doubtful accounts.................... 3.3 9.3 3.3 Gain on sale of available-for-sale securities...... -- (13.1) -- Deferred income taxes.............................. (3.1) (14.2) (2.6) Deferred revenue................................... (2.8) (2.5) 7.3 Minority interest.................................. -- -- 0.1 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.............................. (42.9) 12.6 (32.3) Income taxes..................................... 3.4 (14.2) 12.2 Prepaid expenses and other current assets........ (1.9) (2.1) (0.3) Miscellaneous assets............................. 2.1 2.4 (3.3) Accrued commissions and royalties................ (0.2) (6.8) 0.3 Accounts payable and other accrued liabilities... (1.0) 8.0 1.0 Accrued compensation and related benefits........ 1.6 -- 1.8 ------ ------ ------ Net cash provided by (used in) operating activities.................................... 9.6 (21.2) 39.3 ------ ------ ------ Cash Flows From Investing Activities: Purchases of property and equipment.................. (4.9) (11.4) (5.3) Software costs....................................... (44.8) (43.8) (25.1) Investments and acquisitions, net of cash acquired... -- (4.5) (6.1) Purchase of available-for-sale securities............ -- -- (5.4) Proceeds from sale of available-for-sale securities.. -- 23.2 -- Proceeds from sales of assets........................ -- -- 1.7 Other................................................ -- (0.1) 0.3 ------ ------ ------ Net cash flows used in investing activities.... (49.7) (36.6) (39.9) ------ ------ ------ Cash Flows From Financing Activities: Amount borrowed (repaid) under bank line of credit, net................................................. (46.4) 46.4 -- Repayment of Senior Notes Payable.................... (26.0) -- -- Proceeds from issuance of convertible subordinated notes............................................... 150.0 -- -- Proceeds from issuance of Redeemable Series A Preferred Stock..................................... 10.0 -- -- Proceeds from exercise of stock options.............. 1.6 2.1 4.1 Principal payments under other financing obligations. (2.7) (5.7) (3.5) Dividends paid....................................... -- (4.2) (3.2) ------ ------ ------ Net cash provided by (used in) financing activities.................................... 86.5 38.6 (2.6) ------ ------ ------ Effect of exchange rate changes on cash................ (1.2) 0.2 0.1 ------ ------ ------ Net increase (decrease) in cash and equivalents........ 45.2 (19.0) (3.1) Cash and equivalents: Beginning of year.................................... 38.1 57.1 60.2 ------ ------ ------ End of year.......................................... $ 83.3 $ 38.1 $ 57.1 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. A-15 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED GAIN ON TREASURY COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK TOTAL STOCK- ------------- EXCESS OF RETAINED FOR-SALE TRANSLATION ------------- HOLDERS' SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ADJUSTMENT SHARES AMOUNT EQUITY ------ ------ ---------- -------- ---------- ----------- ------ ------ ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Balance October 31, 1994................... 27.4 $0.1 $20.7 $ 91.8 $ -- $(0.8) (0.4) $(2.5) $109.3 Shares issued upon exercise of employee stock options.......... 0.5 4.1 4.1 Tax benefit of stock options exercised...... 2.8 2.8 Dividends paid--$0.08 per share.............. (3.2) (3.2) Shares issued in business combinations.. 0.2 (1.5) 0.3 0.4 2.5 1.3 Unrealized gain on available-for-sale securities............. 2.5 2.5 Net income.............. 26.6 26.6 Shares issued in three- for-two split.......... 14.0 ---- ---- ----- ------ ----- ----- ---- ----- ------ Balance October 31, 1995................... 42.1 $0.1 $26.1 $115.5 $ 2.5 $(0.8) -- $ -- $143.4 ---- ---- ----- ------ ----- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.3 2.1 2.1 Tax benefit of stock options exercised...... 1.2 1.2 Foreign currency translation adjustment. (0.4) (0.4) Dividends paid--$0.10 per share.............. (4.2) (4.2) Shares issued in business combinations.. 0.2 3.4 3.4 Sales of available-for- sale securities........ (2.5) (2.5) Net loss................ (32.8) (32.8) ---- ---- ----- ------ ----- ----- ---- ----- ------ Balance October 31, 1996................... 42.6 $0.1 $32.8 $ 78.5 $ -- $(1.2) -- $ -- $110.2 ---- ---- ----- ------ ----- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.3 1.6 1.6 Tax benefit of stock options exercised...... 0.5 0.5 Foreign currency translation adjustment. (2.7) (2.7) Dividends--Redeemable Series A Preferred Stock ($20.00 per share)................. (0.2) (0.2) Issuance of warrants.... 2.5 2.5 Beneficial conversion feature of convertible subordinated note...... 8.9 8.9 Beneficial conversion feature of Redeemable Series A Preferred Stock.................. 2.2 (2.2) -- Net income.............. 1.0 1.0 ---- ---- ----- ------ ----- ----- ---- ----- ------ Balance October 31, 1997................... 42.9 $0.1 $48.5 $ 77.1 $ -- $(3.9) -- $ -- $121.8 ==== ==== ===== ====== ===== ===== ==== ===== ======
See accompanying Notes to Consolidated Financial Statements. A-16 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Nature of operations System Software Associates, Inc. (the "Company" or "SSA") is a leading provider of cost-effective business enterprise information systems to the industrial sector worldwide. The Company's BPCS (Business Planning and Control System) Client/Server product line provides business process re-engineering and integration of an enterprise's operations, including multi-mode manufacturing processes, supply chain management and global financial solutions. The BPCS Client/Server product line delivers scalability, interoperability and reconfigurability in a comprehensive product suite to meet changing market demands. The distributed object computing architecture ("DOCA") of BPCS Client/Server provides the benefits of next generation technology in conformity with industry standards. The Company markets, sells and services its products to large and intermediate-sized industrial sector firms primarily through its own world-wide sales organization and to a much lesser extent, through a network of over 100 independent software companies (the "Affiliates"). The Company has strategic relationships with major computer hardware manufacturers, such as IBM, Hewlett Packard and Digital Equipment; advanced planning system software companies, such as i2; and major systems integrators, such as CAP Gemini and the Big Six consulting firms. Principles of consolidation The consolidated financial statements include the accounts of System Software Associates, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Foreign currency translation The functional currencies for substantially all of the Company's foreign subsidiaries are their local currencies. The foreign subsidiaries' balance sheets are translated at the year end rates of exchange and their results of operations at weighted average rates of exchange for the year. Translation adjustments resulting from this process are recorded directly in stockholders' equity and will be included in the determination of net income (loss) only upon sale or liquidation of the subsidiaries, which is not contemplated at this time. Foreign exchange transaction gains (losses) aggregating $0.6 million, $(0.4) million, and $(0.7) million are included in general and administrative expenses for 1997, 1996, and 1995, respectively. Revenue recognition The license fees generated and related commissions earned by the independent Affiliates are included in license fees and cost of license fees, respectively. Software license fees are recognized, as required by AICPA Statement of Position 91-1, upon delivery and acceptance of the product by the end user providing that no significant vendor obligations remain and collection of the related receivable is probable. Revenues and commissions from software maintenance and HelpLine agreements are deferred and recognized ratably over the term of the contract. Client services revenues are recorded when such services are provided. Concentrations of credit risk with respect to accounts receivable are limited due to a large customer base and its geographic dispersion. The principal components of cost of license fees are commissions paid to independent Affiliates, hardware costs, amortization of capitalized software costs, and royalties paid to third parties. The principal components of cost of client services and other are salaries paid to the Company's client services personnel and amounts paid to independent client services professionals. Accrued Affiliate and salesman commissions are not paid until the related accounts receivable balances have been collected. A-17 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property and equipment Property and equipment are stated at cost. Depreciation is computed using various methods over the estimated useful lives of the related assets which range from three to seven years. Leasehold improvements are amortized over the shorter of the life of the assets or related leases. Gains or losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment was $9.3 million, $9.2 million, and $7.9 million in 1997, 1996, and 1995, respectively. Software costs Purchased software is capitalized and stated at cost. The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. Amortization of capitalized costs is computed on a straight-line basis using an estimated useful life of five years or in proportion to current and anticipated revenues, whichever provides the greater amortization. Capitalized software costs are summarized as follows:
OCTOBER 31, -------------- 1997 1996 ------ ------ (IN MILLIONS) Purchased software........................................ $ 10.6 $ 9.5 Internally developed software............................. 178.1 134.4 ------ ------ 188.7 143.9 Less--Accumulated amortization............................ (89.3) (61.1) ------ ------ Net capitalized software costs.......................... $ 99.4 $ 82.8 ====== ======
Amortization of capitalized software costs charged to cost of license fees aggregated $28.2 million, $20.0 million, and $14.9 million during 1997, 1996, and 1995, respectively. Research and development Research and development expenses, principally the design and development of software products (exclusive of costs capitalized under SFAS No. 86), are expensed as incurred. Cost in excess of net assets of acquired businesses The excess of cost over the fair value of the net identifiable assets of acquired businesses is amortized on a straight-line basis, typically over a seven-year period. Amortization expense was $3.1 million, $2.7 million, and $2.2 million in 1997, 1996, and 1995, respectively. Fair value of financial instruments The fair value of cash and equivalents, income taxes payable, receivables, accounts payable and accrued expenses approximates their carrying values. The fair value of public convertible subordinated notes using the quoted market price on October 31, 1997 is $136.6 million. It was not practical to determine the fair value of Redeemable Series A Preferred Stock, private convertible subordinated promissory note, and investments in associated companies at October 31, 1997 as there are no quoted market prices for these instruments. Derivatives The Company periodically enters into foreign currency contracts in order to reduce the impact of certain foreign currency fluctuations. Unrealized gains and losses on foreign currency contracts are recognized in each reporting period in the consolidated statement of operations. A-18 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock-based compensation The Company utilizes the intrinsic value based method of accounting for its stock-based compensation agreements. Earnings per share The loss per share for 1997 and 1996 has been computed using only the weighted average number of shares outstanding. Earnings per share for 1995 has been computed using the weighted average number of shares outstanding plus shares issuable under stock options using the treasury stock method. 1995 share amounts were adjusted for the November 28, 1995 three-for-two stock split. Use of estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Statements of cash flows For purposes of reporting cash flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. At October 31, 1997, the Company had $50.2 million invested in money market funds, auction rate securities, commercial paper, and corporate bonds. Interest income which is included in the Company's Consolidated Statements of Operations in non-operating income (expense), net aggregated $1.3 million, $1.1 million, and $2.0 million during 1997, 1996, and 1995, respectively. Supplemental information is as follows:
YEAR ENDED OCTOBER 31, --------------- 1997 1996 1995 ----- ---- ---- (IN MILLIONS) Non-cash investing and financing activities: Leases capitalized..................................... $ 1.7 $0.6 -- Liabilities assumed in connection with investments and acquisitions.......................................... -- $1.2 $8.7 Shares issued in business combinations................. -- $3.4 $1.3 Issuance of common stock purchase warrants............. $ 2.5 -- -- Beneficial conversion features on issuance of note and preferred stock....................................... $11.1 -- -- Cash paid during the year for: Interest............................................... $ 8.0 $4.0 $2.2 Income taxes........................................... $ 2.4 $9.5 $5.0
NOTE 2--BUSINESS COMBINATIONS: During 1996 and 1995 the Company expanded its global coverage and strengthened its product offerings through various acquisitions. The Company made no acquisitions during 1997. The following table summarizes all acquisitions in 1996 and 1995 which were accounted for under the purchase method and, accordingly, resulted in allocations of the purchase prices to the net assets acquired based upon their estimated fair values as of the acquisition dates. The accompanying consolidated statements of A-19 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) operations reflect the results of operations of the acquired companies since the acquisition dates. Proforma results of operations are not presented as the acquisitions were not significant. These transactions typically involved the Company acquiring a majority interest or additional interest in an existing independent Affiliate.
YEAR ENDED OCTOBER 31, - -------------------------------------------------------------------------------------------- (IN MILLIONS) 1996 1995 - -------------------------------------------------------------------------------------------- . NofTek NW, Inc. (SSA Northwest) (a) . SSA Ontario Corporation . Castillo Informatica (SSA Iberica) (a) . SSA Services Pty., Ltd. (b) . Vector Systems Analysis . BPCS Division of Exigent Computer Group . SSA North Central (a) . Certain assets of Transtech, Inc. - -------------------------------------------------------------------------------------------- Aggregate con- $8.0 $6.5 sideration - -------------------------------------------------------------------------------------------- Goodwill $7.2 $6.3 - --------------------------------------------------------------------------------------------
(a) Acquired the remaining interests of 90% in SSA Northwest, 27% in SSA Iberica and 81% in SSA North Central in 1996. (b) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA Australia and New Zealand) in 1995. During 1995, the Company issued 586,000 shares of common stock, with an aggregate fair value of $21.9 million, for all outstanding common stock of three companies: Softwright Systems Limited, a leading provider of business object technology and systems in Europe specializing in object technology, multimedia, and other leading edge applications, and two of the Company's independent affiliates, SSA Northeast and Priority Systems, Inc. The combinations were accounted for as poolings of interest. The results of operations were included in the Company's consolidated financial statements from the dates of combinations, as the operations for all periods prior to the combinations were not material in relation to the Company's consolidated financial statements. NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES: In July, 1995 the Company entered into a strategic alliance relationship with Harbinger Corporation pursuant to which the Company sold its EDI software assets (net book value of $2.3 million) to Harbinger and was granted a license by Harbinger to market and sell AS/400, Unix, and PC-based EDI software products (there was no gain or loss recognized on the sale). Minimum royalties amounting to $1.4 million and $5.8 million were accrued in 1995 and paid by the Company to Harbinger during 1996. The Company received as consideration 550,000 shares of Harbinger Common Stock and 4,000,000 shares of Harbinger Zero Coupon Preferred Stock. The Zero Coupon Preferred Stock vests at the rate of up to 1,000,000 shares per year beginning in 1997 based upon achieving certain performance targets, and must be redeemed by Harbinger upon vesting for $1.00 per share in cash or, at the option of the Company, an equivalent amount of Harbinger Common Stock. In August 1995, the Company purchased an additional 450,000 shares of Harbinger Common Stock. At October 31, 1995, the investment in Harbinger Corporation Common Stock was classified as available- for-sale and reported at its fair value of $14 million. The adjustment to fair value in 1995 generated a $2.5 million unrealized gain, net of $1.4 million deferred tax and was excluded from earnings and reported in a separate component of shareholders' equity. During 1996 the Company sold all of its shares of Harbinger Common Stock. The proceeds from the sales were $23.2 million, which resulted in a gain of $8.4 million, net of $4.7 million in taxes. The Company also owns minority interests in several of its affiliates and accounts for these investments under the cost method if the Company owns less than 20% and the equity method if ownership is more than 20% of each associated company. The Company does not exercise control over the operations of these companies. A-20 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--FINANCIAL INSTRUMENTS: Periodically, the Company uses forward exchange contracts for the primary purpose of reducing its exposure to fluctuations in foreign currency exchange rates. The instruments are employed to manage transactional exposure. While these financial instruments are subject to the risk that market rates may change subsequent to the acquisition of the financial instrument, such changes would generally be offset by opposite effects on the items being managed. The Company's financial instruments typically mature within three months of origination and are transacted at rates which reflect the market rate at the date of the contract. At October 31, 1997, the Company had no forward exchange contracts outstanding. As of October 31, 1996, the Company had forward contracts for the purchase and sale of European and other currencies, with purchases totaling $3.2 million and sales totaling $26.8 million. These contracts matured on or before November 5, 1996. NOTE 5--LONG-TERM OBLIGATIONS: Long-term obligations consist of the following:
OCTOBER 31, ------------ 1997 1996 ------ ----- (IN MILLIONS) Public convertible subordinated notes....................... $137.1 $ -- Private convertible subordinated note....................... 12.0 -- Multi-bank line of credit................................... -- 46.4 Senior Notes payable........................................ -- 26.0 Notes payable and other obligations......................... 0.5 1.2 Obligations under capital leases............................ 3.4 3.6 ------ ----- 153.0 77.2 Less--Current maturities.................................... 2.2 2.1 ------ ----- $150.8 $75.1 ====== =====
Public Convertible Subordinated Notes On September 12, 1997, the Company issued $138.0 million principal amount of convertible subordinated notes due September 15, 2002 bearing interest at 7% (the "Public Notes"). Interest will be paid March 15 and September 15 of each year, commencing March 15, 1998. The Public Notes are subordinated to all existing and future indebtedness of the Company. The Public Notes are convertible at the holders' option at any time into shares of common stock of the Company at $18.06 per share, subject to adjustments in certain events. The Public Notes are redeemable at the option of the Company after September 20, 2000 in whole, or in part at any time (103.5% beginning September 20, 2000 and 101.75% from September 20, 2001 and thereafter) plus accrued and unpaid interest. In the event that a change in control occurs, each holder of a Public Note may require the Company to repurchase all or a portion of such holders Public Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the purchase date. A substantial portion of the net proceeds from the sale of the notes was used to fund the retirement of the Company's line of credit and Senior Notes payable. Private Convertible Subordinated Note On March 27, 1997, the Company issued a convertible subordinated promissory note (the "Private Convertible Subordinated Note") to a strategic investor in the amount of $12.0 million, bearing interest at the prime rate plus 1% and convertible into common stock of the Company at the lesser of $3.33 per share or 80% A-21 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of the fair market value of the stock at the time of conversion. The loan maturity is three years, and the note is not convertible prior to October 1997, except in the event of prepayment. The Private Convertible Subordinated Note has a beneficial conversion feature because the fair market value of the Company's stock was in excess of its per share conversion price at the date of issuance. The value of the beneficial conversion feature of $8.9 million has been reflected as an increase to capital in excess of par value and was amortized as interest expense in 1997. The expense is included in the Company's Consolidated Statement of Operations for the year ended October 31, 1997 in non-operating income (expense), net. Line of Credit Prior to its retirement in September 1997, the Company had a $50.0 million, multi-bank line of credit which bore interest at the Prime Rate or LIBOR plus a margin. The margin on LIBOR ranged from 3/4% to 3%, and was based on the cumulative amount borrowed and the leverage ratio of the Company at the time of the borrowings. The Company was required to pay a commitment fee equal to 1/8% of the unused portion of the commitment. In addition, the agreement contained certain covenants which the Company was unable to maintain compliance with during 1996. In March 1997, in satisfaction of certain amendments to the line, the Company issued the line's bank group warrants to purchase an aggregate of 500,000 shares of the Company's common stock at an exercise price equal to $10.32, the common stock's fair market value on the date of issuance. The warrants are freely transferable and can be exercised at any time within the five years of the issue date (see Note 8 of Notes to Consolidated Financial Statements). During September 1997, borrowings under the line of credit were fully repaid from a combination of proceeds from the Series A Preferred Stock and the Public Convertible Subordinated Note offerings. The weighted average interest rate on outstanding borrowings during 1997 and 1996 were 10.38% and 7.78%, respectively. Outstanding letters of credit issued against the line of credit were $.5 million and $1.2 million as of October 31, 1997 and October 31, 1996, respectively. Senior Notes Payable Prior to their retirement in September 1997, the Company had Senior Notes payable consisting of $4 million senior notes and $22 million senior notes originally due September 15, 1997 and September 15, 1998, respectively, with original interest rates of 6.23% and 6.69%, respectively. The notes contained covenants including minimum net worth, fixed charge coverage and leverage ratios which, during 1996, the Company was unable to maintain compliance with and technical defaults occurred. As a result, the Senior Noteholders were issued warrants to purchase 275,000 shares of the Company's common stock under the same terms as the warrants issued to the banks as described in the line of credit note (see Note 8 of Notes to Consolidated Financial Statements). In September 1997, the Senior Notes payable were fully repaid from a combination of proceeds from the Series A Preferred Stock and the Public Convertible Subordinated Note offerings. Note Payable and Other Obligations At October 31, 1997, notes payable and other obligations consist of commitments made in connection with investments and acquisitions which are due in 1998. Capital Lease Obligations Capital lease obligations represent the present value of future payments under leases for transportation and data processing equipment. The recorded cost of these assets aggregated $6.5 million and $5.6 million at October 31, 1997 and 1996, respectively; accumulated amortization thereon aggregated $4.0 million and $3.4 million, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. A-22 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a schedule of future minimum lease payments under capital lease obligations, together with the present value of minimum lease payments at October 31, 1997:
YEAR ENDING OCTOBER 31, (IN MILLIONS) AMOUNT ------------------------------------- ------ 1998............................................................... $2.3 1999............................................................... 1.1 2000............................................................... 0.5 ---- Total minimum lease payments....................................... 3.9 Less--Amount representing interest................................. 0.5 ---- Present value of minimum lease payments............................ 3.4 Less--Current maturities........................................... 1.7 ---- $1.7 ====
Interest expense which is included in the Company's Consolidated Statements of Operations in non-operating income (expense), net was $9.3 million, $4.7 million, and $2.2 million during 1997, 1996, and 1995, respectively. NOTE 6--INCOME TAXES: Deferred income taxes arise from temporary differences between the income tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Pretax income (loss) from continuing operations was taxed in the following jurisdictions:
YEAR ENDED OCTOBER 31, -------------------- 1997 1996 1995 ----- ------ ----- (IN MILLIONS) Domestic............................................. $ 4.0 $(57.6) $31.4 Foreign.............................................. (2.4) 6.2 9.5 ----- ------ ----- $ 1.6 $(51.4) $40.9 ===== ====== =====
The provision for income taxes consists of the following:
YEAR ENDED OCTOBER 31, ------------------- 1997 1996 1995 ---- ------ ----- (IN MILLIONS) Current: Federal............................................ $1.6 $ (8.3) $ 8.9 State.............................................. -- (2.8) 0.7 Foreign............................................ 2.1 5.3 7.2 ---- ------ ----- 3.7 (5.8) 16.8 ---- ------ ----- Deferred: Federal............................................ (2.9) (11.5) (2.8) State.............................................. (0.2) (0.8) (0.1) Foreign............................................ -- (0.5) 0.3 ---- ------ ----- (3.1) (12.8) (2.6) ---- ------ ----- $0.6 $(18.6) $14.2 ==== ====== =====
A-23 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition to taxes incurred on foreign operations, the Company is subject to and includes foreign taxes on net remittances from foreign Affiliates as a component in its provision for foreign income taxes. No domestic provision has been recorded for unremitted earnings of foreign subsidiaries as it is anticipated that any U.S. income taxes on distributions of earnings not permanently reinvested will be offset by foreign tax credits. A reconciliation of taxes based on the federal statutory rate and the Company's actual provision is as follows:
YEAR ENDED OCTOBER 31, -------------------------- 1997 1996 1995 ------- -------- ------- (IN MILLIONS) Income tax at the federal statutory rate...... $ 0.5 $ (18.0) $ 14.3 State income taxes, net of federal benefit.... 0.2 (1.3) 0.6 Foreign operating losses...................... 2.9 (0.3) 0.6 Research and development tax credit........... (1.0) (1.2) (1.3) Meals and entertainment....................... 0.7 1.1 0.4 Other, net.................................... (2.7) 1.1 (0.4) ------- -------- ------- $ 0.6 $ (18.6) $ 14.2 ======= ======== =======
The net deferred tax balance is comprised of (asset) liability:
YEAR ENDED OCTOBER 31, -------------- 1997 1996 ------ ------ (IN MILLIONS) Revenue (net of commissions) recognized for tax purposes in advance of financial reporting...................... $ (6.9) $ (3.3) Capitalization of software costs for financial reporting purposes............................................... 33.7 24.7 Provision for doubtful accounts......................... (4.6) (5.0) Rent expense for financial reporting purposes........... (1.1) (1.4) Expense recognized for financial reporting purposes in advance of tax......................................... (4.7) (3.0) Deferred gain........................................... (1.6) (1.6) Domestic credit carryforwards........................... (1.4) (1.4) Foreign carryforwards................................... (8.1) (3.6) Foreign tax credit carryforwards........................ (11.0) (11.0) Research and development credit carryforwards........... (3.6) (2.6) Domestic net operating loss carryforwards............... (15.0) (11.7) Valuation allowance..................................... 13.1 8.3 Other, net.............................................. (3.2) 0.3 ------ ------ $(14.4) $(11.3) ====== ======
At October 31, 1997, the Company has approximately $25.0 million of foreign net operating loss carryforwards, $40.0 million of domestic net operating loss carryforwards, and $11.0 million of tax credit carryforwards and $5.0 million of domestic tax credit carryforwards. At October 31, 1997 and October 31, 1996, the Company recorded valuation allowances related to those items of $13.1 and $8.3 million, respectively. The Company recognizes certain deferred tax assets based upon Management's assessment that these assets will "more likely than not" be recognized in the future in accordance with SFAS 109, "Accounting for Income Taxes". This assessment is based primarily on estimates of future operating results. Of the $25.0 million of foreign net operating loss carryforwards, $12.7 million expire in varying amounts through the fiscal year ending October 31, 2004 and $12.3 million may be carried forward indefinitely. Of the A-24 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $40.0 million of domestic net operating loss carryforwards, $31.0 million expire on October 31, 2011, and $9.0 million expire on October 31, 2012. The $11.0 million of the foreign tax credit carryforwards expire in varying amounts through the fiscal year ending on October 31, 2001. Of the $5.0 million of domestic tax credit carryforwards, $1.4 million expire in varying amounts through the fiscal year ending on October 31, 2002, and $3.6 million expire in varying amounts through the fiscal year ending on October 31, 2012. During 1997, 1996, and 1995 certain employees disposed of shares acquired through the exercise of stock options that allowed the Company to record additional compensation expense for tax purposes measured as the difference between the fair value of the stock and the option price at the date of exercise. The aggregate tax benefit to the Company of $0.5 million, $1.2 million, and $2.8 million, respectively, has been credited to capital in excess of par value. NOTE 7--REDEEMABLE SERIES A PREFERRED STOCK On August 29, 1997, the Company issued 10,000 shares of Series A Preferred Stock and 600,000 common stock purchase warrants to a private investor for $10.0 million. The shares of Series A Preferred Stock have an initial liquidation preference of $1,000 per share, increasing to $3,500 per share on or after the earliest of (i) August 22, 2003, (ii) a change in control and (iii) certain bankruptcy events (such event, a "Trigger Event") (such liquidation preference as from time to time in effect, the "Liquidation Price"). The Series A Preferred Stock accrue dividends, payable quarterly in arrears, at an annual rate of 12% of the Liquidation Price per share, which increases to 14% of the Liquidation Price per share upon a Trigger Event. The dividend rate will increase by 4% per annum upon the occurrence and during the continuance of any payment default or certain other material defaults as described in the purchase agreement. The Redeemable Series A Preferred Stock has a beneficial conversion feature because the fair market value of the Company's stock was in excess of its per share conversion price at the date of issuance. The value of the beneficial conversion feature of $2.2 million was recorded as an increase to capital in excess of par value and a decrease to retained earnings (preferred dividend). Each share of Series A Preferred Stock is convertible at the holder's option at any time into 80.4 shares of Common Stock (subject to proportional and broad-based weighted average anti-dilution). The Series A Preferred Stock may be redeemed at the option of the holders thereof at any time (i) on or after August 31, 2003 or (ii) following the occurrence and continuance of a Redemption Event (as defined below) at a redemption price equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the amount that such holder would have received had such holder converted the Series A Preferred Stock into Common Stock immediately prior to the liquidation of the Company. The Series A Preferred Stock may be redeemed by the Company at any time after the occurrence of a Trigger Event at a redemption price equal to $3,500 per share, plus accrued and unpaid dividends. Upon the occurrence of certain events, including, payment defaults, covenant defaults in the purchase agreement, cross defaults to acceleration of other material indebtedness, bankruptcy and a change in control (each, a "Redemption Event"), the holders of the Series A Preferred Stock may require the Company to redeem their shares of Series A Preferred Stock at a redemption price equal to the greater of $1,000 per share, plus accrued and unpaid dividends or the amount that such holder would have received had such holder converted the Series A Preferred Stock into Common Stock immediately prior to the liquidation of the Company. For so long as at least 2,500 shares of Series A Preferred Stock are outstanding, the Company must comply with various covenants, including, without limitation, maintenance of fixed charge coverage ratios on a rolling four-quarter basis and total debt to capital, and restrictions on mergers, consolidations, sales of assets, liens, payment of dividends and other distributions to, and redemptions of, other classes of equity and limitations on the issuance of additional debt (other than the Public Convertible Subordinated Notes, up to $40.0 million in additional senior indebtedness and certain other exceptions). The Series A Preferred Stock cannot be transferred by the private investor until September 1, 1998. A-25 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--COMMON STOCK PURCHASE WARRANTS: On March 4, 1997, the Company issued 775,000 shares of common stock purchase warrants ("Warrants") as part of amendments to the Company's Line of Credit and Senior Notes payable agreements. The Warrants are initially exercisable at $10.32 per share and may be exercised for five years from the date of issuance. The fair value of the warrants of $0.9 million was recorded as an increase to capital in excess of par value and other current assets and is being amortized over the term of the amendments. On August 29, 1997, the Company issued 600,000 shares of common stock purchase warrants (the "Private Warrants") to a private investor in connection with the Company's issuance of Redeemable Series A Preferred Stock. Each holder of a Private Warrant is entitled to purchase shares of Common Stock at an exercise price equal to $15.125 per share, the fair market value at the date of issuance of the warrants. The Private Warrants are exercisable at any time until August 22, 2007, but the Private Warrants and the Common Stock issuable upon the exercise thereof cannot be transferred until September 1, 1998. Following such anniversary, the Private Warrants and underlying Common Stock are immediately transferable. The fair value of the warrants of $0.8 million was recorded as an increase to capital in excess of par value and a decrease to Redeemable Series A Preferred Stock which is being accreted as preferred dividends over six years beginning the date of issuance. In consideration of certain financial advisory services performed during 1997, the Company agreed to sell to a financial advisor for a nominal amount warrants to purchase from the Company up to 664,452 shares of Common Stock (the "Financial Advisor Warrants"). The Financial Advisor Warrants are initially exercisable at $18.06 per share and may be exercised for a period of five years commencing on the first anniversary of the issuance of such warrants. The fair value of the warrants of $0.9 million was recorded as an increase to capital in excess of par value and a decrease to the Public Convertible Subordinated Notes which is being accreted as interest expense over five years beginning the date of issuance. NOTE 9--STOCK OPTIONS: The Company has certain stock option plans and a long-term incentive plan under which options to purchase shares of the Company's common stock, stock appreciation rights, restricted stock, and cash awards may be granted to key employees and non-employees of the Company and its Affiliates. In April 1997, shareholders approved an amendment to the long-term incentive plan, increasing the aggregate number of common shares to be available for grant to 4,500,000, from a previous aggregate of 1,800,000, provided the aggregate number of common shares which may be granted in an one calendar year, to any one key employee, shall not exceed 200,000 shares. The stock option and long-term incentive plans provide that an aggregate of 9,056,250 common shares be available for grant, subject to adjustments for stock splits, stock dividends, mergers, or other changes in capitalization. Options become exercisable in varying periods (typically 5 years) and are priced by the Board of Directors, but may not be less than 50% of the fair market value of the shares at the date of grant. All options granted during 1997, 1996, and 1995 were granted at fair market value. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement of Financial Accounting Standards No. 123 ("FAS 123"), the Company's net income (loss) available to common stockholders and earnings (loss) per share of common stock would have been reduced to the pro forma amounts indicated below:
1997 1996 ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) Net income (loss) available for common stockholders............................... As Reported $ (1.4) $(32.8) Pro Forma $ (4.0) $(33.7) Earnings (loss) per share of common stock... As Reported $(0.03) $(0.76) Pro Forma $(0.09) $(0.78)
A-26 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the stock option plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant. For purposes of calculating the compensation cost consistent with FAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1997 and 1996: risk free interest rate of 6.3%; expected life of 5.5 years; expected volatility of 53%; and no dividends are expected to be paid. The following is a summary of 1997, 1996, and 1995 stock option activity:
AVAILABLE WEIGHTED AVERAGE FOR GRANT UNEXERCISED EXERCISABLE EXERCISE PRICE ---------- ----------- ----------- ---------------- Balance, October 31, 1994. 682,762 1,677,460 611,081 $ 7.08 ---------- ---------- -------- ------ Granted................... (498,000) 498,000 9.23 Becoming exercisable...... 338,367 6.68 Cancelled................. 154,467 (154,467) 7.62 Exercised................. (497,946) (497,946) 5.93 Reflect three-for-two stock split.............. 169,615 761,524 225,751 ---------- ---------- -------- ------ Balance, October 31, 1995. 508,844 2,284,571 677,253 8.19 ---------- ---------- -------- ------ Granted................... (1,468,001) 1,468,001 14.22 Becoming exercisable...... 393,822 7.52 Cancelled................. 1,384,237 (1,384,237) (191,211) 17.71 Exercised................. (275,906) (275,906) 7.64 ---------- ---------- -------- ------ Balance, October 31, 1996. 425,080 2,092,429 603,958 8.04 ---------- ---------- -------- ------ Authorized................ 2,700,000 Granted................... (3,105,569) 3,105,569 6.36 Becoming exercisable...... 403,679 4.27 Cancelled................. 1,995,296 (1,995,296) (106,289) 9.67 Exercised................. (290,698) (290,698) 5.77 ---------- ---------- -------- ------ Balance, October 31, 1997. 2,014,807 2,912,004 610,650 $ 5.50 ========== ========== ======== ======
The weighted-average fair values of options granted during 1997 and 1996 are $3.46 and $7.85, respectively. The following table summarizes information about the stock options outstanding as of October 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE ------------------------------ --------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF CONTRACTUAL AVERAGE AVERAGE EXERCISE NUMBER OF LIFE EXERCISE NUMBER EXERCISE PRICES SHARES (YEARS) PRICE EXERCISEABLE PRICE -------- --------- ----------- -------- ------------ -------- $1 to 5 2,321,004 8.4 $ 5 610,450 $ 4 $6 to 10 552,000 9.5 8 200 10 $11 to 15 39,000 9.9 14 -- 14 --------- --- --- ------- --- $1 to 15 2,912,004 8.6 $ 6 610,650 $ 4 ========= === === ======= ===
During 1988, the Board of Directors approved a stockholder rights plan designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. At that time, the Company declared a distribution of one right for each share of A-27 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) common stock outstanding (effected as a stock dividend) to stockholders of record as of May 5, 1988, and generally to shares issuable under the Company's stock option plans. Each right entitles the registered holder to purchase from the Company one share of common stock at a purchase price of $47. Each right is exercisable ten days after the acquisition of 20% or more of the Company's voting stock, or the commencement of a tender or exchange offer under which the offered would own 30% or more of the Company's stock. In the event of a proposed takeover satisfying certain additional conditions, the rights could be exercised by all holders other than the takeover bidder at an exercise price of half of the current market price of the Company's common stock. This would have the effect of significantly diluting the holdings of the takeover bidder. These rights expire on May 3, 1998. NOTE 10--EMPLOYEE STOCK PURCHASE PLANS: On October 1, 1997 the Company established Qualified and Non-Qualified Employee Stock Purchase Plans ("Stock Purchase Plans") for all eligible U.S. employees. An aggregate of 2.0 million shares of the Company's common stock (subject to adjustments for stock splits, dividends or other relevant changes in the Company's capitalization) may be sold pursuant to the Stock Purchase Plans. The Stock Purchase Plans enable employees to purchase, through payroll deductions, the Company's common stock at the lesser of 90% (subject to adjustment, but not less than 85%) of the market value on the first day of each month or the market value on the purchase date. NOTE 11--FOREIGN INFORMATION: Information regarding geographic areas for the years ended October 31, 1997, 1996, and 1995 is as follows:
UNITED EUROPE STATES MIDDLE EAST OTHER ELIMINATIONS TOTAL ------ ----------- ------ ------------ ------ (IN MILLIONS) Year Ended October 31, 1997 Sales to unaffiliated customers.................. $208.8 $160.3 $122.3 $(60.9) $430.5 Operating income............ $ 30.0 $(16.9) $ 9.8 $ 22.9 Identifiable assets......... $304.6 $118.5 $117.3 $(65.0) $475.4 ====== ====== ====== ====== ====== Year Ended October 31, 1996 Sales to unaffiliated customers.................. $164.9 $113.8 $ 95.0 $(32.9) $340.8 Operating income............ $(17.4) $(26.6) $(14.8) $(58.8) Identifiable assets......... $234.9 $ 98.6 $107.2 $(56.3) $384.4 ====== ====== ====== ====== ====== Year Ended October 31, 1995, Sales to unaffiliated customers.................. $173.7 $148.1 $ 92.0 $(39.7) $374.1 Operating income............ $ 28.5 $ 9.3 $ 3.3 $ 41.1 Identifiable assets......... $225.2 $130.2 $ 87.3 $(49.5) $393.2 ====== ====== ====== ====== ======
The sales and operating income (loss) amounts reflected above include intercompany royalties, which are eliminated. A-28 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) United States sales by geographical areas during the years ended October 31, 1997, 1996, and 1995 are as follows:
FOREIGN --------------------------------- EUROPE ASIA CANADA UNITED STATES MIDDLE EAST PACIFIC LATIN AMERICA TOTAL ------------- ----------- ------- ------------- ------ (IN MILLIONS) Year Ended October 31, 1997................... $151.6 $37.9 $14.7 $4.6 $208.8 Year Ended October 31, 1996................... $143.1 $13.0 $ 4.3 $4.5 $164.9 Year Ended October 31, 1995................... $147.3 $14.3 $ 5.4 $6.7 $173.7
NOTE 12--COMMITMENTS AND CONTINGENCIES: The Company leases its office space and certain equipment under noncancelable operating leases that expire at various dates through 2015. Rent expense under such leases aggregated approximately $25.4 million, $24.1 million, and $15.7 million during 1997, 1996, and 1995, respectively. Minimum annual rental commitments under noncancelable operating leases for periods subsequent to October 31, 1997 are as follows: $21.6 million in 1998, $15.1 million in 1999, $11.9 million in 2000, $9.8 million in 2001, and $9.7 million in 2002 and $43.8 million in 2003 and thereafter. On August 20, 1997, the Company terminated its engagement of the managing underwriter of its then-pending public offering of convertible notes and concurrently elected not to proceed with its private offering of securities to a group of private investors led by Bain Capital, Inc. (the "Bain Investors"). On August 27, 1997 in the Superior Court of Massachusetts, certain of the Bain Investors filed a complaint against the Company, Roger E. Covey, the Company's Chief Executive Officer, and Hambrecht & Quist LLC, one of the successor representatives of the underwriters in the public offering. For the year ended October 31, 1997, $3.2 million was recorded as a special charge in the Company's Consolidated Statement of Operations related to this lawsuit. In January 1998, the Company settled the Bain Investors' lawsuit (see Note 13 below). In January 1997, class action lawsuits against the Company and certain of its officers were filed in state court in Illinois and in the federal court in Chicago, Illinois. The state court action alleges damages to persons who purchased the Company's Common Stock during the period from November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated statutory and common law. The federal actions allege damages to persons who purchased the Company's Common Stock during the period from August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The lawsuits name the Company and several of its officers and directors as defendants, and allege violations of securities laws, fraud and negligence, stemming from circumstances which resulted in the restatement of the Company's financial statements for 1994 and 1995. The complaints do not specify the amounts of damages sought. The Company has executed a settlement agreement with the class plaintiffs in the Illinois state court action titled Steinberg v. SSA, 97 CH 287 (the "Settlement"). The presiding judge in the Illinois case approved the Settlement on September 30, 1997. Pursuant to the settlement, the Company paid $1.7 million in cash and a director and officer defendant contributed 100,000 shares of Common Stock. The $1.7 million is recorded in the Company's Consolidated Statement of Operations for the year ended October 31, 1997 as a special charge. Certain individual objectors to the Settlement filed a Notice of Appeal on October 17, 1997. There can be no assurance that the Settlement will not be overturned or that it will legally bar the federal claims described above. In addition, even if the Settlement bars the federal claims as described above, because the class period of the federal claims is slightly larger than the class period of the state claim and one defendant was named in the federal action that was not a defendant in the State action, the Settlement may not result in the dismissal of the entire federal action. The failure to achieve a dismissal of either of these actions or the failure to settle them on sufficiently advantageous terms could have a material adverse effect on the business, operating results and financial condition of the Company. A-29 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company is also subject to other legal proceedings and claims which arise in the normal course of business. Although the outcome of these proceedings cannot be determined with certainty, management believes that the final outcomes of these proceedings should not have a material adverse effect on the Company's operations or financial position. NOTE 13--SUBSEQUENT EVENTS (UNAUDITED): During January 1998 the $12.0 million convertible subordinated note was converted into 3.6 million shares of common stock. In January 1998, the Company settled the Bain Investors' lawsuit as described in Note 12. Pursuant to the settlement, the Company paid the Bain Investors approximately $3.65 million and issued to certain of the Bain Investors warrants to purchase an aggregate of 300,000 shares of the Company's Common Stock, which warrants are exerciseable at $9.6875 per share, the fair market value as of the date of settlement. A-30 CHANGE IN CERTIFYING ACCOUNTANTS 1. NOVEMBER 8, 1996 FORM 8-K. On November 8, 1996, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission (the "SEC") containing the following information (the "First November 8-K"): In a letter dated November 1, 1996, System Software Associates, Inc. (the "Company") dismissed Price Waterhouse LLP ("PW") as the Company's principal independent accountant. The decision to dismiss PW was approved by the Company's Board of Directors upon recommendation by the Company's Audit Committee of the Board of Directors. PW's reports on the Company's consolidated financial statements for each of the fiscal years ended October 31, 1994 and 1995 did not originally contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to audit scope or accounting principles. However, in a letter dated November 4, 1996, PW notified the Company that it was withdrawing its opinions on the Company's consolidated financial statements for each of Fiscal 1994 and 1995. In a November 1 letter to the Company (received after the Company had dismissed PW), PW advised the Company of PW's conclusion that facts existed at the time of the initial recognition of revenue on three contracts which, had they been known at the time, would have caused PW to object to the Company's accounting position on such contracts. PW further concluded that these were material matters which would have to be corrected through restatement of the Company's fiscal 1994 and 1995 financial statements. With respect to fiscal 1994, PW advised the Company that the revenue relating to one material contract should not have been recognized in fiscal 1994. With respect to fiscal 1995, PW advised the Company that revenue from two Latin America contracts with one customer should not have been recognized in 1995. In addition, PW advised the Company that income recognized from the last two payments of a four installment payment contract executed in fiscal 1995, for which recognition had earlier been deemed by PW to be immaterial, would become material as a result of the restatement relating to the two Latin America contracts described above. In PW's Report on 1995 Examination to the Company, dated February 27, 1996 (the "Report on 1995 Examination"), PW indicated that it expanded the scope of its Fiscal 1995 audit in response to a variety of factors and events relating to the Company's business evolution. However, PW's audit report on the Company's fiscal 1995 financial statements did not contain an adverse opinion or a disclaimer of opinion, nor was such report qualified or modified as to accounting principles. Moreover, in the Report on 1995 Examination, PW advised the Company's Board of Directors and Audit Committee that there were no disagreements with the Company's management with respect to the fiscal 1995 financial statements. At the August 21, 1996 meeting of the Audit Committee of the Company's Board of Directors (the "August Meeting"), PW and the Company's management discussed the applicable criteria for recognizing revenue on a contract executed in the third quarter of fiscal 1996 and confirmed that revenue was not to be recognized on that contract at that time. PW has informed the Company that these discussions should be characterized as a "disagreement," however the Company does not believe this characterization is accurate. At the August Meeting, PW also advised the Company that PW would need to expand its audit procedures for the Company's fiscal 1996 audit due to weaknesses in the Company's internal controls relating to revenue recognition. PW elaborated on these matters in an August 30, 1996 letter (the "August Letter"), wherein PW informed the Company of what PW considered to be two areas of "material weakness" where internal controls necessary for the Company to develop reliable financial statements did not exist. All of the matters recited in the August Letter had previously been raised by PW as recommendations (but not as "material weaknesses") in the Report on 1995 Examination. The Company has been working diligently to address each of these matters and the Company believes that at this time all of these matters have either been completed or are in the process of completion. In its November 1 letter to the Company, PW acknowledged the Company's efforts to address these matters. The Company believes that the measures being taken to address PW's recommendations will eliminate the "material weaknesses" specified in PW's August Letter. A-31 In its November 1 letter, PW advised the Company that the weaknesses in internal controls and management's positions with respect to the fiscal 1994 and 1995 contracts discussed above had caused PW to believe that it was no longer able to rely on management's representations and that significantly expanded audit procedures would be required for future audit work. In addition, PW advised the Company in its November 1 letter that it did not intend to stand for reappointment as the Company's independent accountants in connection with the examination of the Company's fiscal 1997 financial statements. Except for the matters described above, the Company is not aware of any other "disagreements" between the Company and PW, or any other "reportable events" as defined in Item 304 of Regulation S-K, during fiscal 1994 or 1995 or the interim period preceding the Company's dismissal of PW. The Company's senior executive officers and members of the Audit Committee of the Company's Board of Directors have participated in discussions with PW concerning the specific contracts and internal controls matters described above. However, PW has not discussed the contents or conclusions of its November 1 letter with management or the Audit Committee. The Company has authorized PW to respond fully to any and all inquiries made by KPMG Peat Marwick LLP, which the Company has requested to become its independent accountants, concerning the subject matter of each of the matters described above. The Company has provided PW with a copy of this Form 8-K and has requested PW to furnish a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of such letter will be filed as an exhibit to an amendment to this Form 8-K pursuant to Item 304(a)(3) of Regulation S-K. 2. NOVEMBER 15, 1996 8-K AMENDMENT. On November 15, 1996, the Company filed a Form 8-K/A with the SEC to amend the First November 8-K by adding the following correspondence: November 14, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: System Software Associates, Inc. We have read the Company's Form 8-K dated November 1, 1996 and are in agreement with the statements contained in Item 4 except that, due to a lack of direct knowledge, Price Waterhouse LLP ("PW") is not in a position to agree, disagree or comment upon the following statements: (1) the Company's statement in the second paragraph of Item 4 that PW's November 1 letter was "received after the Company had dismissed PW," and (2) the Company's statement in the sixth paragraph of Item 4 that the Company believes its efforts to address the material weaknesses in its internal controls "have either been completed or are in the process of completion." Further, PW does not comment on the contents of the press releases filed as Exhibits 20.1 and 20.2 to the Company's Form 8-K. Yours very truly, /s/ Price Waterhouse LLP Price Waterhouse LLP A-32 3. NOVEMBER 19, 1996 8-K. On November 19, 1996, the Company filed a Current Report on Form 8-K, dated November 12, 1996, containing the following information: On November 12, 1996, the Company engaged KPMG Peat Marwick LLP ("KPMG") to become the Company's new principal accountants. The decision to retain KPMG was approved by the Company's Board of Directors upon recommendation by the Company's Audit Committee of the Board of Directors. On November 6, 1995, the Company had engaged KPMG to review the application of accounting principles to a four-installment software contract executed by the Company in 1995. However, this engagement was discontinued after a very brief period without KPMG rendering any report, conclusion or advice as to such contract. On September 17, 1996, the Company engaged KPMG to review the Company's internal controls, principally including those over the contracting process, with the objective of providing observations and recommendations for improving those controls, but not the rendering of any opinion. This particular engagement is in process and no recommendations have been made to date. The Company has requested KPMG to furnish a letter addressed to the Commission stating whether KPMG agrees with the above statements. A copy of such letter is filed as an exhibit hereto. Exhibit 16.1 to November 19, 1996 Form 8-K November 18, 1996 Securities and Exchange Commission Washington, D.C. 20549 Ladies and Gentlemen: RE: System Software Associates, Inc. We have read System Software Associates, Inc.'s statements under Item 4 of its Form 8-K dated November 12, 1996, and we agree with such statements, except that we are not in a position to agree or disagree with the Company's statement that the decision to retain us was approved by the Company's Board of Directors upon recommendation of the Company's Audit Committee of the Board of Directors. Very truly yours, /s/ KPMG Peat Marwick LLP A-33 4. DECEMBER 11, 1996 8-K. On December 11, 1996, the Company filed a Current Report on Form 8-K containing the following information: On December 4, 1996, the Company engaged Price Waterhouse LLP ("PW") to audit the Company's financial statements for the fiscal years ended October 31, 1994 and 1995. The decision to retain PW was approved by the Company's Board of Directors upon recommendation by the Company's Audit Committee of the Board of Directors. Prior to November 1, 1996, PW had been the Company's principal independent accountants. On November 12, 1996 (as confirmed by letter dated November 25, 1996), the Company engaged KPMG Peat Marwick LLP as the Company's new principal independent accountants, commencing with the audit of the Company's financial statements for the fiscal year ended October 31, 1996. Since the Company's dismissal of PW on November 1 (as described in the Form 8-K filed by the Company on November 8, 1996), the Company has not consulted with PW on the application of accounting principles to any specific transaction, as to the type of audit opinion that might be rendered on the Company's financial statements or as to any matter that was the subject of a dispute or a reportable event. A-34 ANNEX B TEXT OF THE SYSTEM SOFTWARE ASSOCIATES, INC. QUALIFIED EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE The purpose of the System Software Associates, Inc. Qualified Employee Stock Purchase Plan is to provide eligible Employees of System Software Associates, Inc. and its Affiliates with an opportunity to acquire a proprietary interest in the Company through the purchase of Common Stock of the Company on a payroll deduction basis. It is believed that participation in the ownership of the Company will be to the mutual benefit of the eligible Employees and the Company. It is intended that this Plan shall constitute an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of Code Section 423. 2. DEFINITIONS Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this Plan, have the following meanings. Wherever appropriate, words used in the singular shall be deemed to include the plural and vice versa, and the masculine gender shall be deemed to include the feminine gender. (a) ACCOUNT means the funds accumulated with respect to an Employee as a result of deductions from his paycheck for the purpose of purchasing Common Stock under the Plan. The funds allocated to an Employee's Account shall remain the property of the Employee at all times prior to the purchase of the Common Stock, but may be commingled with the assets of the Company and used for general corporate purposes. No interest shall be paid or accrued on any funds accumulated in the Accounts of Employees. (b) AFFILIATE means a corporation, as defined in Section 424(f) of the Code, that is a parent or subsidiary of the Company, direct or indirect. (c) BOARD means the Board of Directors of the Company. (d) CODE means the Internal Revenue Code of 1986, as amended. (e) COMMITTEE means the committee to which the Board delegates the power to act under or pursuant to the provisions of the Plan, or the Board if no committee is selected. (f) COMMON STOCK means the shares of common stock of the Company, $.01 par value. (g) COMPANY means System Software Associates, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of the Company. (h) COMPENSATION means the compensation paid to an Employee by the Company during a payroll period for federal income tax purposes, as reported on an Employee's Form W-2 (or comparable reporting form) for income tax withholding purposes. (i) EFFECTIVE DATE means the date the Plan is adopted by, and made effective by, the Board, subject to the limitations of Section 16. (j) EMPLOYEE means any person who is employed by the Company or an Affiliate. (k) OFFERING DATE means the date on which the Committee grants Employees the option to purchase shares of Common Stock. (l) OFFERING PERIOD means the period between the Offering Date and the Purchase Date. (m) PURCHASE DATE means the date on which the Committee purchases the shares of Common Stock, which date shall generally be the first business day following the last day of each month. (n) PARTICIPANT means an Employee who elects to participate in the Plan. (o) PLAN means the System Software Associates, Inc. Qualified Employee Stock Purchase Plan. 3. ELIGIBILITY All Employees of the Company and, if designated by the Board, any Affiliate, who are employed by the Company and/or such designated Affiliate on the Effective Date, shall be eligible to participate in the Plan on the Effective Date. Subject to the enrollment limitations of Section 6, each other Employee of the Company and/or a designated Affiliate shall be eligible to participate on the first to occur of (i) the Offering Date coincident with or next following the Employee's first day of employment, or (ii) the first day of any fiscal year quarter coincident with or next following the Employee's first day of employment. 4. ADMINISTRATION The Plan shall be administered by the Committee, which shall consist of not less than two (2) members of the Board. Subject to the provisions of the Plan, the Committee shall be vested with full authority to make, administer, and interpret such rules and regulations as it deems necessary to administer the Plan, and any determination, decision, or action of the Committee in connection with the construction, interpretation, administration, and application of the Plan shall be final, conclusive, and binding upon all Participants and any and all persons claiming under or through any Participant. Notwithstanding anything to the contrary in the Plan, the Committee shall have the discretion to modify the terms of the Plan with respect to Participants who reside outside of the United States or who are employed by a subsidiary of the Company that has been formed under the laws of any foreign country, if such modification is necessary in order to conform such terms to the requirements of local laws. 5. STOCK (a) The Common Stock to be sold to Participants under the Plan may, at the election of the Company, be either treasury shares, shares acquired on the open market, and/or shares originally issued for such purpose. The aggregate number of shares of Common Stock that shall be made available for purchase under the Plan (and the Company's Employee Stock Purchase Plan, which plan shall operate in tandem with the Plan) shall not exceed two million (2,000,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in subparagraph (b) below. If the total number of shares that otherwise would have been acquired under the Plan on any Purchase Date exceeds the number of shares of Common Stock then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. In such event, the payroll deductions to be made pursuant to the Participants' authorizations shall be reduced accordingly, or refunded to the Participants, as the case may be, and the Company shall give written notice of such reduction or refund to each affected Participant. (b) Appropriate adjustments in the aggregate number of shares of Common Stock that shall be made available for purchase under the Plan shall be made to give effect to any mergers, consolidations, acquisitions, reorganizations, stock splits, stock dividends, or other relevant changes in the capitalization of the Company occurring after the Effective Date. The establishment of the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes in its capital or business structure or to merge, consolidate, dissolve, liquidate, sell, or otherwise transfer all or any part of its business or assets. Adjustments under this Section 5 shall be made in the sole discretion of the Committee, and its decision shall be binding and conclusive. (c) A Participant shall not have any interest in shares covered by his authorized payroll deduction until shares of Common Stock are acquired for his Account. 2 6. PARTICIPATION (a) After the Effective Date, each Employee may become a Participant in the Plan by authorizing a payroll deduction on a form provided by the Committee. Such authorization shall become effective on the first day of the next fiscal year quarter following the delivery of the authorization form to the Committee, provided (i) that the Employee is eligible under Section 3 to participate in the Plan on such day and (ii) that the authorization form is delivered to the Committee on or prior to 4:00 p.m. C.S.T. on the last business day prior to the first day of such fiscal year quarter. (b) At the time an Employee files his authorization for a payroll deduction, he shall elect to have deductions made from each paycheck that he receives, such deductions to continue until the Participant withdraws from the Plan or otherwise becomes ineligible to participate in the Plan. Authorized payroll deductions shall be for a minimum of one percent (1%) and a maximum of twenty-five percent (25%) of the Participant's Compensation. The deduction rate so authorized shall continue in effect through the Offering Period and each succeeding Offering Period except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may at any time during any Offering Period, reduce his rate of payroll deduction by filing an authorization form with the Company; and (ii) The Participant may, at any time during any Offering Period, increase the rate of his payroll deduction by filing an authorization form with the Committee. The Participant may not, however,, effect more than one (1) such increase per Offering Period. New deduction rates shall become effective as soon as practicable after the authorization form is filed with the Committee. (c) All Compensation deductions made for a Participant shall be credited to his Account. Except as may otherwise be provided by the Committee under Section 4, a Participant may not make any separate cash payment into his Account. 7. PURCHASE OF SHARES (a) On the date when a Participant's authorization form for a deduction becomes effective, and on each Offering Date thereafter, he shall be deemed to have been granted an option to purchase as many shares of Common Stock as he will be able to purchase with the Compensation deductions credited to his Account during the payroll periods within the applicable Offering Period for which the Compensation deductions are made. In addition to the foregoing, any cash dividends paid on shares of Common Stock held in his Account shall be added to the Account, and used to purchase Common Stock as otherwise provided herein. (b) The purchase price for the shares of Common Stock to be purchased with payroll deductions from the Participant shall be equal to the lesser of ninety percent (90%) (or such other amount as the Committee shall authorize, but in no event less than eighty-five percent (85%)) of (i) the "fair market value" of a share of Common Stock on the Offering Date (or, if later, on the date the Participant's authorization form becomes effective, as set forth in Section 6), or (ii) the "fair market value" of a share on the Purchase Date. However, if a Participant enters the Plan on other than the Offering Date, the clause (i) amount shall in no event be less than the fair market value per share of Common Stock on the Offering Date. Fair market value shall be defined as the closing bid price of the Common Stock on the largest national securities exchange on which such Common Stock is listed at the time the Common Stock is to be valued. If the Common Stock is not then listed on any such exchange, the fair market value shall be the closing sales price if such is reported or otherwise the mean between the closing "Bid" and the closing "Ask" prices, if any, as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the date of valuation, or if none, on the most recent trade date thirty (30) days or less prior to the date of valuation for which such quotations are reported. If the Common Stock is not then listed on any such exchange or quoted in NASDAQ, the fair market value shall be the mean between the average of the "Bid" and the average of the "Ask" prices, if any, as reported in the National Daily Quotation Service for the date of 3 valuation, or, if none, for the most recent trade date thirty (30) days or less prior to the date of valuation for which such quotations are reported. If the fair market value cannot be determined under the preceding three sentences, it shall be determined in good faith by the Committee. 8. TIME OF PURCHASE From time to time, the Committee shall grant to each Participant an option to purchase shares of Common Stock in an amount equal to the number of shares of Common Stock that the accumulated payroll deductions to be credited to his Account during the Offering Period may purchase at the applicable purchase price. Each Offering Period shall be for a specified period of time to be fixed by the Committee and shall be for no less than one month and no more than twenty-seven (27) months' duration. Each Participant who elects to purchase shares of Common Stock hereunder shall be deemed to have exercised his option automatically on such date of purchase. Administrative and commission costs on purchases shall be paid by the Company. The Committee shall cause to be delivered periodically to each Participant a statement showing the aggregate number of shares of Common Stock in his Account, the number of shares of Common Stock purchased for him in the preceding Offering Period, his aggregate Compensation deductions for the preceding Offering Period, the price per share paid for the shares of Common Stock purchased for him during the preceding Offering Period, and the amount of cash, if any, remaining in his Account at the end of the preceding Offering Period. A Participant may request delivery to him of the cash in his Account or of the shares of Common Stock held in his Account at any time (subject to any limitations imposed by Section 16(b) of the Securities Exchange Act of 1934), and the delivery thereof shall be made at such regular time as the Company or its transfer agent shall determine. If such delivery is required at a time other than the normal transfer date set by the Company or its transfer agent, the Participant requesting such transfer shall pay the costs thereof. All of the cash deposits in his Account shall be paid to him promptly after receipt of notice of withdrawal, without interest. Shares of Common Stock to be delivered to a Participant under the Plan shall be registered in the name of the Participant or, if the Participant so directs in writing to the Committee, in the name of the Participant and such person(s) as may be designated by the Participant, to the extent permitted by applicable law, and delivered to the Participant as soon as practicable after the request for a withdrawal. If a Participant wishes to sell the shares of Common Stock in his Account, he may notify the Committee to sell the same, in lieu of a distribution of such shares, in which event all commission costs incurred in connection with the sale of the shares of Common Stock shall be borne by the Participant. The Company shall pay administrative costs associated therewith other than costs arising from a sale occurring at a time different from the prearranged dates set by the Company or its transfer agent for making such sales. 9. CESSATION OF PARTICIPATION A Participant may cease participation in the Plan at any time by notifying the Committee in writing of his intent to cease his participation. If such notice is received by the Committee the Company shall distribute to the Participant all of his accumulated payroll deductions, without interest. If any Participant ceases participation in the Plan, no further Compensation deductions shall be made on his behalf after the effective date of his cessation, except in accordance with a new authorization form filed with the Committee as provided in Section 6. Upon ceasing participation in the Plan, a Participant shall not be permitted to deliver an authorization form to reenter the Plan until six (6) months have elapsed from the date his cessation becomes effective. 10. INELIGIBILITY An Employee must be employed by the Company or an Affiliate on the Purchase Date in order to participate in the purchase for that Offering Period. If an option expires without first having been exercised, all funds credited to the Participant's Account shall be refunded without interest. If a Participant becomes ineligible to participate in the Plan at any time, all Compensation deductions made on behalf of the Participant that have not been used to purchase shares of Common Stock shall be paid to the Participant within thirty (30) days after the Committee determines that the Participant is not eligible to participate in the Plan. 4 11. DESIGNATION OF BENEFICIARY A Participant may file a written designation of a beneficiary who shall receive any shares of Common Stock (or remaining Compensation deductions) credited to the Participant's Account under the Plan in the event of such Participant's death prior to delivery to him of the certificates for such shares (or remaining Compensation deductions). The designation of a beneficiary may be changed by the Participant at any time by written notice given in accordance with rules and procedures established by the Committee. Upon the death of a Participant, and upon receipt by the Company of proof of the identity and existence, at the Participant's death, of a beneficiary validly designated by him under the Plan, the Company shall deliver such shares of Common Stock (or remaining Compensation deductions) to such beneficiary. In the event of the death of the Participant, and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares (or remaining Compensation deductions) to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed, the Company, in its sole discretion, may deliver such shares (or remaining Compensation deductions) to the Participant's spouse or to any one or more dependents or relatives of the Participant, or to such other person or persons as the Company may designate on behalf of the estate of such deceased Participant. 12. TRANSFERABILITY Neither Compensation deductions nor Plan contributions credited to a Participant's Account nor any rights with regard to Plan participation or the right to purchase shares of Common Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by a Participant other than by will or the laws of descent and distribution; provided, however, that shares of Common Stock purchased on behalf of a Participant and left in his Account shall be subject to his absolute control. Any attempted assignment, transfer, pledge, or other disposition shall be void and without effect. 13. AMENDMENT OR TERMINATION The Board may, without further action on the part of the stockholders of the Company, at any time amend the Plan in any respect, or terminate the Plan, except that it may not: (a) Permit the sale of more shares of Common Stock than are authorized under Section 5; (b) Permit Compensation deductions at a rate in excess of the rate set forth herein; (c) Change the class of eligible Employees; or (d) Effect a change inconsistent with Section 423 of the Code or the regulations issued thereunder. 14. NOTICES All notices or other communications by a Participant under or in connection with the Plan shall be deemed to have been duly given when received in writing by the Chief Financial Officer of the Company or when received in the form specified by the Committee at the location and by the person designated by the Committee for the receipt thereof. 15. LIMITATIONS Notwithstanding any other provisions of the Plan: (a) The Company intends that this Plan shall constitute an employee stock purchase plan within the meaning of Section 423 of the Code. Any provisions required to be included in the Plan under said Section, and under regulations issued thereunder, are hereby included as though set forth in the Plan at length. (b) No Employee shall be entitled to participate in the Plan if, immediately after the grant of an option hereunder, the Employee would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or an Affiliate. For purposes of this Section 15, stock ownership shall be determined under the rules of Section 424(d) of the Code and stock that the Employee may purchase under outstanding options shall be treated as stock owned by the Employee. 5 (c) No Employee shall be permitted to purchase Common Stock hereunder if his right and option to purchase Common Stock under this Plan and under all other employee stock purchase plans (as defined in Section 423 of the Code) of the Company or any Affiliates would result in an entitlement to purchase Common Stock in any one (1) calendar year in excess of a fair market value of $25,000 (determined at the time of grant). (d) All Employees shall have the same rights and privileges under the Plan, except that the amount of Common Stock that may be purchased pursuant to the Plan shall bear a uniform relationship to an Employee's Compensation. All rules and determinations of the Committee shall be uniformly and consistently applied to all persons in similar circumstances. (e) Nothing in the Plan shall confer upon any Employee the right to continue in the employment of the Company or any Affiliate or affect the right that the Company or any Affiliate may have to terminate the employment of such Employee. (f) No Participant shall have any right as a stockholder unless and until certificates for shares of Common Stock are issued to him or allocated to his Account. (g) Under any provision of the Plan that requires a computation of the number of shares of Common Stock to be purchased, such number of shares of Common Stock may be expressed as a whole number or as a fractional portion of a whole number. (h) The Plan is intended to provide shares of Common Stock for investment and not for resale. The Company does not, however, intend to restrict or influence any Participant in the conduct of his own affairs. A Participant, therefore, may sell shares of Common Stock purchased under the Plan at any time he chooses, subject to compliance with any applicable federal or state securities laws or any applicable Company restriction or blackout period, provided, however, that because of certain federal tax requirements, each Participant shall agree, by entering the Plan: (i) promptly to give the Company notice of any shares of Common Stock disposed of within two (2) years after the Offering Date of the applicable option, or within one (1) year of the Purchase Date, and the number of such shares disposed of (a "disqualifying disposition"); (ii) that the Company may withhold, pursuant to Code (S)(S) 3102, 3301, and 3402, from his wages and other cash compensation paid to him in all payroll periods following in the same calendar year, any additional taxes the Company may become liable for in respect of amounts includable in his income as additional compensation as a result of a disqualifying disposition of Common Stock acquired under the Plan, or as a result of the acquisition of Common Stock under the Plan; and (iii) that he shall repay the Company any amount of additional taxes the Company may become liable for in respect of amounts includable in his income as additional compensation as a result of a disqualifying disposition of Common Stock acquired under the Plan, or as a result of the acquisition of Common Stock under the Plan, that cannot be satisfied by withholding from the wages and other cash compensation paid to him by the Company. (i) This Plan is intended to comply in all respects with applicable law and regulations, including with respect to Participants who are officers or directors for purposes of Section 16 of the Securities Exchange Act of 1934, as amended from time to time, Rule 16b-3 of the Securities and Exchange Commission. In case any one or more provisions of this Plan shall be held invalid, illegal, or unenforceable in any respect under applicable law and regulation (including Rule 16b-3), the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal, or unenforceable provision shall be deemed null and void; however, to the extent permitted by law, any provision that could be deemed null and void shall first be construed, interpreted, or revised retroactively to permit this Plan to be construed in compliance with all applicable law (including Rule 16b-3), so as to further the intent of this Plan. Notwithstanding anything herein to the contrary, with respect to Participants who are officers and directors for purposes of Section 16(b) of the Securities Exchange Act of 1934, as 6 amended from time to time, and if required to comply with the rules promulgated thereunder, such Participants shall not be permitted to direct the sale of any Common Stock purchased hereunder until at six (6) months have elapsed from the date of purchase, unless the Committee determines that the sale of the Common Stock otherwise satisfies the then current Rule 16b-3 requirements. 16. EFFECTIVE DATE AND APPROVALS The Plan shall become effective at a time when: (a) the Plan has been adopted by the Board; and (b) a registration statement on Form S-8 under the Securities Act of 1933, as amended, has become effective with respect to the Plan; and (c) the Committee has notified the eligible Employees that they may commence participation in the Plan; and (d) the Plan is approved by the holders of a majority of the outstanding shares of Common Stock of the Company, which approval must occur within the period ending twelve (12) months after the date the Plan is adopted by the Board. In the event such stockholder approval is not obtained, the Plan shall terminate and have no further force or effect, and all amounts collected from the Participants during any initial Offering Period(s) hereunder shall be refunded. Unless sooner terminated by the Board, or as set forth above, the Plan shall terminate upon the earlier of (i) the tenth (10th) anniversary of the adoption of the Plan by the Board, or (ii) the date on which all shares available for issuance under the Plan shall have been sold under the Plan. 17. APPLICABLE LAW All questions pertaining to the validity, construction, and administration of the Plan shall be determined in conformity with the laws of Illinois, to the extent not inconsistent with Section 423 of the Code and the regulations thereunder. 7 - -------------------------------------------------------------------------------- P R O X Y SYSTEM SOFTWARE ASSOCIATES, INC. 500 WEST MADISON STREET CHICAGO, ILLINOIS 60661 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Roger E. Covey and Joseph J. Skadra as Proxies, each of them with the power to appoint their substitutes, and hereby authorizes each of them to represent and to vote, as designated below, all the shares of common stock, $0.0033 par value per share, of System Software Associates, Inc., a Delaware corporation (the "COMPANY"), held of record by the undersigned on March 2, 1998 at the Annual Meeting of Stockholders to be held on Tuesday, April 14, 1998, or any adjournment thereof. Election of Directors, Nominees: Nominees are: Roger E. Covey, Casey G. Cowell, Andrew J. Filipowski, Douglas P. Smith, William M. Stuek, and William N. Weaver, Jr. YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD. ------------- SEE REVERSE SIDE ------------- - -------------------------------------------------------------------------------- . FOLD AND DETACH HERE . - -------------------------------------------------------------------------------- [X] Please mark your votes as in this example. 4933 THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO SELECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSED SLATE OF DIRECTORS. - -------------------------------------------------------------------------------- THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ENTIRE SLATE. - -------------------------------------------------------------------------------- 1. Election of Directors (see reverse) FOR WITHHELD [_] [_] For, except vote withheld from the following nominee(s): - -------------------------------------------------------------------------------- 2. Approval of the System Software Associates, Inc. Qualified Employee Stock Purchase Plan FOR AGAINST ABSTAIN [_] [_] [_] 3. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting, or any adjournment thereof. Change of Address/Comments on Reverse Side [_] - -------------------------------------------------------------------------------- DATED: _________________________________, 1998 Please sign exactly as name appears at left. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If as a corporation, please sign in full corporate name by President or other authorized officer. If as a partnership, please sign in full partnership name by authorized person. PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT JOSEPH J. SKADRA AT THE COMPANY AT (312) 258-6000. - -------------------------------------------------------------------------------- Signature - -------------------------------------------------------------------------------- Signature (if held jointly) - -------------------------------------------------------------------------------- . FOLD AND DETACH HERE . -----END PRIVACY-ENHANCED MESSAGE-----