<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1994
REGISTRATION NO. 33-56185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STERLING SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7372 75-1873956
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8080 NORTH CENTRAL EXPWY. JEANNETTE P. MEIER
SUITE 1100 EXECUTIVE VICE PRESIDENT,
DALLAS, TEXAS 75206 GENERAL COUNSEL AND SECRETARY
(214) 891-8600 8080 N. CENTRAL EXPWY.
(ADDRESS, INCLUDING ZIP CODE, AND SUITE 1100
TELEPHONE NUMBER, INCLUDING AREA CODE, DALLAS, TEXAS 75206
OF REGISTRANT'S PRINCIPAL EXECUTIVE (214) 891-8600
OFFICE) (NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
CHARLES D. MAGUIRE, JR. MAURICE N. MALOOF
JACKSON & WALKER, L.L.P. HICKS, MALOOF & CAMPBELL,A PROFESSIONAL
901 MAIN STREET, SUITE 6000 CORPORATION
DALLAS, TEXAS 75202 SUITE 2200, MARQUIS TWO TOWER
(214) 953-6000 285 PEACHTREE CENTER AVENUE, N.E.
ATLANTA, GEORGIA 30303
(404) 588-1100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective and the
effective time of the proposed merger (the "Merger") of a subsidiary of the
Registrant with and into KnowledgeWare, Inc. ("KnowledgeWare"), as described in
the Amended and Restated Agreement and Plan of Merger, dated as of August 31,
1994, attached as Exhibit A to the Proxy Statement/Prospectus forming a part of
this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROXY
STATEMENT/PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-4
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LOCATION IN PROXY
FORM S-4 ITEM STATEMENT/PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration
Statement and Outside Front
Cover of Prospectus.......... Forepart of the Registration Statement;
Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Table of Contents; Available Information;
Incorporation of Certain Documents by
Reference
3. Risk Factors, Ratio of
Earnings to Fixed Charges and
Other Information............ Summary; Investment Considerations; The
Merger; The Merger Agreement; Certain
Information Regarding Sterling Software;
Certain Information Regarding
KnowledgeWare
4. Terms of the Transaction...... Summary; The Special Meeting; The Merger;
The Merger Agreement; Description of
Sterling Software Capital Stock;
Comparison of Stockholder Rights
5. Pro Forma Financial
Information.................. Summary; Pro Forma Combined Condensed
Financial Information
6. Material Contacts with the
Company Being Acquired....... Summary; The Merger; The Merger Agreement;
The Stock Option Agreement; The
Stockholder Agreements; The Escrow
Agreement
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed to
be Underwriters.............. Not Applicable
8. Interests of Named Experts and
Counsel...................... Legal Matters
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to
S-3 Registrants.............. Available Information; Incorporation of
Certain Documents by Reference; Summary;
The Merger; Certain Information Regarding
Sterling Software; Description of Sterling
Software Capital Stock
11. Incorporation of Certain
Information by Reference..... Incorporation of Certain Documents by
Reference
12. Information with Respect to
S-2 or S-3 Registrants....... Not Applicable
</TABLE>
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LOCATION IN PROXY
FORM S-4 ITEM STATEMENT/PROSPECTUS
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13. Incorporation of Certain
Information by Reference........ Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants ................ Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies....................... Available Information; Incorporation of
Certain Documents by Reference;
Summary; Investment Considerations;
The Merger; Certain Information
Regarding KnowledgeWare
16. Information with Respect to S-2
or S-3 Companies................ Not Applicable
17. Information with Respect to
Companies Other Than S-3 or S-2
Companies ...................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies,
Consents or Authorizations Are
to Be Solicited ................ Summary; The Special Meeting; The
Merger; The Stockholder Agreements;
Stockholder Proposals
19. Information if Proxies,
Consents or Authorizations are
not to be Solicited or in an
Exchange Offer.................. Not Applicable
</TABLE>
<PAGE>
KNOWLEDGEWARE, INC.
3340 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
OCTOBER 28, 1994
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
KnowledgeWare, Inc. ("KnowledgeWare") to be held on November 30, 1994, at the
Hotel Nikko, 3300 Peachtree Road, Atlanta, Georgia, commencing at 10:00 a.m.,
local time. At the meeting, you will be asked to consider and vote on a merger
(the "Merger") pursuant to which KnowledgeWare will become a wholly owned
subsidiary of Sterling Software, Inc. ("Sterling").
The Amended and Restated Agreement and Plan of Merger provides for
KnowledgeWare common stockholders to receive up to .1653 of a share of Sterling
common stock for each share of KnowledgeWare common stock they own. Promptly
after the Merger, KnowledgeWare common stockholders will be entitled to receive
.1322 of a share of Sterling common stock for each share of KnowledgeWare
common stock; the remaining 20% of the number of shares of Sterling common
stock issuable upon effectiveness of the Merger will be placed in escrow (the
"Escrowed Shares") and thereafter distributed to KnowledgeWare common
stockholders only if and to the extent that such shares are not necessary to
cover certain losses, claims, liabilities, judgments, costs and expenses that
may be incurred by Sterling or KnowledgeWare in connection with certain claims,
litigation or other proceedings to which Sterling or KnowledgeWare is or may
become a party and with respect to which Sterling is entitled to
indemnification. Since August 30, 1994, a number of actions have been filed
against KnowledgeWare and certain of its officers alleging violations of
securities laws. Losses, claims, liabilities, judgments, costs or expenses
incurred by KnowledgeWare or Sterling in connection with these actions
(including amounts paid in settlement) will result in claims for
indemnification to be satisfied from the Escrowed Shares. In the event that all
the Escrowed Shares are used to cover losses, claims, liabilities, judgments,
costs or expenses incurred by KnowledgeWare or Sterling, no Escrowed Shares
will be distributed to KnowledgeWare common stockholders.
Your Board of Directors has carefully considered the terms of the proposed
transaction, as well as the possibility that none of the Escrowed Shares may be
distributed to KnowledgeWare's stockholders, and believes that the transaction
is fair to and in the best interests of KnowledgeWare's stockholders. The
consummation of the Merger with Sterling represents an opportunity to create a
leading software and services company that provides greater financial and other
resources for KnowledgeWare's products, and that gives KnowledgeWare's
stockholders the opportunity to participate as stockholders in the future
prospects of the combined company. The investment banking firm of Alex. Brown &
Sons Incorporated, after reviewing the terms of all the agreements between
KnowledgeWare and Sterling, including the provisions for the Escrowed Shares,
has delivered its opinion to KnowledgeWare's Board of Directors that, as of the
date of its opinion, the exchange ratio was fair to KnowledgeWare's
stockholders from a financial point of view. The Board has approved the
proposed transaction and unanimously recommends that KnowledgeWare's
stockholders vote FOR its approval.
The accompanying Proxy Statement/Prospectus describes in detail the terms of
the proposed Merger and related documents. It also contains pro forma financial
information and other information about the companies, including information
regarding the Sterling common stock to be issued in the Merger. You are urged
to read this information carefully.
Whether or not you plan to attend the Special Meeting, you are urged to
complete, sign and promptly return the enclosed proxy card to ensure that your
shares will be voted at the meeting. Your vote on the proposed Merger is of
great importance. A postage-paid return envelope is enclosed for your
convenience.
Sincerely,
/s/ Francis A. Tarkenton
Francis A. Tarkenton
Chairman of the Board and Chief
Executive Officer
<PAGE>
KNOWLEDGEWARE, INC.
3340 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 30, 1994
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
KnowledgeWare, Inc., a Georgia corporation ("KnowledgeWare"), will be held on
November 30, 1994, at the Hotel Nikko, 3300 Peachtree Road, Atlanta, Georgia,
commencing at 10:00 a.m., local time, to consider and vote upon the following
matters described in the accompanying Proxy Statement/Prospectus:
1. Approval and adoption of the Amended and Restated Agreement and Plan of
Merger, dated as of August 31, 1994 (as amended, the "Merger
Agreement"), among Sterling Software, Inc., a Delaware corporation
("Sterling"), SSI Corporation, a Georgia corporation and a recently
organized wholly owned subsidiary of Sterling ("Merger Sub"), and
KnowledgeWare, pursuant to which, among other things, (i) Merger Sub
will be merged (the "Merger") with and into KnowledgeWare and
KnowledgeWare will become a wholly owned subsidiary of Sterling and (ii)
each outstanding share of common stock of KnowledgeWare (other than (a)
shares owned by Sterling, Merger Sub or any other subsidiary of Sterling
and (b) shares held in KnowledgeWare's treasury immediately prior to the
effective time of the Merger) will be converted into the right to
receive up to .1653 of a share of common stock of Sterling. Promptly
after the Merger, KnowledgeWare common stockholders will be entitled to
receive .1322 of a share of Sterling common stock for each share of
KnowledgeWare common stock; the remaining 20% of the number of shares of
Sterling common stock issuable upon effectiveness of the Merger will be
placed in escrow (the "Escrowed Shares") pursuant to the terms of an
escrow agreement (the "Escrow Agreement") and thereafter distributed to
KnowledgeWare common stockholders only if and to the extent that such
shares are not necessary to cover certain losses, claims, liabilities,
judgments, costs and expenses that may be incurred by Sterling, Merger
Sub or KnowledgeWare in connection with certain claims, litigation or
other proceedings (including amounts paid in settlement) to which
Sterling, Merger Sub or KnowledgeWare is or may become a party and with
respect to which Sterling is entitled to indemnification. In the event
that all of the Escrowed Shares are used to cover losses, claims,
liabilities, judgments, costs or expenses incurred by KnowledgeWare,
Merger Sub or Sterling, no Escrowed Shares will be distributed to the
KnowledgeWare common stockholders. A copy of the Merger Agreement (which
contains the form of Escrow Agreement) is attached as Appendix A to the
accompanying Proxy Statement/Prospectus.
2. If necessary, whether to adjourn the meeting for the purpose of
soliciting additional proxies.
3. The transaction of such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
Only holders of record of common stock of KnowledgeWare at the close of
business on October 6, 1994 will be entitled to notice of, and to vote at, the
Special Meeting and any adjournment or postponement thereof. Whether or not you
plan to attend the meeting, please complete, date, sign and return the enclosed
proxy card promptly. A return envelope is enclosed for your convenience and
requires no postage for mailing in the United States.
By Order of the Board of Directors,
/s/ Richard M. Haddrill
Richard M. Haddrill
Executive Vice President and Secretary
Atlanta, Georgia
October 28, 1994
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YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
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<PAGE>
STERLING SOFTWARE, INC. PROSPECTUS
----------------
KNOWLEDGEWARE, INC.
PROXY STATEMENT
----------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, without par value ("KnowledgeWare Common Stock"), of KnowledgeWare,
Inc., a Georgia corporation ("KnowledgeWare"), in connection with the
solicitation of proxies by KnowledgeWare's Board of Directors for use at the
Special Meeting of KnowledgeWare stockholders (the "Special Meeting") to be
held on November 30, 1994 at the Hotel Nikko, 3300 Peachtree Road, Atlanta,
Georgia, commencing at 10:00 a.m., local time, and at any adjournment or
postponement thereof. At the Special Meeting the stockholders will consider and
vote upon the following matters:
1. Approval and adoption of the Amended and Restated Agreement and Plan of
Merger, dated as of August 31, 1994 (as amended, the "Merger
Agreement"), among Sterling Software, Inc., a Delaware corporation
("Sterling"), SSI Corporation, a Georgia corporation and a recently
organized wholly owned subsidiary of Sterling ("Merger Sub"), and
KnowledgeWare, pursuant to which, among other things, (i) Merger Sub
will be merged with and into KnowledgeWare and KnowledgeWare will become
a wholly owned subsidiary of Sterling (the "Merger") and (ii) each
outstanding share of KnowledgeWare Common Stock (other than (a) shares
owned by Sterling, Merger Sub or any other subsidiary of Sterling and
(b) shares held in KnowledgeWare's treasury immediately prior to the
effective time of the Merger) will be converted into the right to
receive up to .1653 of a share of common stock, par value $.10 per share
("Sterling Common Stock"), of Sterling. Promptly after the Merger,
KnowledgeWare common stockholders will be entitled to receive .1322 of a
share of Sterling Common Stock for each share of KnowledgeWare Common
Stock; the remaining 20% of the number of shares of Sterling Common
Stock issuable upon effectiveness of the Merger will be placed in escrow
(the "Escrowed Shares") pursuant to the terms of an escrow agreement
(the "Escrow Agreement") and thereafter distributed to KnowledgeWare
common stockholders only if and to the extent that such shares are not
necessary to cover certain losses, claims, liabilities, judgments, costs
and expenses that may be incurred by Sterling, Merger Sub or
KnowledgeWare in connection with certain claims, litigation or other
proceedings (including amounts paid in settlement) to which Sterling,
Merger Sub or KnowledgeWare is or may become a party and with respect to
which Sterling is entitled to indemnification. The interests of the
holders of KnowledgeWare Common Stock as of the effective time of the
Merger in the Escrow Agreement and in the Escrowed Shares will be
contingent, nontransferable interests, will not be evidenced by a
certificate or other instrument and will not be transferable except by
operation of law. IN THE EVENT THAT ALL OF THE ESCROWED SHARES ARE USED
TO COVER LOSSES, CLAIMS, LIABILITIES, JUDGMENTS, COSTS OR EXPENSES
INCURRED BY KNOWLEDGEWARE, MERGER SUB OR STERLING, NO ESCROWED SHARES
WILL BE DISTRIBUTED TO THE KNOWLEDGEWARE COMMON STOCKHOLDERS. A copy of
the Merger Agreement (which contains a form of Escrow Agreement) is
attached as Appendix A to this Proxy Statement/Prospectus.
2. If necessary, whether to adjourn the meeting for the purpose of
soliciting additional proxies.
3. The transaction of such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER, SEE
"INVESTMENT CONSIDERATIONS."
This Proxy Statement/Prospectus also constitutes the prospectus of Sterling
with respect to the issuance of up to 2,654,652 shares of Sterling Common Stock
that are issuable in connection with the proposed Merger. All information
contained in this Proxy Statement/Prospectus relating to Sterling has been
supplied by Sterling, and all information contained in this Proxy
Statement/Prospectus relating to KnowledgeWare has been supplied by
KnowledgeWare.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
This Proxy Statement/Prospectus and the accompanying proxy card are first
being mailed to stockholders of KnowledgeWare on or about October 28, 1994.
The date of this Proxy Statement/Prospectus is October 28, 1994.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 3
SUMMARY................................................................... 4
The Companies........................................................... 4
The Special Meeting..................................................... 5
The Merger.............................................................. 6
The Stock Option Agreement.............................................. 12
The Stockholder Agreements.............................................. 12
The Escrow Agreement.................................................... 12
Recent Developments..................................................... 13
Summary Historical and Pro Forma Financial Information.................. 17
Comparative Per Share Data.............................................. 20
Comparative Market Prices............................................... 20
INVESTMENT CONSIDERATIONS................................................. 22
Integration of the Two Companies; Transaction Costs..................... 22
Financial Condition of KnowledgeWare.................................... 22
Establishment of Escrow................................................. 23
Certain Legal Proceedings............................................... 24
Interests of Certain Affiliates of KnowledgeWare in the Merger.......... 25
Uncertainty of Federal Income Tax Consequences.......................... 26
THE SPECIAL MEETING....................................................... 27
General................................................................. 27
Matters to be Considered at the Special Meeting......................... 27
Board of Directors Recommendation....................................... 27
Record Date; Voting at the Special Meeting.............................. 27
Voting and Revocation of Proxies........................................ 28
THE MERGER................................................................ 29
General................................................................. 29
Background of the Merger................................................ 29
Reasons for the Merger; Recommendation of the KnowledgeWare Board of Di-
rectors................................................................ 33
Opinion of Financial Advisor............................................ 35
Interests of Certain Persons in the Merger.............................. 41
Accounting Treatment.................................................... 43
Certain Federal Income Tax Consequences................................. 43
Regulatory Approval..................................................... 46
Resale Restrictions; Registration Rights................................ 47
No Dissenters' Rights................................................... 47
THE MERGER AGREEMENT...................................................... 47
The Merger.............................................................. 47
Exchange Procedures..................................................... 49
Representations and Warranties.......................................... 50
Certain Covenants....................................................... 50
Indemnification of Sterling; Escrow..................................... 51
No Solicitation of Transactions......................................... 51
Benefit Plans........................................................... 52
Governance.............................................................. 52
Indemnification of Directors and Officers of KnowledgeWare.............. 52
Conditions.............................................................. 53
Termination............................................................. 53
Expenses................................................................ 54
Amendment and Waiver.................................................... 54
THE STOCK OPTION AGREEMENT................................................ 54
The Option.............................................................. 54
Exercise of the Option.................................................. 54
</TABLE>
i
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Expiration of the Option................................................. 55
Adjustments of Number of Shares Subject to Option........................ 55
Registration Rights...................................................... 55
THE STOCKHOLDER AGREEMENTS................................................. 56
THE ESCROW AGREEMENT....................................................... 57
General.................................................................. 57
Disbursement of Escrowed Shares.......................................... 57
Voting and Dividend Rights............................................... 58
The Representative....................................................... 58
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION......................... 58
CERTAIN INFORMATION REGARDING STERLING SOFTWARE............................ 64
General.................................................................. 64
Electronic Commerce Group................................................ 65
Enterprise Software Group................................................ 66
Federal Systems Group.................................................... 67
International Group...................................................... 68
Product Licenses......................................................... 68
Product Support.......................................................... 68
Services................................................................. 68
Product Development...................................................... 68
Sales and Marketing...................................................... 69
Other Information........................................................ 69
Merger Sub............................................................... 69
CERTAIN INFORMATION REGARDING KNOWLEDGEWARE................................ 69
General.................................................................. 69
Products................................................................. 71
Acquisitions............................................................. 72
Sales and Marketing...................................................... 72
Seasonality and Backlog.................................................. 74
Customer Support Services................................................ 74
Research and Development................................................. 74
Competition.............................................................. 75
Product Protection....................................................... 75
Employees................................................................ 75
Properties............................................................... 75
Legal Proceedings........................................................ 76
DESCRIPTION OF STERLING SOFTWARE CAPITAL STOCK............................. 77
Description of Sterling Software Common Stock............................ 77
Description of Sterling Software Preferred Stock......................... 77
COMPARISON OF STOCKHOLDER RIGHTS........................................... 78
Amendment of Charter and Bylaws.......................................... 78
Removal of Directors..................................................... 79
Changes of Control....................................................... 79
Dividends................................................................ 81
Indemnification of Directors and Officers................................ 82
Dissenters' Rights....................................................... 82
</TABLE>
ii
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EXPERTS.................................................................... 83
STOCKHOLDER PROPOSALS...................................................... 83
OTHER MATTERS.............................................................. 84
LEGAL MATTERS.............................................................. 84
TRADEMARK INFORMATION...................................................... 84
</TABLE>
APPENDICES
Appendix A:Amended and Restated Agreement and Plan of Merger
Appendix B:Fairness Opinion of Alex. Brown & Sons Incorporated
Appendix C:Amended and Restated Stock Option Agreement
Appendix D:Amended and Restated Form of Stockholder Agreement
iii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS
IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY STERLING, KNOWLEDGEWARE OR ANY
OTHER PERSON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL
TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF STERLING OR KNOWLEDGEWARE SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
AVAILABLE INFORMATION
Sterling and KnowledgeWare are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith each files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by Sterling and KnowledgeWare with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W, Washington, D.C. 20549, and at the regional offices of the Commission at
75 Park Place, Room 1228, New York, New York 10007, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621. The
Common Stock of Sterling is listed on the New York Stock Exchange (the "NYSE").
Reports, proxy statements and other information concerning Sterling can also be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
Sterling has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities to be issued pursuant to the Merger
Agreement (as hereinafter defined). As permitted by the rules and regulations
of the Commission, this Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. Copies of the Registration
Statement are available from the Commission upon payment of certain fees
prescribed by the Commission. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus as to the contents of any contract, opinion or other
document referred to herein are not necessarily complete. In each instance,
reference is hereby made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document and each
such statement is qualified in all respects by such reference.
The terms "Sterling" and "KnowledgeWare" when used herein shall mean Sterling
Software, Inc. and KnowledgeWare, Inc., respectively, and their respective
subsidiaries and affiliates through which they conduct their business, unless
the context indicates otherwise.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Sterling and
KnowledgeWare are incorporated herein by reference and made a part hereof:
STERLING
(i) Annual Report on Form 10-K (File No. 1-8465) for the year ended
September 30, 1993, as amended by Form 10-K/A Amendment No. 1 filed January
26, 1994 (the "Sterling 10-K");
(ii) Quarterly Report on Form 10-Q (File No. 1-8465) for the quarter
ended December 31, 1993;
(iii) Quarterly Report on Form 10-Q (File No. 1-8465) for the quarter
ended March 31, 1994, as amended by Form 10-Q/A Amendment No. 1 filed May
16, 1994;
(iv) Quarterly Report on Form 10-Q (File No. 1-8465) for the quarter
ended June 30, 1994 (the "Sterling June 30, 1994 10-Q");
(v) Current Report on Form 8-K (File No. 1-8465) filed November 16,
1993;
(vi) Current Report on Form 8-K (File No. 1-8465) filed August 2, 1994;
(vii) Current Report on Form 8-K (File No. 1-8465) filed August 2, 1994;
(viii) Current Report on Form 8-K (File No. 1-8465) filed September 2,
1994;
(ix) Proxy Statement for Sterling's Annual Meeting held on March 17,
1994; and
(x) Registration Statement on Form 8-A (File No. 0-108465), filed March
7, 1990.
KNOWLEDGEWARE
(i) Annual Report on Form 10-K (File No. 0-18213) for the year ended June
30, 1994, as amended by Form 10-K/A Amendment No. 1 filed September 22,
1994, Amendment No. 2 filed October 21, 1994 and Amendment No. 3 filed
October 27, 1994 (the "KnowledgeWare 10-K");
(ii) Current Report on Form 8-K (File No. 0-18213) filed July 6, 1994;
(iii) Current Report on Form 8-K (File No. 0-18213) filed July 20, 1994;
(iv) Current Report on Form 8-K (File No. 0-18213) filed August 4, 1994;
(v) Current Report on Form 8-K (File No. 0-18213) filed September 22,
1994;
(vi) Current Report on Form 8-K (File No. 0-18213) filed October 11,
1994;
(vii) Quarterly Report on Form 10-Q (File No. 0-18213) for the quarter
ended September 30, 1993 filed November 2, 1993, as amended by Form 10-Q/A
Amendment No. 1 filed February 11, 1994 and Amendment No. 2 filed October
27, 1994;
(viii) Quarterly Report on Form 10-Q (File No. 0-18213) for the quarter
ended December 31, 1993 filed February 11, 1994, as amended by Form 10-Q/A
Amendment No. 1 filed October 27, 1994; and
(ix) Quarterly Report on Form 10-Q (File No. 0-18213) for the quarter
ended March 31, 1994 filed May 13, 1994, as amended by Form 10-Q/A
Amendment No. 1 filed October 27, 1994.
All documents filed by Sterling or KnowledgeWare pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing thereof. Any statement contained herein or in a document
incorporated or deemed incorporated by reference herein shall be deemed to be
modified or superseded for all purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by reference some of
which are delivered herewith (the Sterling 10-K, as amended, the Sterling June
30, 1994 10-Q and the KnowledgeWare 10-K, as amended) and some of which are
not presented herein or delivered herewith. Such documents which are not
delivered herewith (other than exhibits and schedules thereto, unless such
exhibits or schedules are specifically incorporated by reference into the
information that this Proxy Statement/Prospectus incorporates) are available
without charge to any person to whom a copy of this Proxy Statement/Prospectus
is delivered, upon the written or oral request of such person. Written or
telephonic requests for copies, in the case of documents relating to Sterling,
should be directed to Sterling Software, Inc., 8080 North Central Expressway,
Suite 1100, Dallas, Texas 75206, Attention: Jeannette P. Meier, Executive Vice
President, Secretary and General Counsel (telephone: (214) 891-8600), or, in
the case of documents relating to KnowledgeWare, directed to KnowledgeWare,
Inc., 3340 Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Rick W.
Gossett, Chief Financial Officer (telephone: (404) 231-8575). In order to
ensure timely delivery of the documents prior to the Special Meeting, any
request must be received by November 22, 1994.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained, or incorporated by
reference, in this Proxy Statement/Prospectus and the Appendices hereto.
Stockholders are urged to read this Proxy Statement/Prospectus and the
Appendices hereto in their entirety. Unless otherwise indicated, year-end
financial and other information referencing a particular year with respect to
Sterling is as of or for the fiscal year ended September 30, and with respect
to KnowledgeWare is as of or for the fiscal year ended June 30. For certain
factors which should be considered in evaluating the Merger, see "Investment
Considerations".
THE COMPANIES
Sterling Software
Sterling is a recognized worldwide supplier of software products and services
within the electronic commerce and enterprise software markets and also
provides technical professional services to certain sectors of the federal
government. Consistent with Sterling's decentralized operating style, each
major market is served by independently-operated business groups which consist
of divisions that focus on specific business niches within those markets.
Sterling has steadily expanded its operations through internal growth and by
business and product acquisitions. In July 1993, Sterling completed the
acquisition of Systems Center, Inc. ("Systems Center") for approximately $156
million in a stock-for-stock transaction, and reorganized the combined company
into four business groups.
. The Electronic Commerce Group provides software and services to
facilitate electronic commerce, defined by Sterling as the worldwide
electronic interchange of business information. Product offerings
include electronic data interchange ("EDI") software and services, data
communications software and electronic payments software for financial
institutions. Sterling is the leading EDI translation software vendor in
North America.
. The Enterprise Software Group provides applications development and
systems management software products for customers typically utilizing
large IBM mainframe computers in conjunction with mid-range computers
and networks of personal computers. Addressing the needs of corporations
as they move to client/server computing environments, Sterling has
expanded its market focus to include products that operate on a variety
of computer platforms and operating systems.
. The Federal Systems Group provides technical professional services to
the federal government under several multi-year contracts primarily in
support of the National Aeronautics and Space Administration aerospace
research projects and secure communications systems for the U.S.
Department of Defense.
. The International Group, headquartered in London, is the exclusive
channel to international markets for all Sterling products. The group
operates through regional divisions representing Europe, Asia/Pacific,
the Americas and other countries throughout the world.
The principal executive offices of Sterling are located at 8080 North Central
Expressway, Suite 1100, Dallas, Texas 75206, and its telephone number is (214)
891-8600. See "Certain Information Regarding Sterling Software."
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KnowledgeWare
KnowledgeWare designs, develops, markets and supports a variety of solutions
and services for the development of a broad range of business applications from
individual support systems to departmental and mission critical enterprise-wide
systems and applications. Through a combination of development, acquisitions
and strategic alliances/partnerships, KnowledgeWare offers technology in a
variety of tool categories including "I-CASE" (integrated computer-aided
software engineering) and visual application development tools for open,
heterogenous client/server, midrange and mainframe computing environments.
KnowledgeWare's revenues also include related consulting services, project
management, training and methodology.
KnowledgeWare's product line includes the Application Development Workbench,
a comprehensive, I-CASE development solution; ObjectView, a visual development
tool for creating Windows-based client/server applications that access multiple
distributed databases; Flashpoint, a Windows-based tool for quickly creating
new graphical user interfaces for legacy applications, as well as integrating
data from a variety of applications at the desktop; Legacy Workbench, a
comprehensive set of tools that accelerate the maintenance, redesign and
migration of existing mainframe-based applications; MAXIM, an object-oriented
PC-based tool for business process reengineering; ClearAccess, a graphical tool
for end-user database queries and reports; and ClearManager, a client/server
management tool for monitoring, controlling and supporting data access
activities.
KnowledgeWare markets its products to a wide range of developers and users
within financial, governmental, telecommunications, manufacturing, utility and
other organizations worldwide. KnowledgeWare product users may include
professional developers within information systems departments; casual
developers who have programming skills but are not employed as full-time
developers; power users who build applications without writing any code to
construct customer queries and reports as well as create and update databases;
and end users of applications and reports developed with KnowledgeWare
products.
KnowledgeWare was incorporated in Michigan in 1979 as Database Design, Inc.
and the name was changed in 1985 to "KnowledgeWare, Inc." KnowledgeWare merged
with Atlanta-based Tarkenton Software, Inc. in 1986 and reincorporated in
Georgia in 1988. KnowledgeWare's principal executive offices are located at
3340 Peachtree Road, N.E., Atlanta, Georgia 30326, and its telephone number is
(404) 231-8575. See "Certain Information Regarding KnowledgeWare."
SSI Corporation
SSI Corporation ("Merger Sub") is a Georgia corporation recently organized by
Sterling solely for the purpose of effecting the Merger. The principal
executive offices of Merger Sub are located at 8080 North Central Expressway,
Suite 1100, Dallas, Texas 75206, and its telephone number is (214) 891-8600.
THE SPECIAL MEETING
Time, Date and Place. The Special Meeting of Stockholders of KnowledgeWare
(the "Special Meeting") is scheduled to be held on November 30, 1994, at the
Hotel Nikko, 3300 Peachtree Road, Atlanta, Georgia, commencing at 10:00 a.m.,
local time.
Purposes of the Special Meeting. The purposes of the Special Meeting are to
consider and vote upon (i) a proposal to approve the Amended and Restated
Agreement and Plan of Merger, dated as of August 31, 1994 (as amended, the
"Merger Agreement"), among Sterling, Merger Sub and KnowledgeWare, (ii) if in
the discretion of management of KnowledgeWare it is necessary to adjourn the
Special Meeting for the purpose of soliciting additional proxies, a proposal to
adjourn the Special Meeting, and (iii) such other matters as may properly be
brought before the Special Meeting.
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Record Date; Shares Entitled to Vote. Only holders of record of shares of
common stock, without par value ("KnowledgeWare Common Stock"), at the close of
business on October 6, 1994, are entitled to notice of and to vote at the
Special Meeting. As of October 6, 1994, there were 14,571,888 shares of
KnowledgeWare Common Stock outstanding, held by approximately 542 holders of
record. The holders of KnowledgeWare Common Stock are entitled to cast one vote
per share on each matter to be acted upon or which may properly come before the
Special Meeting.
Vote Required. The approval and adoption by the KnowledgeWare stockholders of
the Merger Agreement will require the affirmative vote of the holders of a
majority of the outstanding shares of KnowledgeWare Common Stock entitled to
vote at the Special Meeting as of the record date. The approval and adoption of
a motion to adjourn the Special Meeting to solicit additional proxies will
require the affirmative vote of a majority of shares represented in person or
by proxy at the Special Meeting. Certain directors, executive officers and/or
stockholders of KnowledgeWare, who as of August 31, 1994 beneficially owned in
the aggregate approximately 19.1% of the outstanding KnowledgeWare Common
Stock, have entered into agreements obligating them to vote in favor of the
approval and adoption of the Merger Agreement, and have granted to Sterling
irrevocable proxies to vote their shares in such manner in the event such
stockholders fail to vote as required. See "The Stockholder Agreements." In
addition, all other directors and executive officers of KnowledgeWare, who
beneficially own in the aggregate less than one percent of the outstanding
KnowledgeWare Common Stock, have indicated that they will vote all such shares
in favor of the approval and adoption of the Merger Agreement.
THE MERGER
Conversion of Securities. Upon consummation of the transactions contemplated
by the Merger Agreement, (i) Merger Sub will be merged with and into
KnowledgeWare, which will be the surviving corporation and will become a wholly
owned subsidiary of Sterling (the "Merger") and (ii) each issued and
outstanding share of KnowledgeWare Common Stock (other than (a) shares owned by
Sterling, Merger Sub or any other subsidiary of Sterling and (b) shares held in
KnowledgeWare's treasury immediately prior to the effective time of the Merger)
will be converted into the right to receive up to .1653 of a share of common
stock, par value $.10 per share ("Sterling Common Stock"), of Sterling (the
"Exchange Ratio"). Promptly after the Merger, KnowledgeWare common stockholders
will be entitled to receive .1322 of a share of Sterling Common Stock for each
share of KnowledgeWare Common Stock (the "Net Exchange Ratio"); the remaining
20% of the number of shares of Sterling Common Stock issuable upon
effectiveness of the Merger will be placed in escrow (the "Escrowed Shares")
pursuant to the terms of an escrow agreement (the "Escrow Agreement") and
thereafter distributed to KnowledgeWare common stockholders only if and to the
extent that such shares are not necessary to cover certain losses, claims,
liabilities, judgments, costs and expenses that may be incurred by Sterling,
Merger Sub or KnowledgeWare in connection with any pending or threatened
litigation, action, claim, proceeding, dispute or investigation ("Action")
(including amounts paid in settlement) to which Sterling, Merger Sub or
KnowledgeWare is or may become a party and with respect to which Sterling is
entitled to indemnification. Sterling is entitled to indemnification concerning
certain Actions pending as of the date of the Merger Agreement or thereafter
arising, including Actions arising out of violations or alleged violations of
securities laws but excluding Actions arising out of ordinary course of
business transactions and certain other Actions. See "The Merger Agreement-
Indemnification of Sterling; Escrow." Since August 30, 1994, a number of
Actions have been filed against KnowledgeWare and certain of its officers
alleging violations of securities laws. Losses, claims, liabilities, judgments,
costs or expenses incurred by KnowledgeWare, Sterling or Merger Sub in
connection with these Actions (including amounts paid in settlement) will
result in claims for indemnification to be satisfied from the Escrowed Shares.
In the event that all of the Escrowed Shares are used to cover losses, claims,
liabilities, judgments, costs or expenses incurred by KnowledgeWare, Merger Sub
or Sterling, no Escrowed Shares will be distributed to the KnowledgeWare
stockholders. See "Summary--Recent Developments," "Investment Considerations--
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Establishment of Escrow," "Investment Considerations--Certain Legal
Proceedings," "The Merger Agreement--Indemnification of Sterling; Escrow" and
"The Escrow Agreement." Fractional shares of Sterling Common Stock will not be
issued in connection with the Merger. A KnowledgeWare stockholder otherwise
entitled to a fractional share will be entitled to receive only a cash payment
in lieu of such fractional share in an amount representing such holder's
proportionate interest in the net proceeds of the sale by the exchange agent
for the Merger on behalf of all of such holders of fractional shares of
Sterling Common Stock as described under "The Merger Agreement-- Exchange
Procedures." In addition, the options outstanding under the KnowledgeWare Stock
Option Plans (as defined in "The Merger--Interests of Certain Persons in the
Merger") and KnowledgeWare's outstanding warrants to purchase an aggregate of
500,000 shares of KnowledgeWare Common Stock (each a "Warrant" and collectively
the "Warrants") will be assumed by Sterling; provided that (a) each such option
or Warrant shall become exercisable for that whole number of shares of Sterling
Common Stock (to the nearer whole share) equal to the product of the number of
shares of KnowledgeWare Common Stock issuable upon exercise of such option or
Warrant immediately prior to the Effective Time times the Exchange Ratio and
(b) the exercise price of such option or Warrant shall become equal to the
quotient given by dividing the exercise price of such option or Warrant in
effect immediately prior to the Effective Time by the Exchange Ratio.
Recommendation of the KnowledgeWare Board of Directors. The Board of
Directors of KnowledgeWare has unanimously approved the Merger Agreement and
unanimously recommends a vote FOR approval and adoption of the Merger Agreement
by the stockholders of KnowledgeWare and FOR the adjournment of the meeting to
solicit additional proxies, if necessary. The Board of Directors of
KnowledgeWare believes that the terms of the Merger Agreement are fair to and
in the best interests of KnowledgeWare and its stockholders. In making its
recommendation, the Board has taken into account the possibility that none of
the Escrowed Shares may be distributed to the KnowledgeWare stockholders and
that the Merger may not qualify as a tax free reorganization under the Internal
Revenue Code of 1986, as amended (the "Code").
The Boards of Sterling and KnowledgeWare believe that the proposed Merger
represents an opportunity to create one of the leading software and services
companies in the world, which will be able to provide its customers with a
broad range of products and excellent customer support and assist their
movement toward enterprise-wide computing. Specifically, the Boards of Sterling
and KnowledgeWare believe that the combined company will have a greatly
expanded presence in the visual application software and services market,
including integrated computer-aided software engineering and application
development tools and products for client/server, midrange and mainframe
computing environments. Additionally, Sterling will continue to be a leading
provider of electronic commerce software and services in North America, to
provide a broad offering of enterprise-wide systems management software tools
and to have a strong presence in the complex federal systems market. The
combined company is expected to be a leading vendor of application development
tools, and will have a substantial worldwide customer base, a broader global
distribution network, a work force of approximately 3,500 skilled employees and
an expected high level of recurring revenue, all of which Sterling and
KnowledgeWare believe will position the combined company for significant future
growth.
Additionally, the Board of KnowledgeWare believes that its stockholders,
customers and employees will benefit from the greater financial strength of the
combined company and that the transaction will provide KnowledgeWare's
stockholders with greater investment liquidity.
For a discussion of the factors considered by the Boards of Directors in
reaching their decisions, see "The Merger--Reasons for the Merger;
Recommendation of the KnowledgeWare Board of Directors."
Opinion of Financial Advisor. Alex. Brown & Sons Incorporated ("Alex.
Brown"), KnowledgeWare's financial advisor, after reviewing the terms of all of
the agreements between KnowledgeWare and Sterling,
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including the Escrow Agreement, has delivered its written opinion dated August
31, 1994, to KnowledgeWare's Board of Directors to the effect that, as of the
date of its opinion, the Exchange Ratio was fair to the KnowledgeWare common
stockholders from a financial point of view. For the purposes of rendering its
opinion, Alex. Brown considered that none of the Escrowed Shares may ever be
distributed to the KnowledgeWare stockholders. Alex. Brown's opinion is not
contingent upon the qualification of the Merger as a tax free reorganization
under the Code.
A copy of the opinion of Alex. Brown, which sets forth the assumptions made,
matters considered and limits of its review, is attached to this Proxy
Statement/Prospectus as Appendix B. See "The Merger--Opinion of Financial
Advisor."
Interests of Certain Persons in the Merger. Sterling has agreed in the Merger
Agreement to assume all outstanding options granted under the KnowledgeWare
Stock Option Plans. As of October 6, 1994 there were options outstanding to
purchase an aggregate of 1,545,202 shares of KnowledgeWare Common Stock at a
weighted average exercise price of $9.64 per share. Following the Merger, no
new options will be granted under the KnowledgeWare Stock Option Plans.
Sterling has agreed that all rights to indemnification and advancement of
expenses existing in favor of the current and former directors and officers of
KnowledgeWare, to the extent provided under KnowledgeWare's Articles of
Incorporation, Bylaws and indemnification agreements as of the date of the
Merger Agreement, shall survive for at least six years following the Merger,
and Sterling has agreed to indemnify and advance expenses to such persons to
the full extent as would be required of or permitted by KnowledgeWare. In
addition, to the extent available, Sterling has agreed to cause KnowledgeWare
to maintain, for three years following the Merger, KnowledgeWare's current
directors' and officers' liability insurance, or comparable insurance, with
respect to matters occurring prior to the Merger; provided that in no event
will Sterling or KnowledgeWare be required to expend more than $500,000 in the
aggregate to procure or maintain such insurance, and Sterling and KnowledgeWare
will only be required to obtain as much comparable insurance as is available
for an aggregate expenditure of $500,000. KnowledgeWare has received a binder
for a one year directors' and officers' liability insurance policy with an
aggregate limit comparable to that under KnowledgeWare's prior policy. If
KnowledgeWare is acquired by Sterling during the policy term, the policy
converts into a three year "run-off" policy. The premium for this policy is
$600,000. Sterling and KnowledgeWare have agreed that the payment of such
premium by KnowledgeWare shall satisfy Sterling's obligation to maintain or
procure such liability insurance.
Following the Effective Time, Sterling will enter into a three year
Consultation Agreement with Francis A. Tarkenton, the Chairman of the Board and
Chief Executive Officer of KnowledgeWare, pursuant to which he will be
compensated by Sterling at the rate of $300,000 per year plus the reimbursement
of certain expenses. In addition, following the Effective Time, Mr. Tarkenton
will be added to the Sterling Board of Directors. As a member of the Sterling
board, Mr. Tarkenton will be entitled to Sterling's customary outside
directors' fees, currently $22,500 per annum and $2,500 for each meeting
attended.
Sterling has acquired by assignment all of the interest and right of IBM
Credit Corporation ("IBM Credit") under that certain secured Revolving Loan and
Security Agreement with KnowledgeWare (the "Loan Agreement") by paying to IBM
Credit approximately $15.1 million, which was equal to all amounts owed
thereunder by KnowledgeWare. Concurrently, Sterling and KnowledgeWare modified
the terms of the Loan Agreement, among other things, to (i) increase the term
loan portion of the facility from $2.7 million to $6 million and fix the
revolving portion of the facility at $16 million, (ii) reformulate the
borrowing base computation to increase the borrowing base capacity based on
KnowledgeWare's eligible accounts receivable and (iii) modify certain covenants
(as amended from time to time, the "Amended Loan Agreement"). As an inducement
to Sterling's entry into the Amended Loan Agreement, KnowledgeWare agreed to
issue to Sterling warrants to purchase 70,250 shares of KnowledgeWare Common
Stock for each $1,000,000 currently outstanding or subsequently advanced under
the loan. The warrants will be immediately exercisable, expire
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five years from their date of issuance and the exercise price will be equal to
the market price of KnowledgeWare Common Stock as of the business day preceding
the date of the advance giving rise to the warrants' issuance. As of October
25, 1994, KnowledgeWare had issued to Sterling warrants to purchase 1,405,000
shares of KnowledgeWare Common Stock at a weighted average exercise price of
$4.43 per share. As of October 25, 1994, approximately $4.9 million in
additional funds had been advanced by Sterling to KnowledgeWare since Sterling
acquired IBM Credit's interest in the Loan Agreement. KnowledgeWare used the
proceeds from the Loan Agreement with IBM Credit to pay off an existing line of
credit and for working capital and to finance acquisitions, and used the
advances from Sterling for working capital. Sterling's entry into the Amended
Loan Agreement was not a condition to the parties' entering into the Merger
Agreement. On October 25, 1994, Sterling and KnowledgeWare amended the Amended
Loan Agreement to increase the revolving portion of the facility to $22 million
and agreed to waive the borrowing base requirements with respect to borrowings
of up to $16 million under the revolving portion of the facility. Sterling
expects that it likely will grant additional waivers with respect to the
borrowing base requirements if KnowledgeWare needs additional cash to fund
operations prior to the consummation of the Merger. See "The Merger--Interests
of Certain Persons in the Merger."
Sterling has agreed to file a registration statement on behalf of certain
affiliates of KnowledgeWare with respect to the sale by such affiliates from
time to time of Sterling Common Stock received by them pursuant to the Merger.
See "Investment Considerations--Interests of Certain Affiliates of
KnowledgeWare in the Merger," "The Merger--Interests of Certain Persons in the
Merger," "The Merger Agreement--Resale Restrictions; Registration Rights," "The
Merger Agreement--Benefit Plans," "The Merger Agreement--Indemnification of
Directors and Officers of KnowledgeWare" and "The Stockholder Agreements."
Indemnification of Sterling; Escrow. The Merger Agreement provides that
Sterling will be indemnified, solely from the Escrowed Shares, for any losses,
claims, liabilities, judgments, costs and expenses, including attorneys' fees,
incurred by Sterling, KnowledgeWare or any of their subsidiaries in connection
with any pending or threatened Actions from or after the date of the Merger
Agreement, including any such Actions arising out of violations or alleged
violations of securities laws but excluding any Actions arising out of ordinary
course of business transactions, Actions brought by current or former employees
with respect to their employment or termination thereof and certain other
Actions. See "Summary--The Escrow Agreement," "The Merger Agreement--
Indemnification of Sterling; Escrow" and "The Escrow Agreement." Since August
30, 1994, a number of Actions alleging violations of securities laws have been
filed against KnowledgeWare and certain of its officers. Losses, claims,
liabilities, judgments, costs or expenses (including amounts paid in
settlement) of KnowledgeWare, Sterling or Merger Sub resulting from these
Actions (which are described in "Summary--Recent Developments" below) will
result in claims for indemnification to be satisfied from the Escrowed Shares.
As of October 26, 1994, KnowledgeWare estimates that approximately $55,000 of
costs and expenses have been incurred since August 31, 1994 with respect to
such Actions. See "Summary--Recent Developments," "The Merger Agreement--
Indemnification of Sterling; Escrow," "The Escrow Agreement" and "Certain
Information Regarding KnowledgeWare--Legal Proceedings." Neither KnowledgeWare
nor Sterling is able to quantify the amount of the losses, claims, liabilities,
judgments, costs or expenses likely to be paid from the Escrowed Shares because
such Actions have only recently been filed, discovery has not commenced and
KnowledgeWare and its advisors cannot estimate the loss, if any, that will
result from the ultimate resolution of such Actions. Sales by holders of
KnowledgeWare Common Stock of shares of Sterling Common Stock initially
received by them in the Merger shall not affect the right of such holders to
receive their proportionate share of the Escrowed Shares, if any, released to
such holders pursuant to the terms of the Escrow Agreement.
Conditions to the Merger. The obligations of Sterling and KnowledgeWare to
consummate the Merger are subject to the satisfaction of certain conditions,
including obtaining the requisite stockholder approval, the absence of any
injunction prohibiting consummation of the Merger, and the obtaining of certain
regulatory approvals. Sterling's obligation to effect the Merger is also
subject to the condition that each party
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shall have received the opinion of its tax counsel that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and that KnowledgeWare, Sterling and Merger Sub
will each be a party to that reorganization within the meaning of Section
368(b) of the Code. The Merger Agreement may be amended or modified by the
written agreement of Sterling, KnowledgeWare and Merger Sub, and any party to
the Merger Agreement may waive any of the conditions to its obligation to
effect the Merger. Neither Sterling, Merger Sub nor KnowledgeWare has any
current intention of waiving any condition or amending or modifying any
provision of the Merger Agreement. See "The Merger--Certain Federal Income Tax
Consequences," "The Merger--Regulatory Approval" and "The Merger Agreement--
Conditions."
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger with the Secretary of State of the State of
Georgia (the "Effective Time"), which will be filed as promptly as practicable
after KnowledgeWare stockholder approval has been obtained and all other
conditions to the Merger have been satisfied or waived.
Exchange of KnowledgeWare Stock Certificates. Upon consummation of the
Merger, each holder of a certificate or certificates representing shares of
KnowledgeWare Common Stock ("Certificates") outstanding immediately prior to
the Merger, upon the surrender thereof (duly endorsed, if required) to The
First National Bank of Boston, N.A. (the "Exchange Agent"), will be entitled to
receive a certificate or certificates representing the number of whole shares
of Sterling Common Stock into which such shares of KnowledgeWare Common Stock
will have been automatically converted as a result of the Merger, subject to
the withholding of the Escrowed Shares. See "Summary--The Merger," "The
Merger--Indemnification of Sterling; Escrow" and "The Escrow Agreement." The
Exchange Agent will mail a letter of transmittal with instructions to all
holders of record of KnowledgeWare Common Stock as of the Effective Time for
use in surrendering their Certificates in exchange for certificates
representing shares of Sterling Common Stock. Certificates should not be
surrendered until the letter of transmittal and instructions are received. See
"The Merger Agreement--Exchange Procedures."
Accounting Treatment. The Merger is expected to be accounted for using the
purchase method of accounting. See "The Merger--Accounting Treatment."
Certain Federal Income Tax Consequences. The parties to the Merger have not
and do not intend to seek a ruling from the Internal Revenue Service (the
"IRS") as to the U.S. federal income tax consequences of the Merger. Instead,
Sterling has obtained the opinion of its counsel, Jackson & Walker, L.L.P.
("Jackson & Walker"), and KnowledgeWare has obtained the opinion of its
counsel, Hicks, Maloof & Campbell, A Professional Corporation ("Hicks, Maloof &
Campbell"), as to certain of the expected U.S. federal income tax consequences
of the Merger, copies of which are attached as exhibits to the Registration
Statement (the "Opinions").
Subject to the conditions, qualifications and assumptions contained herein
and in its Opinion, counsel for Sterling has opined that, though it is not free
from doubt, it is more likely than not that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (ii) Sterling,
Merger Sub and KnowledgeWare will each be a party to the reorganization within
the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be
recognized by Sterling or Merger Sub as a result of the Merger.
Subject to the conditions, qualifications and assumptions contained herein
and in its Opinion, counsel for KnowledgeWare has opined that, though it is not
free from doubt, it is more likely than not that (i) the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code; (ii)
Sterling, Merger Sub and KnowledgeWare will each be a party to the
reorganization within the meaning of Section 368(b) of the Code; (iii)
KnowledgeWare will recognize no gain or loss as a result of the Merger; (iv)
KnowledgeWare stockholders will recognize no gain or loss upon receipt of
Sterling Common Stock (including the Escrowed Shares) in exchange for their
KnowledgeWare Common Stock in the Merger (except with respect to cash
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received in lieu of fractional shares and, as further discussed below, except
with respect to gain or loss recognized upon the return to, or sale on behalf
of, Sterling of any Escrowed Shares pursuant to the Escrow Agreement); (v) the
tax basis of the Sterling Common Stock (including the Escrowed Shares) received
by KnowledgeWare stockholders in the Merger will be the same as the adjusted
tax basis of the KnowledgeWare Common Stock surrendered in exchange therefor
(reduced by any amount allocable to fractional share interests for which cash
is received); (vi) the holding period of the Sterling Common Stock (including
the Escrowed Shares) received by the KnowledgeWare stockholders in the Merger
will include the holding period of the KnowledgeWare Common Stock surrendered
in exchange therefor; and (vii) KnowledgeWare stockholders who receive cash in
lieu of fractional share interests of Sterling Common Stock in connection with
the Merger will generally, depending on each stockholder's particular
circumstances, recognize a capital gain or loss equal to the difference between
the amount of cash received therefor and the stockholder's adjusted tax basis
in the fractional share interest (which gain or loss will constitute long-term
capital gain or loss if the fractional share interest has been held for more
than one year at the Effective Time). Each KnowledgeWare stockholder will
recognize gain or loss upon return to, or sale on behalf of, Sterling of any
Escrowed Shares in an amount equal to the difference between the then value of
such Escrowed Shares and the KnowledgeWare stockholder's adjusted tax basis in
such shares. KnowledgeWare stockholders generally will not be entitled to claim
a loss based upon the value of the shares returned to, or sold on behalf of,
Sterling. Instead, the adjusted tax basis in their remaining shares of Sterling
Common Stock will be increased by the then value of the shares returned or
sold. Notwithstanding the foregoing, although no authorities directly so hold,
a KnowledgeWare stockholder who has previously disposed of all such remaining
shares should recognize a capital loss equal to the value of the Escrowed
Shares returned to, or sold on behalf of Sterling. Dividends on Escrowed
Shares, which, pursuant to the Escrow Agreement are required to be distributed
to the KnowledgeWare stockholders, will generally be taxable to them as
ordinary income.
The Opinions of Jackson & Walker and Hicks, Maloof & Campbell are based on
the Code, the Income Tax Regulations promulgated thereunder (the "Treasury
Regulations"), administrative rulings and pronouncements of the IRS and
judicial decisions, all as of the date of the Opinions and all of which are
subject to change, prospectively or retroactively. KNOWLEDGEWARE STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL AND OTHER TAX LAWS. See "Investment Considerations--Uncertainty of
Federal Income Tax Consequences," "The Merger--Certain Federal Income Tax
Consequences," "The Merger Agreement--Indemnification of Sterling; Escrow," and
"The Merger Agreement--Conditions."
Regulatory Approval. The consummation of the Merger is subject to the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Early
termination of the waiting period was granted on October 4, 1994. See "The
Merger--Regulatory Approval."
Resale Restrictions; Registration Rights. All shares of Sterling Common Stock
received by KnowledgeWare stockholders in the Merger (including Escrowed Shares
if and when distributed to KnowledgeWare stockholders) will be freely
transferable, except that shares of Sterling Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of KnowledgeWare prior to the Merger may be resold by them only in certain
permitted circumstances. An "affiliate" generally includes individuals or
entities that control, are controlled by, or are under common control with,
another party and may include certain officers and directors of such party as
well as principal stockholders of such party. Sterling has agreed to file a
registration statement under the Securities Act to permit the sale by
KnowledgeWare's affiliates of the shares of Sterling Common Stock to be
received by them in the Merger at such time or times as they may choose free of
the restrictions imposed by the Securities Act. See "The Merger--Resale
Restrictions; Registration Rights."
11
<PAGE>
No Dissenters' Rights. Stockholders of KnowledgeWare will not have any
dissenters' rights in connection with, or as a result of, the matters to be
acted upon at the Special Meeting but will have any rights available to them
under applicable law. See "The Merger--No Dissenters' Rights."
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the approval
by the stockholders of KnowledgeWare: (a) by the mutual consent of
KnowledgeWare, Sterling and Merger Sub; (b) by either Sterling or KnowledgeWare
if (i) the Merger shall not have been consummated by January 31, 1995, provided
that the terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in any manner that shall have
proximately contributed to the failure so to consummate the Merger or (ii) the
approval of the Merger Agreement by KnowledgeWare's stockholders shall not have
been obtained; (c) by KnowledgeWare, if (i) the Board of Directors of Sterling
shall have withdrawn or modified in a manner adverse to KnowledgeWare its
approval or recommendation of the Merger in accordance with the terms of the
Merger Agreement, (ii) the average closing price for Sterling Common Stock on
the NYSE for five consecutive business days shall be $22.00 or less, or (iii)
there has been a material breach by Sterling or Merger Sub of any
representation, warranty, covenant or agreement contained in the Merger
Agreement or the Stock Option Agreement (as hereinafter defined) which is not
curable or, if curable, is not cured within 30 days after written notice of
such breach; or (d) by Sterling, if (i) the Board of Directors of KnowledgeWare
shall have withdrawn or modified in a manner adverse to Sterling its approval
or recommendation of the Merger in accordance with the terms of the Merger
Agreement or shall have recommended to stockholders of KnowledgeWare an
Acquisition Proposal (as defined in "The Merger Agreement--No Solicitation of
Transactions"), (ii) any person shall have made an Acquisition Proposal for
KnowledgeWare and certain conditions cannot be or are not satisfied on or prior
to January 31, 1995, or (iii) there has been a material breach by KnowledgeWare
of any representation, warranty, covenant or agreement contained in the Merger
Agreement or the Stock Option Agreement which is not curable or, if curable, is
not cured within 30 days after written notice of such breach.
In the event that any person shall have made an Acquisition Proposal for
KnowledgeWare and thereafter the Merger Agreement is terminated by either party
(other than pursuant to the breach of the Merger Agreement by Sterling), then
KnowledgeWare, if requested by Sterling, shall pay Sterling a fee of $2,900,000
subject to certain conditions. See "The Merger Agreement--Termination."
THE STOCK OPTION AGREEMENT
Sterling and KnowledgeWare have entered into an Amended and Restated Stock
Option Agreement dated as of August 31, 1994 (the "Stock Option Agreement"),
pursuant to which KnowledgeWare granted to Sterling an irrevocable option (the
"Option"), exercisable only if the Merger Agreement has been terminated and
only upon the occurrence of certain "Exercise Events" described in "The Stock
Option Agreement--Exercise of the Option," to purchase up to 1,200,000 shares
of KnowledgeWare Common Stock at an exercise price of $5.00 per share. A copy
of the Stock Option Agreement is attached hereto as Appendix C. See "The Stock
Option Agreement."
THE STOCKHOLDER AGREEMENTS
Certain directors, executive officers and/or stockholders of KnowledgeWare
have entered into Amended and Restated Stockholder Agreements (the "Stockholder
Agreements") with Sterling pursuant to which each such stockholder has, among
other things, agreed to vote for approval of the Merger Agreement and has
granted to Sterling an irrevocable proxy to vote his or its shares in such
manner in the event such stockholder fails to vote as agreed. As of August 31,
1994, such stockholders of KnowledgeWare beneficially owned in the aggregate
approximately 19.1% of the outstanding shares of KnowledgeWare Common Stock. A
copy of the form of Stockholder Agreement is attached hereto as Appendix D. See
"The Stockholder Agreements."
12
<PAGE>
THE ESCROW AGREEMENT
At the closing of the Merger, Sterling will enter into an Escrow Agreement
with a representative (the "Representative") of the holders of KnowledgeWare
Common Stock as of the Effective Time, to be mutually agreed upon by
KnowledgeWare and Sterling, and a third party escrow agent (the "Escrow
Agent"), which is expected to be The First National Bank of Boston, N.A.,
pursuant to which the Escrowed Shares will be held by the Escrow Agent on
behalf of the holders of KnowledgeWare Common Stock as of the Effective Time.
The interests of the holders of KnowledgeWare Common Stock as of the Effective
Time in the Escrow Agreement and in the Escrowed Shares will be contingent,
nontransferable interests, will not be evidenced by a certificate or other
instrument and will not be transferable except by operation of law. Sales by
holders of KnowledgeWare Common Stock of shares of Sterling Common Stock
initially received by them in the Merger shall not affect the right of such
holders to receive their proportionate share of the Escrowed Shares, if any,
released to such holders pursuant to the terms of the Escrow Agreement. In
general, Sterling will be entitled to make claims for indemnification against
the Escrowed Shares at any time up to the second anniversary of the Effective
Time, subject to the right of the Representative to object to Sterling's
claims. In addition, Sterling, within 30 days prior to the second anniversary
of the Effective Time, may give notice to the Escrow Agent of certain
contingent claims that have not at the time given rise to indemnifiable
damages, together with a good faith reasonable estimate by Sterling of its
maximum indemnifiable damages expected with respect to such claims. On the
second anniversary of the Effective Time, any Escrowed Shares not subject to a
claim made by Sterling, including a notice of contingent claim, will be
disbursed to the holders of KnowledgeWare Common Stock as of the Effective
Time. With respect to Escrowed Shares subject to a notice of contingent claim,
any Escrowed Shares remaining subject to the Escrow Agreement on the fourth
anniversary of the Effective Time and not then the subject of litigation will
be disbursed to the holders of KnowledgeWare Common Stock as of the Effective
Time. Any disbursement to the holders of KnowledgeWare Common Stock as of the
Effective Time will be made in proportion to their relative holdings of
KnowledgeWare Common Stock as of the Effective Time. NO ASSURANCE CAN BE GIVEN
THAT ANY ESCROWED SHARES WILL BE AVAILABLE FOR DISBURSEMENT TO THE HOLDERS OF
KNOWLEDGEWARE COMMON STOCK. Each KnowledgeWare common stockholder will
recognize gain or loss upon return to, or sale on behalf of, Sterling of any
Escrowed Shares in an amount equal to the difference between the then value of
such Escrowed Shares and the KnowledgeWare common stockholder's adjusted tax
basis in such shares. KnowledgeWare common stockholders generally will not be
entitled to claim a loss based upon the value of the shares returned to, or
sold on behalf of, Sterling. Instead, the adjusted tax basis in their remaining
shares of Sterling Common Stock will be increased by the then value of the
shares returned or sold. A copy of the Escrow Agreement is included as Exhibit
4.4 to the Merger Agreement attached hereto as Appendix A. See "Investment
Considerations--Establishment of Escrow," "The Merger--Certain Federal Income
Tax Consequences," "The Merger Agreement--Indemnification of Sterling; Escrow"
and "The Escrow Agreement." Since August 30, 1994, a number of Actions have
been filed against KnowledgeWare alleging violations of securities laws. If
these Actions result in losses, claims, liabilities, judgments, costs or
expenses (including amounts paid in settlement) to KnowledgeWare, Sterling or
Merger Sub, such losses, claims, liabilities, judgments, costs or expenses
(including amounts paid in settlement) will result in claims for
indemnification to be satisfied from the Escrowed Shares. See "Summary--Recent
Developments," "Investment Considerations--Certain Legal Proceedings," "The
Merger Agreement--Indemnification of Sterling; Escrow," and "Certain
Information Regarding KnowledgeWare--Legal Proceedings."
RECENT DEVELOPMENTS
Fiscal 1994 Financial Results of Operations. On September 1, 1994,
KnowledgeWare announced that it had incurred a net loss for the fiscal year
ended June 30, 1994 ("fiscal 1994") of $19,030,000 or $1.34 per
13
<PAGE>
share. KnowledgeWare attributes the loss to increased marketing and headcount
related expenses in expectation of significantly increased product license
revenues which were not realized.
In early fiscal 1994, KnowledgeWare initiated a business plan to market its
products through indirect distribution channels, which included third party
resellers in both the commercial and government markets. Based on the
successful receivable collection experience of KnowledgeWare with respect to
end user customers, KnowledgeWare did not anticipate significant collection
difficulties from its newly implemented reseller program and, accordingly, did
not implement specific credit procedures for the program. As days sales in
receivables increased during the course of fiscal 1994, KnowledgeWare increased
its allowance for doubtful accounts to cover its estimate of reseller
receivable exposure. In the course of the 1994 year-end closing process,
KnowledgeWare retained a collection attorney to assist it in connection with
collection of reseller receivables. During such process, certain resellers
asserted that they either could not or were not required to pay KnowledgeWare
until they had consummated sales to end users and received payments for the
products. After careful analysis of these receivables, KnowledgeWare modified
its accounting policy for reseller license revenue recognition to more
accurately reflect its collection experience from the third party reseller
program, retroactive to the beginning of fiscal 1994. The modification of
accounting policy has also been applied to transactions with federal government
integrators where KnowledgeWare fulfills a product order from the integrator
rather than participating as a subcontractor to the government agency.
KnowledgeWare's modified revenue recognition policy for sales to resellers
provides for (i) revenue recognition upon the earlier of receipt of cash from
the reseller or shipment to an end user and (ii) the establishment of a
reasonable basis for estimating the degree of collectibility of the receivable.
Such reasonable basis is based upon review of transaction-specific facts and
circumstances, including payment history with the reseller, the reseller's
credit rating, the terms of the transactions between the reseller and its end
user, possible issues related to the end user's successful implementation of
the product and other facts pertinent to the transaction. Such procedures were
used as the basis for concluding whether collection was probable during the
1994 audit. The policy modification was implemented to correct reseller revenue
recognition retroactive to the beginning of fiscal 1994. As a result,
previously reported net income for the first quarter of fiscal 1994 decreased
from $1,566,000, or $.12 per share, to $1,382,000, or $.10 per share; for the
second quarter of fiscal 1994 from $2,082,000, or $.15 per share, to $278,000,
or $.02 per share; and for the third quarter of fiscal 1994 from $807,000, or
$.06 per share, to a loss of $5,278,000, or $.36 per share. Sales through
KnowledgeWare's reseller program, after restatement, totalled approximately
$2,263,000 in fiscal 1994.
Certain Legal Proceedings. On December 18, 1991, a complaint was filed in the
United States District Court for the Northern District of Georgia, Atlanta
Division which consolidated and amended several class action lawsuits
previously filed against KnowledgeWare in October 1991. This action, styled In
re: KnowledgeWare, Inc. Shareholder Litigation, Master File No. 1:92-CV-1651-
JTC, pending in the United States District Court for the Northern District of
Georgia (the "1991 Class Action"), was a class action lawsuit alleging
violations of Sections 20 and 10(b) of the Exchange Act and Rule 10b-5 under
the Exchange Act. In summary, the complaint alleged that KnowledgeWare
misrepresented or failed to disclose material facts which would have a material
adverse impact on KnowledgeWare or approved such misrepresentations and
omissions. The complaint sought compensatory damages and reimbursements for the
plaintiffs' fees and expenses. On January 26, 1994, KnowledgeWare entered into
and the District Court preliminarily approved a stipulation of settlement of
the 1991 Class Action (the "Settlement Agreement"). By entering into the
settlement, KnowledgeWare did not admit the allegations in the suit and, to the
contrary, denied any wrongdoing. The Settlement Agreement, which received final
court approval in April 1994, required a cash payment of $1,750,000, all of
which was paid by KnowledgeWare's insurance carrier, and the issuance by
KnowledgeWare of the Warrants, which allow the holders to acquire an aggregate
of 500,000 shares of KnowledgeWare's Common Stock at a price of $17.50 per
share. The Warrants are exercisable for a period of three years from June 9,
1994 (the date of issuance). On August 30, 1994, the plaintiffs in the 1991
Class
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<PAGE>
Action filed a "Motion to Enforce Stipulation of Settlement, for Temporary
Injunction of Merger and for Damages Resulting from Fraud" (the "Motion"). In
the Motion, the plaintiffs allege that the proposed business combination
between KnowledgeWare and Sterling and the announcement by KnowledgeWare that
it modified its accounting policy for revenue recognition and restated
financial results for the first three quarters of fiscal year 1994 resulted in
a substantially reduced value of the Warrants available to the plaintiffs under
the Settlement Agreement. Accordingly, the plaintiffs moved the District Court
for a decree of specific performance of the terms of the Settlement Agreement
entailing the delivery of new warrants of equivalent value to the original
value of the Warrants, and for a preliminary injunction of the consummation of
any business combination between KnowledgeWare and Sterling, pending compliance
by KnowledgeWare with the terms of the Settlement Agreement. Alternatively, the
plaintiffs moved for a declaration that the Warrant Agreement set forth in the
Settlement Agreement was the product of fraud and for an award to the
plaintiffs of the appropriate measure of damages.
On August 30 and 31, 1994, five lawsuits were filed against KnowledgeWare in
the United States District Court for the Northern District of Georgia, Atlanta
Division. The respective cases are styled as follows: (1) Marshall Wolf, on
behalf of himself and all others similarly situated v. KnowledgeWare, Inc.,
Francis A. Tarkenton, Donald P. Addington, and Rick W. Gossett, Civil Action
File No. 1:94-CV-2312-JEC; (2) Ernest Deangelis, on behalf of himself and all
others similarly situated v. KnowledgeWare, Inc., Francis A. Tarkenton, Donald
P. Addington, and Rick W. Gossett, Civil Action No. 1:94-CV-2303-JEC; (3)
Steven Covington, on behalf of himself and all others similarly situated v.
KnowledgeWare, Inc., Francis A. Tarkenton, Donald P. Addington, and Rick W.
Gossett, Civil Action File No. 1:94-CV-2301-JEC; (4) Sam Wietschner v.
KnowledgeWare, Inc., Francis A. Tarkenton, Donald P. Addington, and Rick W.
Gossett, Civil Action File No. 1:94-CV-2320-JEC; and (5) Jack Schecter v.
KnowledgeWare, Inc., Francis A. Tarkenton, Donald P. Addington, and Rick W.
Gossett, Civil Action File No. 1:94-CV-2302-JEC. Three lawsuits were filed
against KnowledgeWare in the United States District Court for the Northern
District of Georgia, Atlanta Division on September 12, 22 and 23, 1994. The
respective cases are styled as follows: (6) Subhash Bhardwaj, on behalf of
himself and all others similarly situated v. KnowledgeWare, Inc., Francis A.
Tarkenton, Donald P. Addington, and Rick W. Gossett, Civil Action File No.
1:94-CV-2427-JEC; (7) Wayne D. Thornhill, individually, as Attorney in Fact for
Georgette C. Thornhill, and on behalf of himself and all others similarly
situated v. KnowledgeWare, Inc., Francis A. Tarkenton, Donald P. Addington, and
Rick W. Gossett, Civil Action File No. 1:94-CV-2538-JEC; and (8) Paul Cross, on
behalf of himself and all others similarly situated v. KnowledgeWare, Inc.,
Francis A. Tarkenton, Donald P. Addington, and Rick W. Gossett, Civil Action
File No. 1:94-CV-2540-JEC (each of those actions numbered 1-8 may be
hereinafter referred to as the "1994 Class Action Suits"). Each of the 1994
Class Action Suits is purportedly a class action lawsuit on behalf of the
KnowledgeWare stockholders alleging violations of Sections 20 and 10(b) of the
Exchange Act, and Rule 10b-5 under the Exchange Act. The alleged factual basis
underlying the 1994 Class Action Suits and the relief sought therein is the
plaintiffs' allegations that KnowledgeWare and the individual defendants
actively misrepresented or failed to disclose the actual financial condition of
KnowledgeWare throughout fiscal year 1994 and that the value of the
KnowledgeWare Common Stock was artificially inflated as a result of such
misrepresentations or failures to disclose. Each of the 1994 Class Action Suits
seeks compensatory damages and reimbursement for the plaintiffs' fees and
expenses.
On September 9, 1994, a lawsuit styled Ecta Corporation and Fairfield
Development, Inc. v. KnowledgeWare, Inc., Donald P. Addington and Francis A.
Tarkenton, Civil Action File No. 4-94-CV-80587, was filed against KnowledgeWare
in the Southern District of Iowa, Central Division (the "Ecta Suit"). The Ecta
Suit is a lawsuit alleging violations of Section 10(b) of the Exchange Act,
Rule 10b-5 under the Exchange Act, Section 12(2) of the Securities Act,
violation of the Iowa Blue Sky Laws (Iowa Stat. Ann. (S)502.502), fraud and
breach of contract. The alleged factual basis underlying the Ecta Suit arises
in connection with the purchase by KnowledgeWare of substantially all of the
assets of ClearAccess Corporation (now known as Ecta Corporation) and Fairfield
Software, Inc. (now known as Fairfield Development, Inc.) pursuant to an Asset
Purchase Agreement dated May 26, 1994 (the "Acquisition Agreement"). The
plaintiffs allege that KnowledgeWare and the individual defendants
misrepresented or failed to disclose the actual financial condition of the
KnowledgeWare, that the value of the KnowledgeWare Common Stock was
artificially
15
<PAGE>
inflated as a result of such misrepresentations or failures to disclose and
that KnowledgeWare has breached certain warranties, representations and
covenants made in the Acquisition Agreement. The Ecta Suit seeks compensatory
damages, rescission of the Acquisition Agreement and/or the sale of
KnowledgeWare's securities issued pursuant thereto, punitive damages,
prejudgment interest, and reimbursement of attorneys' fees and costs. See
"Certain Information Regarding KnowledgeWare--Legal Proceedings."
Losses, claims, liabilities, judgments, costs and expenses of KnowledgeWare,
Merger Sub and Sterling resulting from the above-described Actions will result
in claims for indemnification to be satisfied from the Escrowed Shares. As of
October 26, 1994, KnowledgeWare estimates that approximately $55,000 of costs
and expenses have been incurred since August 31, 1994 with respect to the
above-described Actions.
KnowledgeWare has received informal requests for information from the Staff
of the Commission as to which persons and entities had knowledge of the
negotiations between KnowledgeWare and Sterling prior to the public
announcement of the Initial Merger Agreement on August 1, 1994, and as to the
circumstances with respect to KnowledgeWare's restatement of financial results
for the first three quarters of fiscal 1994.
On October 27, 1994, KnowledgeWare received a letter on behalf of certain
persons (the "Investors") who purchased shares of KnowledgeWare Common Stock
pursuant to a stock purchase agreement between the Investors and KnowledgeWare
dated January 26, 1994. The Investors assert that in light of, among other
things, KnowledgeWare's announcement on September 1, 1994 and KnowledgeWare's
other public statements disclosing its restatement of its financial statements
for the first, second and third quarters of fiscal 1994, it is the position of
the Investors that KnowledgeWare is in breach of the representations and
warranties it made to the Investors in the stock purchase agreement and seek to
recover damages in the amount of approximately $9.5 million, representing the
difference between the aggregate purchase price the Investors paid for their
KnowledgeWare Common Stock and the aggregate price for which they sold those
shares.
Financial Condition of KnowledgeWare. KnowledgeWare incurred a net loss for
fiscal 1994 of $19.0 million. As a result, certain covenants in the Loan
Agreement were violated which caused all amounts owed thereunder to be
immediately due and payable. The loss, together with the covenant violations,
resulted in the inclusion in the auditors' report on the financial statements
of KnowledgeWare of an explanatory paragraph indicating that, at June 30, 1994,
there existed substantial doubt about KnowledgeWare's ability to continue as a
going concern. KnowledgeWare addressed the covenant violations under its Loan
Agreement and its immediate liquidity needs by entering into the Amended Loan
Agreement with Sterling and negotiating delayed payment terms with certain
vendors during the pendency of the Merger. Nonetheless, KnowledgeWare expects
that the current liquidity and cash flow issues, operating losses and lack of
predictability concerning its future business and prospects will continue until
the consummation of the Merger. For example, although no material suppliers
have refused to do business with KnowledgeWare or have changed the terms under
which they will do business with KnowledgeWare, it appears that certain
KnowledgeWare customers have slowed their payments and delayed their purchases
during the pendency of the Merger resulting in reduced cash flow from
operations. As a result, KnowledgeWare expects that it will need at least an
additional $8 million in cash to fund operations prior to the end of November
1994.
To help alleviate KnowledgeWare's anticipated cash flow problems, on October
25, 1994, Sterling and KnowledgeWare amended the Amended Loan Agreement to
increase the revolving portion of the facility to $22 million and agreed to
waive the borrowing base requirements with respect to borrowings of up to $16
million under the revolving portion of the facility. Sterling expects that it
likely will grant additional waivers with respect to the borrowing base
requirements if KnowledgeWare needs additional cash to fund operations prior to
the consummation of the Merger. Because KnowledgeWare has been able to borrow
under the Amended Loan Agreement to meet its cash flow needs, KnowledgeWare's
operations have not been significantly adversely affected by its liquidity and
cash flow problems. As of the date of this Proxy Statement/Prospectus,
KnowledgeWare had outstanding borrowings of approximately $20.0 million of the
$28 million available under the Amended Loan Agreement. As of September 30,
1994, KnowledgeWare had (i) approximately $4.2 million of receivables which are
90 days or more past due, representing approximately 13.4% of total receivables
and (ii) approximately $3.0 million of trade payables which are more than 60
days past the date of invoice, representing approximately 50% of total trade
payables. KnowledgeWare expects that these liquidity and cash flow problems
will be solved upon the consummation of the Merger because it
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<PAGE>
will become a subsidiary of Sterling, which is a much more financially sound
entity. For example, as of June 30, 1994, Sterling had approximately $135
million of available cash and marketable securities, had availability under its
line of credit with Bank of Boston, N.A. of approximately $33 million, and cash
flow from operations for the nine months ended June 30, 1994 was approximately
$60 million.
If the Merger should not be completed, KnowledgeWare would require
substantial additional cash from alternative sources in order to fund currently
anticipated cash and capital requirements and would likely violate certain
covenants under the Amended Loan Agreement. In addition, if the Merger is not
consummated, there can be no assurance that KnowledgeWare will be able to
obtain additional sources of cash to meet its needs. Furthermore, KnowledgeWare
believes it is unlikely that it would be able to refinance its indebtedness
under the Amended Loan Agreement were KnowledgeWare to be in default thereunder
or should the Merger not be consummated. Finally, if the Merger is not
consummated, KnowledgeWare is presently unaware of any other potential merger
partners or sources of equity capital. The result, should the Merger not be
consummated, is that KnowledgeWare would have to consider a variety of actions
to address its liquidity and cash flow problems including making additional
reductions in headcount and spending, selling assets or seeking protection
under laws relating to bankruptcy, insolvency, reorganization or other laws
relating to relief of debtors (collectively, "bankruptcy laws"). To date,
KnowledgeWare has not given significant consideration to seeking protection
under the bankruptcy laws.
KnowledgeWare anticipates that it will incur a substantial operating loss in
the first quarter of fiscal 1995. In addition, KnowledgeWare expects to report
a charge to earnings in the first quarter of fiscal 1995 of approximately $6
million attributable to its previously announced plan of restructuring.
KnowledgeWare may also report a charge to earnings in the first quarter of
fiscal 1995 with respect to the 1991 Class Action, the 1994 Class Action Suits
and the Ecta Suit; however, the amount of such charge, if any, cannot be
estimated at this time. KnowledgeWare anticipates filing its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994 on or before November 14,
1994 and publicly announcing such results on or before such date. When filed
with the Commission, KnowledgeWare's Quarterly Report on Form 10-Q shall be
deemed incorporated by reference in this Proxy Statement/Prospectus and the
information contained in such Quarterly Report should be considered by holders
of shares of KnowledgeWare Common Stock. See "Incorporation of Certain
Documents By Reference."
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
STERLING SOFTWARE SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary consolidated financial data presented below has been derived from
the financial statements of Sterling for each of the five fiscal years in the
period ended September 30, 1993 and from unaudited financial statements for the
nine months ended each of June 30, 1994 and 1993. The data should be read in
conjunction with the financial statements of Sterling and the related notes
incorporated by reference in this Proxy Statement/Prospectus.
STERLING SOFTWARE SUMMARY CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEARS ENDED SEPTEMBER 30,
----------------- ------------------------------------------------
1994 1993 1993(5) 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA: (2)
Revenue................. $338,126 $301,101 $411,795 $378,056 $333,381 $278,301 $244,788
Income (loss) before
other income (expense),
income taxes, extraor-
dinary item and cumula-
tive effect of a change
in accounting principle
(3).................... 64,980 27,592 (45,400) 11,551 (5,413) 10,911 24,029
Income (loss) before ex-
traordinary items and
cumulative effect of a
change in accounting
principle.............. 39,526 15,279 (33,350) (5,162) (2,407) 2,051 14,112
Income (loss) applicable
to common stockholders. 39,379 10,070 (38,609) (6,636) (5,700) -- 13,790
Per common share da-
ta(4):
Income (loss) before
extraordinary items
and cumulative effect
of a change in ac-
counting principle.... $ 1.60 $ .75 $ (2.00) $ (.43) $ (.52) $ (.09) $ .88
Net income (loss)...... 1.60 .53 (2.24) (.43) (.48) -- 1.04
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, --------------------------------------------
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........... $124,939 $ 51,298 $ 38,271 $ 32,402 $ 28,885 $ 51,365
Total assets.............. 450,385 397,661 345,361 330,499 319,944 252,811
Long-term notes payable... 116,267 116,817 79,917 84,833 95,990 67,219
Stockholders' equity...... 155,430 97,213 117,584 108,468 102,093 94,643
</TABLE>
- --------
(1) In July 1993, Sterling acquired Systems Center in a merger accounted for as
pooling of interests. Sterling's consolidated financial statements have
been retroactively adjusted to include the results of Systems Center for
all periods prior to the merger with Systems Center. Sterling's separate
statement of operations data for periods prior to the merger with Systems
Center is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED SEPTEMBER 30,
JUNE 30, -----------------------------------
1993 1992 1991 1990 1989
----------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $207,285 $259,261 $220,738 $195,447 $177,697
Income from continuing
operations before ex-
traordinary items........ 14,047 13,798 10,056 8,666 6,511
Income applicable to com-
mon stockholders......... 12,419 13,406 7,050 6,615 6,189
Per common share data:
Income from continuing
operations before
extraordinary items... $ 1.04 $ 1.19 $ .81 $ .73 $ .51
Net income............. $ .94 $ 1.19 $ .85 $ .84 $ .81
</TABLE>
(2) In the fourth quarter of 1993, Sterling adopted Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("FAS No. 109"). Financial
statements for all periods prior to the adoption of FAS No. 109 were
restated.
(3) Income (loss) before other income (expense), income taxes, extraordinary
items and cumulative effect of a change in accounting principle includes
restructure charges of $91,260,000, $11,515,000 and $23,085,000 in 1993,
1992 and 1991, respectively.
(4)Computed on a fully diluted basis.
(5) Sterling adopted Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS No. 106")
as of October 1, 1992. The cumulative effect of the adoption of FAS No. 106
was $2,774,000, representing the accumulated benefit obligation existing at
that date, net of related income tax benefit of $1,813,000. In addition,
postretirement benefit costs for the year ended September 30, 1993
increased by $1,211,000 as a result of adoption of the new standard.
Postretirement benefit costs for prior years, which were recorded on a cash
basis, were not material and have not been restated.
KNOWLEDGEWARE SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary consolidated financial data presented below has been derived from
the historical financial statements of KnowledgeWare for each of the five
fiscal years in the period ended June 30, 1994. The data should be read in
conjunction with the financial statements of KnowledgeWare and the related
notes incorporated by reference in this Proxy Statement/Prospectus.
KNOWLEDGEWARE SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $132,491 $128,761 $116,542 $125,004 $66,229
Income (loss) from opera-
tions....................... (19,096) (27,539) (946) 21,306 11,541
Net income (loss)............ (19,030) (25,799) 356 15,135 9,005
Net income (loss) per common
share....................... (1.34) (1.94) .03 1.13 .71
<CAPTION>
JUNE 30,
----------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............. $ (9,753) $ 1,089 $ 30,897 $ 43,724 $36,068
Total assets................. 119,644 125,681 130,130 119,878 71,964
Long-term debt, less current
portion..................... 836 3,624 -- -- --
Shareholders' equity......... 52,351 53,732 77,626 74,899 52,465
</TABLE>
18
<PAGE>
The following summary pro forma combined financial information should be read
in conjunction with the Pro Forma Combined Condensed Financial Information
included elsewhere herein and the separate historical financial statements of
Sterling and KnowledgeWare and notes thereto incorporated by reference in this
Proxy Statement/Prospectus. The pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been effective during the periods presented or the results that
may be obtained in the future.
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, 1994 SEPTEMBER 30, 1993
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $437,393 $543,823
Income (loss) before other income
(expense) and income taxes, extraordinary
item and cumulative effect of a change in
accounting principle(1)(2)............... 44,221 (74,494)
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle..................... 19,557 (60,318)
Income (loss) per common share before
extraordinary items and cumulative effect
of change in accounting principle:
Primary................................. $ .79 $ (3.13)
Fully diluted........................... .79 (3.13)
Shares used to compute per share data:
Primary................................. 24,840 19,607
Fully diluted........................... 24,840 19,607
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1994
-------------------------
STERLING KNOWLEDGEWARE PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA: (2)
Working capital................. $124,939 $ (9,753) $(29,500) $ 85,686
Total assets.................... 450,385 119,644 (14,806) 555,223
Long-term debt, less current
portion........................ 116,267 836 -- 117,103
Total stockholders' equity...... 155,430 52,351 (33,040) 174,741
</TABLE>
- --------
(1) Includes restructure costs of $113,236,000 in 1993.
(2) The Merger is expected to be accounted for utilizing the purchase method of
accounting. The purchase price has been allocated to consolidated assets
and liabilities of KnowledgeWare based on preliminary estimates of fair
value. Substantial costs are expected to occur as a result of the
combination of the two companies, including costs with respect to the
elimination of duplicate facilities, severance costs related to the
termination of certain employees, transaction costs, and writeoff of costs
related to certain software products which will not be actively marketed by
the combined company. Such costs directly related to the acquisition of
KnowledgeWare are expected to be approximately $25 million and are included
in the aggregate cost of the Merger. Such costs related to Sterling are
expected to be approximately $12 million and are expected to be charged to
the future results of operations of the combined company and are excluded
from the pro forma combined results of operations. The pro forma combined
results of operations also exclude approximately $46.0 million of purchased
research and development costs which will be charged to expense in the
period the Merger is consummated.
19
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Sterling
and KnowledgeWare and combined per share data on a pro forma basis after giving
effect to the Merger utilizing the purchase method of accounting assuming that
2,407,005 shares of Sterling Common Stock are issued in connection with the
Merger. Because the Escrowed Shares will be outstanding and may be distributed
to KnowledgeWare common stockholders, or may be sold for the benefit of
Sterling in order to satisfy Sterling's rights to indemnification, all such
shares are deemed to be outstanding.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, 1994 SEPTEMBER 30, 1993
----------------- ------------------
<S> <C> <C>
Sterling--historical
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle................... $1.60 $ (2.00)
Book value.............................. 7.60 5.37
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, 1994 SEPTEMBER 30, 1993
----------------- ------------------
<S> <C> <C>
KnowledgeWare--historical (1)
Loss before cumulative effect of
accounting change....................... $(1.39) $(1.95)
Book value............................... 3.60 4.19
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, 1994 SEPTEMBER 30, 1993
----------------- ------------------
<S> <C> <C>
Pro forma combined--per share of Sterling
Common:
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................. $ .79 $ (3.13)
Book value.............................. 7.65
Equivalent pro forma combined--per share
of KnowledgeWare Common Stock:
Based on the Exchange Ratio:
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ $ .13 $ (.52)
Book value............................. 1.26
Based on the Net Exchange Ratio:
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ $ .10 $ (.41)
Book value............................. 1.01
</TABLE>
- --------
(1) Derived from KnowledgeWare's historical financial statements, incorporated
by reference herein. See "Pro Forma Combined Condensed Financial
Information."
COMPARATIVE MARKET PRICES
Sterling Common Stock is listed on the NYSE under the symbol "SSW" and
KnowledgeWare Common Stock is quoted through The Nasdaq National Market System
(the "NMS") under the symbol "KNOW".
20
<PAGE>
The following table sets forth, for the periods indicated, the high and low
closing sales prices per share of Sterling Common Stock and KnowledgeWare
Common Stock as quoted on the NYSE and the NMS, respectively.
<TABLE>
<CAPTION>
STERLING COMMON KNOWLEDGEWARE
STOCK COMMON STOCK
--------------- -----------------
HIGH LOW HIGH LOW
------- ------- --------- -------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1991
1st Quarter................................... $13 3/8 $ 7 1/2 $40 1/8 $19 3/4
2nd Quarter................................... 14 1/2 11 43 21 3/4
3rd Quarter................................... 16 5/8 11 3/4 29 3/4 17 7/8
4th Quarter................................... 24 5/8 15 3/8 19 1/8 10 1/2
CALENDAR YEAR 1992
1st Quarter................................... $24 3/4 $20 1/8 $21 1/4 $14 5/8
2nd Quarter................................... 21 3/8 13 7/8 16 10 3/4
3rd Quarter................................... 18 7/8 16 13 1/2 9 7/8
4th Quarter................................... 22 3/8 15 1/2 15 5/8 10
CALENDAR YEAR 1993
1st Quarter................................... $24 3/8 $19 3/8 $15 3/4 $ 9 1/4
2nd Quarter................................... 23 3/8 17 5/8 12 5/8 8
3rd Quarter................................... 24 19 12 10
4th Quarter................................... 33 1/2 24 18 3/4 11 1/8
CALENDAR YEAR 1994
1st Quarter................................... $34 1/2 $28 $17 $12
2nd Quarter................................... 34 1/4 27 1/8 13 3/4 5 1/2
3rd Quarter................................... 31 5/8 25 3/8 7 11/16 2 5/8
4th Quarter (through October 26, 1994)........ 30 5/8 28 3/4 3 7/8 3 1/2
</TABLE>
On August 31, 1994, the last trading day preceding the public announcement of
the execution of the Merger Agreement, as amended and restated, the closing
sale prices per share of Sterling Common Stock and KnowledgeWare Common Stock
were $28 7/8 and $4 1/2, respectively. Based on such closing sale price of
Sterling Common Stock, the market value of .1653 of a share of Sterling Common
Stock was $4.77 (representing a premium of $0.27 per share to the market price
for KnowledgeWare Common Stock) and the market value of .1322 of a share of
Sterling Common Stock was $3.85 (representing a discount of $0.65 per share to
the market price for KnowledgeWare Common Stock). On October 26, 1994, the
closing sale prices per share of Sterling Common Stock and KnowledgeWare Common
Stock were $29 7/8 and $3 1/2, respectively. Based on such closing sale price
of Sterling Common Stock, the market value of .1653 of a share of Sterling
Common Stock was $4.94 and the market value of .1322 of a share of Sterling
Common Stock was $3.95.
Stockholders of KnowledgeWare are urged to obtain current market quotations
for Sterling Common Stock and KnowledgeWare Common Stock.
21
<PAGE>
INVESTMENT CONSIDERATIONS
Holders of shares of KnowledgeWare Common Stock should carefully consider all
of the information set forth in this Proxy Statement/Prospectus and, in
particular, the following specific investment considerations with respect to
the Merger and shares of Sterling Common Stock to be received in connection
with the Merger.
INTEGRATION OF THE TWO COMPANIES; TRANSACTION COSTS
The anticipated benefits of the Merger will not be achieved unless Sterling
and KnowledgeWare successfully integrate the two companies in a timely manner.
Because the enterprise software industry is highly competitive and because of
the inherent uncertainties associated with merging two large companies, there
can be no assurance that the combined company will be able to realize the
economies of scale and operating efficiencies that Sterling and KnowledgeWare
currently expect to realize as a result of the consolidation of their
operations. Any difficulties encountered in the transition process could have
an adverse impact on the revenues and operating results of the combined
company. Additionally, following the Merger, the combined company expects to
incur approximately $12 million of costs associated with Sterling's elimination
of duplicate facilities, severance costs relating to the termination of certain
employees and the write off of costs relating to certain software products
which will not be actively marketed by the combined company, net of related
deferred income tax benefit.
Sterling considered a number of factors in determining to enter into the
Merger Agreement, including without limitation the following: (i) the two
companies' enterprise software product lines are complementary with minimal
overlap and consist of some of the best known products in the industry; (ii)
the combined company's applications development suite of products will position
the combined company as one of the leaders in that market; and (iii)
KnowledgeWare's products will provide Sterling an expanded presence in the
client/server market with proven products. See "The Merger--Reasons for the
Merger; Recommendation of the KnowledgeWare Board of Directors." However, there
can be no assurance that any of such anticipated benefits will be realized or
that the combined company will be able to retain or increase sales to any of
KnowledgeWare's customers following the Merger.
FINANCIAL CONDITION OF KNOWLEDGEWARE
In early fiscal 1994, KnowledgeWare initiated a business plan to market its
products through indirect distribution channels, which included third party
resellers in both the commercial and government markets. Based on the
successful receivable collection experience of KnowledgeWare with respect to
end user customers, KnowledgeWare did not anticipate significant collection
difficulties from its newly implemented reseller program and, accordingly, did
not implement specific credit procedures for the program. In the course of the
1994 year-end closing process, KnowledgeWare became aware that certain
resellers asserted that they either could not or were not required to pay
KnowledgeWare until they had consummated sales to end users and received
payments for the products. After careful analysis of these receivables,
KnowledgeWare modified its accounting policy for reseller license revenue
recognition to more accurately reflect its collection experience from the third
party reseller program, retroactive to the beginning of fiscal 1994. In
addition, during fiscal 1994, KnowledgeWare incurred increased selling and
marketing costs relative to KnowledgeWare's newer product lines in expectation
of significantly increased product license revenues which were not realized.
KnowledgeWare incurred a net loss for fiscal 1994 of $19.0 million.
As a result, certain covenants in the Loan Agreement were violated, which
caused all amounts owed thereunder to be immediately due and payable. The loss,
together with the covenant violations, resulted in the inclusion in the
auditors' report on the financial statements of KnowledgeWare of an explanatory
paragraph indicating that, at June 30, 1994, there existed substantial doubt
about KnowledgeWare's ability to continue as a going concern. KnowledgeWare
addressed the covenant violations under its Loan Agreement and its immediate
liquidity needs by entering into the Amended Loan Agreement with Sterling and
negotiating delayed payment terms with certain vendors during the pendency of
the Merger. Nonetheless, KnowledgeWare expects that the current liquidity and
cash flow issues, operating losses and lack of predictability concerning its
future business and prospects will continue until the consummation of the
Merger. For example, although no material suppliers have refused to do business
with KnowledgeWare or have changed the terms under which they will do business
with KnowledgeWare, it appears that certain KnowledgeWare customers have slowed
their payments and delayed their purchases during the pendency of the Merger
resulting in reduced cash flow from operations. As a result, KnowledgeWare
expects that it will need at least an additional $8 million in cash to fund
operations prior to the end of November 1994.
To help alleviate KnowledgeWare's anticipated cash flow problems, on October
25, 1994, Sterling and KnowledgeWare amended the Amended Loan Agreement to
increase the revolving portion of the facility to
22
<PAGE>
$22 million and agreed to waive the borrowing base requirements with respect
to borrowings of up to $16 million under the revolving portion of the
facility. Sterling expects that it likely will grant additional waivers with
respect to the borrowing base requirements if KnowledgeWare needs additional
cash to fund operations prior to the consummation of the Merger. Because
KnowledgeWare has been able to borrow under the Amended Loan Agreement to meet
its cash flow needs, KnowledgeWare's operations have not been significantly
adversely affected by its liquidity and cash flow problems. As of the date of
this Proxy Statement/Prospectus, KnowledgeWare had outstanding borrowings of
approximately $20.0 million of the $28 million available under the Amended
Loan Agreement. As of September 30, 1994, KnowledgeWare had (i) approximately
$4.2 million of receivables which are 90 days or more past due, representing
approximately 13.4% of total receivables and (ii) approximately $3.0 million
of trade payables which are more than 60 days past the date of invoice,
representing approximately 50% of total trade payables. KnowledgeWare expects
that these liquidity and cash flow problems will be solved upon the
consummation of the Merger because it will become a subsidiary of Sterling,
which is a much more financially sound entity. For example, as of June 30,
1994, Sterling had approximately $135 million of available cash and marketable
securities, had availability under its line of credit with Bank of Boston,
N.A. of approximately $33 million, and cash flow from operations for the nine
months ended June 30, 1994 was approximately $60 million.
If the Merger should not be completed, KnowledgeWare would require
substantial additional cash from alternative sources in order to fund
currently anticipated cash and capital requirements and would likely violate
certain covenants under the Amended Loan Agreement. In addition, if the Merger
is not consummated, there can be no assurance that KnowledgeWare will be able
to obtain additional sources of cash to meet its needs. Furthermore,
KnowledgeWare believes it is unlikely that it would be able to refinance its
indebtedness under the Amended Loan Agreement were KnowledgeWare to be in
default thereunder or should the Merger not be consummated. Finally, if the
Merger is not consummated, KnowledgeWare is presently unaware of any other
potential merger partners or sources of equity capital. The result, should the
Merger not be consummated, is that KnowledgeWare would have to consider a
variety of actions to address its liquidity and cash flow problems including
making additional reductions in headcount and spending, selling assets or
seeking protection under laws relating to bankruptcy laws. To date,
KnowledgeWare has not given significant consideration to seeking protection
under the bankruptcy laws.
KnowledgeWare anticipates that it will incur a substantial operating loss in
the first quarter of fiscal 1995. In addition, KnowledgeWare expects to report
a charge to earnings in the first quarter of fiscal 1995 of approximately $6
million attributable to its previously announced plan of restructuring.
KnowledgeWare may also report a charge to earnings in the first quarter of
fiscal 1995 with respect to the 1991 Class Action, the 1994 Class Action Suits
and the Ecta Suit; however, the amount of such charge, if any, cannot be
estimated at this time. KnowledgeWare anticipates filing its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994 on or before November
14, 1994 and publicly announcing such results on or before such date. When
filed with the Commission, KnowledgeWare's Quarterly Report on Form 10-Q shall
be deemed incorporated by reference in this Proxy Statement/Prospectus and the
information contained in such Quarterly Report should be considered by holders
of shares of KnowledgeWare Common Stock. See "Incorporation of Certain
Documents By Reference."
ESTABLISHMENT OF ESCROW
On July 31, 1994, Sterling, KnowledgeWare and Merger Sub entered into an
Agreement and Plan of Merger (the "Initial Merger Agreement") contemplating,
among other things, an exchange ratio of .2983 of a share of Sterling Common
Stock for each share of KnowledgeWare Common Stock outstanding (the "Original
Exchange Ratio").
Following execution of the Initial Merger Agreement, KnowledgeWare continued
to work on finalizing its fourth quarter and year-end financial results.
During the course of its 1994 fiscal year end audit, KnowledgeWare and its
independent auditors undertook an evaluation of KnowledgeWare's credit
procedures for its third party resellers and its fiscal 1994 collection
experience on reseller accounts receivable. This review led KnowledgeWare, in
consultation with its independent auditors, to reevaluate KnowledgeWare's
accounting policy for revenue recognition on sales to third party resellers
and to discuss the possible modification of its accounting policy on the
recognition of revenue for sales to resellers. KnowledgeWare considered that
the effect of such a modification of accounting policy would be retroactive,
resulting in a restatement of first, second and third quarter revenues for
fiscal year 1994 and a lower level of fourth quarter revenue, and resulting in
the existence of a shortfall in eligible receivables under the Loan
23
<PAGE>
Agreement with IBM Credit, all of which could create the possibility that
Sterling could terminate the Initial Merger Agreement. Renegotiation of the
Initial Merger Agreement by the managements of KnowledgeWare and Sterling led
to the execution of the Merger Agreement, which contains the revised terms of
the Merger. Under the Merger Agreement, the Original Exchange ratio was revised
so that holders of KnowledgeWare Common Stock will be entitled to receive up to
.1653 of a share of Sterling Common Stock for each share of KnowledgeWare
Common Stock. Promptly after the Merger, KnowledgeWare common stockholders will
be entitled to receive up to .1322 of a share of Sterling Common Stock for each
share of KnowledgeWare Common Stock; the remaining 20% of the number of shares
of Sterling Common Stock issuable upon effectiveness of the Merger will be
placed in escrow pursuant to the terms of the Escrow Agreement and thereafter
distributed to KnowledgeWare common stockholders only if and to the extent that
such shares are not necessary to cover certain losses, claims, liabilities,
judgments, costs and expenses that may be incurred by Sterling, Merger Sub or
KnowledgeWare in connection with any Action (including amounts paid in
settlement) to which Sterling, Merger Sub or KnowledgeWare is or may become a
party and with respect to which Sterling is entitled to indemnification.
Sterling is entitled to indemnification concerning certain Actions pending as
of the date of the Merger Agreement or thereafter arising, including Actions
arising out of violations or alleged violations of securities laws, but
excluding any Actions arising out of ordinary course of business transactions.
Actions brought by current or former employees with respect to their employment
or termination thereof and certain other Actions. Since August 30, 1994, a
number of Actions have been filed against KnowledgeWare and certain of its
officers alleging violations of securities laws. If these Actions result in
losses, claims, liabilities, judgments, costs or expenses (including amounts
paid in settlement) to KnowledgeWare, Merger Sub or Sterling, such losses,
claims, liabilities, judgments, costs or expenses will result in a claim for
indemnification to be satisfied from the Escrowed Shares. In the event that all
of the Escrowed Shares are used to cover losses, claims, liabilities,
judgments, costs or expenses incurred by KnowledgeWare, Merger Sub or Sterling,
no Escrowed Shares will be distributed to the KnowledgeWare common
stockholders. See "The Merger Agreement--The Merger" and "The Escrow
Agreement."
CERTAIN LEGAL PROCEEDINGS
On December 18, 1991, the 1991 Class Action complaint was filed in the United
States District Court for the Northern District of Georgia, Atlanta Division
which consolidated and amended several class action lawsuits previously filed
against KnowledgeWare in October 1991. The 1991 Class Action was a class action
lawsuit alleging violations of Sections 20 and 10(b) of the Exchange Act and
Rule 10b-5 under the Exchange Act. In summary, the complaint alleged that
KnowledgeWare misrepresented or failed to disclose material facts which would
have a material adverse impact on KnowledgeWare or approved such
misrepresentations and omissions. The complaint sought compensatory damages and
reimbursements for the plaintiffs' fees and expenses. On January 26, 1994,
KnowledgeWare entered into and the District Court preliminarily approved the
Settlement Agreement. By entering into the settlement, KnowledgeWare did not
admit the allegations in the suit and, to the contrary, denied any wrongdoing.
The Settlement Agreement, which received final court approval in April 1994,
required a cash payment of $1,750,000, all of which was paid by KnowledgeWare's
insurance carrier, and the issuance by KnowledgeWare of the Warrants, which
allow the holders to acquire an aggregate of 500,000 shares of KnowledgeWare's
Common Stock at a price of $17.50 per share. The Warrants are exercisable for a
period of three years from June 9, 1994 (the date of issuance). On August 30,
1994, the plaintiffs in the 1991 Class Action filed the Motion. In the Motion,
the plaintiffs allege that the proposed business combination between
KnowledgeWare and Sterling and the announcement by KnowledgeWare that it
modified its accounting policy for revenue recognition and restated financial
results for the first three quarters of fiscal year 1994 resulted in a
substantially reduced value of the Warrants available to the plaintiffs under
the Settlement Agreement. Accordingly, the plaintiffs moved the District Court
for a decree of specific performance of the terms of the Settlement Agreement
entailing the delivery of new warrants of equivalent value to the original
value of the Warrants, and for a preliminary injunction of the consummation of
any business combination between KnowledgeWare and Sterling, pending compliance
by KnowledgeWare with the terms of the Settlement Agreement. Alternatively, the
plaintiffs moved for a declaration that the Warrant Agreement set forth in the
Settlement Agreement was the product of fraud and for an award to the
plaintiffs of the appropriate measure of damages.
On August 30 and 31, 1994, and September 12, 22 and 23, 1994, the 1994 Class
Action Suits were filed against KnowledgeWare in the United States District
Court for the Northern District of Georgia, Atlanta
24
<PAGE>
Division. Each of the 1994 Class Action Suits is purportedly a class action
lawsuit variously alleging violations of Sections 20 and 10(b) of the Exchange
Act, and Rule 10b-5 under the Exchange Act. The alleged factual basis
underlying the 1994 Class Action Suits and the relief sought therein is the
plaintiffs' allegations that KnowledgeWare and the individual defendants
actively misrepresented or failed to disclose the actual financial condition of
KnowledgeWare throughout fiscal year 1994 and that the value of the
KnowledgeWare Common Stock was artificially inflated as a result of
misrepresentations or failures to disclose. Each of the 1994 Class Action Suits
seeks compensatory damages and reimbursement for the plaintiffs' fees and
expenses.
On September 9, 1994, the Ecta Suit was filed against KnowledgeWare in the
Southern District of Iowa, Central Division. The Ecta Suit is a lawsuit
alleging violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the
Exchange Act, Section 12(2) of the Securities Act, violation of the Iowa Blue
Sky Laws (Iowa Stat. Ann. (S)502.502), fraud and breach of contract. The
alleged factual basis underlying the Ecta Suit arises in connection with the
purchase by KnowledgeWare of substantially all of the assets of ClearAccess
Corporation (now known as Ecta Corporation) and Fairfield Software, inc. (now
known as Fairfield Development, Inc.) pursuant to the Acquisition Agreement.
The plaintiffs allege that KnowledgeWare and the individual defendants
misrepresented or failed to disclose the actual financial condition of
KnowledgeWare, that the value of the KnowledgeWare Common Stock was
artificially inflated as a result of such misrepresentations or failures to
disclose and that KnowledgeWare has breached certain warranties,
representations and covenants made in the Acquisition Agreement. The Ecta Suit
seeks compensatory damages, rescission of the Acquisition Agreement and/or the
sale of KnowledgeWare's securities issued pursuant thereto, punitive damages,
prejudgment interest, and reimbursement of attorneys' fees and costs.
Losses, claims, liabilities, judgments, costs or expenses (including amounts
paid in settlement) of KnowledgeWare, Sterling or Merger Sub resulting from
these Actions will result in claims for indemnification to be satisfied from
the Escrowed Shares. As of October 26, 1994, KnowledgeWare estimates that
approximately $55,000 of costs and expenses have been incurred since August 31,
1994 with respect to these Actions. See "Summary--Recent Developments," "The
Merger Agreement--Indemnification of Sterling; Escrow," "The Escrow Agreement"
and "Certain Information Regarding KnowledgeWare--Legal Proceedings." Neither
KnowledgeWare nor Sterling is able to quantity the amount of losses, claims,
liabilities, judgments, costs or expenses likely to be paid from the Escrowed
Shares in connection with such Actions because such Actions have only recently
been filed, discovery has not commenced and KnowledgeWare and its advisors
cannot estimate the loss, if any, that will result from the ultimate
resolutions of such Actions. There can be no assurance that additional Actions
will not arise in the future that will result in a claim for indemnification to
be satisfied from the Escrowed Shares. In addition, there can be no assurance
that the proceeds from any applicable insurance and the value of the Escrowed
Shares will be sufficient to cover all losses, claims, liabilities, judgments,
costs or expenses in connection with Actions for which Sterling is entitled to
be indemnified. See "The Escrow Agreement."
KnowledgeWare has received informal requests for information from the Staff
of the Commission as to which persons and entities had knowledge of the
negotiations between KnowledgeWare and Sterling prior to the public
announcement of the Initial Merger Agreement on August 1, 1994, and as to the
circumstances with respect to KnowledgeWare's restatement of financial results
for the first three quarters of fiscal 1994.
On October 27, 1994, KnowledgeWare received a letter on behalf of the
Investors who purchased shares of KnowledgeWare Common Stock pursuant to a
stock purchase agreement between the Investors and KnowledgeWare dated January
26, 1994. The Investors assert that in light of, among other things,
KnowledgeWare's announcement on September 1, 1994 and KnowledgeWare's other
public statements disclosing its restatement of its financial statements for
the first, second and third quarters of fiscal 1994, it is the position of the
Investors that KnowledgeWare is in breach of the representations and warranties
it made to the Investors in the stock purchase agreement and seek to recover
damages in the amount of approximately $9.5 million, representing the
difference between the aggregate purchase price the Investors paid for their
KnowledgeWare Common Stock and the aggregate price for which they sold those
shares.
INTERESTS OF CERTAIN AFFILIATES OF KNOWLEDGEWARE IN THE MERGER
Certain affiliates of KnowledgeWare could be deemed to have an interest in
the Merger. Sterling has agreed to assume all outstanding options granted under
the KnowledgeWare Stock Option Plans. Sterling
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has also agreed that all rights to indemnification and advancement of expenses
existing in favor of the current and former directors and officers of
KnowledgeWare, to the extent provided under KnowledgeWare's Articles of
Incorporation, Bylaws and indemnification agreements as of the date of the
Merger Agreement, shall survive for at least six years following the Merger,
and Sterling has agreed to indemnify and advance expenses to such persons to
the full extent as would be required of or permitted by KnowledgeWare. In
addition, Sterling has agreed to cause KnowledgeWare to maintain, for three
years following the Merger, KnowledgeWare's current directors' and officers'
liability insurance, or comparable insurance, with respect to matters occurring
prior to the Merger. KnowledgeWare has received a binder for a one year
directors' and officers' liability insurance policy with an aggregate limit
comparable to that under KnowledgeWare's prior policy that will convert to a
three year "run-off" policy if the Merger is consummated during the policy
term. The premium for this policy is $600,000. Sterling and KnowledgeWare have
agreed that the payment of such premium by KnowledgeWare shall satisfy
Sterling's obligation to obtain such liability insurance. See "Summary--The
Merger" and "The Merger--Interests of Certain Persons in the Merger."
Following the Effective Time, Sterling will enter into a three year
Consultation Agreement with Mr. Tarkenton pursuant to which he will be
compensated by Sterling at the rate of $300,000 per year plus the reimbursement
of certain expenses. In addition, following the Effective Time, Mr. Tarkenton
will be added to the Sterling Board of Directors pursuant to which he will be
entitled to Sterling's customary outside directors' fees, currently $22,500 per
annum and $2,500 for each meeting attended. See "Summary--The Merger" and "The
Merger--Interests of Certain Persons in the Merger."
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES
The parties to the Merger have not and do not intend to seek a ruling from
the IRS as to the U.S. federal income tax consequences of the Merger. See "The
Merger--Certain Federal Income Tax Consequences" for a general discussion of
the expected U.S. federal income tax consequences of the Merger (the "Tax
Discussion"). The Tax Discussion is based upon the Opinions of Jackson &
Walker, counsel for Sterling, and Hicks, Maloof & Campbell, counsel for
KnowledgeWare. There can be no assurance that the IRS will not challenge the
conclusions set forth in the Opinions and the Tax Discussion. KnowledgeWare
stockholders may have to incur the costs of administrative and court
proceedings in an effort to sustain positions taken by them based on such
conclusions, some or all of which may not be sustained. If not so sustained,
KnowledgeWare and KnowledgeWare stockholders may be liable for additional tax,
interest and penalties with respect to the Merger.
The Opinions are based on the Code, the Treasury Regulations, administrative
rulings and pronouncements of the IRS, and judicial decisions, all as of the
date of the Opinions. There can be no assurance that such authorities will not
be changed prior to the Effective Time or, retroactively, after the Effective
Time. Additionally, because the law is not entirely clear as to certain issues
affecting the U.S. federal income tax consequences of the Merger, the
conclusions described in the Tax Discussion and set forth in the Opinions have
generally been limited by counsel to a "more likely than not" standard.
The Merger Agreement and the Escrow Agreement have been structured in a
manner that is expected to result in the KnowledgeWare stockholders being
treated as the owners, for U.S. federal income tax purposes, of the Escrowed
Shares from the Effective Time. Accordingly, each KnowledgeWare stockholder
will recognize gain or loss upon return to, or sale on behalf of, Sterling of
any Escrowed Shares in an amount equal to the difference between the then value
of such Escrowed Shares and the KnowledgeWare stockholder's adjusted tax basis
in such shares. KnowledgeWare stockholders generally will not be entitled to
claim a loss based upon the value of the shares returned to, or sold on behalf
of, Sterling. Instead, the adjusted tax basis in their remaining shares of
Sterling Common Stock will be increased by the then value of the shares
returned or sold. Notwithstanding the foregoing, although no authorities
directly so hold, a KnowledgeWare stockholder who has previously disposed of
all such remaining shares should recognize a capital loss equal to the value of
the Escrowed Shares returned to, or sold on behalf of, Sterling. Dividends on
Escrowed Shares, which, pursuant to the Escrow Agreement are required to be
distributed to the KnowledgeWare stockholders, will generally be taxable to
them as ordinary income. Thus, former KnowledgeWare stockholders may incur tax
on gain attributable to Escrowed Shares even though the stockholders never
become entitled to actually receive the shares.
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THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of
KnowledgeWare Common Stock in connection with the solicitation of proxies by
the KnowledgeWare Board of Directors for use at the Special Meeting to be held
on November 30, 1994 at the Hotel Nikko, 3300 Peachtree Road, Atlanta, Georgia,
commencing at 10:00 a.m., local time, and at any adjournment or postponement
thereof.
This Proxy Statement/Prospectus and the accompanying proxy card are first
being mailed to stockholders of KnowledgeWare on or about October 28, 1994.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of KnowledgeWare Common Stock will consider
and vote upon (i) a proposal to approve and adopt the Merger Agreement, (ii) if
in the discretion of management of KnowledgeWare it is necessary to adjourn the
Special Meeting for the purpose of soliciting additional proxies, a proposal to
adjourn the Special Meeting, and (iii) such other matters as may properly be
brought before the Special Meeting.
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors of KnowledgeWare has unanimously approved the Merger
Agreement and unanimously recommends a vote FOR approval and adoption of the
Merger Agreement by the stockholders of KnowledgeWare and FOR the adjournment
of the meeting to solicit additional proxies, if necessary.
RECORD DATE; VOTING AT THE SPECIAL MEETING
The KnowledgeWare Board of Directors has fixed October 6, 1994 as the record
date for the determination of KnowledgeWare stockholders entitled to notice of
and to vote at the Special Meeting. Accordingly, only holders of record of
KnowledgeWare Common Stock on that record date will be entitled to notice of
and to vote at the Special Meeting. As of October 6, 1994, there were
14,571,888 shares of KnowledgeWare Common Stock outstanding, held by
approximately 542 holders of record. Each holder of record of shares of
KnowledgeWare Common Stock on the record date is entitled to cast one vote per
share on the proposal to approve and adopt the Merger Agreement, and any other
matters properly submitted for the vote of KnowledgeWare stockholders,
exercisable in person or by properly executed proxy, at the Special Meeting.
The presence, in person or by properly executed proxy, of the holders of
KnowledgeWare Common Stock representing a majority of the votes entitled to be
cast at the Special Meeting is necessary to constitute a quorum at the Special
Meeting.
The approval and adoption by the KnowledgeWare stockholders of the Merger
Agreement will require the affirmative vote of the holders of a majority of the
outstanding shares of KnowledgeWare Common Stock entitled to vote at the
Special Meeting as of the record date. The approval and adoption of a motion to
adjourn the Special Meeting in order to solicit additional proxies will require
the affirmative vote of a majority of shares represented in person or by proxy
at the Special Meeting. Under applicable law, in determining whether the
proposals have received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as a vote against such proposal.
Certain directors, executive officers and/or stockholders of KnowledgeWare,
who as of August 31, 1994 beneficially owned in the aggregate approximately
19.1% of the outstanding KnowledgeWare Common Stock, have entered into
agreements obligating them to vote in favor of the approval and adoption of the
Merger Agreement, and have granted to Sterling irrevocable proxies to vote
their shares in such manner in the event such stockholders fail to vote as
required. See "The Stockholder Agreements." Each such stockholder has also
agreed not to sell, transfer or encumber any of the shares of KnowledgeWare
Common
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Stock now owned or acquired during the term of the Stockholder Agreement by
such stockholder unless the transferee agrees to be bound by the terms of the
Stockholder Agreement. In addition, all other directors and executive officers
of KnowledgeWare, who beneficially own in the aggregate less than one per cent
of the outstanding KnowledgeWare Common Stock, have indicated that they will
vote all such shares in favor of the approval and adoption of the Merger
Agreement. As of the date of this Proxy Statement/Prospectus, Sterling owned
one share of KnowledgeWare Common Stock. Sterling also holds warrants to
purchase 1,405,000 shares of KnowledgeWare Common Stock. See "The Merger--
Interests of Certain Persons in the Merger" and "The Stockholder Agreements."
VOTING AND REVOCATION OF PROXIES
All shares of KnowledgeWare Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted (i) FOR approval and
adoption of the Merger Agreement and (ii) if in the discretion of management of
KnowledgeWare it is necessary to adjourn the Special Meeting, FOR adjournment
to solicit additional proxies.
Approval of the proposal to adjourn the meeting to solicit additional proxies
will provide KnowledgeWare the opportunity, if sufficient votes have not been
received to approve the Merger Agreement as of the scheduled date for the
Special Meeting, to adjourn the meeting and solicit additional proxies on the
proposal to approve the Merger Agreement without calling a new meeting and
providing a new record date.
If any other matters are properly presented at the Special Meeting for
consideration the persons named in the enclosed form of proxy and acting
thereunder will have discretion to vote on such matters in accordance with
their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies given by any stockholder may
be revoked by (i) filing with the Secretary of KnowledgeWare at or before the
taking of the vote at the Special Meeting, a written notice of revocation
bearing a later date than the proxy, (ii) duly executing a later dated proxy
relating to the same shares and delivering it to the Secretary of KnowledgeWare
before the taking of the vote at the Special Meeting or (iii) attending the
Special Meeting and voting in person (although attendance at the Special
Meeting will not in and of itself constitute a revocation of a proxy). Any
written notice of revocation or subsequent proxy by KnowledgeWare stockholders
should be sent so as to be delivered to KnowledgeWare, 3340 Peachtree Road,
N.E., Atlanta, Georgia 30326, Attention: Secretary, or hand delivered to the
Secretary of KnowledgeWare at or before the taking of the vote at the Special
Meeting.
All expenses of this solicitation, excluding the cost of mailing this Proxy
Statement/Prospectus and the filing fee paid to the Commission in connection
with filing the Registration Statement (which will be shared equally by
Sterling and KnowledgeWare), will be paid by the party incurring the expense.
In addition to solicitation by use of the mails, proxies may be solicited by
the respective directors, officers and employees of KnowledgeWare, in person or
by telephone, telegram or other means of communications. Such directors,
officers and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. KnowledgeWare has retained Georgeson & Company, Inc., at an
estimated cost of $7,000 plus reimbursement of expenses, to assist in the
solicitation of proxies from brokers, nominees, institutions and individuals on
its behalf. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries, and
KnowledgeWare will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
KNOWLEDGEWARE STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
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THE MERGER
GENERAL
The Merger Agreement provides for a business combination between Sterling and
KnowledgeWare in which Merger Sub would be merged with and into KnowledgeWare
and the holders of KnowledgeWare Common Stock would be issued shares of
Sterling Common Stock. The discussion in this Proxy Statement/Prospectus of the
Merger and the description of the Merger's principal terms are subject to and
qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Proxy Statement/Prospectus as Appendix A and which is
incorporated herein by reference.
BACKGROUND OF THE MERGER
Throughout its history, Sterling has maintained an active program of
expansion through the acquisition of products and businesses. Since 1983,
Sterling has acquired over 20 businesses, in addition to making numerous
product acquisitions. As part of its acquisition activities, Sterling has
observed KnowledgeWare over a period of several years and has recognized that
KnowledgeWare's products, technologies and marketing and distribution channels
are complementary to those of Sterling's existing enterprise software business.
In late April and early May 1994, KnowledgeWare management, in reviewing its
performance for the quarter ended March 31, 1994, and analyzing its ongoing
operations, concluded that existing cash balances would need to be supplemented
by additional cash from outside sources in order to fund anticipated cash and
capital requirements. KnowledgeWare began negotiations to establish an expanded
line of credit, which resulted in KnowledgeWare and IBM Credit entering into
the Loan Agreement on June 23, 1994. KnowledgeWare also began exploring the
feasibility of software leasing arrangements and engaged Alex. Brown to seek
investors interested in making a capital investment of at least $10 million
through a placement of either common stock or subordinated debt. In May and
June 1994, Alex. Brown arranged for several prospective investors to meet with
management and explore the possibility of a direct investment. Liquidity issues
and the need for additional capital from outside sources were discussed with
the Board of Directors at its regular meeting on May 5, 1994.
On July 1, 1994, KnowledgeWare announced that it anticipated it would have a
significant loss from operations during the quarter ended June 30, 1994. Such a
loss violated financial covenants in the Loan Agreement, for which
KnowledgeWare received a waiver until September 30, 1994. The anticipated loss
raised management's concern that raising at least $10 million in a private
transaction was no longer a viable alternative. During the first week of July,
Alex. Brown commenced a new engagement to seek potential candidates for a
business combination.
On June 9, 1994, senior members of Sterling's management met with a
representative of Broadview Associates, L.P. ("Broadview"), Sterling's
financial advisor, to discuss possible acquisitions, including KnowledgeWare.
On July 7, 1994, a representative of Alex. Brown contacted Sterling L.
Williams, President and Chief Executive Officer of Sterling, and suggested that
Mr. Williams contact KnowledgeWare regarding a possible business combination.
An initial meeting between Mr. Williams and Francis A. Tarkenton, Chairman
and Chief Executive Officer of KnowledgeWare, and other members of
KnowledgeWare's executive management was held on July 9, 1994. At that meeting,
the two parties discussed whether KnowledgeWare and Sterling shared a mutual
interest in considering a possible business combination. Based on those
discussions, a more in depth meeting exploring the feasibility and benefits of
a business combination was planned for July 18, 1994. A confidentiality
agreement was signed on July 15 in preparation for that second meeting.
KnowledgeWare's Board of Directors met on July 12, 1994, to review the status
of Alex. Brown's efforts. Management and representatives of Alex. Brown
reviewed a list of companies that Alex. Brown had contacted
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regarding a possible business combination and discussed the status of those
contacts where there was some level of continuing interest. The KnowledgeWare
Board instructed management to continue pursuing discussions with the
interested candidates.
On July 18, 1994 and July 19, 1994, a series of more detailed discussions
ensued between the management teams of Sterling and KnowledgeWare. Executives
of each company presented to the other an overview of the operations and
product strategies of their respective companies. The meetings ended with a
plan to meet in Atlanta on July 21, 1994, to begin more detailed discussions.
From July 21, 1994 through July 30, 1994, the senior management teams and
financial advisors of Sterling and KnowledgeWare met to further review
operational, marketing and financial issues and to conduct formal due diligence
reviews of each other.
On July 27, 1994, Sterling made its initial proposal to acquire KnowledgeWare
in a transaction to be accounted for as a pooling of interests, and the parties
began to negotiate price. A series of meetings that day between the financial
advisors and subsequently between Mr. Williams and Mr. Tarkenton resulted in a
proposal that Sterling acquire KnowledgeWare at the Original Exchange Ratio of
.2983 of a share of Sterling Common Stock for each share of KnowledgeWare
Common Stock outstanding, which would be equivalent to $8.75 per share of
KnowledgeWare Common Stock based on a value for Sterling Common Stock of
$30.25, the closing price of Sterling Common Stock on the NYSE on July 26,
1994. The proposal was subject to completion of due diligence and Board
approval by each company.
On the night of July 27, 1994, Sterling delivered to KnowledgeWare initial
drafts of a merger agreement, stock option agreement and stockholder
agreements. Negotiations with respect to the terms of such documents continued
until July 29, 1994.
On July 28, 1994, KnowledgeWare management and representatives of Alex. Brown
briefed the KnowledgeWare Board of Directors on the status of discussions. The
Board was presented with an overview of the business and prospects of Sterling,
and analyses concerning the potential fit of the two companies, including
operational and other benefits that could result from such a combination. At
that meeting, Alex. Brown reported that from its contacts with other companies,
no company, other than Sterling, had pursued more than exploratory discussions
and that no company had given an indication as to price or value for
KnowledgeWare within the range reflected by Sterling's proposal. The directors
further discussed the strategic risks and benefits of a potential combination
with Sterling, and then authorized Mr. Tarkenton to negotiate a definitive
agreement for presentation to the Board.
The KnowledgeWare Board of Directors held a special meeting on July 31, 1994
to consider the Initial Merger Agreement and the transactions contemplated
thereby. At such meeting, members of KnowledgeWare's senior management,
together with its legal and financial advisors, reviewed with the KnowledgeWare
Board of Directors, among other things, the background of the proposed
transaction, the potential benefits of this transaction, including the benefits
to its stockholders of a stock-for-stock tax-free business combination, a
summary of the due diligence findings regarding Sterling, financial and
valuation analyses of the transaction and the terms of the proposed agreements.
In addition, Alex. Brown reviewed its opinion that as of such date the Original
Exchange Ratio was fair from a financial point of view to the holders of
KnowledgeWare Common Stock. After extensive consideration, the KnowledgeWare
Board of Directors unanimously approved the transaction.
Both before and after execution of the Initial Merger Agreement,
representatives of KnowledgeWare and Sterling discussed manners in which
Sterling could assist KnowledgeWare in its need for working capital in excess
of its borrowings under the Loan Agreement. The representatives discussed the
possibility of Sterling guaranteeing a loan by a third party or making a direct
loan to KnowledgeWare. Subsequent to the execution of the Initial Merger
Agreement the representatives also discussed the possibility of Sterling
acquiring the interest of IBM Credit under the Loan Agreement.
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Following execution of the Initial Merger Agreement, KnowledgeWare continued
to work on finalizing its fourth quarter and year-end financial results. During
the course of its 1994 fiscal year end audit, KnowledgeWare and its independent
auditors undertook an evaluation of KnowledgeWare's credit procedures for its
third party resellers and its fiscal 1994 collection experience on reseller
accounts receivable. This review led KnowledgeWare, in consultation with its
independent auditors, to reevaluate KnowledgeWare's accounting policy for
revenue recognition on sales to third party resellers and to discuss in
meetings during the week of August 15 with the Audit Committee of
KnowledgeWare's Board of Directors the possible modification of its accounting
policy on the recognition of revenue for sales to resellers. The effect of such
a modification of accounting policy would be retroactive, resulting in a
restatement of first, second and third quarter revenues for fiscal year 1994
and a lower level of fourth quarter revenue and resulting in the existence of a
shortfall in eligible receivables under the Loan Agreement with IBM Credit and
creating the possibility that Sterling could terminate the Initial Merger
Agreement.
On August 24, 1994, Mr. Williams, other Sterling executives and a legal
advisor and Mr. Tarkenton, other KnowledgeWare executives, legal advisors, and
a representative of KnowledgeWare's independent auditors met in Chicago to
review the status of KnowledgeWare's 1994 audit. At this meeting, the parties
discussed issues related to revenue recognition for KnowledgeWare's reseller
program, the status of the audit with respect to receivables from integrators,
the potential for restatement of previously reported 1994 quarterly results,
and the potential for a significant loss for the year. At the conclusion of the
day, the parties agreed to continue discussions the following day. On the
following day, Messrs. Williams and Tarkenton discussed revising the
transactions contemplated under the Initial Merger Agreement, in light of
preliminary information relating to KnowledgeWare's poor collection experience
with reseller accounts receivable and the preliminary fourth quarter and fiscal
1994 results. The revised terms related to a reduction in the number of
Sterling shares to be issued in the Merger for each share of KnowledgeWare
Common Stock. Also, to address concern over KnowledgeWare's exposure to certain
legal claims that might be asserted following execution of the Merger
Agreement, the parties discussed providing for certain of the Sterling shares
otherwise issuable as consideration in the Merger being held in an escrow
arrangement to provide a source of funds to respond if any claims were
asserted. The parties agreed, however, that KnowledgeWare's 1994 audit would
need to be completed before the parties could agree to any such revised terms.
KnowledgeWare did not contact other parties (including parties that had
previously shown interest in a possible transaction with KnowledgeWare) after
discussions commenced with Sterling regarding revising the terms of the
transaction contemplated by the Initial Merger Agreement, because any such
activity initiated by KnowledgeWare could have been alleged by Sterling to
constitute a breach of KnowledgeWare's "no-shop" agreement under the Initial
Merger Agreement. The Initial Merger Agreement contained a "fiduciary out"
provision similar to the provision in the Merger Agreement summarized in "The
Merger Agreement--No Solicitation of Transactions" below, under which
KnowledgeWare could consider and respond to any proposal initiated by a third
party. Following public disclosure of KnowledgeWare's 1994 fiscal year loss and
modification of accounting policy, no third party had substantive contacts with
KnowledgeWare or Alex. Brown regarding a business combination with
KnowledgeWare.
On August 27, 1994, Sterling delivered to KnowledgeWare initial drafts of a
revised merger agreement, including provisions for indemnification of Sterling
pursuant to an escrow arrangement, a stock option agreement and stockholder
agreement, and the parties commenced negotiations on the terms of such
agreements. At the same time, the parties discussed the possibility of Sterling
providing supplemental short term loans to KnowledgeWare. After consideration
of the limitations on borrowing under KnowledgeWare's loan from IBM Credit,
Sterling and KnowledgeWare discussed the possibility that Sterling approach IBM
Credit to purchase KnowledgeWare's indebtedness. At the same time, the parties
discussed the possibility of Sterling providing up to an additional $7 million
of financing to KnowledgeWare.
On August 30, 1994, KnowledgeWare announced that it expected a significant
loss for its fiscal year and that it anticipated restating previously reported
financial results for prior quarters in fiscal 1994. KnowledgeWare also
announced that it was negotiating possible revisions to the Initial Merger
Agreement and that it would require additional waivers of non-compliance with
covenants under the Loan Agreement with IBM Credit and additional working
capital from IBM Credit or Sterling.
Also on August 30, 1994, the Board of Directors of KnowledgeWare held a
special meeting to discuss the possibility of revising the terms of the
proposed merger and of Sterling acquiring the interest of IBM Credit under the
Loan Agreement and increasing the amount available thereunder. At the meeting,
members of KnowledgeWare's senior management, together with its legal and
financial advisors, reviewed with the KnowledgeWare Board of Directors, among
other things, the status of the auditors' review of KnowledgeWare's year-end
financial results, the discussions with Sterling, KnowledgeWare's cash flow
situation, the failure of any other interested party to contact either
KnowledgeWare or Alex. Brown regarding a possible business combination or
investment in KnowledgeWare, the status of discussions with IBM Credit
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and the revisions being negotiated to the Initial Merger Agreement, including
the proposed terms of an escrow agreement. Alex. Brown reviewed with the
KnowledgeWare Board of Directors the material facts that had changed since the
Board had approved the Initial Merger Agreement.
Following the August 30, 1994 Board meeting, the Audit Committee of
KnowledgeWare's Board of Directors met to review preliminary fourth quarter and
year-end financial results, and the effect on prior quarters in fiscal 1994 of
adopting a modification of the accounting policy for sales to third party
resellers, which was also applicable to certain federal government integrators.
Finally on August 30, 1994, KnowledgeWare management and advisors met with
Sterling management and advisors to continue negotiating terms of a revised
merger agreement, an escrow agreement and arrangements to substitute Sterling
for IBM Credit under, and to revise the terms of, the Loan Agreement.
On August 31, 1994, KnowledgeWare completed its year end audit and the
managements of KnowledgeWare and Sterling agreed to the revised terms of the
Merger Agreement, including a revised exchange ratio of .1653 and the escrow of
20% of the shares to be received by KnowledgeWare stockholders, the terms of
the Stock Option Agreement, the terms of the Escrow Agreement, the terms of the
Amended Loan Agreement and the warrants to be issued to Sterling in connection
with the execution of the Amended Loan Agreement and upon subsequent
advancements thereunder. The terms of all these agreements were the result of
arm's-length negotiations between the managements of KnowledgeWare and
Sterling. With reference to the escrow of 20% of the shares to be received by
KnowledgeWare stockholders, the Board of Directors of KnowledgeWare considered,
among other factors: (i) the fact that the 20% level was determined by arm's-
length negotiations between the managements of KnowledgeWare and Sterling; (ii)
the fact that losses, claims, liabilities, judgments, costs and expenses that
may be incurred by KnowledgeWare, Sterling or Merger Sub in connection with
Actions with respect to which Sterling is entitled to indemnification would
result in claims to be satisfied from the Escrowed Shares; and (iii) the fact
that, in the event that losses, claims, liabilities, judgments, costs and
expenses with respect to which Sterling is entitled to indemnification exceed
the value of the Escrowed Shares, such excess would not be borne solely by the
KnowledgeWare stockholders, while if such losses, claims, liabilities,
judgments, costs and expenses do not exceed the value of the Escrowed Shares,
remaining Escrowed Shares would be distributed to the KnowledgeWare
stockholders.
The KnowledgeWare Board of Directors held a special meeting on August 31,
1994 to review the 1994 fiscal year audited financial statements, the form of
the Annual Report on Form 10-K for the 1994 fiscal year, and to consider the
revised terms and conditions to the proposed merger agreement. At such meeting,
members of KnowledgeWare's senior management first reviewed the audited
financial statements in detail, and discussed the form of the Annual Report on
Form 10-K, and responded to questions posed by the Directors. The Board
unanimously approved the consolidated financial statements of KnowledgeWare for
the 1994 fiscal year and the filing of the Annual Report with the Commission.
The Board then reviewed and considered the revised terms of the proposed merger
agreement and the transactions contemplated thereby, including the proposed
exchange ratio of .1653 of a share of Sterling Common Stock for each share of
KnowledgeWare Common Stock, the creation of an escrow of 20% of the shares
otherwise issuable to KnowledgeWare stockholders to provide Sterling with
indemnification for certain contingencies, and the grant by KnowledgeWare of
the proposed option at an exercise price at $5.00 per share contemplated by the
stock option agreement to be entered into with Sterling. At the meeting, the
KnowledgeWare Board reviewed with members of senior management, and with
KnowledgeWare's legal and financial advisors, among other things, the
background and recent events relating to the proposed transaction, the impact
of the 1994 fiscal year financial results upon KnowledgeWare's alternatives,
the continued existence of benefits to the KnowledgeWare stockholders of the
proposed merger, and financial and valuation analyses of the transaction and
the terms of the proposed agreements. Alex. Brown reviewed its proposed opinion
that based upon the proposed terms of the various agreements, including the
provisions for Escrowed Shares, as of such date the Exchange Ratio in the
Merger was fair from a financial point of view to the holders of KnowledgeWare
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Common Stock. After thorough consideration, the KnowledgeWare Board of
Directors unanimously approved the Merger Agreement and the Merger and the
related transactions. The Board then heard a report from members of senior
management as to the terms and conditions of the proposed assignment of the
Loan Agreement from IBM Credit to Sterling and the proposed modification to the
Loan Agreement from Sterling, including specifically the revisions to the
amount available under and the borrowing base computations, the interest rates
and the covenants and the number, exercise price, term and registration rights
of the warrants proposed to be issued in connection with amendment of and
borrowings under the loan. After discussion, the Board approved the Amended
Loan Agreement and the Warrant Agreement, authorized the issuance of the
warrants and the reservation for issuance of KnowledgeWare's Common Stock under
the warrants, and authorized senior management of KnowledgeWare to complete the
necessary actions related thereto. Although the Board considered and approved
the Merger Agreement and the Amended Loan Agreement at the same meeting and
considered each in light of the other, the two agreements were not conditioned
upon one another.
REASONS FOR THE MERGER; RECOMMENDATION OF THE KNOWLEDGEWARE BOARD OF DIRECTORS
Sterling. The Board of Directors of Sterling believes that the terms of the
Merger Agreement are in the best interests of Sterling and its stockholders and
has unanimously authorized management to negotiate, execute and deliver the
Merger Agreement. In reaching its determination, the Sterling Board of
Directors consulted with Sterling management, as well as its financial and
legal advisors, and considered a number of factors, including, without
limitation, the following:
(i) the two companies' enterprise software product lines are
complementary with minimal overlap and consist of some of the best known
products in the industry;
(ii) the combined company's applications development suite of products
will position the combined company as one of the leaders in that market;
(iii) KnowledgeWare's products will provide Sterling an expanded presence
in the client/server market with proven products;
(iv) the combined company will have sales, distribution and support
capabilities in almost all industrialized countries and a much stronger
presence as an international concern;
(v) KnowledgeWare will provide Sterling with additional marketing
channels, including value added resellers and original equipment
manufacturers;
(vi) the combined company's product lines will provide Sterling's
customers with complete applications development solutions covering
planning, analysis, design and construction using an integrated set of CASE
tools, as well as an object oriented development offering;
(vii) the addition of KnowledgeWare's Legacy Workbench product will
provide Sterling's existing customers with significant opportunities to
reduce legacy maintenance costs;
(viii) the combined company's products will offer Sterling an approach to
revitalizing its customers' legacy systems, as well as provide a transition
path to client/server computing for applications development;
(ix) the belief of management of Sterling that customers desire
"strategic vendors" who provide broad based solutions to their applications
development and data center requirements;
(x) the opportunities for economies of scale and operating efficiencies
that could result from the Merger, particularly in terms of the integration
of office facilities and support functions;
(xi) the possibility that the combined company may not be able, in the
short term, to integrate efficiently the businesses of the two companies
and/or to identify and eliminate redundant costs; and
(xii) the terms of the Merger Agreement, the Stock Option Agreement, the
Stockholder Agreements and the Escrow Agreement.
Although the issuance of shares of Sterling Common Stock in connection with
the Merger would have resulted in a dilution of earnings per share on a pro
forma basis for the most recent fiscal years (see "Pro Forma Combined Condensed
Financial Information"), Sterling management noted that such pro forma
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analysis did not give effect to possible synergies that management of both
companies will seek to achieve following the Merger, and believes that any such
dilution is more than offset by the benefits of the Merger.
Sterling and KnowledgeWare expect to achieve savings in operating costs
through the combination of the two companies, including savings resulting from
the elimination of duplicate facilities and the reduction of personnel.
Because the enterprise software industry is highly competitive and because of
the inherent uncertainties associated with merging two large companies, there
can be no assurance that the combined entity will be able to realize the
economies of scale and operating efficiencies that Sterling and KnowledgeWare
currently expect to realize as a result of the consolidation of their
operations.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors of Sterling did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its
determination.
KnowledgeWare. The Board of Directors of KnowledgeWare believes that the
terms of the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of KnowledgeWare's stockholders, and, on that
basis, the KnowledgeWare Board of Directors unanimously adopted the Merger
Agreement and unanimously recommends approval thereof by the stockholders of
KnowledgeWare. In making that determination, the Board of Directors of
KnowledgeWare consulted with KnowledgeWare's management, its legal counsel and
its financial advisors and considered a number of factors including:
(i) KnowledgeWare's current and prospective financial condition,
including cash levels and near-term cash needs, the impact of increasing
awareness of KnowledgeWare's financial condition on sales and collection of
receivables, and the default under the Loan Agreement with IBM Credit, the
need to obtain a waiver from IBM Credit and the need for additional working
capital;
(ii) the recent negative effect on price levels of KnowledgeWare's Common
Stock as market awareness had grown regarding KnowledgeWare's financial
condition, and the effect on such price levels following the announcement
of the 1994 fiscal year-end results and the restatement of earnings for
prior quarters in fiscal year 1994;
(iii) prior inquiries to or discussions with third parties regarding
possible significant equity investments in or business combinations with
KnowledgeWare and the outcomes of those inquiries and discussions;
(iv) the Exchange Ratio and recent trading prices for KnowledgeWare
Common Stock and Sterling Common Stock;
(v) the opportunity presented by the Merger to create a leading software
and services company that provides greater financial and other resources
for KnowledgeWare's products;
(vi) information presented by Alex. Brown concerning the financial
performance, condition, business operations and prospects of Sterling and
KnowledgeWare;
(vii) the terms and conditions of the Merger Agreement, the Stock Option
Agreement and the Escrow Agreement;
(viii) the specific terms and conditions of the proposed Sterling loan to
KnowledgeWare and of the related Warrant Agreement and Registration Rights
Agreement as reviewed with the Board at its August 31 special meeting, and
the immediate availability of the Amended Loan Agreement; and
(ix) the presentation and opinion of Alex. Brown (see "The Merger--
Opinion of Financial Advisor").
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The Board of Directors of KnowledgeWare believes that the Merger offers the
opportunity to create a combined company with greater financial resources,
competitive strengths and business opportunities than would be possible for
KnowledgeWare alone.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors of KnowledgeWare did
not find it practicable to, and did not, quantify or otherwise attempt to
assign relative weights to the specific factors considered in reaching its
determination.
THE BOARD OF DIRECTORS OF KNOWLEDGEWARE UNANIMOUSLY RECOMMENDS THAT
KNOWLEDGEWARE STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
In July 1994, KnowledgeWare retained Alex. Brown to provide investment
banking services in connection with the Merger. At a July 31, 1994 meeting of
the KnowledgeWare Board of Directors, Alex. Brown presented certain financial
analyses with respect to the acquisition of KnowledgeWare by Sterling, and
delivered its written opinion dated July 31, 1994 that the Original Exchange
Ratio was fair, from a financial point of view, to the holders of the common
stock of KnowledgeWare. On August 31, 1994 Alex. Brown was asked to render its
opinion as to the fairness, from a financial point of view, of the Exchange
Ratio to the holders of common stock of KnowledgeWare. Alex. Brown presented
certain financial and other analyses with respect to the acquisition to the
Board of Directors of KnowledgeWare at meetings held on August 30 and August
31, 1994 and indicated to the Board of Directors that it was prepared, after
review of final documentation relating to the Merger Agreement, the Stock
Option Agreement, the Escrow Agreement, the Amended Loan Agreement, the Warrant
Agreement and the Registration Rights Agreement, to deliver its opinion that,
based upon the various considerations set forth in the opinion, the Exchange
Ratio was fair, from a financial point of view, to the holders of common stock
of KnowledgeWare. In the course of such meetings, Alex. Brown noted the
possibility that no Escrowed Shares would ever become available to holders of
the common stock of KnowledgeWare, and indicated that it had performed its
analyses accordingly. Subsequent to the Board meeting, on August 31, 1994 Alex.
Brown delivered its written opinion that as of such date, the Exchange Ratio
was fair, from a financial point of view, to the holders of the common stock of
KnowledgeWare.
The full text of Alex. Brown's written opinion with respect to the Exchange
Ratio, which sets forth, among other things, the assumptions made, matters
considered and limitations on the review undertaken, is attached as Appendix B
to this Proxy Statement/Prospectus. KnowledgeWare stockholders are urged to
read this opinion in its entirety. ALEX. BROWN'S OPINION IS DIRECTED ONLY TO
THE FAIRNESS OF THE EXCHANGE RATIO TO THE HOLDERS OF COMMON STOCK OF
KNOWLEDGEWARE FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY KNOWLEDGEWARE STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE SPECIAL MEETING. THE DISCUSSION OF THE OPINION IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION.
In connection with its opinion, Alex. Brown reviewed certain publicly
available financial information concerning KnowledgeWare and Sterling, reviewed
KnowledgeWare's most current financial information, including information
regarding the capital needs of KnowledgeWare, and certain internal financial
analyses and other information furnished to Alex. Brown by KnowledgeWare and
Sterling. Alex. Brown held discussions with members of the senior managements
of KnowledgeWare and Sterling regarding the businesses and prospects of those
companies. In addition, Alex. Brown (i) reviewed the reported price and trading
activity for the common stock of both KnowledgeWare and Sterling, (ii) compared
certain financial information for both KnowledgeWare and Sterling with similar
information for certain companies in the software industry whose securities are
publicly traded, (iii) compared certain stock market information and valuations
for both KnowledgeWare and Sterling with similar information for certain
companies in the software industry whose securities are publicly traded, (iv)
reviewed the financial terms of certain recent
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business combinations in the software industry, (v) reviewed the terms of the
Merger Agreement and certain related documents and (vi) performed such other
studies and analyses and considered such other factors as Alex. Brown deemed
appropriate. In particular, Alex. Brown performed certain of its analyses
relative to the value received by the holders of the common stock of
KnowledgeWare assuming that the Escrowed Shares are never received by the
holders of the common stock of KnowledgeWare. In addition, Alex. Brown noted
that its opinion was not dependent on the tax consequences of the Merger to the
KnowledgeWare stockholders.
As described in its opinion, Alex. Brown did not independently verify the
information reviewed by it and for the purposes of the opinion assumed and
relied upon the accuracy, completeness and fairness thereof. With respect to
the information relating to the prospects of KnowledgeWare and Sterling, Alex.
Brown assumed that such information reflected the best currently available
judgments and estimates of the managements of KnowledgeWare and Sterling as to
the likely future financial performance of their respective companies and of
the combined company. In addition, Alex. Brown did not make nor was it provided
with an independent evaluation or appraisal of the assets of KnowledgeWare and
Sterling, nor did it make any physical inspection of the properties or assets
of KnowledgeWare or Sterling. Alex. Brown's opinion is based on market,
economic and other conditions as they existed and could be evaluated as of the
date of its opinion letter.
In delivering its opinion to the KnowledgeWare Board, Alex. Brown prepared
and delivered to the KnowledgeWare Board certain written materials, which were
updated and finalized at the time of the delivery of the opinion (the "Alex.
Brown Materials"), and made an oral presentation to the Board of Directors at
its meetings held on August 30 and 31, 1994. The Alex. Brown Materials included
various valuation analyses, as well as other information and judgments,
relating to the proposed transaction, KnowledgeWare and Sterling, as well as
other data and analyses considered in connection with the opinion. The
following is a summary of portions of the Alex. Brown Materials delivered to
the Board of Directors of KnowledgeWare concerning the proposed Merger:
Premiums Paid Analysis. Alex. Brown reviewed publicly available
information for a number of completed merger and acquisition transactions
involving publicly traded software companies since June 1989. The premiums
were calculated based upon the transaction prices per share divided by the
closing price per share four weeks and one day prior to the announcement of
the transaction. Alex. Brown determined that these transactions were
effected at a mean premium to the target's share price four weeks prior to
the announcement and to the target's share price one day prior to the
announcement of approximately 60% and 45%, respectively, versus transaction
discounts based on share prices four weeks and one day prior to the
announcement of the Initial Merger Agreement of approximately 1% and 20%,
respectively, for the Merger. For purposes of this analysis, Alex. Brown
considered the purchase price as calculated net of all of the Escrowed
Shares.
Stock Price Analysis. Alex. Brown reviewed and analyzed the performance
of the per share market prices and the trading volume of KnowledgeWare
Common Stock over two time periods, from October 31, 1989 to August 31,
1994 and a shorter period from March 31, 1994 to August 31, 1994. Alex.
Brown compared the movement of KnowledgeWare's daily closing prices during
these periods with the movement of the Standard & Poor's industrial average
for 500 stocks and composite indices of certain other publicly traded
mainframe computer software companies and computer software tool companies.
The companies included in the mainframe computer software index were
Bachman Information Systems, Inc. ("Bachman Information"), Computer
Associates International Inc. ("Computer Associates"), Compuware Corp.,
Intersolv, Inc., LEGENT Corp. ("Legent"), Cognos, Inc., Micro Focus Group
Plc ("Micro Focus Group"), and Sapiens International Corp. N.V. ("Sapiens
Corp."). The companies included in the computer software tools index were
Gupta Corp., Informix Corp., Oracle Systems Corp. ("Oracle Software"),
Powersoft Corp., and Sybase, Inc.
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Alex. Brown noted that since 1992, KnowledgeWare has significantly
underperformed all indices analyzed. Alex. Brown noted that KnowledgeWare's
price per share prior to announcement of the Initial Merger Agreement
reflected market concern regarding the financial condition of KnowledgeWare
and KnowledgeWare's public announcement of expected results for the fiscal
fourth quarter. In addition, Alex. Brown noted that KnowledgeWare's price
per share on August 31, 1994 also reflected market concerns regarding the
loss for the full fiscal year, the restatement of the financial results of
prior periods and uncertainty regarding the Merger. Alex. Brown also noted
that based on KnowledgeWare's next-twelve-months price to earnings ratio
for the period March 1990 to August 1994, KnowledgeWare's stock had been
trading at the high end of its historical range.
Discussion of KnowledgeWare's Financial Condition. Alex. Brown noted that
KnowledgeWare has reached low cash levels as a result of several factors,
including collection issues related to receivables, expenditures in excess
of planned levels coupled with a shortfall in planned revenues, severance
payments due as a result of the recent restructuring, and acquisition
payments related to the purchase of software distributors and software
products. Market reaction to increasing awareness of KnowledgeWare's
financial condition has further slowed both sales and collection of
receivables, resulting in lower than planned cash levels, as well as
negatively impacting the stock price, creating difficulties in raising
additional equity capital on any terms. In addition, KnowledgeWare was in
default under the Loan Agreement with IBM Credit, which was also
undercollateralized given the level of reductions in accounts receivable
relating to the restatement of revenues. Finally, Alex. Brown noted that
management has expressed concerns regarding the Company's short-term
operating viability and that Coopers & Lybrand, L.L.P., the auditors for
the Company, were planning to include "going concern" language in their
opinion.
Analysis of Certain Other Publicly Traded Companies. Alex. Brown compared
certain financial information relating to KnowledgeWare to corresponding
data and ratios from a group of eight selected mainframe computer software
companies and a group of five selected computer software tools companies.
For purposes of this analysis, Alex. Brown considered the purchase price as
calculated net of all of the Escrowed Shares. The mainframe computer
software group included Bachman Information, Computer Associates, Compuware
Corp., Intersolv, Inc., Legent, Cognos, Inc., Micro Focus Group, and
Sapiens Corp. The computer software tools group included Gupta Corp.,
Informix Corp.; Oracle Software, Powersoft Corp., and Sybase, Inc. Such
financial information included, among other things, (i) market valuation;
(ii) capitalization ratios; (iii) growth rates; (iv) operating performance;
(v) ratios of market value as adjusted for debt and cash ("Aggregate
Value") to revenues, earnings before interest expense and income taxes,
each for the latest reported twelve month period as derived from publicly
available information; and (vi) ratios of market value per share ("Equity
Value") to earnings per share for the latest reported twelve month period
as derived from publicly available information and to estimated earnings
per share for calendar years 1994 and 1995 as reported by the Institutional
Brokers Estimating System ("IBES").
Alex. Brown noted that, on a trailing twelve month basis, the median
multiple of Aggregate Value to revenues of the mainframe computer software
companies was 1.2x and the median multiple of Aggregate Value to revenues
of the computer software tools companies was 3.4x, versus a transaction
multiple of 0.6x for the Aggregate Value of the Merger given Sterling's
stock price as of August 31, 1994. Alex. Brown noted that, on a trailing
twelve month basis, the median multiple of Aggregate Value to earnings
before interest expense and income taxes of the mainframe computer software
companies was 12.0x and the median multiple of Aggregate Value to earnings
before interest expense and income taxes of the computer software tools
companies was 23.0x. Alex. Brown noted that the mainframe computer software
companies traded at a median multiple of expected calendar 1994 net income
of 15.1x and that the computer software tools companies traded at a median
multiple of expected calendar 1994 net income of 34.8x. KnowledgeWare ran
at an operating deficit and was not profitable for the trailing twelve
month period after adjusting for certain changes in accounting and
restructuring charges, and
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therefore no meaningful comparison could be made for Aggregate Value to
earnings before interest expense and income taxes or for the Equity Value
of the Merger. Alex. Brown noted that the mainframe computer software
companies traded at a median multiple of expected calendar 1995 net income
of 11.6x and that the computer software tools companies traded at a median
multiple of expected calendar 1995 net income of 26.8x, versus a
transaction multiple of 14.0x for the Equity Value of the Merger. For
purposes of this analysis, Alex. Brown considered the purchase price as
calculated net of all the Escrowed Shares. Finally, Alex. Brown noted that
the median multiples for the companies are an average of a broad range and
are therefore subject to interpretation.
Analysis of Selected Transactions. Alex. Brown reviewed the financial
terms, to the extent publicly available, of seven recent acquisitions in
the systems software industry. The seven transactions reviewed, in reverse
chronological order of public announcement, were the following: the
acquisition of (i) The ASK Group, Inc. by Computer Associates; (ii) CGI
Informatique by International Business Machines Corp. ("IBM"); (iii)
Systems Center by Sterling; (iv) Pansophic Systems, Inc. by Computer
Associates; (v) On-Line Software International by Computer Associates; (vi)
Index Technology Corp. by SAGE Software, Inc.; and (vii) Cullinet Software,
Inc. by Computer Associates. Alex. Brown noted that these transactions were
effected at a median multiple of Aggregate Value to revenues of 1.3x versus
0.6x for the Merger. For purposes of this analysis, Alex. Brown considered
the purchase price as calculated net of all of the Escrowed Shares. Alex.
Brown further noted that the most recent transaction was completed at a
multiple of 0.8x trailing twelve month revenues. Finally, Alex. Brown noted
that generally the multiples of revenue paid have been dependent upon the
degree of profitability of the target. KnowledgeWare was not profitable for
the trailing twelve month period before the Merger.
Independent Entity Analysis. Alex. Brown calculated the estimated
earnings per share in fiscal year 1995 and fiscal year 1996 based upon
projections by the management of KnowledgeWare. Alex. Brown then calculated
a range of price per share values for KnowledgeWare at the end of fiscal
1995 and fiscal 1996 by applying a range of earnings per share multiples of
11.0 to 17.0 times projected net income per share, based on mainframe
computer software companies. The range of discount rates used reflect
different assumptions regarding the cost of capital of KnowledgeWare,
currently approximately 20%, resulting in a range of $1.86 per share to
$3.25 per share in fiscal year 1995, and $2.34 per share to $4.63 per share
in fiscal year 1996. Alex. Brown then calculated the effect on
KnowledgeWare's price per share of raising the additional capital necessary
for KnowledgeWare to operate as an independent entity, resulting in a range
of $1.59 per share to $2.78 per share in fiscal year 1995, and $2.01 per
share to $3.96 per share in fiscal year 1996.
Disaggregated Revenue Analysis. Alex. Brown determined that
KnowledgeWare's revenues are composed of five separate product and service
components. Alex. Brown valued each of these components based on trailing
twelve month revenue multiples of publicly traded companies to determine an
aggregate revenue valuation for KnowledgeWare, resulting in a valuation
range of $4.39 to $9.63 per share. The midpoint of this range is $7.01.
Alex. Brown then calculated the effect on KnowledgeWare's price per share
of raising the additional capital necessary for KnowledgeWare to operate as
an independent entity, which resulted in a per share value of $6.00. Alex.
Brown noted that the revenue multiples for the publicly traded companies
are highly influenced by these companies' profitability. Therefore, Alex.
Brown noted that this valuation was overstated. KnowledgeWare ran at a
significant operating deficit for the trailing twelve month period ending
June 30, 1994, and therefore no meaningful comparison could be made for
earnings before interest and income taxes.
Contribution Analysis. Alex. Brown analyzed the contribution of each of
KnowledgeWare and Sterling to certain income statement and balance sheet
categories of the pro forma combined company, including revenues, operating
income, net income, total assets, and net worth. This contribution analysis
was then compared to the pro forma ownership percentage of KnowledgeWare's
and Sterling's stockholders (adjusted to take into account options assumed
to be exercised as a result of the Merger) in
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the pro forma combined company. Alex. Brown observed that KnowledgeWare
stockholders are expected to own approximately 7.2% of the combined
company's equity at the close of the Merger, and that Sterling stockholders
are expected to own approximately 91.0% of the combined company's equity at
the close of the Merger (with the balance of 1.8% of the combined company's
equity representing the Escrowed Shares). For the period ended June 30,
1994, it was estimated that KnowledgeWare and Sterling will have
contributed approximately 22.2% and 77.8%, respectively, of the combined
revenues, and approximately 29.3% and 70.7%, respectively, of the combined
expenses. KnowledgeWare will not have contributed to the profitability of
the combined company.
Pro Forma Earnings Analysis. Alex. Brown analyzed the pro forma dilution
or accretion to earnings per share of Sterling Common Stock for the fiscal
years ending September 30, 1994, September 30, 1995 and September 30, 1996,
assuming the effects of anticipated cost savings, write-downs of certain
assets, and the potential impact on KnowledgeWare's business of having
access to the resources of the combined company. This analysis indicated
that the Merger would result in dilution to earnings per share of Sterling
for the 1994, 1995 and 1996 fiscal years.
Sterling Stock Price Analysis. Alex. Brown reviewed and analyzed the
performance of the per share market prices and the trading volume of
Sterling Common Stock over two time periods, from October 31, 1989 to
August 31, 1994 and a shorter period from March 31, 1994 to August 31,
1994. Alex. Brown compared the movement of Sterling's daily closing prices
during these periods with the movement of the Standard & Poor's industrial
average for 500 stocks and composite indices of certain other publicly
traded mainframe computer software companies and computer software tools
companies, which Alex. Brown deemed to be somewhat or substantially
comparable to Sterling. The companies included in the mainframe computer
software index were Bachman Information, Computer Associates, Compuware
Corp., Intersolv, Inc., Legent, Cognos, Inc., Micro Focus Group, and
Sapiens Corp. The companies included in the computer software tools index
were Gupta Corp., Informix Corp., Oracle Software, Powersoft Corp., and
Sybase, Inc.
Alex. Brown determined that while Sterling's price per share has
outperformed the S&P 500 and both groups of comparable company indices in
the period October 31, 1989 to August 31, 1994, it has tracked in between
the S&P 500 and the mainframe computer software companies index but below
computer software tools companies index for the shorter time period between
March 31, 1994 to August 31, 1994. Alex. Brown also calculated the average
market prices for Sterling for the four month, three month, one month and
ten day periods ended July 31, 1994. The average market price of Sterling
Common Stock over such periods ranged from $27.13 per share to $34.50 per
share.
Sterling Valuation Analysis. Alex. Brown noted that Sterling's multiple
of earnings as of August 31, 1994 was at a discount to the median of the
mainframe computer software comparable companies. Alex. Brown calculated
the estimated unlevered free cash flows that Sterling is expected to
generate over a five year period from the fiscal year 1994 to fiscal year
1999. The sum of the unlevered free cash flows for such five year period
and the range of terminal asset values, which are based on a range of
multiples of operating income reflecting Sterling's current valuation, were
then discounted at a range of discount rates reflecting Sterling's current
cost of capital of 13-15%. This analysis indicated a discounted cash flow
valuation of approximately $29.46 to $77.58 per share. Alex. Brown also
valued Sterling based on its disaggregated revenue, indicating a value of
approximately $24.40 to $68.30 per share.
Alex. Brown noted in the Alex. Brown Materials and in its oral presentation
to the Board of Directors of KnowledgeWare a number of factors in addition to
the empirical analysis which it considered in analyzing the fairness of the
proposed transaction. Among other things, Alex. Brown noted that the liquidity
issues relating to KnowledgeWare, the significant losses and lack of
predictable operating results of KnowledgeWare, the lack of predictability
concerning the future business prospects of KnowledgeWare and the frequency of
extraordinary charges, write-offs and restructurings of KnowledgeWare on a
historical basis led to the conclusion that an analysis of selected companies
and transactions did not provide significant
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guidance concerning the fairness of the purchase price for KnowledgeWare.
Accordingly, Alex. Brown noted that it did not consider the Premiums Paid
Analysis, the Analysis of Certain Other Publicly Traded Companies, the Analysis
of Selected Transactions, or the Disaggregated Revenue Analysis to be
significant indicators of the fairness of the Exchange Ratio. Alex. Brown noted
that its judgments regarding the fairness of the transaction were influenced by
the uncertainties facing KnowledgeWare as a result of the restatement of
revenues, its liquidity problems and need for immediate additional cash
support, questions regarding the viability of its business prospects and
product lines and other factors giving rise to concerns regarding the long-term
viability of KnowledgeWare. This included concerns raised by management
regarding the ability of KnowledgeWare to meet its short-term cash operating
needs and indications by KnowledgeWare's independent auditors that a "going
concern" qualification would be required in their opinion on KnowledgeWare's
financial statements for the year ended June 30, 1994.
The summary of the Alex. Brown Materials and presentation to the Board of
Directors set forth above does not purport to be a complete description of the
presentation by Alex. Brown to the Board of Directors of KnowledgeWare or the
analyses performed by Alex. Brown in arriving at its opinion. The preparation
of a fairness opinion involves a determination as to the most appropriate and
relevant methods of analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Alex. Brown believes that its analyses and
the summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or portions of the
above summary, without considering all factors and analyses, could create an
incomplete view of the process underlying the analyses set forth in the Alex.
Brown Materials and in the opinion. The analyses performed by Alex. Brown are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Additionally, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business may actually be sold.
Furthermore, no opinion is being expressed as to the prices at which the
securities to be paid in the Merger may trade at any future time.
KnowledgeWare has agreed to pay Alex. Brown a financial advisory fee of
approximately $970,000, as calculated based on Sterling's stock price as of
August 31, 1994, in connection with the Merger, payable upon consummation of
the Merger. As part of such fee, KnowledgeWare has agreed to pay Alex. Brown
$350,000 for rendering its initial opinion. KnowledgeWare has also agreed to
pay Alex. Brown an additional fee of $50,000 for its opinion delivered on
August 31, 1994. Payment of the fees for these opinions is not conditioned upon
the closing of the transaction. KnowledgeWare has also agreed to reimburse
Alex. Brown for its reasonable out-of-pocket expenses incurred in connection
with rendering financial advisory services, including fees and disbursements of
its legal counsel. KnowledgeWare has agreed to indemnify Alex. Brown and its
directors, officers, agents, employees and controlling persons for certain
costs, expenses and liabilities to which it may be subjected, including
liabilities under federal securities laws arising out of or in connection with
its rendering of services under its engagement as financial advisor.
Alex. Brown, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. Alex. Brown has advised
KnowledgeWare that in the ordinary course of its business it may actively trade
the equity and debt securities of KnowledgeWare and Sterling for its own
account or for the account of its customers and accordingly may at any time
hold a long or short position in such securities. In addition, Alex. Brown
advised the Board of Directors that it has, in the past, provided investment
banking services to Sterling. In March 1993, Alex. Brown acted as a financial
advisor to the Board of Directors of Sterling in connection with the
acquisition of Systems Center, and also was the lead-managing underwriter of
the January 1993 public offering of the 5 3/4% convertible subordinated
debentures of Sterling. At the present time, Alex. Brown is not acting in any
financial advisory capacity for Sterling. Alex. Brown regularly publishes
research reports regarding the computer systems industry and the businesses and
securities of Sterling and other publicly owned companies in the computer
software industry.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
KnowledgeWare Stock Option Plans. As provided in the Merger Agreement, by
virtue of the Merger, all options (the "KnowledgeWare Options") outstanding at
the Effective Time under KnowledgeWare's Incentive Stock Option Plan of 1984,
Second Incentive Stock Option Plan of 1984, 1988 Stock Incentive Plan, 1989
Non-Employee Directors Stock Option Plan, 1989 Employee Stock Purchase Plan
and 1993 Non-Employee Directors Stock Option Plan (collectively, the
"KnowledgeWare Stock Option Plans"), whether or not then exercisable, will be
assumed by Sterling and converted into and become a right with respect to
Sterling Common Stock. Each KnowledgeWare Option assumed by Sterling will be
exercisable upon the same terms and conditions as under the applicable
KnowledgeWare Stock Option Plan and applicable option agreement issued
thereunder, and Sterling will assume the KnowledgeWare Stock Option Plans and
the option agreements for such purposes. Pursuant to the Merger Agreement, at
and after the Effective Time, (i) each KnowledgeWare Option assumed by
Sterling may be exercised solely for Sterling Common Stock, (ii) the number of
shares of Sterling Common Stock subject to each KnowledgeWare Option will be
equal to the product, rounded to the nearer whole share, of (a) the number of
shares of KnowledgeWare Common Stock subject to the original KnowledgeWare
Option immediately prior to the Effective Time, times (b) the Exchange Ratio,
and (iii) the per share exercise price for each such KnowledgeWare Option will
be equal to (a) the per share exercise price for the share of KnowledgeWare
Common Stock otherwise purchasable pursuant to each KnowledgeWare Option
immediately prior to the Effective Time divided by (b) the Exchange Ratio,
rounded upward to the nearest full cent; provided, however, that in the case
of any KnowledgeWare Option which is an "incentive stock option," as defined
under Section 422 of the Code, the option price, the number of shares
purchasable pursuant to such KnowledgeWare Option and the terms and conditions
of the exercise of such KnowledgeWare Option will be determined in a manner
consistent with Section 424(a) of the Code. Sterling has also agreed that (a)
at or prior to the Effective Time, it will take all corporate actions
necessary to reserve for issuance a sufficient number of shares of Sterling
Common Stock for delivery upon exercise of KnowledgeWare Options assumed by it
and (b) it will file a registration statement with respect to the shares of
Sterling Common Stock subject to such KnowledgeWare Options and use its
reasonable efforts to maintain the effectiveness of such registration
statement (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such KnowledgeWare Options remain
outstanding. As of October 6, 1994, there were KnowledgeWare Options
outstanding to purchase an aggregate of 1,545,202 shares of KnowledgeWare
Common Stock at a weighted average exercise price of $9.64 per share.
Following the Merger, no new options will be granted under the KnowledgeWare
Stock Option Plans.
Employee Benefit Plans. Sterling has agreed to cause KnowledgeWare, as the
Surviving Corporation in the Merger (the "Surviving Corporation"), to pay, in
accordance with their terms as in effect on the date of the Merger Agreement,
all amounts payable under the terms of all written employment, severance and
termination contracts, plans and policies of KnowledgeWare with or with
respect to KnowledgeWare's current or former employees, officers and
directors, which amounts were vested on or prior to that date or which become
vested as a result of the Merger. See "The Merger Agreement--Benefit Plans."
Indemnification of Directors and Officers of KnowledgeWare. Sterling has
agreed that all rights to indemnification and advancement of expenses existing
in favor of the current and former directors and officers of KnowledgeWare
against any costs, expenses, judgments, losses, or other liabilities incurred
in connection with any claim arising out of matters existing or occurring at
or prior to the Effective Time will survive the Merger for at least six years
following the Effective Time, to the fullest extent provided under
KnowledgeWare's Articles of Incorporation, Bylaws and indemnification
agreements in effect as of the date of the Merger Agreement, and Sterling has
agreed to indemnify and advance expenses to such persons to the full extent as
would be required of or permitted by KnowledgeWare. In addition, to the extent
available, Sterling has agreed to cause KnowledgeWare to maintain for three
years following the Merger KnowledgeWare's current directors' and officers'
liability insurance, or comparable insurance, with respect to matters
occurring prior to the Merger; provided that in no event will Sterling or
KnowledgeWare be required to expend more than $500,000 in the aggregate to
procure or maintain such insurance, and Sterling
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and KnowledgeWare will only be required to obtain as much comparable insurance
as is available for an aggregate expenditure of $500,000. KnowledgeWare has
received a binder for a one-year directors' and officers' liability insurance
policy with an aggregate limit comparable to that under KnowledgeWare's prior
policy. If KnowledgeWare is acquired by Sterling during the policy term, the
policy converts into a three year "run-off" policy. The premium for this
policy is $600,000. Sterling and KnowledgeWare have agreed that the payment of
such premium by KnowledgeWare shall satisfy Sterling's obligation to maintain
or procure such liability insurance. See "The Merger Agreement--
Indemnification of Directors and Officers of KnowledgeWare."
Stockholder Agreements. Certain directors, executive officers and/or
stockholders of KnowledgeWare have each entered into Stockholder Agreements
with Sterling pursuant to which each such stockholder has, among other things,
agreed to vote for approval of the Merger Agreement and has granted to
Sterling irrevocable proxies to vote his or its shares in such manner in the
event such stockholder fails to vote as agreed. As of August 31, 1994, such
stockholders of KnowledgeWare beneficially owned in the aggregate
approximately 19.1% of the outstanding shares of KnowledgeWare Common Stock.
See "The Stockholder Agreements."
Consultation Agreement. Following the Effective Time, Sterling will enter
into a three year Consultation Agreement with Mr. Tarkenton pursuant to which
he will be compensated by Sterling at a rate of $300,000 per year plus the
reimbursement of certain expenses. In addition, following the Effective Time,
Mr. Tarkenton will be added to the Sterling Board of Directors. As a member of
the Sterling board, Mr. Tarkenton will be entitled to Sterling's customary
outside directors' fees, currently $22,500 per annum and $2,500 for each
meeting attended.
Loan to KnowledgeWare. On August 31, 1994, Sterling acquired by assignment
all of the interest and right of IBM Credit in the Loan Agreement with
KnowledgeWare by paying to IBM Credit approximately $15.1 million, which was
equal to all amounts owed thereunder by KnowledgeWare. Concurrently, Sterling
and KnowledgeWare modified the terms of the Loan Agreement, among other
things, to (i) increase the term loan portion of the facility from $2.7
million to $6 million and fix the revolving portion of the facility at $16
million, (ii) reformulate the borrowing base computation to increase the
borrowing capacity based on KnowledgeWare's eligible accounts receivable and
(iii) modify certain covenants. The loan bears interest at the prime rate plus
1.25% and is secured by substantially all of KnowledgeWare's assets. As of
October 25, 1994, approximately $4.9 million in additional funds had been
advanced by Sterling to KnowledgeWare since Sterling acquired IBM Credit's
interest in the Loan Agreement. KnowledgeWare used the proceeds from the Loan
Agreement with IBM Credit to pay off an existing line of credit and for
working capital and to finance acquisitions, and used the advances from
Sterling for working capital. As an inducement to Sterling's entry into the
Amended Loan Agreement, KnowledgeWare and Sterling entered into a Warrant
Agreement pursuant to which KnowledgeWare agreed to issue to Sterling warrants
to purchase 70,250 shares of KnowledgeWare Common Stock for each $1,000,000
currently outstanding or subsequently advanced under the Amended Loan
Agreement. The warrants expire five years from their date of issuance and will
have an exercise price equal to the market price of KnowledgeWare Common Stock
as of the business day preceding the date of the advance giving rise to the
warrants' issuance. As of October 25, 1994, KnowledgeWare had issued to
Sterling warrants to purchase 1,405,000 shares of KnowledgeWare Common Stock
at the weighted average exercise price of $4.43 per share. On October 25,
1994, Sterling and KnowledgeWare amended the Amended Loan Agreement to
increase the revolving portion of the facility to $22 million and agreed to
waive the borrowing base requirements with respect to borrowings of up $16
million under the revolving portion of the facility. Sterling expects that it
likely will grant additional waivers with respect to the borrowing base
requirements if KnowledgeWare needs additional cash to fund operations prior
to the consummation of the Merger. Pursuant to the terms of the Merger
Agreement, if the Merger is consummated, the shares of KnowledgeWare Common
Stock that may be acquired by Sterling upon the exercise of such warrants will
not be converted into the right to receive Sterling Common Stock but will be
disregarded. Any amounts outstanding under the modified loan agreement will
become due on August 31, 1995 (unless, with respect to the revolving portion,
the Amended Loan Agreement is extended pursuant to its terms), or, if earlier,
upon a change of control of KnowledgeWare or the occurrence of certain other
events of default. Sterling's acquisition and modification of the Loan
Agreement was not a condition to the parties' entering into the Merger
Agreement.
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ACCOUNTING TREATMENT
Sterling intends to record the Merger in accordance with the purchase method
of accounting. Accordingly, from and after the Effective Time, KnowledgeWare's
results of operations will be included in Sterling's consolidated results of
operations.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The parties to the Merger have not and do not intend to seek a ruling from
the IRS as to the U.S. federal income tax consequences of the Merger. Instead,
Sterling has obtained the Opinion of its counsel, Jackson & Walker, and
KnowledgeWare has obtained the Opinion of its counsel, Hicks, Maloof &
Campbell, as to certain of the expected U.S. federal income tax consequences of
the Merger, copies of which are attached as exhibits to the Registration
Statement.
Subject to the conditions, qualifications and assumptions contained herein
and in its Opinion, counsel for Sterling has opined that, though it is not free
from doubt, it is more likely than not that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (ii) Sterling,
Merger Sub and KnowledgeWare will each be a party to the reorganization within
the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be
recognized by Sterling or Merger Sub as a result of the Merger.
Subject to the conditions, qualifications and assumptions contained herein
and in its Opinion, counsel for KnowledgeWare has opined that, though it is not
free from doubt, it is more likely than not that (i) the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code; (ii)
Sterling, Merger Sub and KnowledgeWare will each be a party to the
reorganization within the meaning of Section 368(b) of the Code; (iii)
KnowledgeWare will recognize no gain or loss as a result of the Merger; (iv)
KnowledgeWare stockholders will recognize no gain or loss upon receipt of
Sterling Common Stock (including the Escrowed Shares) in exchange for their
KnowledgeWare Common Stock in the Merger (except with respect to cash received
in lieu of fractional shares and, as further discussed below, except with
respect to gain or loss recognized upon the return to, or sale on behalf of,
Sterling of any Escrowed Shares pursuant to the Escrow Agreement); (v) the tax
basis of the Sterling Common Stock (including the Escrowed Shares) received by
KnowledgeWare stockholders in the Merger will be the same as the adjusted tax
basis of the KnowledgeWare Common Stock surrendered in exchange therefor
(reduced by any amount allocable to fractional share interests for which cash
is received); (vi) the holding period of the Sterling Common Stock (including
the Escrowed Shares) received by the KnowledgeWare stockholders in the Merger
will include the holding period of the KnowledgeWare Common Stock surrendered
in exchange therefor; and (vii) KnowledgeWare stockholders who receive cash in
lieu of fractional share interests of Sterling Common Stock in connection with
the Merger will generally, depending on each stockholder's particular
circumstances, recognize a capital gain or loss equal to the difference between
the amount of cash received therefor and the stockholder's adjusted tax basis
in the fractional share interest (which gain or loss will constitute long-term
capital gain or loss if the fractional share interest has been held for more
than one year at the Effective Time).
The Opinions do not address, among other matters, (i) state, local, foreign
or other tax consequences; (ii) U.S. federal income tax consequences to
KnowledgeWare stockholders subject to special rules under the Code, such as
foreign persons, tax-exempt organizations, insurance companies, financial
institutions, dealers in stocks and securities, and persons whose KnowledgeWare
Common Stock is not a capital asset; and (iii) U.S. federal income tax
consequences affecting shares of KnowledgeWare Common Stock acquired upon
exercise of employee stock options, stock purchase plan rights or otherwise as
compensation, or holders of warrants, options or other rights to acquire shares
of KnowledgeWare Common Stock. The Opinions are based on the Code, the Treasury
Regulations, administrative rulings and pronouncements of the IRS and judicial
decisions, all as of the date of the Opinions and all of which are subject to
change, prospectively or retroactively.
The Opinions represent only such counsels' best judgement as to the expected
U.S. federal income tax consequences of the Merger and are not binding on the
IRS. The IRS may challenge the conclusions stated
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therein and KnowledgeWare stockholders may incur the cost and expense of
defending positions taken by them with respect to the Merger. A successful
challenge by the IRS could have material adverse consequences to Sterling,
Merger Sub, KnowledgeWare and the stockholders of KnowledgeWare. In rendering
the Opinions, counsel have relied, as to factual matters, solely on the present
and continuing accuracy of (i) the description of the facts relating to the
Merger contained in this Proxy Statement/Prospectus, (ii) the factual
representations contained in the Merger Agreement and related documents, and
(iii) certain factual matters addressed by representations made by certain
executive officers of Sterling and KnowledgeWare, as further described in the
Opinions. Events occurring after the date of the Opinions could alter the facts
upon which the Opinions are based, in which event the Opinions and this summary
would no longer be applicable.
Although Sterling presently intends to treat the Merger as a tax-free
reorganization under Section 368(a) of the Code (a "Reorganization"), it is not
a condition precedent to KnowledgeWare's obligation to effect the Merger that
the Merger qualify as a Reorganization and Sterling is not obligated to treat
the Merger as a Reorganization for U.S. federal income tax purposes.
Additionally, although the continuing accuracy of the Opinions is a condition
precedent to Sterling's obligation to effect the Merger, Sterling may, in its
sole and absolute discretion, waive such condition.
ACCORDINGLY, FOR ALL OF THE ABOVE REASONS, KNOWLEDGEWARE STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS.
As discussed in the Opinions, there are certain issues which could adversely
impact qualification of the Merger as a Reorganization. For the Merger to
qualify as a Reorganization, the Treasury Regulations and judicial authorities
require that the historic KnowledgeWare stockholders receive and retain for
some period of time a significant continuing proprietary interest in Sterling
(the "Continuity" requirement). For advance ruling purposes, the IRS requires
that KnowledgeWare stockholders receive in the Merger Sterling Common Stock
having a value equal to at least 50 percent of the value of all the formerly
outstanding Common Stock of KnowledgeWare (although the courts have approved
lower thresholds).
Shares of Sterling Common Stock disposed of after the Merger by former
KnowledgeWare stockholders pursuant to a plan, intention or arrangement
existing at the Effective Time will generally not be counted towards
satisfaction of the Continuity requirement. Counsel have obtained
representations from management of Sterling and KnowledgeWare generally to the
effect that, to their knowledge, there is no plan, intention or arrangement on
the part of any stockholder of KnowledgeWare, to sell, exchange, or otherwise
dispose of a number of shares of Sterling Common Stock received in the Merger
that would reduce the KnowledgeWare stockholders' aggregate ownership of
Sterling Common Stock below the 50 percent threshold. No such representations
have been obtained, however, from the KnowledgeWare stockholders themselves,
and, except with respect to the Escrowed Shares, none of the KnowledgeWare
stockholders are contractually obligated to hold the shares of Sterling Common
Stock received by them in the Merger for any period of time. In the case of a
publicly traded target, however, the IRS has distinguished, for advance ruling
purposes, between (i) target shareholders owning less than 5 percent of the
target's shares, and (ii) target shareholders owning 5 percent or more of the
target's shares. Based on the IRS' advance ruling guidelines, shares of
Sterling Common Stock issued to KnowledgeWare stockholders who hold less than 5
percent of the outstanding KnowledgeWare Common Stock at the Effective Time,
should be treated towards satisfaction of the Continuity requirement.
There is no direct authority as to the effect of the Merger Agreement and the
Escrow Agreement (collectively, the "Escrow Arrangement") and the potential
return to, or sale on behalf of, Sterling of the
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shares subject thereto on the Continuity requirement. Consistent with the
authorities discussed below supporting treatment of such shares as owned by
the KnowledgeWare stockholders from the Effective Time, the Opinions conclude
that the Sterling Common Stock subject to the Escrow Arrangement should count
towards satisfaction of the Continuity requirement, though there is no
assurance that the IRS or a court would agree.
In the context of a Reorganization, escrow arrangements can adversely affect
qualification as a Reorganization and can result in adverse tax consequences
to stockholders otherwise entitled to receive the shares subject to the
escrow. If the stockholders otherwise entitled to receive the shares subject
to the escrow are entitled to be paid any dividends thereon currently and are
entitled to exercise voting rights with respect to the shares, the courts have
generally treated such stockholders as the owners of the shares, for U.S.
federal income tax purposes, from the date issued. The IRS has promulgated
safe-harbor, advance ruling requirements for escrowed stock in
Reorganizations. The Escrow Arrangement has been structured with the intent
that it satisfy the judicial requirements and substantially all of the IRS'
advance ruling requirements. Accordingly, the KnowledgeWare stockholders
entitled to receive the Escrowed Shares should be treated as the owners
thereof, for U.S. federal income tax purposes, at the Effective Time. If
Sterling were treated as the owner of the shares subject to the Escrow
Arrangement until their release to the KnowledgeWare stockholders,
qualification of the Merger as a Reorganization could be adversely affected
and the KnowledgeWare stockholders could be deemed in receipt of imputed
interest income with respect to the delayed delivery of the shares subject to
the Escrow Arrangement.
Assuming the KnowledgeWare stockholders are treated as the owners of the
Escrowed Shares from the Effective Time, the U.S. federal income tax
consequences to them upon their deemed receipt of the Escrowed Shares at the
Effective Time will be as described above with respect to receipt of all of
the Sterling Common Stock (including the Escrowed Shares) at the Effective
Time. There will be no further U.S. federal income tax consequences to the
KnowledgeWare stockholders resulting from any subsequent release to them of
Escrowed Shares. Because, however, the Escrowed Shares are valued as of the
time of their return to, or sale on behalf of, Sterling in satisfaction of
Sterling's right to be indemnified, KnowledgeWare stockholders will recognize
gain or loss upon return to, or sale on behalf of, Sterling of any Escrowed
Shares in an amount equal to the difference between the then value of such
Escrowed Shares and the KnowledgeWare stockholders' adjusted tax basis in such
shares. KnowledgeWare stockholders will not be entitled to claim a loss based
upon the value of the shares returned to, or sold on behalf of, Sterling.
Instead, the adjusted tax basis in their remaining shares of Sterling Common
Stock will be increased by the then value of the returned or sold shares.
Notwithstanding the foregoing, although no authorities directly so hold, a
KnowledgeWare stockholder who has previously disposed of all such remaining
shares should recognize a capital loss equal to the value of the Escrowed
Shares returned to, or sold on behalf of, Sterling. Dividends on Escrowed
Shares, which, pursuant to the Escrow Agreement are required to be distributed
to the KnowledgeWare stockholders, will generally be taxable to them as
ordinary income.
Effective August 31, 1994, Sterling acquired by assignment all of the
interest and right of IBM Credit in the Loan Agreement with KnowledgeWare and
then entered into the Amended Loan Agreement, and, to further induce Sterling
to acquire IBM Credit's interest in the Loan Agreement and to enter into the
Amended Loan Agreement, KnowledgeWare and Sterling entered into the Warrant
Agreement. Financing arrangements between parties to a Reorganization can
adversely impact the tax treatment of the parties to the Reorganization. The
IRS has ruled, in the context of a statutory merger under Code Section
368(a)(1)(A), that cash advances from the acquiring corporation to the target
corporation prior to a merger constituted additional consideration for the
assets of the target corporation and resulted, pursuant to Code Section
361(b), in recognition of gain by the target corporation. Rev. Rul. 72-343,
1972-2 C.B. 213. The advances at issue in Revenue Ruling 72-343 were non-
interest bearing, subordinated demand notes and were repayable only if the
merger was not consummated through the fault of the target or its controlling
shareholder. The indebtedness evidenced by the
Amended Loan Agreement bears interest, is not subordinated, is secured by a
first lien on substantially all of
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KnowledgeWare's assets, and is payable at fixed times and in all events.
Additionally the representation letters from Sterling and KnowledgeWare
management contain representations generally to the effect that (i) the funds
loaned by Sterling or Merger Sub to KnowledgeWare have been or will be made on
an arm's-length basis with terms comparable to those which would have been
obtained by unaffiliated third parties in the practice of making loans of
comparable risk, and were, or will be, adequately collateralized when made or
acquired; (ii) there is no plan or intention that any part of any such loan
will be forgiven or converted, directly or indirectly, into a capital
contribution to KnowledgeWare, and (iii) none of the proceeds of the
indebtedness evidenced by the Loan Agreement and the Amended Loan Agreement
have been or will be distributed to KnowledgeWare stockholders. Accordingly,
although not free from doubt, the facts of Revenue Ruling72-343 appear to be
distinguishable from those relating to the Loan Agreement and the Amended Loan
Agreement.
Advances not treated, for U.S. federal income tax purposes, as debt are
generally treated as constituting equity in the nature of non-voting preferred
stock. In the context of Reorganizations under Sections 368(a)(1)(B) and
368(a)(2)(E) of the Code, cash paid by an acquiror to a target for newly issued
shares of the target's stock, in connection with the consummation of the
Reorganization, is not treated as part of the Reorganization transaction and
does not adversely impact the Reorganization, provided the cash is not
distributed to the target shareholders. Rev. Rul. 72-522, 1972-2 C.B. 215;
Treas. Reg. (S)1.368-2(j)(7), Example 7. Accordingly, in counsels' opinion, the
better view is that even if Sterling's advances under the Amended Loan
Agreement are not treated as debt for U.S. federal income tax purposes, the
recharacterized debt constitutes an additional equity investment by Sterling
which does not constitute additional consideration paid to the KnowledgeWare
stockholders by Sterling in exchange for their KnowledgeWare Common Stock
surrendered in the Merger.
Finally, since KnowledgeWare is the surviving corporation in the Merger, it
does not transfer any of its properties in the Merger; rather, the end result
of the Merger is an exchange of Sterling Common Stock for KnowledgeWare Common
Stock among the KnowledgeWare stockholders and Sterling. Therefore, unlike the
facts of Revenue Ruling 72-343, Code Section 361(b) arguably would not apply to
the Merger even if the advances by Sterling were treated as part of the Merger
Consideration.
Accordingly, although Revenue Ruling 72-343 may be factually and legally
distinguished from the Merger, as discussed herein, there is no direct
authority addressing the effect of Sterling's acquisition of the Loan Agreement
and its advances under the Amended Loan Agreement on qualification of the
Merger as a Reorganization or on recognition of gain at the KnowledgeWare
level. Since there is no direct authority discussing the facts of the Merger
and since the U.S. federal income tax characterization of purported debt as
equity is highly factual, counsel believed it necessary that the Opinions be
rendered on a "more likely than not" basis.
REGULATORY APPROVAL
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger could not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. Sterling and
KnowledgeWare have each filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division. Early termination of the required
waiting period under the HSR Act was granted on October 4, 1994. At any time
before or after consummation of the Merger, the Antitrust Division or the FTC
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Sterling or
KnowledgeWare. At any time before or after the Effective Time, and
notwithstanding that the HSR Act waiting period has been terminated, any state
could take such action under the antitrust laws as it deems necessary or
desirable. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of
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KnowledgeWare or businesses of Sterling or KnowledgeWare by Sterling. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
RESALE RESTRICTIONS; REGISTRATION RIGHTS
All shares of Sterling Common Stock received by KnowledgeWare stockholders
in the Merger (including Escrowed Shares if and when distributed to
KnowledgeWare stockholders) will be freely transferable, except that shares of
Sterling Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of KnowledgeWare prior to
the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in
the case of such persons who become affiliates of Sterling) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of KnowledgeWare or Sterling generally include individuals or entities that
control, are controlled by, or are under common control with, such party and
may include certain officers and directors of such party as well as principal
stockholders of such party. The Merger Agreement requires KnowledgeWare to
exercise its reasonable efforts to cause each of its affiliates to execute a
written agreement to the effect that such person will not offer or sell,
transfer or otherwise dispose of any of the shares of Sterling Common Stock
issued to such person in or pursuant to the Merger unless (a) such sale,
transfer or other disposition has been registered under the Securities Act,
(b) such sale, transfer or other disposition is made in conformity with Rule
145 under the Securities Act or (c) in the opinion of counsel, such sale,
transfer or other disposition is exempt from registration under the Securities
Act.
Sterling has agreed to file a registration statement under the Securities
Act to permit the sale by KnowledgeWare's affiliates of the shares of Sterling
Common Stock to be received by them in the Merger without regard to the
limitations imposed by Rule 144 or Rule 145 promulgated under the Securities
Act. Sterling has agreed to use its reasonable efforts to cause such
registration statement to become effective as soon as practicable following
the filing thereof and to remain effective until all such stockholders are
eligible to sell their Sterling Common Stock pursuant to Rule 144 or Rule 145
under the Securities Act without limitation as to the number of shares which
may be sold by such stockholders.
NO DISSENTERS' RIGHTS
Under Georgia law, stockholders entitled to dissenters' rights may not
challenge the action giving rise to such rights absent procedural defects or
fraud in connection with the approval of the corporate action. Under Georgia
law, however, no stockholder of KnowledgeWare will have any dissenters' rights
in connection with, or as a result of, any of the matters to be acted upon at
the Special Meeting. In the absence of dissenters' rights, all actions
otherwise available at equity or at law remain available to stockholders of
KnowledgeWare.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger
Agreement.
THE MERGER
The Merger Agreement provides that, subject to the terms and conditions of
the Merger Agreement, at the Effective Time, Merger Sub will be merged with
and into KnowledgeWare, and the separate corporate existence of Merger Sub
will thereupon cease. KnowledgeWare will be the surviving corporation in the
Merger and will continue to be governed by the laws of the State of Georgia,
and the separate corporate existence of KnowledgeWare with all its rights,
privileges, immunities, powers and franchises will continue unaffected by the
Merger, except as set forth in the Merger Agreement. The Merger will have the
effects specified in the GBCC.
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As soon as practicable following the closing of the Merger, and provided that
the Merger Agreement has not been terminated or abandoned, KnowledgeWare and
Merger Sub will cause a Certificate of Merger to be filed with the Secretary of
State of the State of Georgia as provided in Section 14-2-1105(b) of the GBCC.
The Merger will become effective at the Effective Time.
At the Effective Time, by virtue of the Merger and without any action on the
part of the holder thereof, each share of KnowledgeWare Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of
KnowledgeWare Common Stock owned by Sterling, Merger Sub or any other
subsidiary of Sterling (collectively, the "Buyer Group") and shares of
KnowledgeWare Common Stock held in KnowledgeWare's treasury immediately prior
to the Effective Time) will be converted into the right to receive up to .1653
of a share of Sterling Common Stock (the "Merger Consideration"). Promptly
after the Merger, KnowledgeWare common stockholders will be entitled to receive
.1322 of a share of Sterling Common Stock for each share of KnowledgeWare
Common Stock with the Escrowed Shares being placed in escrow pursuant to the
terms of the Escrow Agreement and thereafter distributed to KnowledgeWare
common stockholders only if and to the extent that such shares are not
necessary to cover certain losses, claims, liabilities, judgments, costs and
expenses that may be incurred by Sterling, Merger Sub or KnowledgeWare in
connection with certain Actions (including amounts paid in settlement) to which
Sterling, Merger Sub or KnowledgeWare is or may become a party and with respect
to which Sterling is entitled to indemnification. Sterling is entitled to
indemnification concerning certain Actions pending as of the date of the Merger
Agreement or thereafter arising, including Actions arising out of violations or
alleged violations of securities laws but excluding Actions arising out of
ordinary course of business transactions, Actions brought by current or former
employees with respect to their employment or termination thereof, and certain
other Actions. Since August 30, 1994, a number of Actions have been filed
against KnowledgeWare and certain of its officers alleging violations of
securities laws. Losses, claims, liabilities, judgements, costs or expenses
incurred by KnowledgeWare, Sterling or Merger Sub in connection with these
Actions (including amounts paid in settlement) will result in claims for
indemnification to be satisfied from the Escrowed Shares. In the event that all
of the Escrowed Shares are used to cover losses, claims, liabilities,
judgments, costs or expenses incurred by KnowledgeWare, Sterling or Merger Sub,
no Escrowed Shares will be distributed to the KnowledgeWare common
stockholders. See "Summary--The Merger," "Summary--Recent Developments,"
"Investment Considerations--Establishment of Escrow," "The Merger Agreement--
Indemnification of Sterling; Escrow" and "The Escrow Agreement."
As a result of the Merger and without any action on the part of the holder
thereof, all such shares of KnowledgeWare Common Stock will cease to be
outstanding and will be canceled and retired and will cease to exist, and each
holder of a Certificate representing any such shares of KnowledgeWare Common
Stock will thereafter cease to have any rights with respect to such shares of
KnowledgeWare Common Stock, except the right to receive, without interest, the
Merger Consideration (less all or some portion of the Escrowed Shares if such
shares are used to cover certain losses, claims, liabilities, judgments, costs
and expenses incurred by Sterling, Merger Sub or KnowledgeWare as described
above) and cash for fractional interests of Sterling Common Stock (as described
in "The Merger Agreement--Exchange Procedures"), upon the surrender of such
Certificate. Each share of KnowledgeWare Common Stock issued and outstanding at
the Effective Time and owned by any of the Buyer Group, and each share of
KnowledgeWare Common Stock issued and held in KnowledgeWare's treasury at the
Effective Time, by virtue of the Merger and without any action on the part of
the holder thereof, will cease to be outstanding and will be canceled and
retired without payment of any consideration therefor and will cease to exist.
At the Effective Time, each share of common stock of Merger Sub issued and
outstanding immediately prior to the Effective Time will be converted into and
exchanged for one newly and validly issued, fully paid and nonassessable share
of common stock of the Surviving Corporation.
At the Effective Time, all KnowledgeWare Options then outstanding under the
KnowledgeWare Stock Option Plans will remain outstanding and will be assumed by
Sterling. Each KnowledgeWare Option assumed by Sterling will be exercisable
upon the same terms and conditions as under the applicable
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KnowledgeWare Stock Option Plan and the applicable option agreement issued
thereunder, and Sterling will assume the KnowledgeWare Stock Option Plans for
such purposes, except that (a) each such KnowledgeWare Option will be
exercisable for that whole number of shares of Sterling Common Stock into which
the number of shares of KnowledgeWare Common Stock under the unexercised
portion of such option would be converted immediately prior to the Effective
Time and (b) the exercise price per share of Sterling Common Stock will be an
amount equal to the exercise price per share subject to such KnowledgeWare
Option immediately prior to the Effective Time divided by the Exchange Ratio.
Following the Merger, no new options will be granted under the KnowledgeWare
Stock Option Plans.
The Warrants outstanding at the Effective Time will remain outstanding and
will be assumed by Sterling. Each Warrant will be exercisable upon the same
terms and conditions as set forth in the Warrant, except that (a) each such
Warrant will be exercisable for that whole number of shares of Sterling Common
Stock into which the number of shares of KnowledgeWare Common Stock under the
unexercised portion of such Warrant would be converted immediately prior to the
Effective Time and (b) the purchase price (exercise price) per share of
Sterling Common Stock will be an amount equal to the purchase price (exercise
price) for a share of KnowledgeWare Common Stock subject to such Warrant
immediately prior to the Effective Time divided by the Exchange Ratio. The
purchase price (exercise price) per share of KnowledgeWare Common Stock subject
to the Warrants currently is $17.50.
EXCHANGE PROCEDURES
Promptly after the Effective Time, The First National Bank of Boston, N.A.,
as Exchange Agent for the Merger, will mail to each person who was, at the
Effective Time, a holder of record (other than any of the Buyer Group) of a
Certificate or Certificates a letter of transmittal to be used by such holders
in forwarding their Certificates, and instructions for effecting the surrender
of the Certificates in exchange for certificates representing shares of
Sterling Common Stock. Upon surrender to the Exchange Agent of a Certificate
for cancellation, together with such letter of transmittal, the holder of such
Certificate will be entitled to receive a certificate representing that number
of shares of Sterling Common Stock which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions of the
Merger Agreement, and the Certificate so surrendered will be canceled.
KNOWLEDGEWARE STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE A FORM OF LETTER OF TRANSMITTAL.
No interest will be paid or accrued on the amount payable upon surrender of
Certificates. No dividends on shares of Sterling Common Stock, if any, will be
paid with respect to any shares of KnowledgeWare Common Stock or other
securities represented by a Certificate until such Certificate is surrendered
for exchange as provided in the Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of certificates representing shares of Sterling Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such shares
of Sterling Common Stock and not paid, less the amount of any withholding taxes
which may be required thereon, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender thereof and a payment date subsequent to
surrender thereof payable with respect to such shares of Sterling Common Stock,
less the amount of any withholding taxes which may be required thereon.
At or after the Effective Time, there will be no transfers on the transfer
books of KnowledgeWare of shares of KnowledgeWare Common Stock or Warrants
which were outstanding immediately prior to the Effective Time.
No fractional shares of Sterling Common Stock will be issued and any holder
of shares of KnowledgeWare Common Stock entitled under the Merger Agreement to
receive a fractional share will be entitled to receive only a cash payment in
lieu thereof, which payment will represent such holder's
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proportionate interest in the net proceeds from the sale by the Exchange Agent
on behalf of all such holders of the aggregate fractional shares of Sterling
Common Stock that such holders would have been entitled to receive. Any such
sale will be made by the Exchange Agent within ten business days after the date
upon which the Certificate(s) that would otherwise result in the issuance of
such shares of Sterling Common Stock have been received by the Exchange Agent.
Any portion of the fund from which cash payments in lieu of fractional
interests in shares of Sterling Common Stock will be made (including the
proceeds of any investments thereof) and any shares of Sterling Common Stock
that are unclaimed by the former stockholders of KnowledgeWare during the one
year period after the Effective Time will be delivered to the Surviving
Corporation. Any former stockholders of KnowledgeWare who have not theretofore
complied with the exchange procedures in the Merger Agreement may thereafter
look to the Surviving Corporation only as a general creditor for payment of
their shares of Sterling Common Stock, cash in lieu of fractional shares, and
any unpaid dividends and distributions on shares of Sterling Common Stock,
deliverable in respect of each share of KnowledgeWare Common Stock such
stockholder holds, in each case without any interest thereon. Notwithstanding
the foregoing, none of Sterling, the Surviving Corporation, Merger Sub, the
Exchange Agent or any other person will be liable to any former holder of
shares of KnowledgeWare Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
In the event that any Certificate has been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue in exchange
for such lost, stolen or destroyed Certificate the shares of Sterling Common
Stock and cash in lieu of fractional shares, and any unpaid dividends and
distributions on shares of Sterling Common Stock deliverable in respect thereof
pursuant to the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things: (a) the due organization, power and
standing of KnowledgeWare and Sterling and similar corporate matters; (b) the
capital structure of KnowledgeWare and Sterling; (c) investment interests of
KnowledgeWare; (d) the authorization, execution, delivery and enforceability of
the Merger Agreement, the Stock Option Agreement and related matters; (e) any
required consents or approvals, conflicts under charters or bylaws and
violations of any instruments or law; (f) certain documents filed by each of
KnowledgeWare and Sterling with the Commission and the accuracy of information
contained therein; (g) conduct of business in the ordinary course and the
absence of certain changes or material adverse effects; (h) litigation; (i)
taxes; (j) proprietary rights; (k) retirement and other employee benefit plans
of KnowledgeWare and matters relating to the Employee Retirement Income
Security Act of 1974, as amended; (l) brokers' and finders' fees with respect
to the Merger; (m) antitakeover statutes; and (n) labor matters.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, KnowledgeWare has agreed that, during the
period from the date of the Merger Agreement until the Effective Time, except
as permitted by the Merger Agreement or the Stock Option Agreement, it will (a)
conduct its business in the ordinary course; (b) not sell, pledge or agree to
sell or pledge any stock owned by it in any of its subsidiaries, amend its
Articles of Incorporation or Bylaws, split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividends with
respect to any of its capital stock; (c) not (i) issue, sell, pledge, dispose
of or encumber any shares of, or securities convertible or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire, any
shares of its capital stock of any class other than shares of KnowledgeWare
Common Stock issuable pursuant to options outstanding on the date of the Merger
Agreement under the KnowledgeWare Stock Option Plans, the exercise of the
Warrants and the Stock Option Agreement; (ii) transfer, lease, license,
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guarantee, sell, mortgage, pledge, dispose of any other property or assets or
encumber any property or assets or incur or modify any indebtedness or other
liability other than in the ordinary course of business; (iii) authorize
capital expenditures other than in the ordinary course of business; (iv) make
any acquisition of, or investment in, substantially all of the assets or stock
of any other person or entity; or (v) make any payment to third parties for
goods or services that are not commercially reasonable; (d) not grant any bonus
or pay increase or any severance or termination pay to, or enter into any
employment agreement with, any director, officer or other employee of
KnowledgeWare or any of its subsidiaries, subject to certain exceptions; (e)
not establish, adopt, enter into, make or amend any collective bargaining
agreement or employee benefit plan, subject to certain exceptions; (f) not
modify, amend or terminate any material contracts or waive, release or assign
any rights or claims; (g) not change its method of accounting as in effect at
June 30, 1994 except as required by changes in generally accepted accounting
principles as concurred to by KnowledgeWare's independent auditors, or change
its fiscal year; and (h) not take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section
368(a) of the Code.
Both KnowledgeWare and Sterling have agreed to cooperate in the prompt
preparation and filing of certain documents under federal and state securities
laws and with applicable government entities, and KnowledgeWare has agreed to
use its best efforts to obtain and deliver to Sterling certain letters from its
"affiliates," as defined under Rule 145 under the Securities Act.
INDEMNIFICATION OF STERLING; ESCROW
Pursuant to the Merger Agreement, KnowledgeWare has agreed to indemnify
Sterling and Merger Sub, and their respective subsidiaries, directors,
officers, employees and agents from and against all losses, claims,
counterclaims, obligations, causes of action, liabilities, costs, damages,
judgments and expenses (including attorneys' fees, and expenses incurred in
connection with investigating, preparing for, pursuing or defending any Action)
(collectively, "Damages") asserted against or incurred by KnowledgeWare,
Sterling, Merger Sub or such other persons from or after the date of the Merger
Agreement, by reason of or arising from any Action pending as of the date of
the Merger Agreement or thereafter arising, including Actions arising out of
violations or alleged violations of securities laws, but excluding Actions
arising out of ordinary course of business transactions, Actions brought by
current or former employees with respect to their employment or termination
thereof and certain other Actions. The remedies of Sterling, Merger Sub and the
other persons to be indemnified are limited in all cases to the Escrowed Shares
and the provisions of the Escrow Agreement. See "The Escrow Agreement." Since
August 30, 1994, a number of Actions have been filed against KnowledgeWare and
certain of its officers alleging violations of securities laws. Losses, claims,
liabilities, judgments, costs or expenses of KnowledgeWare, Sterling or Merger
Sub resulting from these Actions will result in claims for indemnification to
be satisfied from the Escrowed Shares. See "Summary--The Merger," "Summary--
Recent Developments," "Investment Considerations--Certain Legal Proceedings"
and "Certain Information Regarding KnowledgeWare--Legal Proceedings."
NO SOLICITATION OF TRANSACTIONS
KnowledgeWare has agreed that, prior to the Effective Time or the termination
of the Merger Agreement, it will not, and will direct and use its best efforts
to cause its officers, directors, employees, agents and representatives not to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a
merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, it or any of its subsidiaries (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal"), or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal. KnowledgeWare has agreed to immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted prior to the date of the Merger Agreement with respect to any
of the foregoing and to take the necessary steps to inform the
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appropriate individuals or entities of these obligations. KnowledgeWare has
also agreed to notify Sterling immediately if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it;
provided that the Board of Directors of KnowledgeWare may furnish information
to, or enter into discussions or negotiations with, any person or entity that
makes an unsolicited proposal to acquire KnowledgeWare pursuant to a merger,
consolidation, share exchange, business combination, purchase of a substantial
portion of the assets or other similar transactions, if, and only to the extent
that (a) the Board of Directors of KnowledgeWare, after consultation with and
consideration of the written advice of independent legal counsel, determines in
good faith that such action is required for the Board of Directors of
KnowledgeWare to comply with its fiduciary duties to stockholders imposed by
applicable law, (b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, KnowledgeWare provides
written notice to Sterling to the effect that it is furnishing information to,
or entering into discussions or negotiations with, such person or entity, and
(c) KnowledgeWare keeps Sterling informed, on a current basis, of the status of
any such discussions or negotiations. Notwithstanding any of the foregoing
restrictions, KnowledgeWare's Board of Directors will not be prohibited from
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal.
BENEFIT PLANS
Sterling has agreed to cause the Surviving Corporation to pay, in accordance
with their terms as in effect on the date of the Merger Agreement, all amounts
due and payable under the terms of all written employment, severance and
termination contracts, agreements, plans, policies and commitments of
KnowledgeWare with or with respect to its current and former employees,
officers, and directors (the "Employee Agreements"), which amounts were vested
on or prior to the date of the Merger Agreement or which became vested as a
result of the Merger, and will cause the Surviving Corporation to assume and
continue to honor the terms of such Employee Agreements.
GOVERNANCE
At the Effective Time, the Articles of Incorporation of KnowledgeWare will be
the Articles of Incorporation of the Surviving Corporation, subject to certain
amendments. The Bylaws of Merger Sub in effect immediately prior to the
Effective Time will be the Bylaws of the Surviving Corporation, until duly
amended in accordance with their terms and the GBCC. The directors of Merger
Sub immediately prior to the Effective Time will, from and after the Effective
Time, be the directors of the Surviving Corporation.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF KNOWLEDGEWARE
Sterling has agreed that all rights to indemnification and advancement of
expenses existing in favor of the current and former directors and officers of
KnowledgeWare against any costs, expenses, judgements, losses or other
liabilities will survive the Merger for at least six years following the
Effective Time, to the fullest extent provided under KnowledgeWare's Articles
of Incorporation, Bylaws and indemnification agreements existing as of the date
of the Merger Agreement, and Sterling has agreed to indemnify and advance
expenses to such persons to the full extent as would be required of or
permitted by KnowledgeWare. In addition, to the extent available, Sterling has
agreed to cause KnowledgeWare to maintain for three years following the Merger
KnowledgeWare's current directors' and officers' liability insurance, or
comparable insurance, with respect to matters occurring prior to the Merger;
provided that, in no event will Sterling or KnowledgeWare be required to expend
more than $500,000 in the aggregate to procure or maintain such insurance, and
Sterling and KnowledgeWare will only be required to obtain as much comparable
insurance as is available for an aggregate expenditure of $500,000.
KnowledgeWare has received a binder for a one year directors' and officers'
liability insurance policy with an aggregate limit comparable to the limit
under KnowledgeWare's prior policy. If KnowledgeWare is acquired by Sterling
during the policy term, the policy converts into a three year "run-off" policy.
The premium for this policy is $600,000. Sterling and KnowledgeWare have agreed
that the payment of such premium by KnowledgeWare shall satisfy Sterling's
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obligation to maintain or procure such liability insurance. See "The Merger--
Interests of Certain Persons in the Merger."
CONDITIONS
The respective obligations of KnowledgeWare, Sterling and Merger Sub to
consummate the Merger are subject to the fulfillment of each of the following
conditions, among others: (a) the Merger shall have been approved in the manner
required by law by the holders of the issued and outstanding shares of
KnowledgeWare capital stock entitled to vote thereon; (b) the waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated; (c) none of the parties to the Merger Agreement
shall be subject to any order or injunction against the consummation of the
transactions contemplated by the Merger Agreement; and (d) the Registration
Statement shall have become effective under the Securities Act and no stop
order with respect thereto shall be in effect.
The obligations of each of KnowledgeWare and Sterling to effect the Merger
are also subject to the satisfaction or waiver by the other party prior to the
Effective Time of the conditions, among others, that the other party shall have
performed all obligations required to be performed by it under the Merger
Agreement and the representations and warranties of the other party set forth
in the Merger Agreement shall be true in all material respects as of the
Effective Time. Sterling's obligation to effect the Merger is also subject to
the condition that each party shall have received the opinion of its tax
counsel that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that
KnowledgeWare, Sterling and Merger Sub will each be a party to that
reorganization within the meaning of Section 368(b) of the Code. The obligation
of KnowledgeWare to effect the Merger is also subject to the condition that
Sterling shall have entered into a Registration Rights Agreement (the
"Registration Rights Agreement") with each of the "affiliates" of KnowledgeWare
whereby Sterling undertakes to file a registration statement permitting the
affiliates to sell the Sterling Common Stock received in the Merger. Any party
to the Merger Agreement may waive any of the conditions to its obligation to
effect the Merger.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, before or after the approval by the
stockholders of KnowledgeWare: (a) by the mutual consent of KnowledgeWare,
Sterling and Merger Sub by action of their respective Boards of Directors; (b)
by action of the Board of Directors of either Sterling or KnowledgeWare if (i)
the Merger shall not have been consummated by January 31, 1995, provided that
the terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in any manner that shall have
proximately contributed to the failure so to consummate the Merger or (ii) the
approval of the Merger Agreement by KnowledgeWare's stockholders shall not have
been obtained; (c) by action of the Board of Directors of KnowledgeWare, if (i)
the Board of Directors of Sterling shall have withdrawn or modified in a manner
adverse to KnowledgeWare its approval or recommendation of the Merger Agreement
or the Merger, (ii) the average closing price for Sterling Common Stock on the
NYSE for five consecutive business days shall be $22.00 or less, or (iii) there
has been a material breach by Sterling or Merger Sub of any representation,
warranty, covenant or agreement contained in the Merger Agreement or the Stock
Option Agreement which is not curable or, if curable, is not cured within 30
days after written notice of such breach; or (d) by action of the Board of
Directors of Sterling, if (i) the Board of Directors of KnowledgeWare shall
have withdrawn or modified in a manner adverse to Sterling its approval or
recommendation of the Merger Agreement or shall have recommended to the
stockholders of KnowledgeWare an Acquisition Proposal, (ii) any person shall
have made an Acquisition Proposal for KnowledgeWare and certain conditions to
the consummation of the Merger cannot be or are not satisfied on or prior to
January 31, 1995 or (iii) there has been a material breach by KnowledgeWare of
any representation, warranty, covenant or agreement contained in the Merger
Agreement or the Stock Option Agreement which is not curable or, if curable, is
not cured within 30 days after written notice of such breach.
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In the event that any person shall have made an Acquisition Proposal for
KnowledgeWare and thereafter the Merger Agreement is terminated by either party
(other than pursuant to the breach of the Merger Agreement by Sterling), then
KnowledgeWare, if requested by Sterling, shall promptly, but in no event later
than two days after the date of such request, pay Sterling a fee of $2,900,000;
provided, however, that KnowledgeWare shall not be obligated to pay such fee
unless and until (a) any person (other than Sterling) (an "Acquiring Party")
has entered into a definitive agreement to acquire by purchase, merger,
consolidation, sale, assignment, lease, transfer or otherwise, a majority of
the voting power of the outstanding securities of KnowledgeWare or 50% or more
of the assets of KnowledgeWare; (b) there has been executed a definitive
agreement with respect to a consolidation, merger or similar transaction
between KnowledgeWare and an Acquiring Party which results in the reduction of
the ownership of securities of KnowledgeWare by KnowledgeWare stockholders
immediately prior to such transaction below 50% of the voting power of the
surviving entity (or if applicable, any entity in control of such Acquiring
Party); or (c) any Acquiring Party, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act) acquires beneficial ownership of 50%
of the KnowledgeWare Common Stock whether by tender offer, exchange offer or
otherwise (any such transaction described in clauses (a) through (c) being a
"Business Combination").
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses, except as otherwise
provided in the Merger Agreement.
AMENDMENT AND WAIVER
Subject to the applicable provisions of the GBCC, the parties may modify or
amend the Merger Agreement by written agreement at any time prior to the
Effective Time. The conditions to each party's obligations to consummate the
Merger may be waived by such party in whole or in part to the extent permitted
by applicable law.
THE STOCK OPTION AGREEMENT
The following is a brief summary of certain provisions of the Stock Option
Agreement, a copy of which is attached as Appendix C to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Stock Option
Agreement.
THE OPTION
As a condition and an inducement to Sterling to enter into the Merger
Agreement, concurrently with the execution of the Merger Agreement,
KnowledgeWare and Sterling entered into the Stock Option Agreement, pursuant to
which KnowledgeWare granted to Sterling the Option to purchase up to 1,200,000
shares of KnowledgeWare Common Stock at an exercise price of $5.00 per share.
EXERCISE OF THE OPTION
Sterling may exercise the Option, in whole or in part, at any time and from
time to time upon the occurrence of any of the following events (each such
event being an "Exercise Event"): (i)(a) the Merger Agreement shall have been
terminated by mutual consent of KnowledgeWare and Sterling, (b) an Acquisition
Proposal shall have been received by KnowledgeWare prior to such termination,
and (c) within twelve months after such termination, KnowledgeWare shall have
consummated a Business Combination with any person or entity (other than
Sterling); (ii) the Board of Directors of KnowledgeWare shall have withdrawn,
modified or changed its recommendation of the Merger Agreement in a manner
adverse to Sterling or shall have resolved to do any of the foregoing at a time
when Sterling is not in material breach of the Merger Agreement and, within
twelve months after termination of the Merger Agreement, KnowledgeWare shall
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have consummated an Acquisition Proposal with any person or entity; (iii)(a) a
tender offer or exchange offer for 20% or more of the outstanding shares of
capital stock of KnowledgeWare shall have been commenced while the Merger
Agreement is in effect, (b) the Board of Directors of KnowledgeWare, within 10
business days thereafter, either fails to recommend against, or takes no
position with respect to, the acceptance of such offer by KnowledgeWare's
stockholders and such tender offer or exchange offer is consummated and (c)
Sterling shall have terminated the Merger Agreement; (iv)(a) any person shall
have acquired beneficial ownership or the right to acquire beneficial
ownership, or any group (as such term is defined under Section 13(d) of the
Exchange Act) shall have been formed (excluding any person who has executed a
Stockholder Agreement or any group of which such person is a member) which
beneficially owns, or has the right to acquire beneficial ownership, of 25% or
more of the then outstanding KnowledgeWare Common Stock while the Merger
Agreement is in effect, and (b) Sterling shall have terminated the Merger
Agreement; or (v)(a) the Merger Agreement shall have failed to receive the
requisite vote for approval by the stockholders of KnowledgeWare at the Special
Meeting, (b) at such time, an Acquisition Proposal shall have been made and the
Board of Directors of KnowledgeWare either fails to recommend against, or takes
no position with respect to, acceptance of such Acquisition Proposal, (c) at
the time of the Special Meeting, Sterling shall not have been in material
breach of the Merger Agreement, (d) the Merger Agreement shall have been
terminated, and (e) within twelve months after the termination, KnowledgeWare
consummates such Acquisition Proposal. None of such Exercise Events has
occurred as of the date of this Proxy Statement/Prospectus. IBM has waived its
rights of first refusal under certain agreements with KnowledgeWare and certain
other stockholders of KnowledgeWare with respect to the Merger and the Option.
EXPIRATION OF THE OPTION
The Option expires and is of no further force and effect upon the earlier of:
(i) the Effective Time or (ii) twelve months following the first occurrence of
an Exercise Event.
ADJUSTMENTS OF NUMBER OF SHARES SUBJECT TO OPTION
The number and type of securities subject to the Option will be adjusted for
any change in the KnowledgeWare Common Stock by reason of a stock dividend,
split-up, recapitalization, combination, exchange of shares or similar
transaction, so that Sterling shall receive upon exercise of the Option the
number and class of shares or other securities or property that Sterling would
have received if the Option had been exercised immediately prior to such event,
or on the record date therefor, as applicable. In the event that KnowledgeWare
shall enter into an agreement to (i) consolidate with or merge into any person,
other than Sterling or one of its subsidiaries, and shall not be the continuing
or surviving corporation, (ii) permit any person, other than Sterling or one of
its subsidiaries, to merge into KnowledgeWare and KnowledgeWare shall be the
continuing or surviving corporation, but, in connection with such merger, the
then outstanding shares of KnowledgeWare Common Stock shall be changed into or
exchanged for stock or other securities of KnowledgeWare or any other person or
cash or any other property or then outstanding shares of KnowledgeWare Common
Stock shall after such merger represent less than 50% of the outstanding shares
and share equivalents of the merged company or (iii) sell or otherwise transfer
all or substantially all of its assets to any person, other than Sterling or
one of its subsidiaries, then, and in each such case, proper provision shall be
made so that the Option shall be converted into, or exchanged for, an option to
acquire the same consideration received by the holders of KnowledgeWare Common
Stock pursuant to such a transaction.
REGISTRATION RIGHTS
Sterling has the right (i) within three years after the closing of the
acquisition of the shares of KnowledgeWare Common Stock pursuant to the Option
or (ii) for 20 business days following the occurrence of either (a) a denial of
regulatory approval for Sterling to purchase such shares or (b) a failure to
obtain regulatory approval for such a purchase during the 12-month period
following the date Sterling notifies KnowledgeWare of its desire to exercise
the Option, to require KnowledgeWare to prepare and file up to
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three registration statements under the Securities Act for the shares issued or
issuable upon exercise of the Option and to require KnowledgeWare to use its
best efforts to qualify such shares under any applicable state securities laws,
if necessary, for Sterling to be able to sell such shares.
THE STOCKHOLDER AGREEMENTS
The following is a brief summary of certain provisions of the Stockholder
Agreements, a form of which is attached as Appendix D to this Proxy
Statement/Prospectus. This summary is qualified in its entirety by reference to
the full text of the form of Stockholder Agreement.
Pursuant to the Stockholder Agreements, Francis A. Tarkenton, Tarkenton
Group, Inc., Donald P. Addington and James T. Martin, directors, officers
and/or stockholders of KnowledgeWare (each a "Stockholder") who as of August
31, 1994 beneficially owned in the aggregate 2,774,709 outstanding shares of
KnowledgeWare Common Stock, have each agreed that, until the earlier of (i) the
Effective Time or (ii) the date on which the Merger Agreement is terminated
(the earlier of such time and such date being referred to herein as the
"Stockholder Expiration Date"), the Stockholder will vote all of his or its
shares of KnowledgeWare Common Stock (the "Voting Shares"), (a) for approval
and adoption of the Merger Agreement and any other transaction contemplated by
the Merger Agreement, as such Merger Agreement may be modified or amended from
time to time (but not to reduce the Exchange Ratio), and (b) against any
action, omission or agreement which would impede or interfere with, or have the
effect of discouraging, the Merger, including, without limitation, any
Acquisition Proposal other than the Merger, and (c) in favor of all nominees in
the slate of directors nominated for election by a majority of KnowledgeWare's
non-management directors. Each Stockholder has also agreed that failure to vote
such shares in such manner shall result in the irrevocable appointment of
Sterling until termination of the Merger Agreement, as attorney and proxy to
vote and otherwise act with respect to all of his or its Voting Shares for the
purposes set forth above. Any such proxy will terminate on the Stockholder
Expiration Date.
Each such Stockholder Agreement contains the agreement of the Stockholder
that, among other things, until the Stockholder Expiration Date, he or it: (a)
will not, and will not agree to, sell, transfer, pledge, hypothecate, encumber,
assign, tender or otherwise dispose of (any one or more of which, a "transfer")
any of his or its Voting Shares unless, in connection with such transfer, the
transferee agrees to be bound by the terms of the transferor's Stockholder
Agreement; (b) will not grant, other than as contemplated by the Stockholder
Agreement, any powers of attorney or proxies or consents in respect of any of
his or its Voting Shares, deposit any of his or its Voting Shares into a voting
trust, enter into a voting agreement with respect to any of his or its Voting
Shares or otherwise restrict the ability of the holder of any of the shares of
KnowledgeWare Common Stock freely to exercise all voting rights with respect
thereto; and (c) will not initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any Acquisition
Proposal or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal.
Each Stockholder Agreement contains the Stockholder's representations and
warranties relating to, among other things, (a) if applicable, its corporate
organization and similar matters, (b) the absence of conflicts under its
charter or bylaws (if applicable) or of defaults or required consents under
contracts, commitments or other obligations, (c) the execution, delivery and
enforceability of his or its Stockholder Agreement, and (d) the absence of
irrevocable proxies with respect to his or its Voting Shares.
Each Stockholder Agreement applies to all Voting Shares owned by the
Stockholder, including (a) any additional shares as to which the Stockholder
acquires voting rights after the date of his or its Stockholder Agreement and
(b) any shares of capital stock resulting from a stock dividend, stock split,
recapitalization, reclassification, combination or exchange of shares of
capital stock.
56
<PAGE>
THE ESCROW AGREEMENT
The following is a brief summary of certain provisions of the Escrow
Agreement, a form of which is included herein as Exhibit 4.4 to the Merger
Agreement. The summary is qualified in its entirety by reference to the full
text of the form of Escrow Agreement.
GENERAL
Pursuant to the Merger Agreement, prior to the Effective Time, Sterling,
KnowledgeWare, the Escrow Agent and the Representative will enter into the
Escrow Agreement, pursuant to which the Escrowed Shares will be placed in
escrow with the Escrow Agent. Any disbursements or distributions made by the
Escrow Agent to the holders of KnowledgeWare Common Stock as of the Effective
Time pursuant to the Escrow Agreement will be made in accordance with their
relative record ownership of KnowledgeWare Common Stock as of the Effective
Time. The interests of the holders of KnowledgeWare Common Stock in the Escrow
Agreement and in the Escrowed Shares will be contingent, nontransferable
interests, will not be evidenced by a certificate or other instrument and will
not be transferable except by operation of law.
DISBURSEMENT OF ESCROWED SHARES
Pursuant to the Escrow Agreement, if prior to the second anniversary of the
Effective Time Sterling delivers to the Escrow Agent written notice (a
"Sterling Notice") of a claim for indemnification for Damages, on the twentieth
business day following receipt of such notice, the Escrow Agent will, at
Sterling's direction, transfer to Sterling either (i) a number of Escrowed
Shares having a value equal to such Damages or (ii) proceeds from the sale of
Escrowed Shares equal to such Damages unless within that time period the
Representative delivers to the Escrow Agent a written notice disputing
Sterling's claim. The number of Escrowed Shares to be transferred or sold shall
be determined by dividing the dollar amount of Damages by the most recently
reported closing sale price per share of the Sterling Common Stock preceding
the date of the Sterling Notice. If the Representative delivers a dispute
notice, the Escrow Agent will retain the Escrowed Shares until either (i) the
Escrow Agent receives joint instructions from Sterling and the Representative
or (ii) the dispute is settled by litigation. Within 30 days prior to the
second anniversary of the Effective Time, Sterling may deliver to the Escrow
Agent a notice (a "Contingent Claim Notice") that Sterling believes there exist
one or more Actions ("Contingent Actions") with respect to which Sterling
believes it will be entitled to indemnification for Damages subsequent to the
second anniversary of the Effective Time, together with Sterling's reasonable
good faith estimate of the maximum amount of Damages for which it would be
entitled to indemnification.
On the second anniversary of the Effective Time, the Escrow Agent will
disburse to the holders of KnowledgeWare Common Stock as of the Effective Time
any Escrowed Shares remaining subject to the Escrow Agreement, other than
shares that are the subject of a Sterling Notice or a Contingent Claim Notice.
With respect to any Escrowed Shares remaining subject to the Escrow Agreement
due to a Contingent Claim Notice, if the related Contingent Action has not been
resolved or is not subject to litigation by the fourth anniversary of the
Effective Time, such Escrowed Shares will be disbursed to the holders of
KnowledgeWare Common Stock as of the Effective Time.
Sales by holders of KnowledgeWare Common Stock of shares of Sterling Common
Stock initially received by them in the Merger shall not affect the right of
such holders to receive their proportionate share of the Escrowed Shares, if
any, released to such holders pursuant to the terms of the Escrow Agreement.
Each KnowledgeWare stockholder will recognize gain or loss upon return to, or
sale on behalf of, Sterling of any Escrowed Shares in an amount equal to the
difference between the then value of such Escrowed Shares and the KnowledgeWare
stockholder's adjusted tax basis in such shares. KnowledgeWare stockholders
generally will not be entitled to claim a loss based upon the value of the
shares returned to, or sold on behalf of, Sterling. Instead, the adjusted tax
basis in the remaining shares of Sterling Common Stock will be increased by the
then value of the shares returned or sold. See "The Merger--Certain Federal
Income Tax Consequences."
57
<PAGE>
VOTING AND DIVIDEND RIGHTS
In the event that Sterling pays dividends (within the meaning of Section
301(c)(1) of the Code) in respect of Sterling Common Stock during the term of
the Escrow Agreement, the Escrow Agent shall forward such dividends to the
holders of KnowledgeWare Common Stock as of the Effective Time. If during the
term of the Escrow Agreement, Sterling makes any other distribution, or in the
event Sterling effects a stock dividend, stock split or other recapitalization,
any property or securities distributable with respect to the Escrowed Shares
shall be retained by the Escrow Agent and made part of the Escrowed Shares.
With respect to any matter on which stockholders of Sterling have a right to
vote, the Escrow Agent, on behalf of the holders of KnowledgeWare Common Stock
as of the Effective Time, shall have the right to vote, or not vote, all or any
portion of Escrowed Shares in such manner as it deems appropriate; provided
that, at Sterling's expense, the Escrow Agent shall promptly cause to be
forwarded to the holders of KnowledgeWare Common Stock as of the Effective Time
copies of any proxy statements and other soliciting materials, and the Escrow
Agent shall vote the applicable portion of the Escrowed Shares in accordance
with any written instructions timely received by the Escrow Agent from any such
holder.
THE REPRESENTATIVE
The duties of the Representative will be limited to the observance of the
express provisions of the Escrow Agreement. The Representative will be
compensated for its services under the Escrow Agreement at hourly rates, out of
the Escrowed Shares, upon submission of invoices therefor. The Representative
also will be indemnified, out of the Escrowed Shares, for any loss or damages
it may incur as a result of its services under the Escrow Agreement, except any
such loss or damages arising out of the Representative's willful misconduct.
The Representative may resign upon 30 days' written notice, and may be
removed, with or without cause, by holders of KnowledgeWare Common Stock who as
of the Effective Time owned of record at least 51% of the KnowledgeWare Common
Stock. In the event of such resignation or removal, holders of KnowledgeWare
Common Stock who as of the Effective Time owned of record at least 51% of the
KnowledgeWare Common Stock may designate a substitute representative or, if no
such substitute is designated, the Representative may appoint its successor
(which must be reasonably acceptable to Sterling).
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined condensed financial statements
assume the Merger is accounted for as a purchase of KnowledgeWare by Sterling.
The pro forma combined condensed financial statements are based on the
historical financial statements of Sterling and KnowledgeWare incorporated by
reference in this Proxy Statement/Prospectus. The pro forma combined condensed
balance sheet assumes the Merger had been consummated on June 30, 1994. The pro
forma combined condensed statements of operations assume the Merger had been
consummated as of October 1, 1992.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated as presented in the
accompanying unaudited pro forma combined condensed financial statements, nor
is it necessarily indicative of the future results of operations. The pro forma
adjustments and the assumptions on which they are based are described in the
accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
These pro forma combined condensed financial statements should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of Sterling and KnowledgeWare incorporated herein by
reference.
58
<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PURCHASE
ACCOUNTING
STERLING KNOWLEDGEWARE ADJUSTMENTS PRO FORMA
HISTORICAL HISTORICAL (NOTE 2) COMBINED
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets: ++
Cash and cash equivalents... $106,865 $ 8,519 $(15,766)(d) ++ $ 99,318
(300)(e) ++
Marketable securities....... 34,710 -- -- 34,710
Accounts and notes
receivable, net............ 113,616 37,532 -- 151,148
Deferred income tax asset... 10,158 3,356 4,800 (f) 18,314
Prepaid expenses and other
current assets............. 10,676 3,776 -- 14,452
-------- -------- -------- --------
Total current assets...... 276,025 53,183 (11,266) 317,942
Property and equipment, net... 32,752 21,825 (5,000)(c) 49,577
Computer software, net........ 60,303 28,382 (3,382)(c) ++
(3,000)(f) ++ 82,303
Noncurrent deferred income tax ++
asset, net................... 3,734 -- -- 3,734
Excess cost over net assets
acquired, net................ 52,398 14,616 7,842 (c) 74,856
Other assets.................. 25,173 1,638 -- 26,811
Investment in and advances to
KnowledgeWare................ -- -- 97,811 (a) ++
(45,460)(c) ++ --
(52,351)(b) ++
-------- -------- -------- --------
Total assets.................. $450,385 $119,644 $(14,806) $555,223
======== ======== ======== ========
Current liabilities:
Notes payable and current
portion of long-term debt.. $ 9,043 $ 17,393 $(15,766)(d) $ 10,670
Accounts payable and accrued ++
liabilities................ 75,461 22,809 25,000 (a) ++ 132,270
9,000 (f) ++
Deferred revenue............ 66,582 22,734 -- 89,316
-------- -------- -------- --------
Total current liabilities. 151,086 62,936 18,234 232,256
Long-term debt................ 116,267 836 -- 117,103
Other noncurrent liabilities.. 27,602 3,521 -- 31,123
Stockholders' equity:
Preferred stock............. 20 -- -- 20
Common stock................ 2,202 72,548 241 (a) 2,443
(72,548)(b) ++
Additional paid-in capital.. 191,174 -- 54,532 (a) ++ 245,406
(300)(e) ++
Accumulated deficit......... (18,748) (20,197) (46,000)(c) ++
20,197 (b) ++ (71,948)
(7,200)(f) ++
Less: Treasury stock........ (19,218) -- 18,038 (a) (1,180)
-------- -------- -------- --------
Total stockholders'
equity................... 155,430 52,351 (33,040) 174,741
-------- -------- -------- --------
Total liabilities and
stockholders' equity......... $450,385 $119,644 $(14,806) $555,223
======== ======== ======== ========
Shares of common stock
outstanding.................. 20,214 2,407 22,621
======== ======== ========
</TABLE>
See accompanying notes.
59
<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KNOWLEDGEWARE
----------------------------------------------
STERLING DEDUCT HISTORICAL PRO FORMA PURCHASE
HISTORICAL HISTORICAL THREE MONTHS NINE MONTHS ACCOUNTING
NINE MONTHS ENDED YEAR ENDED ENDED ENDED ADJUSTMENTS PRO FORMA
JUNE 30, 1994 JUNE 30, 1994 SEPTEMBER 30, 1993 JUNE 30, 1994 (NOTE 3) COMBINED
----------------- ------------- ------------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Products............... $122,148 $ 71,294 $19,147 $552,147 $174,295
Product support........ 98,065 39,698 9,472 30,226 128,291
Services............... 117,913 21,499 4,605 16,894 134,807
-------- -------- ------- -------- --------
338,126 132,491 33,224 99,267 437,393
Costs and expenses:
Cost of sales:
Products and product ++
support............... 46,886 22,259 4,768 17,491 $ (3) (a) ++ 64,329
(45) (b)++
Services............... 79,360 18,389 3,682 14,707 (9) (b) 94,058
Selling, general and
administrative........ 123,461 86,743 16,899 69,844 193,305
Product development and
enhancement........... 23,439 24,196 6,155 18,041 41,480
-------- -------- ------- -------- ------ --------
Total costs and
expenses............ 273,146 151,587 31,504 120,083 (57) 393,172
-------- -------- ------- -------- ------ --------
Income (loss) before
other income (expense),
and income taxes....... 64,980 (19,096) 1,720 (20,816) 57 44,221
Other income (expense).. (1,804) 66 (185) 251 386 (c) (1,167)
-------- -------- ------- -------- ------ --------
Income (loss) before
income taxes........... 63,176 (19,030) 1,535 (20,565) 443 43,054
Provision (benefit) for
income taxes........... 23,650 -- 153 (153) 23,497
-------- -------- ------- -------- ------ --------
Net income (loss)....... $ 39,526 $(19,030) $ 1,382 $(20,412) $ 443 $ 19,557
======== ======== ======= ======== ====== ========
Net income (loss) per
common share (Note 4):
Primary................ $ 1.75 $ 0.79
======== ========
Fully diluted.......... $ 1.60 $ 0.79
======== ========
Shares used to compute
per share data (Note
4):
Primary................ 22,568 2,272 24,840
======== ====== ========
Fully diluted.......... 26,624 (1,784) 24,840
======== ====== ========
</TABLE>
See accompanying notes.
60
<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KNOWLEDGEWARE
STERLING ---------------------------------------------------------------------- PURCHASE
HISTORICAL HISTORICAL DEDUCT HISTORICAL ADD HISTORICAL PRO FORMA ACCOUNTING
YEAR ENDED YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED ADJUSTMENTS
SEPTEMBER 30,1993 JUNE 30, 1993 SEPTEMBER 30, 1992 SEPTEMBER 30, 1993 SEPTEMBER 30, 1993 (NOTE 3)
----------------- ------------- ------------------ ------------------ ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Products.......... $150,473 $ 80,307 $19,950 $19,147 $ 79,504
Product support... 121,268 35,256 8,344 9,472 36,384
Services.......... 140,054 13,198 1,663 4,605 16,140
-------- -------- ------- ------- --------
411,795 128,761 29,957 33,224 132,028
Costs and expenses:
Cost of sales:
Products and ++
product support.. 65,998 17,051 2,982 4,768 18,837 $ 1,410 (a) ++
757 (b)++
Services.......... 105,133 7,487 1,084 3,682 10,085 105 (b)
Sales, general and
administrative... 168,174 80,919 17,246 16,899 80,572
Product
development and
enhancement...... 26,630 28,867 7,642 6,155 27,380
Restructuring
charges.......... 91,260 21,976 -- -- 21,976
-------- -------- ------- ------- -------- -------
Total costs and
expenses....... 457,195 156,300 28,954 31,504 158,850 2,272
-------- -------- ------- ------- -------- -------
Income (loss)
before other
income (expense)
income taxes,
extraordinary item
and cumulative
effect of a change
in accounting
principle......... (45,400) (27,539) 1,003 1,720 (26,822) (2,272)
Other income (ex-
pense)............ (2,933) 340 228 (185) (73) 515 (c)
-------- -------- ------- ------- -------- -------
Income (loss)
before income
taxes,
extraordinary item
and cumulative
effect of a change
in accounting
principle ........ (48,333) (27,199) 1,231 1,535 (26,895) (1,757)
Provision (benefit)
for income taxes.. (14,983) (1,400) 437 153 (1,684)
-------- -------- ------- ------- -------- -------
Income (loss)
before
extraordinary item
and cumulative
effect of a change
in accounting
principle......... $(33,350) $(25,799) $ 794 $ 1,382 $(25,211) $(1,757)
======== ======== ======= ======= ======== =======
Income (loss) per
common share
before
extraordinary item
and cumulative
effect of a change
in accounting
principle (Note
4):
Primary........... $ (2.00)
========
Fully diluted..... $ (2.00)
========
Shares used to
compute per share
data (Note 4):
Primary........... 17,200 2,407
======== =======
Fully diluted..... 17,200 2,407
======== =======
<CAPTION>
PRO FORMA
COMBINED
----------
<S> <C>
Revenue:
Products.......... $229,977
Product support... 157,652
Services.......... 156,194
----------
543,823
Costs and expenses:
Cost of sales:
Products and
product support.. 87,002
Services.......... 115,323
Sales, general and
administrative... 248,746
Product
development and
enhancement...... 54,010
Restructuring
charges.......... 113,236
----------
Total costs and
expenses....... 618,317
----------
Income (loss)
before other
income (expense)
income taxes,
extraordinary item
and cumulative
effect of a change
in accounting
principle......... (74,494)
Other income (ex-
pense)............ (2,491)
----------
Income (loss)
before income
taxes,
extraordinary item
and cumulative
effect of a change
in accounting
principle ........ (76,985)
Provision (benefit)
for income taxes.. (16,667)
----------
Income (loss)
before
extraordinary item
and cumulative
effect of a change
in accounting
principle......... $(60,318)
==========
Income (loss) per
common share
before
extraordinary item
and cumulative
effect of a change
in accounting
principle (Note
4):
Primary........... $ (3.13)
==========
Fully diluted..... $ (3.13)
==========
Shares used to
compute per share
data (Note 4):
Primary........... 19,607
==========
Fully diluted..... 19,607
==========
</TABLE>
See accompanying notes.
61
<PAGE>
STERLING SOFTWARE
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1.GENERAL
The Merger is expected to be accounted for as a purchase. The pro forma
combined condensed financial statements reflect the issuance of 2,407,005
shares of Sterling Common Stock for an aggregate 14,562,381 shares of
KnowledgeWare Common Stock (KnowledgeWare Common Stock outstanding as of
June 30, 1994) based on an Exchange Ratio of .1653 shares of Sterling Common
Stock for each share of KnowledgeWare Common Stock. Total shares reflected
as issued and outstanding include the Escrowed Shares. The actual number of
shares of Sterling Common Stock to be issued will be determined at the
Effective Time of the Merger based on the Exchange Ratio and the number of
shares of KnowledgeWare Common Stock then outstanding. The purchase price of
the Merger reflected in the accompanying pro forma financial statements is
$97.8 million which represents the estimated value of the Sterling Common
Stock to be issued (based on a price of $30.25 per share), plus costs
related to the combination described below.
Substantial costs are expected to occur as a result of the combination of
the two companies. The costs directly related to the acquisition of
KnowledgeWare are included in the aggregate cost of the Merger and are
expected to consist of the following:
<TABLE>
<S> <C>
Investment advisor, legal, accounting and other professional
fees............................................................ $ 2,800
Out of pocket costs related to due diligence and acquisition
evaluation...................................................... 2,500
KnowledgeWare employee severance and benefits.................... 8,500
Elimination of duplicate facilities and leases of KnowledgeWare.. 7,700
Other merger related liabilities................................. 3,500
-------
$25,000
=======
</TABLE>
Such costs, including the write-off of costs related to certain software
products which will not be actively marketed by the combined company,
related to Sterling's current operations are expected to be approximately
$12 million and will be charged to the results of operations of the
combined company upon consummation of the Merger.
The purchase price has been allocated to the consolidated assets and
liabilities of KnowledgeWare for purposes of the Pro Forma Combined Balance
Sheet based on preliminary estimates of fair values. These estimates were
determined by Sterling management based primarily on information furnished
by management of KnowledgeWare and a preliminary valuation of acquired
software and research and development prepared by Burton Grad Associates,
Inc. The final allocation of the purchase price will not be determined
until after consummation of the Merger and will be based on a complete
evaluation of the assets and liabilities of KnowledgeWare as acquired.
Accordingly, the information presented herein may differ from the actual
purchase price allocation.
2.PRO FORMA COMBINED CONDENSED BALANCE SHEET
The accompanying pro forma combined condensed balance sheet assumes the
Merger was consummated on June 30, 1994 and reflects the following pro
forma adjustments:
(a) To record the aggregate cost of the Merger, reflecting the value of
Sterling Common Stock issued and costs related to the combination
described in Note 1 above.
(b) To eliminate KnowledgeWare's historical stockholders' equity balances.
62
<PAGE>
(c) To record the aggregate cost of the Merger of $97.8 million as follows:
<TABLE>
<S> <C>
Working capital (deficit). $(9,753)
Property and equipment.... 16,825
Software.................. 25,000
Purchased research and
development costs charged
to expense............... 46,000
Other assets.............. 1,638
Other liabilities......... (4,357)
Excess cost over net
assets acquired.......... 22,458
-------
$97,811
=======
</TABLE>
(d) To record the repayment of all amounts outstanding under
KnowledgeWare's line of credit agreement with IBM Credit.
(e) To record direct costs associated with registering the shares of
Sterling Common Stock.
(f) To record costs associated with Sterling's elimination duplicate
facilities, severance costs relating to termination of certain
employees and the writeoff of costs relating to certain software
products which will not be actively marketed by the combined company,
net of related deferred income tax benefit.
3.PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The pro forma combined condensed statements of operations have been prepared
as if the Merger was consummated as of October 1, 1992 and reflects the
following pro forma adjustments:
(a) To record amortization of purchased software computed using the the
straight-line method over the remaining estimated economic life (five
years).
(b) To record the amortization of excess cost of net assets acquired over
fifteen years.
(c) To record the reduction of interest expense to reflect repayment of the
IBM Credit line of credit, partially offset by the reduction of
investment income to reflect the reduction of cash investments.
4.PRO FORMA COMBINED EARNINGS PER COMMON SHARE
The pro forma combined primary earnings per common share data is computed
by dividing pro forma income (loss) before extraordinary items and
cumulative effect of change in accounting principle, adjusted for preferred
stock dividend requirements, by the weighted average number of common
shares and common share equivalents represented by stock options and
warrants, if such stock options and warrants have a dilutive effect in the
aggregate. For purposes of this computation, income applicable to common
stockholders is adjusted to reflect use of net cash proceeds on the assumed
exercise of stock options and warrants to purchase outstanding long-term
debt. Additionally, income applicable to common stockholders has been
reduced to reflect combined pro forma preferred dividends of $.1 million
and $1.0 million, for the nine months ended June 30, 1994 and the year
ended September 30, 1993, respectively.
The combined pro forma fully diluted earnings per common share computations
assume, in addition, the conversion of Sterling's 5 3/4% Convertible
Subordinated Debentures due 2003 (the "5 3/4% Debentures") in the 1994
computations, and the conversion of Sterling's 8% Convertible Subordinated
Debentures due 2001 (the "8% Debentures") and the conversion of the 5 3/4%
Debentures in the 1993 computations, if such conversions have a dilutive
effect. Upon assumed conversion of Sterling's convertible debentures,
income applicable to common stockholders is adjusted to reflect the
elimination of after tax interest expense related to such debentures. For
purposes of these computations, income applicable to common stockholders is
also adjusted to reflect use of net cash proceeds on the assumed exercise
of stock options and warrants to purchase outstanding long-term debt.
For the year ended September 30, 1993, neither the common share equivalents
nor the assumed conversion of the convertible debentures had a dilutive
effect on the pro forma loss per share calculations. Accordingly, the pro
forma loss per share calculation for such period is based on the weighted
average number of common shares outstanding during the period.
63
<PAGE>
CERTAIN INFORMATION REGARDING STERLING SOFTWARE
GENERAL
Sterling was founded in 1981 and became a publicly owned corporation in 1983.
Sterling is a recognized worldwide supplier of software products and services
within the electronic commerce and enterprise software markets and also
provides technical professional services to certain sectors of the federal
government. Consistent with Sterling's decentralized operating style, each
major market is served by independently-operated business groups which consist
of divisions that focus on specific business niches within those markets.
Sterling has steadily expanded its operations through internal growth and by
business and product acquisitions. In July 1993, Sterling completed the
acquisition of Systems Center for approximately $156 million in a stock-for-
stock transaction, and reorganized the combined company into four business
groups.
. The Electronic Commerce Group, headquartered in Dublin, Ohio, provides
software and services to facilitate electronic commerce, defined by
Sterling as the worldwide electronic interchange of business
information. Product offerings include electronic data interchange
("EDI") software and services, data communications software and
electronic payments software for financial institutions. Since 1975,
Sterling has been a major provider of EDI network services, the
cornerstone of electronic commerce, and Sterling is the leading EDI
translation software vendor in North America.
. The Enterprise Software Group, headquartered in Woodland Hills,
California, provides applications development and systems management
software products for customers typically utilizing large IBM mainframe
computers in conjunction with mid-range computers and networks of
personal computers. Many of Sterling's products with their successive
enhancements have been marketed for over 20 years. Addressing the needs
of corporations as they move to client/server computing environments,
Sterling has expanded its market focus to include products that operate
on a variety of computer platforms and operating systems.
. The Federal Systems Group, headquartered in Foster City, California,
provides technical professional services to the federal government under
several multi-year contracts primarily in support of the National
Aeronautics and Space Administration ("NASA") aerospace research
projects and secure communications systems for the U.S. Department of
Defense ("DoD"). Sterling has provided professional services to both the
NASA Ames Research Center and to the DoD for over 25 years, and has
established a development lab that uses the group's technical expertise
to create products for Sterling's other business groups.
. The International Group, headquartered in London, England, is the
exclusive channel to international markets for all Sterling products.
The group operates through regional divisions representing Europe,
Asia/Pacific, the Americas and other countries throughout the world. The
products are sold and supported through 25 offices in 15 countries, and
through trained agents and distributors. Approximately 27% of Sterling's
revenue comes from its international operations.
A large percentage of Sterling's business is recurring through annual and
multi-year product support agreements generally having terms ranging from one
to three years, fixed term product lease and rental agreements generally having
terms ranging from month-to-month to year-to-year, short-term electronic
commerce services agreements cancellable upon 30 days notice and multi-year
federal contracts generally having terms ranging from one to five years but,
like most federal contracts, with provisions for termination by the government
for convenience or for failure to obtain funding. In both 1993 and 1992,
recurring revenue represented 63% of Sterling's total revenue. Sterling's
customer base includes 94 of the 100 largest U.S. industrial corporations, as
ranked by 1992 sales reported in Fortune Magazine, and 98 of the top 100 U.S.
commercial banks, as ranked by deposits as of December 31, 1992 in the American
Banker magazine. At September 30, 1993, Sterling employed approximately 2,800
persons.
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ELECTRONIC COMMERCE GROUP
The Electronic Commerce Group is comprised of four divisions and provides
over 40 software and services offerings to facilitate electronic commerce.
Sterling is a leader in EDI network services in North America, the cornerstone
of electronic commerce, and is the leading EDI translation software provider in
North America. As of September 30, 1993, the group employed approximately 640
persons.
Sterling's Network Services Division provides software products and services
under the COMMERCE family name. COMMERCE:Network combines the power of EDI, E-
mail, library services and file transfer into a full-service network to handle
store-and-forward data transfer. The network supports all major communications,
messaging and data standards including BSC, SNA, X.25, X.400, ANSI X.12 and
EDIFACT. Sterling recently released COMMERCE:Connection, a graphical user
interface to COMMERCE:Network that runs on desktop computers. Sterling also
just recently released COMMERCE:Complete, a package for desktop users that
includes all tools needed for electronic commerce. COMMERCE:Marketquest is
Sterling's market intelligence database offering that facilitates information
sharing among business partners. Sterling provides electronic commerce training
and education through its COMMERCE:Institute and COMMERCE:Resource offerings.
Sterling's network services are marketed into targeted vertical industries.
Sterling's primary vertical industry markets include healthcare, insurance,
grocery, hardlines, retail, train-truck-ship transportation, automotive,
chemical and petroleum, paper and packaging, banking and government. At
September 30, 1993, Sterling's Network Services Division had approximately
7,400 network customers worldwide.
Sterling's Interchange Software Division markets the group's EDI management
products under the GENTRAN family name. GENTRAN:Basic, the base EDI translation
product for a wide range of platforms including mainframe, midrange, UNIX and
desktop platforms, translates data from internal formats into standard formats
for EDI transmission and interprets incoming EDI communications back into
internal formats for processing. GENTRAN:Plus adds Sterling's communications
products to the GENTRAN: Basic offering. GENTRAN: Control prioritizes batch
processing by trading partner and/or document and GENTRAN:Realtime provides a
full set of powerful on-line translation and EDI management capabilities for
critical documents requiring immediate response. Two other GENTRAN products
provide additional EDI management functions--GENTRAN:Dataguard for data
security through encryption/decryption, and GENTRAN:Viewpoint to provide
increased efficiencies through exception management processing. In 1993, the
division released GENTRAN:Structure for customers needing application
integration and audit trail functions within the EDI environment for
proprietary data exchange. In August 1994, the division acquired American
Business Computer Company, which added the following new products to the
GENTRAN family: GENTRAN:Excel, which is similar in function to GENTRAN:Basic
and provides high performance EDI processing; and GENTRAN:Server, which
provides sophisticated electronic commerce gateway functionality including
advanced data routing, restart/recovery and exception condition monitoring.
Sterling's Communications Software Division provides a range of data
communications products under the CONNECT family name. The CONNECT family is a
complete suite of integrated file transfer and communications management
solutions that support a wide variety of protocols, including BSC, SNA, X.25
and TCP/IP, on a variety of operating systems and hardware platforms, including
MVS, VSE, VM, TANDEM, VMS, AS/400, UNIX, MS-DOS and OS/2. The CONNECT products
provide full-function automated file transfer for clients of all industry
classifications. CONNECT:Direct is primarily used to move large volumes of data
with a focus on high performance that normally addresses intra-company
requirements. CONNECT:Mailbox is used primarily to move information between
corporations with a focus on wide connectivity. CONNECT:Queue is a scheduling
and workload balancing system for heterogeneous UNIX networks.
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Sterling's Banking Systems Division provides the VECTOR family of products
that automate several key areas associated with check processing in major
banks. Recently, the Banking Systems Division gained the leadership position in
the emerging market for financial EDI software for banks. The VECTOR:Connexion
product allows banks to expand their cash management services to include the
handling of financial EDI for corporate customers. Over 1,500 VECTOR systems
have been installed by approximately 500 financial institutions worldwide,
including 98 of the top 100 largest U.S. banks as ranked by deposits as of
December 31, 1992 in the American Banker magazine.
Worldwide revenue from Sterling's Electronic Commerce market represented 28%,
25% and 22% of Sterling's revenue during 1993, 1992 and 1991, respectively.
ENTERPRISE SOFTWARE GROUP
The Enterprise Software Group is comprised of four divisions that focus on
four enterprise software niche markets: applications management, storage
management, systems management and VM operations management. As of September
30, 1993, the group employed approximately 640 persons.
The Applications Management Division markets products under the ANSWER family
name that address a wide range of applications development and information
management needs. ANSWER:Architect is a workstation-based tool for the
planning, analysis and design of applications. ANSWER:Zim is an open systems
applications development tool based on the Entity-Relationship model which
supports a number of relational data base systems and operating environments.
The ANSWER:Testpro product suite includes workstation-based tools that automate
the testing stage of applications development for mainframe, midrange and
desktop platforms. ANSWER:Journey is a tool that runs on desktop computers and
interfaces with other ANSWER products to create queries and reports from a
variety of mainframe resident data sources. ANSWER:Builder and ANSWER:Transact
are applications development tools for batch and online environments,
respectively, that operate on major IBM mainframe platforms.
The Storage Management Division markets its products under the SAMS family
name. SAMS:Disk automates data management and optimizes data availability;
SAMS:Allocate automates allocation control; and SAMS:Compress provides data set
compression. SAMS:Vantage and SAMS:Expert are two new products that operate
with Sterling's other storage management products to provide complete
client/server storage management systems for the enterprise--SAMS:Vantage for
IBM mainframe MVS platforms and SAMS:Expert for local area networks. Finally,
SAMS:Save is an automated backup/restore product for desktop platforms.
Sterling's systems management products are marketed by the Systems Management
Division under the SOLVE family name. These products provide systems operations
and systems administration management functions and address key issues
impacting the cost and service levels of enterprise information systems for the
networked enterprise. Sterling markets three families of integrated systems
management products. SOLVE for systems administration products are:
SOLVE:Problem, SOLVE:Change, SOLVE:Configuration, and SOLVE:Asset, and provide
users with the following respective functions: problem identification, tracking
and resolution; effective management of the system change process to minimize
end user impact; software and hardware configuration tracking, and business
management of computer assets and the services they deliver. The SOLVE for
systems operations product family incorporates SOLVE:Automation, which allows
users to focus systems operations on managing critical services and
consolidates distributed multi-system resources into a single service image.
The SOLVE for network management family includes SOLVE:Netmaster, which
automates SNA and other network management operations across a variety of
enterprise platforms; SOLVE:Stat, which reports on the status of critical SNA
network resources; and SOLVE:Monitor, which provides a graphical user interface
to SOLVE:Netmaster.
Sterling also provides a complete line of systems management tools for the VM
operating system through its VM Software Division. IBM is positioning VM as a
major client/server platform and Sterling's VM
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software product family includes 16 systems management products to provide
full-function systems management for the platform. VM:Manager is a complete
package of eleven individual and closely integrated Sterling products that
provide a comprehensive VM data center management solution. VM:Center is a
subset of VM:Manager that includes seven of the VM products.
Worldwide revenue from Sterling's Enterprise Software market represented 45%,
48% and 49% of Sterling's revenue during 1993, 1992 and 1991, respectively.
FEDERAL SYSTEMS GROUP
The Federal Systems Group is comprised of four divisions and provides highly
specialized technical professional services to sectors of the federal
government, generally under multi-year contracts. Its major customers are NASA
and the DoD. In 1993, Sterling began its 27th year of service to both NASA and
the DoD and secured new contracts and contract renewals with estimated total
revenue of approximately $34,700,000 over the next five years. Most of the
contracts represent an expansion or extension of ongoing services to NASA and
the DoD. Altogether, in 1993 the Federal Systems Group was working under 45
contracts, many of which are for multi-year terms.
As of September 30, 1993, the group employed approximately 1,080 persons.
Sterling's NASA Ames Division concentrates exclusively on scientific software
support and supercomputer facilities management at the NASA Ames Research
Center. The division's work includes software and support services on such
research projects as airborne and space flight systems, experimental and
theoretical aerodynamics, atmospheric sciences and astronomy, and data
acquisition and control systems. The division also manages the Advanced
Computational Facility (the supercomputer center) at NASA Ames, serving about
700 NASA scientists. Sterling is a consistent high performer at NASA Ames and,
in 1993, received "excellent" award fee scores on its most significant NASA
Ames contract.
Sterling's Information Technology Division provides highly technical
professional services to military and intelligence agencies, specializing in
data handling, secure communications, networking and systems integration. The
division supports such varied technical projects as satellite data collection
and counter-terrorism, generally requiring top secret security clearances. Its
computing resources include data processing facilities approved for classified
operations, and substantial hardware and software configurations to support
software development activities in a distributed processing environment. In
1993, the division obtained 25 new or renewed contracts, representing revenue
of approximately $33,200,000 over the next five years.
Sterling's Scientific Systems Division provides highly technical professional
services to civil sectors of the federal government, particularly in scientific
and engineering areas and including specialty software products in advanced
graphics, visualization and virtual reality. The division's contracts include
project applications such as spacecraft imagery and scientific data systems to
aviation research and transportation safety. Customers include Jet Propulsion
Laboratory, NASA Lewis Research Center and MIT Lincoln Laboratory. In 1993, the
division obtained nine new or renewed contracts, representing revenue of
approximately $1,500,000 over the next two years.
Sterling's Federal Labs Division was formed in 1993 to function as a
development lab for other Sterling divisions, primarily by turning software
assets and expertise obtained in scientific projects into commercial products.
A number of potential software products have been identified from Sterling's
work on specialized systems for the federal government. One product that has
been commercialized is CONNECT:Queue which is marketed by Sterling's
Communications Software Division.
Revenue from the Federal Systems Group represented 25% of Sterling's revenue
in each of the years 1993, 1992 and 1991.
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INTERNATIONAL GROUP
The International Group is the exclusive channel to international markets for
all Sterling products. Prior to 1993, all international sales were conducted
through separate divisions within the Electronic Commerce Group (then the EDI
Group) and the Enterprise Software Group (then the Systems Software Group).
Sterling organized a separate group during 1993 to focus on its international
expansion. The group operates through four regional divisions representing
Europe, Asia/Pacific, the Americas and distributors located throughout the
world. In addition to the four operating divisions, the group has an
international marketing organization with specialized product managers for each
product line.
Each division is responsible for sales, marketing and first level support of
all Sterling products and services in their respective regions. The Europe
Division, headquartered in London, is responsible for direct sales in the
United Kingdom, France, Belgium, the Netherlands, Italy, Norway, Sweden,
Germany, Switzerland and Austria and has offices in 16 European cities. The
Pacific Division, headquartered in Tokyo with a major office in Sydney, is
responsible for direct sales in the Asia/Pacific countries, including Japan and
Australia. Canada is the responsibility of the Americas Division, which is
headquartered in Toronto with offices in Ottawa and Montreal. Sterling has a
separate division to manage approximately 50 agents and distributors, the
Distributor Division, headquartered in London. Major distributors are located
in Brazil, Italy, Japan, Korea, Spain, Taiwan and Venezuela.
As of September 30, 1993, the group employed approximately 300 persons.
PRODUCT LICENSES
Sterling's software products are generally licensed for perpetual use or for
a fixed term. Sterling typically does not sell or otherwise transfer title to
its software products. The license agreements generally restrict the use of the
product to designated sites or central processing units and prohibit
reproduction, transfer or disclosure of the product. However, some license
agreements may cover multiple sites or multiple central processing units at one
site.
PRODUCT SUPPORT
Product support is available to Sterling customers, typically in the form of
annual contracts generally priced from 15% to 20% of the then-current license
fee. Sterling's product support contracts allow customers to receive updated or
enhanced versions of Sterling's software products as they become available, as
well as telephone access to Sterling's technical personnel.
SERVICES
Sterling's services primarily include technical professional services in
support of federal government contracts provided through Sterling's federal
systems business and EDI network services provided through Sterling's
electronic commerce business.
PRODUCT DEVELOPMENT
Sterling's product development programs in each of its businesses include the
enhancement of existing products and introduction of new products based upon
current and anticipated customer needs. Each division within Sterling's
Electronic Commerce Group and Enterprise Software Group has its own development
function. In addition, one of the divisions within the Federal Systems Group
functions solely as a software development lab responsible for productizing
technologies to be sold by other Sterling groups. Each development lab operates
as a profit center with revenues derived from intercompany royalties earned on
products sold in the domestic and international markets. This management
organization facilitates development cost control and focuses the development
function on the customer's needs. Approximately 350 Sterling employees were
engaged in product development at September 30, 1993. Product development costs
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in 1993, 1992 and 1991 were $50,360,000, $49,701,000 and $45,181,000,
respectively, of which Sterling capitalized $23,730,000, $24,617,000 and
$20,636,000, respectively, as the cost of developing and testing new or
significantly enhanced software products.
SALES AND MARKETING
As part of its marketing strategy, Sterling conducts its sales and marketing
activities in multiple software divisions focused on specific product markets.
Sterling sells its products and services through a combination of direct sales
and telesales, and in certain countries, independent agents and distributors.
The use of telesales has proven effective in reaching customers at a minimal
cost. Each division within the Electronic Commerce Group and Enterprise
Software Group has its own U.S. sales and marketing organizations. In addition,
Sterling's International Group has its own sales and marketing functions to
focus specifically on the international marketplace for each of Sterling's
product lines. At September 30, 1993, Sterling employed approximately 250 sales
representatives.
OTHER INFORMATION
Other information concerning Sterling's business, securities and financial
condition is incorporated by reference from its reports, filed with the
Commission. See "Incorporation of Certain Documents by Reference."
MERGER SUB
Merger Sub is a corporation recently organized under the laws of the State of
Georgia solely for the purpose of effecting the Merger. It has no material
assets and has not engaged in any activities except in connection with the
Merger.
CERTAIN INFORMATION REGARDING KNOWLEDGEWARE
GENERAL
KnowledgeWare designs, develops, markets and supports a variety of solutions
and services for the development of a broad range of business applications from
individual support systems to departmental and mission critical enterprise-wide
systems and applications. Through a combination of development, acquisitions
and strategic alliances/partnerships, KnowledgeWare offers technology in a
variety of tool categories including "I-CASE" (integrated computer-aided
software engineering) and visual application development tools for open,
heterogenous client/server, midrange and mainframe computing environments.
KnowledgeWare's revenues also include related consulting services, project
management, training and methodology.
KnowledgeWare's product line includes the Application Development Workbench,
a comprehensive, I-CASE development solution; ObjectView, a visual development
tool for creating Windows-based client/server applications that access multiple
distributed databases; Flashpoint, a Windows-based tool for quickly creating
new graphical user interfaces for legacy applications, as well as integrating
data from a variety of applications at the desktop; Legacy Workbench, a
comprehensive set of tools that accelerate the maintenance, redesign, and
migration of existing mainframe-based applications; MAXIM, an object-oriented
PC-based tool for business process reengineering; ClearAccess, a graphical tool
for end-user database queries and reports; and ClearManager, a client/server
management tool for monitoring, controlling and supporting data access
activities.
KnowledgeWare markets its products to a wide range of developers and users
within financial, governmental, telecommunications, manufacturing, utility and
other organizations worldwide. KnowledgeWare product users may include
professional developers within information systems departments;
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casual developers who have programming skills but are not employed as full-time
developers; power users who build applications without writing any code to
construct customer queries and reports as well as create and update databases;
and end users of applications and reports developed with KnowledgeWare
products.
ObjectView was added to KnowledgeWare's product portfolio as part of its
acquisition of Matesys Mathematic Systems S.A. ("Matesys") and its subsidiary,
Matesys Corp. during fiscal year 1993. In connection with the acquisition,
KnowledgeWare issued 900,000 shares of its common stock in exchange for the
Matesys stock. The acquisition was accounted for by KnowledgeWare as a pooling
of interest.
Matesys Corp. had approximately twenty employees and was based in Larkspur,
California; Matesys was based in Paris. ObjectView was initially introduced in
February 1991 and more than 3,000 copies of Version 1 were shipped. Version 2
was announced by Matesys in October 1992, and was first shipped by
KnowledgeWare in April 1993. During fiscal year 1994, KnowledgeWare released
ObjectView 3.0 and ObjectView Enterprise, new releases which provide workgroup
support for teams of developers working concurrently on large-scale projects
through an open object repository. ObjectView Enterprise boosts developer
productivity by facilitating reuse of application objects and logic.
KnowledgeWare also released ObjectView Desktop, a visual development tool
scaled for desktop developers who want comprehensive, yet affordable visual
development environments.
As part of a strategic focus on service and support, KnowledgeWare in
November 1992 formed a new Professional Services division and acquired
Michigan-based Computer and Engineering Consultants, Ltd. ("CEC").
KnowledgeWare provides consulting support for new application development,
business process engineering, and applications maintenance and reengineering.
The acquisition of CEC also brought the Foresight methodology into the
KnowledgeWare product portfolio. Foresight is embedded within the Application
Development Workbench encyclopedia and is an automated methodology management
tool to guide development based on tested methods and techniques.
KnowledgeWare expanded its distribution channels to include both a direct
sales force as well as indirect sales through value-added resellers such as
systems integrators and through a telesales program. The Client/Server Alliance
Program, or "CAP", supports a group of systems integrators and consulting
companies that develop client/server solutions for customers. CAP includes
products, services, support, and training to help systems integrators be
successful with various KnowledgeWare tools. Products currently available under
the program are ObjectView and Flashpoint. More than 200 systems integrators
have become CAP members through June 30, 1994. Based on disappointing results,
the CAP program is being de-emphasized in fiscal 1995, and other indirect
channels are being examined.
To assume direct responsibility of sales, marketing, and support of its
products in Europe, KnowledgeWare acquired Ernst & Young's CASE distributor
business of KnowledgeWare products in Belgium, Denmark, Finland, France,
Germany, Italy, The Netherlands, Norway, Portugal, Spain, Sweden, and the
United Kingdom. KnowledgeWare also established KnowledgeWare Worldwide, Inc. to
manage its international operations. KnowledgeWare Worldwide is headquartered
in Paris, France. To expand its services in Europe, KnowledgeWare also acquired
Image Multi-Medias ("IMM"), a Paris-based client/server training and consulting
service. KnowledgeWare also acquired Ernst & Young's CASE Technology Pty Ltd.
based in Sydney, Australia, and assumed direct responsibility for sales,
marketing, and support of KnowledgeWare's products in Australia and New Zealand
as well as other areas in the Asia Pacific region.
In August 1989, IBM became a significant shareholder in KnowledgeWare
(currently 7.5%). KnowledgeWare has subsequently entered into business
agreements with IBM which include: joint development agreements funded by IBM;
marketing agreements which compensated IBM for marketing activities related to
KnowledgeWare's products; a U.S. Enterprise License that provides IBM the right
to produce an unlimited quantity of certain Company products for IBM's internal
use; a reseller agreement which allows IBM to resell certain of KnowledgeWare's
products and the Loan Agreement with IBM Credit
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which provides a $25,000,000 line of credit to KnowledgeWare. Effective August
31, 1994, KnowledgeWare reached an agreement with Sterling whereby IBM Credit
assigned the loan to Sterling.
KnowledgeWare was incorporated in Michigan in 1979 as Database Design, Inc.
and the name was changed in 1985 to "KnowledgeWare, Inc." KnowledgeWare merged
with Atlanta-based Tarkenton Software, Inc. in 1986 and reincorporated in
Georgia in 1988.
PRODUCTS
Since KnowledgeWare introduced its first products in 1985, KnowledgeWare has
strived to evolve its product and service portfolio to keep pace with emerging
computing technologies and customer demand to apply those technologies in their
companies. In many organizations, computing environments are rapidly migrating
from mainframe-oriented, terminal-based computing to client/server
microprocessor-based, network-oriented environments. As a result, KnowledgeWare
has expanded its product and service portfolio to support application
development for cooperative processing in open, heterogeneous client/server,
midrange, and mainframe computing environments. KnowledgeWare has expanded both
its development and deployment platforms to include Windows, OS/2 and UNIX and
has announced plans to include NT and Apple Macintosh operating systems.
The Application Development Workbench is a comprehensive environment of
integrated, graphical tools that capture and analyze enterprise models,
business requirements and applications designs; and generates application
source code for multiple computing environments from the same business models
and requirements. The ADW toolset assists users in all phases of application
development: planning, analysis, prototyping, design, code generation, system
documentation, and maintenance. All information collected during the
application development life cycle is stored in a central encyclopedia--the
point of integration for all ADW products.
Specific Application Development Workbench components are the ADW/Planning,
Analysis, RAD, Design, Documentation, and Construction Workstations.
ADW/Construction Workstations include ADW/Construction Workstation--GUI that
generates client/server applications with graphical user interfaces running
under Windows or Presentation Manager; ADW/Construction Workstation--400;
ADW/Construction Workstation--MVS; and ADW/Construction Workstation--Ada for
generating Ada/Motif applications for various UNIX environments.
During fiscal year 1994, KnowledgeWare signed a relicensing agreement with
Rottger & Osterberg Software--Technik GmbH ("R&O") to distribute the ROCHADE
client/server information repository. ROCHADE is an open, portable
client/server repository which can expand the reuse and sharing of models,
objects and other information across an entire enterprise.
ObjectView provides a set of language and database transaction features for
rapid, visual development of client/server applications. Currently based on
Windows, ObjectView was designed to develop applications that can
simultaneously access multiple databases for sophisticated transaction
processing. The product enables rapid development of applications that provide
point-and-click access to multiple databases with superior transaction
processing rates, SQL throughput rates, and scalability.
During fiscal 1994, KnowledgeWare released ObjectView 3.0 and ObjectView
Enterprise, new releases which provide workgroup support for teams of
developers working concurrently on large-scale projects through an open object
repository. ObjectView Enterprise boosts developer productivity by facilitating
the reuse of application objects and logic. KnowledgeWare also released
ObjectView Desktop, a visual development tool scaled for desktop developers who
want comprehensive yet affordable visual development environments.
Flashpoint is a Windows-based tool for creating graphical user interfaces for
legacy applications as well as integrating data from a variety of applications
at the desktop. With Flashpoint, developers can integrate
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applications from host, LAN and workstations into a single, user-oriented
desktop, while shifting some of the processing workload to the desktop from the
host. KnowledgeWare originally acquired Flashpoint as part of its acquisition
of Viewpoint Systems, Inc. in 1992.
The Legacy Workbench is a comprehensive set of tools that accelerate the
maintenance, restructuring, documentation and migration of existing mainframe-
based systems. This cooperative processing product running under OS/2 and MVS
is comprised of four components: (1) Application Assessment; (2) Program
Documentation; (3) Program Restructuring; and (4) Graphical Maintenance.
The Application Assessment, Program Documentation and Program Restructuring
components are based on products originally acquired from Language Technology,
Inc. in 1991. These products, which were known as Inspector, Pinpoint, and
Recoder, have been significantly enhanced with the addition of new OS/2
graphical-user interfaces to interact with these mainframe resident tools.
The OS/2-based Graphical Maintenance Facility introduced in November 1993
accelerates source code maintenance with synchronized, graphical views of a
program's (1) high-level structure charts; (2) detailed flow charts of the
execution sequences; and (3) actual source code. The three synchronized views
allow developers to understand the architecture of a program. The views are
dynamically linked so that changes made in one view are automatically reflected
in the other views.
NorthStar has been licensed by KnowledgeWare from Integrated Microcomputer
Systems, Inc. for sale with the Legacy Workbench. NorthStar is a Windows-based
automated reverse engineering tool for design recovery and managed migration of
legacy systems to new technologies such as client/server environments.
During fiscal year 1994, KnowledgeWare introduced MAXIM, a Windows-based
business process reengineering product that graphically depicts and aids in the
analysis of an enterprise's business process and organizational structures.
KnowledgeWare also acquired ClearAccess and ClearManager in fiscal 1994.
ClearAccess is a graphical ad hoc query interface for automated data access and
transparent integration to other applications such as spreadsheets and word
processors and also includes a graphical report writer and a personal data
warehouse for downloading data and charting query results. ClearManager
includes five modules for administrating queries from multiple end users and
controlling and supporting enterprise-wide data access activities.
ACQUISITIONS
In fiscal 1994, KnowledgeWare acquired its Australia distributor, the assets
of IFM Systemer A/S and the assets of ClearAccess Corporation. The purchase
price of the Australia distributor was approximately $1,600,000 plus 4% of
product sales, as defined, through November 9, 1996. Of the purchase price,
$800,000 was paid in January 1994, $800,000 is currently due and payable, and
the 4% payment is made quarterly. Approximately $2,085,000 has been allocated
to goodwill and will be amortized over 12 years using the straight line method.
The acquisition of IFM Systemer A/S, a Denmark based consulting company
specializing in AS/400 applications, was at a purchase price of approximately
$420,000, all paid in April 1994. Approximately $103,000 has been allocated to
goodwill and will be amortized over 10 years using the straight line method.
KnowledgeWare issued 205,906 shares of its common stock in consideration for
the intellectual property and certain other assets of ClearAccess Corporation.
Approximately $2,200,000 has been recorded as capitalized software related to
the ClearAccess and ClearManager products and will be amortized over five
years. On September 9, 1994, the Ecta Suit was filed alleging certain
securities law violations and breach of contract in connection with this
acquisition. See "Summary--Recent Developments" and "--Legal Proceedings"
below.
SALES AND MARKETING
KnowledgeWare markets its products to a wide range of developers and users
within financial, governmental, telecommunications, manufacturing, utility and
other organizations worldwide.
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KnowledgeWare markets its products in the United States through its direct
sales force as well as indirectly through value-added resellers such as system
integrators and telesales representatives. As of June 30, 1994, KnowledgeWare
employed 139 sales and sales support representatives in its domestic sales
force. KnowledgeWare licenses and supports its products from its headquarters
in Atlanta and from field offices in 20 cities in the United States. A
Client/Server Alliance Program, or "CAP," supports a group of systems
integrators and consulting companies that develop client/server solutions for
customers. The sales and marketing practices and policies of KnowledgeWare are
established to enable KnowledgeWare to compete effectively in an industry
characterized by intense price competition. KnowledgeWare uses payment terms in
excess of 30 days and price discounting on certain sales as an inducement to
customers to initiate, increase or accelerate sales. However, KnowledgeWare has
experienced difficulty in implementing an indirect sales strategy through third
party resellers for client/server products as a result of its inability to
successfully negotiate arrangements with creditworthy resellers and to collect
for products delivered on credit to other resellers creating uncertainty about
KnowledgeWare's ability independently to market products through third party
resellers. KnowledgeWare intends to focus future sales efforts using those
channels which have been successful: a direct sales force and value added
resellers. Other third party resellers will be directed to buy the products
from wholesalers.
KnowledgeWare's largest end-user customer, IBM, accounted for approximately
1%, 8% and 14% of KnowledgeWare's software product license revenues in fiscal
years 1994, 1993 and 1992, respectively. KnowledgeWare signed a marketing
agreement with IBM in August 1989, as amended in April 1991, under which IBM
has the non-exclusive right in the United States, Puerto Rico and Canada to
market certain KnowledgeWare products. In June 1992 KnowledgeWare entered into
a U.S. Enterprise License Agreement with IBM which provides IBM with the right
to produce an unlimited quantity of certain KnowledgeWare products for IBM's
internal use for a fee of $12,000,000. Although no assurances exist, future
product offerings of KnowledgeWare may be added to the Enterprise License at a
mutually negotiated fee between IBM and KnowledgeWare (Flashpoint was added
during fiscal 1993 for a fee of $1,000,000). In September 1993, KnowledgeWare
signed a reseller agreement with IBM which allows IBM to resell certain of
KnowledgeWare's products. IBM purchased $1,000,000 of product under this
agreement in fiscal 1994. The Enterprise License also included purchase
commitments for maintenance of all Company products licensed by IBM. The
Company recognized $3,582,000 and $2,500,000 of revenue under the maintenance
agreement in fiscal years 1994 and 1993, respectively. In March 1994,
KnowledgeWare entered into a letter of intent with IBM and Ernst & Young to
allow the transfer of distribution rights in Japan to IBM.
KnowledgeWare has historically marketed its products internationally through
various member firms of Ernst & Young International pursuant to individual,
territory specific, distribution agreements. To assume direct responsibility of
sales, marketing and support of its products in Europe and Australia,
KnowledgeWare acquired Ernst & Young's CASE distributor business in most of the
European countries and in Australia. KnowledgeWare has also assumed direct
responsibility in Canada, New Zealand, Hong Kong and other European countries
upon expiration of distribution contracts. In the remaining territories
throughout the world the distributor bears the costs of marketing and
supporting the products in its territory. International distributors accounted
for approximately 4%, 13% and 25% of KnowledgeWare's revenues for fiscal years
1994, 1993 and 1992, respectively. The lower percentage in 1994 and 1993
results from the switch to direct sales in most of Europe and Australia.
In accordance with industry practice, KnowledgeWare's personal computer
software products are licensed under a "shrink wrap" license agreement
domestically (signed licenses are obtained outside the United States and in
certain instances domestically). A "shrink wrap" license is contained in the
product package and the end-user indicates acceptance of the terms of the
license by breaking the diskette seal. KnowledgeWare's mainframe-based products
are licensed under site-specific license agreements on a non-exclusive basis.
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SEASONALITY AND BACKLOG
KnowledgeWare's quarterly results are subject to fluctuations resulting from
a variety of factors, including the effects of domestic and international
economic conditions, budgetary considerations of
customers, KnowledgeWare's sales compensation plan, the timing and costs of
product upgrades, new product introductions and promotions and recognition of
fees in connection with license, development and similar agreements.
KnowledgeWare typically realizes a larger percentage of its software product
license revenues in the second and fourth quarters of each fiscal year, with
generally lower product license revenues in the first quarter of each fiscal
year. This cyclicality results in part from budgetary spending patterns of
KnowledgeWare's customer base and KnowledgeWare's sales commission plan, which
compensates sales personnel for achieving or exceeding annual quotas,
respectively. Additionally, a major portion of each quarter's product license
revenues is typically realized in the last month of the quarter. Delays in
closing product licensing transactions at or near the end of quarter may cause
quarterly revenues and net income to fall significantly below anticipated
levels. As a result of the factors discussed above, KnowledgeWare's operating
results for any one quarter are not necessarily indicative of results for any
future period.
KnowledgeWare has experienced a backlog of customer orders at the end of
certain prior periods. At June 30, 1994, KnowledgeWare had unfilled, generally
non-cancellable customer orders for software product licenses and consulting
and education services approximating $13,000,000, all of which is anticipated
to be recognized in fiscal 1995. This compares to approximately $14,000,000 of
unfilled customer orders for products and services at June 30, 1993.
CUSTOMER SUPPORT SERVICES
KnowledgeWare offers a variety of support services for its products,
including consulting, training and maintenance. Product maintenance is offered
for each of KnowledgeWare's products and entitles the customer to telephone
support and product release enhancements of certain purchased products.
KnowledgeWare's personal computer software products are covered by a 90-day
limited warranty. KnowledgeWare provides maintenance and support of its
personal computer software products beyond this initial 90-day period for an
annual fee, payable in advance. KnowledgeWare's mainframe-based products are
covered by a one-year limited warranty. KnowledgeWare provides further
maintenance and support for mainframe-based products for an annual fee, payable
in advance. In fiscal 1994 a substantial portion of KnowledgeWare's end-user
customers purchased maintenance support. Revenues from sales of maintenance
support, referred to in KnowledgeWare's financial statements as "service
agreement revenues," are recognized ratably over the term of the agreements.
Consulting services and training programs are available to customers at
published prices. Revenues from such services are recognized as the services
are rendered. Consulting and education revenues increased 100%, from $5,926,000
in fiscal 1992 to $11,861,000 in fiscal 1993, and 65% to $19,550,000 in fiscal
1994.
RESEARCH AND DEVELOPMENT
KnowledgeWare's research and development organization designs, develops,
tests, debugs, enhances and sustains KnowledgeWare's software products.
KnowledgeWare's research and development facilities are located in Atlanta,
Georgia; and Redwood City, California.
During fiscal years 1994, 1993 and 1992 KnowledgeWare incurred $24,196,000,
$28,867,000 and $23,672,000 of research and development expenses, respectively;
after capitalization of $7,480,000, $5,161,000 and $4,400,000, respectively, in
accordance with Statement of Financial Accounting Standards No. 86.
KnowledgeWare also paid $3,248,000 and $11,682,000 in fiscal years 1994 and
1992, respectively, for the acquisition of certain products and technologies.
KnowledgeWare anticipates that it will continue to commit substantial resources
to research and development in the future.
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KnowledgeWare's future financial performance will depend in part on the
successful development and introduction of new products and enhancements to
existing products, and customer acceptance of these products. Many software
companies have experienced delays in completing the development of new products
and there can be no assurance that KnowledgeWare will not encounter
difficulties that could delay or prevent the successful introduction and
marketing of new and enhanced versions of its products.
COMPETITION
KnowledgeWare's business is intensely competitive. The applications
development solutions market is characterized by rapid change and frequent
introduction of new products. KnowledgeWare's principal existing competitors in
the mainframe market are Arthur Andersen Consulting, Bachman Information
Systems, Intersolv, and Texas Instruments, Incorporated. KnowledgeWare's direct
competitors in the client/server market are Powersoft, Gupta and Easel.
Indirect competitors include RDBMS vendors such as Sybase and Oracle who also
sell application development tools, other CASE vendors such as Intersolv and
Bachman Information Systems, and PC vendors with end-user oriented application
development tools such as Microsoft and Borland International. Other companies
may become competitors in the future. In addition to owning approximately 7.5%
of KnowledgeWare, IBM has invested in a number of other software companies
including companies that compete with KnowledgeWare. A number of
KnowledgeWare's existing and potential competitors have greater financial,
marketing and technological resources than KnowledgeWare.
KnowledgeWare believes the principal factors affecting competition in the
applications development solutions market are product performance, product
functionality, ease of use, price and quality of customer support and training
services. KnowledgeWare believes that it competes effectively with respect to
these factors. KnowledgeWare also believes that its ability to compete
effectively over the long term in the application development solutions market
depends in part on the successful development and introduction of new products;
the strategic acquisition and introduction of new products; enhancements to
existing versions of KnowledgeWare's products; and customer acceptance of such
product offerings.
PRODUCT PROTECTION
KnowledgeWare relies on a combination of trade secret, copyright and
trademark laws, license and non-disclosure agreements and technical measures to
protect its rights in its software products and proprietary technology.
Substantially all of KnowledgeWare's employees have signed non-disclosure
agreements obligating them to maintain the confidentiality of KnowledgeWare's
proprietary information. KnowledgeWare's license agreements with end-users
generally limit the use of KnowledgeWare's products to the customer's internal
use. They further provide for the non-disclosure of confidential information.
This protection may not always prevent unauthorized parties from obtaining and
using such information.
EMPLOYEES
As of June 30, 1994, KnowledgeWare employed 949 persons on a full time basis,
including 178 in research and development, 247 in sales and marketing, 218 in
international operations, 204 in service and support and 102 in general and
administrative functions. In July 1994, as part of a restructuring to reduce
operating expenses, KnowledgeWare eliminated 243 positions, reducing the number
of employees in each area to 123, 171, 159, 173 and 80, respectively.
KnowledgeWare's employees are not represented by a union, and KnowledgeWare
considers its relationship with its employees to be good.
PROPERTIES
KnowledgeWare's headquarters is located in a 117,615 square foot leased
office in Atlanta, Georgia. The lease expires in December 1997 and includes two
three year renewal options. KnowledgeWare also leases nine traditional space
offices and twelve executive suites sales offices in the United States totaling
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approximately 370,748 square feet. KnowledgeWare has a total of 22
international sales offices located in Australia, Austria, Belgium, France,
Germany, Hong Kong, Italy, The Netherlands, Portugal, Sweden, Denmark, Norway,
Finland, Spain, Switzerland and the United Kingdom.
LEGAL PROCEEDINGS
On December 18, 1991, the 1991 Class Action complaint was filed in the
United States District Court for the Northern District of Georgia, Atlanta
Division which consolidated and amended several class action lawsuits
previously filed against KnowledgeWare in October 1991. The 1991 Class Action
was a class action lawsuit alleging violations of Sections 20 and 10(b) of the
Exchange Act and Rule 10b-5 under the Exchange Act. In summary, the complaint
alleged KnowledgeWare misrepresented or failed to disclose material facts
which would have a material adverse impact on KnowledgeWare or approved such
misrepresentations and omissions. The complaint sought compensatory damages
and reimbursements for the plaintiffs' fees and expenses. On January 26, 1994,
KnowledgeWare entered into and the District Court preliminarily approved the
Settlement Agreement. By entering into the settlement, KnowledgeWare did not
admit the allegations in the suit and, to the contrary, denied any wrongdoing.
The Settlement Agreement, which received final court approval in April 1994,
required a cash payment of $1,750,000, all of which was paid by
KnowledgeWare's insurance carrier, and the issuance by KnowledgeWare of the
Warrants, which allow the holders to acquire an aggregate of 500,000 shares of
KnowledgeWare's Common Stock at a price of $17.50 per share. The Warrants are
exercisable for a period of three years from June 9, 1994 (the date of
issuance). On August 30, 1994, the plaintiffs in the 1991 Class Action filed
the Motion. In the Motion, the plaintiffs allege that the proposed business
combination between KnowledgeWare and Sterling and the announcement by
KnowledgeWare that it modified its accounting policy for revenue recognition
and restated financial results for the first three quarters of fiscal year
1994 resulted in a substantially reduced value of the Warrants available to
the plaintiffs under the Settlement Agreement. Accordingly, the plaintiffs
moved the District Court for a decree of specific performance of the terms of
the Settlement Agreement entailing the delivery of new warrants of equivalent
value to the original value of the Warrants, and for a preliminary injunction
of the consummation of any business combination between KnowledgeWare and
Sterling, pending compliance by KnowledgeWare with the terms of the Settlement
Agreement. Alternatively, the plaintiffs moved for a declaration that the
Warrant Agreement set forth in the Settlement Agreement was the product of
fraud and for an award to the plaintiffs of the appropriate measure of
damages.
On August 30 and 31, 1994, and September 12, 22 and 23, 1994, the 1994 Class
Action Suits were filed against KnowledgeWare in the United States District
Court for the Northern District of Georgia, Atlanta Division. Each of the 1994
Class Action Suits is purportedly a class action lawsuit variously alleging
violations of Sections 20 and 10(b) of the Exchange Act, and Rule 10b-5 under
the Exchange Act. The alleged factual basis underlying the 1994 Class Action
Suits and the relief sought therein is the plaintiffs' allegations that
KnowledgeWare and the individual defendants actively misrepresented or failed
to disclose the actual financial condition of KnowledgeWare throughout fiscal
year 1994 and that the value of KnowledgeWare's common stock was artificially
inflated as a result of such misrepresentations or failures to disclose. Each
of the 1994 Class Action Suits seeks compensatory damages and reimbursement
for the plaintiffs' fees and expenses.
On September 9, 1994, the Ecta Suit was filed against KnowledgeWare in the
Southern District of Iowa, Central Division. The Ecta Suit is a lawsuit
alleging violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the
Exchange Act, Section 12(2) of the Securities Act, violation of the Iowa Blue
Sky Laws (Iowa Stat. Ann. (S)502.502), fraud and breach of contract. The
alleged factual basis underlying the Ecta Suit arises in connection with the
purchase by KnowledgeWare of substantially all of the assets of ClearAccess
Corporation (now known as Ecta Corporation) and Fairfield Software, Inc. (now
known as Fairfield Development, Inc.) pursuant to the Acquisition Agreement.
The plaintiffs allege that KnowledgeWare and the individual defendants
misrepresented or failed to disclose the actual financial condition of
KnowledgeWare, that the value of KnowledgeWare's common stock was artificially
inflated as a result of such misrepresentations or failures to disclose and
that KnowledgeWare has breached certain warranties, representations and
covenants made in the Acquisition Agreement. The Ecta Suit seeks compensatory
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damages, rescission of the Acquisition Agreement and/or the sale of
KnowledgeWare's securities issued pursuant thereto, punitive damages,
prejudgment interest, and reimbursement of attorneys' fees and costs.
KnowledgeWare has received informal requests for information from the Staff
of the Commission as to which persons and entities had knowledge of the
negotiations between KnowledgeWare and Sterling prior to the public
announcement of the Initial Merger Agreement on August 1, 1994, and as to the
circumstances with respect to KnowledgeWare's restatement of financial results
for the first three quarters of fiscal 1994.
On October 27, 1994, KnowledgeWare received a letter on behalf of the
Investors who purchased shares of KnowledgeWare Common Stock pursuant to a
stock purchase agreement between the Investors and KnowledgeWare dated January
26, 1994. The Investors assert that in light of, among other things,
KnowledgeWare's announcement on September 1, 1994 and KnowledgeWare's other
public statements disclosing its restatement of its financial statements for
the first, second and third quarters of fiscal 1994, it is the position of the
Investors that KnowledgeWare is in breach of the representations and warranties
it made to the Investors in the stock purchase agreement and seek to recover
damages in the amount of approximately $9.5 million, representing the
difference between the aggregate purchase price the Investors paid for their
KnowledgeWare Common Stock and the aggregate price for which they sold those
shares.
DESCRIPTION OF STERLING SOFTWARE CAPITAL STOCK
Sterling's authorized capital stock consists of 50,000,000 shares of Sterling
Common Stock, par value $0.10 per share, and 10,000,000 shares of Preferred
Stock, par value $0.10 per share ("Preferred Stock"). The only Preferred Stock
currently outstanding is the 200,000 shares of the Series B Preferred Stock
(the "Series B Preferred Stock"). No class of Sterling's capital stock carries
preemptive rights. The First National Bank of Boston, NA is the transfer agent,
registrar and dividend disbursing agent for the Sterling Common Stock.
DESCRIPTION OF STERLING SOFTWARE COMMON STOCK
As of June 30, 1994, Sterling had 20,275,521 shares of Sterling Common Stock
outstanding. At such date there were also outstanding (i) options to acquire
6,521,908 shares of Common Stock, (ii) warrants to acquire 230,017 shares of
Common Stock and (iii) 5% Debentures convertible into 4,056,437 shares of
Sterling Common Stock.
Holders of Sterling Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Shares of Sterling Common Stock do
not have cumulative voting rights, which means that the holders of a majority
of the shares of Sterling Common Stock and Series B Preferred Stock voting for
the election of the Board of Directors can elect all members of the Board of
Directors. Holders of record of the Sterling Common Stock are entitled to
receive dividends, when and if declared by the Board of Directors, out of funds
legally available therefor. The terms of the Series B Preferred Stock prohibit
the payment of dividends on the Sterling Common Stock whenever dividends on the
Series B Preferred Stock are in arrears. Upon any liquidation, dissolution or
winding up of Sterling, holders of Sterling Common Stock are entitled to
receive pro rata all of the assets of Sterling available for distribution to
stockholders, subject to any prior rights of holders of any outstanding Series
B Preferred Stock.
DESCRIPTION OF STERLING SOFTWARE PREFERRED STOCK
General. Sterling's Board of Directors is authorized to issue Preferred Stock
in one or more series and to fix the voting rights, liquidation preferences,
dividend rights, conversion rights, redemption rights and terms, including
sinking fund provisions, and certain other rights and preferences, of the
Preferred Stock.
It is not possible to state the actual effects of the issuance of Preferred
Stock upon the rights of holders of Sterling's Common Stock until the Board of
Directors determines the specific rights of the holders of a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on the Sterling Common Stock, diluting the voting power
of the Sterling Common Stock, impairing the liquidation rights of the Sterling
Common Stock and delaying or preventing a change in control of Sterling without
further action by the stockholders.
Series B Preferred Stock. The only shares of Preferred Stock currently
outstanding are the 200,000 shares of Series B Preferred Stock controlled by
the Chairman, the Vice Chairman and a director of Sterling.
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The holders of Series B Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, out of funds legally available for such
purposes, cumulative dividends at the annual rate of approximately $0.98 per
share, payable quarterly. Until all accrued dividends on the Series B Preferred
Stock have been paid in full, certain limitations apply to Sterling's
acquisition of, or distributions with respect to, stock ranking junior to or on
a parity with the Series B Preferred Stock. Sterling is current in its payment
of dividends on the Series B Preferred Stock.
Except as set forth below or required by law, the holders of Series B
Preferred Stock vote together with the holders of shares of Sterling Common
Stock as a single class on all matters on which stockholders are entitled to
vote, with each holder of Series B Preferred Stock entitled to one vote for
each share held of record.
The affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of the Series B Preferred Stock, voting separately as a class, is
necessary (i) to authorize the issuance of securities of any class of capital
stock ranking prior to the Series B Preferred Stock as to dividends or upon
liquidation, dissolution or winding up of Sterling or (ii) to amend Sterling's
Certificate of Incorporation in any manner that would materially alter the
relative rights and preferences of the Series B Preferred Stock. The
affirmative vote of the holders of at least 51% of the outstanding shares of
Series B Preferred Stock, voting separately as a class, is required to create a
class of Preferred Stock ranking on a parity with the Series B Preferred Stock
as to dividends and upon liquidation, dissolution or winding up of Sterling.
In the event Sterling proposes to effect certain transactions, including the
sale or conveyance of all or substantially all of the assets of Sterling or any
of its subsidiaries, any consolidation or merger involving Sterling or any of
its subsidiaries, any reclassification, any dissolution, liquidation or winding
up of Sterling or any other reorganization that requires the consent of
stockholders, the holders of Series B Preferred Stock are entitled to vote
together with the holders of the Sterling Common Stock as a single class and
each holder of the Series B Preferred Stock is entitled to ten votes for each
share of Series B Preferred Stock held of record, unless the proposed
transaction is unanimously approved by all of the members of the Board of
Directors of Sterling who are not beneficial owners of Series B Preferred
Stock, in which case the holders of Series B Preferred Stock are entitled to
one vote for each share of Series B Preferred Stock held of record.
COMPARISON OF STOCKHOLDER RIGHTS
Sterling is incorporated under the laws of the State of Delaware and,
accordingly, the rights of stockholders of Sterling are governed by the DGCL.
KnowledgeWare is incorporated under the laws of the State of Georgia and,
accordingly, the rights of stockholders of KnowledgeWare are governed by the
GBCC. The rights of the stockholders of Sterling and KnowledgeWare also are
governed by their respective Certificate or Articles of Incorporation and
Bylaws. Upon consummation of the Merger, KnowledgeWare stockholders will become
Sterling stockholders and, as such, their rights will be governed by the DGCL,
Sterling's Certificate of Incorporation, as amended (the "Sterling Certificate
of Incorporation"), and Sterling's Restated Bylaws (the "Sterling Bylaws").
Although it is not practical to compare all the differences between the DGCL
and the GBCC, KnowledgeWare's Restated Articles of Incorporation, as amended
(the "KnowledgeWare Articles of Incorporation") and Bylaws (the "KnowledgeWare
Bylaws"), and the Sterling Certificate of Incorporation and Bylaws, the
following is a summary of certain material differences which may affect the
rights of KnowledgeWare stockholders. This summary is qualified in its entirety
by reference to the full text of such documents, the DGCL and the GBCC. For
information as to how such documents may be obtained, see "Available
Information."
AMENDMENT OF CHARTER AND BYLAWS
Sterling. Section 242 of the DGCL provides that stockholders may amend their
corporation's certificate of incorporation if a majority of the outstanding
stock entitled to vote thereon, and a majority of the outstanding stock of each
class entitled to vote thereon as a class, has been voted in favor of the
amendment. The DGCL also provides that after a corporation has received any
payment for its stock, the power to adopt, amend or repeal bylaws resides with
the stockholders entitled to vote. A corporation may, however, grant to its
board of directors in its certificate of incorporation concurrent power to
adopt, amend or repeal bylaws.
The Sterling Certificate of Incorporation requires the affirmative vote of at
least 75% of the shares entitled to vote for election of directors to amend,
repeal or adopt any provision inconsistent with the
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provisions of the Sterling Certificate of Incorporation relating to the
election, number, classification or filling of vacancies of the Board of
Directors.
KnowledgeWare. KnowledgeWare's stockholders may adopt, amend and repeal the
KnowledgeWare Articles of Incorporation and Bylaws by a majority vote of the
shares outstanding. However, the KnowledgeWare Articles of Incorporation
require the affirmative vote of at least 80% of the shares entitled to vote for
election of directors to amend, repeal or adopt any provision inconsistent with
the provisions of the KnowledgeWare Articles of Incorporation relating to the
election, number, classification or filling of vacancies of the board of
directors. KnowledgeWare's Board of Directors also may adopt, amend and repeal
the Bylaws, unless the stockholders prescribe that any Bylaw or Bylaws adopted
by them may not be amended or repealed by the Board of Directors. However, (i)
the Fair Price Provisions (defined below) and the Corporate Takeover Provisions
(defined below) contained in KnowledgeWare's Bylaws may only be repealed by the
affirmative vote of at least two-thirds of the continuing directors and the
holders of a majority of the shares entitled to vote, other than shares
beneficially owned by any interested stockholder and (ii) the Supplemental
Voting Provision (defined below) may only be repealed by the affirmative vote
of the holders of two-thirds of the shares entitled to vote at a duly held
stockholders meeting.
REMOVAL OF DIRECTORS
Sterling. The DGCL permits any director or the entire board of directors to
be removed, with or without cause, by the vote of the holders of a majority of
the shares entitled to vote. Directors of a corporation with a classified board
of directors, however, can be removed only for cause unless the certificate of
incorporation otherwise provides. The Sterling Certificate of Incorporation and
the Sterling Bylaws provide that any director may be removed either for or
without cause by an affirmative vote of a majority of the shares entitled to
vote for such director. Vacancies in the Board and any newly created
directorships resulting from any increase in the authorized number of directors
may be filled by the vote of a majority of the directors then in office, though
less than a quorum. Amendment of specific provisions of the Sterling
Certificate of Incorporation relating to election of the Board of Directors
requires an affirmative vote of at least 75% of the shares entitled to vote
generally in the election of directors.
KnowledgeWare. Under KnowledgeWare's Articles of Incorporation and Bylaws,
any director may be removed from office only for cause by the affirmative vote
of the holders of a majority of the shares then outstanding and entitled to
vote at an election of directors. A removed director's successor may be elected
within 60 days after a director has been removed, by the holders of a majority
of the shares then outstanding and entitled to vote at an election of
directors. If a removed director's successor is not elected within such 60 day
period by the stockholders, the remaining directors may, by majority vote, fill
the vacancy. Any vacancies in the KnowledgeWare Board of Directors resulting
from any reason other than the removal of a director, shall be filled by a
majority vote of the remaining directors.
CHANGES OF CONTROL
Sterling. Section 203 of the DGCL ("Section 203") prohibits a "business
combination" (defined broadly to include mergers, sales and leases of assets,
issuances of securities, and similar transactions having an aggregate value in
excess of 10% of the consolidated assets of the corporation) between a Delaware
corporation and an "interested stockholder" (defined generally as a beneficial
owner of 15% or more of the corporation's voting stock and such person's
affiliates and associates) within three years after the person or entity
becomes an interested stockholder, unless (i) prior to the person or entity
becoming an interested stockholder, the business combination or the transaction
pursuant to which such person or entity became an interested stockholder shall
have been approved by the corporation's Board of Directors, (ii) upon
consummation of the transaction in which such person became an interested
stockholder, such interested stockholder holds at least 85% of such
corporation's voting stock (excluding shares held by persons who are both
officers and directors and shares held by certain employee benefit plans), or
(iii) the business combination
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is approved by the corporation's Board of Directors and by the holders of at
least 66 2/3% of the outstanding voting stock of the corporation, excluding
shares owned by such interested stockholder.
Section 203 applies automatically to Delaware corporations, except those
corporations with less than 2000 stockholders of record and without voting
stock listed on a national securities exchange or listed for quotation with a
registered national securities association. In addition, a Delaware
corporation, by action of its stockholders, may adopt an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
Section 203, provided that such amendment is approved by the affirmative vote
of the holders of a majority of the shares of stock entitled to vote. However,
such amendment will not be effective until 12 months after the adoption thereof
and shall not apply to any business combination between such corporation and
any person who became an interested stockholder of such corporation on or prior
to such adoption. The Sterling Certificate of Incorporation and the Sterling
Bylaws contain no provisions by which Sterling has elected not to be governed
by Section 203.
In addition, the Sterling Certificate of Incorporation and Bylaws contain
provisions which may have the effect of discouraging certain transactions
involving an actual or threatened change of control of Sterling, thereby
depriving some stockholders of opportunities to sell shares of Sterling Common
Stock at higher than market prices. These provisions include the authority to
issue Preferred Stock with such rights and privileges as the Board of Directors
of Sterling may deem appropriate.
The classification of Sterling's Board of Directors, pursuant to which one
class of Sterling's three classes of directors are elected each year for a
three year term, may delay the ability of dissatisfied Sterling stockholders,
or anyone who obtains a controlling interest in Sterling Common Stock, to elect
a new Board of Directors and to exercise control of Sterling.
KnowledgeWare. Certain provisions of Georgia law and the KnowledgeWare
Articles of Incorporation and Bylaws also may have the effect of preventing,
discouraging or delaying a change of control of KnowledgeWare. These provisions
include the authority to issue preferred stock with such rights and privileges
as the Board of Directors may deem appropriate. Like Sterling's,
KnowledgeWare's Board of Directors is classified.
In addition, the KnowledgeWare Articles of Incorporation contain a provision
that permits the Board of Directors, in evaluating a business combination or a
proposal by another person to make a business combination or tender or exchange
officer, to consider, in addition to the adequacy of the amount to be paid in
connection with such transaction, certain specified factors and any other
factors the Board of Directors deems relevant. Among the factors the Board of
Directors may consider are: the social and economic effects of the transaction
on KnowledgeWare and its subsidiaries, employees, customers and creditors, the
business and financial condition and earnings prospects of the acquiror, and
the competence, experience and integrity of the acquiror and its management.
The KnowledgeWare Articles of Incorporation and Bylaws contain fair price
provisions (the "Fair Price Provisions") authorized by the GBCC and designed to
provide some protection against certain forms of two-tiered corporate
takeovers. The Fair Price Provisions impose certain requirements on certain
business combinations of KnowledgeWare with any person who is an interested
stockholder of KnowledgeWare (generally, the beneficial owner of 10% or more of
KnowledgeWare's voting shares). Under the Fair Price Provisions, business
combinations with interested stockholders must meet one of three criteria
designed to protect the minority stockholders: (i) the transaction must be
unanimously approved by the continuing directors who then constitute at least
three members of the Board of Directors (generally, directors who served prior
to the time the interested stockholder acquired 10% ownership and who are
unaffiliated with the interested stockholder); (ii) the transaction must be
recommended by two-thirds of the continuing directors and approved by a
majority of the shares held by stockholders other than the interested
stockholder who is a party to the business combination; or (iii) the terms of
the transaction must meet specified fair price
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criteria and certain other tests which are intended to assure that all
stockholders receive a fair price and equivalent consideration for their shares
regardless of what point in time they sell to the acquiring party.
KnowledgeWare's Bylaws require the affirmative vote of the holders of two-
thirds of the shares entitled to vote in certain situations in order to approve
certain business combinations (the "Supplemental Voting Provision"). The
Supplemental Voting Provision is designed to complement and extend the Fair
Price Provision. Although the Fair Price Provisions are designed to protect the
stockholders of KnowledgeWare against inequities of certain tactics that have
been used in hostile takeover attempts, they do not generally protect the
stockholders against other potential inequitable situations. The Supplemental
Voting Provision is designed to provide additional stockholder protection not
covered by the Fair Price Provisions and only applies to business combinations
that have not been approved by a majority of the continuing directors who then
constitute at least three members of the Board of Directors.
Additionally, the KnowledgeWare Articles of Incorporation and Bylaws contain
provisions authorized by the GBCC relating to certain restrictions and
limitations on certain business combinations (the "Corporate Takeover
Provisions"). The Corporate Takeover Provisions would prevent for five years
after a stockholder becomes an interested stockholder certain business
combinations with that interested stockholder unless (i) prior to the date such
stockholder became an interested stockholder the Board of Directors approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder, or (ii) in the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder became the beneficial owner of at least 90% of the outstanding
voting shares of KnowledgeWare, excluding for purposes of determining the
number of shares outstanding, shares owned by KnowledgeWare's officers,
directors, affiliates, subsidiaries and certain employee stock plans; or (iii)
subsequent to becoming an interested stockholder, such stockholder acquired
additional shares resulting in the interested stockholder becoming the owner of
at least 90% of KnowledgeWare's outstanding voting shares and the business
combination was approved by a majority of the holders of KnowledgeWare's voting
shares, excluding from said vote the stock owned by the interested stockholder
or by KnowledgeWare's officers, directors, affiliates, subsidiaries and certain
employee stock plans.
KnowledgeWare's Fair Price Provisions, Supplemental Voting Provision and
Corporate Takeover Provisions do not apply to the Merger because
KnowledgeWare's Board of Directors, including its continuing directors, has
approved the Merger.
DIVIDENDS
Sterling. Under Delaware law, unless otherwise restricted by a corporation's
certificate of incorporation, dividends may be paid (i) out of the
corporation's surplus (the excess of total assets over the sum of the
corporation's total liabilities plus its capital), or (ii) if there is no such
surplus, out of the corporation's net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year (provided, however, that
the amount of capital of the corporation is not less than the aggregate amount
of capital represented by the issued and outstanding stock of all classes
having preference upon the distribution of assets).
KnowledgeWare. A Georgia corporation, unless otherwise restricted by its
articles of incorporation, may make distributions to its stockholders unless
after giving effect to such distributions (i) the corporation would not be able
to pay its debts as they become due in the usual course of business, or (ii)
the corporation's total assets would be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise) the
amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution
of stockholders whose preferential rights are superior to those receiving the
distribution. Such distributions are not otherwise restricted under the
KnowledgeWare Articles of Incorporation or Bylaws.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sterling. Sterling's directors and officers are, in certain situations,
entitled to indemnification pursuant to the Sterling Bylaws and Delaware law.
Delaware law provides that a corporation may indemnify its officers, directors
and employees for expenses, judgments, or settlements incurred in connection
with suits and other legal proceedings. A corporation may advance expenses to
directors and officers upon receipt of an undertaking by the director or
officer to repay such amount if it is ultimately determined that he is not
entitled to indemnification. Delaware law requires the indemnified party to
have acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation. Indemnification is not
permissible if the person seeking indemnification has been adjudged to be
liable to the corporation, unless the Court of Chancery determines that despite
such adjudication of liability such person is fairly and reasonably entitled to
indemnification. The Sterling Bylaws provide that Sterling will indemnify its
directors to the maximum extent permitted by Delaware law. The Sterling Bylaws
further allow Sterling, to the extent authorized by the Sterling Board of
Directors, to indemnify its officers, and any other person whom it has the
power to indemnify, against any liability, expense, or other matter whatsoever.
Under Delaware law, the right to indemnification under the Sterling Bylaws is
not exclusive of any other right which any person may have or later acquire. In
addition, Delaware law authorizes Sterling to purchase insurance for directors,
officers and employees, whether or not Sterling has the power to indemnify that
person.
KnowledgeWare. KnowledgeWare's directors and officers are, in certain
situations, entitled to indemnification pursuant to the KnowledgeWare Articles
of Incorporation, Bylaws and Georgia law. KnowledgeWare must indemnify its
directors and officers (i) made a party to a proceeding because they are or
were officers or directors of the corporation against liability incurred if
such directors or officers acted in a manner they believed in good faith to be
in or not opposed to the best interests of KnowledgeWare, and (ii) against
reasonable expenses to the extent such person has been successful in the
defense of any proceeding or claim. KnowledgeWare may advance expenses to
directors and officers upon receipt of an undertaking by such directors or
officers to repay such amount if it is ultimately determined that such officers
or directors are not entitled to indemnification. Moreover, under certain
circumstances a director or officer or KnowledgeWare may apply for
indemnification for expenses to a court. The KnowledgeWare Articles of
Incorporation and Bylaws generally provide that KnowledgeWare shall indemnify
each of its directors and officers to the fullest extent permitted by Georgia
law and that the Bylaws are not the exclusive right under which directors and
officers may be entitled to indemnification. Notwithstanding the above rights
of an officer or director to indemnification, KnowledgeWare shall not indemnify
a director or officer for any liability incurred in a proceeding in which the
director or officer is adjudged liable to KnowledgeWare or is subjected to
injunctive relief in favor of KnowledgeWare: (i) for any appropriation in
violation of his duties of any business opportunity of KnowledgeWare; (ii) for
acts or omissions which involve intentional misconduct or a knowing violation
of law; (iii) for any transaction from which he received an improper personal
benefit; or (iv) certain other types of liability set forth under Georgia law.
In addition, Georgia law and KnowledgeWare's Articles of Incorporation and
Bylaws authorize KnowledgeWare to purchase insurance for directors, officers
and employees, whether or not KnowledgeWare has the power to indemnify that
person.
DISSENTERS' RIGHTS
Sterling. Under Delaware law, any stockholder of a Delaware corporation has
the right to dissent from any merger or consolidation, except as described
below, of which the corporation is a constituent corporation. No such appraisal
rights are available for the shares of any class or series of stock of a
Delaware corporation if (i) as of the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, such shares
were either listed on a national securities exchange or held of record by more
than 2,000 stockholders or (ii) such corporation is the surviving corporation
of the merger and the merger did not require the approval of such corporation's
stockholders, unless in either case, the holders of such stock are required by
the agreement of merger or consolidation to accept for that stock something
other than: (a) shares of stock of the corporation surviving or resulting from
the merger or consolidation; (b) shares of stock of any other corporation that,
at the effective
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date of the merger, will be listed on a national securities exchange or held of
record by more than 2,000 stockholders; (c) cash in lieu of fractional shares
of a corporation described in clause (a) or (b) above; or (d) any combination
of the shares of stock and cash in lieu of fractional shares described in
clauses (a) through (c) above. Because Sterling is not a constituent
corporation of the Merger, stockholders of Sterling do not have dissenters'
rights with respect to the Merger.
KnowledgeWare. Under Georgia law, a stockholder is entitled to dissent and
obtain payment of the fair value of his shares in the event of: (i)
consummation of a plan of merger to which the corporation is a party, if either
(a) stockholder approval is required and the stockholder is entitled to vote on
the merger or (b) the corporation is a subsidiary that is merged into its
parent; (ii) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the stockholder
is entitled to vote on the plan; (iii) consummation of a sale or exchange of
all or substantially all of the property of the corporation, if stockholder
approval is required; (iv) an amendment to the articles of incorporation that
materially and adversely affects the rights of the dissenter's shares in
specified ways; or (v) any corporate action pursuant to a stockholder vote to
the extent that the articles of incorporation, bylaws, or board resolution
provide that dissenters' rights shall apply. No holder of any shares of any
class or series is entitled to dissent, however, if such shares are either
listed on a national securities exchange or held of record by more than 2,000
stockholders, unless: (i) in the case of a plan of merger or share exchange,
the holders of shares of that class or series are required to accept for their
shares anything except shares of the surviving corporation or another publicly
held company that as of the effective date of such plan of merger or share
exchange are either listed on a national securities exchange or held of record
by more than 2,000 stockholders, or cash payments in lieu of fractional shares;
or (ii) the articles of incorporation or a resolution of the board of directors
approving the transaction provide otherwise. Because the NASDAQ National Market
is defined to be a national securities exchange for the purposes of the GBCC,
and the Sterling Common Stock is traded on the NYSE, stockholders of
KnowledgeWare do not have dissenters' rights with respect to the Merger.
EXPERTS
The consolidated financial statements and financial statement schedules
appearing in Sterling's Annual Report on Form 10-K for the year ended September
30, 1993, as amended by Form 10-K/A Amendment No. 1 filed January 26, 1994,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated by reference herein,
which as to the years 1992 and 1991, are based in part on the report of Arthur
Andersen LLP, independent public accountants. Such consolidated financial
statements and schedules are incorporated herein by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting
and auditing.
The consolidated financial statements of KnowledgeWare, Inc. and subsidiaries
as of June 30, 1994 and 1993 and for each of the three years in the period
ending June 30, 1994 incorporated by reference in this Proxy
Statement/Prospectus have been incorporated herein on the report, which
includes an explanatory paragraph about KnowledgeWare's ability to continue as
a going concern, of Coopers & Lybrand L.L.P., independent certified public
accountants, given upon the authority of that firm as experts in accounting and
auditing.
STOCKHOLDER PROPOSALS
If the Merger is not consummated, pursuant to Rule 14a-8 of the Exchange Act
and the Proxy Statement relating to KnowledgeWare's 1993 Annual Meeting of
Shareholders, KnowledgeWare stockholders must have presented appropriate
proposals for consideration at such meeting not later than June 28, 1994. Any
such required date with respect to proposals to be submitted in connection with
the 1995 Annual Meeting of Shareholders will be set forth in KnowledgeWare's
Proxy Statement for the 1994 Annual Meeting, if any such meeting is held.
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OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Board of Directors of
KnowledgeWare knows of no matters which will be presented for consideration at
the Special Meeting other than as described in this Proxy Statement/Prospectus.
However, if any other matter shall come before the Special Meeting or any
adjournment or postponement thereof and be voted upon, the proposed proxy will
be deemed to confer discretionary authority to the individuals named as
authorized therein to vote the shares represented by such proxy as to any such
matters.
LEGAL MATTERS
The validity of the shares of Sterling Common Stock to be issued in
connection with the Merger will be passed upon by Jackson & Walker, L.L.P.,
Dallas, Texas. Michael C. French, a partner in Jackson & Walker, is a director
of Sterling. The federal income tax consequences in connection with the Merger
will be passed upon for Sterling by Jackson & Walker and for KnowledgeWare by
Hicks, Maloof & Campbell.
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
YOUR PROXY IN ORDER TO ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE
MEETING. THE GIVING OF SUCH PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON
IN THE EVENT YOU ATTEND THE MEETING.
TRADEMARK INFORMATION
The following product names used herein are registered or unregistered
trademarks owned by Sterling: ANSWER, ANSWER:Architect, ANSWER:Builder,
ANSWER:Journey, ANSWER:Testpro, ANSWER:Transact, ANSWER:Zim, COMMERCE:Complete,
COMMERCE:Connection, COMMERCE:Institute, COMMERCE:Marketquest,
COMMERCE:Network, COMMERCE:Resource, CONNECT:Direct, CONNECT:Mailbox,
CONNECT:Queue, GENTRAN, GENTRAN:Basic, GENTRAN:Control, GENTRAN:Dataguard,
GENTRAN:Excel, GENTRAN:Plus, GENTRAN:Realtime, GENTRAN:Server,
GENTRAN:Structure, GENTRAN:Viewpoint, SAMS:Allocate, SAMS:Compress, SAMS:Disk,
SAMS:Expert, SAMS:Save, SAMS:Vantage, SOLVE:Asset, SOLVE:Automation,
SOLVE:Change, SOLVE:Configuration, SOLVE:Monitor, SOLVE:Netmaster,
SOLVE:Problem, SOLVE:Stat, VECTOR, VECTOR:Connexion, VM:Center and VM:Manager.
The following product names used herein are registered or unregistered
trademarks owned by KnowledgeWare or in which KnowledgeWare claims ownership:
KnowledgeWare, Application Development Workbench, ADW, Legacy Workbench,
Viewpoint, Flashpoint, ObjectView, ObjectView Desktop, ObjectView Enterprise,
ClearAccess, ClearManager, MAXIM, Recoder, NorthStar and Matesys.
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
entered into this 31st day of August 1994, to be effective as of July 31, 1994,
among KNOWLEDGEWARE, INC., a Georgia corporation (the "Corporation"), STERLING
SOFTWARE, INC., a Delaware corporation ("Buyer"), and SSI CORPORATION, a
Georgia corporation and a wholly-owned subsidiary of Buyer ("Merger Sub").
RECITALS
A. The Boards of Directors of the Corporation and Buyer each have determined
that a business combination between Buyer and the Corporation is in the best
interests of their respective companies and stockholders, and presents an
opportunity for their respective companies to achieve long-term strategic
objectives, and accordingly have agreed to effect the merger provided for
herein upon the terms and subject to the conditions set forth herein.
B. The Corporation, Buyer and Merger Sub on July 31, 1994 entered into an
Agreement and Plan of Merger (the "Original Agreement"), and now desire to
amend and restate the Original Agreement in its entirety as set forth herein.
C. To induce Buyer to enter into the Original Agreement, simultaneously with
the execution and delivery of the Original Agreement, the Corporation and Buyer
entered into a Stock Option Agreement, and the Corporation and Buyer have
entered into an Amended and Restated Stock Option Agreement dated as of the
date hereof (as so amended and restated, the "Stock Option Agreement"),
pursuant to which the Corporation has granted to Buyer an option to acquire
shares of common stock of the Corporation upon the occurrence of certain events
and in accordance with certain terms and conditions set forth in the Stock
Option Agreement.
D. To further induce Buyer to enter into the Original Agreement, certain
holders of common stock of the Corporation have entered into Stockholder
Agreements, dated as of July 31, 1994, and such stockholders have entered into
Amended and Restated Stockholder Agreement (as so amended and restated, the
"Stockholder Agreements"), with Buyer pursuant to which such stockholders have
agreed to vote their Shares (as hereinafter defined) in favor of the Merger (as
hereinafter defined).
E. The Board of Directors of the Corporation has approved the acquisition of
shares of the Corporation pursuant to the Stock Option Agreement and the
transactions contemplated by the Stockholder Agreements in accordance with the
provisions of Sections 14-2-1111(1) and 14-2-1132(a)(1) of the Georgia Business
Corporation Code (the "GBCC").
F. The Corporation, Buyer and Merger Sub desire to make certain
representations, warranties and agreements in connection with the Merger.
G. The merger provided for herein may be qualified for federal income tax
purposes as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), in Buyer's sole discretion and
if such qualification is available.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
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ARTICLE 1
1. THE MERGER.
1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with
and into the Corporation in accordance with this Agreement and the separate
corporate existence of Merger Sub shall thereupon cease (the "Merger"). The
Corporation shall be the surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation") and shall continue to
be governed by the laws of the State of Georgia, and the separate corporate
existence of the Corporation with all its rights, privileges, powers,
immunities, purposes and franchises shall continue unaffected by the Merger,
except as set forth in Articles 2 and 3. The Merger shall have the effects
specified in the GBCC.
1.2. The Closing. The closing of the Merger (the "Closing") shall take place
(i) at the executive offices of Buyer, in the State of Texas, at 9:00 a.m.,
local time, on the first business day immediately following the day on which
the last to be fulfilled or waived of the conditions set forth in Article 8
shall be fulfilled or waived in accordance herewith or (ii) at such other time
and place and/or on such other date as the Corporation and Buyer may agree. The
date on which the Closing occurs is hereafter referred to as the "Closing
Date."
1.3. Effective Time. If all the conditions to the Merger set forth in Article
8 shall have been fulfilled or waived in accordance herewith and this Agreement
shall not have been terminated in accordance with Article 9, the parties hereto
shall cause a Certificate of Merger meeting the requirements of Section 14-2-
1105(b) of the GBCC to be properly executed and filed in accordance with such
Section on the Closing Date. The Merger shall become effective at the time of
the filing of the Certificate of Merger in accordance with the GBCC or at such
later time which the parties hereto have theretofore agreed upon and designated
in such filing as the effective time of the Merger (the "Effective Time").
ARTICLE 2
2. ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
2.1. Articles of Incorporation. Effective at the Effective Time and subject
to the provisions of Section 7.17, the Articles of Incorporation of the
Corporation shall be the Articles of Incorporation of the Surviving
Corporation, as amended as set forth in Exhibit 2.1.
2.2. Bylaws. Subject to the provisions of Section 7.17, the Bylaws of Merger
Sub in effect immediately prior to the Effective Time shall be the Bylaws of
the Surviving Corporation, until duly amended in accordance with their terms
and the GBCC.
ARTICLE 3
3. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.
3.1. Directors. The persons who are directors of Merger Sub immediately prior
to the Effective Time shall, from and after the Effective Time, be and become
directors of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Articles of
Incorporation and Bylaws.
3.2. Officers. The officers of the Corporation shall continue as officers of
the Surviving Corporation until their resignation or removal.
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ARTICLE 4
4. CONVERSION OF SHARES IN THE MERGER.
4.1. Conversion of Shares. The manner of converting shares of the Corporation
and Merger Sub in the Merger shall be as follows:
(i) Subject to the provisions of Section 4.4, at the Effective Time, each
share of the Common Stock, without par value (the "Shares"), of the
Corporation issued and outstanding immediately prior to the Effective Time
(other than Shares owned by Buyer, Merger Sub or any other subsidiary of
Buyer (the "Buyer Group")) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the right to
receive .1653 share of Common Stock, par value $.10 per share (the "Buyer
Common Stock") of Buyer (the "Exchange Ratio").
(ii) As a result of the Merger and without any action on the part of the
holder thereof, all Shares (other than Shares owned by the Buyer Group)
shall cease to be outstanding and shall be cancelled and retired and shall
cease to exist, and each holder of a certificate (a "Certificate")
representing any Shares shall thereafter cease to have any rights with
respect to such Shares, except the right to receive, without interest, the
Buyer Common Stock and cash for fractional interests of the Buyer Common
Stock in accordance with Section 4.1(i) upon the surrender of such
Certificate.
(iii) The warrants (the "Warrants") issued pursuant to that certain
Warrant Agreement (the "Warrant Agreement") dated as of June 9, 1994
between the Corporation and Trust Company Bank and outstanding at the
Effective Time shall, by virtue of the Merger, and without any further
action on the part of the Corporation or the holder of any Warrant, be
assumed by Buyer. The Warrants assumed by Buyer shall be exercisable upon
the same terms and conditions existing at the date hereof except that (a)
the Warrants shall be exercisable for that whole number of shares of Buyer
Common Stock (to the nearer whole share) into which the number of Shares
subject to the Warrants immediately prior to the Effective Time would be
converted, and (b) the exercise price per share of Buyer Common Stock shall
be an amount equal to the "Purchase Price" (as such term is used in the
Warrant Agreement) per Share immediately prior to the Effective Time (i.e.,
the exercise price of $17.50 per Share as it may be adjusted pursuant to
the terms of the Warrant Agreement) divided by the Exchange Ratio (the
exercise price per share, as so determined, being rounded upward to the
nearest full cent). No payment shall be made for fractional interests.
(iv) Each Share issued and outstanding at the Effective Time and owned by
any of the Buyer Group, and each Share issued and held in the Corporation's
treasury at the Effective Time, by virtue of the Merger and without any
action on the part of the holder thereof, shall cease to be outstanding and
shall be cancelled and retired without payment of any consideration
therefor and shall cease to exist.
(v) At the Effective Time, each share of Common Stock, par value $.10 per
share, of Merger Sub issued and outstanding immediately prior to the
Effective Time as result of the Merger shall be converted and exchanged for
one newly and validly issued, fully paid and nonassessable share of Common
Stock of the Surviving Corporation.
(vi) At the Effective Time, all options (individually, a "Corporation
Option" or collectively, the "Corporation Options") then outstanding under
the Corporation's Incentive Stock Option Plan of 1984, Second Incentive
Stock Option Plan of 1984, 1988 Stock Incentive Plan, 1989 Non-Employee
Directors Stock Option Plan, 1989 Employee Stock Purchase Plan and 1993
Non-Employee Directors Stock Option Plan (collectively, the "Corporation
Stock Option Plans") shall remain outstanding following the Effective Time
and shall remain exercisable pursuant to the terms of such plans. At the
Effective Time, such Corporation Options shall, by virtue of the Merger and
without any further action on the part of the Corporation or the holder of
any such Corporation Options, be assumed by Buyer in such manner that Buyer
(a) is a corporation "assuming a stock option in a transaction to which
Section 424(a) applied" within the meaning of Section 424 of the Code, or
(b) to the extent that Section 424 of the Code does not apply to any such
Corporation Option, would be such a corporation were Section 424 applicable
to such option. Each Corporation Option assumed by Buyer shall be
exercisable upon the
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same terms and conditions as under the applicable Corporation Stock Option
Plan and the applicable option agreement issued thereunder, except that (a)
each such Corporation Option shall be exercisable for that whole number of
shares of Buyer Common Stock (to the nearer whole share) into which the
number of Shares subject to such Option immediately prior to the Effective
Time would be converted under this Section 4.1, and (b) the option exercise
price per share of Buyer Common Stock shall be an amount equal to the
option price per Share subject to such Corporation Option in effect prior
to the Effective Time divided by the Exchange Ratio (the price per share,
as so determined, being rounded upward to the nearest full cent). The
Corporation Disclosure Letter (as hereinafter defined) sets forth, as to
each holder of a Corporation Option, the name of such holder, the number of
Shares subject to such Corporation Option, the Corporation Stock Option
Plan pursuant to which such Corporation Option was issued, the vesting
schedule and the expiration date of such Corporation Option. No payment
shall be made for fractional interests. From and after the date of this
Agreement, no additional options shall be granted by the Corporation or its
subsidiaries under the Corporation Stock Option Plans or otherwise.
4.2. Exchange of Certificates Representing Shares.
(i) As of the Effective Time, Buyer shall make available, or shall cause
to be made available, with an exchange agent selected by Buyer, which shall
be Buyer's Transfer Agent or such other party reasonably satisfactory to
the Corporation (the "Exchange Agent"), for the benefit of the holders of
Shares, for exchange in accordance with this Article 4, certificates
representing a sufficient number of shares of Buyer Common Stock necessary
for the Exchange Agent to make payments pursuant to Section 4.1 hereof
(such certificates for shares of Buyer Common Stock, together with the
amount of any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") in exchange for outstanding
Shares.
(ii) Promptly after the Effective Time, Buyer shall cause the Exchange
Agent to mail to each person who was, at the Effective Time, a holder of
record (other than any of the Buyer Group) of a Certificate or Certificates
(i) a letter of transmittal which shall specify that delivery shall be
effected, and the risk of loss and title to the Certificates shall pass,
upon (and only upon) delivery of the Certificates to the Exchange Agent,
and which shall be in such form and have such other provisions as Buyer and
the Exchange Agent may reasonably specify, and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing Buyer Common Stock. Promptly following the surrender to the
Exchange Agent of a Certificate for cancellation together with such letter
of transmittal, duly executed and completed in accordance with the
instructions thereto, the Exchange Agent shall deliver to the holder of
such Certificate in exchange therefor a certificate representing that
number of shares of Buyer Common Stock and unpaid dividends and
distributions, if any, which such holder has the right to receive in
respect of the Certificate surrendered pursuant to the provisions of this
Article 4, after giving effect to any required tax withholdings, and the
Certificate so surrendered shall forthwith be cancelled. No interest will
be paid or accrued on the amount payable upon surrender of Certificates. In
the event of a transfer of ownership of Shares which is not registered in
the transfer records of the Corporation, a certificate representing the
proper number of shares of Buyer Common Stock may be issued to such a
transferee if the Certificate representing such Shares is presented to the
Exchange Agent, accompanied by all documents required by the Exchange Agent
to evidence and effect such transfer of Shares and to evidence that any
applicable stock transfer taxes have been paid.
(iii) Notwithstanding any other provisions of this Agreement, no
dividends on Buyer Common Stock shall be paid with respect to any Shares or
other securities represented by a Certificate until such Certificate is
surrendered for exchange as provided herein. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall
be paid to the holder of certificates representing shares of Buyer Common
Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to
such shares of Buyer Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the
appropriate payment date, the
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amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender thereof and a payment date subsequent
to surrender thereof payable with respect to such shares of Buyer Common
Stock, less the amount of any withholding taxes which may be required
thereon.
(iv) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Corporation of Shares which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for certificates for shares of Buyer Common Stock
in accordance with the procedures set forth in this Article 4. Certificates
surrendered for exchange by any person constituting an "affiliate" of the
Corporation within the meaning of Rule 145(c) under the Securities Act of
1933, as amended (the "Securities Act"), shall not be exchanged until Buyer
has received a written agreement from such person as provided in Section
7.13.
(v) Notwithstanding Section 4.1 or any other provision of this Section
4.2, no fractional shares of Buyer Common Stock will be issued and any
holder of Shares entitled hereunder to receive a fractional share of Buyer
Common Stock but for this Section 4.2(v) will be entitled hereunder to
receive no such fractional share of Buyer Common Stock but a cash payment
in lieu thereof, which payment shall represent such holder's proportionate
interest in the net proceeds from the sale by the Exchange Agent on behalf
of all such holders of the aggregate fractional shares of Buyer Common
Stock that such holders would be entitled to receive but for this Section
4.2(v). Any such sale shall be made by the Exchange Agent within ten
business days after the date upon which the Certificate(s) that would
otherwise result in the issuance of shares of Buyer Common Stock have been
received by the Exchange Agent.
(vi) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Buyer Common Stock) that is unclaimed
by the former stockholders of the Corporation during the one year period
after the Effective Time shall be delivered to the Surviving Corporation.
Any former stockholders of the Corporation who have not theretofore
complied with this Article 4 shall thereafter look to the Surviving
Corporation only as general creditors for payment of their shares of Buyer
Common Stock, and cash in lieu of fractional shares, and unpaid dividends
and distributions on shares of Buyer Common Stock, deliverable in respect
of each Share such stockholder holds as determined pursuant to this
Agreement, in each case without any interest thereon.
(vii) None of the Corporation, the Surviving Corporation, Merger Sub, the
Exchange Agent or any other person shall be liable to any former holder of
Shares for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(viii) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate shares of Buyer Common Stock and cash in
lieu of fractional shares, and unpaid dividends and distributions on shares
of Buyer Common Stock as provided in Section 4.2(iii), deliverable in
respect thereof pursuant to this Agreement.
4.3. Adjustment of Exchange Ratio. In the event that between the date of this
Agreement and the Effective Time, Buyer or the Corporation changes the number
of shares of Buyer Common Stock or Shares issued and outstanding as a result of
a stock split, reverse stock split, stock dividend, recapitalization or other
similar transaction, the Exchange Ratio shall be appropriately adjusted.
4.4. Escrow. Of the aggregate shares of Buyer Common Stock issuable upon
consummation of the Merger at the Effective Time, Buyer shall deposit in escrow
a number of shares of Buyer Common Stock equal to 20% of the total number of
shares of Buyer Common Stock to be issued in connection with the Merger (the
"Escrowed Shares"), pursuant to the terms of an Escrow Agreement (the "Escrow
Agreement") in the form attached hereto as Exhibit 4.4, to be entered into
among the Corporation, Buyer and an escrow
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agent to be selected by Sterling, which may be the Exchange Agent (the "Escrow
Agent"). The Escrowed Shares shall be issued in the name of the Escrow Agent
and shall be released if and as permitted under the terms of the Escrow
Agreement to the record holders of Shares as of the Effective Time pro rata
based on the number of Shares held by such holders at the Effective Time;
provided that such holders shall have complied with Section 4.2 in connection
with the surrender of their Certificates. No fractional shares of Buyer Common
Stock will be issued in connection with any distribution of Escrowed Shares and
any person that would otherwise be entitled under the Escrow Agreement to
receive a fractional share will receive a cash payment in lieu thereof, which
payment shall represent such holder's proportionate interest in the net
proceeds from the sale by the Escrow Agent, within ten business days following
the date of the final disbursement of the Escrowed Shares, on behalf of all
such persons of the aggregate fractional shares of Buyer Common Stock that such
persons would otherwise be entitled to receive.
ARTICLE 5
5. Representations and Warranties of the Corporation. Except as set forth in
the disclosure letter delivered at or prior to the execution hereof to Buyer
(the "Corporation Disclosure Letter"), the Corporation represents and warrants
to Buyer as of the date of this Agreement as follows:
5.1. Existence; Good Standing; Corporate Authority; Compliance With Law. The
Corporation is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation. The Corporation
is duly licensed or qualified to do business as a foreign corporation and is in
good standing under the laws of any other state of the United States in which
the character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where
the failure to be so qualified would not have a material adverse effect on the
Corporation. As used in this Agreement, the term "material adverse effect"
means, with respect to any entity, a material adverse effect on the financial
condition, properties, business or results of operations of such entity and its
subsidiaries taken as a whole, or on the ability of such entity to perform its
obligations hereunder or to consummate the transactions contemplated hereby.
The Corporation has all requisite corporate power and authority to own, operate
and lease its properties and carry on its business as now conducted. The
Corporation is not in default with respect to any order of any court,
governmental authority or arbitration board or tribunal to which the
Corporation is a party or is subject, and the Corporation is not in violation
of any laws, ordinances, governmental rules or regulations to which it is
subject, where such default or violation would have a material adverse effect
on the Corporation. The Corporation has obtained all licenses, permits and
other authorizations and has taken all actions required by applicable law or
governmental regulation in connection with its business as now conducted where
the failure to obtain any such item or to take any such action would have a
material adverse effect on the Corporation. The copies of the Corporation's
Articles of Incorporation and Bylaws previously delivered to Buyer are true and
correct.
5.2. Authorization, Validity and Effect of Agreements. The Corporation has
the requisite corporate power and authority to execute and deliver this
Agreement and the Stock Option Agreement and all agreements and documents
contemplated hereby, and the consummation by the Corporation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action (subject, in the case of this Agreement, only to the
approval of the Merger by the holders of a majority of the outstanding Shares
in accordance with the GBCC). This Agreement and the Stock Option Agreement
constitute, and all agreements and documents contemplated hereby (when executed
and delivered pursuant hereto for value received) will constitute, the valid
and legally binding obligations of the Corporation enforceable in accordance
with their terms.
5.3. Capitalization. The authorized capital stock of the Corporation consists
of 100,000,000 Shares and 50,000,000 shares of preferred stock, no par value
(the "Preferred Stock"). As of June 30, 1994, there were 14,562,381 Shares
issued and outstanding. As of such date there were no shares of Preferred Stock
issued and outstanding. Since such date, no additional shares of capital stock
of the Corporation have been issued
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except pursuant to the Corporation Stock Option Plans and the Warrants. Other
than Shares reserved for issuance pursuant to the Stock Option Agreement, the
Corporation has no Shares or shares of Preferred Stock reserved for issuance,
except that, as of the above-referenced date, 59,979 Shares were reserved for
issuance pursuant to the Incentive Stock Option Plan of 1984 and the Second
Incentive Stock Option Plan of 1984, 1,487,701 Shares were reserved for
issuance pursuant to the 1988 Stock Incentive Plan, 6,000 Shares were reserved
for issuance pursuant to the 1989 Non-Employee Directors Stock Option Plan,
392,778 Shares were reserved for issuance pursuant to the 1989 Employee Stock
Purchase Plan, 50,000 Shares were reserved for issuance pursuant to the 1993
Directors Plan and 500,000 Shares were reserved for issuance pursuant to the
Warrants. The Corporation has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or are convertible
into or exercisable for securities having the right to vote) with the
stockholders of the Corporation on any matter ("Voting Debt"). All such issued
and outstanding Shares are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Other than as set forth above or
in the Corporation Disclosure Letter, or as contemplated by this Agreement or
the Stock Option Agreement, there are not at the date of this Agreement any
existing options, warrants, calls, put rights, subscriptions, convertible
securities, or other rights or other agreements or commitments which obligate
the Corporation or any of its subsidiaries to issue, transfer, sell or purchase
any shares of capital stock of the Corporation or any of its subsidiaries.
After the Effective Time, the Surviving Corporation will have no obligation to
issue, transfer or sell any Shares or shares of Preferred Stock or any other
securities of the Surviving Corporation pursuant to any Benefit Plan (as
defined in Section 5.12) or Corporation Stock Option Plan.
5.4. Subsidiaries. The Corporation owns directly or indirectly each of the
outstanding shares of capital stock of each of the Corporation's subsidiaries
(individually, a "Corporation Subsidiary" and collectively, the "Corporation
Subsidiaries"), except as set forth in the Corporation Reports (as defined in
Section 5.7) filed prior to the date of this Agreement and the Corporation
Disclosure Letter and except shares held by officers and directors of the
Corporation and Corporation Subsidiaries or agents of the Corporation as
nominees for the benefit of the Corporation or any Corporation Subsidiary. Each
of the outstanding shares of capital stock of each of the Corporation
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
(or, in the case of foreign Corporation Subsidiaries, is appropriately
authorized, validly issued and, if applicable under local law, nonassessable),
and except as set forth in the Corporation Disclosure Letter are owned,
directly or indirectly, by the Corporation free and clear of all liens,
pledges, security interests, claims or other encumbrances. The following
information for each Corporation Subsidiary is set forth in the Corporation
Disclosure Letter, as applicable: (i) its name and jurisdiction of
incorporation; (ii) its authorized capital stock or share capital; (iii) the
number of issued and outstanding shares of capital stock or share capital; and
(iv) the names of its directors, officers and/or managing director.
5.5. Other Interests. Except as set forth in the Corporation Disclosure
Letter, neither the Corporation nor any Corporation Subsidiary owns directly or
indirectly any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity (other than
investments in short-term investment securities and teaming, corporate
partnering, development, cooperative marketing and similar undertakings and
arrangements entered into in the ordinary course of business).
5.6. Noncontravention. Except as set forth in the Corporation Disclosure
Letter, neither the execution and delivery by the Corporation of this Agreement
or the Stock Option Agreement, nor the consummation by the Corporation of the
transactions contemplated hereby and thereby in accordance with the terms
hereof and thereof, will: (i) conflict with or result in a breach of any
provisions of the Articles of Incorporation or Bylaws of the Corporation; (ii)
except as disclosed in the Corporation Reports (as hereinafter defined) or the
Corporation Disclosure Letter, result in a breach or violation of, a default
under, or the triggering of any payment or other material obligations pursuant
to, or accelerate vesting under, any of the Corporation Stock Option Plans or
any grant or award made under any of the Corporation Stock Option Plans, (iii)
violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or in a right
of
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termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of the Corporation under, or result in
being declared void, voidable, or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any material license, franchise, permit, lease, contract, agreement or
other instrument or commitment or obligation to which the Corporation or any of
the Corporation Subsidiaries is a party ("Contracts") (other than Contracts
with customers, software license agreements with third parties relating to the
use of commercially available software and Contracts for the purchase or lease
of tangible personal property entered into in the ordinary and usual course of
business, but including without limitation, strategic alliance agreements,
third party software development agreements and third party software license
agreements relating to software incorporated into the Corporation's software
products, and other than Contracts which require the consent of the other party
or parties thereto to assign or transfer to Merger Sub or Buyer by reason of
the execution of this Agreement or the consummation of the transactions
contemplated hereby which required consents are set forth in the Corporation
Disclosure Letter and with respect to which the parties hereto shall use
reasonable efforts to obtain prior to the Closing), or by which the Corporation
or any of its properties is bound or affected except with respect to matters
which are not material to the Corporation; or (iv) other than the filings
provided for in Article 1, as required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") and under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the Securities Act, applicable state
securities and "Blue Sky" laws, and the rules and regulations promulgated by
the National Association of Securities Dealers, Inc. and in connection with the
maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any material consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority, domestic or foreign, of which the failure
to obtain would have a material adverse effect on the Corporation.
5.7 Reports; Financial Statements. The Corporation has delivered to Buyer
each registration statement, report, proxy statement or information statement
prepared by it since June 30, 1993, including, without limitation, (i) its
Annual Report on Form 10-K for the year ended June 30, 1993, (ii) its Quarterly
Reports on Form 10-Q for the periods ended September 30, 1993, December 31,
1993 and March 31, 1994 and (iii) its Annual Report on Form 10-K for the year
ended June 30, 1994, each in the form (including exhibits and any amendments
thereto) filed with the Securities and Exchange Commission (the "SEC")
(collectively, the "Corporation Reports"). As of their respective dates, except
as set forth in the Corporation Disclosure Letter, the Corporation Reports (i)
were prepared in all material respects in accordance with the requirements of
the Securities Act, the Exchange Act, and the rules and regulations thereunder
and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. Except as set forth in the Corporation Disclosure
Letter, each of the consolidated balance sheets included in or incorporated by
reference into the Corporation Reports (including the related notes and
schedules) fairly presents the consolidated financial position of the
Corporation and the Corporation Subsidiaries as of its date and each of the
consolidated statements of income, retained earnings and of cash flows included
in or incorporated by reference into the Corporation Reports (including any
related notes and schedules) fairly presents the results of operations,
retained earnings and cash flows, as the case may be, of the Corporation and
the Corporation Subsidiaries for the periods set forth therein (subject, in the
case of unaudited balance sheets and statements, to normal year-end audit
adjustments which would not be material in amount or effect), in each case in
accordance with the published rules and regulations of the SEC and generally
accepted accounting principles consistently applied during the periods
involved, except as may be noted therein. Except as and to the extent set forth
on the consolidated balance sheet of the Corporation and the Corporation
Subsidiaries at June 30, 1993 or at June 30, 1994, including all notes thereto,
neither the Corporation nor any of the Corporation Subsidiaries has any
material liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on, or reserved
against in, a balance sheet of the Corporation or in the notes thereto,
prepared in accordance with the published rules and regulations of the SEC and
generally accepted accounting principles consistently applied, except
liabilities arising in the ordinary course of business since such date. Except
as set forth in the Corporation Disclosure
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Letter, other than the Corporation Reports and any reports filed subsequent to
the date hereof, the Corporation has not filed any other definitive reports or
statements with the SEC since June 30, 1994.
5.8. Litigation. Except as disclosed in the Corporation Disclosure Letter,
there are no actions, suits or proceedings pending against the Corporation or
the Corporation Subsidiaries or, to the actual knowledge of the executive
officers of the Corporation, threatened against the Corporation or the
Corporation Subsidiaries, at law or in equity, or before or by any federal,
state, commission, board, bureau, agency or instrumentality that are reasonably
likely to have a material adverse effect on the Corporation.
5.9. Absence of Certain Changes. Except as disclosed in the Corporation
Reports filed with the SEC on or prior to the date hereof, the Corporation
Disclosure Letter and except for changes arising from the public announcement
of the transactions contemplated by this Agreement, since June 30, 1993, the
Corporation has conducted its business only in the ordinary course of such
business and there has not been (i) any change in the Corporation or any
development or combination of developments of which any of its executive
officers has actual knowledge which has resulted or is reasonably likely to
result in a material adverse effect on the Corporation; (ii) any declaration,
setting aside or payment of any dividend or other distribution with respect to
its capital stock; or (iii) any material change in its accounting principles,
practices or methods.
5.10. Taxes and Tax Returns. The Corporation and each Corporation Subsidiary
(i) has timely filed all material federal, state and foreign income, franchise,
property, sales, use, payroll and other tax returns and reports required to be
filed by it for its tax years ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request shall have
been granted and not expired and all such filed returns are complete in all
material respects, (ii) has paid or accrued all taxes shown to be due and
payable on such returns, (iii) has properly accrued all such taxes for such
periods subsequent to the periods covered by such returns, and (iv) the "open"
years for federal income tax returns are set forth in the Corporation
Disclosure Letter.
5.11. Proprietary Rights. The Corporation and the Corporation Subsidiaries
own or have the right to use pursuant to lease or license computer software
programs, which, in the aggregate, are sufficient and adequate to operate the
business of the Corporation and the Corporation's Subsidiaries. The Corporation
Disclosure Letter sets forth all current versions or releases of the computer
software programs ("software") owned or marketed by the Corporation or the
Corporation Subsidiaries (other than commercially available software products
which are not material to the Corporation). Except as set forth in the
Corporation Disclosure Letter, the Corporation or one of the Corporation
Subsidiaries has good and marketable rights, title and interest in and to all
versions or releases of that software, free and clear of any liens, charges,
restrictions or encumbrances or rights of any third party. Neither the
existence nor use in the business of the Corporation or any Corporation
Subsidiary of any version or release of any software program set forth in the
Corporation Disclosure Letter infringes on any patent, trademark or copyright,
violates any trade secret, know how, process or proprietary information of any
third party or entitles any third party to any interest in or right to
compensation from the Corporation or any Corporation Subsidiary by reason of
the use, exploitation or sale of any such software programs. Except with
respect to programs licensed to the Corporation or one of the Corporation
Subsidiaries and set forth in the Corporation Disclosure Letter, the
Corporation or one of the Corporation Subsidiaries is in actual possession of
the source code of each software program set forth in the Corporation
Disclosure Letter and the Corporation or one of the Corporation Subsidiaries is
in possession of all other documentation necessary for the effective use of
each such software. The Corporation Disclosure Letter lists, by program, all
third parties which have been provided with the source code to any of the
software listed in the Corporation Disclosure Letter and any parties who would
be entitled to receive such source code as a result of transactions
contemplated by this Agreement. There are no defects in any of the software
offered by the Corporation or any of the Corporation Subsidiaries in connection
with its business which would, in any material and adverse respect, affect the
functioning of any such software in accordance with the specifications therefor
published by the Corporation or any of the Corporation Subsidiaries or provided
to its customers or prospective customers, and each piece of such software,
together
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with all know how and process used in connection therewith, functions as
intended, is in machine readable form, conforms to all applicable standards,
contains all current revisions of such software and includes all computer
programs, materials, tapes, know how, object and source codes and procedures
used by it in the conduct of its business. Except for rights of customers under
Contracts or as disclosed in the Corporation Disclosure Letter, no other person
has (i) any interest of any kind or nature in or with respect to any software
program or portion thereof set forth in the Corporation Disclosure Letter, or
(ii) any rights to use, market or exploit any such software program or portion
thereof. The Corporation has registered the trademarks, service marks and
copyrights identified in the Corporation Disclosure Letter, such trademarks,
service marks and copyrights do not infringe upon the rights of any third
parties, nor have any claims been asserted with respect thereto, which
infringement would have a material adverse effect on the Corporation. To the
actual knowledge of the executive officers of the Corporation, there exist no
material defaults under contracts with Rottger & Osterberg Software - Technik
GmbH, Burl Software Laboratories, Inc., Object Design, Inc., Integrated
Microcomputer Systems, Inc., and International Business Machines Corporation
("IBM"); provided, however, this sentence shall not apply to the following
contracts: (i) Stockholders Agreement dated as of August 18, 1989, by and among
IBM, Francis A. Tarkenton, James Martin, Arthur Young United States and the
Corporation, (ii) Common Stock Purchase Agreement by and between the
Corporation and IBM, and (iii) Revolving Loan and Security Agreement by and
between IBM Credit Corporation and the Corporation.
5.12. Employee Benefit Plans. All material employee benefit plans covering
employees of the Corporation and the Corporation Subsidiaries, other than the
Corporation Stock Option Plans, are listed in the Corporation Reports (the
"Benefit Plans") and the Corporation Disclosure Letter. To the extent
applicable, the Benefit Plans comply, in all material respects, with the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code, and any Benefit Plan intended to be qualified under
Section 401(a) of the Code has been determined by the Internal Revenue Service
to be so qualified. No Benefit Plan is covered by Title IV of ERISA or Section
412 of the Code. Neither a Benefit Plan nor the Corporation has incurred any
liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA.
Each Benefit Plan has been maintained and administered in all material respects
in compliance with its terms and with ERISA and the Code to the extent
applicable thereto. To the knowledge of the executive officers of the
Corporation, there are no pending or anticipated material claims against or
otherwise involving any of the Benefit Plans and no suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Benefit Plan activities) has been brought against or with respect to any such
Benefit Plan. All material contributions required to be made as of the date
hereof to the Benefit Plans have been made or provided for. All payments to
employees pursuant to and vesting of benefits under employment, severance or
termination agreements and pursuant to severance policies of the Corporation
are set forth in the Corporation Disclosure Letter.
5.13. Labor Matters. The Corporation is not a party to or bound by any
collective bargaining agreement. There is no unfair labor practice or labor
arbitration proceedings pending or, to the actual knowledge of the executive
officers of the Corporation and except as provided in the Corporation
Disclosure Letter, threatened relating to its business. To the actual knowledge
of the executive officers of the Corporation, there are not any organizational
efforts presently being made or threatened involving employees of the
Corporation.
5.14 No Brokers. Except as set forth in the Corporation Disclosure Letter,
the Corporation has not entered into any contract, arrangement or understanding
with any person or firm which may result in the obligation of Buyer to pay, and
the Corporation is not aware of any claim for payment of, any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
5.15 Takeover Statutes. The provisions of Parts 2 and 3 of Article 11 of the
GBCC as they relate to the Corporation, the provisions of Article 8 of the
Restated Articles of Incorporation of the Corporation and the provisions of
Articles 13, 14 and 15 of the Bylaws of the Corporation do not and will not
apply to this
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Agreement, the Stock Option Agreement, the Stockholder Agreements or the
transactions contemplated hereby and thereby because the Corporation's Board of
Directors has approved the execution and delivery of this Agreement and the
Stock Option Agreement and the transactions contemplated hereby and thereby in
accordance with those provisions of the GBCC, the Restated Articles of
Incorporation of the Corporation and the Bylaws of the Corporation.
5.16 Related Parties. Except as disclosed in the Corporation Disclosure
Letter or the Corporation Reports, to the actual knowledge of the executive
officers of the Corporation, none of the executive officers or directors of the
Corporation or the Corporation Subsidiaries, or any beneficial owner of two
percent (2%) or more of the outstanding Shares, or any entity controlled by any
of the foregoing or any member of the immediate family of any of the foregoing:
(i) owns, directly or indirectly, any interest in (except for stock
holdings not in excess of two percent (2%) held solely for investment
purposes in securities which are listed on a national securities exchange
or which are regularly traded in the over-the-counter market), or is an
owner, sole proprietor, stockholder, partner, director, officer, employee,
provider, consultant or agent of any person which is a competitor, lessor,
lessee or customer of, or supplier of goods or services to, the Corporation
or any of the Corporation Subsidiaries, except where the value to such
person of any such arrangement with the Corporation and the Corporation
Subsidiaries has been less than $60,000 in the last 12 months;
(ii) owns, directly or indirectly, in whole or in part, any real
property, leasehold interests, tangible property or intangible property
with a fair market value of $60,000 or more which the Corporation or any of
the Corporation Subsidiaries currently use in their respective businesses;
(iii) has any cause of action or other suit, action or claim whatsoever
against, or owes any amount to the Corporation or any of the Corporation
Subsidiaries, except for claims in the ordinary course of business, such as
for accrued vacation pay, accrued benefits under Compensation Plans and
similar matters; or
(iv) has sold to, or purchased from, the Corporation or any of the
Corporation Subsidiaries any assets or property for consideration in excess
of $60,000 in the aggregate since June 30, 1993.
As used in this Section 5.16, a person's immediate family shall mean such
person's spouse, parents, grandparents, uncles, aunts, first cousins, children,
siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers
and sisters-in-law.
ARTICLE 6
6. Representations and Warranties of Buyer. Except as set forth in the
disclosure letter delivered at or prior to the execution hereof by Buyer to the
Corporation (the "Buyer Disclosure Letter"), Buyer represents and warrants to
the Corporation as of the date of this Agreement as follows:
6.1. Existence; Good Standing; Corporate Authority; Compliance With
Law. Buyer is a corporation duly incorporated, validly existing in good
standing under the laws of its state of incorporation. Buyer is duly licensed
or qualified to do business as a foreign corporation and in good standing under
the laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be so
qualified would not have a material adverse effect on Buyer. Buyer has all
requisite corporate power and authority to own, operate and lease its
properties and carry on its business as now conducted. Neither Buyer nor Merger
Sub is in default with respect to any order of any court, governmental
authority or arbitration board or tribunal to which Buyer or Merger Sub is a
party or is subject, and neither Buyer nor Merger Sub is in violation of any
laws, ordinances, governmental rules or regulations to which it is subject,
where such default or violation would have a material adverse effect on Buyer.
Buyer and Merger Sub have obtained all licenses, permits and other
authorizations and have taken all actions required by applicable law or
governmental
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regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
material adverse effect on Buyer. The copies of Buyer's Certificate of
Incorporation and Bylaws previously delivered to the Corporation are true and
correct. Merger Sub is a corporation duly incorporated, validly existing and in
good standing under the laws of Georgia. Merger Sub has not conducted any
business or incurred any liabilities other than in connection with the
negotiation and execution of this Agreement. Merger Sub has the corporate power
and authority to execute and deliver this Agreement and consummate the
transactions contemplated hereby.
6.2. Authorization, Validity and Effect of Agreements. The sole stockholder
of Merger Sub has approved this Agreement. The execution and delivery of this
Agreement and all agreements and documents contemplated hereby by Buyer and
Merger Sub, and the consummation by them of the transactions contemplated
hereby and thereby, have been duly authorized by all requisite corporate
action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Buyer
and Merger Sub, enforceable in accordance with their terms.
6.3. Capitalization. The authorized capital stock of Buyer consists of
50,000,000 shares of Buyer Common Stock and 10,000,000 shares of Preferred
Stock, par value $.10 per share. As of June 30, 1994, 20,275,521 shares of
Buyer Common Stock were issued and outstanding, 1,743,398 shares of Buyer
Common Stock were held in treasury and 200,000 shares of Preferred Stock were
issued and outstanding. On or about the date of this Agreement, Buyer will
issue approximately 306,550 shares of Buyer Common Stock in connection with an
acquisition previously disclosed to the Corporation. The Corporation has no
shares of Buyer Common Stock or Preferred Stock reserved for issuance, except
that, as of the above-referenced date, an aggregate of 8,891,036 shares of
Buyer Common Stock were reserved for issuance pursuant to stock option plans
of, or assumed by, Buyer, an aggregate of 230,017 shares of Buyer Common Stock
were reserved for issuance pursuant to certain warrants issued or assumed by
Buyer and 4,056,437 shares of Buyer Common Stock were reserved for issuance
pursuant to the terms of Buyer's 5 3/4% Convertible Subordinated Debentures.
Buyer has no outstanding bonds, debentures, notes or other obligations the
holders of which have the right to vote (or are convertible into or exercisable
for securities having the right to vote) with the stockholders of Buyer on any
matter ("Voting Debt"). All such issued and outstanding shares of Buyer Common
Stock and Preferred Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Other than as set forth in the
Buyer Disclosure Letter, or as contemplated by this Agreement, there are not at
the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights or other agreements or
commitments which obligate Buyer or any of its subsidiaries to issue, transfer
or sell any shares of capital stock of Buyer or any of its subsidiaries in
excess of the reserved share amounts set forth above.
6.4. Subsidiaries. Buyer owns directly or indirectly each of the outstanding
shares of capital stock of each of Buyer's subsidiaries (individually, a "Buyer
Subsidiary" and collectively, the "Buyer Subsidiaries"), except as set forth in
Buyer Reports (as defined in Section 6.6) filed prior to the date of this
Agreement and except shares held by officers and directors of Buyer and Buyer
Subsidiaries or agents of Buyer as nominees for the benefit of Buyer or any
Buyer Subsidiary. The following information for each Buyer Subsidiary has been
previously provided to the Corporation or will be provided in the Buyer
Disclosure Letter as applicable: (i) its name and jurisdiction of
incorporation; (ii) its authorized capital stock or share capital; (iii) the
number of issued and outstanding shares of capital stock or share capital; and
(iv) the names of its directors, officers and managing director.
6.5. Noncontravention. Except as set forth in the Buyer Disclosure Letter,
neither the execution and delivery by Buyer of this Agreement or the Stock
Option Agreement, nor the consummation by Buyer of the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof, will: (i) conflict with or result in a breach of any provisions of the
Certificate of Incorporation or Bylaws of Buyer; (ii) violate, or conflict
with, or result in a material breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the
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termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any material lien,
security interest, charge or encumbrance upon any of the material properties of
Buyer under, or result in being declared void, voidable, or without further
binding effect, any of the terms, conditions or provisions of any Contract, to
which Buyer is a party, or by which Buyer or any of its properties is bound or
affected except with respect to matters which are not material to Buyer; or
(iii) other than Regulatory Filings, require any material consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority, of which the failure to obtain which would have a
material adverse effect on Buyer.
6.6. Reports; Financial Statements. Buyer has delivered to the Corporation
each registration statement, report, proxy statement or information statement
prepared by it since September 30, 1993, including, without limitation, (i) its
Annual Report on Form 10-K for the year ended September 30, 1993, and (ii) its
Quarterly Reports on Form 10-Q for the periods ended December 31, 1993, March
31, 1994 and June 30, 1994, each in the form (including exhibits and any
amendments thereto) filed with the SEC collectively, the "Buyer Reports"). As
of their respective dates, the Buyer Reports (i) were prepared in accordance
with the requirements of the Securities Act, the Exchange Act, and the rules
and regulations thereunder and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets included in or incorporated by reference into the
Buyer Reports (including any related notes and schedules) fairly presents the
consolidated financial position of Buyer and the Buyer Subsidiaries as of its
date and each of the consolidated statements of income, retained earnings and
of cash flows included in or incorporated by reference into the Buyer Reports
(including any related notes and schedules) fairly presents the results of
operations, retained earnings and cash flows, as the case may be, of Buyer and
the Buyer Subsidiaries for the periods set forth therein (subject, in the case
of unaudited balance sheets and statements, to normal year-end adjustments
which would not be material in amount or effect), in each case in accordance
with the published rules and regulations of the SEC and generally accepted
accounting principles consistently applied during the periods involved, except
as may be noted therein. Except as and to the extent set forth on the
consolidated balance sheet of Buyer and the Buyer Subsidiaries at September 30,
1993, including all notes thereto, neither Buyer nor any of the Buyer
Subsidiaries has any material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet of Buyer or in the notes
thereto, prepared in accordance with the published rules and regulations of the
SEC and generally accepted accounting principles except liabilities arising in
the ordinary course of business since such date.
6.7. Litigation. Except as disclosed in the Buyer Disclosure Letter, there
are no actions, suits or proceedings pending against Buyer or the Buyer
Subsidiaries or, to the actual knowledge of the executive officers of Buyer,
threatened against Buyer or the Buyer Subsidiaries, at law or in equity, or
before or by any federal, state, commission, board, bureau, agency or
instrumentality that are reasonably likely to have a material adverse effect on
Buyer.
6.8. Absence of Certain Changes. Except as disclosed in the Buyer Reports
filed with the SEC prior to the date hereof and except for changes arising from
the public announcement of the transactions contemplated by this Agreement,
since September 30, 1993, Buyer has conducted its business only in the ordinary
course of such business and there has not been (i) any change in Buyer or any
development or combination of developments of which any of its executive
officers has actual knowledge which has resulted or is reasonably likely to
result in a material adverse effect on Buyer; (ii) except for regular dividends
on Buyer's Preferred Stock, any declaration, setting aside or payment of any
dividend or other distribution with respect to its capital stock; or (iii) any
material change in its accounting principles, practices or methods.
6.9. Taxes and Tax Returns. Buyer (i) has timely filed all material federal,
state and foreign income, franchise, property, sales, use, payroll and other
tax returns and reports required to be filed by it for the years ended prior to
the date of this Agreement or requests for extensions have been timely filed
and any such request shall have been granted and not expired and all such filed
returns are complete in all material
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respects, (ii) has paid or accrued all taxes shown to be due and payable on
such returns and (iii) has properly accrued all such taxes for periods
subsequent to the periods covered by such returns.
6.10. Proprietary Rights. Buyer and Buyer Subsidiaries own or have the right
to use pursuant to lease or license computer software programs, which, in the
aggregate, are sufficient and adequate to operate the business of the Buyer
Subsidiaries. To the knowledge of the executive officers of Buyer, and except
as described in the Buyer Disclosure Letter, Buyer's trademarks, service marks
and copyrights do not infringe upon the rights of any third parties, nor have
any claims been asserted with respect thereto except for such infringement
which would not have a material adverse effect on Buyer.
6.11. Labor Matters. Buyer is not a party to or bound any collective
bargaining agreement. There is no unfair labor practice or labor arbitration
proceeding pending or, to the actual knowledge of the executive officers of
Buyer, threatened relating to its business. To the actual knowledge of the
executive officers of Buyer, there are not any organizational efforts presently
being made or threatened involving employees of Buyer.
6.12. No Brokers. Except as set forth in the Buyer Disclosure Letter, Buyer
has not entered into any contract, arrangement or understanding with any person
or firm which may result in the obligation of Buyer to pay, and Buyer is not
aware of any claim for payment of, any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
6.13. Capital Stock. The shares of Common Stock of Merger Sub are validly
issued, fully paid and nonassessable and are owned directly by Buyer, free and
clear of all liens, claims and encumbrances. The issuance and delivery by Buyer
of shares of Buyer Common Stock in connection with the Merger have been duly
and validly authorized by all necessary corporate action on the part of Buyer
except for the approval of its shareholders contemplated by this Agreement. The
shares of Buyer Common Stock to be issued in connection with the Merger, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable and listed on the New York Stock Exchange
("NYSE").
ARTICLE 7
7. Covenants.
7.1. Acquisition Proposals. Prior to the earlier of the Effective Time or the
termination of this Agreement, the Corporation agrees (a) that neither the
Corporation nor any of the Corporation Subsidiaries, and the Corporation shall
direct and use its best efforts to cause their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of the
Corporation Subsidiaries) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, the Corporation or any of the Corporation
Subsidiaries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to an Acquisition Proposal, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal; (b) that the
Corporation will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and will take the necessary steps to
inform the individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this Section 7.1; and (c) that the Corporation
will notify Buyer immediately if any such inquiry or proposal is received by,
any such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, the Corporation; provided,
however, that nothing contained in
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this Section 7.1 shall prohibit the Board of Directors of the Corporation from
(i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited proposal to acquire the
Corporation pursuant to a merger, consolidation, share exchange, purchase of a
substantial portion of the assets, business combination or other similar
transaction, if, and only to the extent that, (A) the Board of Directors, after
consultation with and consideration of the written advice of independent legal
counsel, determines in good faith that such action is required for the Board of
Directors to comply with the Corporation's fiduciary duties to stockholders
imposed by applicable law, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, the
Corporation provides written notice to Buyer to the effect that the Corporation
is furnishing information to, or entering into discussions or negotiations
with, such person or entity, and (C) the Corporation keeps Buyer informed, on a
current basis, of the status of any such discussions or negotiations (but the
Corporation need not inform Buyer of the substance of such discussions or
negotiations); and (ii) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal. The Corporation will use
reasonable efforts to cause a person provided proprietary information in
accordance with the foregoing to enter into a confidentiality agreement.
7.2. Interim Operations of the Corporation. The Corporation covenants and
agrees as to itself and the Corporation Subsidiaries that, from and after the
date hereof until the Effective Time (except as Buyer shall otherwise agree or
except as otherwise contemplated by this Agreement or the Stock Option
Agreement):
(i) To the extent reasonably practicable taking into account any
operational matters that may arise that are attributable to the pendency of
the Merger, the business of the Corporation and the Corporation
Subsidiaries shall be conducted only in the ordinary course and, to the
extent consistent therewith, the Corporation and the Corporation
Subsidiaries shall use their commercially reasonable efforts to preserve
their business organization intact and maintain their existing relations
with customers and suppliers.
(ii) The Corporation shall not (a) sell, pledge or otherwise transfer, or
agree to sell, pledge or otherwise transfer any stock owned by it in any of
its subsidiaries; (b) amend its Articles of Incorporation or Bylaws; (c)
split, combine or reclassify any outstanding capital stock; (d) declare,
set aside or pay any dividend payable in cash, stock or property with
respect to any of its capital stock; or (e) repurchase, redeem or otherwise
acquire, or permit any Corporation Subsidiary to purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock or any
securities convertible into or exercisable for any shares of its capital
stock.
(iii) Neither the Corporation nor any of the Corporation Subsidiaries
shall (a) issue, sell, pledge, dispose of or encumber, or authorize or
propose the issuance, sale, pledge, disposition or encumbrance of, any
shares of, or securities convertible or exchangeable for, or options,
warrants, calls, commitments or rights of any kind to acquire, any shares
of its capital stock of any class or Voting Debt other than Shares issuable
pursuant to options outstanding on the date hereof under the Corporation
Stock Option Plans, the Warrants and the Stock Option Agreement; (b)
transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of any
other property or assets or encumber any property or assets or incur or
modify any indebtedness or other liability other than in the ordinary
course of business; (c) authorize capital expenditures other than in the
ordinary course of business; (d) make any acquisitions of, or investment
in, the assets of or stock of any other person or entity; or (e) make any
payment to third parties for goods or services which are not commercially
reasonable or on an arm's length basis.
(iv) Neither the Corporation nor any of the Corporation Subsidiaries
shall grant any bonus or pay increase or any severance or termination pay
to, or enter into any Employment Agreement with, any director, officers or
other employee of the Corporation or any of the Corporation Subsidiaries,
except as (x) may be required to satisfy existing contractual obligations
of the Corporation and the Corporation Subsidiaries as of the date hereof
which are set forth in the Corporation Disclosure Letter or (y) required by
applicable law.
(v) Except as set forth in the Corporate Disclosure Letter or as may be
required to satisfy existing contractual obligations of the Corporation and
the Corporation Subsidiaries existing as of the date hereof
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and the requirements of applicable law, neither the Corporation nor any of
the Corporation Subsidiaries shall establish, adopt, enter into, make or
amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, employee
stock ownership, deferred compensation, employment, termination, severance
or other plan, trust, fund, policy or arrangement for the benefit of any
class of directors, officers or employees or make, or accelerate the
vesting of, any grants, awards, benefits or options under any such plans.
(vi) Neither the Corporation nor any of the Corporation Subsidiaries
shall, except in the ordinary and usual course of business and on
commercially reasonable terms, modify, amend or terminate any of its
Contracts or waive, release or assign any rights or claims.
(vii) The Corporation shall not change its method of accounting as in
effect at June 30, 1994, except as required by changes in generally
accepted accounting principles as concurred to by the Corporation's
independent auditors. The Corporation will not change its fiscal year.
(viii) The Corporation shall not take or cause to be taken any action
which would disqualify the Merger as a "reorganization" within the meaning
of Section 368(a) of the Code; provided, however, that nothing hereunder
shall limit the ability of the Corporation to exercise any of its rights or
perform any of its obligations under the Stock Option Agreement.
(ix) Neither the Corporation nor any of the Corporation Subsidiaries will
authorize or enter into an agreement to do any of the actions referred to
in paragraphs (i) through (ix) above unless such agreement is conditioned
upon the consent of Buyer.
To the extent that the Corporation seeks approval to take any of the actions
referred to in paragraphs (i) through (ix) above, such approval shall not be
unreasonably withheld, giving effect however, to Buyer's operational objectives
with respect to the Merger.
7.3. Interim Operations of Buyer. Buyer does not anticipate that the business
of Buyer and the Buyer Subsidiaries will be conducted in any manner materially
inconsistent with its business in the ordinary and usual course, including the
acquisition from time to time of the assets or stock of other businesses.
7.4. Meeting of Shareholders. The Corporation will take all action necessary
in accordance with applicable law and its Articles of Incorporation and Bylaws
to convene a meeting of its shareholders as promptly as practicable to consider
and vote upon the approval of the Merger. The Board of Directors of the
Corporation shall, except to the extent such Board of Directors determines in
good faith is required by fiduciary obligations under applicable law, recommend
such approval and the Corporation shall each take all lawful action to solicit
such approval. At any such meeting all of the Shares, if any, then owned by
Buyer (or as to which Buyer shall have received a proxy) will be voted in favor
of the Merger.
7.5. Filings; Other Action. Subject to the terms and conditions herein
provided, the Corporation and Buyer shall: (a) promptly make their respective
filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; and (b) use all reasonable efforts to cooperate
with one another in (i) determining which filings are required to be made prior
to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several States
and foreign jurisdictions in connection with the execution and delivery of this
Agreement, the Stock Option Agreement and the consummation of the transactions
contemplated hereby and thereby and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations; and (c)
use all reasonable efforts to take, or cause to be taken, all other action and
do, or cause to be done, all other things, necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purpose of this Agreement or the Stock Option
Agreement, the proper officers and/or directors of Buyer, Merger Sub and the
Corporation shall take all such necessary action.
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7.6. Access. Each of the Corporation and Buyer shall afford the other and
their respective officers, employees, counsel, accountants and other authorized
representatives reasonable access, upon reasonable notice and during normal
business hours throughout the period prior to the Effective Time, to all of the
properties, books, contracts, commitments and records of the Corporation and
the Corporation Subsidiaries, on the one hand, and Buyer, on the other hand,
and, during such period, each of the Corporation and Buyer shall furnish
promptly to Buyer and the Corporation, as the case may be, a copy of each
report, schedule and other document filed or received by it pursuant to this
Section 7.6.
7.7. Publicity. The initial press release shall be a joint press release and
thereafter the Corporation and Buyer shall consult with each other in issuing
any press releases or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
7.8. Registration Statement. Buyer and the Corporation shall cooperate and
promptly prepare and file with the SEC as soon as practicable a Registration
Statement on Form S-4 ("S-4") under the Securities Act, with respect to Buyer
Common Stock issuable in the Merger, a portion of which Registration Statement
shall also serve as the proxy statement with respect to the meeting of the
shareholders of the Corporation to approve the Merger (the "Proxy
Statement/Prospectus"). The respective parties will use all reasonable efforts
to cause the Proxy Statement/Prospectus and the S-4 to comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder, and to cause the S-4 to comply as to form in all
material respect with the provisions of the Securities Act and the rules and
regulations thereunder. Buyer shall use all reasonable efforts, and the
Corporation will cooperate with Buyer, to have the S-4 declared effective by
the SEC as promptly as practicable. Buyer shall use its reasonable efforts to
obtain, prior to the effective date of the Proxy Statement/Prospectus, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and will pay all
expenses incident thereto. Buyer agrees that the S-4, when declared effective
by the SEC, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by Buyer in reliance upon and in conformity with written
information concerning the Corporation furnished to Buyer by the Corporation.
The Corporation agrees that the information provided by it for inclusion in the
Proxy Statement/Prospectus, when the Proxy Statement/Prospectus is mailed to
Buyer's stockholders, will not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. No amendment or supplement to the Proxy
Statement/Prospectus will be made by Buyer until it has consulted with the
Corporation and its counsel. Buyer will advise the Corporation, promptly after
it receives notice thereof, of the time when the S-4 has become effective or
any supplement or amendment has been filed, of the issuance of any stop order,
or the suspension of the qualification of Buyer Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction or any
request by the SEC for amendment of the Proxy Statement/Prospectus or the S-4
or comments thereon and responses thereto or requests for additional
information. The Corporation represents that it meets the Registrant
Requirements of Part I.A. of the General Instructions of Form S-3 promulgated
under the Securities Act.
7.9. Listing Application. Buyer shall prepare and submit to the NYSE a
listing application covering Buyer Common Stock to be issued in connection with
the Merger and shall use its reasonable efforts to obtain, prior to the
Effective Time, approval for the listing of such Buyer Common Stock upon
official notice of issuance.
7.10. Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effectuate the Merger.
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7.11. Notification of Certain Matters. The Corporation shall give prompt
notice to Buyer of: (a) any notice of, or other communication which becomes
known to an executive officer of the Corporation relating to, a default or
event that, with notice or lapse of time or both, would become a default,
received by the Corporation, or any of the Corporation Subsidiaries, subsequent
to the date of this Agreement and prior to the Effective Time, under any
Contract material to the businesses of the Corporation and to which the
Corporation or one of the Corporation Subsidiaries is a party or is subject;
and (b) any change that results in a material adverse effect on such party. The
Corporation shall give prompt notice to Buyer of any notice or other
communication from any third party that becomes known to an executive officer
of the Corporation alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement.
7.12. Legal Conditions to Merger. Each party shall, and shall cause each of
its subsidiaries to, use its reasonable efforts to take, or cause to be taken,
all actions necessary to comply promptly with all legal requirements which may
be imposed on such party or its subsidiaries with respect to the Merger and,
subject to the terms and conditions set forth in this Agreement, to consummate
the transactions contemplated by this Agreement, the Stock Option Agreement,
the Escrow Agreement and the Stockholder Agreements; provided, however, that
nothing in this Agreement shall limit the ability of Buyer or the Corporation
to exercise any of its rights or perform any of its obligations under the Stock
Option Agreement, the Escrow Agreement, the Stockholder Agreements or Section
9(b) of this Agreement. Each party will promptly cooperate with and furnish
information to each other party in connection with any such restriction
suffered by, or requirement imposed upon, it or any of its subsidiaries in
connection with the foregoing.
7.13. Agreements by Affiliated Shareholders of the Corporation and Buyer.
(i) At least ten days prior to the date of the meeting of the
Corporation's shareholders contemplated by Section 7.4, the Corporation
shall deliver to Buyer a list of names and addresses of those persons who
were, in the Corporation's reasonable judgment, at the record date for such
meeting, "affiliates" of the Corporation within the meaning of Rule 145
(each such person, together with the persons identified below, an
"Affiliate") of the rules and regulations promulgated under the Securities
Act ("Rule 145"). The Corporation shall provide Buyer such information and
documents as Buyer shall reasonably request for purposes of reviewing such
list. There shall be added to such list the names and addresses of any
other person (within the meaning of Rule 145) which Buyer reasonably
identifies (by written notice to the Corporation within five business days
after Buyer's receipt of such list) as being a person who may be deemed to
be an Affiliate of the Corporation within the meaning of Rule 145;
provided, however, that no such person identified by Buyer shall be added
to the list of Affiliates of the Corporation if Buyer shall receive from
the Corporation, on or before the Effective Time, an opinion of counsel
reasonably satisfactory to Buyer to the effect that such person is not an
Affiliate. The Corporation shall use all reasonable efforts to deliver or
cause to be delivered to Buyer, prior to the Effective Time, from each of
the Affiliates of the Corporation identified in the foregoing list (as the
same may be supplemented as aforesaid), Affiliates Letters in the form
attached hereto as Exhibit 7.13(i). Buyer and Merger Sub shall be entitled
to place legends as specified in such Affiliates Letters on the certificate
evidencing any Buyer Common Stock to be received by such Affiliates
pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for Buyer Common Stock,
consistent with the terms of such Agreements.
(ii) At the Closing, Buyer will enter into with each of the Affiliates of
the Corporation a Registration Rights Agreement in the form attached hereto
as Exhibit 7.13(ii).
7.14. Employee Benefits.
(i) Buyer hereby agrees to cause the Surviving Corporation to pay, in
accordance with their terms as in effect on the date hereof, all amounts
due and payable under the terms of all written employment, severance and
termination contracts, agreements, plans, policies and commitments of the
Corporation and its subsidiaries with or with respect to its current or
former employees, officers and directors as set
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forth in the Corporation Disclosure Letter (the "Employee Agreements"),
which amounts are vested on or prior to the date of this Agreement or which
become vested as a result of the transactions contemplated hereby and will
cause the Surviving Corporation to assume and continue to honor the terms
of such Employee Agreements.
(ii) Buyer hereby acknowledges that the consummation of the Merger will
constitute a "friendly" change of control of the Corporation (to the extent
relevant) for all Benefit Plans, Employee Agreements, Corporation Stock
Option Plans and other compensation arrangements of the Corporation.
7.15. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense except as
expressly provided herein.
7.16. Documentation; Registration. Promptly following the Effective Time of
the Merger, Buyer shall file a Registration Statement covering the shares of
Buyer Common Stock issuable upon the exercise of the assumed Corporation
Options. Buyer will use its reasonable efforts to cause such shares to be
registered under the Securities Act and to maintain such registration in effect
until the exercise or termination of all such Corporation Options.
7.17. Director and Officer Indemnification. Buyer agrees that all rights to
indemnification and advancement of expenses existing in favor of the current
and former directors and officers of the Corporation (the "Indemnified
Parties") under the provisions existing on the date hereof of the Articles of
Incorporation, By-Laws and indemnification agreements of the Corporation shall
survive the Effective Date for at least six years thereafter and Buyer agrees
to indemnify and advance expenses to the Indemnified Parties to the full extent
as would be required or permitted by the Corporation under the provisions
existing on the date hereof of the Articles of Incorporation, Bylaws and
indemnification agreements of the Corporation. Until the third anniversary of
the Effective Time, Buyer shall cause the Surviving Corporation to maintain in
effect with respect to matters occurring prior to the Effective Time, to the
extent available, the policies of directors' and officers' liability insurance
currently maintained by the Corporation; provided that the Surviving
Corporation may substitute therefor policies containing coverage, terms and
conditions which are no less advantageous; provided that in no event shall
Buyer or the Surviving Corporation be required to expend more than $500,000 in
the aggregate to maintain or procure insurance coverage pursuant hereto and
further provided that if Buyer or the Surviving Corporation is unable to obtain
the insurance called for by this Section, Buyer or the Surviving Corporation
will obtain as much comparable insurance as is available for an aggregate
expenditure of $500,000.
7.18. Indemnification.
(i) Notwithstanding any other provisions of this Agreement, subject to
the provisions of this Section 7.18 and limited in all cases to the
Escrowed Shares and the terms of the Escrow Agreement, the Corporation
shall indemnify and hold harmless Buyer and Merger Sub, and their
respective parent and subsidiary corporations, heirs, assigns, successors,
directors, officers, employees, agents, attorneys, administrators,
beneficiaries and executors (each an "Escrow Indemnified Party" and
collectively, the "Escrow Indemnified Parties"), from and against all
losses, claims, counterclaims, obligations, demands, causes of action,
choses in action, suits, assessments, common law and statutory penalties,
liabilities, costs, damages, punitive and exemplary damages, judgments,
interest and expenses (including without limitation amounts paid in
settlement and fees and disbursements of counsel and expenses incurred in
connection with investigating, preparing for, pursuing or defending any
pending or threatened litigation, action, claim, proceeding, dispute or
investigation (an "Action")) (collectively, "Damages") asserted against or
incurred by the Corporation or such Escrow Indemnified Parties from or
after the date of this Agreement by reason of or arising from any Action
now pending or threatened against the Corporation or that may arise
following the date hereof involving the Corporation or the Escrow
Indemnified Parties, and relating to the nature of or business and affairs
of the Corporation, this Agreement or the transactions contemplated hereby.
Notwithstanding the foregoing, such indemnification shall include without
limitation any Action arising out of violations or alleged violations of
securities laws and any Actions brought by the current and former directors
and officers of the Corporation to enforce their
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rights under Section 7.17 of this Agreement against the Corporation or an
Escrow Indemnified Party but such indemnification shall exclude any Actions
arising out of ordinary course of business transactions, other Actions
brought by current or former employees with respect to their employment or
termination thereof and those Actions set forth in Section 5.8 of the
Corporation Disclosure Letter; provided, however, the Corporation or such
Escrow Indemnified Parties shall be indemnified for Damages arising with
respect to those items set forth in Item IV of Section 5.8 of the
Corporation Disclosure Letter. Notwithstanding the provisions of this
Section 7.18, the Escrow Indemnified Parties' rights hereunder shall not
limit in any respect any rights the Corporation or any Escrow Indemnified
Party may have against third persons with respect to any Action, including
without limitation rights under insurance policies and contractual rights
as an indemnitee. Neither the Corporation, Buyer nor any other Escrow
Indemnified Party shall have any duty or obligation to pursue any rights
against third persons as a precondition to the indemnification provided for
in this Section 7.18.
(ii) Notwithstanding the provisions of Section 7.18(i), Buyer shall not
be entitled to deliver notice of indemnification for Damages pursuant to
Section 7.18(i) after the second anniversary of the Effective Time except
to the extent provided in the Escrow Agreement.
ARTICLE 8
8. Conditions.
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment in all material respects at or prior to the Effective Time of
the following conditions:
(i) The Merger shall have been approved in the manner required by law by
the holders of the issued and outstanding shares of the Corporation's
capital stock entitled to vote thereon.
(ii) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(iii) None of the parties hereto shall be subject to any order or
injunction against the consummation of the transaction contemplated by this
Agreement. In the event any such order or injunction shall have been
issued, each party agrees to use its reasonable efforts to have any such
injunction lifted.
(iv) The Registration Statement contemplated by Section 7.8 shall have
become effective and no stop order with respect thereto shall be in effect.
(v) The Corporation, Buyer and the Escrow Agent shall have executed and
delivered the Escrow Agreement.
8.2. Conditions to Obligation of the Corporation to Effect the Merger. The
obligation of the Corporation to effect the Merger shall be subject to the
fulfillment in all material respects at or prior to the Effective Time of the
following conditions: Buyer and Merger Sub shall have performed each agreement
contained in this Agreement required to be performed on or prior to the
Effective Time and the representations and warranties of Buyer contained in
this Agreement shall be true in all material respects on and as of the
Effective Time (other than any failure to so perform or any misrepresentation
or omission which would not materially influence the investment decision of a
reasonable purchaser of securities); and the Corporation shall have received a
certificate of the President or a Vice President of Buyer, certifying to such
effect.
8.3. Conditions to Obligation of Buyer and Merger Sub to Effect the
Merger. The obligation of Buyer and Merger Sub to effect the Merger shall be
subject to the fulfillment in all material respects at or prior to the
Effective Time of the following conditions:
(i) The Corporation shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the Corporation contained in this
Agreement shall be true in all material respects on and as of the Effective
Time (other than any failure to so perform or any misrepresentation or
omission which would not materially influence the investment decision of a
reasonable purchaser of securities); and Buyer shall have received a
certificate of the President or a Vice President of the Corporation
certifying to such effect.
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(ii) If Buyer intends to have the Merger qualify for Federal income tax
purposes as a reorganization within the meaning of Section 368 of the Code,
in its sole discretion, Buyer shall have received the opinion of Jackson &
Walker, L.L.P., counsel to Buyer, and the Corporation shall have received
the opinion of counsel to the Corporation, each dated the Closing Date, to
the effect that the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and
that Buyer, Merger Sub and the Corporation will each be a party to that
reorganization within the meaning of Section 368(b) of the Code.
ARTICLE 9
9. Termination.
9.1. Termination by Mutual Consent. This Agreement may be terminated and may
be abandoned at any time prior to the Effective Time, before or after the
approval of this Agreement by the shareholders of the Corporation, by the
mutual consent of Buyer, Merger Sub and the Corporation.
9.2. Termination by Either Buyer or the Corporation. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Buyer or the Corporation if (i) the Merger shall not have been
consummated by January 31, 1995, or (ii) the approval of the Corporation's
stockholders required by Section 8.1(i) shall not have been obtained at a
meeting duly convened therefor or at any adjournment thereof, provided, in the
case of a termination pursuant to clause (i) above, the terminating party shall
not have breached in any material respect its obligations under this Agreement
in any manner that shall have proximately contributed to the occurrence of the
failure referred to in said clause.
9.3. Termination by the Corporation. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the adoption and approval by stockholders of the Corporation referred to
in Section 8.1(i), by action of the Board of Directors of the Corporation, if
(i) the Board of Directors of Buyer shall have withdrawn or modified in a
manner adverse to the Corporation its approval or recommendation of this
Agreement or the Merger, (ii) the average closing price for Buyer Common Stock
on the NYSE Composite Tape for five consecutive business days shall be $22.00
or less, or (iii) there has been a breach by Buyer or Merger Sub of any
representation, warranty, covenant or agreement contained in this Agreement or
the Stock Option Agreement which would have a material adverse effect on Buyer
which is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by the Corporation to the party committing such
breach.
9.4. Termination by Buyer. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, by action of the
Board of Directors of Buyer, if (i) the Board of Directors of the Corporation
shall have withdrawn or modified in a manner adverse to Buyer its approval or
recommendation of the Merger, or shall have recommended to stockholders of the
Corporation an Acquisition Proposal, (ii) any person shall have made an
Acquisition Proposal for the Corporation and the conditions specified in
Sections 8.1(iii) or 8.3(i) cannot be or are not satisfied on or prior to
January 31, 1995 or (iii) there has been a breach by the Corporation of any
representation, warranty, covenant or agreement contained in this Agreement or
the Stock Option Agreement which would have a material adverse effect on the
Corporation which is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by Buyer to the Corporation.
9.5. Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article 9,
no party hereto (or any of its directors or officers) shall have any liability
or further obligation to any other party to this Agreement except as provided
in Section 9.5(b), Section 7.15 (subject to Section 9.5(b)) and Section 10.6
below, other than the Confidentiality Agreement and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
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(b) In the event that any person shall have made an Acquisition Proposal for
the Corporation and thereafter the Agreement is terminated by either party
(other than pursuant to the breach of this Agreement by Buyer), then the
Corporation, if requested by Buyer, shall, subject to the provisions set forth
below, promptly, but in no event later than two days after the date of such
request, pay Buyer a fee of $2,900,000, which amount shall be payable by wire
transfer of same day funds; provided however, that no fee shall be payable to
Buyer pursuant to this Section 9.5(b) unless and until (i) any person (other
than Buyer) (an "Acquiring Party") has entered into a definitive agreement to
acquire, by purchase, merger, consolidation, sale, assignment, lease, transfer
or otherwise, in a transaction or a series of transactions, a majority of the
voting power of the outstanding securities of the Corporation or 50% or more of
the assets of the Corporation, (ii) there has been executed a definitive
agreement with respect to a consolidation, merger or similar transaction
between the Corporation and an Acquiring Party in which the stockholders of the
Corporation immediately prior to such proposed consolidation, merger or similar
transaction do not own securities representing at least 50% of the outstanding
voting power of the surviving entity (or, if applicable, any entity in control
of such Acquiring Party) of such proposed consolidation, merger or similar
transaction immediately following the consummation thereof, or (iii) an
Acquiring Party, or any "group" (as such term is defined under Section 13(d) of
the Exchange Act) acquires beneficial ownership or the right to acquire
beneficial ownership of 50% of the common stock of the Corporation, whether by
tender offer, exchange offer or otherwise (any such transaction described in
clauses (i) through (iii) being a "Business Combination"). The Corporation
acknowledges that the agreements contained in this Section 9.5(b) are an
integral part of the transactions contemplated in this Agreement, and that,
without these agreements, Buyer and Merger Sub would not enter into this
Agreement; accordingly, if the Corporation fails to promptly pay the amount due
pursuant to this Section 9.5(b), and, in order to obtain such payment, Buyer or
Merger Sub commences a suit which results in a judgment against the Corporation
for the fee set forth in this paragraph (b), the non-prevailing party shall pay
to the prevailing party its costs and expenses (including attorneys' fees) in
connection with such suit, together with interest on the amount of the fee at
the prime rate of Bank of Boston, N.A. in effect on the date such payment was
required to be made.
9.6. Extension; Waiver. At any time prior to the Effective Time of the
Merger, any party hereto, by action taken by its Board of Directors, may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 10
10. General Provisions.
10.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4 and
in Sections 7.12, 7.14, 7.15, 7.16, 7.17, 7.18 and 10.6 and the Agreements
delivered pursuant to this Agreement shall survive this Agreement.
10.2. Notices. Any notice required to be given hereunder shall be in writing
and given by facsimile transmission, overnight courier service, hand delivery
or certified or registered mail (return receipt requested and first-class
postage prepaid), addressed as follows:
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If to the Corporation:
KnowledgeWare, Inc.
3340 Peachtree Road, N.E.
Suite No. 1100
Atlanta, Georgia 30326
Attention: Francis A. Tarkenton, Chairman of the Board
FAX: (404) 364-0883
Copy to: Hicks, Maloof & Campbell
Suite 2200, Marquis Two Tower
285 Peachtree Center Avenue, N.E.
Atlanta, Georgia 30303
Attention: Maurice N. Maloof
FAX: (404) 420-7474
If to Buyer or Merger Sub:
8080 N. Central Expressway
Dallas, Texas 75206
Attention: Sterling L. Williams, President
FAX: (214) 750-0905
Copy to: 8080 N. Central Expressway
Dallas, Texas 75206
Attention: Jeannette P. Meier, Executive Vice President and
General Counsel
FAX: (214) 750-0905
Copy to: Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: Charles D. Maguire, Jr.
FAX: (214) 953-5822
or to such other address as any party shall specify by written notice so given.
Such notice shall be deemed given and received on the date it is delivered if
given by telecopy, overnight courier or hand-delivery or on the fifth business
day following the date it is so mailed.
10.3. Binding Effect; Benefit. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
except for the provisions of Article 4 and Sections 7.12, 7.14, 7.15, 7.16,
7.17, 7.18 and 10.6 nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
10.4. Entire Agreement. This Agreement, the Stock Option Agreement, the
Escrow Agreement, the Confidentiality Agreement, the Exhibits, Disclosure
Letters and other documents and agreements among the parties hereto, constitute
the entire agreement among the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, among the parties
with respect thereto, including without limitation any oral or written
understandings or commitments with respect to loans, advances or guaranties
from or by Buyer or severance or other employment arrangements with respect to
employees of the Corporation. No addition to or modification of any provision
of this Agreement shall be binding upon any party hereto unless made in writing
and signed by all parties hereto.
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10.5. Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of the Corporation but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
10.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws; provided, however, the Merger of Merger Sub into the
Corporation shall be governed by the laws of the State of Georgia.
10.7. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
10.8. Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
10.9. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.10. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
10.11. Incorporation of Exhibits and Disclosure Letters. All Exhibits and
Disclosure Letters attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
10.12. Severability. If for any reason whatsoever, any one or more of the
provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid as applied to any particular case or in all cases,
such circumstances shall not have the effect of rendering such provision
invalid in any other case or of rendering any of the other provisions of this
Agreement inoperative, unenforceable or invalid.
10.13. Obligation of Buyer. Buyer shall cause Merger Sub to perform each of
its duties and obligations under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first hereinabove
written.
THE CORPORATION:
KNOWLEDGEWARE, INC., a Georgia
corporation
/s/ Francis A. Tarkenton
By:__________________________________
Francis A. Tarkenton,
Chairman of the Board and Chief
Executive Officer
BUYER:
STERLING SOFTWARE, INC., a Delaware
corporation
/s/ Sterling L. Williams
By:__________________________________
Sterling L. Williams,
President
MERGER SUB:
SSI CORPORATION, a Georgia
corporation
/s/ Sterling L. Williams
By:__________________________________
Sterling L. Williams,
President
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<PAGE>
EXHIBIT 2.1
(i) Paragraph (b) of Article 4 of the Corporation's Restated Articles of
Incorporation shall be amended and restated to read in its entirety as follows:
"(b) The total number of shares of stock which the Corporation shall have
authority to issue is Eleven Thousand (11,000) shares, consisting of Ten
Thousand (10,000) shares of Common Stock, having a par value of $.10 per
share, and One Thousand (1,000) shares of Preferred Stock, having a par
value of $.10 per share."
(ii) Article 8 of the Corporation's Restated Articles of Incorporation shall
be deleted in their entirety, and all subsequent Articles (except as provided
herein) and cross-references thereto shall be deemed renumbered accordingly.
(iii) Article 9 of the Corporation's Restated Articles of Incorporation (to
be renumbered Article 7 pursuant to the amendments to be effected hereby) shall
be amended and restated to read in its entirety as follows:
"7
The number of directors of the Corporation shall be determined in
accordance with the Bylaws of the Corporation."
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<PAGE>
EXHIBIT 4.4
ESCROW AGREEMENT
This Escrow Agreement ("Agreement"), dated as of , 1994, among Sterling
Software, Inc., a Delaware corporation ("Sterling"), KnowledgeWare, Inc., a
Georgia corporation ("KnowledgeWare"), The First National Bank of Boston (the
"Agent") and as representative (the "Representative"),
W I T N E S S E T H:
WHEREAS, Sterling, SSI Corporation, a Georgia corporation and wholly owned
subsidiary of Sterling ("Newco"), and KnowledgeWare are parties to that certain
Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994
to be effective as of July 31, 1994 (as amended, the "Merger Agreement")
pursuant to which Newco will merge with and into KnowledgeWare; and
WHEREAS, pursuant to the Merger Agreement, Sterling is entitled to
indemnification under certain circumstances as set forth in the Merger
Agreement; and
WHEREAS, the purpose of this Agreement is to provide for the deposit of
shares of common stock, par value $0.10 per share, of Sterling ("Buyer Common
Stock") pursuant to the Merger Agreement to satisfy the rights of Sterling to
be indemnified under Section 7.18 of the Merger Agreement and to provide for
the distribution, if applicable, of any shares of Buyer Common Stock to persons
who as of the Effective Time (as defined in the Merger Agreement) were holders
of record ("Record Holders") of issued and outstanding Shares (as defined in
the Merger Agreement);
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Definitions. As used in this Agreement, all capitalized terms not defined
herein shall have the meanings attributed to such terms in the Merger
Agreement. The parties acknowledge and agree that the term "Damages" also
includes amounts paid in settlement of any Action (including, without
limitation, fees and disbursements of counsel and investigation expenses
incurred in connection therewith.)
2. Appointment of Agent and Representative.
(a) Sterling and KnowledgeWare hereby appoint the Agent as escrow agent for
the purposes set forth herein and the Agent hereby accepts such appointment on
the terms herein provided.
(b) The Representative is hereby appointed as agent and representative of the
Record Holders for the purposes set forth herein and the Representative accepts
such appointment on the terms herein provided.
3. Escrowed Shares.
(a) For the purposes herein set forth, Sterling has caused to be deposited
with the Agent shares of Buyer Common Stock (the "Escrowed Shares"). The
Escrowed Shares shall be registered in the name of the Agent or its nominee. If
during the term of this Agreement there is declared a stock dividend or stock
split, all securities thereby issuable with respect to the Escrowed Shares
shall be deposited hereunder and shall be deemed "Escrowed Shares" for the
purposes of this Agreement. If during the term of this Agreement there is paid
any dividends (within the meaning of Section 301(c)(1) of the Code) in cash or
other property in respect of the Escrowed Shares, such dividends shall be paid
by the Agent to the Record Holders, pro rata, except that any such dividends
paid in respect of Escrowed Shares as to which a claim exists pursuant to a
Sterling Notice shall constitute and be deemed part of such Escrowed Shares for
purposes of this Agreement. If during the term of this Agreement there is any
other distribution which does not constitute a dividend (within the meaning of
Section 301(c)(1) of the Code) in cash or other property in respect of the
Escrowed
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Shares, such distribution shall be retained by the Agent and shall constitute
part of the "Escrowed Shares" for purposes of this Agreement. The Escrowed
Shares shall be held and disbursed by the Agent in accordance with the terms of
this Agreement.
(b) The Escrowed Shares held by the Agent pursuant to this Agreement shall be
deemed issued and outstanding. With respect to any matter on which stockholders
of Sterling have a right to vote, the Agent, on behalf of the Record Holders,
shall have the right to vote, or not vote, all Escrowed Shares (or any portion
thereof) in such manner as it deems appropriate as agent for the Record
Holders; provided that, at Sterling's expense, the Agent shall promptly
forward, or cause to be forwarded, copies of any proxies, proxy statements and
other soliciting materials to the Record Holders, and shall vote the applicable
portion of the Escrowed Shares in accordance with any written instructions
timely received by the Agent from any Record Holder.
(c) The Record Holders' interest in this Agreement and the Escrowed Shares
(prior to the disbursement thereof) may not be transferred except by operation
of law.
4. Application of Escrow Deposit. The Escrowed Shares shall be held in escrow
under the terms of this Agreement and released by the Agent upon the following
terms:
(a) Upon joint written notice and instruction from Sterling and the
Representative that the Escrowed Shares, or any portion thereof, should be
disbursed, the Agent shall make such disbursement in accordance with the
directions set forth in such joint written notice and instruction.
(b) If at any time, or from time to time, before the second anniversary
of the Effective Time, Sterling delivers to the Agent written notice (a
"Sterling Notice") asserting that Sterling is entitled to indemnification
as set forth in Section 7.18 of the Merger Agreement, which Sterling Notice
shall state the basis and amount of such claim, then the Agent shall
disburse, on the twentieth business day following receipt of the Sterling
Notice, all or such portion of the Escrowed Shares to Sterling as specified
in the Sterling Notice; provided that if the Agent receives written notice
from the Representative prior to such twentieth business day that a dispute
exists with respect to the claims made in the Sterling Notice (a "Dispute
Notice"), which Dispute Notice shall state the basis of such dispute, the
Agent shall continue to hold the Escrowed Shares (but shall disburse to
Sterling any portion of such Escrowed Shares as to which no dispute exists)
until directed otherwise pursuant to paragraph (a) above or (c) below.
(c) If the Agent timely receives a Dispute Notice, the Agent shall retain
the Escrowed Shares subject of the Sterling Notice until the first to occur
of the following:
(i) receipt by the Agent of a joint written instructions from
Sterling and the Representative, in which case the Agent shall disburse
the Escrowed Shares (or applicable portions thereof) as set forth in
such joint written instructions; or
(ii) receipt by the Agent of a written notice from either Sterling or
the Representative (a "Litigation Certificate") to the effect that such
person(s) has received a final non-appealable judgment or order from a
court of competent jurisdiction (and attaching a copy of such judgment
or order) resolving the dispute as to the disbursement of the subject
Escrowed Shares setting forth in reasonable detail the substance of
such judgment and instructions as to the resulting disbursement of the
Escrowed Shares (or applicable portions thereof), in which case the
Agent shall make such disbursement (or portions thereof) on the
twentieth business day following receipt of the Litigation Certificate;
provided that if Sterling or the Representative delivers to the Agent a
certificate prior to such twentieth business day disputing the contents
of the Litigation Certificate (the "Countervailing Certificate"), then
the Agent, on the twentieth business day following receipt of the
Countervailing Certificate, shall interplead the subject Escrowed
Shares into, or file a declaratory judgment action with, a court of
competent jurisdiction to determine the rights of the parties to the
Escrowed Shares, unless prior to such twentieth business day the Agent
receives a joint written instruction pursuant to paragraph (c)(i)
above.
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(d) If, on the second anniversary of the Effective Time, there are
Escrowed Shares remaining undisbursed and not the subject of a Sterling
Notice or a Contingent Claim Notice (defined below), the Agent shall
disburse such Escrowed Shares to the Record Holders pro rata in accordance
with their relative record ownership of Shares issued and outstanding as of
the Effective Time.
(e) If, within 30 days prior to the second anniversary of the Effective
Time, Sterling, in its reasonable good faith judgment, believes that there
exist one or more Actions with respect to which Sterling would be entitled
to indemnification for Damages incurred subsequent to the second
anniversary of the Effective Time (each a "Contingent Claim" and
collectively, "Contingent Claims"), Sterling may give the Agent written
notice (a "Contingent Claim Notice") of such Contingent Claims, which
Contingent Claim Notice shall state the basis of the Contingent Claims and
Sterling's reasonable good faith estimate of the maximum amount of Damages
for which it would be entitled to indemnification with respect thereto. In
the event a Contingent Claim Notice is delivered, a number of Escrowed
Shares equal to the aggregate amount of such estimated Damages divided by
the most recently reported closing sales price of Buyer Common Stock on the
date of the Contingent Claim Notice shall remain subject to this Agreement,
and this Agreement shall remain in effect; provided that, with respect to
any Contingent Claim which has not been resolved on or prior to the fourth
anniversary of the Effective Time, any Escrowed Shares attributable to such
Contingent Claim and not disbursed shall be disbursed to the Record Holders
pro rata in accordance with their relative record ownership of Shares
issued and outstanding as of the Effective Time unless, as of the fourth
anniversary of the Effective Time, such Contingent Claim is then subject to
litigation or binding arbitration proceedings, in which case such Escrowed
Shares shall remain subject to this Agreement, and this Agreement shall
remain in effect, until the final, nonappealable resolution of such
proceedings.
(f) Notwithstanding any other provision of this Agreement, no fractional
shares of Buyer Common Stock will be issued to the Record Holders and any
Record Holder who would otherwise be entitled to receive a fractional share
will be entitled to receive a cash payment in lieu thereof, which payment
shall represent such holder's proportionate interest in the net proceeds
from the sale by the Agent, within ten business days following the date the
disbursement of such fractional share would have been made, on behalf of
all such Record Holders of the aggregate fractional shares of Buyer Common
Stock that such persons would be entitled to receive but for this paragraph
(f).
(g) For the purposes of this Agreement, whenever in this Agreement it is
provided that the Agent may or shall disburse Escrowed Shares to Sterling,
the Agent shall, as Sterling may direct in writing, either (i) deliver to
Sterling a stock certificate representing the appropriate number of
Escrowed Shares or (ii) sell an appropriate number of Escrowed Shares and
deliver the proceeds therefrom to Sterling. In determining the number of
shares to be so disbursed or sold in respect of Damages, the number of
Escrowed Shares to be disbursed or sold shall be equal to the number of
shares (rounded to the nearer whole share) determined by dividing the
amount of Damages with respect to which Sterling is entitled to be
indemnified by the most recently reported closing sale price of the Buyer
Common Stock preceding the date Sterling delivers to the Agent the Sterling
Notice.
(h) Notwithstanding paragraph (g) above, in the event that the Agent is
required to sell any of the Escrowed Shares pursuant to Section 4(g) or
Section 12(c) or otherwise, Sterling may notify the Agent that the Agent
shall suspend its efforts to sell any or all of such shares until receipt
of further notice from Sterling, without giving any reason therefor, and
the Agent shall suspend such efforts until receipt of such further notice.
5. Communications with Representative.
(a) Within a reasonable time following receipt of notice of an Action for
which Sterling believes it is entitled to indemnification, Sterling shall give
the Representative written notice of such Action, which notice shall describe
the material allegations of such Action.
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(b) Within a reasonable time following the end of each calendar quarter while
this Agreement is in effect, Sterling shall deliver to the Representative a
written summary of the status of each Action with respect to which Sterling is
seeking indemnification.
(c) At least ten (10) days prior to settling any Action with respect to which
Sterling is seeking indemnification (or such shorter period as is then
consented to by the Representative), Sterling shall give the Representative
written notice thereof, which notice shall describe the material terms of such
settlement.
(d) Within a reasonable time after receiving a request therefor from the
Representative, Sterling shall furnish the Representative such additional
information relating to Actions as he may reasonably request from time to time.
6. Liability of the Agent. The duties of the Agent hereunder shall be limited
to the observance of the express provisions of this Agreement. The Agent shall
not be subject to, or be obliged to recognize, any other agreement between the
parties hereto or directions or instructions not specifically set forth or
provided for herein. The Agent shall not make any disposition of Escrowed
Shares which is not expressly authorized by this Agreement. The Agent may rely
upon and act upon any instrument received by it pursuant to the provisions of
this Agreement which it in good faith believes to be genuine and in conformity
with the requirements of this Agreement. Except as expressly provided in this
Agreement, the Agent shall have no duty to determine or inquire into the
happening or occurrence of any event. Anything in this Agreement to the
contrary notwithstanding, the Agent shall not be liable to any person for
anything which it may do or refrain from doing in connection with this
Agreement, unless the Agent is guilty of gross negligence or willful
misconduct.
7. Duties of the Agent.
(a) The Agent shall hold or sell the Escrowed Shares, or portions thereof, as
set forth herein.
(b) The Agent shall have no authority or obligation to invest funds except as
herein provided.
(c) Promptly following receipt by the Agent of any certificate or notice (i)
from Sterling or the Representative pursuant to Section 4, the Agent shall
promptly provide a copy thereof to the other and (ii) from any Record Holder
pursuant to Section 13, the Agent shall promptly provide a copy thereof to
Sterling and the Representative.
8. Indemnification of the Agent.
(a) Sterling and KnowledgeWare (solely to the extent of the Escrowed Shares)
each shall severally indemnify and hold the Agent, its employees, officers,
agents, successors and assigns harmless from and against any and all loss,
cost, damages or expenses (including reasonable attorneys' fees) it or they may
sustain by reason of the Agent's service as escrow agent hereunder, except such
a loss, cost, damage or expense (including reasonable attorneys' fees) incurred
by reason of such acts or omissions for which the Agent is liable or
responsible under the provisions of Section 6 hereof.
(b) The Agent is hereby given a prior lien on all rights, titles and
interests of Sterling and the Record Holders in the Escrowed Shares, including
any property or cash (or cash equivalent) arising therefrom, in order to
protect, indemnify and reimburse the Agent for the costs, expenses, fees and
liabilities to which it is entitled pursuant to Section 8(a) above.
9. Fees of the Agent. The Agent's compensation for services hereunder shall
be in accordance with Exhibit A. In the event extraordinary services are
required of the Agent beyond the services described herein, compensation shall
be an amount that is fair and equitable based upon the services and
responsibility involved. Sterling shall pay the fees and expenses of the Agent
for serving as escrow agent.
10. Resignation of the Agent. The Agent may resign as escrow agent by giving
each of Sterling and the Representative not less than 30 days' written notice
of the effective date of such resignation. Sterling shall
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<PAGE>
have the right to designate a substitute escrow agent, provided it is
reasonably acceptable to the Representative. If on or prior to the effective
date of such resignation, the Agent has not received written instructions from
Sterling of a substitute escrow agent, it shall thereupon deposit the Escrowed
Shares into the registry of a court of competent jurisdiction. The parties
hereto intend that a substitute escrow agent shall be appointed to fulfill the
duties of the Agent hereunder for the remaining term of this Agreement in the
event of the Agent's resignation.
11. Remedies of the Agent.
(a) In the event of any dispute hereunder, or if conflicting demands or
notices are made upon the Agent, or in the event the Agent in good faith is in
doubt as to what action it should take hereunder, the Agent shall have the
right to (i) stop all further proceedings in, and performance of, this
Agreement and instructions received hereunder, and/or (ii) file a suit in
interpleader and obtain an order from a court of competent jurisdiction
requiring all persons involved to interplead and litigate in such court their
several claims and rights with respect to the Escrowed Shares.
(b) While any legal proceeding arising out of this Agreement is pending, the
Agent shall have the right to stop all further proceedings in, and performance
of, this Agreement and instructions received hereunder until all differences
shall have been resolved by agreement or a final order.
(c) The Agent may from time to time consult with legal counsel of its own
choosing in the event of any disagreement, controversy, question or doubt as to
the construction of any of the provisions hereof or its duties hereunder, and
it shall incur no liability and shall be fully protected in acting in good
faith in accordance with the opinion and instructions of such counsel. Any such
fees and expenses of such legal counsel shall be considered part of the fees
and expenses of the Agent for the purposes of Section 9 of this Agreement.
12. Responsibilities of the Representative.
(a) The Representative is an attorney who has been designated by the
Board of Directors of KnowledgeWare with the consent of Sterling in its
reasonable discretion. The duties of the Representative hereunder shall be
limited to the observance of the express provisions of this Agreement. The
Representative shall not be subject to, or be obliged to recognize, any
other agreement between the parties hereto or directions or instructions
not specifically set forth or provided for herein. Anything in this
Agreement to the contrary notwithstanding, the Representative shall not be
liable to any Record Holder or any other person for anything which it may
do or refrain from doing in connection with this Agreement, unless the
Representative is guilty of willful misconduct.
(b) The Representative and its successors and assigns shall be
indemnified and held harmless, out of the Escrowed Shares, from and against
any and all loss, cost, damages or expenses (including reasonable
attorneys' fees) it or they may sustain by reason of the Representative's
services as representative hereunder, except such loss, cost, damage or
expense (including reasonable attorneys' fees) incurred by reason of such
acts or omissions for which the Representative is responsible pursuant to
paragraph (a) above.
(c) The Representative's compensation for services hereunder shall be at
his normal hourly rate. The fees and reasonable expenses of the
Representative shall be paid out of the Escrowed Shares on a timely basis
upon presentation of invoices to the Agent, and shall be paid through the
sale by the Escrow Agent of a sufficient number of Escrowed Shares.
13. Resignation or Removal of the Representative. The Representative may
resign as representative by giving Sterling, the Agent and each of the Record
Holders not less than 30 days' written notice of the effective date of such
resignation. Record Holders who as of the Effective Time owned of record at
least 51% of the issued and outstanding Shares may, by delivering written
notice to Sterling, the Agent and the Representative, remove the Representative
with or without cause. Prior to the effective date of such resignation or
removal, Record Holders who as of the Effective Time owned of record at least
51% of the issued and outstanding
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<PAGE>
Shares may deliver to Sterling and the Agent a written designation of a
substitute representative who shall be acceptable to Sterling in its reasonable
discretion. If no designation is made, the Representative shall appoint a
substitute representative, provided such substitute representative is
reasonably acceptable to Sterling.
14. Miscellaneous.
(a) Any notice or communication hereunder to Sterling, the Representative
or the Agent must be in writing and given by overnight courier, depositing
the same in the United States mail, addressed to the person to be notified,
postage prepaid and registered or certified with return receipt requested,
or by delivering the same in person. Such notice shall be deemed received
on the date on which it is received if sent by overnight courier or hand-
delivered or on the third business day following the date on which it is so
mailed. For purposes of notice, the addresses shall be:
If to Sterling: Sterling Software, Inc.
8080 North Central Expressway
Suite 1100
Dallas, Texas 75206
Attn: General Counsel
with a copy to: Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attn: Charles D. Maguire, Jr.
If to the Representative:
If to the Agent: The First National Bank of Boston
Blue Hills Office Park
150 Royal Street; Mail Stop 45-02-15
Canton, MA 02021
Attention: Corporate Trust
Any notice or communication hereunder to a Record Holder must be in writing and
given by depositing the same in the United States mail, addressed to the Record
Holder as reflected on the records of the transfer agent for the Shares as of
the Effective Time, which notice shall be deemed received on the fifth business
day following the date on which it is so mailed. Any party or Record Holder may
change its address for notice by written notice given to the other parties in
accordance with this Section. In cases where Sterling and the Representative
may give joint written notice or instructions to the Agent, such notice may be
given by separate instruments of similar tenor.
(b) This Agreement may be amended, modified or supplemented only by an
instrument in writing executed by Sterling, the Representative and the Agent;
provided that this Agreement may not be amended in a manner that would
materially and adversely affect the rights or benefits of the Record Holders
without the written consent of Record Holders who as of the Effective Time
owned of record at least 51% of the issued and outstanding Shares.
(c) This Agreement and the agreements contemplated hereby constitute the
entire agreement of the parties regarding the subject matter hereof, and
supersede all prior agreements and understandings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof.
(d) This Agreement and the rights and obligations of the parties hereto shall
be governed by and construed and enforced in accordance with the substantive
laws (but not the rules governing conflicts of laws) of the State of Texas.
(e) This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, and all of which together shall constitute one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement to
be executed as of the day and year first above written.
STERLING:
STERLING SOFTWARE, INC.
By: _________________________________
Its: ________________________________
KNOWLEDGEWARE:
KNOWLEDGEWARE, INC.
By: _________________________________
Its: ________________________________
AGENT:
THE FIRST NATIONAL BANK OF BOSTON
By: _________________________________
Its: ________________________________
REPRESENTATIVE:
_____________________________________
A-33
<PAGE>
EXHIBIT A
SCHEDULE OF FEES
- --------------------------------------------------------------------------------
A-34
<PAGE>
EXHIBIT 7.13(I)
FORM OF AFFILIATE LETTER
Sterling Software, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of KnowledgeWare, Inc, a Georgia corporation (the
"Corporation"), as the term "affiliate" is defined for purposes of paragraphs
(c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms
of the Amended and Restated Agreement and Plan of Merger dated as of August 31,
1994 to be effective as of July 31, 1994 (the "Merger Agreement") among
Sterling Software, Inc., a Delaware corporation (the "Buyer"), SSI Corporation,
a Georgia corporation ("Merger Sub"), and the Corporation, Merger Sub will be
merged with and into the Corporation (the "Merger").
As a result of the Merger, I may receive shares of common stock, par value
$.10 per share, of the Buyer (the "Buyer Securities") in exchange for shares
owned by me of common stock, no par value, of the Corporation (the "Shares").
I represent, warrant and covenant to the Buyer that in the event I receive
any Buyer Securities as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the Buyer
Securities in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable
limitations upon my ability to sell, transfer or otherwise dispose of Buyer
Securities to the extent I felt necessary, with my counsel or counsel for
the Corporation.
C. I have been advised that the issuance of Buyer Securities to me
pursuant to the Merger has been registered with the Commission under the
Act on a Registration Statement on Form S-4. However, I have also been
advised that, since at the time the Merger was submitted for a vote of the
stockholders of the Corporation, I may be deemed to have been an affiliate
of the Corporation and the distribution by me of the Buyer Securities has
not been registered under the Act, I may not sell, transfer or otherwise
dispose of Buyer Securities issued to me in the Merger unless (i) such
sale, transfer or other disposition has been registered under the Act, (ii)
such sale, transfer or other disposition is made in conformity with the
volume and other limitations of Rule 145 promulgated by the Commission
under the Act, or (iii) in the opinion of counsel reasonably acceptable to
Buyer, such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
D. I understand that the Buyer is under no obligation to register the
sale, transfer or other disposition of the Buyer Securities by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available except, as
applicable, as set forth in the Merger Agreement.
E. I also understand that stop transfer instructions will be given to the
Buyer's transfer agent with respect to the Buyer Securities and that there
will be placed on the certificates for the Buyer Securities issued to me,
or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT
A-35
<PAGE>
DATED , 1994 BETWEEN THE REGISTERED HOLDER HEREOF AND STERLING
SOFTWARE, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF KNOWLEDGEWARE, INC.
F. I also understand that unless the transfer by me of my Buyer
Securities has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, the Buyer reserves the right to
put the following legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE
WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this
Agreement.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Corporation as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
_____________________________________
(Signature)
_____________________________________
(Printed Name)
A-36
<PAGE>
EXHIBIT 7.13(II)
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of ,
1994 by and among Sterling Software, Inc., a Delaware corporation (the
"Buyer"), and the former stockholders of KnowledgeWare, Inc., a Georgia
corporation (the "Corporation"), listed on the signature page hereto (the
"Stockholders").
WHEREAS, the Buyer, SSI Corporation, a Georgia corporation and a wholly owned
subsidiary of the Buyer ("Merger Sub") and the Corporation entered into an
Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994
to be effective as of July 31 (the "Merger Agreement"; capitalized terms not
defined herein shall have the meanings set forth in the Merger Agreement); and
WHEREAS, Section 7.13 of the Merger Agreement contemplates that Buyer will
enter into this Agreement; and
WHEREAS, certain of the Stockholders executed Amended and Restated
Stockholders Agreements (the "Stockholder Agreements") dated as of August 31,
1994 providing that such Stockholders would vote in favor of the transactions
contemplated by the Merger Agreement, and to induce such Stockholders to enter
into the Stockholders Agreement, the Buyer has agreed to grant such
Stockholders certain registration rights as set forth herein;
NOW THEREFORE, in consideration of the foregoing and the covenants set forth
herein, in the Merger Agreement and the Stockholders Agreements, the
Stockholder and Buyer agree as follows:
1. REGISTRATION RIGHTS. The Buyer shall prepare and file a registration
statement (on an appropriate form) under the Securities Act to permit the sale
or other disposition, on a delayed or continuous basis, of any or all shares of
Buyer Common Stock that have been acquired by or are issuable to the
Stockholders with respect to the Shares and the Corporation Options (if such
Stockholder is not otherwise able to sell such shares free from restriction
under the federal securities laws). The Buyer shall use its reasonable efforts
to cause such registration statement to become effective as promptly as
reasonably practicable following the filing thereof, and to obtain all consents
or waivers of other parties which are required thereof and to keep such
registration statement effective for such period as may be reasonably necessary
to effect such sale or other disposition; provided, however, Buyer shall not be
obligated to keep such registration statement effective after such time as all
Stockholders are eligible to sell their shares of Buyer Common Stock pursuant
to Rule 144 or 145 under the Securities Act without being subject to volume
resale limitations; and provided, further, the Buyer shall not be required to
prepare audited financial statements (other than annual audited financial
statements) in order to maintain the effectiveness of the registration
statement. In connection with any sale by any Stockholder of Buyer Common Stock
pursuant to such registration statement, such Stockholder must give and the
Buyer must receive written notice of such Stockholder's intention to make such
a sale no less than two (2) nor more than twenty (20) business days prior to
the date of the proposed sale, which notice shall include the number of shares
proposed to be sold, the proposed plan of distribution and the time period
during the thirty (30) days following the date of such notice during which the
shares may be sold (the "Sale Period"), and such Stockholder shall not, during
any Sale Period, deliver any prospectus that is part of such registration
statement during any period of time when, but only so long as, the Buyer gives
such Stockholder written notice (a "Delay Notice") that the Buyer is in
possession of material non-public information that, in the exercise of its
reasonable judgement, would be required to be disclosed in such registration
statement in order to comply with the Securities Act and the rules and
regulations of the SEC thereunder; provided that the Buyer shall promptly
provide written notice to such Stockholder when such delay is no longer
applicable; provided further that no stockholder shall be so prevented from
selling such Buyer Common Stock for a period longer than ninety (90)
consecutive days (a "Delay Period") following receipt of a Delay Notice and any
two Delay Periods must be at least fifteen (15) days apart.
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<PAGE>
2. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Buyer. The Buyer agrees to indemnify and hold
harmless each Stockholder, its officers, directors, agents, employees,
representatives and each person or entity who controls such Stockholder (within
the meaning of the Securities Act), against all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue or alleged untrue statement of material fact
contained in any registration statement, any amendment or supplement thereto,
any prospectus or preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as the same arise
out of or are based upon any such untrue statement or omission contained in any
information furnished in writing to the Buyer by such Stockholder for use in
the preparation thereof. In connection with an underwritten offering, the Buyer
will indemnify the underwriters thereof, their officers and directors and each
person who controls such underwriters (within the meaning of the Securities
Act) to the same extent as provided above with respect to the indemnification
of the Stockholders.
(b) Indemnification by Stockholders. In connection with any registration
statement in which a Stockholder is participating, each such Stockholder will
furnish to the Buyer in writing such information with respect to the name and
address of such Stockholder, the amount of Buyer Common Stock held by such
Stockholder and the nature of such holdings, and such other information as is
required by the Buyer for use in connection with any such registration
statement or prospectus and agrees to indemnify and hold harmless the Buyer,
its directors, officers, agents, employees, representatives and each person or
entity who controls the Buyer (within the meaning of the Securities Act),
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any untrue or
alleged untrue statement of material fact contained in any registration
statement, any amendment or supplement thereto, any prospectus or preliminary
prospectus or any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, to
the extent that such untrue statement is contained in or omission arises from
any information furnished in writing by such Stockholder for use in the
preparation thereof. In no event shall the liability of any selling Stockholder
of Buyer Common Stock hereunder be greater in amount than the dollar amount of
the proceeds received by such Stockholder upon the sale of the Buyer Common
Stock giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such person of any written notice of
the commencement of any action, suit, proceeding or investigation or threat
thereof made in writing for which such person will claim indemnification or
contribution pursuant to this Agreement and, unless in the reasonable judgment
of such indemnified party (i) a conflict of interest may exist between such
indemnified party and the indemnifying party with respect to such claim or (ii)
the named parties to any such action, suit, proceeding or investigation
(including any impleaded parties) include both an indemnifying party and an
indemnified party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the indemnifying party,
permit the indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to such indemnified party. Whether or not such defense
is assumed by the indemnifying party, the indemnifying party will not be
subject to any liability for any settlement made without its consent (but such
consent will not be unreasonably withheld). No indemnifying party will consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. If the indemnifying party is not entitled to, or elects not to,
assume the defense of a claim, it will not be obligated to pay the fees and
expenses of more than one counsel with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of one additional counsel.
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<PAGE>
(d) Contribution. If the indemnification provided for in this Section 2 from
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any statement of a material fact or omission or alleged
omission to state a material fact has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 2(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 2(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 2(d), no selling
Stockholder shall be required to contribute any amount in excess of the amount
by which the total price at which the Buyer Common Stock of such selling
Stockholder were offered to the public exceeds the amount of any damages which
such selling Stockholder has otherwise been required to pay by reason of such
untrue statement or omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this Section 2, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Section 2(a) and (b) without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided for in
this Section 2(d).
3. MISCELLANEOUS.
(a) Expenses. Except as otherwise provided herein, each of the parties hereto
shall bear and pay all costs and expenses incurred by it or on its behalf in
connection with the exercise of registration rights granted hereunder,
including fees and expenses of its own counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement (including other
documents and instruments referred to herein or therein) (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof
and (ii) is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or a
governmental entity to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
(e) Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-39
<PAGE>
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be given by overnight courier, by delivering the same in
person, by telecopy (with confirmation) or by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to the Buyer to:
Sterling Software, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Telecopier No.: (214) 750-0905
Attention: President
with a copy to:
Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Telecopier No.: (214) 953-5822
Attention: Charles D. Maguire, Jr.
If to the Stockholder to:
Such address as appears on the signature page hereof
Such notice shall be deemed delivered and received on the date on which it is
received if sent by overnight courier, hand-delivered or telecopy, or on the
fifth business day following the date on which it is so mailed.
(g) Counterparts. This Agreement and any amendments hereto may be executed in
two counterparts, each of which shall be considered one and the same agreement
and shall become effective when both counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
(h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party hereto.
(i) Specific Performance. The parties hereto agree that this Agreement may be
enforced by either party through specific performance, injunctive relief and
other equitable relief. The parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any
such equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
A-40
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
Address for Notice: STOCKHOLDERS:
A-41
<PAGE>
APPENDIX B
[LOGO OF ALEX. BROWN
& SONS INCORPORATED
APPEARS HERE]
ALEX. BROWN & SONS
INCORPORATED
ESTABLISHED 1800 . AMERICAS'S OLDEST INVESTMENT BANKING FIRM
MEMBERS: NEW YORK STOCK EXCHANGE, INC. AND OTHER LEADING
EXCHANGES
REPLY TO: P.O. BOX 515
BALTIMORE, MD 21203
August 31, 1994
Board of Directors
KnowledgeWare, Inc.
3340 Peachtree Road, NE
Atlanta, GA 30326
Dear Sirs:
We understand that KnowledgeWare, Inc. (the "Company"), Sterling Software,
Inc. ("Sterling"), and a wholly owned subsidiary of Sterling (the "Sub")
propose to enter into an Amended and Restated Agreement and Plan of Merger (the
"Agreement"). Pursuant to the Agreement, the Sub will be merged with and into
the Company (the "Merger"), which shall be the surviving corporation, and the
separate existence of the Sub shall cease. The Agreement provides, among other
things, that each share of the Company's common stock issued and outstanding
immediately prior to the effective time of the Merger will be converted into
.1653 of a share of common stock of Sterling (the "Exchange Ratio"). The terms
and conditions of the Merger are more fully set forth in the Agreement. You
have requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to the holders of the common stock of the Company.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
the Company in connection with the Merger and will receive a fee for our
services, a portion of which is contingent upon the consummation of the Merger.
Alex. Brown & Sons Incorporated maintains a market in the common stock of both
the Company and Sterling, and regularly publishes research reports regarding
the computer software industry and the businesses and securities of publicly
owned companies in that industry, including Sterling. We have also acted as a
financial advisor to Sterling in connection with its prior acquisition of
Systems Center, Inc. on June 1, 1993 and as the lead-managing underwriter of a
public offering of Sterling's 5 3/4% Convertible Subordinated Debentures,
closed in February 1993.
In connection with our opinion, we have reviewed certain publicly available
financial information concerning the Company and Sterling, reviewed the
Company's most current financial information, including information regarding
the capital needs of the Company, and certain internal financial analyses and
other information furnished to us by the Company and Sterling. We have also
held discussions with members of the senior management of the Company and
Sterling regarding their respective businesses and prospects. In addition, we
have (i) reviewed the reported price and trading activity for the common stock
of both the Company and Sterling, (ii) compared certain financial information
for both the Company and Sterling with similar information for certain
companies in the software industry whose securities are publicly traded, (iii)
compared certain stock market information and valuations for both the Company
and Sterling with similar information for certain companies in the software
industry whose securities are publicly traded, (iv) reviewed the financial
terms of certain recent business combinations in the software industry, (v)
reviewed the terms of the Agreement and certain related documents, and (vi)
performed such other studies and analyses and considered such other factors as
we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to information relating to the
ONE THIRTY-FIVE EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202 . TELEPHONE:
410-727-1700 . TELEX: 198186
B-1
<PAGE>
KnowledgeWare, Inc.
August 31, 1994
Page Two
prospects of the Company and Sterling, we have assumed that such information
reflects the best currently available estimates and judgments of the
managements of the Company and Sterling as to the likely future financial
performance of their respective companies and of the combined entity. In
addition, we have not made or been provided with an independent evaluation or
appraisal of the assets of the Company or Sterling, nor have we made any
physical inspection of the properties or assets of the Company or Sterling. Our
opinion is based on market, economic and other conditions as they exist and can
be evaluated as of the date of this letter.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of
view, to the holders of the common stock of the Company.
Our advisory services and the opinion expressed herein are provided solely
for your benefit in connection with the proposed Merger and are not intended to
confer rights or remedies upon any stockholder of the Company or Sterling or
any other person.
Very truly yours,
/s/ Alex. Brown & Sons Incorporated
ALEX. BROWN & SONS INCORPORATED
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APPENDIX C
AMENDED AND RESTATED STOCK OPTION AGREEMENT
This AMENDED AND RESTATED STOCK OPTION AGREEMENT (this "Agreement") is
entered into as of August 31, 1994 to be effective as of July 31, 1994 by and
between KnowledgeWare, Inc., a Georgia corporation (the "Corporation"), and
Sterling Software, Inc., a Delaware corporation (the "Buyer").
WHEREAS, the Buyer, SSI Corporation, a Georgia corporation and a wholly-owned
subsidiary of the Buyer ("Merger Sub"), and the Corporation have entered into
an Agreement and Plan of Merger dated as of July 31, 1994 and propose to enter
into an Amended and Restated Agreement and Plan of Merger dated as of the date
hereof (the "Merger Agreement"; capitalized terms not defined herein shall have
the meanings set forth in the Merger Agreement), providing for, among other
things, the merger of Merger Sub with and into the Corporation with the
Corporation as the surviving corporation; and
WHEREAS, as a condition and an inducement to the Buyer's willingness to enter
into the Merger Agreement, the Buyer has requested that the Corporation agree,
and the Corporation has agreed, to grant the Buyer the Option (as defined
below);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, the Corporation and the Buyer agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein, the
Corporation hereby grants to the Buyer an irrevocable option (the "Option") to
acquire up to 1,200,000 (as adjusted as set forth in Section 6 hereof) shares
(the "Option Shares") of Common Stock, no par value, of the Corporation
("Corporation Common Stock") at an exercise price of $5.00 per Option Share
(the "Purchase Price").
2. EXERCISE OF OPTION. (a) The Buyer may exercise the Option, in whole or in
part, at any time and from time to time following the occurrence of an Exercise
Event (as defined below); provided that, except as otherwise provided in this
Section 2(a), the right to exercise the Option pursuant to this Section 2 shall
expire and be of no further force and effect upon: (i) the Effective Time; or
(ii) twelve months following the first occurrence of an Exercise Event.
Notwithstanding the expiration of the Option, the Buyer shall be entitled to
acquire those Option Shares with respect to which it has exercised the Option
in accordance with the terms hereof prior to the expiration of the Option.
(b) An "Exercise Event" shall occur for purposes of this Agreement upon the
occurrence of any of the following:
(i) (x) the Merger Agreement shall have been terminated by mutual consent
of the Corporation and the Buyer, (y) an Acquisition Proposal shall have
been received by the Corporation prior to such termination and (z) within
twelve months after such termination, the Corporation shall have
consummated a Business Combination with any person or entity (other than
the Buyer or its subsidiaries or affiliates);
(ii) the Board of Directors of the Corporation shall have withdrawn,
modified or changed its recommendation of the Merger Agreement or the
Merger in a manner adverse to the Buyer or shall have resolved to do any of
the foregoing at a time when Buyer is not in material breach of the Merger
Agreement and, within twelve months after termination of the Merger
Agreement, the Corporation shall have consummated an Acquisition Proposal
with any person or entity;
(iii) (x) a tender offer or exchange offer for twenty percent (20%) or
more of the outstanding shares of capital stock of the Corporation shall
have been commenced while the Merger Agreement is in effect, (y) the Board
of Directors of the Corporation, within 10 business days after such tender
offer or exchange offer has been so commenced, either fails to recommend
against acceptance of such tender offer or exchange offer by its
stockholders or takes no position with respect to the acceptance of such
tender
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offer or exchange offer by its stockholders and such tender offer is
consummated and (z) the Buyer shall have terminated the Merger Agreement;
(iv) (x) any person shall have acquired beneficial ownership or the right
to acquire beneficial ownership, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act) shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of,
twenty-five percent (25%) or more of the then outstanding Corporation
Common Stock while the Merger Agreement is in effect, and (y) the Buyer
shall have terminated the Merger Agreement; provided, however, this Section
2(b)(iv) shall not apply with respect to any person who has executed a
Stockholder Agreement or any "group" of which such person is a member; or
(v) (v) the Merger Agreement shall have failed to receive the requisite
vote for approval and adoption by the stockholders of the Corporation at
the stockholders' meeting called for that purpose, (w) at such time, an
Acquisition Proposal shall have been made and the Board of Directors of the
Corporation either fails to recommend against acceptance of such
Acquisition Proposal by its stockholders or takes no position with respect
to such Acquisition Proposal, (x) at the time of such stockholders'
meeting, the Buyer shall not have been in material breach of the Merger
Agreement, (y) the Merger Agreement shall have been terminated, and (z)
within twelve months after the termination, the Corporation consummates
such Acquisition Proposal.
(c) In the event the Buyer wishes to exercise the Option, it shall send to
the Corporation a written notice (the "Notice"; the date of such notice being
herein referred to as the "Notice Date") specifying (i) the total number of
Option Shares it intends to acquire pursuant to such exercise and (ii) a place
and date not earlier than three business days nor later than 15 business days
from the Notice Date for the closing of such acquisition (the "Closing Date");
provided that, if the closing of the acquisition pursuant to the exercise of
the Option (the "Closing") cannot be consummated by reason of any applicable
law, the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which such restriction on consummation has
expired or been terminated; and provided further, without limiting the
foregoing, that if prior notification to or approval of any governmental or
regulatory authority, agency, court or other entity (a "Governmental Entity")
is required in connection with such acquisition, the Buyer shall promptly file
the required notice or application for approval and shall expeditiously process
the same (and the Corporation shall cooperate with the Buyer in the filing of
any such notice or application and the obtaining of any such approval), and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which, as the case may be (i) any required
notification period has expired or been terminated or (ii) such approval has
been obtained, and in either event, any requisite waiting period has passed.
(d) Notwithstanding Section 2(c), in no event shall any Closing Date be more
than 12 months after the related Notice Date, and if the Closing Date shall not
have occurred within 12 months after the related Notice Date due to the failure
to obtain any such required approval, the exercise of the Option effected on
the Notice Date shall be deemed to have expired. Notwithstanding the first
sentence of this paragraph (d), in the event (i) the Buyer receives official
notice that an approval of any Governmental Entity required for the purchase of
Option Shares would not be issued or granted or (ii) a Closing Date shall not
have occurred within 12 months after the related Notice Date due to the failure
to obtain any such required approval, the Buyer shall be entitled to exercise
the Option in connection with the resale of Corporation Common Stock or other
securities pursuant to a registration statement as provided in Section 7.
3. PAYMENT AND DELIVERY OF CERTIFICATES. (a) On each Closing Date, the Buyer
shall pay the Corporation, in immediately available funds by wire transfer to a
bank account designated by the Corporation, an amount equal to the Purchase
Price multiplied by the number of Option Shares to be purchased on such Closing
Date.
(b) At such Closing, simultaneously with the delivery of the consideration
specified in Section 3(a), the Corporation shall deliver to the Buyer a
certificate or certificates representing the Option Shares to be
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acquired at such Closing, which Option Shares shall be free and clear of all
liens, claims, charges and encumbrances of any kind whatsoever (including any
preemptive rights of any shareholder).
(c) Certificates evidencing the shares delivered at each Closing pursuant to
Section 3(b) shall be endorsed with the restrictive legend set forth below in
its entirety:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO REGISTRATION OF TRANSFER
OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS SUCH
TRANSFER IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH ACT DOES NOT APPLY."
It is understood and agreed that this legend shall be removed by delivery of
substitute certificate(s) without such legend if the Buyer shall have delivered
to the Corporation a copy of a letter from the staff of the Securities and
Exchange Commission, or an opinion of counsel (from counsel reasonably
acceptable to the Corporation) in form and substance reasonably satisfactory to
the Corporation and its counsel, to the effect that such legend is not required
for purposes of the Securities Act of 1933, as amended (the "Securities Act").
4. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The representations and
warranties of the Corporation set forth in Sections 5.2 and 5.6 of the Merger
Agreement are incorporated herein by reference as though set forth herein in
full and shall survive any termination of the Merger Agreement. In addition,
the Corporation hereby represents and warrants to the Buyer that (i) the
Corporation has taken all necessary corporate and other action to reserve, and
at all times from the date hereof until the obligation to deliver Corporation
Common Stock upon the exercise of the Option terminates will have reserved for
issuance, upon exercise of the Option, shares of Corporation Common Stock equal
to the number of shares of Corporation Common Stock for which the Option may be
exercised, and the Corporation will take all necessary corporate action to
reserve for issuance all additional shares of Corporation Common Stock or other
securities which may be issued upon exercise of the Option pursuant to Section
6 of this Agreement and (ii) the shares of Corporation Common Stock to be
issued upon due exercise of the Option, including all additional shares of
Corporation Common Stock or other securities which may be issuable pursuant to
Section 6 of this Agreement, upon issuance and payment therefor pursuant
hereto, shall be validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all liens, claims, charges and encumbrances of any
kind whatsoever, including any preemptive rights of any shareholder of the
Corporation.
5. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The representations and
warranties of the Buyer set forth in the second and third sentences of Section
6.2 and Section 6.5 of the Merger Agreement are incorporated herein by
reference as if set forth herein in full and shall survive any termination of
the Merger Agreement. In addition, the Buyer hereby represents and warrants to
the Corporation that the Option is not being taken, and any Option Shares or
other securities acquired by the Buyer upon exercise of the Option will not be
taken, with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the Securities Act.
6. ADJUSTMENT UPON SHARE ISSUANCES, CHANGES IN CAPITALIZATION, ETC. (a) In
the event of any change in Corporation Common Stock by reason of, without
limitation, a stock dividend, split-up, recapitalization, combination, exchange
of shares or similar transaction, the type and number of shares or securities
to be delivered by the Corporation pursuant to the Option shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction, so that the Buyer shall receive upon exercise of the Option
the number and class of shares or other securities or property that the Buyer
would have received if the Option had been exercised immediately prior to such
event, or the record date therefor, as applicable.
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(b) In the event that the Corporation shall enter into an agreement (i) to
consolidate with or merge into any person, other than the Buyer or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than the Buyer or
one of its subsidiaries, to merge into the Corporation and the Corporation
shall be the continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Corporation Common Stock shall be
changed into or exchanged for stock or other securities of the Corporation or
any other person or cash or any other property or then outstanding shares of
Corporation Common Stock shall after such merger represent less than 50% of
the outstanding shares and share equivalents of the merged company or (iii) to
sell or otherwise transfer all or substantially all of its assets to any
person, other than the Buyer or one of its subsidiaries, then, and in each
such case, the agreement governing such transaction shall make proper
provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth in this Agreement, be
converted into, or exchanged for, an option to acquire the same consideration
received by the holders of Corporation Common Stock pursuant to such a
transaction had the Option been exercised in full prior to the consummation of
such transaction. The provisions of this Agreement, including Sections 1, 2, 6
and 7, shall apply with appropriate adjustments to any securities for which
the Option becomes exercisable pursuant to this Section 6.
7. REGISTRATION RIGHTS. The Corporation shall, if requested by the Buyer at
any time and from time to time (a) within three years after the first Closing
Date or (b) for 20 business days following the occurrence of either of the
events set forth in clauses (i) and (ii) of Section 2(d), as expeditiously as
possible prepare and file up to three registration statements under the
Securities Act if such registration is necessary in order to permit the sale
or other disposition of any or all shares of Corporation Common Stock or other
securities that have been acquired by or are issuable to the Buyer upon
exercise of the Option by the Buyer, including a "shelf" registration
statement under Rule 415 under the Securities Act or any successor provision,
and the Corporation shall use its best efforts to qualify such shares or other
securities under any applicable state securities laws. The Buyer agrees to use
all reasonable efforts to cause, and to cause any underwriters of any sale or
other disposition to cause, any sale or other disposition pursuant to such
registration statement to be effected on a widely distributed basis so that
upon consummation thereof no purchaser or transferee shall own beneficially 5%
or more of the then outstanding voting power of the Corporation. The
Corporation shall use all reasonable efforts to cause each such registration
statement to become effective, to obtain all consents or waivers of other
parties which are required thereof and to keep such registration statement
effective for such period as may be reasonably necessary to effect such sale
or other disposition; provided, however, the Corporation shall not be required
to prepare audited financial statements in order to maintain the effectiveness
of the registration statement. In the event that the Buyer requests the
Corporation to file a registration statement following the failure to obtain a
required approval for an exercise of the Option as described in Section 2(d),
the closing of the sale or other disposition of Corporation Common Stock or
other securities pursuant to such registration statement shall occur
substantially simultaneously with the exercise of the Option. The obligations
of the Corporation hereunder to file a registration statement and to maintain
its effectiveness may be suspended for one or more periods of time not
exceeding 90 days in the aggregate for all such periods (and such periods
being at least 15 days apart) if the Board of Directors of the Corporation
shall have determined that the filing of such registration statement or the
maintenance of its effectiveness would require disclosure of nonpublic
information that would materially and adversely affect the Corporation. Any
registration statement prepared and filed under this Section 7, and any sale
covered thereby, shall be at the Corporation's expense except for underwriting
discounts or commissions, brokers' fees and the fees and disbursements of the
Buyer's counsel related thereto. The Buyer shall provide all information
reasonably requested by the Corporation for inclusion in any registration
statement to be filed hereunder. In connection with any registration pursuant
to this Section 7, the Corporation and the Buyer shall provide each other and
any underwriter of the offering with customary representations, warranties,
covenants, indemnification and contribution in connection with such
registration. In the event of a Business Combination proper provision shall be
made in the definitive acquisition agreement executed in connection therewith
to provide that the acquiring party or successor party thereto shall be bound
by the provisions of this Section 7 as if such party was a signatory hereto.
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8. DIVISION OF OPTION. This Agreement and the Option granted hereby are
exchangeable, without expense, at the option of the Buyer upon partial exercise
of the Option or partial assignment of the Option, in both instances as
provided herein, upon presentation and surrender of this Agreement at the
principal office of the Corporation, for other Agreements providing for Options
of different denominations entitling the holder thereof to acquire in the
aggregate the same number of shares of Corporation Common Stock which may be
acquired hereunder. The terms "Agreement" and "Option" as used herein include
any other Agreements and related Options for which this Agreement and the
Option granted hereby may be exchanged.
9. MISCELLANEOUS: (a) Expenses. Except as otherwise provided in the Merger
Agreement, each of the parties hereto shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including fees and expenses of its own counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived in
writing at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or supplemented
except upon the execution and delivery of a written agreement executed by the
parties hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement (including other
documents and instruments referred to herein or therein) (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof
and (ii) is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or a
Governmental Entity to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
(e) Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be given by overnight courier, by delivering the same in
person, by telecopy (with confirmation) or by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to the Buyer to:
Sterling Software, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Telecopier No.: (214) 750-0905
Attention: President
with a copy to:
Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas
75202 Telecopier No.: (214) 953-5822
Attention: Charles D. Maguire, Jr.
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If to the Corporation to:
KnowledgeWare, Inc.
3340 Peachtree Road, N.E.
Suite No. 1100
Atlanta, GA 30326
Telecopier No.: (404) 364-0883
Attention: President
with a copy to:
Hicks, Maloof & Campbell
Suite No. 2200, Marquis Two Tower
285 Peachtree Center Ave., N.E.
Atlanta, GA 30303
Telecopier No.: (404) 420-7474
Attention: Maurice N. Maloof
Such notice shall be deemed delivered and received on the date on which it is
received if sent by overnight courier, hand-delivery or telecopy, or on the
fifth business day following the date on which it is so mailed.
(g) Counterparts. This Agreement and any amendments hereto may be executed in
two counterparts, each of which shall be considered one and the same agreement
and shall become effective when both counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
(h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by the Corporation
(whether by operation of law or otherwise) without the prior written consent of
the Buyer. The Buyer may assign its rights, interests or obligations under this
Agreement or the Option to any person, including without limitation an
assignment of its rights under Section 7 of this Agreement in connection with
the sale of Corporation Common Stock to any purchaser thereof. Subject to the
first sentence of this Agreement, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
(i) Mutual Drafting. Each party hereto has participated in the drafting of
this Agreement, which each party acknowledges is the result of extensive
negotiations between the parties.
(j) Further Assurances. In the event of any exercise of the Option by the
Buyer, the Corporation and the Buyer shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
(k) Specific Performance. The parties hereto agree that this Agreement may be
enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any
such equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
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IN WITNESS WHEREOF, the Corporation and the Buyer have caused this Stock
Option Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
Knowledgeware, Inc.
By: /s/ Francis A. Tarkenton
---------------------------------
Francis A. Tarkenton,
Chairman of the Board and Chief
Executive Officer
Sterling Software, Inc.
By: /s/ Sterling L. Williams
---------------------------------
Sterling L. Williams,
President
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APPENDIX D
AMENDED AND RESTATED STOCKHOLDER AGREEMENT
This AMENDED AND RESTATED STOCKHOLDER AGREEMENT (this "Agreement") is entered
into as of August 31, 1994 to be effective as of July 31, 1994, by and between
Sterling Software, Inc., a Delaware corporation (the "Buyer"), and the
stockholder listed on the signature page hereof (the "Stockholder").
WHEREAS, the Stockholder, as of the date hereof, is the owner of the
respective number of shares (the "Shares") of Common Stock, no par value (the
"Common Stock"), of KnowledgeWare, Inc., a Georgia corporation (the
"Corporation") set forth below the name of the Stockholder on the signature
page hereof;
WHEREAS, the Buyer and SSI Corporation, a Georgia corporation and a wholly-
owned subsidiary of the Buyer ("Merger Sub"), entered into an Agreement and
Plan of Merger with the Corporation dated as of July 31, 1994, and in reliance
in part upon the execution and delivery of this Agreement, the Buyer and Merger
Sub will enter into an Amended and Restated Agreement and Plan of Merger, dated
as of the date hereof (the "Merger Agreement;" capitalized terms not defined
herein shall have the meanings set forth in the Merger Agreement), with the
Corporation which provides that, among other things, upon the terms and subject
to the conditions thereof Merger Sub will be merged with and into the
Corporation, with the Corporation continuing as the surviving corporation and a
wholly-owned subsidiary of the Buyer (the "Merger"), and each outstanding share
of Common Stock, including the Shares, will, by reason of the Merger, be
converted into a fraction of a share of the Buyer's common stock, par value
$.10 per share (the "Buyer Common Stock"), that is equal to the Exchange Ratio
(subject to the provisions of the Merger Agreement);
WHEREAS, in reliance upon the execution and delivery of this Agreement, the
Buyer will enter into an Amended and Restated Stock Option Agreement, dated as
of the date hereof (the "Stock Option Agreement"), with the Corporation
pursuant to which the Corporation has granted to the Buyer an option to acquire
shares of Common Stock upon the occurrence of certain events; and
WHEREAS, to induce the Buyer to enter into the Merger Agreement and the Stock
Option Agreement and to incur the obligations set forth therein, the
Stockholder is entering into this Agreement pursuant to which the Stockholder
agrees to vote in favor of the Merger and certain other matters as set forth
herein, and to make certain agreements with respect to the Shares upon the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreement set forth herein and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. VOTING OF SHARES; IRREVOCABLE PROXY. The Stockholder agrees that
until the earlier of (i) the Effective Time and (ii) the termination of the
Merger Agreement (the earlier of such dates being hereinafter referred to as
the "Expiration Date"), the Stockholder shall vote all Shares owned by the
Stockholder at any meeting of the Corporation's stockholders (whether annual or
special and whether or not an adjourned or postponed meeting), or, if
applicable, take action by written consent (x) for adoption of the Merger
Agreement and in favor of the Merger and any other transaction contemplated by
the Merger Agreement, as such Merger Agreement may be modified or amended from
time to time (but not to reduce the Exchange Ratio), (y) against any action,
omission or agreement which would impede or interfere with, or have the effect
of discouraging, the Merger, including, without limitation, any Acquisition
Proposal other than the Merger, and (z) in favor of all nominees in the
Corporation's slate of directors nominated for election by a majority of the
Corporation's non-management directors. Any such vote shall be cast or consent
shall be given in accordance with such procedures relating thereto as shall
ensure that it is duly counted for purposes of determining that a quorum is
present and for purposes of recording the results of such vote or consent.
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In the event that the Stockholder shall fail to comply with the provisions of
this Section 1 (as determined by the Buyer in its sole discretion), the
Stockholder hereby agrees that such failure shall result, without any further
action by the Stockholder, in the irrevocable appointment of the Buyer, until
termination of the Merger Agreement, as its attorney and proxy with full power
of substitution, to vote and otherwise act (by written consent or otherwise)
with respect to the Shares which the Stockholder is entitled to vote at any
meeting of stockholders of the Corporation (whether annual or special and
whether or not an adjourned or postponed meeting) or consent in lieu of any
such meeting or otherwise, on the matters and in the manner specified in
Section 1 above. THE STOCKHOLDER ACKNOWLEDGES THAT THIS PROXY IS COUPLED WITH
AN INTEREST, AND CONSTITUTES, AMONG OTHER THINGS, AN INDUCEMENT FOR THE BUYER
TO ENTER INTO THE MERGER AGREEMENT, IS IRREVOCABLE AND SHALL NOT BE TERMINATED
BY OPERATION OF LAW UPON THE OCCURRENCE OF ANY EVENT, INCLUDING, WITHOUT
LIMITATION, THE DEATH OR INCAPACITY OF THE STOCKHOLDER. Notwithstanding any
provision contained in such proxy, such proxy shall terminate upon the
Expiration Date.
Section 2. COVENANTS OF THE STOCKHOLDER. The Stockholder covenants and agrees
for the benefit of the Buyer that, until the Expiration Date, it:
(a) will not sell, transfer, pledge, hypothecate, encumber, assign,
tender or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
hypothecation, encumbrance, assignment, tender or other disposition of (any
one or more of which, a "Transfer"), any of the Shares owned by it unless,
in connection with such Transfer, the transferee executes a counterpart of
this Agreement agreeing to be bound by the terms hereof;
(b) will, other than as expressly contemplated by this Agreement, not
grant any powers of attorney or proxies or consents in respect of any of
the Shares owned by it, deposit any of the Shares owned by it into a voting
trust, enter into a voting agreement with respect to any of the Shares
owned by it or otherwise restrict the ability of the holder of any of the
Shares owned by it freely to exercise all voting rights with respect
thereto except for powers of attorney granted in the ordinary course
consistent with the terms of the Merger Agreement;
(c) will not take any action which, if taken by the Corporation, would be
prohibited by Section 7.1 of the Merger Agreement;
(d) will use its best efforts to take, or cause to be taken, all action,
and do, or cause to be done, all things necessary or advisable in order to
consummate and make effective the transactions contemplated by this
Agreement including, without limitation, to enter into an affiliate's
letter substantially in the form of Annex A hereto; provided however, if
the Stockholder is a director of the Corporation the provisions of this
paragraph (d) are subject to the fiduciary duties such Stockholder has to
the Corporation as a member of the Board of Directors; and
(e) will not exercise any appraisal or dissenter's rights, if any, with
respect to the Shares.
Section 3. COVENANTS OF THE BUYER. The Buyer covenants and agrees for the
benefit of the Stockholder that (a) immediately upon execution of this
Agreement, the Buyer shall enter, and cause Merger Sub to enter, into the
Merger Agreement, and (b) until the Expiration Date, it shall use its best
efforts to take, or cause to be taken, all action, and do, or cause to be done,
all things necessary or advisable in order to consummate and make effective the
transactions contemplated by this Agreement and the Merger Agreement,
consistent with the terms and conditions of each such agreement.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
represents and warrants to the Buyer that: (a) if applicable, the Stockholder
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization; (b) the execution, delivery and
performance by the Stockholder of this Agreement will not conflict with,
require a consent, waiver or approval under, or result in a breach or a default
under, its Certificate of Incorporation or By-laws (if applicable), or any of
the terms of any contract, commitment or other obligations (written or oral) to
which
D-2
<PAGE>
the Stockholder is bound, which breach would result in a material adverse
effect on the Stockholder; (c) this Agreement has been duly executed and
delivered by the Stockholder and constitutes a valid and binding obligation of
the Stockholder, enforceable against the Stockholder in accordance with its
terms; (d) if applicable, the execution, delivery and performance of this
Agreement and the consummation by it of the transactions contemplated hereby
have been approved by all necessary corporate action on its part; (e) other
than as set forth herein, the Stockholder has not entered into an irrevocable
proxy with respect to the Shares.
The representations and warranties contained herein shall be made as of the
date hereof and as of each date from the date hereof through and including the
Closing.
Section 5. ADJUSTMENTS; ADDITIONAL SHARES. In the event (i) of any stock
dividend, stock split, recapitalization, reclassification, combination or
exchange of shares of capital stock of the Corporation on, of or affecting the
Shares, or (ii) the Stockholder shall acquire voting rights with respect to any
additional shares of Common Stock or other securities of the Corporation,
including any securities entitling the holder hereof to vote or give consent
with respect to the matters set forth in Section 1 hereof but excluding shares
of Common Stock of the Corporation as to which the holders thereof have granted
revocable proxies to the Stockholder in connection with the shareholders
meeting of the Corporation contemplated by Section 7.4 of the Merger Agreement,
then the terms of this Agreement shall apply to the shares of capital stock
held by the Stockholder immediately following the effectiveness of the events
described in clause (i) or the Stockholder becoming the beneficial owner
thereof, as described in clause (ii), as though they were Shares hereunder. As
soon as practicable after the receipt of such other capital stock or
securities, the Stockholder shall surrender to the Corporation all certificates
or instruments representing such for the purpose of affixing the legend set
forth in Section 6 hereof.
Section 6. SPECIFIC PERFORMANCE. The Stockholder acknowledges that the
agreements contained in this Agreement are an integral part of the transactions
contemplated by the Merger Agreement and the Stock Option Agreement and that,
without these agreements, the Buyer and Merger Sub would not enter into the
Merger Agreement or the Stock Option Agreement, and acknowledges that damages
would be an inadequate remedy for any breach by it of the provisions of this
Agreement. Accordingly, the Stockholder and the Buyer each agree that the
obligations of the parties hereunder shall be specifically enforceable and
neither party shall take any action to impede the other from seeking to enforce
such right of specific performance. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
Section 7. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given by overnight
courier, by delivering the same in person, by telecopy (with confirmation), or
by registered or certified mail (return receipt requested) to the Stockholder
at the address listed on the signature page hereof, with a copy to Hicks,
Maloof & Campbell, Suite 2200, Marquis Two Tower, 285 Peachtree Center Avenue,
N.E., Atlanta, Georgia 30303, Attention: Maurice N. Maloof, facsimile number
(404) 420-7474, and to the Buyer at 8080 N. Central Expressway, Suite 1100,
Dallas, Texas 75206, Attention: President, facsimile number (214) 750-0905,
with a copy to Jackson & Walker, L.L.P., 901 Main Street, Suite 6000, Dallas,
Texas 75202, Attention: Charles D. Maguire, Jr., Facsimile number
(214) 953-5822, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Any such notice shall be deemed
delivered and received on the date on which it is received if sent by overnight
courier, hand-delivered or telecopy, or on the fifth business day following the
date on which it is so mailed.
Section 8. BINDING EFFECT; SURVIVAL. Upon execution and delivery of this
Agreement by the Buyer, this Agreement shall become effective as to the
Stockholder at the time the Stockholder executes and delivers this Agreement.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, personal representatives, successors and
assigns.
D-3
<PAGE>
Section 9. ASSIGNMENT. The Buyer may, without the consent of the Stockholder,
assign its rights hereunder to any direct or indirect wholly owned subsidiary
of the Buyer, provided that any such assignment shall not affect the
obligations of the Buyer hereunder.
Section 10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to its
rules of conflict of laws.
Section 11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
Section 12. EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction hereof.
Section 13. ADDITIONAL AGREEMENTS; FURTHER ASSURANCE. Subject to the terms
and conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement. The Stockholder
will provide the Buyer with all documents which may reasonably be requested by
the Buyer and will take reasonable steps to enable the Buyer to obtain all
rights and benefits provided it hereunder.
Section 14. AMENDMENT; WAIVER. No amendment or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by the Buyer and the Stockholder, in the case of an
amendment, or by the party which is the beneficiary of any such provision, in
the case of waiver or a consent to departure therefrom.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
STERLING SOFTWARE, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
STOCKHOLDER:
By: _____________________________
Name: _________________________
Title: ________________________
Address:
Number of Shares:
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a corporation to
indemnify its directors and officers or former directors and officers and to
purchase insurance with respect to liability arising out of their capacity or
status as directors and officers. Such law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's certificate of incorporation, bylaws, any agreement or otherwise.
Article IX of the Registrant's Certificate of Incorporation, as amended,
provides that, to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended, a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Article IX of the
Registrant's Restated Bylaws provides for indemnification of officers and
directors. In addition, the Registrant has entered into Indemnity Agreements
with each of its officers and directors pursuant to which such officers and
directors may be indemnified against losses arising from certain claims,
including claims under the Securities Act of 1933, as amended (the "Securities
Act"), which may be made by reason of their being officers or directors.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as a part of this Registration
Statement on Form S-4, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 None
2.1 Amended and Restated Agreement and Plan of Merger dated as of August
31, 1994 among the Registrant, KnowledgeWare, Inc. and SSI
Corporation (included as Appendix A to the Proxy
Statement/Prospectus that forms a part of this Registration
Statement) (1)
2.2 Agreement dated October 11, 1994 among the Registrant,
KnowledgeWare, Inc. and SSI Corporation (16)
2.3 First Amendment to Amended and Restated Agreement and Plan of Merger
dated as of October 24, 1994 among the Registrant, KnowledgeWare,
Inc. and SSI Corporation (16)
3.1 Certificate of Incorporation of the Registrant (2)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant (3)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant (4)
3.4 Restated Bylaws of the Registrant (5)
4.1 Form of Common Stock Certificate (6)
5 Opinion of Jackson & Walker, L.L.P. (16)
6 None
7 None
8.1 Opinion of Jackson & Walker, L.L.P. (16)
8.2 Opinion of Hicks, Maloof & Campbell (16)
9 None
10.1 Amended and Restated Stock Option Agreement dated as of August 31,
1994 between the Registrant and KnowledgeWare, Inc. (included as
Appendix C to the Proxy Statement/Prospectus that forms a part of
this Registration Statement) (1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.2 Form of Amended and Restated Stockholder Agreement dated as of
August 31, 1994 between the Registrant and certain stockholders of
KnowledgeWare, Inc. (included as Appendix D to the Proxy
Statement/Prospectus that forms a part of this Registration
Statement) (1)
10.3 Form of Registration Rights Agreement to be entered into among the
Registrant and certain affiliates of KnowledgeWare, Inc. (included
as an exhibit to the Amended and Restated Agreement and Plan of
Merger filed as part of the Proxy Statement/Prospectus that forms
a part of this Registration Statement) (1)
10.4 Form of Escrow Agreement to be entered into among the Registrant,
KnowledgeWare, Inc., the Representative and the Escrow Agent
(included as an exhibit to the Amended and Restated Agreement and
Plan of Merger filed as part of the Proxy Statement/ Prospectus
that forms a part of this Registration Statement) (1)
10.5 Amended Incentive Stock Option Plan of the Registrant (7)
10.6 Amended Non-Statutory Stock Option Plan of the Registrant (7)
10.7 Supplemental Executive Retirement Plan II of Informatics General
Corporation (3)
10.8 Form of Supplemental Executive Retirement Plan II Agreement (the
"SERP II Agreement") (3)
10.9 Amendment to SERP II Agreement (3)
10.10 Form of Employment Agreement with Jeannette P. Meier, George H.
Ellis and Phillip A. Moore (3)
10.11 Form of Amendment No. 1 to Employment Agreement with Jeannette P.
Meier, George H. Ellis and Phillip A. Moore (3)
10.12 Employment Agreement with Sam Wyly (3)
10.13 Employment Agreement with Charles J. Wyly, Jr. (3)
10.14 Employment Agreement with Sterling L. Williams (3)
10.15 Form of Amendment No. 1 to Employment Agreement with Charles J.
Wyly, Jr. and Sterling L. Williams (3)
10.16 Amendment No. 1 to Employment Agreement with Sam Wyly (3)
10.17 Amendment No. 2 to Employment Agreement with Sam Wyly (3)
10.18 Consultation Agreement with REC Enterprises, Inc. (3)
10.19 Employment Agreement with William D. Plumb (3)
10.20 Employment Agreement with William D. Plumb (3)
10.21 Form of Employment Agreement with Edward J. Lott, Warner C. Blow,
Werner L. Frank and Geno P. Tolari (3)
10.22 Employment Agreement with Sterling L. Williams (8)
10.23 Form of Employment Agreement with Jeanette P. Meier, George H.
Ellis, Phillip A. Moore, Warner C. Blow and Geno P. Tolari (8)
10.24 Employment Agreement with Werner L. Frank (8)
10.25 Form of Series B Warrant Agreement (3)
10.26 Form of Amendment to Series B Warrant Agreement (January 1988) (3)
10.27 Form of Amendment to Series B Warrant Agreement (May 1989) (3)
10.28 Form of Series E Warrant Agreement (3)
10.29 Form of Amendment to Series E Warrant Agreement (May 1989) (3)
10.30 Form of Series F Warrant Agreement (3)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.31 Form of Amendment to Series F Warrant Agreement (May 1989) (3)
10.32 Amended and Restated Revolving Credit and Term Loan Agreement dated
June 8, 1990 between the Registrant and The First National Bank of
Boston and BankOne Texas N.A. ("Loan Agreement") (3)
10.33 First Amendment to Loan Agreement dated as of October 16, 1990 (3)
10.34 Second Amendment to Loan Agreement dated as of September 19, 1991
(3)
10.35 Third Amendment to Loan Agreement dated as of December 31, 1991 (3)
10.36 Fourth Amendment to Loan Agreement dated as of June 15, 1992 (3)
10.37 Fifth Amendment to Loan Agreement dated as of July 31, 1992 (3)
10.38 Sixth Amendment to Loan Agreement dated as of August 31, 1992 (3)
10.39 Seventh Amendment to Loan Agreement dated as of September 9, 1992
(3)
10.40 Eighth Amendment to Loan Agreement dated as of September 30, 1992
(3)
10.41 Ninth Amendment to Loan Agreement dated as of October 13, 1992 (3)
10.42 Tenth Amendment to Loan Agreement dated as of December 17, 1992 (8)
10.43 Form of Eleventh Amendment to Loan Agreement dated as of March 29,
1993 (3)
10.44 Twelfth Amendment to Loan Agreement dated as of June 30, 1993 (3)
10.45 Form of Thirteenth Amendment to Loan Agreement dated as of November
10, 1993 (3)
10.46 Form of Fourteenth Amendment to Loan Agreement dated as of November
22, 1993 (3)
10.47 Fifteenth Amendment to Loan Agreement dated as of December 21, 1993
(9)
10.48 Sixteenth Amendment to Loan Agreement dated as of December 30, 1993
(9)
10.49 Seventeenth Amendment to Loan Agreement dated as of January 31, 1994
(9)
10.50 Eighteenth Amendment to Loan Agreement dated as of March 15, 1994
(10)
10.51 Nineteenth Amendment to Loan Agreement dated as of May 17, 1994 (7)
10.52 Form of Indenture between the Registrant and Bank of America Texas,
National Association as Trustee, including the form of 5 3/4%
Convertible Subordinated Debenture attached as Exhibit A thereto
(11)
10.53 1992 Executive Compensation Plan for Group Presidents (3)
10.54 1993 Executive Compensation Plan for Group Presidents (8)
10.55 1994 Executive Compensation Plan for Group Presidents (3)
10.56 Form of Series G Warrant Agreement (3)
10.57 Amended 1992 Non-Statutory Stock Option Plan (12)
10.58 1994 Non-Statutory Stock Option Plan (13)
10.59 Form of Indemnity Agreement between the Registrant and each of its
directors (3)
10.60 Systems Center, Inc. Restated and Amended Restricted Stock Plan (15)
10.61 Systems Center, Inc. Amended and Restated Nondiscretionary
Restricted Stock Plan (15)
10.62 Systems Center, Inc. 1982 Stock Option Plan (15)
10.63 Systems Center, Inc. 1992 Stock Incentive Plan (15)
10.64 Systems Center, Inc. 1983 Stock Plan (15)
10.65 Systems Center, Inc. Share Option Scheme (15)
10.66 Registration Rights Agreement dated as of July 1, 1993 among the
Registrant and the Selling Stockholders named therein(14)
10.67 Assignment of Loan Documents and Security Interests dated as of
August 31, 1994 among the Registrant, IBM Credit Corporation and
KnowledgeWare, Inc. (16)
10.68 Amended and Restated Revolving Loan and Security Agreement dated as
of August 31, 1994 between the Registrant and KnowledgeWare, Inc.
(16)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.69 Warrant Agreement dated as of August 31, 1994 between the Registrant
and KnowledgeWare, Inc. (16)
10.70 Registration Rights Agreement dated as of August 31, 1994 between
the Registrant and KnowledgeWare, Inc. (16)
10.71 First Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of October 25, 1994 between the Registrant and
KnowledgeWare, Inc. (16)
11 None
12 None
13 None
14 None
15 None
16 None
21 Subsidiaries (16)
23.1 Consent of Ernst & Young L.L.P. (1)
23.2 Consent of Arthur Andersen LLP(1)
23.3 Consent of Coopers & Lybrand, L.L.P. (1)
23.4 Consent of Alex. Brown & Sons Incorporated (16)
23.5 Consent of Jackson & Walker, L.L.P. (included in its opinions filed
as Exhibits 5 and 8 to this Registration Statement) (16)
23.6 Consent of Hicks, Maloof & Campbell, A Professional Corporation (16)
23.7 Consent of Francis A. Tarkenton (1)
24 Power of Attorney (16)
25 None
26 None
27 None
28 None
99 Form of Proxy Card (16)
</TABLE>
- --------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Registrant's Registration Statement
No. 2-82506 on Form S-1 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1993 and incorporated herein
by reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-69926 on Form S-8 and incorporated herein by reference
(5) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Registration Statement
No. 2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1994 and incorporated
herein by reference.
(8) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-62028 on Form S-4 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1993 and incorporated
herein by reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1994 and incorporated
herein by reference.
(11) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-57428 on Form S-3 and incorporated herein by reference.
II-4
<PAGE>
(12) Previously filed as an exhibit to the Registrant's Registration Statement
No 33-53831 on Form S-3 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-53837 on Form S-3 and incorporated herein by reference.
(14) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-71706 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-65402 on Form S-8 and incorporated herein by reference.
(16) Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that,
II-5
<PAGE>
for purposes of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF DALLAS, STATE OF TEXAS ON THE 27TH DAY OF
OCTOBER, 1994.
Sterling Software, Inc.
/s/ Jeannette P. Meier
By: ____________________________
Jeannette P. Meier
Name: _______________________________
Executive Vice President
Title: ______________________________
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
*/s/ Sterling L. Williams President, Chief October 27, 1994
- ------------------------------------- Executive Officer
STERLING L. WILLIAMS and Director
(Principal
Executive Officer)
*/s/ George H. Ellis Executive Vice October 27, 1994
- ------------------------------------- President and Chief
GEORGE H. ELLIS Financial Officer
(Principal
Financial and
Accounting Officer)
*/s/ Sam Wyly Chairman of the October 27, 1994
- ------------------------------------- Board of Directors
SAM WYLY
*/s/ Charles J. Wyly, Jr. Vice Chairman of the October 27, 1994
- ------------------------------------- Board of Directors
CHARLES J. WYLY, JR.
*/s/ Evan A. Wyly Director October 27, 1994
- -------------------------------------
EVAN A. WYLY
*/s/ Michael C. French Director October 27, 1994
- -------------------------------------
MICHAEL C. FRENCH
*/s/ Robert J. Donachie Chairman of the
- ------------------------------------- Audit Committee and October 27, 1994
ROBERT J. DONACHIE Director
*/s/ Phillip A. Moore Executive Vice October 27, 1994
- ------------------------------------- President,
PHILLIP A. MOORE Technology and
Director
II-8
<PAGE>
SIGNATURES TITLE DATE
---------- ----- ----
*/s/ Robert E. Cook Director October 27, 1994
- -------------------------------------
ROBERT E. COOK
*/s/ Donald R. Miller, Jr. Director October 27, 1994
- -------------------------------------
DONALD R. MILLER, JR.
* By: /s/ Jeannette P. Meier
-------------------------------
JEANNETTE P. MEIER, ATTORNEY-IN-FACT
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------- ---------------------- ------------
<C> <S> <C>
1 --None
2.1 --Amended and Restated Agreement and Plan of Merger
dated as of August 31, 1994 among the Registrant,
KnowledgeWare, Inc. and SSI Corporation (included as
Appendix A to the Proxy Statement/Prospectus that
forms a part of this Registration Statement) (1)
2.2 --Agreement dated October 11, 1994 among the
Registrant, KnowledgeWare, Inc. and SSI Corporation
(16)
2.3 --First Amendment to Amended and Restated Agreement
and Plan of Merger dated as of October 24, 1994
among the Registrant, KnowledgeWare, Inc. and SSI
Corporation (16)
3.1 --Certificate of Incorporation of the Registrant (2)
3.2 --Certificate of Amendment of Certificate of
Incorporation of the Registrant (3)
3.3 --Certificate of Amendment of Certificate of
Incorporation of the Registrant (4)
3.4 --Restated Bylaws of the Registrant (5)
4.1 --Form of Common Stock Certificate (6)
5 --Opinion of Jackson & Walker, L.L.P. (16)
6 --None
7 --None
8.1 --Opinion of Jackson & Walker, L.L.P. (16)
8.2 --Opinion of Hicks, Maloof & Campbell (16)
9 --None
10.1 --Amended and Restated Stock Option Agreement dated
as of August 31, 1994 between the Registrant and
KnowledgeWare, Inc. (included as Appendix C to the
Proxy Statement/Prospectus that forms a part of this
Registration Statement) (1)
10.2 --Form of Amended and Restated Stockholder Agreement
dated as of August 31, 1994 between the Registrant
and certain stockholders of KnowledgeWare, Inc.
(included as Appendix D to the Proxy
Statement/Prospectus that forms a part of this
Registration Statement) (1)
10.3 --Form of Registration Rights Agreement to be entered
into among the Registrant and certain affiliates of
KnowledgeWare, Inc. (included as an exhibit to the
Amended and Restated Agreement and Plan of Merger
filed as part of the Proxy Statement/Prospectus that
forms a part of this Registration Statement) (1)
10.4 --Form of Escrow Agreement to be entered into among
the Registrant, KnowledgeWare, Inc., the
Representative and the Escrow Agent (included as an
exhibit to the Amended and Restated Agreement and
Plan of Merger filed as part of the Proxy Statement/
Prospectus that forms a part of this Registration
Statement) (1)
10.5 --Amended Incentive Stock Option Plan of the
Registrant (7)
10.6 --Amended Non-Statutory Stock Option Plan of the
Registrant (7)
10.7 --Supplemental Executive Retirement Plan II of
Informatics General Corporation (3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------- ---------------------- ------------
<C> <S> <C>
10.8 --Form of Supplemental Executive Retirement Plan II
Agreement (the "SERP II Agreement") (3)
10.9 --Amendment to SERP II Agreement (3)
10.10 --Form of Employment Agreement with Jeannette P.
Meier, George H. Ellis and Phillip A. Moore (3)
10.11 --Form of Amendment No. 1 to Employment Agreement
with Jeannette P. Meier, George H. Ellis and Phillip
A. Moore (3)
10.12 --Employment Agreement with Sam Wyly (3)
10.13 --Employment Agreement with Charles J. Wyly, Jr. (3)
10.14 --Employment Agreement with Sterling L. Williams (3)
10.15 --Form of Amendment No. 1 to Employment Agreement
with Charles J. Wyly, Jr. and Sterling L. Williams
(3)
10.16 --Amendment No. 1 to Employment Agreement with Sam
Wyly (3)
10.17 --Amendment No. 2 to Employment Agreement with Sam
Wyly (3)
10.18 --Consultation Agreement with REC Enterprises, Inc.
(3)
10.19 --Employment Agreement with William D. Plumb (3)
10.20 --Employment Agreement with William D. Plumb (3)
10.21 --Form of Employment Agreement with Edward J. Lott,
Warner C. Blow, Werner L. Frank and Geno P. Tolari
(3)
10.22 --Employment Agreement with Sterling L. Williams (8)
10.23 --Form of Employment Agreement with Jeanette P.
Meier, George H. Ellis, Phillip A. Moore, Warner C.
Blow and Geno P. Tolari (8)
10.24 --Employment Agreement with Werner L. Frank (8)
10.25 --Form of Series B Warrant Agreement (3)
10.26 --Form of Amendment to Series B Warrant Agreement
(January 1988) (3)
10.27 --Form of Amendment to Series B Warrant Agreement
(May 1989) (3)
10.28 --Form of Series E Warrant Agreement (3)
10.29 --Form of Amendment to Series E Warrant Agreement
(May 1989) (3)
10.30 --Form of Series F Warrant Agreement (3)
10.31 --Form of Amendment to Series F Warrant Agreement
(May 1989) (3)
10.32 --Amended and Restated Revolving Credit and Term Loan
Agreement dated June 8, 1990 between the Registrant
and The First National Bank of Boston and BankOne
Texas N.A. ("Loan Agreement") (3)
10.33 --First Amendment to Loan Agreement dated as of
October 16, 1990 (3)
10.34 --Second Amendment to Loan Agreement dated as of
September 19, 1991 (3)
10.35 --Third Amendment to Loan Agreement dated as of
December 31, 1991 (3)
10.36 --Fourth Amendment to Loan Agreement dated as of June
15, 1992 (3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------- ---------------------- ------------
<C> <S> <C>
10.37 --Fifth Amendment to Loan Agreement dated as of July
31, 1992 (3)
10.38 --Sixth Amendment to Loan Agreement dated as of
August 31, 1992 (3)
10.39 --Seventh Amendment to Loan Agreement dated as of
September 9, 1992 (3)
10.40 --Eighth Amendment to Loan Agreement dated as of
September 30, 1992 (3)
10.41 --Ninth Amendment to Loan Agreement dated as of
October 13, 1992 (3)
10.42 --Tenth Amendment to Loan Agreement dated as of
December 17, 1992 (8)
10.43 --Form of Eleventh Amendment to Loan Agreement dated
as of March 29, 1993 (3)
10.44 --Twelfth Amendment to Loan Agreement dated as of
June 30, 1993 (3)
10.45 --Form of Thirteenth Amendment to Loan Agreement
dated as of November 10, 1993 (3)
10.46 --Form of Fourteenth Amendment to Loan Agreement
dated as of November 22, 1993 (3)
10.47 --Fifteenth Amendment to Loan Agreement dated as of
December 21, 1993 (9)
10.48 --Sixteenth Amendment to Loan Agreement dated as of
December 30, 1993 (9)
10.49 --Seventeenth Amendment to Loan Agreement dated as of
January 31, 1994 (9)
10.50 --Eighteenth Amendment to Loan Agreement dated as of
March 15, 1994 (10)
10.51 --Nineteenth Amendment to Loan Agreement dated as of
May 17, 1994 (7)
10.52 --Form of Indenture between the Registrant and Bank
of America Texas, National Association as Trustee,
including the form of 5 3/4% Convertible
Subordinated Debenture attached as Exhibit A thereto
(11)
10.53 --1992 Executive Compensation Plan for Group
Presidents (3)
10.54 --1993 Executive Compensation Plan for Group
Presidents (8)
10.55 --1994 Executive Compensation Plan for Group
Presidents (3)
10.56 --Form of Series G Warrant Agreement (3)
10.57 --Amended 1992 Non-Statutory Stock Option Plan (12)
10.58 --1994 Non-Statutory Stock Option Plan (13)
10.59 --Form of Indemnity Agreement between the Registrant
and each of its directors (3)
10.60 --Systems Center, Inc. Restated and Amended
Restricted Stock Plan (15)
10.61 --Systems Center, Inc. Amended and Restated
Nondiscretionary Restricted Stock Plan (15)
10.62 --Systems Center, Inc. 1982 Stock Option Plan (15)
10.63 --Systems Center, Inc. 1992 Stock Incentive Plan (15)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------- ---------------------- ------------
<C> <S> <C>
10.64 --Systems Center, Inc. 1983 Stock Plan (15)
10.65 --Systems Center, Inc. Share Option Scheme (15)
10.66 --Registration Rights Agreement dated as of July 1,
1993 among the Registrant and the Selling
Stockholders named therein(14)
10.67 --Assignment of Loan Documents and Security Interests
dated as of August 31, 1994 among the Registrant,
IBM Credit Corporation and KnowledgeWare, Inc. (16)
10.68 --Amended and Restated Revolving Loan and Security
Agreement dated as of August 31, 1994 between the
Registrant and KnowledgeWare, Inc. (16)
10.69 --Warrant Agreement dated as of August 31, 1994
between the Registrant and KnowledgeWare, Inc. (16)
10.70 --Registration Rights Agreement dated as of August
31, 1994 between the Registrant and KnowledgeWare,
Inc. (16)
10.71 --First Amendment to Amended and Restated Revolving
Loan and Security Agreement dated as of October 25,
1994 between the Registrant and KnowledgeWare, Inc.
(16)
11 --None
12 --None
13 --None
14 --None
15 --None
16 --None
21 --Subsidiaries (16)
23.1 --Consent of Ernst & Young LLP (1)
23.2 --Consent of Arthur Andersen LLP(1)
23.3 --Consent of Coopers & Lybrand, L.L.P. (1)
23.4 --Consent of Alex. Brown & Sons Incorporated (16)
23.5 --Consent of Jackson & Walker, L.L.P. (included in
its opinions filed as Exhibits 5 and 8 to this
Registration Statement) (16)
23.6 --Consent of Hicks, Maloof & Campbell, A Professional
Corporation (16)
24 --Power of Attorney (16)
25 --None
26 --None
27 --None
28 --None
99 --Form of Proxy Card (16)
</TABLE>
- --------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Registrant's Registration Statement
No. 2-82506 on Form S-1 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1993 and incorporated herein
by reference.
<PAGE>
(4) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-69926 on Form S-8 and incorporated herein by reference
(5) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Registration Statement
No. 2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1994 and incorporated
herein by reference.
(8) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-62028 on Form S-4 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1993 and incorporated
herein by reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1994 and incorporated
herein by reference.
(11) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-57428 on Form S-3 and incorporated herein by reference.
(16) Previously filed.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to all references to our firm in the Registration Statement
(Form S-4) pertaining to the registration of 2,654,652 shares of common stock of
Sterling Software, Inc. and to the incorporation by reference therein of our
report dated November 15, 1993, with respect to the consolidated financial
statements and schedules of Sterling Software, Inc. included in its Annual
Report on Form 10-K for the year ended September 30, 1993, as amended by
Form 10-K/A Amendment No. 1 filed January 26, 1994, filed with Securities and
Exchange Commission.
/s/Ernst & Young LLP
Dallas, Texas
October 24, 1994
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated June 18, 1993
(except with respect to the matter discussed in Note 19 at to which the date is
June 1, 1993), included in Sterling Software, Inc.'s Annual Report on Form 10-K
for the year ended September 30, 1993, and to all references to our Firm
included in this registration statement.
Washington, D.C.
October 24, 1994
/s/ Arthur Andersen LLP
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
We consent to the incorporation by reference in this registration statement on
Form S-4 of our report, which includes an explanatory paragraph about
KnowledgeWare, Inc.'s ability to continue as a going concern, dated August 31,
1994, on our audit of the financial statements of KnowledgeWare, Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Experts".
Atlanta, Georgia
October 26, 1994
/s/ Coopers & Lybrand L.L.P.
<PAGE>
EXHIBIT 23.7
Consent of Francis A. Tarkenton
Francis A. Tarkenton hereby consents, for purposes of this Registration
Statement on Form S-4, to being named as a person who will serve as a director
of Sterling Software, Inc. ("Sterling") following the effectiveness of the
merger of a wholly owned subsidiary of Sterling with and into KnowledgeWare,
Inc. as contemplated by this Registration Statement.
Date: October 27, 1994. /s/ Francis A. Tarkenton
------------------------
Francis A. Tarkenton
