<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 14, 1994
-------------------------
Sterling Software, Inc.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-8467 75-1873956
--------------- ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8080 N. Central Expwy., Suite 1100, Dallas, Texas 75206
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 891-8600
---------------------------
<PAGE>
Item 5. Other Events.
As previously discussed in the Current Report on Form 8-K dated November 3,
1994, of Sterling Software, Inc., a Delaware corporation ("Sterling"), on August
31, 1994, Sterling and SSI Corporation, a Georgia corporation and a recently
organized wholly owned subsidiary of Sterling ("Merger Sub"), entered into an
Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994
(as amended, the "Merger Agreement") with KnowledgeWare, Inc., a Georgia
corporation ("KnowledgeWare"), pursuant to which, among other things, (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 outstanding share of the common stock, without par value, of
KnowledgeWare (the "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 recieve
.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 an 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, judgements, 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 (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 pursuant to the terms of the Merger Agreement.
Consummation of the Merger is subject to the approval and adoption by the
KnowledgeWare stockholders of the Merger Agreement, as well as certain other
conditions set forth in the Merger Agreement. The Special Meeting of
Stockholders of KnowledgeWare 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.
All information contained in this Form 8-K relating to KnowledgeWare has
been supplied to Sterling by KnowledgeWare.
Item 7. Financial Statements and Exhibits.
a. Financial Statements of KnowledgeWare.
On November 14, 1994, KnowledgeWare filed its Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994. Included on pages A-1 to A-8 of this
Current Report on Form 8-K are the following condensed consolidated financial
statements of KnowledgeWare: (i) the unaudited Condensed Consolidated Statements
of Operations for the three months ended September 30, 1994 and 1993; (ii) the
unaudited Condensed Consolidated Balance Sheet as of September 30, 1994 and the
audited Condensed Consolidated Balance Sheet as of June 30, 1994; (iii) the
unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1994 and 1993; and (iv) the related notes thereto.
b. Exhibits.
The following is a list of exhibits filed as part of this Current Report on
Form 8-K.
Exhibit
Number Description of Exhibit
- - ------ ----------------------
2.1 Amended and Restated Agreement and Plan of Merger dated as of August
31, 1994 among the Registrant, KnowledgeWare, Inc. and SSI Corporation
(1)
2.2 Agreement dated October 11, 1994 among the Registrant, KnowledgeWare,
Inc. and SSI Corporation (1)
2
<PAGE>
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 (1)
4.1 Certificate of Incorporation of the Registrant (2)
4.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant (3)
4.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant (4)
4.4 Restated Bylaws of the Registrant (5)
4.5 Form of Common Stock Certificate (6)
- - --------------------------------------------------------------------------------
(1) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-56185 on Form S-4 and incorporated herein by reference.
(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.
3
<PAGE>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------
Revenues: 1994 1993
---- ----
<S> <C> <C>
Software product license.............................. $ 7,298 $19,147
Service agreement..................................... 9,240 9,472
Consulting and education.............................. 4,883 4,234
Other................................................. 370 371
-------- -------
21,791 33,224
-------- -------
Costs and expenses:
Cost of software product license revenues............. 1,495 1,523
Cost of service agreement revenues.................... 2,774 3,244
Cost of consulting and education revenues............. 4,826 3,683
Selling and marketing................................. 11,663 12,745
General and administrative............................ 6,115 4,154
Research and development.............................. 4,678 6,155
Corporate restructuring charge........................ 6,205 -0-
-------- -------
37,756 31,504
-------- -------
Income (loss) from operations........................ (15,965) 1,720
Foreign currency...................................... 596 -0-
Interest income (expense), net......................... (456) (185)
-------- -------
Income (loss) before income taxes.................... (15,825) 1,535
Provision for income taxes............................. -0- (153)
-------- -------
Net income (loss).................................... $(15,825) $ 1,382
======== =======
Net income (loss) per common share..................... $(1.08) $.10
======== =======
Weighted average number of common and common
equivalent shares
outstanding........................................... 14,713 13,305
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-1
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
ASSETS
September 30, June 30,
Current assets: 1994 1994
---- ----
<S> <C> <C>
Cash and cash equivalents......................... $ 5,846 $ 8,519
Trade accounts receivable:
Receivable from related parties............... 250 250
Other, net.................................... 24,286 37,282
Prepaid expenses and other........................ 3,486 3,577
Prepaid income taxes and income taxes receivable.. 199 199
Deferred income taxes............................. 3,356 3,356
-------- --------
Total current assets.......................... 37,423 53,183
-------- --------
Property and equipment:
Leasehold improvements............................ 5,593 5,567
Furniture and fixtures............................ 17,578 17,539
Computers and related equipment and software...... 30,336 29,802
-------- --------
53,507 52,908
Less: accumulated depreciation and amortization.. (33,088) (31,083)
-------- --------
20,419 21,825
-------- --------
Other assets:
Acquired and developed software, net.............. 28,039 28,382
Goodwill, net..................................... 14,266 14,616
Other long-term assets............................ 1,663 1,638
-------- --------
43,968 44,636
-------- --------
$101,810 $119,644
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Note payable to Sterling Software, Inc.............. $ 18,266 $ -0-
Note payable to IBM Credit Corporation.............. -0- 15,766
Trade accounts payable.............................. 6,906 7,670
Deferred revenues................................... 18,740 22,734
Accrued expenses and other current liabilities...... 12,106 8,732
Accrued compensation and payroll taxes.............. 4,542 6,407
Current portion of long-term debt................... 845 1,627
-------- --------
Total current liabilities....................... 61,405 62,936
Long-term debt....................................... 854 836
Deferred income taxes................................ 3,521 3,521
Shareholders' equity:
Common Stock, without par value--100,000,000 shares
authorized; 14,571,888 and 14,562,381 shares issued
and outstanding on September 30, 1994 and
June 30, 1994, respectively........................ 72,579 72,548
Retained earnings (deficit)......................... (35,464) (19,639)
Cumulative translation adjustments.................. (1,085) (558)
-------- --------
Total shareholders' equity...................... 36,030 52,351
-------- --------
$101,810 $119,644
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-2
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------
Operating Activities: 1994 1993
---- ----
<S> <C> <C>
Net income (loss)....................................... $(15,825) $ 1,382
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization......................... 3,924 3,432
Capitalization of software development costs.......... (1,243) (1,985)
Provision for uncollectible accounts receivable....... 300 -0-
Foreign currency gain................................. (596) -0-
Changes in operating assets and liabilities, net of
effect on acquisitions:
Trade accounts receivable........................... 13,507 412
Inventories and escrow, prepaid expenses and other.. (673) (837)
Trade accounts payable, accrued expenses and other
current liabilities and accrued compensation and
payroll taxes...................................... 633 (6,031)
Deferred revenues................................... (4,012) (2,707)
Income taxes........................................ -0- 899
-------- -------
Net cash provided (used in) operating activities.. (3,985) (5,435)
-------- -------
Investing activities:
Purchases of property and equipment..................... (452) (1,713)
Other non-current assets................................ 58 21
-------- -------
Net cash used in investing activities............. ( 394) (1,692)
-------- -------
Financing activities:
Proceeds from note payable to Sterling Software, Inc.... 2,500 -0-
Proceeds from note payable to IBM Credit Corporation.... -0- 2,000
Payments on debt........................................ (598) (1,911)
Proceeds from sale of Common Stock and exercise of
stock options.......................................... 31 29
-------- -------
Net cash provided by financing activities......... 1,933 118
-------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................. (227) (441)
-------- -------
Decrease in cash and cash equivalents.................... (2,673) (7,450)
Cash and cash equivalents at beginning of year........... 8,519 16,816
-------- -------
Cash and cash equivalents at end of year.......... $ 5,846 $ 9,366
======== =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.............................................. $ 466 $ 335
======== =======
Income taxes.......................................... $ -0- $ -0-
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-3
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- - --------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by [KnowledgeWare] pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the most recent annual audited financial
statements of [KnowledgeWare]. In the opinion of [KnowledgeWare's] management,
the unaudited condensed consolidated financial statements include all
adjustments necessary for a fair presentation. Operating results for the three
months ended September 30, 1994 are not necessarily indicative of the results
expected for the fiscal year ending June 30, 1995.
2. Net Income (Loss) Per Common Share
Net income (loss) per common share is based on [KnowledgeWare's] Common Stock
and is computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options and are calculated based on the treasury stock
method.
3. Income Taxes
[KnowledgeWare] provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year. Cumulative
adjustments to the tax provision are recorded in the interim period in which a
change in the estimated annual effective rate is determined. KnowledgeWare's
net income tax for the first quarter of fiscal 1995 is zero as a result of
significant operating losses. No benefit has been recorded due to limitations
based on a valuation allowance.
4. Inventory
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1994 1994
---- ----
<S> <C> <C>
Assembled product kits.......................... $184 $296
Product media, documentation and packaging...... 108 112
---- ----
$292 $408
==== ====
</TABLE>
5. 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 (the "1991 Class Action"). 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 a
stipulation of settlement in this lawsuit. By entering into the settlement,
KnowledgeWare did not admit the allegations in the suit and, to the
A-4
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- - --------------------------------------------------------------------------------
5. Legal Proceedings, continued
contrary, denied any wrongdoing. The settlement, 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
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 a
motion (the "Motion") alleging 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 stipulation of settlement. Accordingly, the plaintiffs moved the District
Court for a decree of specific performance of the terms of the stipulation of
settlement 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 stipulation of
settlement. Alternatively, the plaintiffs moved for a declaration that the
warrant agreement set forth in the stipulation of settlement was the product of
fraud and for an award to the plaintiffs of the appropriate measure of damages.
Subsequent to the filing of the Motion, the plaintiffs filed a motion with the
District Court to withdraw the request for a preliminary injunction of the
business combination between KnowledgeWare and Sterling.
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 [KnowledgeWare's]
shareholders 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
A-5
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- - --------------------------------------------------------------------------------
5. Legal Proceedings, continued
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
[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 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.
The plaintiffs in the above-described actions seek unspecified compensatory
damages, legal fees and litigation costs. [KnowledgeWare] is unable to predict
the outcome or the potential financial impact of the above-described legal
proceedings either as an amount or range of amounts. [KnowledgeWare] does,
however, believe defense costs related to the proceedings will equal or exceed
the retention amount of $500,000 under the applicable insurance policies.
[KnowledgeWare] has, therefore, accrued a $500,000 loss relative to these
matters in the quarter ended September 30, 1994. For the 12 month period ended
September 30, 1994, KnowledgeWare maintained directors and officers liability
insurance policies with a maximum aggregate loss amount of $4.0 million. Losses,
claims, judgements costs and expenses of Knowledgeware and Sterling resulting
from the above-described actions will also result in claims for indemnification
to be satisfied from the escrowed shares provided for in the Amended Merger
Agreement. 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 Securities and Exchange Commission as to which persons and entities had
knowledge of the negotiations between KnowledgeWare and Sterling prior to the
public announcement of the 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. Additionally, a request has been
received [by KnowledgeWare] from the National Association of Securities Dealers,
Inc. for information as to persons and entities who may have had information
concerning events preceding the press release of KnowledgeWare made on August
30, 1994 regarding results for 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
A-6
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
- - --------------------------------------------------------------------------------
5. Legal Proceedings, continued
aggregate purchase price the Investors paid for their KnowledgeWare Common Stock
and the aggregate price for which they sold those shares.
6. Reclassifications
Certain changes in the presentation of amounts as of and for the three
months ended September 30, 1993 have been made to conform to the comparable
presentations as of and for the three months ended September 30, 1994.
7. Note Payable
On August 31, 1994 [KnowledgeWare] entered into a revolving and term loan
agreement with Sterling to replace the loan agreement with IBM Credit
Corporation and expand [KnowledgeWare's] borrowing capacity. The agreement
provides for maximum borrowings under the loan arrangement of $22,000,000,
(including a revolving line of credit of $16,000,000 and a term loan of
$6,000,000), the issuance of 70,250 warrants to purchase [KnowledgeWare's]
common stock at its fair market value upon the date of issuance (initially $4.50
per share) for each one million dollars drawn; and interest at 1 1/4% over prime
and a maturity date of August 31, 1995. [KnowledgeWare] has reserved a maximum
of 1,545,500 shares of its Common Stock for issuance under the loan agreement
with Sterling. On October 25, 1994, Sterling and KnowledgeWare amended the
arrangement to increase the revolving portion of the facility to $22,000,000 and
agreed to waive the borrowing base requirements with respect to borrowings of up
to $16,000,000 under the revolving portion of the facility. [KnowledgeWare] has
reserved an additional 421,500 shares of its Common Stock for issuance under the
loan agreement with Sterling.
8. Corporate Restructuring Charge
As a result of a rapidly changing operating environment and disappointing
fiscal 1994 performance, [KnowledgeWare] implemented a plan to restructure its
operations in the first quarter of fiscal 1995. The plan included the
termination of approximately 250 employees, consolidation of corporate real
estate and the closing of certain European subsidiaries. The restructuring
charge of $6,205,000 included approximately $4,000,000 related to the reduction
of personnel, $1,800,000 related to consolidation of corporate real estate and
$400,000 related to the closing of certain European subsidiaries. Accrued
expenses at September 30, 1994 include approximately $3,500,000 relative to this
restructuring charge and approximately $1,100,000 relative to a restructuring
charge in the third quarter of fiscal 1993.
9. Liquidity
[KnowledgeWare] has suffered recurring losses from operations. These losses
have resulted in negative working capital and an accumulated deficit. In
addition, losses in the fourth quarter of fiscal 1994 violated financial
covenants in the line of credit agreement with IBM Credit Corporation for which
[KnowledgeWare] received a waiver until September 30, 1994. The loan was
subsequently acquired and amended by Sterling Software, Inc. Management [of
KnowledgeWare] believes that existing cash balances must be supplemented by
additional cash from outside sources in order to fund currently anticipated cash
and capital requirements.
Understanding its strategic alternatives, including remaining an independent
company and the impact of financial constraints on its ability to invest in and
execute future plans, management [of KnowledgeWare]
A-7
<PAGE>
KNOWLEDGEWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
- - --------------------------------------------------------------------------------
9. Liquidity, continued
engaged Alex Brown to seek potential candidates for a business combination. On
July 31, 1994 the Board of Directors [of KnowledgeWare] approved [the] plans [of
KnowledgeWare's management] to enter into a merger agreement with Sterling
Software. Management [of KnowledgeWare] announced on August 1, 1994, it had
entered into a Merger Agreement and an Amended and Restated Merger Agreement was
executed as of August 31, 1994.
The financial statements [of KnowledgeWare] do not include any adjustments
that may be necessary as a result of this uncertainty.
A-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STERLING SOFTWARE, INC.
Date: November 14, 1994
By: /s/ George H. Ellis
---------------------------------------
Its: Executive Vice President and
Chief Financial Officer
---------------------------------------
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- - ------ ----------------------
2.1 Amended and Restated Agreement and Plan of Merger dated as of August
31, 1994 among the Registrant, KnowledgeWare, Inc. and SSI Corporation
(1)
2.2 Agreement dated October 11, 1994 among the Registrant, KnowledgeWare,
Inc. and SSI Corporation (1)
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 (1)
4.1 Certificate of Incorporation of the Registrant (2)
4.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant (3)
4.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant (4)
4.4 Restated Bylaws of the Registrant (5)
4.5 Form of Common Stock Certificate (6)
- - --------------------------------------------------------------------------------
(1) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-56185 on Form S-4 and incorporated herein by reference.
(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.
