<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1994
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______________
to_______________
Commission File No. 1-8465
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8080 North Central Expressway, Suite 1100
Dallas, Texas 75206
(Address of principal executive offices)
(214) 891-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of January 31, 1995
- ---------------------------- -----------------------------------------
Common Stock, $.10 par value 23,415,334
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Index to Financial Statements
Page
----
Sterling Software, Inc. Consolidated Balance Sheets at December 31, 1994
and September 30, 1994.................................................. 3
Sterling Software, Inc. Consolidated Statements of Operations for the
Three Months Ended December 31, 1994 and 1993........................... 4
Sterling Software, Inc. Consolidated Statements of Stockholders' Equity
for the Three Months Ended December 31, 1994 and 1993................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1994 and 1993........................... 6
Sterling Software, Inc. Notes to Consolidated Financial Statements........ 7
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
<TABLE>
<CAPTION>
December 31 September 30
1994 1994
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 92,919 $101,893
Marketable securities.................................................. 54,648 41,847
Accounts and notes receivable, net..................................... 145,120 132,166
Deferred income taxes.................................................. 15,359 11,294
Prepaid expenses and other current assets.............................. 15,317 9,978
-------- --------
Total current assets................................................. 323,363 297,178
Property and equipment, net of accumulated depreciation of $50,470 at
December 31, 1994 and $47,241 at September 30, 1994..................... 56,248 36,699
Computer software, net of accumulated amortization of $89,476 at
December 31, 1994 and $90,259 at September 30, 1994..................... 80,521 58,131
Excess cost over net assets acquired, net of accumulated amortization of
$19,226 at December 31, 1994 and $18,753 at September 30, 1994.......... 76,492 54,504
Noncurrent deferred income taxes......................................... 6,927 2,216
Note and accrued interest receivable from
KnowledgeWare, Inc. (Note 3)............................................ 18,266
Other assets............................................................. 23,752 21,779
-------- --------
$567,303 $488,773
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt...................................... $ 12,392 $ 7,257
Income taxes payable................................................... 10,699 10,945
Accounts payable and accrued liabilities............................... 125,429 76,219
Deferred revenue....................................................... 87,777 77,598
-------- --------
Total current liabilities............................................ 236,297 172,019
Long-term debt........................................................... 116,344 115,932
Other noncurrent liabilities............................................. 23,549 25,018
Commitments and contingencies (Note 4)...................................
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares authorized; 200,000
shares issued and outstanding......................................... 20 20
Common stock, $.10 par value; 50,000,000 shares authorized; 23,277,000
and 22,378,000 shares issued at December 31, 1994
and September 30, 1994, respectively.................................. 2,328 2,238
Additional paid-in capital............................................. 250,511 192,064
Retained earnings (deficit)............................................ (60,806) 572
Less treasury stock, at cost: 88,000 and 1,793,000 shares at
December 31, 1994 and September 30, 1994, respectively................ (940) (19,090)
-------- --------
Total stockholders' equity........................................... 191,113 175,804
-------- --------
$567,303 $488,773
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
--------------------
1994 1993
-------- --------
<S> <C> <C>
Revenue:
Products............................................ $ 49,551 $ 40,318
Product support..................................... 34,671 32,755
Services............................................ 42,196 36,959
-------- --------
126,418 110,032
Costs and expenses:
Cost of sales:
Products and product support...................... 16,011 16,363
Services.......................................... 26,499 25,309
-------- --------
42,510 41,672
Product development and enhancement................. 9,446 7,476
Selling, general and administrative................. 49,015 41,460
Restructuring charge (Note 3)....................... 19,512
Purchased research and development (Note 3)......... 62,000
-------- --------
182,483 90,608
-------- --------
Income (loss) before other income (expense) and income
taxes................................................ (56,065) 19,424
Other income (expense):
Interest expense.................................... (1,990) (1,673)
Investment income................................... 888 680
Other............................................... (136) (825)
-------- --------
(1,238) (1,818)
-------- --------
Income (loss) before income taxes..................... (57,303) 17,606
Provision for income taxes............................ 4,352 6,783
-------- --------
Net income (loss)..................................... (61,655) 10,823
Preferred stock dividends............................. 49 49
-------- --------
Income (loss) applicable to common stockholders....... $(61,704) $ 10,774
======== ========
Income (loss) per common share:
Net income (loss):
Primary........................................... $(2.87) $.48
======== ========
Fully diluted..................................... $(2.87) $.44
======== ========
Average common shares outstanding..................... 21,476 18,399
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended December 31, 1994 and 1993
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
--------------- ---------------- -------------------
Number Number Additional Retained Number Total
of Par of Par Paid-in Earnings of Stockholders'
Shares Value Shares Value Capital (Deficit) Shares Cost Equity
------ ----- ------ ----- ---------- --------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993... 200 $20 19,917 $1,992 $169,825 $(54,582) 1,837 $(19,558) $ 97,697
Net income.................... 10,823 10,823
Preferred stock dividends..... (49) (49)
Issuance of common stock
pursuant to stock options
and warrants................. 634 63 7,799 7,862
Issuance of common stock
to retirement plan........... 117 (14) 149 266
Other......................... 829 829
------ ----- ------ ------ -------- -------- ------ -------- --------
Balance at December 31, 1993.... 200 $20 20,551 $2,055 $177,741 $(42,979) 1,823 $(19,409) $117,428
====== ===== ====== ====== ======== ======== ====== ======== ========
Balance at September 30, 1994... 200 $20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804
Net loss...................... (61,655) (61,655)
Preferred stock dividends..... (49) (49)
Issuance of common stock
and treasury stock for
acquisition (Note 3)......... 720 72 56,260 (1,701) 18,111 74,443
Common stock issuance costs... (689) (689)
Issuance of common stock
pursuant to stock options
and warrants................. 179 18 2,821 2,839
Issuance of common stock
to retirement plan........... 55 (4) 39 94
Other......................... 326 326
------ ----- ------ ------ -------- -------- ------ -------- --------
Balance at December 31, 1994.... 200 $20 23,277 $2,328 $250,511 $(60,806) 88 $ (940) $191,113
====== ===== ====== ====== ======== ======== ====== ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
---------------------
1994 1993
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $(61,655) $ 10,823
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................... 11,008 8,173
Provision for losses on accounts receivable............. 1,500 3,201
Provision for deferred income taxes..................... 3,008 5,509
Purchased research and development...................... 62,000
Write-down of property and equipment and other assets... 2,242
Write-down of purchased and capitalized computer
software costs......................................... 6,215
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Increase in accounts and notes receivable............. (5,020) (8,892)
Increase in prepaids and other assets................. (2,033) (17)
Decrease in accounts payable, accrued liabilities and
income taxes payable................................. (1,122) (5,476)
Increase (decrease) in deferred revenue............... 4,744 (912)
Other................................................. 818 279
-------- --------
Net cash provided by operating activities........... 21,705 12,688
Investing activities:
Purchases of property and equipment....................... (14,165) (4,252)
Purchases and capitalized cost of development of
computer software........................................ (4,158) (4,400)
Business acquisitions, net of cash acquired............... (7,169)
Purchases of investments.................................. (21,281) (20,971)
Proceeds from sales of investments........................ 8,661 7,603
Other..................................................... 205 422
-------- --------
Net cash used in investing activities............... (37,907) (21,598)
Financing activities:
Retirement and redemption of debt and capital lease
obligations.............................................. (4,596) (3,282)
Proceeds from issuance of debt............................ 8,960 2,961
Proceeds from sales of installment and lease
contracts receivable..................................... 4,233 1,128
Preacquisition advances to KnowledgeWare, Inc............. (4,435)
Proceeds from issuance of common stock pursuant to
stock options and warrants............................... 2,839 7,862
Other..................................................... 86 458
-------- --------
Net cash provided by financing activities........... 7,087 9,127
Effect of foreign currency exchange rate changes on
cash....................................................... 141 (150)
-------- --------
Increase (decrease) in cash and cash equivalents............ (8,974) 67
Cash and cash equivalents at beginning of period............ 101,893 30,199
-------- --------
Cash and cash equivalents at end of period.................. $ 92,919 $ 30,266
======== ========
Supplemental cash flow information:
Interest paid............................................. $ 237 $ 91
======== ========
Income taxes paid......................................... $ 1,851 $ 578
======== ========
Income tax refunds........................................ $ 371 $ 514
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software, Inc. and its wholly owned subsidiaries (the "Company") after
elimination of all significant intercompany balances and transactions. The
Company's quarterly financial data should be read in conjunction with the
consolidated financial statements of the Company for the year ended September
30, 1994. Certain amounts for periods ended prior to December 31, 1994 have been
reclassified to conform to the current year presentation.
Revenue
Revenue from license fees, including leasing transactions, for standard
software products is recognized when the software is delivered, provided no
significant future vendor obligations exist and collection is probable. Service
revenue and revenue from certain products involving installation or other
services are recognized as the services are performed.
Product support contracts entitle the customer to telephone support, bug
fixing and the right to receive software updates as they are released. Revenue
from product support contracts, including product support included in initial
license fees, is recognized ratably over the contract period. All significant
costs and expenses associated with product support contracts are expensed
ratably over the contract period.
If software product transactions include the right to receive future
products, a portion of the software product revenue is deferred and recognized
as products are delivered. Contract accounting is applied for sales of software
products requiring significant modification or customization, such that revenue
is recognized only when the modification or customization is complete.
When products, product support and services are billed prior to the time
the related revenue is recognized, deferred revenue is recorded and related
costs paid in advance are deferred.
Revenue from professional services provided to the federal government under
multi-year contracts is recognized as the services are performed. Revenue for
services under long-term contracts is recognized using the percentage-of-
completion method of accounting. Losses on long-term contracts are recognized
when the current estimate of total contract costs indicates a loss on a contract
is probable.
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<PAGE>
Cash Equivalents, Marketable Securities and Other Investments
Cash equivalents consist primarily of highly liquid investments in
repurchase agreements backed by U.S. Treasury securities and investment-grade
commercial paper of various issuers, with maturities of three months or less
when purchased. The carrying amount reported in the consolidated balance sheet
for cash and cash equivalents approximates its fair value.
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
government obligations, which may include both investment grade and non-
investment grade securities. The fair values for marketable securities are based
on quoted market prices. All marketable securities and long-term investments are
classified as available-for-sale securities.
2. Unaudited Interim Financial Statements
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments, which are
of a normal recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Results of
operations for the periods presented herein are not necessarily indicative of
results of operations for the entire year.
3. Business Combination
On November 30, 1994, Sterling Software, Inc. acquired KnowledgeWare, Inc.
("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a
leading provider of applications development software and services, for
approximately $100 million, in a stock-for-stock acquisition (the "Merger"). In
connection with the Merger, the Company issued approximately 2,421,000 shares of
the Company's $0.10 par value Common Stock (the "Common Stock") valued at
approximately $74,443,000 and reserved approximately 340,000 shares of Common
Stock for issuance upon exercise of KnowledgeWare's options and warrants. In
addition, the Company incurred cash costs directly related to the Merger of
approximately $25,739,000. The Merger, which was accounted for as a purchase,
was completed pursuant to the terms of an Amended and Restated Agreement and
Plan of Merger dated as of August 31, 1994, as amended (the "Merger Agreement"),
among the Company, SSI Corporation, a Georgia corporation and a wholly owned
subsidiary of the Company ("Merger Sub"), and KnowledgeWare. Of the 2,421,000
shares of Common Stock issued, approximately 484,800 shares were placed in
escrow (the "Escrowed Shares") to cover certain losses that may result in
connection with any pending or threatened litigation, action, claim, proceeding,
dispute or investigation ("Actions") (including amounts paid in settlement) to
which the Company is entitled to indemnification pursuant to the terms of the
Merger Agreement. (See Note 4 "Commitments and Contingencies.")
The operating results of KnowledgeWare are included in the Company's
results of operations from the date of the Merger. In addition, the results
of operations for the first quarter of 1995 include $62,000,000 of purchased
research and development costs, which is the
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<PAGE>
portion of the purchase price attributed to in-process research and development,
and which is charged to expense in accordance with purchase accounting. The
$62,000,000 charge has no related tax benefit. The results of operations also
include a charge for restructure costs of $19,512,000 to integrate
KnowledgeWare's business into the Company's operations. Approximately $7,000,000
of the restructure charge has no related tax benefit.
The following unaudited supplemental information presents the results of
operations as if the Merger had occurred at October 1, 1993. This summary does
not purport to be indicative of what would have occurred had the Merger occurred
as of that date or of results which may occur in the future. This method of
combining the companies is for the presentation of unaudited pro forma summary
results of operations. Actual statements of operations of Sterling Software,
Inc. and of KnowledgeWare, Inc. have been combined from November 30, 1994
forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Three Months
Ended December 31
-------------------
(Dollars in thousands, except per share data) 1994 1993
-------- --------
<S> <C> <C>
Revenue $134,753 $145,585
======== ========
Income before other income (expense) and income taxes $ 9,532 $ 20,080
======== ========
Income (loss) applicable to common stockholders $ (1,275) $ 10,948
======== ========
Net income (loss) per common share $ (.06) $ .42
======== ========
</TABLE>
The unaudited supplemental information presented above does not include a
$62,000,000 charge for purchased research and development costs and a
$19,512,000 restructuring charge directly related to the acquisition.
4. Commitments and Contingencies
One of the Company's subsidiaries, formerly known as KnowledgeWare,
continues to be a defendant in several lawsuits filed against it in connection
with its restatement of its financial results for the first three quarters of
its 1994 fiscal year and its financial results for its full 1994 fiscal year.
Several lawsuits, claims and inquiries are discussed in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994, Item 1 at
pages 9 and 10 ("Form 10-K"). Subsequently, one of the threatened claims has
matured into a lawsuit, as more fully described below, and one additional such
suit, also described below, has been filed.
On January 19, 1995, a lawsuit was filed against KnowledgeWare in the
District Court, Second Judicial District, State of Minnesota, County of Ramsay
(the "Jacobs Suit"). The Jacobs Suit was brought by seven named plaintiffs,
including Irwin L. Jacobs, who purchased 666,700 shares of KnowledgeWare's
common stock pursuant to a Stock Purchase Agreement dated January 26, 1994 (the
"Agreement"). The lawsuit alleges breach of contract and violations of Section
12 (2) of the Securities Act of 1933, as amended. The alleged factual basis
underlying the lawsuit and the relief sought therein is the plaintiffs'
allegation that KnowledgeWare
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<PAGE>
breached its obligations under the Agreement because the representations and
warranties in the Agreement relating to the financial condition of KnowledgeWare
allegedly were false and misleading in that they contained untrue statements or
omitted to state material facts necessary to make the statements not misleading.
As a result, plaintiffs seek damages in the approximate amount of $8.5
million, plus interest, representing the difference between the aggregate
purchase price the plaintiffs paid for the 666,700 shares of KnowledgeWare
common stock and the aggregate price at which they allegedly sold those shares.
On January 20, 1995, a lawsuit was filed against KnowledgeWare and Francis
A. Tarkenton, Donald P. Addington, Richard M. Haddrill, Rick W. Gossett, J.
William Scruggs, Sam A. Brooks and P. E. Sadler, former officers and directors
of KnowledgeWare, in the District Court, Second Judicial District, State of
Minnesota, County of Ramsay (the "Second Jacobs Suit"). The lawsuit was brought
by over twenty named plaintiffs, including Irwin L. Jacobs, individually and as
trustee of certain trusts for the benefit of his children. The Second Jacobs
Suit alleges violations of Section 12 (2) of the Securities Act of 1933, as
amended, the securities laws of the states of Georgia and Minnesota, fraud and
breach of the individual defendants' fiduciary duties. Plaintiffs allege that
from time to time from and after November 1993, they purchased shares of common
stock of KnowledgeWare based on representations made by or on behalf of
defendants which allegedly contained untrue statements of material fact or
omitted to state material facts necessary to make the statements not misleading.
Plaintiffs seek to rescind such purchases, in the case of stock still held, or
to recover rescissory damages in the aggregate amount of $5.8 million, plus
interest and other relief.
Pursuant to the Merger Agreement approximately 484,800 shares of the
Company's Common Stock were placed in escrow to cover certain losses that may
arise in connection with any Actions for which the Company is entitled to
indemnification. The Company is entitled to indemnification, to be satisfied
exclusively from the Escrowed Shares, 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 the ordinary course of business
transactions, Actions brought by current or former employees with respect to
their employment or termination thereof and certain other Actions. If any of the
Actions described above or in the Company's Form 10-K result in losses, claims,
liabilities, judgments, costs or expenses, including amounts paid in settlement
(hereinafter "Losses") to KnowledgeWare, Merger Sub or the Company, such Losses
will result in a claim for indemnification to be satisfied from the Escrowed
Shares. While discovery has just commenced in some Actions and has not commenced
in others, KnowledgeWare intends to defend each suit vigorously. There can be,
however, no assurance of the final resolution of any of the lawsuits, claims or
inquiries against KnowledgeWare, as to the amount of Losses that will result in
connection with such Actions, nor as to the resulting impact on the Company. As
of December 31, 1994, the Company estimates that approximately $475,000 of costs
and expenses have been incurred since August 31, 1994 with respect to such
Actions. In the event that all of the Escrowed Shares are used to cover Losses
incurred by the Company, Merger Sub or KnowledgeWare, no Escrowed Shares will be
distributed to the former KnowledgeWare common stockholders. If the ultimate
Losses exceed the proceeds from applicable insurance, the value of the Escrowed
Shares, and amounts accrued by KnowledgeWare prior to consummation of the
Merger, such excess may be included in the Company's cost of acquiring
KnowledgeWare to the extent such excess can be reasonably estimated within one
year of the date of acquisition.
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<PAGE>
As of December 31, 1994, the value of the Escrowed Shares was approximately
$17.8 million based on the December 31, 1994 closing stock price of $36 3/4 per
share.
5. Segment Information
In connection with the Merger, the Company reorganized into five groups and
18 divisions. A new group, Applications Management, was established to focus
exclusively on the applications management market. This group addresses two key
needs in applications management, the need to develop new applications and the
need to revitalize existing applications. Consulting services are also provided
to ensure that customers are successful using Sterling's applications management
products. Additionally, the Company's international business (the International
Group) was combined with KnowledgeWare's. Finally, the Company created a new
Systems Management Group out of the former Enterprise Software Group. The
Electronic Commerce Group and the Federal Systems Group remained essentially
unchanged.
The Company acquires, develops, markets and supports a broad range of
computer software products and services in four major markets classified as
Systems Management, Electronic Commerce, Applications Management and Federal
Systems. Each major market is represented through independently operated
business groups. The Systems Management Group provides enterprise-wide systems
management software for large computing environments. The Electronic Commerce
Group provides software and services to facilitate electronic commerce, defined
by the Company as the worldwide electronic interchange of business information,
including electronic data interchange software and services, data communications
software and electronic payments software for financial institutions. The
Applications Management Group focuses exclusively on the applications management
market. The group provides products for developing new applications and
revitalizing existing applications and consulting services to ensure that
customers are successful using the applications management products. The Federal
Systems Group provides highly technical services to the federal government under
several multi-year contracts primarily in support of National Aeronautics and
Space Administration aerospace research projects and secure communications
systems for the Department of Defense. The fifth business group, International,
is responsible for sales and first level support of the Company's products
outside North America. International Group operating results and assets are
included, as applicable, in the Company's Systems Management, Electronic
Commerce and Applications Management segments in the business segment tables
contained herein. International Group revenue of $32,034,000 and $26,940,000 and
operating profit of $6,339,000 and $3,713,000 for the three months ended
December 31, 1994 and 1993, respectively, have been allocated to the business
segments.
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<PAGE>
Financial information concerning the Company's operations, by business
segment, for the three months ended December 31, 1994 and 1993, restated to
conform to the current year presentation, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended December 31
-------------------
1994 1993
-------- --------
<S> <C> <C>
Revenue:
Electronic Commerce........................ $ 47,905 $ 35,866
Systems Management......................... 33,374 35,442
Federal Systems............................ 23,665 24,718
Applications Management.................... 20,010 11,893
Corporate and other........................ 1,464 2,113
-------- --------
Consolidated totals........................ $126,418 $110,032
======== ========
Operating Profit (Loss):
Electronic Commerce........................ $ 12,752 $ 6,985
Systems Management......................... 11,136 12,936
Federal Systems............................ 1,526 1,614
Applications Management.................... 4,491 2,604
Restructuring charge....................... (19,512)
Purchased research and development......... (62,000)
Corporate and other........................ (4,458) (4,715)
-------- --------
Consolidated totals...................... $(56,065) $ 19,424
======== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
inter-segment eliminations and the results of operations of the Company's retail
software division.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merger with KnowledgeWare, Inc.
On November 30, 1994, Sterling Software, Inc. (the "Company") acquired
KnowledgeWare, Inc. ("KnowledgeWare"), a Georgia corporation based in Atlanta,
Georgia which was a leading provider of applications development software and
services, for approximately $100 million, in a stock-for-stock acquisition (the
"Merger"). In connection with the Merger, the Company issued approximately
2,421,000 shares of the Company's $0.10 par value Common Stock (the "Common
Stock") valued at approximately $74,443,000 and reserved approximately 340,000
shares of Common Stock for issuance upon exercise of KnowledgeWare's options and
warrants. In addition, the Company incurred cash costs directly related to the
Merger of approximately $25,739,000. The Merger, which was accounted for as a
purchase, was completed pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger dated as of August 31, 1994, as amended (the
"Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation
and a recently organized wholly owned subsidiary of the Company ("Merger Sub"),
and KnowledgeWare. Of the 2,421,000 shares of Common Stock issued, approximately
484,800 shares were placed in escrow (the "Escrowed Shares") to cover certain
losses that may result in connection with any pending or threatened litigation,
action, claim, proceeding, dispute or investigation ("Actions") (including
amounts paid in settlement) to which the Company is entitled to indemnification
pursuant to the terms of the Merger Agreement. (See Note 4 "Commitments and
Contingencies.")
In connection with the Merger, the Company reorganized into five groups and
18 divisions. A new group, Applications Management ("AMG"), was established to
focus exclusively on the applications management market. The Group addresses two
key needs in applications management, the need to develop new applications and
the need to revitalize existing applications. Consulting services are also
provided to ensure that customers are successful using the Company's
applications management products. Additionally, the Company's international
business (the International Group) was combined with KnowledgeWare's. Finally,
the Company created a new Systems Management Group ("SMG") out of the former
Enterprise Software Group. The Electronic Commerce Group ("ECG") and the Federal
Systems Group ("FSG") remained essentially unchanged.
The cash costs directly related to the Merger of approximately $25,739,000
are included in the aggregate cost of the Merger and consist of employee
termination costs, transaction costs, costs associated with the elimination of
duplicate facilities and other direct costs of the acquisition. Approximately
$12,900,000 was paid in the first quarter of 1995.
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<PAGE>
The Company's restructuring charge related to the combining of the
companies is $19,512,000, which is included in the results of operations for the
first quarter of 1995. Approximately $7,000,000 of the restructuring charge has
no related tax benefit. The components of the restructuring charge are the
following:
<TABLE>
<S> <C>
Employee termination costs $ 7,100,000
Write-offs of software products which will not be
actively marketed 6,215,000
Elimination of duplicate facilities and equipment 2,600,000
Out of pocket costs related to the reorganization 2,200,000
Other 1,397,000
-----------
$19,512,000
===========
</TABLE>
As a result of the restructuring charge, future operating results are
expected to benefit from the reduction in workforce and elimination of duplicate
facilities. Estimated annual cost reductions of approximately $12,000,000 in
salaries and benefits from the reduction in workforce and estimated total future
cost reductions of approximately $8,200,000 in depreciation, amortization and
rent expense are anticipated from the write-offs of software products which will
not be actively marketed by the Company and the elimination of duplicate
facilities and equipment. Of the total restructuring charge of $19,512,000,
approximately $8,457,000 is a non-cash charge and the remaining $11,055,000
requires cash outlays, of which approximately $3,500,000 was expended prior to
December 31, 1994. Future cash expenditures related to the restructuring are
anticipated to be made from cash generated from operations. The Company does not
expect to incur costs related to the restructure in excess of the amount charged
to operations in the first quarter of 1995.
Pursuant to purchase accounting guidelines, the deferred revenue balance
associated with product support contracts acquired in a business combination may
not be recognized as revenue ratably over the remaining terms of the product
support contracts acquired. However, the net present value of the costs
associated with the Company's obligation to provide product support services
under those contracts may be accrued at the date of acquisition. Accordingly,
deferred revenue of approximately $14,208,000 related to product support
contracts acquired in the acquisition of KnowledgeWare will not be recognized as
revenue in periods subsequent to November 30, 1994 and costs of approximately
$13,679,000 have been accrued representing the net present value of the
Company's obligation to provide product support services under these contracts.
As the product support services are performed the costs of performing such
services will be offset against this accrued liability.
Since August 30, 1994, a number of lawsuits have been filed against
KnowledgeWare and certain of its former officers and directors alleging
violations of securities laws. (See Note 4 "Commitments and Contingencies.")
If these Actions result in losses, claims, liabilities, judgments, costs or
expenses (including amounts paid in settlement) to the Company, Merger Sub or
KnowledgeWare, such losses, claims,
-14-
<PAGE>
liabilities, judgments, costs or expenses will result in a claim for
indemnification to be satisfied from the Escrowed Shares. While discovery has
just commenced in some Actions and has not commenced in others, KnowledgeWare
intends to defend each suit vigorously. There can be, however, no assurance of
the final resolution of any of the lawsuits, claims or inquiries against
KnowledgeWare, as to the amount of losses that will result in connection with
such Actions, nor as to the resulting impact on the Company. As of December 31,
1994, the Company estimates that approximately $475,000 of costs and expenses
have been incurred since August 31, 1994 with respect to such Actions. In the
event that all of the Escrowed Shares are used to cover losses, claims,
liabilities, judgments, costs or expenses incurred by the Company, no Escrowed
Shares will be distributed to the former KnowledgeWare common stockholders. If
the ultimate losses from such actions exceed the proceeds from applicable
insurance, the value of the Escrowed Shares and amounts accrued by KnowledgeWare
prior to consummation of the Merger, such excess may be included in the
Company's cost of acquiring KnowledgeWare to the extent such excess can be
reasonably estimated within one year of the date of acquisition. As of December
31, 1994, the value of the Escrowed Shares was approximately $17.8 million based
on the December 31, 1994 closing stock price of $36 3/4 per share.
Three Months Ended December 31, 1994 and 1993
Revenue increased $16,386,000, or 15%, in the first quarter of 1995 over
the same period of 1994. ECG revenue increased $12,039,000, or 34%, on the
strength of a $4,607,000, or 38%, increase in network services revenue, a
$6,206,000, or 46%, increase in product revenue and a $1,226,000, or 12%,
increase in product support revenue. The increased network services revenue was
due to an increase in the network service customer base, primarily in the
grocery, hardlines and retail vertical markets, and increases in the network
processing volume for existing customers. The increase in ECG product revenue is
the result of increased revenue in the group's three software product lines. ECG
product support revenue increased primarily as a result of an increase in the
installed customer base and price increases for some products. SMG revenue
decreased $2,068,000, or 6%. The revenue decrease is in part due to the sale of
lower dollar value contracts for VM and systems management products in the first
quarter of 1995 versus the first quarter of 1994. The revenue decrease was
partially offset by the revenue generated from new storage management products
released in 1994 which were not available for sale in the first quarter of 1994.
AMG revenue increased $8,117,000, or 68%, due to businesses acquired in the
Merger. FSG revenue decreased $1,053,000, or 4%, primarily due to lower contract
billings at NASA Ames. Revenue from outside North America represented
approximately 25% of the Company's revenue in the first quarters of 1995 and
1994.
Total costs and expenses increased $91,875,000, primarily due to a
$62,000,000 charge for the portion of the purchase price of KnowledgeWare
attributed to in-process research and development and to a $19,512,000 charge
for restructuring of the Company resulting from the Merger. Total cost of sales
increased $838,000, or 2%, on a 15% increase in revenue, primarily due to
$1,311,000 relating to businesses acquired in the Merger, offset by a
$1,155,000, or 5%, decrease in federal contract costs, commensurate with the
decrease in FSG revenue. Product development expense for the first quarter of
1995 of $9,446,000, net of $4,146,000 of costs capitalized pursuant to Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("FAS No. 86"), increased
$1,970,000, or 26%, compared to first quarter of 1994 product development
expense of $7,476,000, net of $4,400,000 of costs capitalized pursuant to FAS
No. 86. The increase is primarily due to increased gross product development
expense and a 6% decrease in the capitalization of software development costs.
Product development expense and the capitalization rate may fluctuate from
period to period depending in part upon the number and status of software
development projects which are in process. Selling, general and administrative
-15-
<PAGE>
expense increased $7,555,000, or 18%, primarily due to $3,402,000 relating to
businesses acquired in the Merger and due to increased headcount in ECG to
support the continuing growth in ECG.
The loss before income taxes was $57,303,000 in the first quarter of 1995
as compared to income before income taxes of $17,606,000 in the first quarter of
1994. Excluding the $62,000,000 non-recurring charge for purchased research and
development and the $19,512,000 non-recurring charge for restructuring, income
before income taxes increased $6,603,000, or 38%, primarily due to higher
operating profits in ECG, up 83%, and AMG, up 72%.
Liquidity and Capital Resources
The Company maintained a strong liquidity and financial position with
$87,066,000 of working capital at December 31, 1994, which includes $92,919,000
of cash and cash equivalents and $54,648,000 of marketable securities. Net cash
flows from operations increased $9,017,000 in the first quarter of 1995 as
compared to the first quarter of 1994, primarily due to higher operating profits
before noncash charges, restructuring costs and the writeoff of non-cash related
research and development costs related to the acquisition of KnowledgeWare.
Cash flows from operations and available cash balances were used to fund
operations, marketable securities purchases, capital expenditures, including
software additions and direct costs related to the purchase of KnowledgeWare.
On November 30, 1994, the Company issued approximately 2,421,000 shares of
the Company's Common Stock, valued at approximately $74,443,000, for all the
outstanding shares of common stock of KnowledgeWare. In addition, the
Company incurred cash costs directly related to the Merger of approximately
$25,739,000. The Merger was accounted for as a purchase and recorded as
follows:
<TABLE>
<S> <C>
Working capital (deficit) $(25,132)
Property and equipment 12,684
Computer software 29,000
Purchased research and development costs charged to expense 62,000
Other assets and deferred tax asset 13,735
Obligation for postcontract customer-support services (13,679)
Other liabilities (4,389)
Excess costs over net assets acquired net of tax benefit 25,963
--------
$100,182
========
</TABLE>
Of the shares issued, approximately 1,701,000 were issued from treasury at
a cost of $18,111,000. Also, as a result of the Merger, the outstanding
note receivable from KnowledgeWare of approximately $18,266,000 at September 30,
1994 was converted to an intercompany loan and accordingly was eliminated in
consolidation.
-16-
<PAGE>
At December 31, 1994, after the utilization of $5 million for standby
letters of credit, $30 million was available for borrowing on the Company's $35
million revolving credit and term loan agreement ("Loan Agreement"). Borrowings,
if any, outstanding on March 31, 1995 will convert to a term loan with seven
equal quarterly payments. Certain of the Company's foreign subsidiaries have
separate lines of credit available for foreign exchange exposure management and
working capital requirements. These lines of credit are guaranteed by the U.S.
parent company. At December 31, 1994, $11.8 million was outstanding pursuant to
foreign lines of credit and $7.4 million was available for borrowing thereunder.
At December 31, 1994, the Company's capital resource commitments consisted
of commitments under lease arrangements for office space and equipment. The
Company intends to meet such obligations primarily from internally generated
funds. No significant commitments exist for future capital expenditures. The
Company believes available balances of cash, cash equivalents and short-term
investments combined with cash flows from operations and amounts available under
credit and term loan agreements are sufficient to meet the Company's cash
requirements for the foreseeable future.
Other Matters
Demand for many of the Company's products tends to improve with increased
inflation as customers strive to increase employee productivity and reduce
costs. However, the effect of inflation on the Company's relatively labor
intensive cost structure could adversely affect its results of operations to the
extent the Company might not be able to recover increased operating costs
through increased product licensing and prices.
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occur. Unrealized translation
gains and losses are included as an adjustment to retained earnings. The Company
has mitigated a portion of its currency exposure through decentralized sales,
marketing and support operations and through international development
facilities, in which all costs are local currency based. When necessary, the
Company may also hedge to prevent material exposure.
The Company maintains a strategy of acquiring businesses and products that
fill strategic market niches within the business groups. This acquisition
strategy contributes in part of the Company's growth in revenue and operating
profit before restructuring charges. The impact of future acquisitions on
continued growth in revenue and operating profit cannot presently be determined.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
2(a) - Agreement and Plan of Merger dated as of March 31, 1993 among
the Company, Systems Center, Inc. and SSI Acquisition
Corporation ("SCI Agreement and Plan of Merger") (1)
2(b) - First Amendment to SCI Agreement and Plan of Merger (11)
2(c) - Amended and Restated Agreement and Plan of Merger dated as of
August 31, 1994, among the Company, KnowledgeWare, Inc. and
SSI Corporation ("KWI Agreement and Plan of Merger") (2)
2(d) - Agreement dated October 11, 1994 among the Company,
KnowledgeWare, Inc. and SSI Corporation (2)
2(e) - First Amendment to KWI Agreement and Plan of Merger (2)
4(a) - Certificate of Incorporation of the Company (3)
4(b) - Certificate of Amendment of Certificate of Incorporation of
the Company (11)
4(c) - Certificate of Amendment of Certificate of Incorporation of
the Company (4)
4(d) - Restated Bylaws of the Company (5)
4(e) - Form of Common Stock Certificate (6)
4(f) - Form of Certificate of Designation, Preferences, Rights and
Limitations with respect to Series B Junior Preferred Stock
(11)
4(g) - Form of Indenture between the Company and Bank of America
Texas, National Association, as Trustee, including the form
of 5 3/4% Convertible Subordinated Debenture attached as
Exhibit A thereto (7)
4(h) - Preferred Stock and Warrant Purchase Agreement dated June 25,
1991 among Systems Center, Inc. and the Investors named
therein (8)
4(i) - Warrant Agreement dated June 9, 1994 between KnowledgeWare,
Inc. and Trust Company Bank (14)
4(j) - Supplemental Warrant Agreement dated as of November 30, 1994
between KnowledgeWare, Inc. and Trust Company Bank (14)
10(a) - Amended and Restated Stock Option Agreement dated as of
August 31, 1994 between the Company and KnowledgeWare, Inc.
(2)
10(b) - Form of Amended and Restated Stockholder Agreement dated as
of August 31, 1994 between the Company and certain
stockholders of KnowledgeWare, Inc. (2)
10(c) - Form of Registration Rights Agreement dated as of November
30, 1994 among the Company and the Selling Stockholders named
therein (2)
10(d) - Form of Escrow Agreement dated as of November 30, 1994 among
the Company, KnowledgeWare, Inc., The First National Bank of
Boston, N.A. and Stuart Finestone (2)
-18-
<PAGE>
10(e) - Amended Incentive Stock Option Plan of the Company (16)
10(f) - Amended Non-Statutory Stock Option Plan of the Company (16)
10(g) - Supplemental Executive Retirement Plan II of Informatics
General Corporation (11)
10(h) - Form of Supplemental Executive Retirement Plan II Agreement
(the "SERP II Agreement") (11)
10(i) - Amendment to SERP II Agreement (11)
10(j) - Form of Employment Agreement with Jeannette P. Meier, George
H. Ellis and Phillip A. Moore (11)
10(k) - Form of Amendment No. 1 to Employment Agreement with
Jeannette P. Meier, George H. Ellis and Phillip A. Moore (11)
10(l) - Employment Agreement with Sam Wyly (11)
10(m) - Employment Agreement with Charles J. Wyly, Jr. (11)
10(n) - Employment Agreement with Sterling L. Williams (11)
10(o) - Form of Amendment No. 1 to Employment Agreement with Charles
J. Wyly, Jr. and Sterling L. Williams (11)
10(p) - Amendment No. 1 to Employment Agreement with Sam Wyly (11)
10(q) - Amendment No. 2 to Employment Agreement with Sam Wyly (11)
10(r) - Consultation Agreement with REC Enterprises, Inc. (11)
10(s) - Form of Employment Agreement with Edward J. Lott, Warner C.
Blow, Werner L. Frank and Geno P. Tolari (11)
10(t) - Employment Agreement with Sterling L. Williams (1)
10(u) - Form of Employment Agreement with Jeannette P. Meier, George
H. Ellis, Phillip A. Moore, Warner C. Blow and Geno P. Tolari
(1)
10(v) - Employment Agreement with Werner L. Frank (19)
10(w) - Form of Series B Warrant Agreement (11)
10(x) - Form of Amendment to Series B Warrant Agreement (January
1988) (11)
10(y) - Form of Amendment to Series B Warrant Agreement (May 1989)
(11)
10(z) - Form of Series E Warrant Agreement (11)
10(aa) - Form of Amendment to Series E Warrant Agreement (May 1989)
(11)
10(bb) - Form of Series F Warrant Agreement (11)
10(cc) - Form of Amendment to Series F Warrant Agreement (May 1989)
(11)
10(dd) - Amended and Restated Revolving Credit and Term Loan Agreement
dated June 8, 1990 between the Company and The First National
Bank of Boston and BankOne Texas N.A. ("Loan Agreement") (11)
10(ee) - First Amendment to Loan Agreement dated as of October 16,
1990 (11)
10(ff) - Second Amendment to Loan Agreement dated as of
September 19, 1991 (11)
10(gg) - Third Amendment to Loan Agreement dated as of December 31,
1991 (11)
10(hh) - Fourth Amendment to Loan Agreement dated as of June 15, 1992
(11)
10(ii) - Fifth Amendment to Loan Agreement dated as of July 31, 1992
(11)
10(jj) - Sixth Amendment to Loan Agreement dated as of August 31, 1992
(11)
-19-
<PAGE>
10(kk) - Seventh Amendment to Loan Agreement dated as of September 9,
1992 (11)
10(ll) - Eighth Amendment to Loan Agreement dated as of September 30,
1992 (11)
10(mm) - Ninth Amendment to Loan Agreement dated as of October 13,
1992 (11)
10(nn) - Tenth Amendment to Loan Agreement dated as of December 17,
1992 (1)
10(oo) - Form of Eleventh Amendment to Loan Agreement dated as of
March 29, 1993 (11)
10(pp) - Twelfth Amendment to Loan Agreement dated as of June 30, 1993
(11)
10(qq) - Form of Thirteenth Amendment to Loan Agreement dated as of
November 10, 1993 (11)
10(rr) - Form of Fourteenth Amendment to Loan Agreement dated as of
November 22, 1993 (11)
10(ss) - Fifteenth Amendment to Loan Agreement dated as of December
21, 1993 (12)
10(tt) - Sixteenth Amendment to Loan Agreement dated as of December
30, 1993 (12)
10(uu) - Seventeenth Amendment to Loan Agreement dated as of January
31, 1994 (12)
10(vv) - Eighteenth Amendment to Loan Agreement dated as of March 15,
1994 (13)
10(ww) - Nineteenth Amendment to Loan Agreement dated as of May 17,
1994 (16)
10(xx) - Form of Twentieth Amendment to Loan Agreement dated as of
November 30, 1994 (19)
10(yy) - Twenty-First Amendment to Loan Agreement dated as of December
29, 1994 (19)
10(zz) - Twenty-Second Amendment to Loan Agreement dated as of January
31, 1995 (20)
10(aaa) - 1993 Executive Compensation Plan for Group Presidents (1)
10(bbb) - 1994 Executive Compensation Plan for Group Presidents (11)
10(ccc) - 1995 Executive Compensation Plan for Group Presidents (19)
10(ddd) - Form of Series G Warrant Agreement (11)
10(eee) - Amended 1992 Non-Statutory Stock Option Plan (17)
10(fff) - 1994 Non-Statutory Stock Option Plan (15)
10(ggg) - Form of Indemnity Agreement between the Company and each of
its directors and officers (11)
10(hhh) - Systems Center, Inc. Restated and Amended Restricted Stock
Plan (9)
10(iii) - Systems Center, Inc. Amended and Restated Nondiscretionary
Restricted Stock Plan (9)
10(jjj) - Systems Center, Inc. 1982 Stock Option Plan (9)
10(kkk) - Systems Center, Inc. 1992 Stock Incentive Plan (9)
10(lll) - Systems Center, Inc. 1983 Stock Plan (9)
-20-
<PAGE>
10(mmm) - Systems Center, Inc. Share Option Scheme (9)
10(nnn) - Registration Rights Agreement dated as of July 1, 1993 among
the Company and the Selling Stockholders named therein (10)
10(ooo) - KnowledgeWare, Inc. Incentive Stock Option Plan of 1984 (18)
10(ppp) - KnowledgeWare, Inc. Second Incentive Stock Option Plan of
1984 (18)
10(qqq) - KnowledgeWare, Inc. 1988 Stock Incentive Plan (18)
10(rrr) - Consultation Agreement dated December 1, 1994 between the
Company and Francis A. Tarkenton (19)
10(sss) - Form of Employment Agreement with M. Gene Konopik, A. Maria
Smith and Clive Smith (19)
10(ttt) - Form of Employment Agreement with M. Gene Konopik, A. Maria
Smith and Clive Smith (19)
10(uuu) - Consultation Agreement with REC Enterprises, Inc. dated July
2, 1994 (19)
11 - Computation of Earnings Per Share, Three Months Ended
December 31, 1993 (20)
15 - None
18 - None
19 - None
22 - None
23 - None
24 - None
27 - Financial Data Schedule (20)
99(a) - Ralph Klein, William W. Nicholson; Irwin L. Jacobs, et al. v.
-------------------------------------------------------------
KnowledgeWare, Inc., a Georgia corporation, Contract Court
----------------------------------------------------------
File No. C9-95-675.
----
99(b) - Ralph and Sharon Klein, husband and wife; Amy Klein; Sandra
-----------------------------------------------------------
Klein; William W. Nicholson; Robert H. Grodahl; Irwin L.
--------------------------------------------------------
Jacobs, et al. v. KnowledgeWare, Inc., a Georgia corporation;
-------------------------------------------------------------
Francis A. Tarkenton; Donald P. Addington; Richard M.
-----------------------------------------------------
Haddrill; Rick W. Gossett; J. William Scruggs; Sam A. Brooks;
-------------------------------------------------------------
and P.E. Sadler, Civil Court File No. C9-95-674.
---------------
(b) Reports on Form 8-K.
On November 3, 1994, the Company filed a Current Report on Form 8-K dated
November 3, 1994, with respect to Item 5 and Item 7 of said form, which report
related to the Company's proposed acquisition of KnowledgeWare. The Company
included in such report the following financial statements of KnowledgeWare: (i)
Consolidated Balance Sheets as of June 30, 1994 and 1993; (ii) Consolidated
Statements of Operations for the years ended June 30, 1994, 1993 and 1992; (iii)
Consolidated Statements of Shareholders' Equity for the years ended June 30,
1994, 1993 and 1992; (iv) Consolidated Statements of Cash Flows for the years
ended June 30, 1994, 1993 and 1992 and (v) the related notes thereto. The
Company also included in such report the following pro forma combined condensed
financial statements assuming a business combination between the Company
-21-
<PAGE>
and KnowledgeWare accounted for as a purchase of KnowledgeWare by Sterling: (i)
the unaudited Pro Forma Combined Condensed Balance Sheet of Sterling and
KnowledgeWare as of June 30, 1994; (ii) the unaudited Pro Forma Combined
Condensed Statements of Operations of Sterling and KnowledgeWare for the nine
months ended June 30, 1994; (iii) the unaudited Pro Forma Combined Condensed
Statements of Operations of Sterling and KnowledgeWare for the year ended
September 30, 1993; and (iv) the related notes thereto.
On November 14, 1994, the Company filed a Current Report on Form 8-K dated
November 14, 1994, with respect to Item 5 and Item 7 of said form, which report
related to the Company's proposed acquisition of KnowledgeWare. The Company
included in such report the following 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 Sheets as of September 30, 1994 (unaudited) and June 30,
1994 (audited); (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.
On November 25, 1994, the Company filed a Current Report on Form 8-K dated
November 14, 1994, with respect to Item 5 of said form, which report related to
the Company's proposed acquisition of KnowledgeWare.
On December 15, 1994, the Company filed a Current Report on form 8-K dated
December 14, 1994, with respect to Item 2 and Item 7 of said form, which report
related to the Company's acquisition of KnowledgeWare.
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-62028 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
33-56185 on Form S-4 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-57428 on Form S-3 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of
Systems Center, Inc. for the quarter ended June 30, 1991 and incorporated
herein by reference.
(9) Previously filed as an exhibit to the Company's Registration Statement No.
33-65402 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-71706 on Form S-3 and incorporated herein by reference.
-22-
<PAGE>
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1993 and incorporated herein by
reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56679 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Registration Statement
No. 33-53837 on Form S-3 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56683 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56681 on Form S-8 and incorporated herein by reference.
(19) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994, as amended by Form 10-K/A
Amendment No. 1, filed January 25, 1995, and incorporated herein by
reference.
(20) Filed herewith.
-23-
<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 thereunto duly authorized.
STERLING SOFTWARE, INC.
Date: February 14, 1995 /s/ Sterling L. Williams
----------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: February 14, 1995 /s/ George H. Ellis
----------------------------------
George H. Ellis
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-24-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- ----------------------------------------------
2(a) - Agreement and Plan of Merger dated as of March 31, 1993 among
the Company, Systems Center, Inc. and SSI Acquisition
Corporation ("SCI Agreement and Plan of Merger") (1)
2(b) - First Amendment to SCI Agreement and Plan of Merger (11)
2(c) - Amended and Restated Agreement and Plan of Merger dated as of
August 31, 1994, among the Company, KnowledgeWare, Inc. and SSI
Corporation ("KWI Agreement and Plan of Merger") (2)
2(d) - Agreement dated October 11, 1994 among the Company,
KnowledgeWare, Inc. and SSI Corporation (2)
2(e) - First Amendment to KWI Agreement and Plan of Merger (2)
4(a) - Certificate of Incorporation of the Company (3)
4(b) - Certificate of Amendment of Certificate of Incorporation of the
Company (11)
4(c) - Certificate of Amendment of Certificate of Incorporation of the
Company (4)
4(d) - Restated Bylaws of the Company (5)
4(e) - Form of Common Stock Certificate (6)
4(f) - Form of Certificate of Designation, Preferences, Rights and
Limitations with respect to Series B Junior Preferred Stock (11)
4(g) - Form of Indenture between the Company and Bank of America Texas,
National Association, as Trustee, including the form of 5 3/4%
Convertible Subordinated Debenture attached as Exhibit A thereto
(7)
4(h) - Preferred Stock and Warrant Purchase Agreement dated June 25,
1991 among Systems Center, Inc. and the Investors named therein
(8)
4(i) - Warrant Agreement dated June 9, 1994 between KnowledgeWare, Inc.
and Trust Company Bank (14)
4(j) - Supplemental Warrant Agreement dated as of November 30, 1994
between KnowledgeWare, Inc. and Trust Company Bank (14)
10(a) - Amended and Restated Stock Option Agreement dated as of August
31, 1994 between the Company and KnowledgeWare, Inc. (2)
10(b) - Form of Amended and Restated Stockholder Agreement dated as of
August 31, 1994 between the Company and certain stockholders of
KnowledgeWare, Inc. (2)
10(c) - Form of Registration Rights Agreement dated as of November 30,
1994 among the Company and the Selling Stockholders named
therein (2)
<PAGE>
10(d) - Form of Escrow Agreement dated as of November 30, 1994 among the
Company, KnowledgeWare, Inc., The First National Bank of Boston,
N.A. and Stuart Finestone (2)
10(e) - Amended Incentive Stock Option Plan of the Company (16)
10(f) - Amended Non-Statutory Stock Option Plan of the Company (16)
10(g) - Supplemental Executive Retirement Plan II of Informatics General
Corporation (11)
10(h) - Form of Supplemental Executive Retirement Plan II Agreement (the
"SERP II Agreement") (11)
10(i) - Amendment to SERP II Agreement (11)
10(j) - Form of Employment Agreement with Jeannette P. Meier, George H.
Ellis and Phillip A. Moore (11)
10(k) - Form of Amendment No. 1 to Employment Agreement with Jeannette
P. Meier, George H. Ellis and Phillip A. Moore (11)
10(l) - Employment Agreement with Sam Wyly (11)
10(m) - Employment Agreement with Charles J. Wyly, Jr. (11)
10(n) - Employment Agreement with Sterling L. Williams (11)
10(o) - Form of Amendment No. 1 to Employment Agreement with Charles J.
Wyly, Jr. and Sterling L. Williams (11)
10(p) - Amendment No. 1 to Employment Agreement with Sam Wyly (11)
10(q) - Amendment No. 2 to Employment Agreement with Sam Wyly (11)
10(r) - Consultation Agreement with REC Enterprises, Inc. (11)
10(s) - Form of Employment Agreement with Edward J. Lott, Warner C.
Blow, Werner L. Frank and Geno P. Tolari (11)
10(t) - Employment Agreement with Sterling L. Williams (1)
10(u) - Form of Employment Agreement with Jeannette P. Meier, George H.
Ellis, Phillip A. Moore, Warner C. Blow and Geno P. Tolari (1)
10(v) - Employment Agreement with Werner L. Frank (19)
10(w) - Form of Series B Warrant Agreement (11)
10(x) - Form of Amendment to Series B Warrant Agreement (January 1988)
(11)
10(y) - Form of Amendment to Series B Warrant Agreement (May 1989) (11)
10(z) - Form of Series E Warrant Agreement (11)
10(aa) - Form of Amendment to Series E Warrant Agreement (May 1989) (11)
10(bb) - Form of Series F Warrant Agreement (11)
10(cc) - Form of Amendment to Series F Warrant Agreement (May 1989) (11)
10(dd) - Amended and Restated Revolving Credit and Term Loan Agreement
dated June 8, 1990 between the Company and The First National
Bank of Boston and BankOne Texas N.A. ("Loan Agreement") (11)
<PAGE>
10(ee) - First Amendment to Loan Agreement dated as of October 16, 1990
(11)
10(ff) - Second Amendment to Loan Agreement dated as of September 19,
1991 (11)
10(gg) - Third Amendment to Loan Agreement dated as of December 31, 1991
(11)
10(hh) - Fourth Amendment to Loan Agreement dated as of June 15, 1992
(11)
10(ii) - Fifth Amendment to Loan Agreement dated as of July 31, 1992 (11)
10(jj) - Sixth Amendment to Loan Agreement dated as of August 31, 1992
(11)
10(kk) - Seventh Amendment to Loan Agreement dated as of September 9,
1992 (11)
10(ll) - Eighth Amendment to Loan Agreement dated as of September 30,
1992 (11)
10(mm) - Ninth Amendment to Loan Agreement dated as of October 13, 1992
(11)
10(nn) - Tenth Amendment to Loan Agreement dated as of December 17, 1992
(1)
10(oo) - Form of Eleventh Amendment to Loan Agreement dated as of March
29, 1993 (11)
10(pp) - Twelfth Amendment to Loan Agreement dated as of June 30, 1993
(11)
10(qq) - Form of Thirteenth Amendment to Loan Agreement dated as of
November 10, 1993 (11)
10(rr) - Form of Fourteenth Amendment to Loan Agreement
dated as of November 22, 1993 (11)
10(ss) - Fifteenth Amendment to Loan Agreement dated as of December 21,
1993 (12)
10(tt) - Sixteenth Amendment to Loan Agreement dated as of December 30,
1993 (12)
10(uu) - Seventeenth Amendment to Loan Agreement dated as of January 31,
1994 (12)
10(vv) - Eighteenth Amendment to Loan Agreement dated as of March 15,
1994 (13)
10(ww) - Nineteenth Amendment to Loan Agreement dated as of May 17, 1994
(16)
10(xx) - Form of Twentieth Amendment to Loan Agreement dated as of
November 30, 1994 (19)
10(yy) - Twenty-First Amendment to Loan Agreement dated as of December
29, 1994 (19)
10(zz) - Twenty-Second Amendment to Loan Agreement dated as of January
31, 1995 (20)
10(aaa) - 1993 Executive Compensation Plan for Group Presidents (1)
10(bbb) - 1994 Executive Compensation Plan for Group Presidents (11)
<PAGE>
10(ccc) - 1995 Executive Compensation Plan for Group Presidents (19)
10(ddd) - Form of Series G Warrant Agreement (11)
10(eee) - Amended 1992 Non-Statutory Stock Option Plan (17)
10(fff) - 1994 Non-Statutory Stock Option Plan (15)
10(ggg) - Form of Indemnity Agreement between the Company and each of its
directors and officers (11)
10(hhh) - Systems Center, Inc. Restated and Amended Restricted Stock Plan
(9)
10(iii) - Systems Center, Inc. Amended and Restated Nondiscretionary
Restricted Stock Plan (9)
10(jjj) - Systems Center, Inc. 1982 Stock Option Plan (9)
10(kkk) - Systems Center, Inc. 1992 Stock Incentive Plan (9)
10(lll) - Systems Center, Inc. 1983 Stock Plan (9)
10(mmm) - Systems Center, Inc. Share Option Scheme (9)
10(nnn) - Registration Rights Agreement dated as of July 1, 1993 among the
Company and the Selling Stockholders named therein (10)
10(ooo) - KnowledgeWare, Inc. Incentive Stock Option Plan of 1984 (18)
10(ppp) - KnowledgeWare, Inc. Second Incentive Stock Option Plan of 1984
(18)
10(qqq) - KnowledgeWare, Inc. 1988 Stock Incentive Plan (18)
10(rrr) - Consultation Agreement dated December 1, 1994 between the
Company and Francis A. Tarkenton (19)
10(sss) - Form of Employment Agreement with M. Gene Konopik, A. Maria
Smith and Clive Smith (19)
10(ttt) - Form of Employment Agreement with M. Gene Konopik, A. Maria
Smith and Clive Smith (19)
10(uuu) - Consultation Agreement with REC Enterprises, Inc. dated July 2,
1994 (19)
11 - Computation of Earnings Per Share, Three Months Ended December
31, 1993 (20)
15 - None
18 - None
19 - None
22 - None
23 - None
24 - None
27 - Financial Data Schedule (20)
99(a) - Ralph Klein, William W. Nicholson; Irwin L. Jacobs, et al. v.
-------------------------------------------------------------
KnowledgeWare, Inc., a Georgia corporation, Contract Court
----------------------------------------------------------
File No. C9-95-675.
--------
99(b) - Ralph and Sharon Klein, husband and wife; Amy Klein; Sandra
-----------------------------------------------------------
Klein; William W. Nicholson; Robert H. Grodahl; Irwin L. Jacobs,
----------------------------------------------------------------
et al. v. KnowledgeWare, Inc., a Georgia corporation; Francis A.
----------------------------------------------------------------
Tarkenton; Donald P. Addington; Richard M. Haddrill; Rick W.
------------------------------------------------------------
Gossett; J. William Scruggs; Sam A. Brooks; and P.E. Sadler,
------------------------------------------------------------
Civil Court File No. C9-95-674.
<PAGE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-62028 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
33-56185 on form S-4 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-57428 on Form S-3 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of
Systems Center, Inc. for the quarter ended June 30, 1991 and incorporated
herein by reference.
(9) Previously filed as an exhibit to the Company's Registration Statement No.
33-65402 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-71706 on Form S-3 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1993 and incorporated herein by
reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Registration Statement No.
33-53837 on Form S-3 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Company's Registration Statement No.
33-56683 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Company's Registration Statement No.
33-56681 on Form S-8 and incorporated herein by reference.
(19) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994, as amended by Form 10-K/A
Amendment No. 1, filed January 25, 1995, and incorporated herein by
reference.
(20) Filed herewith.
<PAGE>
EXHIBIT 10.22
TWENTY-SECOND AMENDMENT AGREEMENT
TWENTY-SECOND AMENDMENT AGREEMENT dated as of January 31, 1995 (this
"Amendment") by and among STERLING SOFTWARE, INC., a Delaware corporation (the
"Company"), the direct and indirect subsidiaries of the Company listed on the
signature pages hereto (collectively, the "Sterling Subsidiaries"), THE FIRST
NATIONAL BANK OF BOSTON AND BANK ONE, TEXAS, NATIONAL ASSOCIATION (collectively,
the "Banks") and THE FIRST NATIONAL BANK OF BOSTON, as agent (the "Agent") for
the Banks, amending certain provisions of an Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 8, 1990 (as heretofore amended,
the "Loan Agreement") by and among the Company, the Banks and the Agent. Terms
not otherwise defined herein which are defined in the Loan Agreement shall have
the respective meanings herein assigned to such terms in the Loan Agreement.
WHEREAS, the Company has requested that the Agent and the Banks agree to
amend certain provisions of the Loan Agreement;
WHEREAS, upon the terms and subject to the conditions contained herein,
the Agent and the Banks are willing to amend such provisions of the Loan
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Loan Agreement, the other Loan Documents and herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
(S)1. AMENDMENT OF (S)1.1 OF THE LOAN AGREEMENT. Section 1.1 of the Loan
-----------------------------------------
Agreement is hereby amended by:
(a) deleting the definition of "Operating Cash Flow" in its entirety and
substituting in lieu thereof the following new definition:
"Operating Cash Flow. For any fiscal period, Consolidated Earnings
-------------------
Before Interest and Taxes, less the Restructuring Charge, less the
---- ----
Purchased Research and Development Amount, less Software Credits, less
---- ----
cash taxes, plus depreciation and amortization, less capital expenditures,
---- ----
calculated with respect to the Company and its Subsidiaries on a
consolidated basis.";
(b) adding the following new definitions in the order required by
alphabetical order:
"Purchased Research and Development Amount. That portion of the
-----------------------------------------
purchase price for the acquisition by the Company of KnowledgeWare and its
Subsidiaries attributable to the value assigned to research and
development costs in the Company's consolidated
<PAGE>
-2-
financial statements for the fiscal quarter ended December 31, 1994, in an
aggregate amount not to exceed $70,000,000."; and
"Restructuring Charge. Cash and non-cash charges, in an aggregate
--------------------
amount not to exceed $30,000,000, with the cash portion thereof not to
exceed $20,000,000, incurred by the Company for severance costs, duplicate
facilities costs, due diligence costs and the write-off of certain
software in connection with the acquisition by the Company of
KnowledgeWare and its Subsidiaries."
(S)2. AMENDMENT OF (S)9.1 OF THE LOAN AGREEMENT. Section 9.1 of the Loan
-----------------------------------------
Agreement is hereby amended by deleting the dollar amount "$15,000,000" in
subsection (h) thereof and substituting in lieu thereof the dollar figure
"$25,000,000".
(S)3. AMENDMENT OF (S)9.8 OF THE LOAN AGREEMENT. Section 9.8 of the Loan
-----------------------------------------
Agreement is hereby amended by deleting the table set forth therein in its
entirety and substituting in lieu thereof the following new table:
Maximum
"Period Permissible Amount
------ ------------------
October 1, 1994 - September 30, 1995 $35,000,000
October 1, 1995 - December 31, 1996 $35,000,000"
(S)4. AMENDMENT OF (S)9.9 OF THE LOAN AGREEMENT. Section 9.9 of the Loan
-----------------------------------------
Agreement is hereby amended by:
(a) deleting the word "and" at the end of subsection (g) thereof;
(b) deleting the period (".") at the end of subsection (h) thereof and
substituting in lieu thereof the text "; and"; and
(c) inserting a new subsection (i) at the end thereof with the following
text:
"(i) Sales or other dispositions of assets by any of the Sterling
Companies (i) in an amount not to exceed $1,500,000 in any individual
case or $15,000,000 in the aggregate, but solely in the event that
such assets do not constitute Collateral or the proceeds thereof; and
(ii) with the prior written consent of the Agent and the Banks, in the
event that such assets constitute Collateral or the proceeds thereof."
(S)5. AMENDMENT OF (S)10.1 OF THE LOAN AGREEMENT. Section 10.1 of the
------------------------------------------
Loan Agreement is hereby deleted in its entirety and the following new (S)10.1
is hereby substituted in lieu thereof:
"(S)10.1. PROFITABILITY. The Company shall not (a) at the end of
-------------
any two consecutive fiscal quarters, cause or permit (i) Consolidated Net
Income minus the Restructuring Charge minus the Purchased Research and
----- -----
Development Amount or (ii) Consolidated Net Operating Income minus the
-----
Restructuring Charge minus the Purchased
-----
<PAGE>
-3-
Research and Development Amount, in either case, to be less than $1.00 or
(b) in any fiscal quarter of the Company, incur any loss on (i)
Consolidated Net Income minus the Restructuring Charge minus the Purchased
----- -----
Research and Development Amount or (ii) Consolidated Net Operating Income
minus the Restructuring Charge minus the Purchased Research and
----- -----
Development Amount, in either case, in excess of $1,000,000."
(S)6. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to be
---------------------------
effective as of January 31, 1995 (the "Effective Date") upon the satisfaction of
the conditions precedent that, on or before February 8, 1995, the Agent shall
have received facsimile copies of original counterparts (to be followed promptly
by original counterparts) of this Amendment, executed by each of the Company,
the Sterling Subsidiaries, the Banks and the Agent.
(S)7. REPRESENTATION AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each of
-------------- --- ---------- -- ------- -------------
the Company and the Sterling Subsidiaries hereby represents and warrants to each
of the Agent and the Banks as follows:
(a) Each of the representations and warranties of the Company and the
Sterling Subsidiaries contained in the Loan Agreement, the other Loan Documents
or in any document or instrument delivered pursuant to or in connection with the
Loan Agreement, the other Loan Documents or this Amendment was true as of the
date as of which it was made and is true as and at the date of this Amendment,
and no Default or Event of Default has occurred and is continuing as of the date
of this Amendment; and
(b) This Amendment has been duly authorized, executed and delivered by the
Company and each of the Sterling Subsidiaries and shall be in full force and
effect upon the satisfaction of the conditions set forth in (S)6 hereof, and the
agreements of the Company and each of the Sterling Subsidiaries party hereto
contained herein, in the Loan Agreement, as amended, and the other Loan
Documents, as amended, respectively constitute the legal, valid and binding
obligations of the Company and each of the Sterling Subsidiaries party hereto,
enforceable against the Company or such Sterling Subsidiary in accordance with
their respective terms.
(S)8. RATIFICATION ETC. Except as expressly amended hereby, the Loan
------------ ---
Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. All references in the Loan Agreement
or such other Loan Documents or in any related agreement or instrument to the
Loan Agreement or such other Loan Documents shall hereafter refer to such
agreements as amended hereby and as previously amended, if previously amended,
pursuant to the provisions of the Loan Agreement.
(S)9. NO IMPLIED WAIVER, ETC. Except as expressly provided
-- ------- ------ ---
herein, nothing contained herein shall constitute a waiver of, impair or
otherwise affect any Obligations, any other obligations of the Company or
any right of the Agent or the Banks consequent thereon. The waivers and
consents provided herein are limited strictly to their terms. Neither the
Agent
<PAGE>
-4-
nor any of the Banks shall have any obligation to issue any further waiver
or consent with respect to the subject matter hereof or any other matter.
(S)10. COUNTERPARTS. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)11. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED
--------- ---
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
<PAGE>
-5-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
THE FIRST NATIONAL BANK OF BOSTON,
Individually and as Agent
By: /s/ ELIZABETH M. PASSELA
---------------------------------------
Title: Director
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By: /s/ WILLIAM R. LITTLE
---------------------------------------
Title: Vice President
STERLING SOFTWARE, INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Vice President, Controller
Each of the undersigned hereby acknowledges the foregoing Amendment as of the
Effective Date and agrees that its obligations under the Guaranty will extend to
the Loan Agreement, as so amended, and the other Loan Documents, as so amended.
STERLING SOFTWARE (MIDWEST), INC.
(formerly Creative Data Systems, Inc.)
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(NORTHERN AMERICA), INC.
(formerly Directions, Inc.)
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
<PAGE>
-6-
STERLING SOFTWARE
(UNITED STATES), INC.
(formerly Zanthe, Inc. Dylakor, Inc.
and Answer Systems, Inc.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE (AMERICA), INC.
(formerly Ordernet Services, Inc.)
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE (U.S.A.), INC.
(formerly Systems Software Marketing,
Inc. and Software Laboratories, Inc.)
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE (US), INC.
(formerly known as Sterling
Federal Systems, Inc.
and Sterling IMD, Inc.)
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
SYSTEMS CENTER, INC.
(formerly Sterling Software, Inc.
a Wyoming corporation)
By: /s/ RICHARD CONNELLY
--------------------------------------
Title: Assistant Treasurer
<PAGE>
-7-
STERLING SOFTWARE LEASING COMPANY
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Secretary
STERLING SOFTWARE
INTERNATIONAL, INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING ZEROONE, INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
ZEROONE SYSTEMS, INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE (UNITED STATES
OF AMERICA), INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(NORTH AMERICA), INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(U.S. OF AMERICA), INC.
By: /s/ RICHARD CONNELLY
---------------------------------------
Title: Assistant Treasurer
<PAGE>
EXHIBIT 11
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED DECEMBER 31, 1993
(in thousands, except per share information)
<TABLE>
<CAPTION>
Fully
Primary Diluted
------- -------
<S> <C> <C>
Earnings:
Earnings applicable to common stockholders.............. $10,774 $10,774
Add: Interest expense on amounts outstanding for the
5 3/4% Convertible Subordinated Debentures
(net of applicable income taxes)................. 205 1,064
Interest income on investment of proceeds from
assumed conversion of options and warrants
(net of applicable income taxes)................. 135
------- -------
$10,979 $11,973
======= =======
Shares:
Weighted average of shares outstanding.................. 18,399 18,399
Add common shares issued on assumed exercise of options
and warrants........................................... 8,401 8,401
Less common shares assumed repurchased.................. (3,745) (3,745)
------- -------
23,055 23,055
=======
Common shares issued on assumed conversion of 5 3/4%
Convertible Subordinated Debentures..................... 4,056
-------
27,111
=======
Earnings per common share:
Primary................................................. $ .48
=======
Fully diluted........................................... $ .44
=======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 92,919
<SECURITIES> 54,648
<RECEIVABLES> 161,066
<ALLOWANCES> 15,946
<INVENTORY> 0
<CURRENT-ASSETS> 323,363
<PP&E> 106,718
<DEPRECIATION> 50,470
<TOTAL-ASSETS> 567,303
<CURRENT-LIABILITIES> 236,297
<BONDS> 116,344
<COMMON> 2,328
0
20
<OTHER-SE> 188,765
<TOTAL-LIABILITY-AND-EQUITY> 567,303
<SALES> 126,418
<TOTAL-REVENUES> 126,418
<CGS> 42,510
<TOTAL-COSTS> 182,483
<OTHER-EXPENSES> 81,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,990
<INCOME-PRETAX> (57,303)
<INCOME-TAX> 4,352
<INCOME-CONTINUING> (61,655)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,655)
<EPS-PRIMARY> (2.87)
<EPS-DILUTED> (2.87)
</TABLE>
<PAGE>
EXHIBIT 99(a)
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
- ------------------------------ CASE TYPE: CONTRACT
Ralph Klein, William W. Nicholson, Court File No.____________
Irwin L. Jacobs, Theodore Deikel,
Carl R. Pohlad, Daniel T. Lindsay,
and Gerald A. Schwalbach,
Plaintiffs,
vs. COMPLAINT
---------
Knowledgeware, Inc., a Georgia JURY TRIAL DEMANDED
corporation, -------------------
Defendant.
- ------------------------------
Plaintiffs Ralph Klein, William W, Nicholson, Irwin L. Jacobs, Theodore
Deikel, Carl R. Pohlad, Daniel T. Lindsay, and Gerald A. Schwalbach
(collectively, "Plaintiffs"), for their Complaint against defendant
KnowledgeWare, Inc. ("KWI"), state and allege as follows:
NATURE OF THE ACTION
--------------------
1. This is an action for breach of contract and for damages and
declaratory relief pursuant to Minn. Stat. Chapter 555 and Section 12(2) of the
Securities Act of 1933, 15 U.S.C. (S) 771(2) ("Securities Act"). Plaintiffs'
claims arise out of KWI's sale to Plaintiffs of 666,700 shares, in the
aggregate, of KWI's common stock pursuant to a Stock Purchase Agreement dated
January 26, 1994 (the "Agreement").
THE PARTIES
-----------
2. Plaintiffs Ralph Klein, Irwin L. Jacobs, Theodore Deikel, Carl R.
Pohlad, Daniel T. Lindsay, and Gerald A. Schwalbach are
<PAGE>
each residents of Minnesota. Plaintiff William W. Nicholson is a resident of
Texas. Each of the Plaintiffs purchased shares of KWI's common stock pursuant to
the Agreement.
3. At all material times, Defendant KWI was a publicly held Georgia
corporation, with its principal place of business located at 3340 Peachtree
Street, Atlanta, Georgia. KWI is in the business of developing, manufacturing,
licensing and selling various lines of computer software products, and providing
consulting and educational services with respect to computer systems and
products. KWI's fiscal year ran from July 1 of each year to June 30 of the
following year.
JURISDICTION AND VENUE
----------------------
4. This Court has jurisdiction over Plaintiffs' claim under Section 12(2)
pursuant to Section 22(a) of the Securities Act, 15 U.S.C. (S) 77v(a).
5. KWI is licensed to do business and transacts its business in
Minnesota. Its registered agent for service of process is CT Corporation System
Inc., located at 405 Second Avenue South, Minneapolis, Minnesota 55401.
6. This action is commenced within the time prescribed by applicable
statutes of limitations.
BACKGROUND
----------
7. In late 1993, Plaintiffs and KWI entered into negotiations for the
sale by KWI to Plaintiffs of 667,700 shares of KWI's common stock (the
"Shares"). These negotiations were
-2-
<PAGE>
conducted over interstate telephone lines and the United States mails.
8. On January 20, 1994, KWI announced its results for the second fiscal
quarter of 1994, ended December 31, 1993. Specifically, KWI announced revenues
of $38,178,000 and net income of $2,082,000 for the quarter.
9. On or about January 26, 1994, Plaintiffs and KWI executed the
Agreement. Pursuant to the Agreement, KWI sold the Shares to Plaintiffs for an
aggregate price of $9,833,825, or $14.75 per share.
10. As a material condition to Plaintiffs' obligation to purchase the
Shares, KWI expressly represented and warranted in paragraphs 3.5 through 3.7 of
the Agreement that:
3.5 Disclosure. [KWI's filings with the Securities and Exchange
-----------
Commission] do not contain any untrue statements of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
3.6 Financial Statements. The financial statements of KWI set forth in
--------------------
[KWI's filings with the Securities and Exchange Commission] were
prepared in accordance with generally accepted accounting principles
consistently applied and fairly present the results of operations and
financial position at the dates and for the periods indicated.
3.7 No Material Adverse Events. Since September 30, 1993, there has been
--------------------------
no Material Adverse Event [as defined in the Agreement] except as
disclosed in any [of KWI's filings with the Securities and Exchange
Commission].
11. In paragraph 6.1 of the Agreement, KWI certified and confirmed that
the representations and warranties contained in the Agreement (including those
set forth in paragraphs 3.5 through 3.7
-3-
<PAGE>
of the Agreement), were true and correct as of the closing date with the same
effect as though those representations and warranties had been made on and as of
the closing date of January 26, 1994.
12. Finally, paragraph 9.6 of the Agreement further provided that the
"representations and warranties of the parties contained in or made pursuant
to this Agreement shall survive the execution and delivery of this Agreement and
the issuance, delivery and payment of the Shares hereunder."
13. On or about August 1, 1994, KWI announced that it had signed an
agreement with Sterling Software, Inc. ("Sterling"), pursuant to which KWI would
be acquired by Sterling in exchange for Sterling common stock worth
approximately $143 million.
14. On or about August 30, 1994, KWI announced, among other things, that
it would report a substantial loss for the 1994 fiscal year ended June 30, 1994,
and that notwithstanding KWI's representations and warranties to Plaintiffs set
forth in the Agreement, KWI disclosed that it was restating its financial
results for the first, second, and third fiscal quarters of 1994 to more
accurately reflect revenue recognition. Indeed, KWI acknowledged in its amended
filings with the Securities and Exchange Commission that it was modifying its
accounting policy for revenue recognition related to reseller product license
revenue, which policy had been set forth in its prior filings with the
Securities and Exchange Commission, and had "restated its financial results to
correct revenues previously reported on a basis that was not in conformity with
generally accepted accounting principles."
-4-
<PAGE>
15. Specifically, on or about September 1, 1994, KWI announced that as a
result of its restatement of its financial results for the first two fiscal
quarters of 1994, net income for the first fiscal quarter ended September 30,
1993, was reduced from the previously reported $1,566,000, or 12c per share, to
$1,382,000, or 10c per share, and net income for the second fiscal quarter ended
December 31, 1993, was reduced from $2,082,000, or 15c per share, to $278,000,
or 2c per share. In addition, net income for KWI's third fiscal quarter ended
March 31, 1994, was reduced from $807,000, or 6c per share, to a loss of
$5,278,000, or (36c) per share. Overall, KWI's results for the first three
quarters of 1994 were reduced from a profit of $4,455,000, or 32c per share, to
a loss of $3,618,000, or (25c) per share. KWI also suffered a loss of $15.4
million, or ($1.05) per share, in the fourth fiscal quarter, for a total loss of
more than $19 million, or ($1.34) per share, for the entire fiscal year.
16. Additionally, KWI announced that the value of the planned merger with
Sterling was being reduced by 40% as a direct result of the downward restatement
of KWI's earnings and the loss for fiscal year 1994.
17. On or about November 30, 1994, KWI merged with and became a
wholly-owned subsidiary of Sterling.
COUNT ONE
---------
CLAIM FOR BREACH OF CONTRACT
----------------------------
18. Plaintiffs reallege the allegations set forth in paragraphs 1 through
17 above as if fully set forth herein.
-5-
<PAGE>
19. KWI's representations and warranties, as set forth in paragraphs 3.5,
3.6 and 3.7 of the Agreement, were material conditions to Plaintiffs' obligation
to purchase the Shares under the Agreement.
20. As alleged above, KWI breached its obligations under the Agreement
because the representations and warranties in paragraphs 3.5, 3.6 and 3.7 of the
Agreement were false and misleading. Among other things, (1) KWI's filings with
the Securities and Exchange Commission falsely and misleadingly represented that
KWI's accounting policies were in conformity with generally accepted accounting
principles and that KWI's financial statements and other disclosures in KWI's
filings fairly presented KWI's financial position in conformity with generally
accepted accounting principles, and (2) KWI omitted to disclose to Plaintiffs
that a Material Adverse Event had occurred with respect to KWI from
September 30, 1993 to the date of the closing on January 26, 1994.
21. Plaintiffs request that the Court declare that KWI breached the
Agreement, and award damages to Plaintiffs in a reasonable amount in excess of
$50,000.00.
COUNT TWO
---------
CLAIM FOR VIOLATIONS OF
SECTION 12(2) OF THE SECURITIES ACT
----------------------------------
22. Plaintiffs reallege the allegations set forth in paragraphs 1 through
21 above as if fully set forth herein.
23. Section 12(2) provides in relevant part, that any person who:
-6-
<PAGE>
offers or sells a security ... by the use of any means or
instruments of transportation or communication in interstate
commerce or of the mails, by means of a prospectus or oral
communication, which includes an untrue statement of a material
fact or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances under
which they were made, not misleading (the purchaser not knowing
of such untruth or omission), and who shall not sustain the burden
of proof that he did not know, and in the exercise of reasonable
care could not have known, of such untruth or omission, shall be
liable to the person purchasing such security from him who may
sue either at law or in equity in any court of competent
jurisdiction, to recover the consideration paid for such security
with interest thereon, less the amount of any income received
thereon, upon the tender of such security, or for damages if he
no longer owns the security.
24. KWI offered and sold the Shares to Plaintiffs by means of a prospectus
and oral communications. KWI constitutes a seller under Section 12(2) in that it
passed title to the Shares to Plaintiffs.
25. The Agreement contained untrue statements of material fact or omitted
to state material facts necessary to make the statements not misleading. In
particular, the representations and warranties set forth in the Agreement, which
the parties acknowledged to be material to Plaintiffs, were materially false
and misleading in that, among other things, (a) KWI's filings with the
Securities and Exchange Commission falsely and misleadingly represented that
KWI's accounting policies were in conformity with generally accepted accounting
principles and that KWI's financial statements and other disclosures in KWI's
filings fairly presented KWI's financial position in conformity with generally
accepted accounting principles, and (2) KWI omitted to disclose to
-7-
<PAGE>
Plaintiffs that a Material Adverse Event had occurred with respect to KWI from
September 30, 1993 to the date of the closing on January 26, 1994.
26. KWI's materially false and misleading representations and warranties,
as set forth in paragraphs 3.5, 3.6 and 3.7 of the Agreement were a direct and
material condition to Plaintiffs' purchases of the Shares. Plaintiffs did not
know of KWI's untrue statements or omissions.
27. In connection with the conduct complained of herein, KWI directly or
indirectly used the means and instrumentalities of interstate commerce,
including the United States mails and interstate telephone communications.
28. Plaintiffs collectively seek damages of $8,091,992, representing the
difference between the aggregate purchase price of $9,391,325 and the $1,299,333
they received, in the aggregate, upon selling the Shares, plus interest. In
addition, Plaintiff Deikel seeks as damages $442,500, as measured by the
consideration paid for the Shares which he has not sold, plus interest.
Plaintiff Deikel hereby continually tenders to KWI the Sterling shares he
received in the merger between KWI and Sterling in exchange for the Shares which
he purchased and did not sell, against repayment of the consideration paid by
him for those shares.
WHEREFORE, Plaintiffs demand that a judgment be entered in favor of
Plaintiffs and against KWI, declaring that KWI breached the Agreement, awarding
Plaintiffs damages in a reasonable amount in excess of $50,000.00 plus interest
up to the date of payment by
-8-
<PAGE>
KWI, awarding Plaintiffs their costs and expenses incurred in connection with
this action, including reasonable attorneys' fees, and granting such other
relief as the Court deems just, proper, and equitable.
Dated: January 19, 1995
MAUN & SIMON, FLC
/s/ Geoffrey P. Jarpe
-----------------------------
Geoffrey P. Jarpe (#49761)
John R. Landis (#234217)
2300 World Trade Center
30 East Seventh Street
Saint Paul, Minnesota 55101-4904
(612) 229-2900
- and -
WEIL GOTSHAL & MANGES
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
Attorneys for Plaintiffs
ACKNOWLEDGMENT
--------------
The undersigned hereby acknowledges that costs, disbursements, and
reasonable attorney and witness fees may be awarded pursuant to Minn. Stat.
(S) 549.21, subdivision 2, to the party against whom the allegations in this
pleading are asserted.
/s/ Geoffrey P. Jarpe
-----------------------------
Geoffrey P. Jarpe
-9-
<PAGE>
EXHIBIT 99(b)
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
- ------------------------------ CASE TYPE: OTHER CIVIL
Court File No.____________
Ralph and Sharon Klein, husband and wife;
Amy Klein; Sandra Klein; William W.
Nicholson; Robert H. Grodahl; Irwin L.
Jacobs, individually and as a trustee
of the Irrevocable Trusts for the
Benefit of Melinda Jacobs-Grodnick,
Randi Jacobs, and Trisha Jacobs;
Melinda Jacobs-Grodnick; Randi Jacobs;
Trisha Jacobs; Rose Jacobs; Roy F.
Smalley III; Judi McFarlane; Theodore
Deikel; Roger Cloutier; Calvin Turner;
Grant Oppegaard; Edward Willhite; Calvin
and Bobbie Schmidt, husband and wife; Charles
S. Shuken; James Chafoulias; and Mark J.
Freidson,
Plaintiffs, COMPLAINT
---------
vs. JURY TRIAL DEMANDED
-------------------
KnowledgeWare, Inc., a Georgia
corporation; Francis A. Tarkenton;
Donald P. Addington; Richard M.
Haddrill; Rick W. Gossett;
J. William Scruggs; Sam A. Brooks;
and P.E. Sadler,
Defendants.
- ------------------------------
Plaintiffs, as and for their complaint against Defendants, state and allege
as follows:
JURISDICTION AND VENUE
----------------------
1. This Court has subject matter jurisdiction over this action pursuant to
(S) 22(a) of the Securities Act of 1933, as amended ("Securities Act") and 15
U.S.C. (S) 77v. This Court has personal jurisdiction pursuant to Minnesota
Statute (S) 543.19 because Defendants transact business in this state and in the
acts set forth herein caused injury in this state. The venue of this
<PAGE>
action is proper in this Court because the securities which are the subject of
this action were offered and sold, and the acts and transactions complained of
occurred, in this state. In connection with each of the acts alleged herein,
Defendants directly or indirectly made use of means or instruments of
transportation or communication in interstate commerce and of the mails. This
action is commenced within the time prescribed by applicable statutes of
limitations.
2. Defendants have engaged in acts and practices, directly or indirectly,
that constitute violations of:
a. (S) 12(2) of the Securities Act, 15 U.S.C. (S) 771;
-
b. Minn Stat. Chapters 80A and 325F and/or (S)(S) 10-5-12 and
10-5-14 of the Official Code of Georgia ("Georgia Securities Act"); and
c. Well-established principles of the statutory and common law,
including negligence, fraud, breach of fiduciary duty, and controlling
person violations of state statutes.
THE PARTIES
-----------
3. All Plaintiffs are citizens and residents of Minnesota. Irwin L.
Jacobs ("Jacobs") is a Minneapolis businessman and investor. Rose Jacobs is his
81 year old widowed mother. Melinda Jacobs-Grodnick, Randi Jacobs, and Trisha
Jacobs are his daughters. The other plaintiffs are long-time friends and
business associates of Jacobs.
4. KnowledgeWare, Inc. ("KWI") is a corporation organized and existing
under the laws of the State of Georgia. Its principal place of business is
located at 3340 Peachtree Road, N.E., Atlanta, Georgia 30326. KWI is in the
business of developing, manufacturing, licensing, and selling various lines of
computer
2
<PAGE>
software, and providing consulting and educational services with respect to
computer systems and products. KWI transacts its business in Minnesota. KWI was
formed in 1979 and merged with Tarkenton Software, Inc. in 1986. KWI was
reincorporated in Georgia in 1988. At all material times, KWI's common stock was
publicly traded over the counter on the National Association of Securities
Dealers Automated Quotation National Market System ("NASDAQ"). KWI's fiscal year
ran from July 1 of each year to June 30 of the following year.
5. On November 30, 1994, pursuant to an amended merger agreement dated as
of August 31, 1994, KWI became a wholly owned subsidiary of Sterling Software,
Inc., a Delaware corporation with its headquarters and principal place of
business located in Dallas, Texas.
6. At all material times, Defendant Francis A. Tarkenton ("Tarkenton")
was Chairman of the Board, Chief Executive Officer, and a shareholder of KWI.
Tarkenton is a former quarterback of the Minnesota Vikings professional football
team, a member of the National Football League Hall of Fame, and a former
television personality and entertainer.
7. At all material times, Defendant Donald P. Addington ("Addington") was
President and Chief Operating Officer, a director, and a shareholder of KWI.
8. At all material times, Defendant Richard M. Haddrill ("Haddrill") was
Executive Vice President, a director, and a shareholder of KWI.
3
<PAGE>
9. At all material times, Defendant Rick W. Gossett ("Gossett") was Chief
Financial Officer, Treasurer, and a shareholder of KWI.
10. At all material times, Defendant Sam A. Brooks ("Brooks") was
President of MedCare Investment Corp. and a director of KWI. He was a member of
various committees of the KWI Board of Directors, including the Audit Committee.
11. At all material times, Defendant P.E. Sadler ("Sadler") was Chairman
of ActaMed Corp. and a director of KWI. He was a member of various committees of
the KWI Board of Directors, including the Audit Committee.
12. At all material times, Defendant J. William Scruggs ("Scruggs") was a
consultant to International Business Machines Corporation ("IBM") and a director
of KWI. He was a member of various committees of the KWI Board of Directors,
including the Audit Committee.
FACTUAL BACKGROUND
------------------
13. For many years, Jacobs has been a close personal friend of Tarkenton.
From time to time, they have engaged in business and investment transactions
with one another. Prior to the events giving rise to this action, Tarkenton had
convinced Jacobs and certain of his business associates to invest in KWI, and
they did so. Jacobs held Tarkenton in very high regard, and had complete trust
and confidence in him.
14. In a press release dated and issued from its headquarters on October
18, 1993, KWI announced record first quarter revenues of
4
<PAGE>
$34.1 million and healthy net income of $.12 per share. The release further
stated:
"These revenues are the highest for a KnowledgeWare first quarter, and they
reflect the momentum we established in our record-breaking fourth quarter
last year," said KnowledgeWare Chairman Francis Tarkenton. "This is our
second successive quarter of record revenues, which begins to validate the
restructuring and expansion KnowledgeWare initiated last year."
There was no negative or cautionary information reported in the release
regarding KnowledgeWare's financial condition, performance, prospects, or sales
practices.
15. On October 20, 1993, Donaldson, Lufkin and Jenrette ("DLJ"), a
respected Wall Street investment banking and brokerage firm, issued a "buy"
recommendation for KWI stock, emphasizing the company's recent strong
performance and its "new product, service and distribution efforts that should
enable it to participate in the client-server boom." The recommendation
estimated revenues for fiscal year 1994 at $147.1 million with earnings per
share of $.60, and revenues of $173 million for fiscal year 1995 with earnings
per share of $.80.
16. On November 1, 1993, KWI issued its SEC Form 10-Q for the quarter
ended September 30, 1993. The 10-Q was signed by Defendants Addington and
Gossett. Among other things, that filing stated:
The Company believes it has now eliminated the cost redundancies and
structured its operations in accordance with its plans for maintaining
multiple product lines, multiple distribution channels and a significant
services business.
* * *
5
<PAGE>
KnowledgeWare believes that existing cash balances and cash generated from
operations will be sufficient to meet currently anticipated cash and
capital requirements through at least September 30, 1994.
17. In November 1993, Tarkenton, on his own behalf and on behalf of the
other Defendants, telephoned Jacobs in Minnesota to discuss an additional
investment in KWI. Tarkenton specifically affirmed to Jacobs the earnings
estimates and prospects for KWI contained in the DLJ "buy" recommendation,
stating that if anything, the report and estimates were "very conservative."
Tarkenton pointed out that he had been "burned before" by making overly
optimistic statements and forecasts and had "learned (his) lesson." Tarkenton
further emphasized that KWI had "cleaned house" in 1993 and "cut the fat out of
our operations," so that KWI was "lean and competitive, and well positioned for
the future." Tarkenton also told Jacobs that KWI only needed $10,000,000 to
meet its cash needs for fiscal 1994 and beyond, and that a larger additional
investment than that amount would be "more than sufficient."
18. As a result of these discussions, on November 19, 1993, Jacobs, Ralph
Klein, Nicholson and Deikel agreed to purchase 433,300 shares of KWI common
stock pursuant to a written contract at an aggregate price of $6,391,175, or
$14.75 per share. Three other investors (the "Contract Investors") also agreed
to participate in the agreement by purchasing 233,400 shares at $14.75 per
share.
19. Plaintiffs Jacobs, Ralph Klein, Deikel and Nicholson (along with the
other Contract Investors) and Defendants thereafter
6
<PAGE>
undertook negotiations for a final written stock purchase agreement. These
negotiations included telephone and fax communications from Defendants in
Georgia to Minnesota.
20. Upon completion of the negotiations, Jacobs, Ralph Klein, Deikel and
Nicholson (as well as the other Contract Investors) and Defendants entered into
a formal Stock Purchase Agreement dated January 26, 1994, a copy of which is
attached hereto and incorporated herein as Exhibit A. Jacobs, Ralph Klein and
Deikel (and the other Contract Investors) signed the Stock Purchase Agreement in
Minnesota and Nicholson signed in Texas. Copies of the signed Stock Purchase
Agreement were faxed from Minnesota to Georgia (except Nicholson's). Gossett
signed the Stock Purchase Agreement on behalf of KWI in Georgia and faxed it to
Minnesota. Jacobs, Ralph Klein and Deikel (and the other Contract Investors)
advanced their funds pursuant to the Stock Purchase Agreement from Minnesota.
Nicholson advanced his funds from Texas. At Defendant's request, all funds were
wire transferred to KWI's bank account in Atlanta, Georgia on January 25, 1994.
21. Meanwhile, on January 20, 1994, Defendants announced KWI's results for
the second fiscal quarter of 1994, ended December 31, 1993. Specifically, KWI
announced revenues of $38,178,000 and net income of $2,082,000 for the quarter.
22. In the Stock Purchase Agreement, KWI represented and warranted that
"(s)ince September 30, 1993, there has been no Material Adverse Event except as
disclosed in any SEC filings." (Paragraph 3.7). "Material Adverse Event" was
defined to mean:
7
<PAGE>
an occurrence having a consequence that (a) is materially adverse as to the
condition (financial or otherwise), results of operations, or prospects of
KWI and the Subsidiaries on a consolidated basis or (b) is reasonably
foreseeable, has a reasonable likelihood of occurring, and, if it were to
occur as reasonably foreseen, would be materially adverse as to the
condition (financial or otherwise), results of operations, or prospects of
KWI and the Subsidiaries on a consolidated basis. (Paragraph 2.1)
23. The Stock Purchase Agreement constituted a "prospectus" within the
meaning of (S) 2(10) of the Securities Act because it was a written confirmation
of the sale of securities.
24. In the Stock Purchase Agreement, KWI also represented and warranted
that its SEC filings, including the September 30, 1993 Form 10-Q:
do 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 contained therein, in light of the circumstances under which
they were made, not misleading. (Paragraph 3.5)
25. In the Stock Purchase Agreement, KWI further represented and warranted
that its financial statements including, among others, the September 30, 1994
Form 10-Q:
were prepared in accordance with generally accepted accounting principles
(GAAP) consistently applied and fairly present the results of operations
and financial position at the dates and for the periods indicated.
(Paragraph 3.6)
26. In paragraph 6.1 of the Stock Purchase Agreement, KWI certified and
confirmed that the representations and warranties contained in the Agreement
(including those set forth in paragraphs 3.5 through 3.7 of the Agreement), were
true and correct as of the closing date with the same effect as though those
representations and warranties had been made on and as of the closing date of
January 26, 1994.
8
<PAGE>
27. Paragraph 9.6 of the Stock Purchase Agreement further provided that:
representations and warranties of the parties contained in or made
pursuant to this Agreement shall survive the execution and delivery
of this Agreement and the issuance, delivery and payment of the
Shares hereunder.
28. Under the Stock Purchase Agreement, KWI further agreed to register the
shares sold under the Agreement pursuant to the Securities Act and state law,
following the closing of the transaction in January, 1994. (Paragraph 8) KWI
accomplished such registration by means of a further Prospectus prepared by
Defendants and KWI outside counsel dated March 11, 1994, a copy of which is
attached hereto and incorporated herein as Exhibit B.
29. The aforesaid sale of securities by KWI pursuant to the Stock
Purchase Agreement was also accomplished by means of the oral communications
previously described between Jacobs and Tarkenton (acting individually, on
behalf of KWI, and on behalf of the other Defendants).
30. On February 10, 1994, KWI issued its SEC Form 10-Q for the quarter
ended December 31, 1993, a copy of which is attached hereto and incorporated
herein as Exhibit C. The filing was signed by Defendant Gossett. Among other
things, this filing stated:
The Company believes it has now eliminated the cost redundancies and
structured its operations in accordance with its plans for maintaining
multiple product lines, multiple distribution channels and a significant
services business.
* * *
Negative cash flow from operations for the 12 month period ended December
31, 1993 was $11,130,000. Approximately $9,000,000 of negative cash flow
can be attributed directly to the March 1993 restructuring
9
<PAGE>
charge. Negative cash flow from operations also results from having no
European revenues for much of the quarter ended March 31, 1993 while the
acquisition (of European product distribution rights) was being
completed. These factors are not an indicator of negative cash flow
going forward. The Company expects to generate positive cash flow from
operations for the fiscal year ending June 30, 1994.
* * *
On January 27, 1994, the Company sold 1,000,000 shares of Common Stock to
several investors in a private transaction and received $14,750,000 in
proceeds from the sale. The Company expects to use the proceeds from this
sale for general corporate purposes, including working capital and payment
of purchase price obligations related to its recent acquisitions.
* * *
KnowledgeWare believes that existing cash balances, proceeds from the sale
of Common Stock in January 1994, and cash generated from operations will
be sufficient to meet currently anticipated cash and capital requirements
through at least December 31, 1994. ...
31. Also on February 10, 1994, KWI issued an Amended SEC Form 10-K for the
fiscal year ended June 30, 1993. The above statements were reiterated in the
following form:
Negative cash flow from operations for the 12 month period ended June 30,
1993 was $12,171,000, of which approximately $7,000,000 can be attributed
directly to the March 1993 restructuring charge. The balance of the
negative cash flow from operations results primarily from having no
European revenues for much of the quarter ended March 1993 while the
acquisition was being completed. These factors are not an indicator of
negative cash flow going forward. The Company expects to generate positive
cash flow from operations for the fiscal year ending June 30, 1994.
* * *
KnowledgeWare believes that existing cash balances, cash generated from
operations and the available loan agreement with IBM will be sufficient to
meet currently anticipated cash and capital requirements through at least
June 30, 1994. ...
10
<PAGE>
32. KWI also issued an Amended Form 10-Q for the quarterly period ended
September 30, 1993 that was received by the SEC on February 14, 1994. The
Amended Form 10-Q repeated the material quoted above from the previously filed
Forms 10-Q.
33. Meanwhile, on January 30, 1994, Montgomery Securities, another
brokerage firm, strongly reiterated its previous purchase recommendation for KWI
common stock, forecasting "dramatic growth" and earnings per share for fiscal
1994 of $.67, and for fiscal 1995 of $1.12. On that date, KWI common stock
closed at $16.25 per share. Jacobs was furnished and reviewed the report and
contacted his friend Tarkenton. Jacobs asked Tarkenton about the increase in
earnings per share from the previous DLJ recommendation, and Tarkenton stated
that the numbers were still conservative, that he agreed with them, and that KWI
would certainly achieve them.
34. By reports dated February 17 and 22, 1994, Kidder, Peabody & Company,
Inc., another Wall Street investment bank and brokerage firm, issued its "buy"
recommendation on KWI, forecasting healthy 1994 earnings per share of $.65 and
1995 earnings per share of $.80.
35. The March 11, 1994 Prospectus (Exhibit B, at pp. 2-3) specifically
incorporated the SEC Forms 10-Q for the quarters ended September 30 and December
31, 1993, the Amended Form 10-K for the year ended June 30, 1993, and the
Amended Form 10-Q for the quarter ended September 30, 1993.
36. In the March 11, 1994 Prospectus (Exhibit B) that was filed with the
SEC, Defendants stated:
11
<PAGE>
KnowledgeWare typically realizes a larger percentage of its software
product license revenues in the second and fourth quarters of each fiscal
year.
* * *
During the 18-month period ending December 31, 1993, the Company incurred
negative cash flow from operations totalling $19,929,000, of which
$9,000,000 can be attributed directly to a restructuring charge in March,
1993. Negative cash flow from operations also results from having no
European revenues for much of the March, 1993 quarter while the acquisition
of certain of the Company's European distributors was being completed.
These factors are not an indicator of negative cash flow going forward.
In January, 1994, the Company sold 1,000,000 shares of its Common Stock to
several of its private investors for $14,750,000. The proceeds were
intended to replenish working capital that was used to fund acquisitions
and was used in funding corporate restructuring. KnowledgeWare believes
that existing cash balances and cash generated from operation will be
sufficient to meet current anticipated cash and capital requirements
through at least December 31, 1994. The Company's belief is based on (1)
internal forecasts that reflect profitable operations, and (2) cash,
collection and payment trends from recent historical periods. The Company
further forecasts operations that will generate positive cash flow from
operations through December 31, 1995.
37. By press release dated April 21, 1994, KWI released results for the
third quarter of its 1994 fiscal year, reporting substantially higher revenues
and earnings than the previous year. The release also included a number of
positive statements about the company's products and prospects, including
Tarkenton's statement that "(t)his is KnowledgeWare's fourth consecutive quarter
of record-setting revenues, and we are very satisfied to have achieved our
objectives. ..." The release contained no negative or cautionary information,
and KWI's common stock closed at $12.75 per share on that date.
12
<PAGE>
38. From time to time from and after November 1993, as a direct and
proximate result of and in reliance on the aforesaid continuing flow of positive
information from and representations made by or on behalf of Defendants,
Plaintiffs made numerous purchases of KWI common stock, all as set forth on the
Schedule attached hereto and incorporated herein as Exhibit D.
39. Defendants continued to flood the market with positive news. On June
3, 1994, Tarkenton was quoted in The Wall Street Journal that "we like our
-----------------------
position and think we're in great shape to go forward." In the same article,
Addington stated that "cash flow was being managed carefully at this point." On
June 9, 1994, Defendants announced that KWI had acquired assets of Clear Access
Corporation and its subsidiary Fairfield Software, Inc. in exchange for 205,906
shares of KWI common stock plus undisclosed future considerations. On June 21,
1994, Defendants announced that KWI had signed a nonexclusive agreement to sell
Netwise, Inc.'s TransAccess products and provide related training and support
for their use. On June 23, 1994, Defendants announced a new financing agreement
with its lender, IBM Credit Corporation.
40. When the stock markets closed on the late afternoon of July 3, 1994,
KWI suddenly issued a stunning press release that was a complete reversal of the
tide of glowing representations that had proclaimed its financial health for so
many months. It stated that it expected to report a loss for the fourth quarter
of fiscal 1994 (which Plaintiffs had been led to believe would be KWI's
strongest quarter) and had not determined whether it would lose money for the
full year. It also stated that it planned to restructure its
13
<PAGE>
operations again and to make additional cuts in costs, which would likely result
in a further charge against earnings in the first quarter of fiscal 1995. KWI
said that the failure of some customer transactions to close by July 2 was the
principal explanation for the unanticipated loss. The price of KWI common stock
dropped to $2.50 per share on release of this news.
41. Following this development, most Plaintiffs sold their KWI common
stock at substantial losses, all as set forth on the Schedule attached as
Exhibit D. Certain Plaintiffs still hold small amounts of stock also as set
forth on Exhibit D.
42. On July 19, 1994, KWI announced the specifics of its restructuring and
cost cutting plans, stating that it was reducing its worldwide work force by
25%.
43. On August 30, 1994, KWI amplified the July 3 bad news by announcing
that it would report a substantial net loss for the fiscal year ended June 30,
1994, and that it expected to restate its financial results for "several
quarters" in that fiscal year due to collectability issues associated with its
North American reseller program, and the resulting modification of its
accounting policy relating to revenue purportedly generated from transactions
with resellers.
44. On September 1, 1994, KWI announced that it had restated the results
of the first, second and third quarters of fiscal 1994, and that it had
modified its accounting policy for the recognition of reseller license revenue
"to more accurately reflect its collection experiences from its reseller program
that was developed during fiscal 1994." If further stated that it would now
14
<PAGE>
"recognize license revenue from its resellers when payment is actually received
by KnowledgeWare, unless the products are shipped directly to end-users and
specific credit information allows a reasonable basis for estimating
collectability at that time." As a result, total revenue for the first nine
months of fiscal 1994 was restated to $102,077,000 from the originally reported
$111,250,000. Results for the first three quarters were restated to a loss of
$3,618,000 ($.25 per share) from net income previously reported of $4,455,000
($.32 per share), a negative swing of $8,073,000 ($.57 per share). The first
quarter ended September 30, 1993 restated revenue to $33,224,000 from the
originally reported $34,144,000, and net income to $1,382,000 ($.10 per share)
from the originally reported $1,566,000 ($.12 per share). Revenues for the
second quarter ended December 31, 1993 were restated to $35,553,000 from
$38,178,000. Net income was restated to $278,000 ($.02 per share) from
$2,082,000 ($.15 per share). For the third quarter ended March 31, 1994,
revenues were restated to $33,300,000 from $38,928,000. Net income was restated
to a loss of $5,278,000 ($.36 per share) from net income of $807,000 ($.06 per
share). KWI also suffered a loss of $15,412,000 ($1.05 per share) for the fourth
quarter. For the full year, KWI reported a loss of $19,030,000 ($1.34 per
share).
45. In connection with the aforesaid restated results, KWI acknowledged in
its October 27, 1994, amended Form 10-QA SEC filings for each of the first three
quarters of fiscal 1994, that it "restated its financial results to correct
revenues previously reported on a basis that was not in conformity with
generally
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accepted accounting principles" (GAAP). Defendant Gossett signed each of these
amended filings.
46. On September 2, 1994, KWI filed its Annual Report on Form 10-K with
the SEC for the fiscal year ended June 30, 1994. The report detailed the
aforesaid restated revenues, earnings, and losses and, among other things,
commented at length upon KWI's liquidity and capital resources. The report
stated that KWI suffered a working capital deficit of $9,753,000 at June 30,
1994, compared to working capital of $1,089,000 at June 30, 1993. It further
stated that KWI had
used payment terms in excess of 90 days as an inducement to initiate,
increase or accelerate sales. Use of extended payment terms increases
credit risk. At June 30, 1994, accounts receivable included approximately
$5,666,000 with payment terms greater than 90 days. (KWI) has $1,657,000 of
accounts receivable at June 30, 1994 which are 90 days or more past their
due date.
It went on to state that KWI's loss in the fourth quarter of 1994 caused it to
violate the financial covenants under its IBM Credit Corporation line of credit
dealing with earnings, net worth and working capital. As a result, its
independent auditors issued a qualified opinion on KWI's financial statements,
stating that the foregoing events raised "substantial doubt about (KWI's)
ability to continue as a going concern."
47. All of this negative truthful information contained in the September
2, 1994 Form 10-K flatly contradicted the many written and oral representations
made from late 1993 through July 3, 1994 that previous negative cash flow was
related to past events and were not an indicator of negative cash flow going
forward; that the company expected to generate positive cash flow from
operations
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for the fiscal year ending June 30, 1994 and beyond; and that existing cash
balances, cash generated from operations, and the available loan agreement would
be sufficient to meet cash and capital requirements through at least June 30,
1994 and beyond.
48. The premature recognition of revenue from reseller product sales,
which artificially and impermissibly inflated revenues and earnings and caused
them to be later restated, violated GAAP, specifically the Statement of
Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return
Exists." Among other things, the resellers were not unconditionally obligated to
pay (as opposed to their obligations being contingent on resale of the
products), and the amount of future returns of products could not be reasonably
estimated and accrued. This rendered all financial statements issued throughout
fiscal 1994 false, misleading and fraudulent.
49. Defendants Brooks, Sadler and Scruggs, as directors and members of
KWI's Audit Committee, knew, or should have known, that the accounting
practices and results of KWI were falsely misrepresented in the Stock Purchase
Agreement as well as the public representations, including but not limited to
the September 30, 1993 Form 10-Q, the December 31, 1993 Form 10-Q, the Amended
Form 10-K for fiscal year ended June 30, 1994 (dated February 10, 1994) and the
March 11, 1994 Prospectus.
50. Defendants' pre-July 3, 1994 representations, projections and
forecasts of positive earnings per share and positive cash flow did not reflect
surrounding past, present and reasonably foreseeable facts and circumstances at
the time they were made and
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communicated, particularly in light of the risky sales strategies and practices
and improper accounting practices previously described. The projections
suggested reliability, but had no sound, reasonable, factual or historical
basis, particularly in light of the sales strategy that was consciously employed
to increase accounts receivable. Defendants formulated the projections in bad
faith to entice purchases of KWI common stock at artificially inflated prices in
the desperate hope that it would buy much-needed time for them to discover some
way to truly turn the company around.
51. Thus, contrary to Defendants' written and oral representations to
Plaintiffs, their SEC filings, press releases, and statements to and by
securities analysts which they endorsed and adopted, (1) negative cash flow was
actually expected to continue and worsen, rather than abate; (2) negative cash
flow was largely caused by an increase in trade accounts receivable, rather than
the one-time restructuring charge booked in March, 1993 or from not having the
benefit of European revenues, so that negative cash flow was not related only to
past events that KWI had put behind it; (3) internal forecasts reflecting
profitable operations through the balance of fiscal 1994 and all of fiscal 1995
did not reflect the sales strategy of facilitating sales with liberal extended
payment terms and through resellers, a strategy that Defendants clearly knew or
should have known falsely and fraudulently inflated reported revenues and
earnings; (4) a substantial cash infusion resulting from purchases made pursuant
to the Stock Purchase Agreement of common stock would not be "more
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than sufficient" to take care of KWI's cash needs, which would have to "be
supplemented by additional cash from outside sources in order to fund currently
anticipated cash and capital requirements"; and (5) KWI's quarterly financial
statements were not prepared in accordance with GAAP and did not fairly present
KWI's results of operations and financial position at the dates and for the
periods indicated.
COUNT I - SECTION 12(2) OF THE SECURITIES ACT
---------------------------------------------
52. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 51 of this Complaint.
53. Defendants violated Section 12(2) of the Securities Act, in that they
offered and sold securities, using instruments of interstate commerce, by means
of prospectuses and oral communications that contained untrue statements of
material fact and omitted to state material facts necessary to make the
statements not misleading, all as heretofore more fully described above in this
Complaint.
54. Plaintiffs were unaware of and relied upon Defendants'
misrepresentations, and acted without knowledge of the omissions.
55. Plaintiffs sustained substantial damages in excess of $5.8 million in
connection with their purchase of KWI common stock, and are therefore entitled
to rescind such purchases in the case of stock still held, or to recover from
Defendants, and each of them, rescissory damages in the aggregate amount of in
excess of $5.8 million, together with interest and other relief. With respect to
stock still held as reflected on Plaintiff's Exhibit D, Plaintiffs hereby
continually tender to Defendants the Sterling shares they
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received in the merger in exchange for the KWI stock which they purchased and
did not sell, against repayment of the consideration paid by them for those
shares.
COUNT II - CONTROLLING PERSON LIABILITY - SECURITIES ACT
--------------------------------------------------------
56. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 55 of this Complaint.
57. The individual defendants, by reason of their management positions and
membership on the Board of Directors, were at all times controlling persons of
KWI within the meaning of Section 15 of the Securities Act (15 U.S.C. (S) 770).
The individual defendants had, and exercised the power and influence to cause,
KWI to engage in the misconduct alleged herein.
58. By reason of the aforesaid misconduct, the individual defendants are
jointly and severally liable with KWI and one another under Section 12(2) of the
Securities Act pursuant to Section 15 thereof. As a direct and proximate result
of the aforesaid misconduct, Plaintiffs sustained substantial damages in
connection with their purchase of KWI common stock, and are therefore entitled
to recover from defendants, and each of them, rescissory damages in the
aggregate amount of in excess of $5.8 million, together with interest and other
relief. With respect to stock still held as reflected on Plaintiff's Exhibit D,
Plaintiffs hereby continually tender to Defendants the Sterling shares they
received in the merger in exchange for the KWI stock which they purchased and
did not sell, against repayment of the consideration paid by them for those
shares.
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COUNT III - BREACH OF FIDUCIARY DUTY
------------------------------------
59. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 58 of this Complaint.
60. The individual Defendants, as officers and directors of KWI, owed all
Plaintiffs, through Jacobs, Grodahl, Turner, Cloutier, and Willhite, who were
previous and/or existing shareholders of KWI, the fiduciary duties of utmost
integrity, loyalty, good faith, fair and honest dealing, candor, disclosure and
care. Plaintiffs at all times relied upon Defendants to discharge their
fiduciary duties. By inducing Plaintiffs to purchase KWI common stock without
full, fair and accurate disclosure of all material facts, and by misrepresenting
material facts, Defendants violated the aforesaid fiduciary duties.
61. As a direct and proximate result of the aforesaid breaches of
fiduciary duties, Plaintiffs have been substantially damaged, and are therefore
entitled to recover from Defendants, and each of them, reasonable damages
substantially in excess of $50,000, together with interest and other relief.
COUNT IV - GEORGIA SECURITIES ACT
---------------------------------
62. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 61 of this Complaint.
63. Defendants, and each of them directly and indirectly, in connection
with the purchase and sale of KWI common stock, employed devices, schemes or
artifices to defraud; made untrue statements of material fact or omitted to
state material facts necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading; and engaged in
acts,
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practices or a course of business which operated as a fraud and deceit upon
Plaintiffs as purchasers of KWI common stock, all in violation of (S)(S)
10-5-12(a)(2) and 10-5-14(a) of the Georgia Securities Act.
64. As a direct and proximate result of the aforesaid misconduct,
Plaintiffs sustained substantial damages, and are therefore entitled to recover
from Defendants, and each of them, reasonable damages substantially in excess of
$50,000, together with interest and other relief.
COUNT V - MINNESOTA SECURITIES ACT
----------------------------------
65. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 64 of this Complaint.
66. Defendants, and each of them directly and indirectly, in connection
with the purchase and sale of KWI common stock, employed devices, schemes or
artifices to defraud; made untrue statements of material fact or omitted to
state material facts necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading; and engaged in
acts, practices or a course of business which operated as a fraud and deceit
upon Plaintiffs as purchasers of KWI common stock, all in violation of Minn.
Stat. (S)(S) 80A.01 and 80A.23, subd. 2.
67. As a direct and proximate result of the aforesaid misconduct,
Plaintiffs sustained substantial damages, and are therefore entitled to recover
from Defendants, and each of them, reasonable damages substantially in excess of
$50,000, together with interest and other relief.
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COUNT VI - CONTROLLING PERSON LIABILITY - STATE SECURITIES LAWS
---------------------------------------------------------------
68. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 67 of this Complaint.
69. The individual Defendants, by reason of their management positions and
membership on the board of directors, were at all times controlling persons of
KWI within the meaning of (S) 10-5-14-(c) of the Georgia Securities Act and
Minn. Stat. (S) 80A.23, subd.3. The individual Defendants had and exercised the
power and influence to cause KWI to engage in the misconduct alleged herein.
70. By reason of the aforesaid misconduct, the individual Defendants are
jointly and severally liable with KWI and one another under (S) 10-5-12(a) of
the Georgia Securities Act and Minn. Stat. (S)(S) 80A.01 and 80A.23. As a
direct and proximate result of the aforesaid misconduct, Plaintiffs sustained
substantial damages in connection with their purchases of KWI common stock, and
are therefore entitled to recover from Defendants, and each of them, reasonable
damages substantially in excess of $50,000, together with interest and other
relief.
COUNT VII - MINNESOTA CONSUMER FRAUD ACT
----------------------------------------
71. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 70 of this Complaint.
72. Defendants, directly and indirectly, in connection with the sale of
KWI common stock to Plaintiffs, engaged in the act, use, or employment of fraud,
false pretense, false promise, misrepresentation, misleading statement and
deceptive practice with the intent that Plaintiffs rely thereon, all in
violation of Minn. Stat. (S)(S) 325F.68 and 325F.69.
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73. As a direct and proximate result of the aforesaid misconduct,
Plaintiffs sustained substantial damages, and are therefore entitled to recover
from Defendants, and each of them, reasonable damages substantially in excess of
$50,000, together with interest and other relief.
COUNT VIII - COMMON LAW FRAUD
-----------------------------
74. Plaintiffs reallege and incorporate herein all of the allegations set
forth in paragraphs 1 through 73 of this Complaint.
75. Defendants, intentionally, recklessly, or negligently and carelessly,
misrepresented material facts pertaining to the sale of KWI common stock to
Plaintiffs, and omitted to state material facts concerning the sale of stock
when they were required to fully, thoroughly, and truthfully disclose all
material facts.
76. In purchasing the KWI common stock, Plaintiffs relied on the false
representations made by Defendants and on the fidelity, integrity, and superior
knowledge of Defendants. In addition, had omitted material facts been disclosed
and the true facts fully revealed to Plaintiffs, they would not have purchased
KWI common stock.
77. As a direct and proximate result of the aforesaid misconduct,
Plaintiffs sustained substantial damages, and are therefore entitled to recover
from Defendants, and each of them, reasonable damages substantially in excess of
$50,000, together with interest and other relief.
PRAYER FOR RELIEF
-----------------
WHEREFORE, Plaintiffs pray judgment against Defendants, and each of them,
as follows:
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(a) All reasonable compensatory damages suffered as a result of the wrongs
complained of herein, in the aggregate amount of substantially in excess of
$50,000;
(b) Rescission of the purchases of KWI or Sterling common stock still
held;
(c) Interest, reasonable attorneys' fees, costs, disbursements,
investigation expenses, and other expenses of suit; and
(d) Such other and further relief as the Court determines is just, proper,
and equitable.
Dated: January 20, 1995 Respectfully submitted,
MAUN & SIMON, PLC
/s/ Geoffrey P. Jarpe
------------------------------------
Geoffrey P. Jarpe (#49761)
John R. Landis (#234217)
Jarett B. Decker (#214309)
Martha J. Keon (Admission Pending)
2300 World Trade Center
30 East Seventh Street
Saint Paul, Minnesota 55101-4904
(612) 229-2900
Attorneys for Plaintiffs
ACKNOWLEDGMENT
--------------
The undersigned hereby acknowledges that costs, disbursements, and
reasonable attorney and witness fees may be awarded pursuant to Minnesota
Statutes (S) 549.21, subdivision 2, to the party against whom the allegations in
this pleading are asserted.
/s/ Geoffrey P. Jarpe
----------------------
Geoffrey P. Jarpe
25
