<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 June 30, 1995
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, including zip code)
(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 July 31, 1995
------------------------------ ----------------------------------------
Common Stock, $.10 par value 25,135,845
- 1 -
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Index to Financial Statements
Page
----
Sterling Software, Inc. Consolidated Balance Sheets at June 30, 1995 and
September 30, 1994....................................................... 3
Sterling Software, Inc. Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 1995 and 1994....................... 4
Sterling Software, Inc. Consolidated Statements of Stockholders' Equity
for the Nine Months Ended June 30, 1995 and 1994......................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1995 and 1994................................. 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)
<TABLE>
<CAPTION>
A S S E T S
June 30 September 30
1995 1994
----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................... $125,624 $101,893
Marketable securities....................... 75,288 41,847
Accounts and notes receivable, net.......... 160,976 132,166
Deferred income taxes....................... 3,059 11,294
Prepaid expenses and other current assets... 20,351 9,978
-------- --------
Total current assets...................... 385,298 297,178
Property and equipment, net of accumulated
depreciation of $55,470 at June 30, 1995
and $47,241 at September 30, 1994........... 65,423 36,699
Computer software, net of accumulated
amortization of $99,767 at June 30, 1995
and $90,259 at September 30, 1994........... 85,003 58,131
Excess cost over net assets acquired,
net of accumulated amortization of $21,736
at June 30, 1995 and $18,753 at
September 30, 1994.......................... 74,053 54,504
Noncurrent deferred income taxes.............. 9,718 2,216
Note and accrued interest receivable from
KnowledgeWare, Inc.......................... 18,266
Other assets.................................. 19,126 21,779
-------- --------
$638,621 $488,773
======== ========
<CAPTION>
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
<S> <C> <C>
Current liabilities:
Current portion of long-term debt........... $ 15,808 $ 7,257
Income taxes payable........................ 7,521 10,945
Accounts payable and accrued liabilities.... 103,259 76,219
Deferred revenue............................ 96,662 77,598
-------- --------
Total current liabilities................. 223,250 172,019
Long-term debt................................ 116,424 115,932
Other noncurrent liabilities.................. 25,078 25,018
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000
shares authorized; 200,000 shares issued
and outstanding at September 30, 1994...... 20
Common stock, $.10 par value; 75,000,000
shares authorized; 24,828,000 and
22,378,000 shares issued at June 30, 1995
and September 30, 1994, respectively....... 2,483 2,238
Additional paid-in capital................... 291,219 192,064
Retained earnings (deficit).................. (19,143) 572
Less treasury stock, at cost: 66,000 and
1,793,000 shares at June 30, 1995 and
September 30, 1994, respectively........... (690) (19,090)
-------- --------
Total stockholders' equity............... 273,869 175,804
-------- --------
$638,621 $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 Nine Months
Ended June 30 Ended June 30
------------------- --------------------
1995 1994 1995 1994
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenue:
Products.............................. $ 62,001 $ 41,173 $ 164,057 $125,043
Product support....................... 41,571 33,825 115,550 99,079
Services.............................. 47,376 41,545 135,966 117,919
-------- -------- -------- --------
150,948 116,543 415,573 342,041
Costs and expenses:
Cost of sales:
Products and product support........ 17,216 14,216 50,288 48,196
Services............................ 31,708 27,326 84,955 79,360
-------- -------- -------- --------
48,924 41,542 135,243 127,556
Product development and enhancement... 11,661 8,852 32,463 24,506
Selling, general and administrative... 56,452 42,390 157,383 125,106
Restructuring charge.................. 19,512
Purchased research and development.... 62,000
-------- -------- -------- --------
117,037 92,784 406,601 277,168
-------- -------- -------- --------
Income before other income (expense)
and income taxes....................... 33,911 23,759 8,972 64,873
Other income (expense):
Interest expense...................... (2,189) (1,621) (6,389) (4,954)
Investment income..................... 2,592 1,147 5,719 2,558
Other................................. 512 397 776 556
-------- -------- -------- --------
915 (77) 106 (1,840)
-------- -------- -------- --------
Income before income taxes.............. 34,826 23,682 9,078 63,033
Provision for income taxes.............. 12,537 8,707 28,284 23,680
-------- -------- -------- --------
Net income (loss)....................... 22,289 14,975 (19,206) 39,353
Preferred stock dividends............... 49 49 147 147
-------- -------- -------- --------
Income (loss) applicable to common
stockholders........................... $ 22,240 $ 14,926 ($19,353) $ 39,206
======== ======== ======== ========
Income (loss) per common share:
Net income (loss):
Primary............................. $ .79 $ .65 ($ .84) $ 1.72
======== ======== ======== ========
Fully diluted....................... $ .73 $ .59 ($ .84) $ 1.58
======== ======== ======== ========
Average common shares outstanding....... 24,118 20,433 23,036 19,558
======== ======== ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended June 30, 1995 and 1994
(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.................. 39,353 39,353
Preferred stock dividends... (147) (147)
Issuance of common stock
pursuant to stock options
and warrants............... 2,409 241 20,878 21,119
Issuance of common stock to
retirement plan............ 346 (29) 306 652
Other....................... 95 (3,236) (3) 34 (3,107)
---- --- ------ ------ -------- -------- ------ -------- --------
Balance at June 30, 1994..... 200 $20 22,326 $2,233 $191,144 ($18,612) 1,805 ($19,218) $155,567
==== === ====== ====== ======== ======== ====== ======== ========
Balance at September 30,
1994........................ 200 $20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804
Net loss.................... (19,206) (19,206)
Preferred stock dividends... (147) (147)
Issuance of common stock
and treasury stock for
acquisition................ 720 72 56,260 (1,701) 18,111 74,443
Common stock issuance costs. (730) (730)
Issuance of common stock
pursuant to stock
options and warrants....... 1,730 173 30,535 30,708
Issuance of common stock
to retirement plan......... 378 (18) 196 574
Tax benefit from exercise
of stock options........... 12,651 12,651
Issuance of warrants upon
conversion of preferred
stock...................... (200) (20) 20
Other....................... 41 (362) (8) 93 (228)
---- --- ------ ------ -------- -------- ------ -------- --------
Balance at June 30, 1995..... 24,828 $2,483 $291,219 ($19,143) 66 ($ 690) $273,869
==== === ====== ====== ======== ======== ====== ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30
---------------------
1995 1994
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)........................ ($19,206) $ 39,353
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.......... 33,938 25,402
Provision for losses on accounts
receivable............................ 2,643 4,126
Provision for deferred income taxes.... 14,762 16,542
Purchased research and development..... 62,000
Write-down of property and equipment
and other assets...................... 2,462
Write-down of purchased and
capitalized computer software costs... 6,215
Changes in operating assets and
liabilities, net of effect of
business acquisitions:
Increase in accounts and notes
receivable......................... (24,604) (14,490)
Increase in prepaids and other
assets............................. (3,109) (2,129)
Decrease in accounts payable,
accrued liabilities and income
taxes payable...................... (10,407) (12,587)
Increase in deferred revenue........ 12,348 6,540
Other............................... (1,168) (1,964)
-------- --------
Net cash provided by operating
activities........................ 75,874 60,793
Investing activities:
Purchases of property and equipment...... (31,601) (12,727)
Purchases and capitalized cost of
development of computer software........ (16,016) (16,609)
Business acquisitions, net of cash
acquired................................ (17,489)
Purchases of investments................. (81,808) (47,968)
Proceeds from sales of investments....... 51,415 61,942
Other.................................... 316 1,514
-------- --------
Net cash used in investing
activities........................ (95,183) (13,848)
Financing activities:
Retirement and redemption of debt and
capital lease obligations............... (15,264) (12,916)
Proceeds from issuance of debt........... 22,661 17,597
Proceeds from the sale of lease and
installment receivables................. 9,685 7,389
Preacquisition advances to
KnowledgeWare, Inc...................... (4,435)
Proceeds from issuance of common stock
pursuant to stock options and warrants.. 30,708 21,119
Other................................... (601) (2,980)
-------- --------
Net cash provided by financing
activities........................ 42,754 30,209
Effect of foreign currency exchange
rate changes on cash..................... 286 295
-------- --------
Increase in cash and cash equivalents..... 23,731 77,449
Cash and cash equivalents at beginning
of period................................ 101,893 30,199
-------- --------
Cash and cash equivalents at end of
period................................... $125,624 $107,648
======== ========
Supplemental cash flow information:
Interest paid............................ $ 4,667 $ 3,733
======== ========
Income taxes paid........................ $ 8,665 $ 3,329
======== ========
Income tax refunds....................... $ 1,184 $ 1,110
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(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 the periods ended prior to June 30, 1995 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.
- 7 -
<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 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 $102 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 $27,665,000. 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 portion
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<PAGE>
of the purchase price attributed to in-process research and development, and
which is charged to expense in accordance with purchase accounting guidelines.
The $62,000,000 charge has no related tax benefit. The results of operations for
the first quarter of 1995 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 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>
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. The actual statements of operations of Sterling
Software, Inc. and of KnowledgeWare have been combined from November 30, 1994
forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Nine Months
Ended June 30
------------------
(Dollars in thousands, except per share data) 1995 1994
-------- --------
<S> <C> <C>
Revenue $423,908 $441,308
======== ========
Income before other income (expense) and
income taxes 74,569 44,114
======== ========
Income applicable to common stockholders 41,075 19,237
======== ========
Net income per common share $ 1.41 $ .78
======== ========
</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, along
with various of its former officers and directors, continues to be a defendant
in several lawsuits filed in connection with KnowledgeWare's restatement of its
financial results for the first three quarters of its 1994 fiscal year and with
KnowledgeWare's financial results for its full 1994 fiscal
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<PAGE>
year. Several lawsuits, claims and inquiries and a formal investigation by the
Securities and Exchange Commission 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"), the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994, Note 4 "Commitments and Contingencies" ("First Quarter
Form 10-Q"), and the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, Note 4 "Commitments and Contingencies" ("Second Quarter
Form 10-Q"). Subsequently, one additional lawsuit has been filed and one lawsuit
has been dismissed without prejudice, all as more fully described below.
On June 27, 1995, Compass Investors, a New York limited partnership,
Frederick K. Martin, MTI Vacations, Inc., Martin A Liebowitz, Hawley Equity
Fund, and Robert A. Burstine, who were investment clients of Mitchell Hutchins
Asset Management, Inc., and who had purchased 177,000 shares of KnowledgeWare
stock in a private placement in January 1994, brought suit in the United States
District Court for the district of Minnesota, Fourth Division, against
KnowledgeWare, Francis A. Tarkenton, Donald P. Addington, Richard M. Haddrill,
Rick W. Gossett, J. Williams Scruggs, Sam A. Brooks and P. E. Sadler, former
directors and officers of KnowledgeWare (the "Compass Investors Suit"), alleging
claims substantially identical to those alleged in the Jacobs Suit as amended
(disclosed in the Second Quarter Form 10-Q).
On May 5, 1995, the plaintiff in the derivative suit styled Howard Lasker v.
Francis A. Tarkenton, Donald P. Addington, Richard M. Haddrill, Sam A. Brooks,
P. E. Sadler, J. William Scruggs, Rick W. Gossett, Defendants, and
KnowledgeWare, Inc., Nominal Defendant, dismissed that suit without prejudice
and without the payment or promise of any consideration.
The 1994 Class Action Suits (disclosed in the Form 10-K), the Jacobs Suit,
the Second Jacobs Suit (disclosed in the Second Quarter Form 10-Q), the Ecta
Suit (disclosed in the Form 10-K) and the Caussade Suit (disclosed in the
Second Quarter Form 10-Q) are all in discovery.
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, First Quarter Form
10-Q or Second Quarter Form 10-Q 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 June 30,
1995, the Company estimates that
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<PAGE>
approximately $1,000,000 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.
As of June 30, 1995, the value of the Escrowed Shares was approximately
$18,665,000 based on the June 30, 1995 closing stock price of $38 1/2 per share.
5. Segment Information
In connection with the Merger, the Company reorganized into five groups and
18 divisions. The Applications Management Group 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 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 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 of the United States and Canada. International Group operating results
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 $38,581,000 and $25,382,000 and
operating profit of $5,523,000 and $3,048,000 for the three months ended June
30, 1995 and 1994, respectively, have been
- 11 -
<PAGE>
allocated to the business segments. International Group revenue of $105,990,000
and $76,425,000 and operating profit of $16,688,000 and $10,038,000 for the nine
months ended June 30, 1995 and 1994, respectively, have been allocated to the
business segments.
Financial information concerning the Company's operations, by business
segment, for the three and nine months ended June 30, 1995 and 1994, restated to
conform to the current year presentation, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30 Ended June 30
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Electronic Commerce.................... $ 55,836 $ 42,446 $152,551 $117,028
Systems Management..................... 37,821 32,539 108,482 102,027
Federal Systems........................ 25,372 27,296 73,627 78,959
Applications Management................ 29,548 12,212 74,905 36,077
Corporate and other.................... 2,371 2,050 6,008 7,950
-------- -------- -------- --------
Consolidated totals.................... $150,948 $116,543 $415,573 $342,041
======== ======== ======== ========
Operating Profit (Loss):
Electronic Commerce.................... $ 18,548 $ 12,786 $ 47,752 $ 30,665
Systems Management..................... 14,154 10,723 38,750 35,788
Federal Systems........................ 1,953 2,391 5,346 5,699
Applications Management................ 5,284 3,181 14,900 7,152
Restructuring charge................... (19,512)
Purchased research and development..... (62,000)
Corporate and other.................... (6,028) (5,322) (16,264) (14,431)
-------- -------- -------- --------
Consolidated totals................... $ 33,911 $ 23,759 $ 8,972 $ 64,873
======== ======== ======== ========
</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.
- 12 -
<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. (together with its wholly
owned subsidiaries, 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 $102 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 $27,665,000. 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. The Applications Management Group ("AMG") was
established to focus exclusively on the applications management market. AMG
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
$27,665,000 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 $20,513,000 was paid in the first nine months of 1995.
- 13 -
<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 $9,694,000 was expended prior to
June 30, 1995. 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.
Approximately $10,067,000 of costs incurred through June 30, 1995 have been
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 among other things. (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, 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,
- 14 -
<PAGE>
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 June 30,
1995, the Company estimates that approximately $1,000,000 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 June 30,
1995, the value of the Escrowed Shares was approximately $18,665,000 based on
the June 30, 1995 closing stock price of $38 1/2 per share.
Results of Operations
The results of the International Group are included in the management's
discussion and analysis of financial condition and results of operations for
ECG, AMG and SMG.
Three Months Ended June 30, 1995 and 1994
Revenue increased $34,405,000, or 30%, in the third quarter of 1995
over the same period of 1994. Revenue outside of the United States and Canada
grew $13,199,000, or 52%, in the third quarter of 1995 over the third quarter of
1994. This revenue represented 26% and 22% of the Company's total revenue in the
third quarters of 1995 and 1994, respectively. The foreign currency effect due
to the weaker U.S. dollar had a favorable impact on revenue of approximately
$4,700,000. For the three months ended June 30, 1995, 37% of the Company's
product revenue was for products that run on hardware platforms other than
mainframe hardware. This compares to 19% for the same period in 1994.
ECG third quarter revenue increased $13,390,000, or 32%, over the same
period of 1994. Network services revenue increased $5,255,000 on the growth in
existing customer volume and the addition of new customers to the network
primarily in the healthcare, grocery, retail and hardlines vertical markets.
- 15 -
<PAGE>
Product and product support revenue increased $8,715,000, or 31%, related to the
sale of new products acquired in 1994, new product releases and sales growth in
the EDI translation, banking and communications software products.
AMG revenue grew $17,336,000, or 142%, due to the businesses acquired
in the Merger. Product and product support revenue from products acquired in
the Merger represented $13,507,000, or 46%, of total AMG revenue. Consulting
and training services revenue, previously an immaterial component of AMG's total
revenue, represented 10% of total AMG revenue.
SMG revenue increased $5,282,000, or 16%, over the third quarter of
1994 primarily due to increased product revenue in systems management and
storage management product lines and price increases on certain products.
FSG revenue decreased $1,924,000, or 7%, in the third quarter of 1995
primarily due to lower contract billings at NASA Ames resulting from lower
billable costs and fewer federal contracts than in the same period of 1994.
Technology developed in this group is being shared with the commercial
businesses of the Company and is expected to benefit future revenue growth in
those segments. In May 1995, the Company formed the Federal Electronic Commerce
Division within FSG. The new division will provide electronic commerce
solutions to the federal government.
Total cost and expenses increased $24,253,000, or 26%, on a 30% increase in
revenue. Cost of sales increased $7,382,000, or 18%, primarily due to increased
consulting services and product support costs of businesses acquired in the
Merger and higher network services costs to support the increase in network
services volume partially offset by lower contract costs associated with lower
contract billings in FSG. In addition, approximately $3,296,000 of product
support costs related to customer support contracts acquired in the Merger were
offset against a liability for product support costs accrued at the Merger date
in accordance with purchase accounting guidelines.
Net product development expense for the third quarter of 1995 of
$11,661,000 is net of $6,323,000 of capitalized software development costs.
This compares to net product development expense of $8,852,000 for the third
quarter of 1994, which is net of $5,668,000 of capitalized costs for the same
period. Total capitalized costs represented 35% and 39% of total development
expense for the quarters ended June 30, 1995 and 1994, respectively. Software
amortization expense was $5,477,000 and $4,372,000 for the third quarters of
1995 and 1994, respectively.
- 16 -
<PAGE>
Selling, general and administrative expense increased $14,062,000, or
33%, primarily due to increased sales, marketing and administrative support
personnel in AMG due to businesses acquired in the Merger and increased sales
personnel in ECG and outside North America to support the continuing revenue
growth.
Interest expense increased due to higher international borrowings to
manage foreign currency risk and to maintain increased working capital
requirements after the Merger. Investment income was also higher due to the
higher average cash balances available for investment as well as higher interest
rates in the third quarter of 1995 versus the third quarter of 1994. The impact
on operating profit from the foreign currency effect of the weaker U.S. dollar
was approximately $1,900,000. Income before income taxes was $34,826,000 in the
third quarter of 1995 as compared to $23,682,000 in the third quarter of 1994.
Income before income taxes increased $11,144,000, or 47%, primarily due to
higher operating profits in ECG, up 45%, in SMG, up 32%, and in AMG, up 66%.
There were no restructure costs included in the results of operations for the
third quarter of 1995. All restructure costs related to the Merger were incurred
and recognized in the first quarter of 1995.
Nine Months Ended June 30, 1995 and 1994
Revenue increased $73,532,000, or 21%, in the first nine months of
1995 over the same period of 1994. Revenue in the first nine months of 1995
from outside of the United States and Canada grew $29,565,000, or 39%, over the
first nine months of 1994. This revenue represented 26% and 22% of the
Company's total revenue in the first nine months of 1995 and 1994, respectively.
The foreign currency effect due to the weaker U.S. dollar had a favorable impact
on revenue of approximately $9,100,000. For the nine months ended June 30, 1995,
37% of the Company's product revenue was for products that run on hardware
platforms other than mainframe hardware. This compares to 18% for the same
period in 1994.
ECG contributed $35,523,000 to the total revenue growth for the first
nine months of 1995, increasing 30% over the first nine months of 1994. Network
services revenue increased $15,301,000 on the growth in existing customer volume
and the addition of new customers to the network primarily in the healthcare,
grocery, retail and hardlines vertical markets. Product and product support
revenue increased $20,844,000, or 27%, related to the sale of new products
acquired in 1994, new product releases and sales growth in the EDI translation,
banking and communications software products.
AMG revenue grew $38,828,000, or 108%, due to the businesses acquired
in the Merger. Product and product support revenue from products acquired in
the Merger represented $31,443,000, or 42%, of total AMG revenue. Consulting
and training services revenue, previously an immaterial component of AMG's total
revenue, represented 12% of total AMG revenue.
- 17 -
<PAGE>
SMG revenue increased $6,455,000, or 6%, over the first nine months of
1994 primarily due to increased product revenue in systems management and
storage management product lines and price increases on certain products.
FSG revenue decreased $5,332,000, or 7%, in the first nine months of
1995 primarily due to lower contract billings at NASA Ames resulting from lower
billable costs and fewer federal contracts than in the same period of 1994.
Total cost and expenses increased $129,433,000, or 47%. Total costs and
expenses include $19,512,000 of restructure costs of the Merger and the write-
off of $62,000,000 of purchased research and development costs resulting from
the application of purchase accounting guidelines in recording the Merger. Cost
of sales increased $7,687,000, or 6%, primarily due to increased consulting
services and product support costs of businesses acquired in the Merger and
higher network services costs to support the increase in higher network services
volume partially offset by lower contract costs associated with lower contract
billings in FSG. In addition, approximately $10,067,000 of product support costs
related to customer support contracts acquired in the Merger were offset against
a liability for product support costs accrued at the Merger date in accordance
with purchase accounting guidelines.
Net product development expense for the first nine months of 1995 of
$32,463,000 is net of $15,795,000 of capitalized software development costs.
This compares to net product development expense of $24,506,000 for the first
nine months of 1994, which is net of $14,984,000 of capitalized costs for the
same period. Total capitalized costs represented 33% and 38% of total
development expense for the nine months ended June 30, 1995 and 1994,
respectively. Software amortization expense was $16,973,000 and $15,084,000 for
the first nine months of 1995 and 1994, respectively.
Selling, general and administrative expense increased $32,277,000, or
26%, primarily due to increased sales, marketing and administrative support
personnel in AMG due to businesses acquired in the Merger and increased sales
personnel in ECG and outside North America to support the continuing revenue
growth.
Interest expense increased due to higher international borrowings to manage
foreign currency risk and to maintain increased working capital requirements
after the Merger. Investment income was also higher due to the higher average
cash balances available for investment, as well as higher interest rates in the
first nine months of 1995 versus the first nine months of 1994. The impact on
operating profit from the foreign currency effect of the weaker U.S. dollar was
approximately $3,000,000. Income before income taxes was $9,078,000 in the first
nine months of 1995 as compared to income before income taxes of $63,033,000 in
the first nine months of 1994. The decrease in income before income taxes in the
first nine months can
- 18 -
<PAGE>
be attributed to the Merger restructure costs of $19,512,000 and the write-off
of $62,000,000 of purchased research and development costs pursuant to the
application of purchase accounting guidelines in recording the Merger. In the
first nine months of 1995 income before income taxes, restructure costs, and the
write-off of purchased research and development costs was $90,590,000, up
$27,557,000, or 44%, over the first nine months of 1994, primarily due to higher
operating profits in ECG, up 56%, and in AMG, up 108%.
Liquidity and Capital Resources
The Company maintained a strong liquidity and financial position with
$162,048,000 of working capital at June 30, 1995, which includes $125,624,000 of
cash and cash equivalents and $75,288,000 of marketable securities. Days sales
outstanding, measured on a quarterly basis, decreased from 98 days for the
quarter ended March 31, 1995 to 96 days for the quarter ended June 30, 1995.
Net cash flows from operations increased $15,081,000 in the first nine months of
1995 as compared to the first nine months of 1994, primarily due to higher
operating profits before non-cash charges, restructuring costs and the write-off
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 the 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 $27,665,000.
The Merger was accounted for as a purchase and recorded as follows (in
thousands):
<TABLE>
<S> <C>
Working capital (deficit) $(25,528)
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 16,057
Obligation for postcontract
customer-support services (13,679)
Other liabilities (4,389)
Excess costs over net assets acquired
net of tax benefit 25,963
--------
$102,108
========
</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.
- 19 -
<PAGE>
At June 30, 1995, after the utilization of $3,900,000 for standby
letters of credit, $31,100,000 was available for borrowing on the Company's $35
million revolving credit and term loan agreement. Borrowings, if any,
outstanding on August 31, 1995 will convert to a term loan with six 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 June 30, 1995, $15,300,000 was outstanding pursuant to foreign
lines of credit and $8,400,000 was available for borrowing thereunder.
On June 27, 1995, the 200,000 shares of the Company's outstanding
preferred stock were exchanged for warrants to purchase 269,380 shares of the
Company's Common Stock. The warrants become fully exercisable on September 25,
1995 at an exercise price of $36.50 per share and expire on June 26, 1997,
pursuant to their terms.
At June 30, 1995, 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.
Revenue and expense accounts of these operations are translated at average
exchange rates during the period in which the
- 20 -
<PAGE>
transactions occur. 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 to 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.
- 21 -
<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 (9)
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)
3(a) - Certificate of Incorporation of the Company (3)
3(b) - Certificate of Amendment of Certificate of Incorporation
of the Company (9)
3(c) - Certificate of Amendment of Certificate of Incorporation
of the Company (4)
3(d) - Certificate of Amendment of Certificate of Incorporation
of the Company (12)
3(e) - Restated Bylaws of the Company (5)
4(a) - Form of Common Stock Certificate (6)
4(b) - Form of Certificate of Designation, Preferences, Rights
and Limitations with respect to Series B Junior Preferred
Stock (9)
4(c) - 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(d) - Preferred Stock and Warrant Purchase Agreement dated June
25, 1991 among Systems Center, Inc. and the Investors
named therein (8)
4(e) - Warrant Agreement dated June 9, 1994 between
KnowledgeWare, Inc. and Trust Company Bank (10)
4(f) - Supplemental Warrant Agreement dated as of November 30,
1994 between KnowledgeWare, Inc. and Trust Company Bank
(10)
4(g) - Form of Common Stock Purchase Warrant dated as of June
27, 1995 (13)
4(h) - Exchange Agreement dated as of June 27, 1995 among
Sterling Software, Inc. and Preferred Stockholders named
therein (13)
10(a) - Incentive Stock Option Plan of the Company, as amended
through April 26, 1995 (12)
10(b) - Non-Statutory Stock Option Plan of the Company, as
amended through June 15, 1995 (13)
10(c) - Twenty-Fourth Amendment to Loan Agreement dated as of May
31, 1995 (13)
- 22 -
<PAGE>
10(d) - Form of Employment Agreement with Richard Connelly,
Albert Hoover, James Jenkins, Anne Vahala and Evan Wyly
(13)
10(e) - Form of Employment Agreement with Richard Connelly,
Albert Hoover, James Jenkins, Anne Vahala and Evan Wyly
(13)
10(f) - Form of Amendment to Employment Agreement dated as of
July 7, 1995 with Warner C. Blow, George H. Ellis, Werner
L. Frank, M. Gene Konopik, Edward J. Lott, Jeannette P.
Meier, Phillip A. Moore, Clive A. Smith, A. Maria Smith,
Geno P. Tolari, Sterling L. Williams, Charles J. Wyly,
Jr., and Sam Wyly (13)
11(a) - Computation of Earnings Per Share, Three Months Ended
June 30, 1995 (13)
11(b) - Computation of Earnings Per Share, Three Months Ended
June 30, 1994 (13)
11(c) - Computation of Earnings Per Share, Nine Months Ended June
30, 1994 (13)
15 - None
18 - None
19 - None
22 - None
23 - None
24 - None
27 - Financial Data Schedule (13)
99(a) - Compass Investors, et al. v. KnowledgeWare, Inc., et al.
--------------------------------------------------------
Civil File No. 3-95-602 (13)
(b) Reports on Form 8-K.
None.
-----------
(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.
- 23 -
<PAGE>
(9) 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.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement No.
33-59107 on form S-3 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 March 31, 1995 and incorporated herein by
reference.
(13) Filed herewith.
- 24 -
<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: August 11, 1995 /s/ Sterling L. Williams
----------------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: August 11, 1995 /s/ George H. Ellis
----------------------------------------------
George H. Ellis
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
- 25 -
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Description Page
------- ------------------------------------------ ------------
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 (9)
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)
3(a) - Certificate of Incorporation of the
Company (3)
3(b) - Certificate of Amendment of
Certificate of Incorporation of the
Company (9)
3(c) - Certificate of Amendment of
Certificate of Incorporation of the
Company (4)
3(d) - Certificate of Amendment of
Certificate of Incorporation of the
Company (12)
3(e) - Restated Bylaws of the Company (5)
4(a) - Form of Common Stock Certificate (6)
4(b) - Form of Certificate of Designation,
Preferences, Rights and Limitations
with respect to Series B Junior
Preferred Stock (9)
4(c) - 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(d) - Preferred Stock and Warrant Purchase
Agreement dated June 25, 1991 among
Systems Center, Inc. and the
Investors named therein (8)
4(e) - Warrant Agreement dated June 9, 1994
between KnowledgeWare, Inc. and Trust
Company Bank (10)
4(f) - Supplemental Warrant Agreement dated
as of November 30, 1994 between
KnowledgeWare, Inc. and Trust Company
Bank (10)
4(g) - Form of Common Stock Purchase Warrant
dated as of June 27, 1995 (13)
4(h) - Exchange Agreement dated as of June
27, 1995 among Sterling Software,
Inc. and Preferred Stockholders named
therein (13)
10(a) - Incentive Stock Option Plan of the
Company, as amended through April 26,
1995 (12)
10(b) - Non-Statutory Stock Option Plan of
the Company, as amended through June
15, 1995 (13)
- 26 -
<PAGE>
10(c) - Twenty-Fourth Amendment to Loan
Agreement dated as of May 31, 1995
(13)
10(d) - Form of Employment Agreement with
Richard Connelly, Albert Hoover,
James Jenkins, Anne Vahala and Evan
Wyly (13)
10(e) - Form of Employment Agreement with
Richard Connelly, Albert Hoover,
James Jenkins, Anne Vahala and Evan
Wyly (13)
10(f) - Form of Amendment to Employment
Agreement dated as of July 7, 1995
with Warner C. Blow, George H. Ellis,
Werner L. Frank, M. Gene Konopik,
Edward J. Lott, Jeannette P. Meier,
Phillip A. Moore, Clive A. Smith, A.
Maria Smith, Geno P. Tolari, Sterling
L. Williams, Charles J. Wyly, Jr.,
and Sam Wyly (13)
11(a) - Computation of Earnings Per Share,
Three Months Ended June 30, 1995 (13)
11(b) - Computation of Earnings Per Share,
Three Months Ended June 30, 1994 (13)
11(c) - Computation of Earnings Per Share,
Nine Months Ended June 30, 1994 (13)
15 - None
18 - None
19 - None
22 - None
23 - None
24 - None
27 - Financial Data Schedule (13)
99(a) - Compass Investors, et al. v.
----------------------------
KnowledgeWare, Inc., et al.
---------------------------
Civil File No. 3-95-602 (13)
-----------
(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 Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
- 27 -
<PAGE>
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement No.
33-59107 on form S-3 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 March 31, 1995 and incorporated herein by
reference.
(13) Filed herewith.
- 28 -
<PAGE>
EXHIBIT 4(g)
NEITHER THE WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF UNLESS AND UNTIL THEY ARE FIRST REGISTERED UNDER SUCH ACT
AND ALL APPLICABLE STATE SECURITIES LAWS AND ALL RULES AND REGULATIONS RELATING
TO THE SALE, TRANSFER, OR OTHER DISPOSITION THEREUNDER HAVE BEEN COMPLIED WITH,
OR UNLESS THE COMPANY RECEIVES EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
STERLING SOFTWARE, INC.
COMMON STOCK
PURCHASE WARRANT
----------------
This Common Stock Purchase Warrant (the "Warrant"), effective as of June
27, 1995, is by and between Sterling Software, Inc., a Delaware corporation (the
"Company"), and ____________________ ("Holder").
The Company and the Holder agree as follows:
1. Issuance of Warrant. Pursuant to that certain Exchange Agreement,
-------------------
dated as of June 27, 1995, between the Company and the Holder, the Company
hereby issues to Holder this Warrant to purchase from the Company ____________
shares of common stock, par value $0.10 per share (the "Common Stock"), of the
Company upon the terms and conditions set forth herein.
2. Time of Exercise. The Warrant may be exercised, in whole or in part,
----------------
according to the following schedule:
Percentage
Exercisable Period
------------- ---------------------
100% On September 25, 1995
3. Term. The Warrant and all rights incident thereto shall terminate at
----
5:00 p.m., New York City time, on June 27, 1997.
4. Exercise Price. The exercise price per share of Common Stock (a
--------------
"Share") purchased hereby payable upon exercise of the Warrant shall be $36.50
(the "Per Share Price"), subject to adjustment as provided herein. The Per
Share Price times the number of
<PAGE>
Shares purchased at any time pursuant hereto is hereinafter referred to as the
"Exercise Price."
5. Restrictions on Exercise. No certificates representing Shares subject
------------------------
to the Warrant shall be delivered if any requisite registration with, clearance
by, or consent, approval or authorization of, any governmental authority of any
kind having jurisdiction over the exercise of the Warrant, or transfer of
securities upon such exercise, shall not have been taken or secured.
6. Manner of Exercise. The Warrant shall be exercised by written notice
------------------
to the Company of the number of Shares being purchased and the Exercise Price to
be paid, accompanied by the following:
(a) full payment of the Exercise Price in United States dollars or in
any other form of valid consideration (including shares of Common Stock then
owned by the Holder), or a combination of any of the foregoing, as permitted by
the Board of Directors of the Company in its sole discretion; and
(b) an undertaking to furnish or execute such documents as the Company
in its reasonable discretion shall deem necessary (i) to evidence such exercise
of the Warrant, (ii) to determine whether registration is then required under
the Securities Act of 1933, as then in effect (the "Securities Act"), and (iii)
to comply with or satisfy the requirements of the Securities Act, or any other
federal, state or local law, as then in effect.
Upon due exercise of the Warrant, the Company shall deliver to Holder a
certificate representing the Shares so purchased and, in the case of a partial
exercise hereof, a new warrant substantially in the form hereof representing the
right to purchase the number of Shares as to which the Warrant shall not have
been exercised.
7. Reservation of Shares. The Company shall, at all times, reserve and
---------------------
keep available out of its authorized but unissued shares of Common Stock such
number of Shares as shall from time to time be sufficient to effect the exercise
of the Warrant.
8. Adjustments. The Warrant shall be subject to adjustment from time to
-----------
time as hereinafter provided in this Section 8.
(a) If the Company at any time divides the outstanding shares of its
Common Stock into a greater number of shares (whether pursuant to a stock split,
stock dividend or otherwise), and conversely, if the outstanding shares of its
Common Stock are combined into a smaller number of shares, the Per Share Price
in effect immediately prior to such division or combination shall be
proportionately adjusted to reflect the reduction or increase in the value of
each such common share.
(b) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the
<PAGE>
sale of all or substantially all of its assets to another corporation shall be
effected in such a way that holders of the Company's Common Stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for such common shares, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, the Holder shall have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant and in lieu of the Shares immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such shares of stock, other securities or assets as would have been issued or
delivered to the Holder if it had exercised the Warrant and had received such
Shares prior to such reorganization, reclassification, consolidation, merger or
sale.
(c) Upon any adjustment of the Per Share Price in accordance with
Section 8(a), the Holder shall thereafter be entitled to purchase, at the Per
Share Price resulting from such adjustment, the number of Shares obtained by
multiplying the Per Share Price in effect immediately prior to such adjustment
by the number of Shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Per Share Price resulting
from such adjustment.
(d) Upon any adjustment of the Per Share Price, the Company shall give
written notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of the Warrant at the address of such holder as shown on the
books of the Company, which notice shall state the Per Share Price resulting
from such adjustment and increase or decrease, if any, in the number of Shares
purchasable at such price upon the exercise of the Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
9. Transferability of Warrants. Subject to the legend set forth at the
---------------------------
top of the Warrant, the Holder may assign or transfer all or any portion of the
Warrant to any other person or entity. However, such transfer shall be
effective only upon registration thereof upon the books of the Company, which
shall require delivery hereof thereto, duly endorsed by the Holder or by his
duly authorized attorney or representative, or accompanied by evidence
satisfactory to the Company of succession, assignment or authority to transfer.
The record holder of this Warrant may be treated by the Company and all
other persons dealing with the Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby, or
to effect the transfer hereof on the books of the Company.
10. Rights as Stockholder. Neither the Holder nor any of the assignees or
---------------------
transferees hereof shall be deemed to have any rights as a stockholder with
respect to any Shares covered by the Warrant until the issuance effected by the
exercise hereof is recorded on the books of the Company.
11. Warrant Purchased for Investment. The Holder, by accepting the
--------------------------------
Warrant, represents, warrants, covenants and agrees that the Warrant is being
acquired for investment
<PAGE>
and not for resale or distribution, and that upon the exercise of the Warrant,
the person entitled to exercise the same shall furnish evidence reasonably
satisfactory to the Company to the effect that the Shares are being acquired in
good faith for investment and not for resale or distribution.
12. No Obligation to Exercise Warrant. No obligation is imposed upon the
---------------------------------
Holder to exercise the Warrant.
13. LAW GOVERNING. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
-------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE.
IN WITNESS WHEREOF, the Company and the Holder have executed the Warrant as
of the date first above written.
STERLING SOFTWARE, INC.
By:___________________________________________
Its:__________________________________________
HOLDER:
______________________________________________
<PAGE>
FORM OF ASSIGNMENT
------------------
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns
and transfers to ______________________________ the within Warrant, together
with all rights, title and interest therein, and does hereby irrevocably
constitute and appoint ______________________________ attorney to transfer such
Warrant on the register of the within named Company, with full power of
substitution.
___________________________________
(Signature)
Dated:____________________
Signature Guaranteed:
__________________________
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase ______ shares of the
Common Stock evidenced by the within Warrant, according to the terms and
conditions thereof, and herewith makes payment of the purchase price of
$______________ in full. The undersigned requests that certificate(s) for such
shares (or other comparable units) shall be issued in the name set forth below.
Dated:____________________ ___________________________________
(Signature)
Name:______________________________
(Please Print)
Address:___________________________
___________________________
Social Security No.________________
or other identifying number
<PAGE>
If said number of shares shall not be all the shares purchasable under the
within Warrant, the undersigned requests that a new Warrant for the unexercised
portion shall be registered in the name of the undersigned and delivered to the
address set forth below:
Dated:__________________ Name_______________________________
(Please Print)
Address ___________________________
___________________________
Social Security No.________________
or other identifying number
<PAGE>
EXHIBIT 4(h)
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (this "Agreement") is made and entered into as of
the 27th day of June, 1995, by and among Sterling Software, Inc. (the "Company")
and the individuals and entities listed on the signature page hereto (the
"Preferred Stockholders").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Preferred Stockholders own the respective number of shares of
Series B Preferred Stock, par value $.10 per share, of the Company (the
"Preferred Stock") set forth opposite their respective names on Exhibit A; and
---------
WHEREAS, the Preferred Stockholders desire to exchange an aggregate of
200,000 Preferred Shares (the "Preferred Shares") for warrants ("Warrants") to
purchase an aggregate of 269,380 shares (the "Common Shares") of the Company's
Common Stock, par value $.10 per share (the "Common Stock") at an exercise price
of $36.50 per share.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Exchange. The Preferred Stockholders hereby agree to assign
--------- --------
and transfer to the Company the number of Preferred Shares set forth on Exhibit
-------
A, in exchange for which the Company agrees to issue and deliver to the
-
Preferred Stockholders Warrants to purchase the number of shares of Common Stock
(the "Warrant Shares") set forth on Exhibit A at an exercise price of $36.50 per
---------
share. Simultaneously with each Preferred Stockholder's execution and delivery
of this Agreement, such Preferred Stockholder shall deliver to the Company the
certificates evidencing such stockholder's Preferred Shares.
Section 2. Terms of Warrants. The Warrants will be fully exercisable
--------- -----------------
beginning on September 25, 1995 and will expire on June 26, 1997. All other
terms of the Warrants shall be as set forth in the form of Common Stock Purchase
Warrant attached hereto as Exhibit B.
---------
Section 3. Investment Intent; Restricted Securities. Each Preferred
--------- ----------------------------------------
Stockholder represents and warrants that he or it is acquiring the Warrants and
shall be acquiring the Warrant Shares solely for his or its own account and not
with a view to or for resale in connection with any distribution or public
offering thereof within the meaning of any applicable securities laws and
regulations, unless such distribution or offering is registered under the
Securities Act of 1933, as amended (the "Act"), or any exemption from such
registration is available. Each Preferred Stockholder realizes that the resale
of the Warrants and the Warrant Shares is restricted by federal and state
securities laws and, accordingly, the Warrants and the Warrant Shares must be
held indefinitely unless the resale is subsequently registered under the Act, or
an exemption from such registration is available for such resale. Holder
acknowledges and understands that the Warrants and each of the Warrant Shares
constitute "restricted securities" as that term is defined in Securities and
Exchange Commission Rule 144. Holder acknowledges and consents that the
certificates for the Warrant Shares will be, when issued, legended substantially
as follows:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. SUCH SECURITIES
MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 COVERING SUCH SECURITIES,
OR PURSUANT TO AN EXEMPTION THEREFROM, AND IN COMPLIANCE WITH OTHER
APPLICABLE SECURITIES LAWS.
Section 4. Governing Law. This Agreement shall be construed and enforced
--------- -------------
in accordance with and governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company and the Preferred Stockholders have
executed this Agreement as of the date first above written.
STERLING SOFTWARE, INC.
By:________________________________
Its:_______________________________
PREFERRED STOCKHOLDERS:
Laurie L. Wyly Revocable Trust
By:________________________________
Sam Wyly, Trustee
Lisa Wyly Revocable Trust
By:________________________________
Sam Wyly, Trustee
<PAGE>
Kelly Wyly Elliott Trust
By:________________________________
Sam Wyly, Trustee
Martha Caroline Wyly Trust
By:________________________________
Charles J. Wyly, Jr., Trustee
Charles J. Wyly, III Trust
By:________________________________
Charles J. Wyly, Jr., Trustee
Emily Ann Wyly Trust
By:________________________________
Charles J. Wyly, Jr., Trustee
Jennifer Lynn Wyly Trust
By:________________________________
Charles J. Wyly, Jr., Trustee
___________________________________
Evan A. Wyly
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Number of Shares of
Number of Shares of Common Stock
Preferred Stock Underlying Warrants
Name Exchanged to be Received
-------------------------------- ------------------- -------------------
<S> <C> <C>
Laurie L. Wyly Revocable Trust 24,998 33,670
Lisa Wyly Revocable Trust 24,999 33,671
Kelly Wyly Elliott Trust 24,998 33,670
Martha Caroline Wyly Trust 24,999 33,671
Charles J. Wyly, III Trust 24,999 33,671
Emily Ann Wyly Trust 24,998 33,670
Jennifer Lynn Wyly Trust 24,999 33,671
Evan A. Wyly 25,010 33,686
------- -------
200,000 269,380
</TABLE>
<PAGE>
EXHIBIT 10(b)
STERLING SOFTWARE, INC.
NON-STATUTORY STOCK OPTION PLAN
(AS AMENDED, THROUGH JUNE 15, 1995)
1. Purpose. The purpose of the Non-Statutory Stock Option Plan of
Sterling Software, Inc. (the "Plan") is to provide key employees and advisors
with a proprietary interest in Sterling Software, Inc., a Delaware corporation,
and its subsidiaries (the "Company") through the granting of options ("Option"
or "Options") to purchase shares of the Company's authorized Common Stock, par
value $0.10 per share ("Common Stock"), in order to:
a. Increase the interest in the Company's welfare of those key
employees and advisors who share primary responsibility for the management,
growth and protection of the business of the Company;
b. Recognize the contributions made by certain key employees and
advisors to the Company's growth during its development stage;
c. Furnish an incentive to such key employees and advisors to continue
their services for the Company; and
d. Provide a means through which the Company may attract able persons
to engage as key employees and advisors.
With respect to persons subject to Section 16 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), transactions under the Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent that any provision of the Plan
or action by the Committee (as defined in Section 2) fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
2. Administration. With respect to Participants who are directors or
executive officers of the Company ("Insiders"), the Plan shall be administered
in accordance with the requirements of Rule 16b-3 of the Exchange Act by a
committee (the "16b-3 Committee") consisting of such number of directors as are
appointed by the Board of Directors of the Company (the "Board of Directors" or
"Board") from time to time in accordance with the requirements of Rule 16b-3.
With respect to all other Participants, the Plan shall be administered by the
Board or by a committee (the "Stock Option Committee") consisting of not less
than two directors of the Company appointed by the Board. As used herein,
"Committee" shall mean (i) with respect to decisions relating to Insiders, the
16b-3 Committee, and (ii) with respect to decisions relating to all other
Participants, the Stock Option Committee. Except as otherwise provided by the
terms of this Plan or by the Board, the Committee shall have all the power and
authority of the Board hereunder.
The Committee shall have full and final authority in its discretion, but
subject to the provisions of the Plan, to determine from time to time the
individuals to whom Options shall be granted and the number of shares to be
covered by each Option; to determine the time or times at which Options shall be
granted; to interpret the Plan and the instruments by which Options will be
evidenced; to make, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of the instruments by which Options
shall be evidenced; with the consent of the Participant (as defined in Section
3), to modify or amend any Option agreement or waive any conditions or
restrictions applicable to any Option or the exercise thereof; and to make all
other determinations necessary or advisable for the administration of the Plan.
Non-employee members of the Board ("non-employee directors") shall not be
eligible to receive Options under the Plan except as expressly provided in
Section 21.
3. Participants. The Committee may, from time to time, select particular
key employees and advisors of the Company, or of any subsidiary of the Company,
to whom Options are to be granted, and upon the grant of such Options, the
selected key employees and advisors shall become Participants in the Plan. As
<PAGE>
used herein, the term "Participant" means a key employee or advisor who accepts
an Option, or the estate, personal representative or beneficiary thereof having
the right to exercise an Option pursuant to its terms.
4. Shares Subject to the Plan. The shares of Common Stock subject to
Options granted pursuant to the Plan shall be either shares of authorized but
unissued Common Stock or shares of Common Stock reacquired by the Company.
Shares that by reason of the expiration of an Option, or for any other reason,
are no longer subject to purchase pursuant to an Option granted under the Plan,
and shares from time to time rendered in payment of the exercise price of
Options, may be made subject to additional Options granted pursuant to the Plan.
The maximum aggregate number of shares of Common Stock that may be issued from
time to time pursuant to the Plan shall be 4,875,000; provided that the
Committee may adjust the number of shares available for Options, the number of
shares subject to and the exercise price of Options granted hereunder to effect
a change in capitalization of the Company, such as a stock dividend, stock
split, reverse stock split, share combination, exchange of shares, merger,
consolidation, reorganization, liquidation, or the like, of or by the Company.
5. Grant of Options. Options granted hereunder shall be evidenced by
written stock option agreements containing such terms and provisions as are
recommended and approved from time to time by the Committee, but subject to and
not more favorable than the terms of the Plan. The Committee may from time to
time require additional terms which the Committee deems necessary or advisable.
The Company shall execute stock option agreements upon instruction from the
Committee.
6. Maximum Amount of Stock Subject to Options. Subject to Section 21, the
maximum aggregate fair market value (determined as of the time the Option is
granted) of the Common Stock for which any Participant may be granted Options in
any calendar year shall be determined by the Committee in its discretion.
7. Option Exercise Price. The purchase price of Common Stock subject to
an Option granted pursuant to the Plan shall be no less than the fair market
value of the Common Stock on the date of grant.
8. Restrictions. The Committee may, but need not, at the time of granting
of an Option or at any subsequent time impose such restrictions, if any, on
issuance, voluntary disposition and release from escrow of any Options
including, without limitation, permitting exercise of Options only in
installments over a period of years.
9. Payment. Full payment for Common Stock purchased upon the exercise of
an Option shall be made at the time of exercise. No Common Stock shall be
issued until full payment has been made and a Participant shall have none of the
rights of a shareholder until shares of Common Stock are issued to him. Any
federal, state or local taxes required to be paid or withheld at the time of
exercise shall also be paid or withheld in full prior to any delivery of shares
of Common Stock upon exercise. Payment may be made in cash, in shares of Common
Stock then owned by the Participant, or in any other form of valid
consideration, or a combination of any of the foregoing, as required by the
Committee in its discretion. Shares of Common Stock tendered in payment of the
exercise price of any Options may be reissued to the Participant who tendered
the shares of Common Stock as part of the shares of Common Stock issuable upon
exercise of other Options granted from time to time pursuant to the Plan.
10. Transferability of Options. Except as may be agreed upon by the
Committee in accordance with the following two paragraphs, Options granted under
the Plan shall not be transferable other than by will or the laws of descent and
distribution, or pursuant to a qualified domestic relations order, as defined by
the Internal Revenue Code of 1986, as amended (the "Code"), or Title I of the
Employee Retirement Income Security Act ("ERISA"), or the rules thereunder. The
designation by the holder of an Option of a beneficiary shall not constitute a
transfer of the Option.
<PAGE>
The Committee shall have the discretion to include in (or amend to include
in) any Option agreement held by a Participant who is not an Insider such
provisions regarding transferability of the Options as the Committee, in its
sole discretion, deems to be appropriate.
The Committee shall have the discretion to include in (or amend to include
in) any Option agreement held by a Participant who is an Insider (other than a
non-employee director) a provision permitting such Participant's Option to be
transferred by the Participant to members of the Participant's immediate family,
trusts for the benefit of such immediate family members and partnerships in
which such immediate family members are the only partners, provided that there
cannot be any consideration for the transfer.
11. Time of Granting of an Option. The grant of an Option pursuant to the
Plan shall be deemed to have occurred when the Stock Option Committee shall have
adopted a resolution approving such grant.
12. Rights in Event of Death or Disability of Participant. The Committee
shall have discretion to include in each Option agreement such provisions
regarding exercisability of the Options following the death or disability of the
Participant as it, in its sole discretion, deems to be appropriate.
13. Termination of Option Rights and Awards. The Committee may provide in
each Option agreement for the circumstances under which Options granted
hereunder may terminate for any reason that the Committee, in its sole
discretion, deems appropriate.
14. Stock Purchased for Investment. At the discretion of the Committee,
any Option agreement may provide that the Option holder shall, by accepting an
Option, represent and agree on behalf of himself and his transferees by will or
the laws of descent and distribution that all shares of Common Stock purchased
upon the exercise of the Option will be acquired for investment and not for
resale or distribution, and that upon each exercise of any portion of an Option,
the person entitled to exercise the same shall furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares of Common Stock are being acquired in good faith and for investment
and not for resale or distribution.
15. Amendment or Discontinuation. The Plan may be amended, altered or
discontinued by the Board or, if the Board has specifically delegated this
authority to the Committee, by the Committee, without approval of the
stockholders. In the event any law, or any rule or regulation issued or
promulgated by the Internal Revenue Service, Securities and Exchange Commission,
National Association of Securities Dealers, Inc., any stock exchange upon which
the Common Stock is listed for trading or other governmental or quasi-
governmental agency having jurisdiction over the Company, its Common Stock or
the Plan requires the Plan to be amended, the Plan will be amended at that time
and all Options then outstanding will be subject to such amendment.
16. Employment. This Plan and any Option granted under this Plan do not
confer upon the Participant any right to be employed or to continue employment
with the Company.
17. No Obligation to Exercise Option. The granting of an Option pursuant
to the Plan shall not impose any obligation upon the Participant to exercise
such Option.
18. Termination. Unless sooner terminated by action of the Board or, if
the Board has specifically delegated its authority to terminate the Plan to the
Committee, by the Committee, the Plan shall terminate on December 31, 2011, and
no Options may be granted pursuant to the Plan after such date.
19. Use of Proceeds. The proceeds derived from the sale of stock pursuant
to Options granted under the Plan shall constitute general funds of the Company.
20. Effective Date of the Plan. The Plan shall be effective, as amended,
on June 15, 1995.
<PAGE>
21. Automatic Grants to Non-Employee Directors. Grants to non-employee
directors on or after the date hereof shall be solely pursuant to the following
formula: each non-employee director elected or appointed to the Board will
receive, at the time of his or her initial election or appointment, an automatic
grant of Options to purchase 40,000 shares of Common Stock. In addition, during
the term of this Plan, each non-employee director will receive an additional
automatic grant of Options to purchase 40,000 shares of Common Stock every five
years on the anniversary date of his or her initial election or appointment to
the Board, beginning on the fifth anniversary of his or her initial election or
appointment to the Board; provided that such non-employee director has served
continuously as a director of the Company since the date of his or her initial
election or appointment to the Board. The exercise price of each such Option
will be equal to the fair market value of the Common Stock on the date of grant.
Each such Option will become exercisable in cumulative annual installments of
one-fourth of the shares covered by the grant, commencing one year after the
date of grant, and will expire five years from the date of grant; provided that
each such Option will become immediately exercisable with respect to 100% of the
shares covered by the grant in the event of a change of control. A change of
control is deemed to occur (i) when any person, other than Sam Wyly or Charles
J. Wyly, Jr., or an affiliate of either of them, becomes the beneficial owner of
securities of the Company representing 20% or more of the combined voting power
of the Company's outstanding securities, (ii) if, during any three consecutive
years, individuals who constitute the Board of Directors at the beginning of
such period cease to constitute a majority of the Board of Directors or (iii)
upon the occurrence of any event that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act. This section shall not be amended more than once in any six-month
period, other than to comport with changes in the Code or ERISA, or the rules
thereunder.
STERLING SOFTWARE, INC.
By:_____________________________________
Sterling L. Williams
President and Chief Executive Officer
<PAGE>
EXHIBIT 10(c)
TWENTY-FOURTH AMENDMENT AND
MODIFICATION AGREEMENT
TWENTY-FOURTH AMENDMENT AND MODIFICATION AGREEMENT dated as of May 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 and release the security interest of
the Agent, for the benefit of the Banks, in and to the Collateral;
WHEREAS, upon the terms and subject to the conditions contained herein, the
Agent and the Banks are willing to amend certain provisions of the Loan
Agreement and to release the security interest of the Agent, for the benefit of
the Banks, in and to the Collateral;
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 deleting the date "May 31, 1995" in the
definition of "Conversion Date" and substituting in lieu thereof the date
"August 31, 1995".
(S)2. AMENDMENT OF (S)3.1 OF THE LOAN AGREEMENT. Section 3.1 of the Loan
-----------------------------------------
Agreement is hereby amended by deleting the text "in seven equal (as nearly as
may be) consecutive quarterly installments" and substituting in lieu thereof the
text "in six (6) equal (as nearly as may be) consecutive quarterly
installments".
(S)3. RELEASE OF COLLATERAL. (a) Each of the Sterling Companies has
---------------------
requested that the Agent and the Banks release the security interest of the
Agent, for the benefit of the Banks, in and to the Collateral. Each of the
Banks hereby consents to the release by the Agent of its security interest,
<PAGE>
- 2 -
for the benefit of the Banks, in the Collateral pursuant to the Security
Documents. Accordingly, the Agent hereby releases all security interests and
liens which any of the Sterling Companies may have granted to the Agent, for the
benefit of the Banks, in and to the Collateral pursuant to any of the Security
Documents to secure the Obligations. The Agent and the Banks agree to deliver to
the Sterling Companies, at the Company's sole cost and expense, such stock
certificates, UCC termination statements and other instruments of termination
and release as the Sterling Companies may reasonably request in connection with
the above-described release of the liens and security interests granted by any
of the Sterling Companies to the Agent to secure the Obligations.
(b) The Agent, at the request of the Sterling Companies and the Banks, having
released its security interest and lien in and to the Collateral pursuant to the
foregoing clause (a), each of the Sterling Companies, the Agent and the Banks
agrees that the Loan Agreement is hereby deemed amended by deleting all
references to the Collateral, the Security Documents (other than the Guaranty),
and to any financing statements or other recordings related thereto and by
making all such other changes or modifications which are necessary or
appropriate to reflect the releases referenced in the foregoing clause (a).
(c) Nothing contained herein shall be deemed to constitute the consent of the
Agent or either Bank to the termination, rescission, cancellation, release or
other modification of the Guaranty, and each of the Sterling Subsidiaries hereby
expressly ratifies and confirms its obligations under the Guaranty.
(S)4. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to be
---------------------------
effective as of the date first written above (the "Effective Date") upon the
satisfaction of the conditions precedent that, on or before May 31, 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)5. 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, after giving effect to the amendments set forth in
(S)3(b) hereof, 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)4 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
<PAGE>
- 3 -
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)6. RATIFICATION ETC. Except as expressly amended hereby (including,
----------------
without limitation, the release and amendments contained in (S)3 hereof), 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)7. 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 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)8. 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)9. 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>
- 4 -
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
/s/ ELIZABETH M. PASSELA
By:____________________________________
Title: Director
BANK ONE, TEXAS, NATIONAL ASSOCIATION
/s/ WILLIAM R. LITTLE
By:____________________________________
Title: Vice President
STERLING SOFTWARE, INC.
/s/ RICHARD CONNELLY
By:_____________________________________
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.)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE
(NORTHERN AMERICA), INC.
(formerly Directions, Inc.)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
<PAGE>
- 5 -
STERLING SOFTWARE
(UNITED STATES), INC.
(formerly Zanthe, Inc. Dylakor, Inc.
and Answer Systems, Inc.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE (AMERICA), INC.
(formerly Ordernet Services, Inc.)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE (U.S.A.), INC.
(formerly Systems Software Marketing,
Inc. and Software Laboratories, Inc.)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE (US), INC.
(formerly known as Sterling
Federal Systems, Inc.
and Sterling IMD, Inc.)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
SYSTEMS CENTER, INC.
(formerly Sterling Software, Inc.
a Wyoming corporation)
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
<PAGE>
- 6 -
STERLING SOFTWARE LEASING COMPANY
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Secretary
STERLING SOFTWARE
INTERNATIONAL, INC.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING ZEROONE, INC.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
ZEROONE SYSTEMS, INC.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE (UNITED STATES
OF AMERICA), INC.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE
(NORTH AMERICA), INC.
/s/ RICHARD CONNELLY
By:____________________________________
Title: Assistant Treasurer
STERLING SOFTWARE
(U.S. OF AMERICA), INC.
/s/ RICHARD CONNELLY
By: ___________________________________
Title: Assistant Treasurer
<PAGE>
EXHIBIT 10(d)
THIS AGREEMENT entered into as of the 1st day of June, 1995, by and between
STERLING SOFTWARE, INC., a Delaware corporation, (hereinafter referred to as the
"Company") and ______________ (hereinafter referred to as the "Executive").
WHEREAS, the Company wishes to attract and retain well-qualified executive
and key personnel and to assure both itself and Executive of continuity of
management in the event of any actual or threatened change of control of the
Company; and
WHEREAS, Executive has heretofore been employed by the Company and is
experienced in the business of the Company;
NOW, THEREFORE, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall continue in effect through May 31, 1996; provided, however,
that commencing on June 1, 1996 and each June 1 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, not
later than the November 30 immediately preceding such June 1st, the Company
shall have given notice that it does not wish to extend this Agreement;
provided, further, that notwithstanding any such notice by the Company not to
extend, if a Change in Control shall have occurred during the original or
extended term of this Agreement, this Agreement shall continue in effect for a
period of twelve (12) months beyond the term in effect immediately before such
Change in Control.
2. Employment. The Company hereby agrees to employ Executive, and
----------
Executive hereby agrees to remain in the employ of the Company, for the period
commencing on the Change of Control Date and ending on the termination of
Executive's employment pursuant to Section 8 hereof (the "Employment Period"),
to exercise such authority and perform such executive duties as are commensurate
with the authority being exercised and duties being performed by Executive
immediately prior to the Change of Control Date, which services shall be
performed at the location where Executive was employed immediately prior to the
Change of Control Date.
3. Base Compensation. The Company agrees to pay Executive during the
-----------------
Employment Period a salary, payable in cash at intervals not less frequently
than twice monthly, which is not less than his annual salary immediately prior
to the Change of Control Date, with the opportunity for increases, from time to
time thereafter, which are in accordance with the Company's regular practices in
effect prior to the Change of Control Date.
4. Discretionary Bonuses. During the Employment Period, Executive
---------------------
shall be entitled to participate in an equitable manner with all other key
management personnel of the Company in discretionary bonuses paid to the
Company's key management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for Executive's right to participate in
such discretionary bonuses when and as declared by the Board of Directors or by
any committee thereof.
1
<PAGE>
5. Other Compensation.
------------------
(a) Participation in Retirement and Medical Plans. During the
---------------------------------------------
Employment Period, Executive shall be entitled to receive employee benefits
under, and participate in, all employee benefit plans to which Executive
was entitled immediately prior to the Change of Control Date, including but
not limited to any applicable pension, retirement, employee stock ownership
or Section 401(k) thrift and savings plans (collectively, "Retirement
Plans"), and any disability, life insurance or medical and dental plans
provided by the Company to executives with comparable duties; provided,
however, that this provision shall not be construed to require the Company
to establish any new plans.
(b) Executive Benefits; Expenses. During the Employment Period,
----------------------------
Executive shall be entitled to receive any fringe benefits and perquisites
which may be or become applicable to the Company's executive employees,
including but not limited to participation in the Company's incentive stock
option plan, non-statutory stock option plans, and any other stock option
or incentive plans adopted by the Board of Directors, a reasonable expense
account, and any other benefits and perquisites which are commensurate with
the responsibilities and functions to be performed by Executive under this
Agreement. The Company shall reimburse Executive for all out-of-pocket
expenses which Executive shall incur in connection with his services for
the Company. During the Employment Period, Executive shall be entitled to
the use of a Company automobile in accordance with the Company's practices
in effect prior to the Change of Control Date for providing automobiles to
its executives.
6. Vacation, Sick Leave and Leaves of Absence. During the Employment
------------------------------------------
Period, Executive shall be entitled, without loss of pay, to absent himself
voluntarily from the performance of his employment under this Agreement for the
following purposes:
(a) Executive shall be entitled to an annual vacation in accordance
with the Company's practices in effect prior to the Change of Control Date
for its senior management officials.
(b) Upon Executive's request, the Board of Directors shall be entitled
to grant to Executive a leave or leaves of absence with or without pay at
such time or times and upon such terms and conditions as the Board of
Directors in its reasonable discretion may determine.
(c) In addition, Executive shall be entitled to an annual sick leave
in accordance with the Company's practices in effect prior to the Change of
Control Date for its senior management officials.
7. Control.
-------
(a) Change of Control. Except as provided in this Section 7(a), for
-----------------
purposes of this Agreement, a Change of Control shall mean a change in
control of a nature that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A
2
<PAGE>
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such
reporting requirement; provided that, without limitation, a Change of
Control shall be deemed to have occurred if (A) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act), other than Mr.
Sam Wyly, Mr. Charles J. Wyly, Jr., or any affiliate of either of them, is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the Company's then
outstanding securities; or (B) during any period of three consecutive years
(not including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board of
Directors, including for this purpose any new director whose election by
the Board, or nomination for election by the Company's stockholders, was
approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof.
(b) Change of Control Date. For purposes of this Agreement, the term
----------------------
Change of Control Date shall mean the date upon which a Change of Control
as defined in Section 7(a) hereof is deemed to have occurred.
8. Termination of the Employment Period. The Employment Period shall
------------------------------------
terminate upon the occurrence of any of the following events:
(a) any termination by the Company of the employment of Executive with
the Company for any reason other than death, physical or mental incapacity,
or
(b) the resignation of Executive upon the occurrence of any of the
following:
(i) a significant change in the nature or scope of Executive's
authorities or duties from those described in Section 2,
(ii) a reduction in or delay in payment of total compensation
from that provided in Section 3, 4 and 5,
(iii) the material breach by the Company of any other provision
of this Agreement; or
(iv) a determination made by Executive, in his sole discretion,
that as a result of a Change in Control of the Company and a change in
circumstances thereafter affecting his position, he is unable to fully
exercise the authorities, powers, functions or duties attached to his
position as contemplated by Section 2 of this Agreement.
9. Calculation of Termination Pay. For purposes of this Agreement,
------------------------------
Termination Date shall mean the date upon which the Employment Period terminates
pursuant to Section 8 hereof. If the
3
<PAGE>
Employment Period is terminated pursuant to Section 8 hereof after a Change of
Control, but prior to the first anniversary of the Change of Control Date, the
Company shall pay to Executive as termination pay the amounts determined as
follows:
(a) an amount equivalent to one (1) times one hundred percent (100%)
of Executive's aggregate monthly salary for the twelve (12) months
immediately prior to the Termination Date; and
(b) an amount equivalent to one (1) times one hundred percent (100%)
of Executive's aggregate bonuses for the twelve (12) months immediately
prior to the Termination Date; and
(c) an amount equivalent to one (1) times one hundred percent (100%)
of the aggregate monthly equivalent cash values of those benefits which
Executive shall have received during the twelve (12) months immediately
prior to the Termination Date in the form of (i) a car allowance or Company
car, and (ii) those contributions by the Company on behalf of Executive
pursuant to a Section 401(k) or other tax-advantaged savings plan
established or to be established by the Company; and
(d) in addition to the benefits to which Executive is entitled under
any pension or retirement benefit plan or plans maintained by the Company,
or any successor plan or plans thereto (hereinafter referred to as the
"Pension Plan"), a lump sum equal to the actuarial equivalent of the excess
of (x) the retirement pension (determined as a straight life annuity
commencing at age sixty-five (65)) which Executive would have accrued under
the terms of the Company's Pension Plan (without regard to any amendment to
such Pension Plan made subsequent to the Change in Control Date and on or
prior to the Termination Date, which amendment adversely affects in any
manner the computation of retirement benefits thereunder), determined as if
Executive were fully vested thereunder and had accumulated (after the
Termination Date) twelve (12) months of service credit thereunder at a
level of one hundred percent (100%) of Executive's average rate of
compensation during the twelve (12) months immediately prior to the
Termination Date and (y) the retirement pension (determined as a straight
life annuity commencing at age sixty-five (65)) which Executive had then
accrued pursuant to the provisions of the Pension Plan.
10. Continuation of Medical and Health Benefits. For a period of twelve
-------------------------------------------
(12) months following the Termination Date, the Company shall arrange to provide
Executive with life, medical, dental, health, accident and disability insurance
benefits substantially similar to those that Executive is receiving or is
entitled to receive immediately prior to the Termination Date, which benefits
shall in no event be less than those benefits in effect immediately prior to the
Change of Control Date.
11. Payment of Legal Expenses. The Company shall also pay Executive all
-------------------------
legal fees and expenses incurred by Executive as a result of any termination
pursuant to Section 8 hereof, including, but not limited to, all such fees and
expenses, if any, incurred in contesting or disputing
4
<PAGE>
any such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
12. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in Section 9
hereof shall be determined in good faith by the Company within 15 days following
the Termination Date, and such termination payments shall be distributed by the
Company to Executive, at the election of Executive (which election shall be made
within thirty (30) days following the Termination), either (A) in one lump sum
within ninety (90) days following the Termination Date or (B) in twelve (12)
equal monthly installments beginning thirty (30) days following the Termination
Date and continuing every thirty (30) days thereafter.
13. Notices. Any notices, demands and other communications provided for
-------
by this Agreement shall be sufficient if in writing and if sent by registered or
certified mail to Executive at the last address he has filed in writing with the
Company or, in the case of the Company, at its principal executive offices to
the attention of the President, with a copy to the attention of the General
Counsel.
14. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Company which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise,
all or substantially all of the assets of the Company.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive should
die while he or she is entitled to receive any amounts payable pursuant to
this Agreement, all such amounts shall be paid in accordance with the terms
of this Agreement to Executive's devisee, legatee or other designee or, if
there is no such designee, to Executive's estate.
15. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties.
16. Applicable Law. This Agreement shall be governed in all respects,
--------------
whether as to validity, construction capacity; performance or otherwise, by the
laws of the State of Texas, except to the extent that federal law shall be
deemed to apply.
17. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Entire Agreement. This Agreement contains all the terms agreed upon
----------------
by the parties with respect to the subject matter hereof and supersedes all
prior agreements, arrangements and communications.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the _____
day of June, 1995.
EXECUTIVE:
______________________________
ATTEST: STERLING SOFTWARE, INC.
By:
_____________________________ ___________________________
6
<PAGE>
EXHIBIT 10(e)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the ___ day of June, 1995 by and between Sterling Software, Inc., a Delaware
corporation ("Sterling"), and _________________, an individual ("Executive").
RECITALS:
WHEREAS, Sterling, through its wholly owned subsidiaries, acquires,
develops, markets and supports a broad range of products and services; and
WHEREAS, Sterling desires to continue to retain Executive as its Vice
President, __________________; and
WHEREAS, Executive is willing to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants
contained herein and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Executive agrees to render such managerial services as are
----------
customarily required of the Vice President, __________________, and
Sterling agrees to utilize such services on the terms and conditions
contained herein.
2. Term. This Agreement shall commence on June 1, 1995 and shall continue
----
in effect for twelve (12) months after the "Notice Date" as defined in
paragraph 3 hereof.
3. Termination of Employment. The parties acknowledge that Executive is
-------------------------
employed "at will" and may be terminated by Sterling at any time with
or without cause. The Executive shall be entitled to termination pay
calculated in accordance with Section 4 hereof upon termination of
Executive's employment by Sterling, with or without cause.
The date on which a notice of termination is given to Executive by
Sterling shall be deemed the "Notice Date" with the termination to be
effective twelve (12) months following the Notice Date. On the Notice
Date, Executive shall be deemed to have been assigned "no duties",
shall vacate his or her office, and shall resign as an officer of
Sterling and its subsidiaries. Since Executive will be assigned "no
duties" with the Company, Executive shall be free to
-1-
<PAGE>
pursue other employment or consulting opportunities during the twelve
month period in which Executive receives termination pay.
4. Termination Pay. For purposes of this Agreement, if Executive's
---------------
employment is terminated pursuant to Section 3, upon receipt of a fully
executed release in form reasonably acceptable to counsel for Sterling,
Sterling shall pay to Executive as termination pay:
(a) an amount equal to one hundred percent of Executive's aggregate
monthly salary for the twelve (12) months immediately preceding the
Notice Date; and
(b) an amount equivalent to one hundred percent (100%) of Executive's
aggregate bonuses for the twelve months immediately prior to the
Notice Date.
5. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in
Section 4 hereof shall be determined in good faith by the Company
within 15 days following the Notice Date, and such termination payments
shall be distributed by the Company to Executive in twelve (12) equal
monthly installments beginning thirty (30) days following the Notice
Date and continuing every thirty (30) days thereafter.
6. Continuation of Medical and Health Benefits. For a period of twelve
-------------------------------------------
(12) months following the Notice Date, the Company shall arrange to
provide Executive, at no additional charge to Executive, with life,
medical, dental, health, accident and disability insurance benefits
substantially similar to those that Executive is receiving or is
entitled to receive immediately prior to the Notice Date, which
benefits shall in no event be less than those benefits in effect
immediately prior to the Notice Date.
7. Continuation of Stock Options. For a period of twelve (12) months
-----------------------------
following the Notice Date, the Executive shall continue to participate
in Sterling's Incentive and Non-Statutory Stock Option Plans, 1992 Non-
Statutory Stock Option Plan and 1994 Non-Statutory Stock Option Plan
and any other such plans as may be adopted in the future for the
benefit and retention of Sterling's executive officers, provided that
such participation shall only apply with respect to options granted
prior to the Notice Date. In no event will Sterling be required to
make any new grants of options to such Executive after the Notice Date.
8. Change in Control. Anything in this Agreement to the contrary
-----------------
notwithstanding, in the event that the Notice Date occurs within twelve
(12)
-2-
<PAGE>
months following a Change in Control (as that term is defined in
the Employment Agreement dated the 1st day of June, 1995 between
Executive and Sterling (the "Parachute Agreement")), at the option of
Executive, the terms of the Parachute Agreement shall govern the
termination.
9. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party set
forth below or such other places as may from time to time be
designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are actually
received.
If to Sterling, to: 8080 N. Central Expressway
Suite 1100
Dallas, TX 75206
If to Executive, to: 8080 N. Central Expressway
Suite 1100
Dallas, TX 75206
(ii) This Agreement shall be binding upon Sterling and Executive and
their respective successors, assigns, heirs and personal
representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Employment Agreement.
Executed by the parties hereto on the _____ day of June, 1995.
EXECUTIVE
_________________________________________
STERLING SOFTWARE, INC.
By:
_____________________________________
Sterling L. Williams
President and Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10(f)
AMENDMENT TO
AGREEMENT ENTERED INTO ON ________________
BETWEEN STERLING SOFTWARE, INC. AND ________________
THIS AMENDMENT, made and entered into as of this 7th day of July, 1995,
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
_________________ (hereinafter referred to as "Executive").
W I T N E S S E T H :
WHEREAS, the Company and Executive have entered into that certain agreement
dated as of __________________ (the "Agreement"), relating to certain change of
control situations; and
WHEREAS, the Company and Executive are desirous of amending the Agreement
to clarify any ambiguities regarding change of control situations therein.
NOW, THEREFORE, for and in consideration of the promises, covenants, and
conditions contained herein, the parties agree as follows:
1. Section 2 of the Agreement is hereby amended in its entirety to read as
follows:
2. Employment. The Company hereby agrees to employ Executive, and
----------
Executive hereby agrees to remain in the employ of the Company, for
the period commencing on the Change of Control Date and ending on
the termination of Executive's employment pursuant to Section 8
hereof (the "Employment Period"), to exercise such authority and
perform such executive duties as are commensurate with the
authority being exercised and duties being performed by Executive
immediately prior to the Change of Control Date, which services
shall be performed at the location where Executive was employed
immediately prior to the Change of Control Date.
2. There being no further additions, deletions, modifications, or
amendments thereto, the Agreement shall otherwise remain in full force and
effect as originally written.
<PAGE>
EXECUTED as of the day and year first above written.
STERLING SOFTWARE, INC.
----------------------------------------
BY: ________________________________________
ITS: ________________________________________
----------------------------------------
________________________________________
Executive
<PAGE>
STERLING SOFTWARE, INC. EXHIBIT 11(a)
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1995
(in thousands, except per share information)
<TABLE>
<CAPTION>
Fully
Primary Diluted
------- -------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders......................................... $22,240 $22,240
Add: Interest expense on amounts
outstanding for the 5 3/4%
Convertible Subordinated Debentures
(net of applicable income taxes)............... 391 1,053
Interest income on investment of
proceeds from assumed conversion
of options and warrants (net of
applicable income taxes)....................... 377
------- -------
$22,631 $23,670
======= =======
Shares:
Weighted average of shares outstanding................ 24,118 24,118
Add common shares issued on assumed
exercise of options and warrants..................... 9,379 9,379
Less common shares assumed repurchased................ (4,952) (4,952)
------- -------
28,545 28,545
=======
Common shares issued on assumed
conversion of 5 3/4% Convertible
Subordinated Debentures............................... 4,056
-------
32,601
=======
Earnings per common share:
Primary............................................... $.79
=======
Fully diluted......................................... $.73
=======
</TABLE>
<PAGE>
STERLING SOFTWARE, INC. EXHIBIT 11(b)
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1994
(in thousands, except per share information)
<TABLE>
<CAPTION>
Fully
Primary Diluted
------- -------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders......................................... $14,926 $14,926
Add: Interest expense on amounts
outstanding for the 5 3/4%
Convertible Subordinated Debentures
(net of applicable income taxes)............... 21 1,053
Interest income on investment of
proceeds from assumed conversion
of options and warrants (net of
applicable income taxes)....................... 19
------- -------
$14,947 $15,998
======= =======
Shares:
Weighted average of shares outstanding................ 20,433 20,433
Add common shares issued on assumed
exercise of options and warrants..................... 6,772 6,772
Less common shares assumed repurchased................ (4,104) (4,104)
------- -------
23,101 23,101
=======
Common shares issued on assumed
conversion of 5 3/4% Convertible
Subordinated Debentures................................ 4,056
-------
27,157
=======
Earnings per common share:
Primary............................................... $.65
=======
Fully diluted......................................... $.59
=======
</TABLE>
<PAGE>
STERLING SOFTWARE, INC. EXHIBIT 11(c)
COMPUTATION OF EARNINGS PER SHARE
NINE MONTHS ENDED JUNE 30, 1994
(in thousands, except per share information)
<TABLE>
<CAPTION>
Fully
Primary Diluted
------- -------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders......................................... $39,206 $39,206
Add: Interest expense on amounts
outstanding for the 5 3/4%
Convertible Subordinated Debentures
(net of applicable income taxes)............... 76 3,160
Interest income on investment of
proceeds from assumed conversion
of options and warrants (net of
applicable income taxes)....................... 68
------- -------
$39,282 $42,434
======= =======
Shares:
Weighted average of shares outstanding................ 19,558 19,558
Add common shares issued on assumed
exercise of options and warrants..................... 7,404 7,404
Less common shares assumed repurchased................ (4,104) (4,104)
------- -------
22,858 22,858
=======
Common shares issued on assumed conversion
of 5 3/4% Convertible Subordinated
Debentures............................................. 4,056
-------
26,914
=======
Earnings per common share:
Primary............................................... $1.72
=======
Fully diluted......................................... $1.58
=======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 125,624
<SECURITIES> 75,288
<RECEIVABLES> 160,976
<ALLOWANCES> 8,812
<INVENTORY> 0
<CURRENT-ASSETS> 385,298
<PP&E> 120,893
<DEPRECIATION> 55,470
<TOTAL-ASSETS> 638,621
<CURRENT-LIABILITIES> 223,250
<BONDS> 116,424
<COMMON> 2,483
0
0
<OTHER-SE> 271,386
<TOTAL-LIABILITY-AND-EQUITY> 638,621
<SALES> 415,573
<TOTAL-REVENUES> 415,573
<CGS> 135,243
<TOTAL-COSTS> 406,601
<OTHER-EXPENSES> 81,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,389
<INCOME-PRETAX> 9,078
<INCOME-TAX> 28,284
<INCOME-CONTINUING> (19,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,206)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
<PAGE>
Exhibit 99(a)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
FOURTH DIVISION
------------------------------------ Civil File No. 3-95-602
--------
Compass Investors, a New York
limited partnership; Frederick K.
Martin; MTI Vacations, Inc.;
Martin A. Liebowitz; Hawley
Equity Fund; and Robert A. Burstine,
Plaintiffs, COMPLAINT
---------
JURY TRIAL DEMANDED
-------------------
vs.
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:
1. This Court has subject matter jurisdiction over this action pursuant
to (S) 27 of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), 15 U.S.C (S) 78aa, 28 U.S.C (S) 1331, and principles of supplemental
jurisdiction in accordance with 28 U.S.C (S) 1367. The claims asserted herein
arise under (S)(S) 10(b) and 18 of the Exchange Act, 15 U.S.C. (S) 78j(b)
and 78r, Rule 10b-5 promulgated thereunder by the Securities and Exchange
Commission ("SEC"), the Racketeer Influenced and Corrupt Organization Act
("RICO"), 18 U.S.C. (S) 1961 et. seq., state securities, antiracketeering,
-- ---
and consumer fraud laws, and common law principles of contract and fraud.
<PAGE>
2. This Court has personal jurisdiction pursuant to Minnesota Statute
(S)(S) 543.19 because Defendants transact business in this state and the
acts of the defendants set forth herein caused injury in this state. The
venue of this action is proper in this District because Defendants transact
business in this District and the securities which are the subject of this
action were offered and sold, and the acts and transactions complained of
occurred, in this District. 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.
THE PARTIES
-----------
3. All Plaintiffs are investment clients of Mitchell Hutchins Asset
Management, Inc., a wholly owned subsidiary of PaineWebber, Inc., one of
the largest multi-service securities firms in the United States. Plaintiff
Frederick K. Martin is a managing director of Mitchell Hutchins Asset
Management, Inc., with offices in Downtown Minneapolis. In turn, Compass
Investors is a New York limited partnership in which Mitchell Hutchins Asset
Management, Inc. is the sole general partner and Frederick K. Martin is
the special limited partner. There are additional limited partners who are
passive investors in Compass Investors. Compass Investors was formed in
August, 1993.
4. At all material times, KnowledgeWare, Inc. ("KWI") was a corporation
organized and existing under the laws of the State of
-2-
<PAGE>
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 software,
and providing consulting and educational service 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 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. KWI is now known as Sterling
Software-South, Inc.
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.
-3-
<PAGE>
8. At all material times, Defendant Richard M. Haddrill ("Haddrill")
was Executive Vice President, a director, and a shareholder of KWI.
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, Irwin L. Jacobs ("Jacobs") and Carl R. Pohlad
("Pohlad"), who are Minneapolis businessmen and investors, have been close
personal friends 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
-4-
<PAGE>
invest in KWI, and they did so. Jacobs and Pohlad 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 $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:
-5-
<PAGE>
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.
* * *
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, Mitchell
Hutchins Asset Management, Inc. acting as agent for and on behalf of plaintiffs
and others, its investment clients, agreed to purchase 333,300 shares of
KWI common stock at an aggregate price of $4,916,175, or $14.75 per share.
Plaintiffs purchased
-6-
<PAGE>
177,000 of such shares, which are involved in this action. Jacobs, Pohlad,
and several of their business associates agreed to purchase an additional
666,700 shares of KWI common stock at the same price of $14.75 per share.
19. Jacobs and other purchasers thereafter undertook negotiations for a
final written stock purchase agreement. These negotiations included telephone
and fax communications from Defendants in Georgia to the purchasers in
Minnesota.
20. The negotiations resulted in a formal Stock Purchase Agreement dated
January 26, 1994, a copy of which is attached hereto and incorporated herein
as Exhibit A. Mitchell Hutchins Asset Management, Inc. signed the Stock
Purchase Agreement acting as the agent of Plaintiffs, its investment clients.
Copies of the signed Stock Purchase Agreement were faxed from Minnesota to
Georgia. Gossett signed the Stock Purchase Agreement on behalf of KWI in Georgia
and faxed it to Minnesota. Mitchell Hutchins Asset Management, Inc. allocated
the 333,300 shares to the accounts of Plaintiffs. Tarkenton, Gossett and
KWI's legal counsel were informed that Mitchell Hutchins Asset Management,
Inc. was purchasing some of the stock for its investment clients. All funds
paid pursuant to the Stock Purchase Agreement were paid from Minnesota, and
wire transferred to KWI's bank account in Atlanta, Georgia on January 25, 1994
at Defendants' request.
21. Meanwhile, on January 20, 1994, Defendants announced KWI's results
for the second fiscal quarter of 1994, ended December
-7-
<PAGE>
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
to Plaintiffs 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:
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. 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)
24. 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)
25. 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
-8-
<PAGE>
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.
26. 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.
27. Under the Stock Purchase Agreement, KWI further agreed to register
the shares sold under the Agreement pursuant to the Exchange 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.
28. The aforesaid sale of securities by KWI to Plaintiffs 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).
29. The 177,000 KWI shares acquired pursuant to the Stock Purchase
Agreement that are involved in this action were acquired by Plaintiffs as
follows:
<TABLE>
<S> <C>
Compass Investors 131,000
Frederick K. Martin 3,000
MTI Vacations, Inc. 8,000
Martin A. Liebowitz 5,000
Hawley Equity Fund 25,000
Robert A. Burstine 5,000
</TABLE>
-9-
<PAGE>
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 the 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 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:
-10-
<PAGE>
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.
32. 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.
33. In the March 11, 1994 Prospectus (Exhibit B) that was filed with
the SEC, Defendants stated:
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 ended 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. . . .
-11-
<PAGE>
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.
34. 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 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.
35. Following this development, Plaintiffs sold their 177,000 shares
of KWI common stock at a substantial aggregate loss of more than $2 million.
-12-
<PAGE>
36. 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%.
37. 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 revellers [sic.].
38. 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." It further stated that it
would now recognize license revenue from revellers [sic.] when payment is
actually received, unless products are shipped directly to end users and
specific credit information allowed 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
-13-
<PAGE>
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).
39. 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 accepted accounting principles" (GAAP). Defendant Gossett
signed each of these amended filings.
40. 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,
-14-
<PAGE>
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 the 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."
41. 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 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.
42. The premature recognition of revenue from reseller product sales,
which artificially and impermissibly inflated revenues and earnings and
caused them to be later restated,
-15-
<PAGE>
violated GAAP, specifically the Statement of Financial Accounting Standards
No. 48, "Revenue Recognition When Right of Return Exists." Among other
things, the revellers [sic.] 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.
43. Defendants Brooks, Sadler and Scruggs, as directors and members
of KWI's Audit Committee, knew, or should have known, that the accounting
practices 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.
44. 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 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
-16-
<PAGE>
buy much-needed time for them to discover some way to truly turn the company
around.
45. 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 Plaintiffs' and others' purchase of 1,000,000 shares of common
stock would not be "more 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.
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COUNT I - BREACH OF CONTRACT
----------------------------
46. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 45 of this Complaint.
47. In the Stock Purchase Agreement and March 11, 1994 Prospectus, KWI
represented and warranted to Plaintiffs that (a) the SEC filings did not
contain any misrepresentations or omissions of material facts, and (b) between
September 30, 1993 and January 26, 1994, there had been no material adverse
event except as disclosed in SEC filings.
48. The aforesaid representations and warranties were false and misleading,
in that defendants knew that KWI had changed its sales methods and targets,
which would likely result in increased accounts receivable, failure of sales
to close, rescission of purported sales, and returns of products, a resulting
overstatement of sales and earnings, and persistent negative cash flow.
49. No defendant informed any Plaintiff or other stock purchaser of
the foregoing material facts, and all SEC filings and other information
provided to Plaintiffs, including sales forecasts, earnings forecasts, and
positive cash flow forecasts, were to the contrary.
50. Defendants breached the Stock Purchase Agreement in the manner
described above.
51. As a direct and proximate result of said breach, Plaintiffs sustained
substantial damages in connection with the purchase of the KWI securities,
in the amount of more than $2 million, which they are entitled to recover
from defendants, and
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each of them, together with interest, reasonable attorneys' fees, and other
relief.
COUNT II - EXCHANGE ACT SECTION 10(b) AND RULE 10b-5
----------------------------------------------------
52. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 51 of this Complaint.
53. Defendants, singularly and in concert, engaged in a plan, scheme
or artifice to defraud; engaged in a course of conduct, pursuant to which
they knowingly or recklessly engaged in acts, transactions, practices, and
a course of business which operated as a fraud upon Plaintiffs; and made
various untrue statements of material fact and omitted to state material
facts necessary in order to make the statements made not misleading. The
purpose and effect thereof was to induce Plaintiffs to purchase KnowledgeWare
common stock. Plaintiffs relied upon Defendants' misrepresentations and
omissions in purchasing the KWI common stock. By reason of the aforesaid
misconduct, Defendants violated Section 10(b) of the Exchange Act, 15 U.S.C.
(S) 78j(b), and Rule 10b-5 promulgated thereunder.
54. As a direct and proximate result of the aforesaid misconduct,
Plaintiffs sustained substantial damages as a result of their purchase of
KWI common stock, and are therefore entitled to recover from Defendants,
and each of them, reasonable damages of more than $2 million, together with
interest and other relief.
COUNT III - CONTROLLING PERSON LIABILITY - EXCHANGE ACT
-------------------------------------------------------
55. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 54 of this Complaint.
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<PAGE>
56. 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 20 of the Exchange Act (15
U.S.C. (S) 78t). The individual Defendants had and exercised the power and
influence to cause KWI to engage in the misconduct alleged herein.
57. By reason of the aforesaid misconduct, the individual Defendants
are jointly and severally liable with KWI and one another under Section
10(b) of the Exchange Act pursuant to Section 20 thereof. As a direct and
proximate result of the aforesaid misconduct, Plaintiffs sustained substantial
damages as a result of their purchase of KWI common stock, and are therefore
entitled to recover from Defendants, and each of them, reasonable damages
of more than $2 million, together with interest and other relief.
COUNT IV - EXCHANGE ACT (S) 18 (15 U.S.C. (S) 78r)
--------------------------------------------------
58. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 57 of the Complaint.
59. Defendants made or caused to be made statements in reports and other
documents filed with the SEC pursuant to the Exchange Act, which statements
were, at the time and in the light of the circumstances under which they
were made, false and misleading with respect to the earnings, revenues,
and prospects for KWI. In doing so, Defendants violated (S) 18 of the Exchange
Act, 15 U.S.C. (S) 78r.
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60. Plaintiffs relied upon such statements in their purchases of KWI
common stock. In doing so, Plaintiffs did not know that such statements
were false and misleading.
61. 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 of more than
$2 million, together with interest, reasonable attorneys' fees, and other
relief.
COUNT V - 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, 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. Plaintiffs relied upon Defendants' misrepresentations and omissions
in purchasing the KWI common stock. By reason of the aforesaid misconduct,
Defendants violated (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
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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 VI - 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. Plaintiffs
relied upon Defendants' misrepresentations and omissions in purchasing the
KWI common stock. By reason of the aforesaid misconduct, Defendants violated
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 VII - 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 purchase 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 VIII - 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
or fraud, false pretense, false promise, misrepresentation, misleading
statement and deceptive practice with
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the intent that Plaintiffs rely thereon, all in violation of Minn. Stat.
(S)(S) 325F.68 and 325F.69.
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 IX - 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.
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COUNT X - FEDERAL RICO
----------------------
78. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 77 of this Complaint.
79. At times relevant to this action, KWI constituted an "enterprise"
as defined in 18 U.S.C. (S) 1961(4). KWI and its affiliates were and are
engaged in interstate commerce. This enterprise is an ongoing entity having
an existence separate and distinct from the persons and pattern of racketeering
activity alleged herein.
80. Defendants are "persons" as that term is defined in 18 U.S.C. (S)
1961(3).
81. Defendants committed acts of "racketeering activity" as that term
is defined in 18 U.S.C. (S) 1961(1). By way of example and not of limitation,
Defendants provided Plaintiffs with financial statements and forecasts that
contained materially fraudulent misstatements and omitted to state material
facts intended to induce Plaintiffs to purchase KWI securities. Such fraudulent
activities of Defendants constitute "racketeering activity."
82. In furtherance of their scheme to defraud Plaintiffs, as more fully
alleged above, Defendants on numerous occasions used or caused to be used
the United States mails in violation of 18 U.S.C. (S) 1341. Also, Defendants
on numerous occasions used interstate telephone communications in violation
of 18 U.S.C. (S) 1343, to communicate and transmit financial and other
information which contained fraudulent statements and omitted to state material
facts, intending to induce Plaintiffs to purchase KWI securities.
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83. Defendants continued such racketeering activity through willful,
intentional and fraudulent statements and omissions concerning KWI's financial
condition and prospects. Moreover, several Defendants were sued in 1991
for alleged securities and other fraud in the U.S. District Court for the
Northern District of Georgia, in which it was alleged then, as now, that
KWI's sales practices and terms artificially inflated sales and earnings.
That action was settled in early 1994, and was the reason Tarkenton told
Jacobs he had been "burned before" and was one of the adverse matters that
KWI "had gotten behind it" when it "cleaned house," as heretofore alleged
in (paragraph) 17.
84. On information and belief, from 1991 to 1993, in spite of the fact
that they had been sued for securities fraud for allegedly falsely inflating
sales revenues and earnings, Defendants persisted in such misconduct by,
among other things, causing:
a. the forging of purchase orders near the end of fiscal quarters
to improve otherwise laggard financial performance;
b. the "warehousing" of products with distributors and falsely
recording the shipment of such products as actual sales; and
c. purportedly "repurchasing" the European, Australian, and New
Zealand sales and distribution rights for KWI products from Ernst &
Young and its affiliates, when KWI actually repurchased unsold and
unsalable KWI products that had been falsely "sold" to the international
distributors in prior
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periods; the transaction was falsely masked as "goodwill" on KWI's
accounting books and records, thereby converting false sales for prior
periods into a false asset (goodwill increased from zero to $11.4 million
on KWI's audited balance sheet from fiscal 1992 to fiscal 1993, and
to $14.6 million in fiscal 1994) in the ongoing fraudulent attempt to
portray KWI as financially healthy and growing.
85. Defendants' sordid, previously unknown history and escapades are
recounted in articles in the April 1995 Corporate Report magazine and GQ
---------------- --
magazine, which are attached hereto and incorporated herein together as
Exhibit D. The aforesaid numerous acts of racketeering activity committed
by Defendants throughout 1991-1994 constitute a "pattern of racketeering
activity" within the meaning of that term as defined in 18 U.S.C. (S) 1961.
86. By reason of the foregoing conduct, acts and pattern of racketeering
activity, Plaintiffs have sustained substantial damages to their property;
have been damaged in the aggregate amount of more than $2 million; and are
entitled to recover from Defendants treble the actual damages, in addition
to their costs and disbursements and reasonable attorneys' fees pursuant
to 18 U.S.C. (S) 1964 (c).
COUNT XI - GEORGIA RICO ACT
---------------------------
87. Plaintiffs reallege and incorporate herein all of the allegations
set forth in paragraphs 1 through 86 of the complaint.
88. At times relevant to this action, KWI constituted an "enterprise"
as defined in (S) 16-14-3(6) of the Georgia Criminal
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Code. This enterprise is an ongoing entity having an existence separate and
distinct from the persons and pattern of racketeering activity alleged herein.
89. Defendants engaged in "racketeering activity" as that term is defined in
(S) 16-14-3(9)(A) & (B) of the Georgia Criminal Code. By way of example and not
by way of limitation, Defendants provided Plaintiffs with financial statements
and forecasts that contained materially fraudulent misstatements and omitted to
state material facts with the intention to induce Plaintiffs to purchase KWI
securities. Such fraudulent activities of Defendants constitute "racketeering
activity."
90. Some of the "racketeering activity" described above was committed in or
from the State of Georgia.
91. In furtherance of their scheme to defraud Plaintiffs, as more fully
alleged above, Defendants on numerous occasions used or caused to be used the
United States mail in violation of 18 U.S.C. (S) 1341. Also, Defendants on
numerous occasions used interstate telephone communications in violation of 18
U.S.C. (S) 1343, to communicate and transmit financial and other information
which contained fraudulent statements and omitted to state material facts,
intended to induce Plaintiffs to purchase KWI securities.
92. Defendants continued such racketeering activity through willful,
intentional, and fraudulent statements and omissions concerning KWI's financial
condition and prospects, all as previously alleged.
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93. These numerous incidents of racketeering activity throughout 1991-1994,
the last of which occurred within four years after a prior incident of
racketeering activity, constitute a "pattern of racketeering activity" within
the meaning of that term as defined in (S) 16-14-3(8) of the Georgia Criminal
Code.
94. Through the pattern of racketeering activity described above or proceeds
derived from it, the Defendants:
a. acquired or maintained an interest in or control of an enterprise,
real property, or personal property;
b. conducted or participated in an enterprise, namely KWI, directly or
indirectly; and
c. conspired or endeavored to commit the acts described in (a) and (b)
above;
all in violation of (S) 16-14-4 of the Georgia Criminal Code.
95. By reason of the foregoing conduct, incidents, and pattern of
racketeering activity, committed in violation of (S) 16-14-4 of the Georgia
Criminal Code, Plaintiffs have sustained substantial damage to their property;
have been injured in the aggregate amount of more than $2 million; and are
entitled to recover from Defendants treble damages and punitive damages, in
addition to their attorneys' fees in the trial and appellate courts and the
costs of investigation and litigation reasonably incurred, all pursuant to
(S) 16-14-6(c) of the Georgia Criminal Code.
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, the aggregate amount of more than $2 million;
(b) Treble the foregoing sum pursuant to the state and federal Racketeer
Influenced and Corrupt Organization Acts;
(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: June 27, 1995. MAUN & SIMON, PLC
/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
Attorneys for Plaintiffs
PLAINTIFFS DEMAND TRIAL BY JURY ON ALL ISSUES
---------------------------------------------
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
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