-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, L5RKDomN6W+emexqI/2cvfmMYGDKoUnotjg+wa1lI0xCaQFVngvbyoBc6RczR+yb sQAxiok8P5s90bj4J+tofA== 0000930661-95-000135.txt : 19950516 0000930661-95-000135.hdr.sgml : 19950516 ACCESSION NUMBER: 0000930661-95-000135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING SOFTWARE INC CENTRAL INDEX KEY: 0000716714 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 751873956 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 95538498 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 10-Q 1 FORM 10-Q (QE 3-31-95) 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 March 31, 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 May 1, 1995 ---------------------------- ------------------------------------ Common Stock, $.10 par value 23,907,128 -1- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Index to Financial Statements
Page ---- Sterling Software, Inc. Consolidated Balance Sheets at March 31, 1995 and September 30, 1994..................................................................... 3 Sterling Software, Inc. Consolidated Statements of Operations for the Three and Six Months Ended March 31, 1995 and 1994................................................... 4 Sterling Software, Inc. Consolidated Statements of Stockholders' Equity for the Six Months Ended March 31, 1995 and 1994................................................... 5 Sterling Software, Inc. Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1995 and 1994.......................................................... 6 Sterling Software, Inc. Notes to Consolidated Financial Statements....................... 7
-2- STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information) A S S E T S
March 31 September 30 1995 1994 ----------- ------------ (Unaudited) Current assets: Cash and cash equivalents................................................... $ 87,869 $101,893 Marketable securities....................................................... 79,683 41,847 Accounts and notes receivable, net.......................................... 151,170 132,166 Deferred income taxes....................................................... 14,970 11,294 Prepaid expenses and other current assets................................... 15,206 9,978 -------- -------- Total current assets...................................................... 348,898 297,178 Property and equipment, net of accumulated depreciation of $53,982 at March 31, 1995 and $47,241 at September 30, 1994.............................. 59,548 36,699 Computer software, net of accumulated amortization of $94,443 at March 31, 1995 and $90,259 at September 30, 1994.............................. 84,135 58,131 Excess cost over net assets acquired, net of accumulated amortization of $20,166 at March 31, 1995 and $18,753 at September 30, 1994.................. 76,022 54,504 Noncurrent deferred income taxes.............................................. 7,001 2,216 Note and accrued interest receivable from KnowledgeWare, Inc. ................ 18,266 Other assets.................................................................. 20,740 21,779 -------- -------- $596,344 $488,773 ======== ======== 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 Current liabilities: Current portion of long-term debt........................................... $ 11,459 $ 7,257 Income taxes payable........................................................ 22,159 10,945 Accounts payable and accrued liabilities.................................... 111,329 76,219 Deferred revenue............................................................ 89,293 77,598 -------- -------- Total current liabilities............................................... 234,240 172,019 Long-term debt................................................................ 116,437 115,932 Other noncurrent liabilities.................................................. 22,772 25,018 Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized; 200,000 shares issued and outstanding............................................. 20 20 Common stock, $.10 par value; 75,000,000 shares authorized; 23,911,000 and 22,378,000 shares issued at March 31, 1995 and September 30, 1994, respectively.............................................................. 2,391 2,238 Additional paid-in capital.................................................. 261,685 192,064 Retained earnings (deficit)................................................. (40,399) 572 Less treasury stock, at cost: 76,000 and 1,793,000 shares at March 31, 1995 and September 30, 1994, respectively....................... (802) (19,090) -------- -------- Total stockholders' equity.............................................. 222,895 175,804 -------- -------- $596,344 $488,773 ======== ========
See accompanying notes. -3- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) (Unaudited)
Three Months Six Months Ended March 31 Ended March 31 -------------------- --------------------- 1995 1994 1995 1994 -------- -------- --------- -------- Revenue: Products................................................... $ 52,505 $ 43,607 $ 102,056 $ 83,925 Product support............................................ 39,308 32,499 73,979 65,254 Services................................................... 46,394 39,360 88,590 76,319 -------- -------- --------- -------- 138,207 115,466 264,625 225,498 Costs and expenses: Cost of sales: Products and product support.............................. 17,061 17,617 33,072 33,980 Services.................................................. 26,748 26,725 53,247 52,034 -------- -------- --------- -------- 43,809 44,342 86,319 86,014 Product development and enhancement........................ 11,356 8,178 20,802 15,654 Selling, general and administrative........................ 51,916 41,256 100,931 82,716 Restructuring charge....................................... 19,512 Purchased research and development......................... 62,000 -------- -------- --------- -------- 107,081 93,776 289,564 184,384 -------- -------- --------- -------- Income (loss) before other income (expense) and income taxes..................................................... 31,126 21,690 (24,939) 41,114 Other income (expense): Interest expense.......................................... (2,210) (1,660) (4,200) (3,333) Investment income......................................... 2,239 731 3,127 1,411 Other..................................................... 399 984 264 159 -------- -------- --------- -------- 428 55 (809) (1,763) -------- -------- --------- -------- Income (loss) before income taxes.......................... 31,554 21,745 (25,748) 39,351 Provision for income taxes................................. 11,395 8,190 15,747 14,973 -------- -------- --------- -------- Net income (loss).......................................... 20,159 13,555 (41,495) 24,378 Preferred stock dividends.................................. 49 49 98 98 -------- -------- --------- -------- Income (loss) applicable to common stockholders............ $ 20,110 $ 13,506 ($41,593) $ 24,280 ======== ======== ========= ======== Income (loss) per common share: Net income (loss): Primary.................................................. $.72 $.59 ($ 1.85) $1.07 ======== ======== ========= ======== Fully diluted............................................ $.67 $.54 ($ 1.85) $.99 ======== ======== ========= ======== Average common shares outstanding.......................... 23,526 19,857 22,490 19,120 ======== ======== ========= ========
See accompanying notes. -4- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended March 31, 1995 and 1994 (in thousands) (Unaudited)
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 ------ ----- ------ ------ ---------- --------- ------ --------- ------------- Balance at September 30, 1993.. 200 $20 19,917 $1,992 $169,825 ($54,582) 1,837 ($19,558) $ 97,697 Net income.................... 24,378 24,378 Preferred stock dividends..... (98) (98) Issuance of common stock pursuant to stock options and warrants................. 2,272 227 19,037 19,264 Issuance of common stock to retirement plan........... 204 (20) 218 422 Other......................... 95 (144) (3) 34 (15) --- --- ------ ------ -------- -------- ----- -------- -------- Balance at March 31, 1994...... 200 $20 22,189 $2,219 $189,161 ($30,446) 1,814 ($19,306) $141,648 === === ====== ====== ======== ======== ===== ======== ======== Balance at September 30, 1994.. 200 $20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804 Net loss...................... (41,495) (41,495) Preferred stock dividends..... (98) (98) Issuance of common stock and treasury stock for acquisition.................. 720 72 56,260 (1,701) 18,111 74,443 Common stock issuance costs........................ (788) (788) Issuance of common stock pursuant to stock options and warrants................. 813 81 13,920 14,001 Issuance of common stock to retirement plan.............. 130 (8) 85 215 Other......................... 99 622 (8) 92 813 --- --- ------ ------ -------- -------- ----- -------- -------- Balance at March 31, 1995..... 200 $20 23,911 $2,391 $261,685 ($40,399) 76 ($802) $222,895 === === ====== ====== ======== ======== ===== ======== ========
See accompanying notes. -5- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended March 31 ------------------- 1995 1994 -------- -------- Operating activities: Net income (loss)............................................................... ($41,495) $ 24,378 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................................................. 22,356 17,195 Provision for losses on accounts receivable................................... 279 3,962 Provision for deferred income taxes........................................... 3,403 12,190 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................................... (9,770) (14,716) Decrease (increase) in prepaids and other assets............................ 293 (568) Increase (decrease) in accounts payable, accrued liabilities and income taxes payable........................................................ 1,319 (19,614) Increase in deferred revenue................................................. 5,218 5,575 Other........................................................................ (257) 191 -------- -------- Net cash provided by operating activities.................................... 52,023 28,593 Investing activities: Purchases of property and equipment............................................. (21,847) (8,776) Purchases and capitalized cost of development of computer software.............. (9,504) (10,119) Business acquisitions, net of cash acquired..................................... (16,270) Purchases of investments........................................................ (62,672) (38,195) Proceeds from sales of investments.............................................. 26,847 32,221 Other........................................................................... 317 1,673 -------- -------- Net cash used in investing activities........................................ (83,129) (23,196) Financing activities: Retirement and redemption of debt and capital lease obligations................. (14,280) (7,001) Proceeds from issuance of debt.................................................. 17,561 10,485 Proceeds from the sale of lease and installment receivables..................... 3,798 5,273 Preacquisition advances to KnowledgeWare, Inc. ................................. (4,435) Proceeds from issuance of common stock pursuant to stock options and warrants...................................................................... 14,001 19,264 Other........................................................................... 192 (102) -------- -------- Net cash provided by financing activities.................................... 16,837 27,919 Effect of foreign currency exchange rate changes on cash......................... 245 (37) -------- -------- Increase (decrease) in cash and cash equivalents................................. (14,024) 33,279 Cash and cash equivalents at beginning of period................................. 101,893 30,199 -------- -------- Cash and cash equivalents at end of period....................................... $ 87,869 $ 63,478 ======== ======== Supplemental cash flow information: Interest paid................................................................... $ 3,633 $ 3,609 ======== ======== Income taxes paid............................................................... $ 4,490 $ 1,677 ======== ======== Income tax refunds.............................................................. $ 470 $ 578 ======== ========
See accompanying notes. -6- STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 periods ended prior to March 31, 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- Cash Equivalents, Marketable Securities and Other Investments Cash equivalents consist primarily of highly liquid investments in repurchase agreements backed by U.S. Treasury securities and investment-grade commercial paper of various issuers, with maturities of three months or less when purchased. The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates its fair value. The Company invests excess cash in a diversified portfolio consisting of a variety of securities including commercial paper, corporate notes and U.S. government obligations, which may include both investment grade and non- investment grade securities. The fair values for marketable securities are based on quoted market prices. All marketable securities and long-term investments are classified as available-for-sale securities. 2. Unaudited Interim Financial Statements The interim consolidated financial information contained herein is unaudited but, in the opinion of management, includes all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position and results of operations for the periods presented. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. 3. Business Combination On November 30, 1994, Sterling Software, Inc. acquired KnowledgeWare, Inc. ("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a leading provider of applications development software and services, for approximately $100 million, in a stock-for-stock acquisition (the "Merger"). In connection with the Merger, the Company issued approximately 2,421,000 shares of the Company's $0.10 par value Common Stock (the "Common Stock") valued at approximately $74,443,000 and reserved approximately 340,000 shares of Common Stock for issuance upon exercise of KnowledgeWare's options and warrants. In addition, the Company incurred cash costs directly related to the Merger of approximately $25,739,000. The Merger, which was accounted for as a purchase, was completed pursuant to the terms of an Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994, as amended (the "Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and KnowledgeWare. Of the 2,421,000 shares of Common Stock issued, approximately 484,800 shares were placed in escrow (the "Escrowed Shares") to cover certain losses that may result in connection with any pending or threatened litigation, action, claim, proceeding, dispute or investigation ("Actions") (including amounts paid in settlement) to which the Company is entitled to indemnification pursuant to the terms of the Merger Agreement. (See Note 4 "Commitments and Contingencies.") The operating results of KnowledgeWare are included in the Company's results of operations from the date of the Merger. In addition, the results of operations for the first quarter of 1995 include $62,000,000 of purchased research and development costs, which is the portion -8- of the purchase price attributed to in-process research and development, and which is charged to expense in accordance with purchase accounting. The $62,000,000 charge has no related tax benefit. The results of operations 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 following unaudited supplemental information presents the results of operations as if the Merger had occurred at October 1, 1993. This summary does not purport to be indicative of what would have occurred had the Merger occurred as of that date or of results which may occur in the future. This method of combining the companies is for the presentation of unaudited pro forma summary results of operations. Actual statements of operations of Sterling Software, Inc. and of KnowledgeWare have been combined from November 30, 1994 forward, with no retroactive restatement.
Six Months Ended March 31 ------------------ (Dollars in thousands, except per share data) 1995 1994 -------- -------- Revenue $272,960 $294,351 ======== ======== Income before other income (expense) and income taxes 40,658 36,300 ======== ======== Income applicable to common stockholders 18,835 19,072 ======== ======== Net income per common share $ .69 $ .73 ======== ========
The unaudited supplemental information presented above does not include a $62,000,000 charge for purchased research and development costs and a $19,512,000 restructuring charge directly related to the acquisition. 4. Commitments and Contingencies One of the Company's subsidiaries, formerly known as KnowledgeWare, continues to be a defendant in several lawsuits filed against it in connection with its restatement of its financial results for the first three quarters of its 1994 fiscal year and with its financial results for its full 1994 fiscal year. Several lawsuits, claims and inquiries are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994, Item 1 at pages 9 and 10 ("Form 10-K") and the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, Note 4 "Commitments and Contingencies" ("Form 10-Q"). Subsequently, the plaintiffs have moved to amend two of the lawsuits, one has been dismissed without prejudice, one additional such suit has been filed and the informal inquiry of the Securities and Exchange Commission ("SEC") has become a formal investigation, all as more fully described below. On April 5, 1995, KnowledgeWare removed both of the lawsuits filed against it in Minnesota state court to the United States District Court, District of Minnesota, Fourth Division. The first such suit was brought against KnowledgeWare by seven named -9- plaintiffs, including Irwin L. Jacobs, who purchased 666,700 shares of KnowledgeWare's common stock in a private placement (the "Jacobs Suit"), and the second suit was brought against KnowledgeWare and its former directors and certain of its former officers by over twenty named plaintiffs, including Irwin L. Jacobs, individually and as trustee of certain trusts for the benefit of his children (the "Second Jacobs Suit"). On April 26, 1995, the plaintiffs in the Jacobs Suit filed a motion to amend their complaint, dropping their claims under Section 12(2) of the Securities Act of 1933, as amended (the "Securities Act"), but adding (a) Francis A. Tarkenton, Donald P. Addington, Richard M. Haddrill, Rick W. Gossett, J. William Scruggs, Sam A. Brooks and P. E. Sadler, former directors and officers of KnowledgeWare, as defendants, (b) claims for violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 thereunder, (c) claims against the individual defendants for controlling person liability under Section 20 of the Exchange Act, (d) claims for violation of Section 18 of the Exchange Act, (e) claims for violation of the Georgia Securities Act and Minnesota Securities Act, (f) claims against the individual defendants for controlling person liability under the Georgia Securities Act and Minnesota Securities Act, (g) claims for violation under the Minnesota Consumer Fraud Act, (h) claims against the individual defendants for breach of fiduciary duty, (i) claims for common law fraud and (j) claims for treble and punitive damages and attorneys' fees under Federal and Georgia RICO statutes. On April 26, 1995, the plaintiffs in the Second Jacobs Suit filed a motion to amend their complaint, dropping their claims under Section 12(2) of the Securities Act, but adding (a) claims for violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, (b) claims against the individual defendants for controlling person liability under Section 20 of the Exchange Act, (c) claims for violation of Section 18 of the Exchange Act and (d) claims for treble and punitive damages and attorneys' fees under Federal and Georgia RICO statutes. 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, has agreed to dismiss the suit without prejudice and without the payment or promise of any consideration, and the parties are in the process of making the necessary filing with the court. On April 27, 1995, Gerald Caussade, a former employee of KnowledgeWare and a principal of Ecta Corporation and Fairfield Development, Inc. (plaintiffs in the Ecta Suit disclosed in the Form 10-K), filed suit in the United States District Court, Southern District of Iowa, Central Division, against KnowledgeWare, Donald Addington, Francis Tarkenton, Sterling Software, Inc., Werner Frank and Sterling Williams. The plaintiff is claiming (a) breach of contract as a third party beneficiary under the Asset Purchase Agreement dated May 26, 1994 among KnowledgeWare, Ecta Corporation and Fairfield Development, Inc., (b) as to the individual defendants, tortious interference with his business relations with KnowledgeWare, (c) fraudulent misrepresentation and negligent misrepresentation in connection with his accepting employment with KnowledgeWare, (d) wrongful termination in violation of public policy in connection with his termination from employment and (e) breach of contract under his employment contract. Plaintiff is seeking unspecified compensatory damages, damages for emotional distress, punitive damages and interest and other costs. -10- On March 14, 1995, the SEC entered an Order Directing Private Investigation and Designating Officers to take Testimony titled "In the Matter of KnowledgeWare, Inc. (NY-6231)." The investigation generally relates to trading in KnowledgeWare securities from July 1, 1992 through the time of the Merger, KnowledgeWare's compliance with SEC filing and reporting obligations and the adequacy and/or accuracy of its public disclosures, recordkeeping and accounting controls. 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 or 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 March 31, 1995, the Company estimates that approximately $600,000 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 March 31, 1995, the value of the Escrowed Shares was approximately $16,900,000 based on the March 31, 1995 closing stock price of $34 7/8 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 -11- Group. The Electronic Commerce Group and the Federal Systems Group remained essentially unchanged. The Company acquires, develops, markets and supports a broad range of computer software products and services in four major markets classified as Systems Management, Electronic Commerce, Applications Management and Federal Systems. Each major market is represented through independently operated business groups. The Systems Management Group provides enterprise-wide systems management software for large computing environments. The Electronic Commerce Group provides software and services to facilitate electronic commerce, defined by the Company as the worldwide electronic interchange of business information, including electronic data interchange software and services, data communications software and electronic payments software for financial institutions. The Applications Management Group focuses exclusively on the applications management market. The group provides products for developing new applications and revitalizing existing applications and consulting services to ensure that customers are successful using the applications management products. The Federal Systems Group provides highly technical services to the federal government under several multi-year contracts primarily in support of National Aeronautics and Space Administration aerospace research projects and secure communications systems for the Department of Defense. The fifth business group, International, is responsible for sales and first level support of the Company's products outside North America. International Group operating results and assets are included, as applicable, in the Company's Systems Management, Electronic Commerce and Applications Management segments in the business segment tables contained herein. International Group revenue of $35,586,000 and $24,103,000 and operating profit of $6,377,000 and $3,277,000 for the three months ended March 31, 1995 and 1994, respectively, have been allocated to the business segments. International Group revenue of $67,620,000 and $51,043,000 and operating profit of $12,716,000 and $6,990,000 for the six months ended March 31, 1995 and 1994, respectively, have been allocated to these business segments. -12- Financial information concerning the Company's operations, by business segment, for the three and six months ended March 31, 1995 and 1994, restated to conform to the current year presentation, is summarized as follows (in thousands):
Three Months Six Months Ended March 31 Ended March 31 ------------------ ------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Revenue: Electronic Commerce.................. $ 48,810 $ 38,716 $ 96,715 $ 74,582 Systems Management................... 37,287 34,046 70,661 69,488 Federal Systems...................... 24,590 26,945 48,255 51,663 Applications Management.............. 25,347 11,972 45,357 23,865 Corporate and other.................. 2,173 3,787 3,637 5,900 -------- -------- -------- -------- Consolidated totals.................. $138,207 $115,466 $264,625 $225,498 ======== ======== ========= ======== Operating Profit (Loss): Electronic Commerce.................. $ 16,452 $ 10,894 $ 29,204 $ 17,879 Systems Management................... 13,460 12,129 24,596 25,065 Federal Systems...................... 1,867 1,694 3,393 3,308 Applications Management.............. 5,125 1,367 9,616 3,971 Restructuring charge................. (19,512) Purchased research and development... (62,000) Corporate and other.................. (5,778) (4,394) (10,236) (9,109) -------- -------- -------- -------- Consolidated totals................. $ 31,126 $ 21,690 ($24,939) $ 41,114 ======== ======== ========= ========
The amounts presented for "Corporate and other" include corporate expense, intersegment eliminations and the results of operations of the Company's retail software division. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Merger with KnowledgeWare, Inc. On November 30, 1994, Sterling Software, Inc. (the "Company") acquired KnowledgeWare, Inc. ("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a leading provider of applications development software and services, for approximately $100 million, in a stock-for-stock acquisition (the "Merger"). In connection with the Merger, the Company issued approximately 2,421,000 shares of the Company's $0.10 par value Common Stock (the "Common Stock") valued at approximately $74,443,000 and reserved approximately 340,000 shares of Common Stock for issuance upon exercise of KnowledgeWare's options and warrants. In addition, the Company incurred cash costs directly related to the Merger of approximately $25,739,000. The Merger, which was accounted for as a purchase, was completed pursuant to the terms of an Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994, as amended (the "Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation and a recently organized wholly owned subsidiary of the Company ("Merger Sub"), and KnowledgeWare. Of the 2,421,000 shares of Common Stock issued, approximately 484,800 shares were placed in escrow (the "Escrowed Shares") to cover certain losses that may result in connection with any pending or threatened litigation, action, claim, proceeding, dispute or investigation ("Actions") (including amounts paid in settlement) to which the Company is entitled to indemnification pursuant to the terms of the Merger Agreement. (See Note 4 "Commitments and Contingencies.") In connection with the Merger, the Company reorganized into five groups and 18 divisions. 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 $25,739,000 are included in the aggregate cost of the Merger and consist of employee termination costs, transaction costs, costs associated with the elimination of duplicate facilities and other direct costs of the acquisition. Approximately $19,332,000 was paid in the first six months of 1995. -14- 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: 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 ===========
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 $7,037,000 was expended prior to March 31, 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 $6,800,000 of costs incurred through March 31, 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, -15- KnowledgeWare intends to defend each suit vigorously. There can be, however, no assurance of the final resolution of any of the lawsuits, claims or inquires 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 March 31, 1995, the Company estimates that approximately $600,000 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 March 31, 1995, the value of the Escrowed Shares was approximately $16,900,000 based on the March 31, 1995 closing stock price of $34 7/8 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 March 31, 1995 and 1994 Revenue increased $22,741,000, or 20%, in the second quarter of 1995 over the same period of 1994. Revenue outside of North America grew $11,483,000, or 48%, in the second quarter of 1995 over the second quarter of 1994. This revenue represented 26% and 21% of the Company's total revenue in the second quarters of 1995 and 1994, respectively. The foreign currency impact due to the weaker U.S. dollar had a favorable impact on revenue of approximately $3,000,000. For the three months ended March 31, 1995, 35% 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 $10,094,000 to the total revenue growth for the quarter increasing 26% over the second quarter of 1994. Network services revenue increased $5,439,000, 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 $4,712,000, or 18%, 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 $13,375,000, or 112%, due to the businesses acquired in the Merger. Product and product support revenue from products acquired in the Merger represented $10,605,000, or 42%, of total AMG revenue. Consulting and training services revenue, previously an immaterial component of AMG's total revenue, represented 19% of total AMG revenue. During the quarter, AMG initiated a specific sales and consulting services program that targets the KnowledgeWare customer base to assist them in the use of their application management software. The cost of this effort has no related revenue in the second quarter of -16- 1995. The near term impact has been an increase in the sales pipeline for the KEY and VISION products for which revenue may be realized in the future. SMG revenue increased $3,241,000, or 10%, as the seasonality impact experienced from the difference between the fiscal years of the Company and Systems Center, Inc. ("Systems Center"), acquired in a pooling in 1993, has been reduced in the second quarter of 1995. Product and product support revenue increased $2,776,000, or 8%, due to increases in systems management and storage management fixed term license agreements. SMG offers fixed term licenses in addition to perpetual licenses which offer the customer a suite of software products for a specific period of time, generally three years, and accordingly are typically higher value contracts. The group sold a higher percentage of these license agreements in the second quarter of 1995 versus the second quarter of 1994. An increase in the installed customer base as well as price increases on certain products and on renewal of product support contracts also contributed to the revenue increase. FSG revenue decreased $2,355,000, or 9%, in the second 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. Total cost and expenses increased $13,305,000, or 14%, on a 20% increase in revenue primarily due to increased selling, general and administrative expense to support the revenue growth in AMG, ECG and outside North America and an increase in net product development expenses directly related to the additional products and development activity acquired in the Merger. Costs of sales decreased slightly due to lower costs associated with lower contract billings in FSG. In addition, approximately $5,700,000 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 second quarter of 1995 of $11,356,000 is net of $5,326,000 of capitalized software development costs. This compares to net product development expense of $8,178,000 for the second quarter of 1994, which is net of $4,916,000 of capitalized costs for the same period. Total capitalized costs represented 32% and 38% of total development expenses for the quarters ended March 31, 1995 and 1994, respectively. Software amortization expense was $5,632,000 and $5,584,000 for the second quarters of 1995 and 1994, respectively. Selling, general and administrative expense increased $10,660,000, 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 is also higher due to the higher average cash balances available for -17- investment as well as higher interest rates in the second quarter of 1995 versus the second quarter of 1994. The impact on operating profit from the currency impact of the weaker U.S. dollar was approximately $500,000. Income before income taxes was $31,554,000 in the second quarter of 1995 as compared to $21,745,000 in the second quarter of 1994. Income before income taxes increased $9,809,000, or 45%, primarily due to higher operating profits in ECG, up 51%, and in AMG, up 275%. There were no restructure costs included in the results of operations for the second quarter of 1995. All restructure costs related to the Merger were incurred and recognized in the first quarter of 1995. Six Months Ended March 31, 1995 and 1994 Revenue increased $39,127,000, or 17%, in the first six months of 1995 over the same period of 1994. Revenue in the first six months of 1995 from outside of North America grew $16,577,000, or 32%, over the first six months of 1994. This revenue represented 26% and 23% of the Company's total revenue in the first half of 1995 and 1994, respectively. The foreign currency impact due to the weaker U.S. dollar had a favorable impact on revenue of approximately $4,000,000. For the six months ended March 31, 1995, 36% 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 contributed $22,133,000 to the total revenue growth for the first half of 1994 increasing 30% over the first six months of 1994. Network services revenue increased $10,046,000 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 $12,129,000, or 24%, 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 $21,492,000, or 90%, due to the businesses acquired in the Merger. Product and product support revenue from products acquired in the Merger represented $18,577,000, or 41%, of total AMG revenue. Consulting and training services revenue, previously an immaterial component of AMG's total revenue, represented 13% of total AMG revenue. In the second quarter of 1995, AMG initiated a specific sales and consulting services program that targets the KnowledgeWare customer base to assist them in the use of their application management software. The cost of this effort has no related revenue in the first half of 1995. The near term impact has been an increase in the sales pipeline for the KEY and VISION products for which revenue may be realized in the future. SMG revenue increased $1,173,000, or 2%. Second quarter growth offset revenue declines reported in the first quarter of 1995 versus the first quarter of 1994. The first quarter revenue decrease was in part due to the sale of lower dollar value contacts for VM and systems management products in the first quarter of 1995 versus the first quarter of 1994. This revenue decrease was partially offset by the revenue generated from new storage management products which were not available for sale in the first quarter of 1994. -18- FSG revenue decreased $3,408,000, or 7%, in the first six 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 $105,180,000, or 57%, primarily due to $19,512,000 of restructure costs of the Merger, 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, increased selling, general and administrative expense to support the revenue growth in AMG and ECG and an increase in net product development expenses directly related to the additional products and development activity acquired in the Merger. In addition, approximately $6,800,000 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. Lower contract costs associated with lower contract billings in FSG also contributed to a lower cost of sales. Net product development expense for the first six months of 1995 of $20,802,000 is net of $9,472,000 of capitalized software development costs. This compares to net product development expense of $15,654,000 for the first six months of 1994, which is net of $9,316,000 of capitalized costs for the same period. Total capitalized costs represented 31% and 37% of total development expense for the six months ended March 31, 1995 and 1994, respectively. Software amortization expense was $11,496,000 and $10,712,000 for the first six months of 1995 and 1994, respectively. Selling, general and administrative expense increased $18,215,000, or 22%, 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 is also higher due to the higher average cash balances available for investment, as well as higher interest rates in the first half of 1995 versus the first half of 1994. The impact on operating profit from the currency impact of the weaker U.S. dollar was approximately $1,000,000. The loss before income taxes was $25,748,000 in the first six months of 1995 as compared to income before income taxes of $39,351,000 in the first six months of 1994. The loss in the first six months can 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 six months of 1995 income before income taxes, restructure costs, and the write-off of purchased research and development costs was $55,764,000, up $16,413,000, or 42%, over the first six months of 1994, primarily due to higher operating profits in ECG, up 63%, and in AMG, up 142%. Liquidity and Capital Resources The Company maintained a strong liquidity and financial position with $114,658,000 of working capital at March 31, 1995, which includes $87,869,000 of cash and cash equivalents and -19- $79,683,000 of marketable securities. Days sales outstanding, measured on a quarterly basis, decreased from 103 days for the quarter ended December 31, 1994 to 98 days for the quarter ended March 31, 1995. Net cash flows from operations increased $23,430,000 in the first six months of 1995 as compared to the first six 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 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 commom stock of KnowledgeWare. In addition, the Company incurred cash costs directly related to the Merger of approximately $25,739,000. The Merger was accounted for as a purchase and recorded as follows (in thousands): Working capital (deficit) $(25,132) Property and equipment 12,684 Computer software 29,000 Purchased research and development costs charged to expense 62,000 Other assets and deferred tax asset 13,735 Obligation for postcontract customer-support services (13,679) Other liabilities (4,389) Excess costs over net assets acquired net of tax benefit 25,963 -------- $100,182 ========
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. At March 31, 1995, after the utilization of $4,100,000 for standby letters of credit, $30,900,000 was available for borrowing on the Company's $35 million revolving credit and term loan agreement. Borrowings, if any, outstanding on May 31, 1995 will convert to a term loan with seven equal quarterly payments. Certain of the Company's foreign subsidiaries have separate lines of credit available for foreign exchange exposure management and working capital requirements. These lines of credit are guaranteed by the U.S. parent company. At March 31, 1995, $11,000,000 was outstanding pursuant to foreign lines of credit and $7,700,000 was available for borrowing thereunder. At March 31, 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 -20- 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 forseeable future. Other Matters Demand for many of the Company's products tends to improve with increased inflation as customers strive to increase employee productivity and reduce costs. However, the effect of inflation on the Company's relatively labor intensive cost structure could adversely affect its results of operations to the extent the Company might not be able to recover increased operating costs through increased product licensing and prices. The assets and liabilities of non-U.S. operations are translated into U.S. dollars at exchange rates in effect as of the respective balance sheet dates, and revenue and expense accounts of these operations are translated at average exchange rates during the month the transactions occur. 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- PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders (the "Meeting") on March 16, 1995. The stockholders of the Company voted on and approved the following proposals: 1. The election of three Class B Directors for terms expiring in 1998. 2. A proposal to amend the Company's Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance from 50,000,000 shares to 75,000,000 shares. 3. Amendments to the Company's Incentive Stock Option Plan (the "Incentive Plan") and Non-Statutory Stock Option Plan (the "Non-Statutory Plan") to increase the number of shares of Common Stock available for issuance upon exercise of options granted under the Incentive Plan from 1,750,000 shares to 2,000,000 shares and under the Non-Statutory Plan from 4,000,000 shares to 4,875,000 shares, as set forth in the Company's Proxy Statement for the Meeting. The proposals were approved by the following votes: 1. Election of Directors --------------------- NAME FOR WITHHELD ---- --- -------- Phillip A. Moore 20,577,816 149,158 Charles J. Wyly, Jr. 20,561,581 165,393 Michael C. French 20,528,068 198,906 2. Amendment to the Company's Certificate of Incorporation ------------------------------------------------------- FOR AGAINST ABSTENTIONS BROKER NON-VOTES --- ------- ----------- ---------------- 19,312,315 1,336,367 78,292 NA 3. Amendments to the Incentive Plan and the Non-Statutory Plan ----------------------------------------------------------- FOR AGAINST ABSTENTIONS BROKER NON-VOTES --- ------- ----------- ---------------- 12,680,894 7,948,831 97,249 NA -22- 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) 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 April 26, 1995 (11) 10(c) -- Twenty-Third Amendment to Loan Agreement dated as of March 29, 1995 (12) 11(a) -- Computation of Earnings Per Share, Three Months Ended March 31, 1995 (12) 11(b) -- Computation of Earnings Per Share, Three Months Ended March 31, 1994 (12) 11(c) -- Computation of Earnings Per Share, Six Months Ended March 31, 1994 (12)
-23- 15 -- None 18 -- None 19 -- None 22 -- None 23 -- None 24 -- None 27 -- Financial Data Schedule (12) 99(a) -- Gerald Caussade v. KnowledgeWare, Inc., Donald P. Addington, ------------------------------------------------------------ Francis A. Tarkenton, Sterling Software, Inc., Werner Frank and --------------------------------------------------------------- Sterling Williams, Case No. 4-95-CV-80301. (12) -----------------
(b) Reports on Form 8-K. On February 28, 1995, the Company filed a Current Report on Form 8-K dated February 28, 1995, with respect to Item 5 of said form, which report related to the Company's restatement of business segment information for each quarter of the years 1994 and 1993. - ---------- (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. (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) Filed herewith. -24- 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: May 15, 1995 /s/ Sterling L. Williams ------------------------------------------- Sterling L. Williams President, Chief Executive Officer and Director (Principal Executive Officer) Date: May 15, 1995 /s/ George H. Ellis ------------------------------------------- George H. Ellis Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -25- 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) 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 April 26, 1995 (11) 10(c) -- Twenty-Third Amendment to Loan Agreement dated as of March 29, 1995 (12) 11(a) -- Computation of Earnings Per Share, Three Months Ended March 31, 1995 (12)
-26- 11(b) -- Computation of Earnings Per Share, Three Months Ended March 31, 1994 (12) 11(c) -- Computation of Earnings Per Share, Six Months ended March 31, 1994 (12) 15 -- None 18 -- None 19 -- None 22 -- None 23 -- None 24 -- None 27 -- Financial Data Schedule (12) 99(a) -- Gerald Caussade v. KnowledgeWare, Inc. Donald P. Addington, ----------------------------------------------------------- Francis A. Tarkenton, Sterling Software, Inc., Werner Frank and --------------------------------------------------------------- Sterling Williams, Case No. 4-95-CV-80301. (12) -----------------
- ---------- (1) Previously filed as an exhibit to the Company 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. (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) Filed herewith. -27- EX-3 2 AMENDMENT TO CERT. OF INCO EXHIBIT 3(d) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Sterling Software, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Sterling Software, Inc., resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that said amendment be considered at the next annual meeting of the stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that, subject to approval of the Company's stockholders of the Charter Amendment, the Company's Certificate of Incorporation be, and it hereby is, amended by changing the first paragraph of the Article numbered "IV" so that, as amended, said paragraph of said Article shall read as follows: "The total number of shares of stock of all classes which the corporation shall have authority to issue is Eighty-Five Million (85,000,000), consisting of Seventy-Five Million (75,000,000) shares of Common Stock having a par value of $.10 per share, and Ten Million (10,000,000) shares of Preferred Stock having a par value of $.10 per share." SECOND: That thereafter, pursuant to certain resolutions, the Board of Directors directed that said amendment be considered at the next annual meeting of the stockholders. An annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Sterling Software, Inc. has caused this certificate to be signed by Albert K. Hoover, its Vice President, on this 11th day of May, 1995. By: /s/ Albert K. Hoover -------------------------------------- Albert K. Hoover, Vice President EX-10.A 3 INCENTIVE STOCK OPTION P EX10(a) STERLING SOFTWARE, INC. INCENTIVE STOCK OPTION PLAN (AS AMENDED, THROUGH APRIL 26, 1995) 1. Purpose. The purpose of the Incentive Stock Option Plan of Sterling Software, Inc. (the "Plan") is to provide key employees 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 who share primary responsibility for the management, growth and protection of the business of the Company; b. Furnish an incentive to such employees to continue their services for the Company; and c. Provide a means through which the Company may attract able persons to enter its employment. It is intended that Options issued pursuant to this Plan shall constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986. 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 of 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. 3. Eligibility. The Committee may, from time to time, select particular employees from among those key employees of the Company and any subsidiary of the Company to whom Options are to be granted, and upon the grant of such Options, the selected employees shall become Participants in the Plan. As used herein the term "Participant" means an eligible employee as described in this Section who accepts an Option, or the estate, personal representative or beneficiary thereof having the right to exercise an Option pursuant to its terms. Employees are eligible hereunder if they are employed by the Company or any of its subsidiaries on a full-time basis and are compensated for such employment by a regular salary. There shall be included as eligible employees members of the Board who are also salaried officers or employees of the Company. 4. Number of Shares Available for Options. 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 exercise of Options granted pursuant to the Plan shall be 2,000,000; 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, share combination, exchange of shares, merger, consolidation, reorganization, liquidation, or the like, of or by the Company. 5. The 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. The maximum aggregate fair market value (determined as of the time the Option is granted) of the Common Stock with respect to which Options are exercisable for the first time by any employee during any calendar year (under all incentive stock option plans of the Company and its subsidiaries) shall not exceed $100,000. This limitation shall apply to all Options granted under the Plan after December 31, 1986. 7. Option Exercise Price. The purchase price of Common Stock subject to an Option granted pursuant to the Plan shall be determined by the Committee on the date of the grant. The price shall not be less than 100% of the fair market value of the Common Stock on the date of the grant of the Option; provided, however, that if the Participant owns more than 10% combined voting power of all of the outstanding capital stock of the Company on the date of the grant, the exercise price shall not be less than 110% of the fair market value of the Common Stock on the date of grant. The Committee shall determine the fair market value of the Common Stock on the date of the grant, and shall set forth the determination in its minutes. 8. Exercise of Option. a. Options granted under the Plan may not be exercisable while there is outstanding any incentive stock option previously granted to the Participant. An Option will be considered outstanding until such Option is exercised in full or expires by reason of lapse of time. This Section 8.a. shall not apply to any Option granted to any employee pursuant to the Plan after December 31, 1986. b. An Option may not be exercised, nor may Common Stock be issued pursuant to the exercise of an Option, if any requisite action, approval or consent of any governmental authority of any kind having jurisdiction over the exercise of the Option shall not have been taken or secured. The term of each Option shall not be more than ten years from the date of grant; provided, however, that in the case of a Participant who owns greater than 10% of the Common Stock of the Company at the time the Option is granted, the term of the Option shall not be more than five years from the date of grant. 9. Payment. Full payment for Common Stock purchased upon the exercise of the 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 stockholder 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 -2- of the shares of Common Stock issuable upon exercise of other Options granted from time to time pursuant to the Plan. 10. Time of Granting of 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. Such Option shall not be effective unless granted on or before December 31, 2003. 11. Non-Transferability of Options. Options granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and may only be exercised during the lifetime of the Participant by such Participant. 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. Notice Upon Disposition. Participants shall immediately notify the Company upon sale of any Common Stock acquired pursuant to the exercise of an Option granted under the Plan if such sale occurs within two years from the date of the grant of the Option, or one year from the date of the exercise of the Option. 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. 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. 16. 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; provided that the Board or the Committee shall not have the power or authority, without approval of the stockholders, to change the employees or class of employees who are eligible to participate or the aggregate number of shares which may be issued pursuant to the exercise of the Options. 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 Security 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. 17. Employment. This Plan and any Option granted under this Plan do not confer upon the Participant any right to be employed or to continue in the employ of the Company, nor does it in any way interfere with the right of the Company to terminate the employment of the Participant at any time. 18. 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. 19. 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, 2003, and no Options may be granted pursuant to the Plan after such date. -3- 20. 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. 21. Effective Date of the Plan. The Plan shall become effective and shall be deemed to have been adopted on December 19, 1994. STERLING SOFTWARE, INC. By: /s/ Sterling L. Williams ----------------------------------------- Sterling L. Williams President and Chief Executive Officer -4- EX-10.C 4 23RD MODIFICATION AGRMNT EXHIBIT 10(c) TWENTY-THIRD AMENDMENT AND MODIFICATION AGREEMENT TWENTY-THIRD AMENDMENT AND MODIFICATION AGREEMENT dated as of March 29, 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 grant certain limited waivers; 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 grant certain limited waivers; 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 "March 31, 1995" in the definition of "Conversion Date" and substituting in lieu thereof the date "May 31, 1995". (S)2. Limited Waiver of (S)8.20 of the Loan Agreement. In connection ----------------------------------------------- with the prior merger of KnowledgeWare and SSI Corporation, a Georgia corporation (the "Acquisition Subsidiary"), the Company has requested that the Agent and the Banks continue to waive the covenants set forth in (S)8.20 of the Loan Agreement, solely with respect to KnowledgeWare and the KnowledgeWare Subsidiaries. Subject to all conditions of the Loan Agreement and this Amendment, each of the Agent and the Banks hereby waives the provisions of (S)8.20 of the Loan Agreement which (a) require that the Company pledge to the Agent for the benefit of the Banks the issued and outstanding capital stock of KnowledgeWare, and of KnowledgeWare's wholly owned Subsidiaries, (b) require KnowledgeWare and any of its wholly owned Subsidiaries to grant to the Agent for the benefit of the Banks a first perfected priority security interest in the items or types of collateral described in the Security Agreement, and (c) require that KnowledgeWare and any of its -2- wholly owned Subsidiaries become a party to and guarantor obligated under the Guaranty; provided, however, that the waivers contained in clauses (a), (b) and -------- ------- (c) above shall only be effective until May 31, 1995 and that the security interest granted in the items or types of collateral described in the Security Agreement following May 31, 1995 shall be subject only to the liens and security interests in favor of the Company and described in (S)9.2(p) of the Loan Agreement. (S)3. Limited Waiver of (S)2(a) of the Assignment Agreement. In ----------------------------------------------------- connection with the prior merger of KnowledgeWare and the Acquisition Subsidiary, the Company has requested that the Agent and the Banks continue to waive the requirements of (S)2(a) of the Assignment Agreement with respect to the assignment of (a) the Amended and Restated Term Note dated as of November 30, 1994 executed by KnowledgeWare in favor of the Company in the original principal amount of $6,000,000, (b) the Amended and Restated Revolving Note dated as of November 30, 1994 executed by KnowledgeWare in favor of the Company in the original principal amount of $22,000,000, (c) the Term Note dated as of November 30, 1994 executed by KnowledgeWare in favor of the Company in the original principal amount of up to $5,000,000 and (d) the Revolving Credit Note dated as of November 30, 1994 executed by KnowledgeWare in favor of the Company in the original principal amount of up to $10,000,000 (collectively, the "KnowledgeWare Notes"), collectively evidencing, in the case of (a), (b), (c) and (d) above, up to $38,000,000 of Intercompany Indebtedness of KnowledgeWare to the Company under the KnowledgeWare Loan Agreements and in the case of (c) and (d), up to $10,000,000 of Intercompany Indebtedness of KnowledgeWare to the Company under the loan agreements referenced in subsections (b) and (c) of the definition of KnowledgeWare Loan Agreements. Subject to all conditions of the Loan Documents and this Amendment and solely to the limited extent provided herein, each of the Agent and the Banks hereby waives, until May 31, 1995, the requirement of (S)2(a) of the Assignment Agreement that the Company pledge, endorse and deliver to the Agent the KnowledgeWare Notes. (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 March 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 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 -3- 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 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, 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). -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 By: /s/ Elizabeth M. Passela ------------------------------------ Title: Director BANK ONE, TEXAS, NATIONAL ASSOCIATION By: /s/ William R. Little ------------------------------------ Title: Vice President STERLING SOFTWARE, INC. By: /s/ Richard Connelly ------------------------------------ Title: Vice President, Controller Each of the undersigned hereby acknowledges the foregoing Amendment as of the Effective Date and agrees that its obligations under the Guaranty will extend to the Loan Agreement, as so amended, and the other Loan Documents, as so amended. STERLING SOFTWARE (MIDWEST), INC. (formerly Creative Data Systems, Inc.) By: /s/ Richard Connelly ------------------------------------ Title: Assistant Treasurer STERLING SOFTWARE (NORTHERN AMERICA), INC. (formerly Directions, Inc.) By: /s/ Richard Connelly ---------------------------------- Title: Assistant Treasurer -5- STERLING SOFTWARE (UNITED STATES), INC. (formerly Zanthe, Inc. Dylakor, Inc. and Answer Systems, Inc. By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (AMERICA), INC. (formerly Ordernet Services, Inc.) By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (U.S.A.), INC. (formerly Systems Software Marketing, Inc. and Software Laboratories, Inc.) By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (US), INC. (formerly known as Sterling Federal Systems, Inc. and Sterling IMD, Inc.) By: /s/ Richard Connelly ------------------------------- Title: Assistant Treasurer SYSTEMS CENTER, INC. (formerly Sterling Software, Inc. a Wyoming corporation) By: /s/ Richard Connelly ------------------------------- Title: Assistant Treasurer -6- STERLING SOFTWARE LEASING COMPANY By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer STERLING SOFTWARE INTERNATIONAL, INC. By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer STERLING ZEROONE, INC. By: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer ZEROONE SYSTEMS, INC. By: /s/ Richard Connelly ------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (UNITED STATES OF AMERICA), INC. By: /s/ Richard Connelly ------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (NORTH AMERICA), INC. By: /s/ Richard Connelly -------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (U.S. OF AMERICA), INC. BY: /s/ Richard Connelly --------------------------------- Title: Assistant Treasurer EX-11.A 5 COMP. OF EARNINGS/SHARE EXHIBIT 11(a) Computation of Earnings Per Share, Three Months Ended March 31, 1995 STERLING SOFTWARE, INC. EXHIBIT 11(a) COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED MARCH 31, 1995 (in thousands, except per share information)
Fully Primary Diluted ------- ------- Earnings: Earnings applicable to common stockholders................................ $20,110 $20,110 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)........... 439 1,042 Interest income on investments of proceeds from assumed conversion of options and warrants (net of applicable income taxes)........... 605 ------- ------- $20,549 $21,757 ======= ======= Shares: Weighted average of shares outstanding.................................... 23,526 23,526 Add common shares issued on assumed exercise of options and warrants...... (4,769) (4,769) Less common shares assumed repurchased.................................... 9,877 9,877 ------- ------- 28,634 28,634 ======= Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures................................................... 4,056 ------- 32,690 ======= Earnings per common share: Primary................................................................... $ .72 ======= Fully diluted............................................................. $ .67 =======
EX-11.B 6 COMP. OF EARNINGS/SHARE EXHIBIT 11(b) Computation of Earnings Per Share, Three Months Ended March 31, 1994 STERLING SOFTWARE, INC. EXHIBIT 11(b) COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED MARCH 31, 1994 (in thousands, except per share information)
Fully Primary Diluted ------- ------- Earnings: Earnings applicable to common stockholders................................ $13,506 $13,506 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)........... 1,042 ------- ------- $13,506 $14,548 ======= ======= Shares: Weighted average of shares outstanding.................................... 19,857 19,857 Add common shares issued on assumed exercise of options and warrants...... 7,293 7,293 Less common shares assumed repurchased.................................... (4,075) (4,075) ------- ------- 23,075 23,075 ======= Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures................................................... 4,056 ------- 27,131 ======= Earnings per common share: Primary................................................................... $ .59 ======= Fully diluted............................................................. $ .54 =======
EX-11.C 7 COMP. OF EARNINGS/SHARE EXHIBIT 11(c) Computation of Earnings Per Share, Six Months Ended March 31, 1994 STERLING SOFTWARE, INC. EXHIBIT 11(c) COMPUTATION OF EARNINGS PER SHARE SIX MONTHS ENDED MARCH 31, 1995 (in thousands, except per share information)
Fully Primary Diluted ------- ------- Earnings: Earnings applicable to common stockholders................................ $24,280 $24,280 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)........... 2,106 Interest income on investments of proceeds from assumed conversion of options and warrants (net of applicable income taxes)........... 67 51 ------- ------- $24,347 $26,437 ======= ======= Shares: Weighted average of shares outstanding.................................... 19,120 19,120 Add common shares issued on assumed exercise of options and warrants...... 7,721 7,721 Less common shares assumed repurchased.................................... (4,074) (4,074) ------- ------- 22,767 22,767 ======= Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures................................................... 4,056 ------- 26,823 ======= Earnings per common share: Primary................................................................... $ 1.07 ======= Fully diluted............................................................. $ .99 =======
EX-27 8 FDS
5 This schedule contains summary financial information extracted from Form 10Q and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS SEP-30-1995 MAR-31-1995 87,869 79,683 160,691 9,521 0 348,898 113,530 53,982 596,344 234,240 116,437 2,391 0 20 220,484 596,344 264,625 264,625 86,319 289,564 81,512 0 4,200 (25,748) 15,747 (41,495) 0 0 0 (41,495) (1.85) (1.85)
EX-99.A 9 COMPLAINT IN THE UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF IOWA, CENTRAL DIVISION - -------------------------------------------------------------------------------- GERALD CAUSSADE, ) NO.___________ SS# ###-##-#### ) ) Plaintiff, ) ) COMPLAINT vs. ) ) KNOWLEDGEWARE, INC., DONALD P. ) ADDINGTON, FRANCIS A. ) TARKENTON, STERLING SOFTWARE, ) INC., WERNER FRANK, and STERLING ) WILLIAMS. ) ) Defendants. ) - -------------------------------------------------------------------------------- COMES NOW plaintiff, Gerald Caussade, by and through the undersigned counsel of the law firm Dickinson, Mackaman, Tyler & Hagen, P.C., and states for his Complaint as follows: PARTIES ------- 1. Plaintiff Gerald Caussade was employed by KnowledgeWare, Inc. ("KWI") as the Product Marketing Director from June 7, 1994, until October 4, 1994 when Plaintiff was involuntarily terminated by KWI. Plaintiff was a citizen of Fairfield, Iowa at all times relevant herein but has since become a citizen of Florida. 2. Defendant KnowledgeWare, Inc. is a corporation duly organized and existing under the laws of the State of Georgia. KWI has its principle place of business in Fulton County, Georgia and is registered to do business in Iowa. 3. Defendant Donald P. Addington ("Addington") was, at all times relevant herein, The President, Chief Operating Officer, and Director of KWI. Upon information and belief, Addington is a citizen of Georgia. 4. Defendant Francis A. Tarkenton ("Tarkenton") was, at all time relevant herein, Chairman of the Board, Chief Executive Officer and Director of KWI. Upon information and belief, Tarkenton is a citizen of Georgia. 5. Defendant Sterling Software, Inc. ("Sterling") is a corporation duly organized and existing under the laws of the State of Delaware. Sterling has its principle place of business in Texas and is registered to do business in Iowa. 6. Defendant Werner Frank ("Frank") was, at all times relevant herein, Executive Vice President of Sterling Software and the unofficial Acting President of KWI. Upon information and belief, Frank is a citizen of Texas. 7. Defendant Sterling Williams ("Williams") was, at all relevant times herein, the President of Sterling Software Inc. On information and belief, Williams is a citizen of Texas . JURISDICTION AND VENUE ---------------------- 8. This Court's jurisdiction is based upon 28 U.S.C. (S) 1332. Plaintiff and Defendants are citizens of different states and the matter of controversy exceeds the sum of $50,000, exclusive of interest and costs. Venue is proper in this Court pursuant to 28 U.S.C. (S) 1391. FACTUAL BACKGROUND ------------------ 9. Plaintiff, Gerald Caussade, was the President and majority shareholder of ClearAccess Corporation ("ClearAccess") and Fairfield Software, Inc. ("Fairfield"). In that capacity, Plaintiff developed and marketed ClearAccess and ClearManager software and their derivative products. 2 10. In the early half of 1994, Plaintiff received offers from two companies, IQ Software and Logic Works, to purchase substantially all of the assets of ClearAccess and Fairfield and to hire plaintiff to assist in marketing and developing the software. 11. At or about the same time, Defendant KWI approached Plaintiff with an offer to purchase substantially all of the assets of ClearAccess and Fairfield and to hire Plaintiff as Product Marketing Director of KWI immediately following the purchase of ClearAccess and Fairfield. 12. Under the terms of the Asset Purchase Agreement, KWI also offered the "Development Team," of which Plaintiff was a member, royalties based on product sales. These royalty payments are described as "Product Payments" in the Asset Purchase Agreement. The Development Team was to receive Product Payments of 2.5% of the sales of ClearAccess and ClearManager software and their derivative products. Under the terms of the Asset Purchase Agreement, Plaintiff was to receive 40% of the 2.5% of the product sales. 13. KWI covenanted in the Asset Purchase Agreement that it would make all "commercially reasonable efforts" to maximize revenues from which the Product Payments were to be computed. Defendant Addington represented to Plaintiff that KWI was committed to marketing these products and that KWI was going to engage in an intensive marketing campaign over the next several years to "maximize revenues" from the sale of these products. Specifically, Defendant Addington told Plaintiff that the marketing campaign during the first year would include the development and distribution of brochures introducing the software to the market, a direct mail campaign, training of staff and a push to introduce the software in the international market. 3 14. Under the terms of the KWI's Employment Contract with Plaintiff (attached as Exhibit A), Plaintiff was to receive a salary of $90,000 per year with a bonus of up to $25,000 to be paid to Plaintiff upon the completion of certain goals to be set by KWI's Senior Vice President of Operations. Defendant Addington represented to Plaintiff that the bonuses were paid on a quarterly basis and that the full bonuses were always paid because KWI was a profitable company. The Employment Contract, in accordance with the Asset Purchase Agreement, also provided that Plaintiff would be granted options to purchase 50,000 shares of KWI stock over a period of 4 years at the rate of 25% per year. 15. During KWI's negotiations with Plaintiff concerning the Asset Purchase Agreement and the Employment Contract, KWI, through its officers, Defendants Addington and Tarkenton communicated with Plaintiff about the financial condition of KWI. Specifically, Defendants made oral and written representations to Plaintiff that KWI was in sound financial condition and that the company was earning profits. Defendants Addington and Tarkenton repeatedly assured Plaintiff of the financial stability of KWI. 16. On one occasion, Addington traveled to Plaintiff's office in Iowa during these negotiations and assured Plaintiff that KWI had earned profits during the prior three financial quarters. Upon information and belief, Defendant Addington was responsible for determining how KWI reported revenues and receivables. Defendants Addington and Tarkenton signed financial reports filed with the Securities Exchange Commission. Addington and Tarkenton provided these statements to Plaintiff as further proof of the financial stability of KWI. On another occasion, an article appeared in the Wall Street Journal on ------------------- June 3, 1994, which referred to KWI as "struggl[ing] to survive a cash crunch." Tarkenton called Plaintiff and the other 4 shareholders of ClearAccess and Fairfield and expressly denied the story and stated that the article was "old news," "irresponsible" and "erroneous" and that KWI was "not in trouble" and that KWI was a "good company." 17. When Plaintiff specifically inquired about the financial stability of KWI in relation to KWI's offer to employ him, Defendant Addington told Plaintiff that KWI was a "healthy company" and it was only experiencing some cash flow problems because of KWI's recent acquisitions and because of slow collection of receivables from Europe. 18. Plaintiff was also told by Defendant Addington that KWI had no plans to merge or sell in the next year. 19. Based on all of the oral and written representations made by Defendants KWI, Addington and Tarkenton, Plaintiff rejected the offers from other companies and accepted KWI's offer to purchase substantially all of the assets of ClearAccess and Fairfield. The Asset Purchase Agreement was executed on June 7, 1994. 20. Based on all of the oral and written representations made by Defendants KWI, Addington and Tarkenton, Plaintiff rejected the offers from other companies and accepted KWI's offer to employ him. The Employment Contract was executed on June 7, 1994. 21. On June 8, 1994, KWi filed an S-3 registration statement with the Security Exchange Commission ("SEC"). Within a few days of the filing of the S-3 registration, the SEC decided to review KWI's S-3 registration. Following several weeks of delays, Rick Gossett, KWI's Chief Financial Officer, told Plaintiff that it was "not in anyone's best interest to answer the SEC's questions" and that "if we have to answer [the SEC's] questions, we are toast." As a result, the SEC registration was delayed. 5 22. Approximately 1 month after KWI purchased ClearAccess and Fairfield, in the first week of July 1994, KWI announced a 25% layoff and losses for the quarter and year end. KWI also approached IBM to renegotiate its credit line in order to avoid bankruptcy. 23. In late July early August 1994, Defendant Sterling Software, Inc. announced its intent to acquire KWI. Following the announcement, Defendant Williams, President of Sterling Software, admitted to Plaintiff that Defendants KWI, Addington and Tarkenton had not been honest with Plaintiff about the financial condition of KWI during the negotiations to purchase ClearAccess and Fairfield. Defendant Sterling also told Plaintiff that Sterling Software had been negotiating the acquisition of KWI with Defendants Addington and Tarkenton prior to KWI's purchase of ClearAccess and Fairfield. Defendant Sterling's statements were directly contrary to the earlier oral and written representations Defendants KWI, Addington and Tarkenton had made to Plaintiff. 24. In September 1994 KWI publicly admitted that its financial statements filed with the SEC for the first three quarter of 1994 were materially inaccurate. KWI had reported a net income of $4.5 million for the first three quarters of 1994. Because of the inaccuracy of these public reports, KWI restated its financial results for those three fiscal quarters reflecting losses of $3.6 million. 25. Following the sale of ClearAccess and Fairfield, KWI also failed to make efforts to maximize revenues from the sale of the Clearaccess and Clear Manager software and their derivative products as covenanted in the Asset Purchase Agreement. Sales of ClearAccess and Clear Manager software and their derivative works, which were originally projected to generate $30 million in revenue, fell to an estimated $10 million. 6 26. When Plaintiff's first bonus came due at the end of the first quarter, Plaintiff was told that KWI could not pay him the $6,250 bonus because of KWI's unexpected poor earnings and cash flow problems. 27. Plaintiff feared that if KWI terminated his employment contract he would not receive his severance pay because of KWI's tenuous financial situation. 28. In September 1994, Plaintiff was told by Geno Tolari, Executive Vice President of Defendant Sterling Software, that the only way Plaintiff could be sure to recover what KWI had promised, was to file a lawsuit. Tolari warned Plaintiff that if he filed a lawsuit against KWI Plaintiff's employment would be in jeopardy. 29. On September 9, 1994, Plaintiff, as President of ClearAccess and Fairfield, filed a lawsuit in the federal district court in the Southern District of Iowa against KWI, Addington and Tarkenton. 30. Following the filing of the suit, Geno Tolari told Plaintiff that he would have to speak with Defendant Williams, the President of Sterling Software, to see if Plaintiff had a conflict of interest because of the lawsuit and if Plaintiff needed to be terminated. 31. In the last week of September, Plaintiff contacted Defendant Werner Frank, Executive Vice President of Sterling Software and Acting President of KWI, and asked Frank whether he or Defendant Williams intended to fire Plaintiff because of a conflict of interest. Defendant Frank said he would check with Defendant Williams. 32. On October 4, 1994, Plaintiff was terminated from his employment with KWI. Plaintiff was not told the reasons for his termination. 7 33. Since his termination, Plaintiff has been receiving severance payments in accordance with his employment contract which provided that Plaintiff is entitled to severance payments for 6 months if he is terminated without cause. 34. Immediately following Plaintiff's termination, the KWI Board of Directors, voted to convert KWI shares into Sterling Software shares and make all options immediately exercisable upon the acquisition. 35. On December 1, 1994, Sterling Software purchased KWI and all options for KWI stock were immediately exercisable. COUNT I: FRAUDULENT MISREPRESENTATION -------------------------------------- 36. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 37. KWI through its agents, Defendants Addington and Tarkenton made the following representations to Plaintiff while he was considering whether to accept KWI's Employment Contract: a. Defendants KWI, Addington and Tarkenton repeatedly represented to Plaintiff that KWI was financially stable prior to KWI's purchase of ClearAccess and Fairfield. Specifically, Defendants made oral and written representations to Plaintiff that KWI was in sound financial condition and that the company was earning profits. On one occasion, Addington traveled to Plaintiff's office in Iowa during the negotiations and assured Plaintiff that KWI had earned profits during the prior three financial quarters. Defendants Addington and Tarkenton signed financial reports filed with the Securities Exchange Commission. Addington and Tarkenton provided these statements to Plaintiff as further proof of the financial stability of KWI. b. On another occasion, an article appeared in the Wall Street ----------- Journal on June 3, 1994, which referred to KWI as "struggl[ing] ------- to survive a cash crunch." Tarkenton called Plaintiff and the other 8 shareholders of ClearAccess and Fairfield and expressly denied the story and stating the article was "old news," "irresponsible" and "erroneous" that KWI was "not in trouble" and that KWI was a "good company." c. When Plaintiff specifically inquired about the financial stability of KWI, Defendant Addington told Plaintiff that KWI was a "healthy company" and it was only experiencing some cash flow problems because of KWI's recent acquisitions and because of slow collection of receivables from Europe. d. Defendant Addington also represented to Plaintiff that KWI had no plans to merge or sell the company for at least one year following KWI's purchase of ClearAccess and Fairfield. 38. The statements by Defendants were false. 39. Defendants knew the representations were false or made the representations with reckless disregard for the truth. 40. The statements by Defendants were material. 41. Defendants made these statements for the purpose of deceiving Plaintiff and to induce him into executing the Employment Contract. 42. Plaintiff reasonably relied upon the truth of the representations made by Defendants when he agreed to execute the Employment Contract. 43. Defendants' actions were malicious and in reckless disregard for the rights of Plaintiff. 44. Defendants' false representations were the proximate cause of Plaintiff's injuries and damages, including economic harm and personal injuries related to emotional distress. WHEREFORE, Plaintiff requests that the Court enter judgment against Defendants KWI, Don Addington and Fran Tarkenton and in favor of Plaintiff for the damages suffered by Plaintiff 9 as a result of Defendants' fraudulent misrepresentations, plus punitive damages, interest at the highest legal rate, court costs and such other relief as the Court deems just and equitable. COUNT II: NEGLIGENT MISREPRESENTATION -------------------------------------- TO INDUCE EMPLOYMENT -------------------- 45. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 46. KWI through its agents, Defendants Addington and Tarkenton negligently made the following representations to Plaintiff while he was considering whether to accept KWI's Employment Contract: a. Defendants KWI, Addington and Tarkenton repeatedly represented to Plaintiff that KWI was financially stable prior to KWI's purchase of ClearAccess and Fairfield. Specifically, Defendants made oral and written representations to Plaintiff that KWI was in sound financial condition and that the company was earning profits. On one occasion, Addington traveled to Plaintiff's office in Iowa during the negotiations and assured Plaintiff that KWI had earned profits during the prior three financial quarters. Defendants Addington and Tarkenton signed financial reports filed with the Securities Exchange Commission. Addington and Tarkenton provided these state- ments to Plaintiff as further proof of the financial stability of KWI. b. On another occasion, an article appeared in the Wall Street ----------- Journal on June 3, 1994, which referred to KWI as "struggl[ing] ------- to survive a cash crunch." Tarkenton called Plaintiff and the other shareholders of ClearAccess and Fairfield and expressly denied the story stating that the article was "old news," "irresponsible" and "erroneous," that KWI was "not in trouble" and that KWI was a "good company." c. When Plaintiff specifically inquired about the financial stability of KWI, Defendant Addington told Plaintiff that KWI was a "healthy company" and it was only experiencing some cash flow problems because of KWI's recent acquisitions and because of slow collection of receivables from Europe. 10 d. Defendant Addington also represented to Plaintiff that KWI had no plans to merge or sell the company for at least one year following KWI's purchase of ClearAccess and Fairfield. 47. The statements by Defendants were false. 48. Defendants had a financial interest in supplying information to Plaintiff to entice him to accept KWI's Employment Contract. 49. Defendants intended to supply the information, or knew that the person who received the information intended to supply it, for the benefit and guidance of third parties such as Plaintiff. 50. Defendants intended the information to influence Plaintiff's decisions as to whether or not he would accept KWI's Employment Contract. 51. Plaintiff acted in reliance on the truth of the information supplied by Defendants and was justified in relying on the information and promises. 52. The negligently supplied information was a proximate cause of Plaintiff's damages. WHEREFORE, Plantiff requests that the Court enter judgment against Defendants KWI, Addington and Tarkenton and in favor of Plaintiff for the damages suffered by Plantiff as a result of Defendants' negligent misrepresentations, plus interest at the highest legal rate, court costs and such other relief as the Court deems just and equitable. COUNT III: WRONGFUL TERMINATION IN ----------------------------------- VIOLATION OF PUBLIC POLICY -------------------------- 53. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 54. Defendants KWI, Don Addington, Fran Tarkenton, Werner Frank and Sterling Williams caused Plaintiff's contractual relationships with KWI to be terminated. 11 55. Plaintiff was terminated because as President of ClearAccess and Fairfield he authorized the lawsuit filed against Defendants KWI, Addington and Tarkenton which was filed on September 9, 1994. 56. The termination violated the public policy of the State of Iowa. These violations included but are not limited to the following: a. Defendants' actions were carried out for the purpose of retaliating against Plaintiff, as the President of ClearAccess and Fairfield, for carrying out his fiduciary duties as set forth under Iowa law. These duties include but are not limited to those set forth in Iowa Code (SS) 490.841, 490.842, 490.830 and 490.302. b. Defendants' actions were carried out for the purpose of retaliating against Plaintiff, as the President of ClearAccess and Fairfield, for pursuing the companies' right to seek redress through the court system for Defendants' wrongful acts. 57. Defendants' actions were malicious and in reckless disregard for the duties and rights of Plaintiff. 58. As a proximate result of Defendants' conduct, Plaintiff suffered loss of income, fringe benefits, lost royalty payments under the Asset Purchase Agreement, lost stock options, lost business investment opportunities and emotional distress. WHEREFORE, Plaintiff requests that the Court enter judgment against Defendants KWI, Don Addington, Fran Tarkenton, Werner Frank and Sterling Williams and in favor of Plaintiff for the damages suffered by Plaintiff as a result of Defendants' wrongful termination, plus punitive damages, interest at the highest legal rate, court costs and such other relief as the Court deems just and equitable. 12 COUNT IV: BREACH OF CONTRACT ----------------------------- (Third Party Beneficiary Claim Under Asset Purchase Agreement) 59. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 60. Defendant KWI entered into the Asset Purchase Agreement with ClearAccess and Fairfield on June 7, 1994. Under the terms of the Asset Purchase Agreement KWI agreed to pay members of the "Development Team" royalties based on product sales. These royalty payments are described as "Product Payments" in Section 1.3(b) of the Asset Purchase Agreement. The Development Team was to receive Product Payments of 2.5% of the sales of ClearAccess and ClearManager software and their derivative products. 61. Under the Asset Purchase Agreement, KWI represented and covenanted in Section 1.3(k), that for a three year period after the Closing Date, KWI would "in good faith . . . use commercially reasonable efforts to maintain, market, promote and to distribute ClearAccess and ClearManager" and "will use commercially reasonable efforts to maximize revenues from licenses of the Purchased Assets." 62. Plaintiff was a member of the Development Team and under the terms of Section 1.3(b) of the Asset Purchase Agreement and Exhibit 1.3(i) ("Special Retention Incentive Plan"), Plaintiff was to receive 40% of the 2.5% of the Product Sales. As a member of the Development Team, Plaintiff was an intended third party beneficiary of the Asset Purchase Agreement. 63. Defendant KWI materially breached the terms of the Asset Purchase Agreement in that Defendant has failed to perform the obligations and promises therein by failing to maximize revenues of the products from which the Development Team would have been entitled royalties. 13 64. As a proximate result of Defendant KWI's breach of the Asset Purchase Agreement, Plaintiff, as an intended third party beneficiary, has been injured and damaged, including economic harm and personal injuries related to emotional distress. WHEREFORE, Plaintiff requests that the Court enter judgment against Defendant KWI in favor of Plaintiff for the damages suffered by Plaintiff as a third party beneficiary as a result of Defendants' breach of the Asset Purchase Agreement including damages to compensate him for his economic harm, emotional distress, plus interest at the highest legal rate, court costs and such other relief as the Court deems just and equitable. COUNT V: BREACH OF CONTRACT --------------------------- UNDER IOWA CODE CHAPTER 91A --------------------------- (Employment Contract) 65. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 66. Defendant KWI entered into the Employment Contract with Plaintiff, under the terms of which KWI agreed to pay Plaintiff a bonus of up to $25,000 during his first year of employment with KWI subject to the satisfaction of certain goals to be set by KWI's Senior Vice President. Defendant Addington told Plaintiff that the bonuses were always paid and that Plaintiff would receive the bonus on a quarterly basis. 67. On information and belief, Plaintiff fulfilled the goals and when the bonus came due at the end of the first quarter Plaintiff was told that the bonus would not be paid because of the financial condition of the company. 68. Defendant KWI materially breached the Employment Contract by failing to pay Plaintiff the bonus he was entitled to after the first quarter of his employment. 14 69. Defendant's refusal to pay Plaintiff the bonus owed him was intentional and willful. 70. Defendant's failure to pay Plaintiff the bonus owed to him upon his termination violated Iowa Code Chapter 91A. 71. As a proximate result of Defendant KWI's breach of the Employment Contract, Plaintiff has been injured and damaged, including economic harm and personal injuries related to emotional distress. WHEREFORE, Plaintiff requests that the Court enter judgment against Defendant KWI in favor of Plaintiff for the damages suffered by Plaintiff as a result of Defendants' breach of the Employment Agreement in violation of Iowa Code Chapter 91A including damages to compensate him for his economic harm, emotional distress, plus interest at the highest legal rate, liquidated damages, court costs, attorneys fees and such other relief as the Court deems just and equitable. COUNT VI: TORTIOUS INTERFERENCE WITH BUSINESS RELATIONS ------------------------------------------------------- 72. Plaintiff realleges and incorporates by reference paragraphs 1-35 as though set forth fully herein. 73. Defendants Sterling Software, Sterling Williams, Werner Frank, Don Addington and Fran Tarkenton knew of Plaintiff's contractual relationships with KWI. 74. Defendants intentionally interfered with Plaintiff's contractual relationship with KWI, causing a termination of Plaintiff's relationships with KWI. 75. Defendants interference was improper because it was done for the purpose of depriving Plaintiff of his income, fringe benefits, royalties, stock options and other business 15 expectancies under the Asset Purchase Agreement and Employment Agreement and it was done in retaliation for Plaintiff pursuing litigation against KWI, Addington and Tarkenton. 76. Plaintiff has been damaged as a result of the interference of Defendants, including economic and personal injuries due to emotional distress. 77. Defendants actions were malicious and in reckless disregard of the rights of Plaintiff. WHEREFORE, Plaintiff requests that the Court enter judgment against Defendants in favor of Plaintiff for the compensatory damages and emotional distress suffered by Plaintiff as a result of Defendants' intentional interference, punitive damages, interest at the highest legal rate, court costs and such other relief as the Court deems just and equitable. Respectfully Submitted, /s/ BRENT APPEL / KB --------------------------------------- BRENT R. APPEL, ###-##-#### OF DICKINSON, MACKAMAN, TYLER & HAGEN, P.C. 1600 Hub Tower, 699 Walnut Street Des Moines, Iowa 50309-3986 Telephone: (515) 244-2600 FAX: (515) 246-4550 ATTORNEY FOR PLAINTIFF 16 -----END PRIVACY-ENHANCED MESSAGE-----