<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
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. 1-14196
STERLING COMMERCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2623341
(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 August 8, 1996
- ---------------------------- ---------------------------------------
Common Stock, $.01 par value 75,000,000
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to Financial Statements
Page
----
Sterling Commerce, Inc. Consolidated Balance Sheets at
June 30, 1996 and September 30, 1995................................. 3
Sterling Commerce, Inc. Consolidated Statements of Operations
for the Three and Nine
Months Ended June 30, 1996 and 1995.................................. 4
Sterling Commerce, Inc. Consolidated Statements of
Stockholders' Equity for the Nine Months Ended
June 30, 1996 and 1995............................................... 5
Sterling Commerce, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1996 and 1995..................... 6
Sterling Commerce, Inc. Notes to Consolidated Financial Statements..... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 11
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 16
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STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........... $ 21,706 $ 395
Marketable securities............... 21,428
Accounts and notes
receivable, net.................... 57,059 49,155
Amounts due from Sterling
Software........................... 11,750
Deferred income taxes............... 2,462 3,463
Prepaid expenses and
other current assets............... 4,596 3,041
-------- --------
Total current assets............... 119,001 56,054
Property and equipment,
net of accumulated
depreciation of $26,288
at June 30, 1996 and
$18,943 at September 30, 1995....... 38,315 25,838
Computer software, net of
accumulated amortization
of $40,920 at June 30, 1996
and $34,112 at September 30, 1995... 33,415 32,263
Excess cost over net
assets acquired, net of
accumulated amortization
of $3,407 at June 30,
1996 and $3,087 at
September 30, 1995.................. 9,939 10,259
Other assets......................... 6,868 4,564
-------- --------
$207,538 $128,978
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable and
accrued liabilities............... $ 26,517 $ 21,442
Deferred revenue................... 37,155 30,920
-------- --------
Total current liabilities........ 63,672 52,362
Deferred income taxes............... 21,191 17,749
Other noncurrent
liabilities........................ 6,893 5,680
Stockholders' equity:
Preferred stock, $.01 par
value; 50,000,000 shares
authorized........................
Common stock, $.01 par
value; 150,000,000
shares authorized;
75,000,000 shares issued
and outstanding at June
30, 1996.......................... 750
Additional paid-in capital......... 93,971
Retained earnings.................. 21,061
Stockholder's net
investment........................ 53,187
-------- --------
Total stockholders' equity....... 115,782 53,187
-------- --------
$207,538 $128,978
======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------ -------------------
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Products............................... $22,295 $16,339 $ 60,206 $ 44,616
Product support........................ 14,093 11,872 41,354 33,705
Services............................... 27,384 19,957 72,271 56,747
Royalties from affiliated company...... 5,453 3,469 13,620 7,940
------- ------- -------- --------
69,225 51,637 187,451 143,008
Costs and expenses:
Cost of sales:
Products and product support.......... 6,995 5,893 22,040 16,548
Services.............................. 6,700 4,340 16,907 12,925
------- ------- -------- --------
13,695 10,233 38,947 29,473
Product development and enhancement.... 4,187 3,706 11,252 11,337
Selling, general and administrative.... 27,684 19,284 70,844 53,122
------- ------- -------- --------
45,566 33,223 121,043 93,932
Income before other expense and income
taxes.................................. 23,659 18,414 66,408 49,076
Other income (expense).................. 521 (171) 312 (343)
------- ------- -------- --------
521 (171) 312 (343)
------- ------- -------- --------
Income before income taxes.............. 24,180 18,243 66,720 48,733
Provision for income taxes.............. 9,430 7,297 26,446 19,493
------- ------- -------- --------
Net income.............................. $14,750 $10,946 $ 40,274 $ 29,240
======= ======= ======== ========
Income per common share:
Net income:
Pro forma.............................. $.15 $.40
======= ========
Primary................................ $.19 $.54
======= ========
Fully diluted.......................... $.19 $.53
======= ========
Average common shares outstanding....... 75,000 73,200 73,975 73,200
======= ======= ======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NUMBER ADDITIONAL STOCKHOLDERS' TOTAL
OF PAR PAID-IN RETAINED NET STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS INVESTMENT EQUITY
------- ----- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994........... $ 43,051 $ 43,051
Net income............................. 29,240 29,240
Net cash distributed to Sterling
Software.............................. (25,206) (25,206)
Other.................................. (852) (852)
-------- --------
Balance at June 30, 1995................ $ 46,233 $ 46,233
======== ========
Balance at September 30, 1995........... $ 53,187 $ 53,187
Formation transactions (Note 3)........ 73,200 $732 $53,871 (54,603)
Net proceeds from initial public
offering.............................. 1,800 18 40,100 40,118
Net cash distributed to
Sterling Software..................... (17,819) (17,819)
Net income............................. $21,039 19,235 40,274
Other.................................. 22 22
------- ---- ------- ------- -------- --------
Balance at June 30, 1996................ 75,000 $750 $93,971 $21,061 $115,782
======= ==== ======= ======= ======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30
-------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income............................. $ 40,274 $ 29,240
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 15,833 12,579
Provision for losses on accounts
receivable.......................... 635 335
Provision for deferred income taxes.. 4,443 3,401
Changes in operating assets and
liabilities, net of effect of
business acquisitions:
Increase in accounts and notes
receivable....................... (10,245) (7,977)
Increase in amounts due from
Sterling Software................ (11,750)
(Increase) decrease in prepaids
and other assets................. (1,668) 7
Increase in accounts payable and
accrued liabilities.............. 4,862 5,876
Increase in deferred revenue...... 6,235 5,605
Other............................. 478 (213)
-------- --------
Net cash provided by operating
activities...................... 49,097 48,853
Investing activities:
Purchases of property and equipment.... (18,755) (11,771)
Purchases and capitalized cost of
development of computer software...... (9,286) (8,356)
Business acquisitions, net of cash
acquired.............................. (185) (3,651)
Purchases of investments............... (21,428)
Other................................ 192
-------- --------
Net cash used in investing
activities...................... (49,654) (23,586)
Financing activities:
Net proceeds from stock issuance....... 40,118
Proceeds from the sale of installment
receivables........................... 167 569
Other.................................. (598) (598)
-------- --------
Net cash provided by (used in)
financing activities............ 39,687 (29)
Net cash distributed to Sterling
Software............................... (17,819) (25,206)
-------- --------
Increase in cash and cash equivalents... 21,311 32
Cash and cash equivalents at beginning
of period.............................. 395 379
-------- --------
Cash and cash equivalents at end of
period................................. $ 21,706 $ 411
======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Commerce, 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, 1995 (including the notes thereto), set forth in the Company's Registration
Statement on Form S-1 (No. 33-80595). Certain amounts for periods ended prior to
June 30, 1996 have been reclassified to conform to the current year
presentation. The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from the estimates
used by management in preparation of the financial statements.
Revenue
Revenue from license fees for software products is recognized when the
software is delivered, provided no significant future vendor obligations exist
and collection is probable. 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. Services revenue and revenue
from products involving installation or other services are recognized as the
services are performed. Services revenue earned but not invoiced at the end of a
month is recognized as revenue in such month and recorded as unbilled accounts
receivable until invoiced in the following month. Royalties from affiliated
company represent royalties earned from Sterling Software, Inc. ("Sterling
Software") and certain of its subsidiaries acting as international distributors
of certain of the Company's products outside of the United States and Canada.
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 as
incurred, which approximates ratable expenses over the contract period.
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.
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Cash Equivalents and Marketable Securities
Cash equivalents consist primarily of 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.
Income Taxes
The Company has entered into a tax allocation agreement with Sterling
Software covering the period of time the Company has been and continues to be
included in Sterling Software's consolidated tax returns. (See Note 3 "Initial
Public Offering, Formation Transactions and Proposed Distribution"). The
Company's operations have historically been included in income tax returns filed
by Sterling Software as part of its corporate group. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
returns separately from the Sterling Software group of companies. Deferred taxes
result primarily from the use of accelerated depreciation for tax purposes,
expensing of development costs and the timing of deductions for expenses under
certain employee benefit plans and accrued expenses.
Earnings Per Share
Pro forma net income per common share is calculated as though there were
73,200,000 shares outstanding throughout the periods presented. Net income per
common share is calculated as though there were 73,200,000 shares outstanding,
together with the weighted average of additional shares resulting from the
Offering (as defined below) and common stock equivalents.
Transactions with Affiliated Companies
Amounts payable and receivable from Sterling Software arise as a result of
various transactions between the Company and Sterling Software, including the
Company's participation in Sterling Software's central cash management program,
royalties paid to the Company as a result of Sterling Software and certain of
its subsidiaries acting as international distributors of certain of the
Company's products, tax expense charged to the Company and other expenses
incurred on behalf of the Company.
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.
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3. INITIAL PUBLIC OFFERING, FORMATION TRANSACTIONS AND PROPOSED DISTRIBUTION
Sterling Software incorporated the Company in Delaware as a wholly owned
subsidiary in December 1995. The Company completed its initial public offering
(the "Offering") of 13,800,000 shares of common stock, par value $.01 per share
("Commerce Stock"), on March 13, 1996. Pursuant to the Offering, Sterling
Software sold to the public 12,000,000 of the 73,200,000 shares of Commerce
Stock then owned by it and the Company sold 1,800,000 previously unissued shares
of Commerce Stock. The Offering price was $24 per share of Commerce Stock
resulting in net proceeds to Sterling Software of approximately $267,458,000
after deducting underwriting discounts and commissions and Sterling Software's
pro rata share of Offering expenses. The Offering resulted in net proceeds to
the Company of approximately $40,118,000 after deducting underwriting discounts
and commissions and the Company's pro rata share of Offering expenses.
In contemplation of the Offering, among other things, (i) Sterling Software
caused to be transferred to or merged into the Company all of the subsidiaries
previously comprising Sterling Software's Electronic Commerce Group, (ii)
Sterling Software caused to be transferred to the Company certain assets
relating to the electronic commerce business previously conducted by Sterling
Software's international operations and certain assets relating to the
electronic commerce business previously conducted by Sterling Software's Federal
Systems business segment, and (iii) the Company entered into the contractual
arrangements described below.
Ownership of Commerce Stock
Sterling Software currently owns 61,200,000 shares of Commerce Stock,
constituting 81.6% of the total number of shares of Commerce Stock outstanding.
The Company and Sterling Software have entered into a Stock Registration and
Option Agreement pursuant to which Sterling Software, during the period between
the completion of the Offering and the completion of the proposed Distribution
(as defined below), will have an option to purchase from the Company in one or
more transactions at then-current market prices such number of shares of
Commerce Stock as Sterling Software may determine to be necessary to allow
Sterling Software to continue to include the Company in Sterling Software's
consolidated federal income tax return or to maintain the tax-free nature of the
Distribution. In addition, Sterling Software may engage in open-market purchases
of Commerce Stock.
So long as Sterling Software beneficially owns a majority of the outstanding
Commerce Stock, it will have the ability to elect all of the members of the
Board of Directors of the Company and otherwise control the management and
affairs of the Company. In addition, certain directors and executive officers of
the Company are also directors and executive officers of Sterling Software.
Certain provisions of the Company's Certificate of Incorporation and Bylaws and
of applicable law will also facilitate Sterling Software's ability to exercise
control of the Company.
Proposed Distribution
Sterling Software has announced that it intends to distribute pro rata to
its stockholders as a dividend all of its remaining shares of Commerce Stock by
means of a tax-free distribution (the
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<PAGE>
"Distribution"). The Distribution has been subject to certain conditions,
including approval by Sterling Software's stockholders of both the Distribution
and a new Sterling Software stock option plan and the declaration by Sterling
Software's Board of Directors of a dividend of the shares of Commerce Stock then
owned by Sterling Software. Sterling Software has informed the Company that at
its Annual Meeting of Stockholders held on May 29, 1996, Sterling Software's
stockholders approved the Distribution and the proposed stock option plan.
Sterling Software has also informed the Company that the declaration of the
dividend by the Sterling Software Board to effect the Distribution has not yet
occurred and remains conditioned upon the receipt of a favorable ruling from the
Internal Revenue Service (the "IRS") as to the tax-free nature of the
Distribution and the absence of any change in market conditions or other
circumstances that would cause the Sterling Software Board to conclude that the
Distribution is not in the best interests of the stockholders of Sterling
Software. Sterling Software has informed the Company that it has applied to the
IRS for a ruling as to the tax-free nature of the Distribution, and that
Sterling Software and its advisors believe the ruling request is fully supported
by relevant provisions of federal tax law and that they are not aware of any
impediments to the receipt of a favorable ruling. Further, Sterling Software has
informed the Company that, while it does not control the IRS ruling process and
cannot assure the timing of the ruling, its management continues to believe that
Sterling Software will receive a favorable ruling in time to complete the
Distribution by September 30, 1996. Sterling Software has also advised the
Company that Sterling Software has not determined what action, if any, it would
take if it were not to receive the favorable tax ruling. No assurance can be
given that the Distribution will occur, or that, if it does not receive the
favorable tax ruling, Sterling Software will not sell its shares of Commerce
Stock to reduce its investment in the Company.
In conjunction with the Distribution, the actual number of shares of
Commerce Stock to be distributed with respect to each outstanding share of
Sterling Software common stock, par value $.10 per share ("Software Stock"),
will depend upon the number of shares of Software Stock outstanding on the
record date established by the Sterling Software Board and the number of shares
of Commerce Stock owned by Sterling Software on such record date.
Contractual Arrangements with Sterling Software
In anticipation of the Offering, and in view of Sterling Software's
intention to undertake the Distribution, the Company and Sterling Software
entered into a number of agreements. These agreements, which became effective
upon the completion of the Offering, include a Services Agreement, a Space
Sharing Agreement, a Data Processing Agreement, a Tax Allocation Agreement, an
International Marketing Agreement, a Master Software License Agreement, an
Indemnification Agreement and a Stock Registration and Option Agreement. As a
result of Sterling Software's ownership interest in the Company, the terms of
such agreements were not, and the terms of any future amendments to those
agreements may not be, the result of arm's-length negotiation. The Company has
been advised by Sterling Software that it intends that, for as long as Sterling
Software beneficially owns a majority of the outstanding Commerce Stock, the
terms of any future transactions and agreements between the Company and Sterling
Software or its affiliates will be at least as favorable to the Company as could
be obtained from third parties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Total revenue increased $17,588,000, or 34%, in the third quarter of 1996
over the same period of 1995 due to a 36% increase in products revenue, a 19%
increase in product support revenue, a 37% increase in services revenue and a
57% increase in royalties from Sterling Software's international operations. The
increase in products revenue is primarily the result of increased sales of
communications and interchange software products. Approximately 58% of the
Company's total software revenue was derived from platforms other than stand-
alone mainframes. This compares with 40% in the third quarter of 1995. Product
support revenue increased primarily as a result of an increase in the installed
customer base across all product lines. The increase in services revenue is
primarily due to an increase in the network services customer base and increases
in the processing volume for existing customers. The increase in royalties
revenue is the result of an increase in product sales and product support
outside of the United States and Canada.
Total costs and expenses increased $12,343,000, or 37%, on revenue growth of
34%, primarily due to an increase in selling, general and administrative
expense. Cost of goods sold increased $3,462,000, or 34%, when compared with the
same period of last year primarily due to increases in network service costs.
These increases are the result of an increase in network service activity. In
addition, cost of sales increased commensurately with higher levels of products,
product support and services revenue.
Product development and enhancement expense of $4,187,000 for the third
quarter of 1996 is net of $3,048,000 of capitalized software development costs.
This compares to product development and enhancement expense of $3,706,000 for
the third quarter of 1995, which is net of $2,851,000 of capitalized software
development costs for the same period. Total software development costs
capitalized during the third quarter of 1996 and 1995 represent 42% and 43% of
total product development and enhancement expense for the quarter ended June 30,
1996 and 1995, respectively. Software amortization expense is $2,371,000 and
$2,434,000 for the third quarter of 1996 and 1995, respectively.
Selling, general and administrative expense increased $8,400,000, or 44%,
primarily due to an increase in sales, marketing and customer support activities
needed to support the revenue growth as well as an increase in expenses due to
the expansion of international sales, marketing and customer support activities.
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
Total revenue increased $44,443,000, or 31%, in the first nine months of
1996 over the same period of 1995 due to a 35% increase in products revenue, a
23% increase in product support revenue, a 27% increase in services revenue and
a 72% increase in royalties from
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Sterling Software's international operations. The increase in products revenue
is primarily the result of increased sales of communications and interchange
software products. Approximately 56% of the Company's total software revenue was
derived from platforms other than stand-alone mainframes. This compares with 41%
in the first nine months of 1995. Product support revenue increased primarily as
a result of an increase in the installed customer base across all product lines.
The increase in services revenue is primarily due to an increase in the network
services customer base and increases in the processing volume for existing
customers. The increase in royalties revenue is the result of an increase in
product sales and product support outside of the United States and Canada.
Total costs and expenses increased $27,111,000, or 29%, on revenue growth of
31%, primarily due to an increase in selling, general and administrative
expense. Cost of goods sold increased $9,474,000, or 32%, when compared with the
same period of last year primarily due to increases in network service costs.
These increases are the result of an increase in network service activity. In
addition, cost of sales increased commensurately with higher levels of products,
product support and services revenue.
Product development and enhancement expense of $11,252,000 for the first
nine months of 1996 is net of $8,789,000 of capitalized software development
costs. This compares to product development and enhancement expense of
$11,337,000 for the first nine months of 1995, which is net of $7,279,000 of
capitalized software development costs for the same period. Total software
development costs capitalized during the first nine months of 1996 and 1995
represent 44% and 39% of total product development and enhancement expense for
the nine months ended June 30, 1996 and 1995, respectively. Software
amortization expense is $7,273,000 and $6,691,000 for the first nine months of
1996 and 1995, respectively.
Selling, general and administrative expense increased $17,722,000, or 33%,
primarily due to an increase in sales, marketing and customer support activities
needed to support the revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
On March 13, 1996, the Company issued and sold 1,800,000 shares of Commerce
Stock in the Offering for net proceeds, after deducting underwriting discounts
and commissions and the Company's pro rata share of Offering expenses, of
$40,118,000. Prior to the completion of the Offering, all cash in excess of the
Company's daily cash requirements was transferred to Sterling Software pursuant
to Sterling Software's centralized cash management system, which was terminated
as to the Company as of the close of business on March 12, 1996. Sterling
Software continues to provide cash management services to the Company on an
interim basis pursuant to the services agreement ("the Services Agreement")
(which will automatically terminate on the occurrence of the Distribution and is
otherwise terminable by either party on or after September 30, 1996). The
Services Agreement provides, among other things, for (i) Sterling Software to
advance to the Company funds sufficient to meet its daily cash requirements and
(ii) the Company to advance to Sterling Software all cash generated by the
Company (other than the net proceeds of the Offering) in excess of the Company's
daily cash requirements. At June 30, 1996,
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outstanding net advances by the Company to Sterling Software under the Services
Agreement totaled $11,750,000.
The Company had $55,329,000 of working capital at June 30, 1996, including
$21,706,000 of cash and cash equivalents and $21,428,000 of marketable
securities. Approximately $40,118,000 of the cash and cash equivalents and
marketable securities resulted from the net proceeds of the Offering. Days sales
outstanding, measured on a quarterly basis, increased slightly from 80 days for
the quarter ended March 31, 1996 to 81 days for the quarter ended June 30, 1996.
Net cash flows from operations increased $244,000 to $49,097,000 in the first
nine months of 1996 as compared to the first nine months of 1995, primarily due
to higher operating profits and higher non-cash charges, offset, in part, by
amounts due from affiliate and an increase in accounts and notes receivable.
Cash flows from operations, to the extent not distributed to Sterling Software,
were used to fund operations and capital expenditures, including capitalized
software. Property and equipment purchases of $18,755,000 in the first nine
months of 1996 include purchases made for equipment upgrades for network
processing systems and computer equipment purchases to support the continuing
growth in revenue.
At June 30, 1996, the Company's capital resource commitments consisted of
commitments under lease arrangements for office space and equipment. The Company
intends to meet such obligations from internally generated funds and available
cash balances. No significant commitments exist for future capital expenditures.
The Company believes available balances of cash and cash equivalents combined
with cash flows from operations are sufficient to meet the Company's cash
requirements for the foreseeable future.
The Company's business strategy includes the selective acquisition of
products and businesses to facilitate the expansion of its operations. Such
acquisitions, if any, are expected to be funded from cash on hand, cash from
operations, issuance of Company securities, bank borrowings or other capital
markets transactions or a combination of one or more of the foregoing.
OTHER MATTERS
Demand for many of the Company's products tends to increase with increases
in the rate of inflation as customers strive to improve 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 prices for products and services.
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's acquisition strategy contributes in part to the Company's
growth in revenue and operating profit. The impact of future acquisitions on
continued growth in revenue and operating profit cannot presently be determined.
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FORWARD-LOOKING INFORMATION
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management. When used in SEC Filings, the words "anticipate," "contemplate,"
"estimate," "expect," "future," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
inherent uncertainties, including, in addition to any uncertainties specifically
identified in the text surrounding such statements, the uncertainties described
under the caption "Risk Factors" or elsewhere in the Company's Registration
Statement on Form S-1 (No. 33-80595). Such statements are also subject to
various uncertainties with respect to changes or developments in social,
economic, business, industry, market, legal and regulatory circumstances and
conditions and actions taken or omitted to be taken by third parties, including
the Company's stockholders, customers, suppliers, business partners and
competitors, and legislative, regulatory, judicial and other governmental
authorities and officials. Consequently, actual events, circumstances,
consequences, effects and results may vary significantly from those described in
or contemplated by such forward-looking statements and information.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on May 30, 1996, at which
the stockholders of the Company voted on and approved the Sterling Commerce,
Inc. 1996 Stock Option Plan.
The vote was as follows:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
68,413,451 4,713,677 13,900 0
-15-
<PAGE>
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:
3(a) - Third Amended and Restated Certificate of Incorporation of
the Company filed March 4, 1996 (1)
3(b) - Amended and Restated Bylaws of the Company as of February 12,
1996 (1)
11 - Computation of Earnings Per Share (2)
27 - Financial Data Schedule (2)
(b) Reports on Form 8-K.
During the three months ended June 30, 1996, the Company filed a
Current Report on Form 8-K dated May 29, 1996 reporting information under
Item 5.
_______________
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-80595 on Form S-1 and incorporated herein by reference.
(2) Filed herewith.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING COMMERCE, INC.
Date: August 13, 1996 /s/ Sterling L. Williams
-----------------------------------------------------
Sterling L. Williams
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: August 13, 1996 /s/ Jeannette P. Meier
-----------------------------------------------------
Jeannette P. Meier
Executive Vice President, Chief Financial
Officer and General Counsel
(Principal Financial and Accounting Officer)
-17-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3(a) - Third Amended and Restated Certificate of Incorporation of the
Company filed March 4, 1996 (1)
3(b) - Amended and Restated Bylaws of the Company as of February 12, 1996
(1)
11 - Computation of Earnings Per Share (2)
27 - Financial Data Schedule (2)
_______________
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-80595 on Form S-1 and incorporated herein by reference.
(2) Filed herewith.
-18-
<PAGE>
EXHIBIT 11
STERLING COMMERCE, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Primary:
Average shares outstanding.............. 75,000 73,975
Net effect of dilutive stock
options--based on the treasury stock
method using average market price...... 2,554 1,204
------- -------
Total................................... 77,554 75,179
======= =======
Net income.............................. $14,750 $40,274
======= =======
Per share amount........................ $ .19 $ .54
======= =======
Fully diluted:
Average shares outstanding.............. 75,000 73,975
Net effect of dilutive stock
options--based on the treasury stock
method using ending market price....... 2,630 1,338
------- -------
Total................................... 77,630 75,313
======= =======
Net income.............................. $14,750 $40,274
======= =======
Per share amount........................ $ .19 $ .53
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIERTY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 21,706
<SECURITIES> 21,428
<RECEIVABLES> 57,059
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 119,001
<PP&E> 64,603
<DEPRECIATION> 26,288
<TOTAL-ASSETS> 207,538
<CURRENT-LIABILITIES> 63,672
<BONDS> 0
0
0
<COMMON> 750
<OTHER-SE> 115,032
<TOTAL-LIABILITY-AND-EQUITY> 207,538
<SALES> 187,451
<TOTAL-REVENUES> 187,451
<CGS> 38,947
<TOTAL-COSTS> 121,043
<OTHER-EXPENSES> (312)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 66,720
<INCOME-TAX> 26,446
<INCOME-CONTINUING> 40,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,274
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
