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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-14196
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STERLING COMMERCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2623341
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 891-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 Par Value New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 15, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $2,087,008,048 based on the closing
sales price of $28 7/8 of the Registrant's Common Stock on the New York Stock
Exchange.
As of November 15, 1996, 75,000,000 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the Registrant to
be held during 1997 are incorporated by reference in Part III.
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STERLING COMMERCE, INC.
TABLE OF CONTENTS
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FORM 10-K ITEM PAGE
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PART I.
Item 1. Business................................................ 1
Item 2. Properties.............................................. 9
Item 3. Legal Proceedings....................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..... 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 10
Item 6. Selected Financial Data................................. 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
Item 8. Financial Statements and Supplementary Data............. 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 30
PART III.
Item 10. Directors and Executive Officers of the Registrant...... 30
Item 11. Executive Compensation.................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 30
Item 13. Certain Relationships and Related Transactions.......... 30
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 31
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Sterling Commerce, Inc. (the "Company") was incorporated in December 1995 as
a subsidiary of Sterling Software, Inc. ("Sterling Software"). The Company
completed its initial public offering (the "Offering") on March 13, 1996.
Pursuant to the Offering, the Company sold to the public 1,800,000 previously
unissued shares of Common Stock, $0.01 par value, of the Company ("Commerce
Stock"), and Sterling Software sold to the public 12,000,000 of the 73,200,000
shares of Commerce Stock then owned by it.
In contemplation of the Offering, among other things: (i) Sterling Software
caused to be transferred to the Company certain assets relating to the
electronic commerce business previously conducted by Sterling Software, and
(ii) the Company entered into contractual arrangements with Sterling Software
related to, among other things, tax allocation, international marketing,
indemnification, space sharing and certain services. See "Shared Management
and Contractual Arrangements with Sterling Software".
On September 23, 1996, the Board of Directors of Sterling Software declared
a special dividend consisting of the distribution (the "Distribution") of all
shares of Commerce Stock held by Sterling Software on September 30, 1996,
payable pro rata to the holders of record of Sterling Software's common stock,
$0.10 par value ("Software Stock"), as of the close of business on such date.
As a result, effective September 30, 1996, the Company ceased to be a
subsidiary of Sterling Software.
GENERAL
The Company is a provider of electronic data interchange ("EDI") and other
electronic commerce ("EC") products, services and solutions worldwide. The
Company develops, markets and supports electronic commerce software products,
and provides electronic commerce services, that enable businesses to engage in
business-to-business electronic communications and transactions. The Company
has been providing electronic commerce solutions for over 20 years and has
numerous customers in industries such as banking, pharmaceuticals and
retailing.
A successful electronic commerce program requires the use of multiple
technologies and solutions. The Company offers a comprehensive range of
electronic commerce products and services for the electronic commerce market.
The Company continually strives to: (i) understand the business requirements
of the global electronic commerce market, (ii) address these requirements with
flexible, reliable and secure electronic commerce solutions, and (iii) deliver
these solutions in an effective and efficient manner. The Company believes
that many of today's businesses operate as extended enterprises that include
an entity's divisions, plant sites and sales offices. The extended enterprise
also includes close partnering relationships with customers, suppliers,
lenders and other trading partners. Reliable and secure communications
software is the foundation for transacting business electronically. Upon this
foundation, solutions are provided for messaging management, data translation,
network services and automated payment integration. The Company provides all
of these elements of electronic commerce, plus others, to support the extended
enterprise.
The Company operates through five separate groups. The Commerce Services
Group, the Interchange Software Group, the Communications Software Group and
the Banking Systems Group each offers distinct families of products and
services in the United States and Canada. The Company's fifth group, the
International Group, markets electronic commerce services outside of the
United States and Canada. The Company believes that its decentralized
organizational structure promotes operating flexibility, improves
responsiveness to customer requirements and focuses management on achieving
revenue and profit objectives.
A majority of the Company's software customers enter into product support
agreements and renew such agreements upon expiration. Moreover, although most
network services agreements are cancelable upon 30 days' notice, the Company's
experience is that once customers initiate use of the Company's network
services, they
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generally continue to use such services. Accordingly, the Company considers
revenue from product support and network services as recurring revenue.
Recurring revenue represented 57% and 59% of the Company's total revenue in
1996 and 1995, respectively.
PRODUCTS AND SERVICES
The Company offers four principal families of software products and
services.
The COMMERCE family offers over a dozen service and software solutions to
facilitate the electronic exchange of business transactions and documents.
Serving businesses in many different industries, COMMERCE:Network provides an
electronic messaging system with mailbox facilities to accommodate the
exchange of EDI documents, electronic business forms, e-mail messages and
attachments and the posting of technical or reference data. All of the most
commonly used protocols for EDI and e-mail exchanges are accepted by
COMMERCE:Network. Along with many standard services, COMMERCE:Network offers
value-added services that help companies conduct business electronically with
their trading partners. These services include the programs that assist
companies in implementing electronic commerce with their trading partners;
strategic consulting to help define electronic commerce solutions that address
a company's needs; and shared applications to help trading communities and
companies to leverage common applications. Other value-added services include
extended customer support, product training and education. Software products
include COMMERCE:Connection, a Windows-based suite of products that provides
integrated access to a full range of electronic commerce services including
EDI, e-mail, file transfer and electronic libraries. With COMMERCE:Connection,
a company can communicate many types of business documents electronically from
CAD/CAM drawings to trading partner policies to price lists. This product can
also be used to relay business transactions, distribute software and collect
sales and database information. The Commerce Services' products and services
are marketed into targeted vertical industry groups which include the primary
markets of pharmaceuticals, hardlines, grocery, healthcare, insurance, retail,
train-truck-ship transportation, automotive, entertainment,
telecommunications, chemical and petroleum, paper and packaging, banking and
government. As of September 30, 1996, there were over 13,600 Commerce Services
customer sites worldwide.
The GENTRAN family of products offers software solutions for electronic
commerce gateway messaging and EDI translation. GENTRAN software automates the
flow of internal business transactions within organizations and between
organizations and their customers and suppliers. GENTRAN translators and
intelligent messaging servers are available for the major operating systems
and platforms such as UNIX, Windows, Windows NT, AS/400 and IBM mainframes.
GENTRAN was designed for high-volume, commercial traffic and supports any-to-
any formatted message exchange ("FME") across platforms. This makes GENTRAN an
excellent tool for linking disparate applications and for the intelligent
dissemination of information received via the World Wide Web (the "Web"). The
GENTRAN family of products is packaged into three categories of electronic
commerce business solutions: EDI Complete, for companies that need plug-and-
play EDI with expert consultants to assist them through the start-up process;
EC Messaging Gateway or EC Gateway for the Internet, for companies who need a
full electronic commerce solution that integrates with core enterprise
applications; and, EC Desktop Solutions, for those who want to supply vendors,
customers or distributors with push-button, EDI-enabled applications that make
it easy to do business with their trading partners. Key products include
GENTRAN:Server, a sophisticated electronic commerce gateway that recognizes,
manages and routes all types of business messages; GENTRAN:Director for
Windows-based EDI processing; GENTRAN:Mentor, which uses expert systems
technology and graphical navigation to fully automate EDI mapping; and
GENTRAN:Basic, the base EDI translation product for the mainframe, AS/400 and
HP3000 platforms, that translates data from internal formats into standard
formats for EDI processing. GENTRAN products were installed at over 3,900
customer sites as of September 30, 1996.
The CONNECT family of software products is a complete suite of automated
file transfer and communications management solutions that support a wide
variety of protocols. The CONNECT family of products provides an enterprise-
wide solution that integrates seamlessly with existing operations and supports
the addition of new applications, databases, hardware and software. These
products offer prompt access to
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information and the highest levels of security for a company's computer data
and network. CONNECT:Direct is primarily used to move large volumes of data
with a focus on high performance, security, reliability and intelligent
automation. CONNECT:Direct addresses the information needs of electronic
commerce between internal departments and offices and external customer and
client locations. CONNECT:Mailbox is used primarily to move information
between companies with a focus on wide connectivity. The software works
independently of applications, platforms and protocols, and provides open
connections throughout the network to any host, midrange or remote workstation
or value-added network. CONNECT products were installed at over 2,500 customer
sites as of September 30, 1996.
The VECTOR family of products enables banks to provide to their corporate
customers integrated trade-payment processing services for both paper-based
check payments and electronic payments. VECTOR:Connexion provides financial
EDI payment services. VECTOR:Banker provides PC-based cash management and
electronic payment software for medium and small sized banks. The VECTOR
products also automate several key functions in banks, including item
processing applications such as statement sorting, research and adjustments,
check fraud control, electronic check presentment, return item processing and
signature verification. Approximately 2,000 VECTOR systems have been installed
at approximately 830 customer sites worldwide, including 99 of the top 100
U.S. banks, as ranked by deposits as of December 31, 1995 in American Banker
magazine.
The Company provides a wide range of solutions that enable enterprises to
conduct business electronically over the Internet in a safe, reliable
environment. The GENTRAN family of products provides two Web based products:
GENTRAN:Server with the Weblink module, designed for commercial-grade,
business-to-business transactions over the Web; and, GENTRAN:Server with the
Microsoft Merchant Server extension, designed for message management for
companies reaching consumers on the Web. Both products track, route and
reformat messages between an enterprise's Web server and its internal
applications. Additional Internet-based services include a customized home
page creation and hosting service, and the Internet Partners Program, designed
to help companies combine Internet technology with their existing electronic
commerce systems. CONNECT:Firewall provides multiple security capabilities to
Internet users as well as to other network environments, and
COMMERCE:Connection allows easy Internet protocol ("IP") connectivity to
COMMERCE:Network and Web-based forms applications. COMMERCE:Connection for the
Internet includes the Microsoft Internet Explorer browser and Internet access
capability.
SHARED MANAGEMENT AND CONTRACTUAL ARRANGEMENTS WITH STERLING SOFTWARE
Management
The Board of Directors of the Company (the "Board") currently has seven
members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are directors
of the Company and are also directors of Sterling Software. Mr. Sterling L.
Williams serves as Chairman of the Board of the Company and as President and
Chief Executive Officer and a member of the Board of Directors of Sterling
Software. In addition, Jeannette P. Meier serves as Executive Vice President,
Chief Financial Officer, General Counsel and Secretary of both companies and
Phillip A. Moore serves as an Executive Vice President of both companies.
Neither the length of service for any particular individual nor the capacity
or capacities in which he or she may serve either the Company or Sterling
Software (or both) has been determined as of the date of this report.
The Company and Sterling Software have significant contractual and other
ongoing relationships as discussed below under "Intercompany Agreements."
Conflicts of interest may arise between the Company and Sterling Software in a
number of areas relating to such ongoing relationships, including potential
competitive business activities, international marketing functions, tax and
employee benefit matters, indemnity arrangements, and the continued service of
certain directors and executive officers of each of the Company and Sterling
Software as directors and executive officers of the other company. The Board
will utilize such procedures in evaluating the terms and provisions of any
material transactions between the Company and Sterling Software and their
respective affiliates as the Board may determine appropriate in light of its
fiduciary duties under state law.
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Intercompany Agreements
In anticipation of the Offering, the Company and Sterling Software entered
into a number of agreements (the "Intercompany Agreements") for the purpose of
defining certain relationships between them. Certain of the more significant
Intercompany Agreements are summarized below. As a result of Sterling
Software's ownership interest in the Company, the terms of such agreements
were not the result of arm's-length negotiation. Copies of certain of the
Intercompany Agreements, including those described below, have been filed as
exhibits to this report.
Tax Allocation Agreement. The Company and Sterling Software have entered
into a tax allocation agreement (the "Tax Allocation Agreement") to provide
for (i) the allocation of payments of taxes for periods during which Sterling
Software (or any of its affiliates other than the Company and its
subsidiaries) and the Company or any of its subsidiaries are included in the
same consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state, local or foreign tax
purposes, (ii) the allocation of responsibility for the filing of tax returns,
(iii) the conducting of tax audits and the handling of tax controversies, and
(iv) various related matters. For periods during which the Company and/or its
subsidiaries are included in Sterling Software's consolidated federal income
tax returns or consolidated, combined or unitary state tax returns (which
periods include the period between the Offering and the Distribution), the
Company is required to pay to or is entitled to receive from Sterling Software
its allocable portion of the consolidated federal and state income tax
liability or refunds, respectively. The Company is directly responsible for
separate state, local and foreign tax returns and related liabilities for
itself and its subsidiaries for all periods.
International Marketing Agreement. A subsidiary of each of the Company and
Sterling Software have entered into a marketing and services agreement
pursuant to which Sterling Software acts as the exclusive distributor
(directly and through subdistributors) of the Company's GENTRAN and CONNECT
software products in markets outside the United States and Canada and is
responsible for sales, marketing and first level support of such products in
those markets. The International Marketing Agreement, which expires in March
1999, provides for the payment to the Company of royalties equal to 50% of the
net revenue that Sterling Software derives from licenses of the Company's
GENTRAN and CONNECT software products and related product support services,
with the balance of such net revenue to be retained by Sterling Software as
payment for the services provided by it under the International Marketing
Agreement. The International Marketing Agreement obligates Sterling Software
to use efforts in the marketing of the Company's software products and the
provision of related services comparable to those used by Sterling Software in
connection with the marketing of its own products and services. Although it is
not anticipated that products and services offered by Sterling Software will
be directly competitive with the products and services offered by it on behalf
of the Company, the International Marketing Agreement does not expressly
prohibit Sterling Software from offering such products and services (subject
to the obligations described in the preceding sentence).
Indemnification Agreement. The Company and Sterling Software have entered
into an indemnification agreement (the "Indemnification Agreement"). Under the
Indemnification Agreement, subject to limited exceptions, the Company is
required to indemnify Sterling Software and its directors, officers,
employees, agents and representatives for liabilities under federal or state
securities laws as a result of the Offering or the Distribution. The
Indemnification Agreement also provides that each party thereto (the
"Indemnifying Party") will indemnify the other party thereto and its
directors, officers, employees, agents and representatives (each, an
"Indemnified Party") for liabilities that may be incurred by an Indemnified
Party relating to, resulting from or arising out of (i) the businesses,
operations or assets conducted or owned or formerly conducted or owned by the
Indemnifying Party and its subsidiaries (except, in the case where Sterling
Software is the Indemnifying Party, the businesses, operations and assets of
the Company and its subsidiaries) or (ii) the failure by the Indemnifying
Party to comply with any other agreements executed in connection with the
Offering. In addition, the Indemnification Agreement and a subsequent
agreement between the Company and Sterling Software provide that the Company
will indemnify Sterling Software and its directors, officers, employees,
agents and representatives for any liabilities resulting from or arising out
of certain acts, failures to act or the provision of incorrect factual
information by the Company in connection with the Internal Revenue Service
("IRS") ruling request that cause the Distribution to be taxable to Sterling
Software or its stockholders.
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The Indemnification Agreement also provides that each party thereto (the
"Obligor Party") (i) will use reasonable efforts to obtain the release of the
other party thereto (the "Guarantor Party") from its obligation under or in
respect of all material guarantees, surety and performance bonds, letters of
credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for
any liabilities incurred under such guarantees, bonds, letters of credit and
other arrangements, and (iii) will reimburse the Guarantor Party for its
direct costs (or, in certain circumstances, the Obligor Party's pro rata share
of such direct costs) of maintaining such guarantees, bonds, letters of credit
and other arrangements pending the release of the Guarantor Party thereunder.
EMPLOYEES
The Company's business is dependent upon its ability to attract and retain
highly qualified managerial, technical and sales personnel, who are in limited
supply. The Company's operations could be adversely affected if it were to
lose the services of a significant number of qualified employees or if it were
unable to obtain additional qualified personnel when needed. To attract and
retain qualified employees, the Company strives to maintain excellent employee
relations, attractive office facilities and challenging working environments,
and offers competitive compensation and benefits packages . None of the
Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its employee relations to be
excellent.
At September 30, 1996, the Company employed approximately 1,266 full-time
employees.
SALES AND MARKETING
Each of the Company's Commerce Services, Interchange Software,
Communications Software and Banking Systems Groups has its own sales and
marketing organizations. These organizations license and market the Company's
products and services in the United States and Canada through a combination of
direct sales, telesales and telemarketing. The Company's International Group,
headquartered in Paris, France, markets electronic commerce services outside
the United States and Canada, primarily in Europe (directly and through
distributors). The Company's Banking Systems Group markets its software
products and product support services worldwide. The Company has implemented a
comprehensive, performance-based system of sales commissions, awards and
recognition designed to compensate and motivate its sales force.
Pursuant to an agreement with Sterling Software, Sterling Software acts as
the exclusive distributor (directly and through subdistributors) of the
Company's GENTRAN and CONNECT software products in markets outside the United
States and Canada and is responsible for sales, marketing and first level
support of such products in those markets. Sterling Software presently
maintains offices throughout Europe and in Tokyo, Japan and Sydney, Australia
and has relationships with agents and distributors in Asia (other than Japan),
Central and South America, Eastern Europe, the Middle East, Mexico and South
Africa.
CUSTOMERS
The Company's customers include 96 of the 100 largest U.S. industrial
corporations, as ranked by 1995 sales in Fortune magazine, and 99 of the top
100 U.S. commercial banks, as ranked by deposits as of December 31, 1995, in
American Banker magazine.
PRODUCT LICENSES AND PRODUCT SUPPORT
The Company's software products are licensed for perpetual use or for a
fixed term. The Company typically does not sell or otherwise transfer title to
its software products. The license agreements generally restrict the use of
the product to designated sites or central processing units and prohibit
reproduction, transfer or disclosure of the product. However, some license
agreements may cover multiple sites or multiple central processing units at
one site.
In addition to licensing the use of its software products to its customers,
the Company also often sells product support services to its customers.
Typically, the Company provides these services pursuant to product support
agreements having terms ranging generally from one to three years. The
Company's product support agreements allow customers to receive updated or
enhanced versions of the Company's software products as they become available
and also allows telephone access to the Company's technical personnel.
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PRODUCT DEVELOPMENT
The Company's product development strategy is to enhance existing products
and to introduce new products based upon current and anticipated customer
needs. In addition, the Company has made a number of acquisitions to expand
the array of products and services available to its customers.
Each of the Company's Commerce Services, Interchange Software,
Communications Software and Banking Systems Groups performs its own product
development function. Each group's development lab operates as a profit
center, with revenues derived from royalties earned on products sold in the
domestic and international markets. The Company believes that this
organizational structure facilitates development cost control and focuses the
development function on customer needs. Gross product development costs in
1996, 1995 and 1994 were $27,800,000 $24,900,000 and $21,700,000,
respectively, of which the Company capitalized $12,300,000 $10,100,000 and
$9,200,000, respectively, as the cost of developing and testing new or
significantly enhanced software products. Product development expense and the
capitalization rate may fluctuate from period to period depending, in part,
upon the number and status of software development projects in process.
The Company's disciplined approach to product development includes, among
other things, evaluating anticipated customer needs, analyzing the cost of
developing new products versus the cost of acquiring new products and
analyzing anticipated revenues from new and enhanced products. For example,
the Company may seek to acquire an existing product or to acquire a company
that owns an existing product rather than develop the product internally, and
in other instances the Company may contract with a third-party developer to
develop the product on the Company's behalf. Because of these and other
factors, the Company is unable to estimate future product development costs.
COMPETITION
The electronic commerce software product and services industry is very
competitive. Numerous companies supply electronic commerce products and
services, and several competitors target specific customer requirements for
which the Company presently is, or is seeking to become, a provider. The
Company's competitors include both large companies with substantially greater
resources than the Company and small specialized companies that may compete
effectively in a specific market niche. The Company may in the future
experience increased competition from telecommunications companies such as
AT&T Corp. and various regional telecommunications companies, among others.
The Company also competes with internal programming staffs of businesses, some
of which are capable of developing products similar to those offered by the
Company.
The Company believes that its ability to compete successfully in the
electronic commerce industry depends on numerous factors, both within and
outside its control, including product performance, functionality and
reliability, price and customer service and support. The Company's strategy is
to offer total solutions, including sophisticated interchange and
communication software, software solutions for financial electronic commerce
and bank automation, reliable network services and other value-added services
designed to meet the needs of the various segments of the electronic commerce
market. The Company seeks to differentiate itself through superior products
and services, its reputation for quality and value and its ability to respond
quickly and efficiently to the changing needs of its electronic commerce
customers.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright, patent and
trademark laws, confidentiality procedures and contractual provisions to
protect its intellectual property rights. The Company routinely enters
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into non-disclosure and confidentiality agreements with employees,
contractors, consultants and customers. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent
as the laws of the United States. However, the Company believes that, due to
the rapid pace of innovation within the electronic commerce industry, factors
such as the technological and creative skills of its personnel are more
important in establishing and maintaining a leadership position within this
industry than are the various legal protections afforded its technology.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties in any material respect. Licenses for a
number of software products have been granted to the Company for its own use
or for remarketing to its customers. In the aggregate, these licenses are
material to the business of the Company, but the Company believes that the
loss of any one of these licenses would not materially affect the Company's
results of operations or financial position.
The COMMERCE, GENTRAN, CONNECT and VECTOR families of product names used
herein are registered or unregistered trademarks owned by the Company.
EXECUTIVE OFFICERS
The following information regarding the executive officers of the Company is
as of November 15, 1996.
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Sterling L. Williams 53 Chairman of the Board
Warner C. Blow 59 President and Chief Executive Officer; Director
Jeannette P. Meier 49 Executive Vice President, Chief Financial Officer and General Counsel
Phillip A. Moore 54 Executive Vice President
William W. Hymes 60 Senior Vice President and Group President
Paul L. H. Olson 46 Senior Vice President and Group President
Stephen R. Perkins 52 Senior Vice President and Group President
J. Brad Sharp 39 Senior Vice President and Group President
Thomas A. Lutz 56 Vice President and Group President
Albert K. Hoover 36 Vice President, Legal
James W. Hoyt 49 Vice President, Technology
Steven P. Shiflet 49 Vice President, Finance
Dawn Wheeler 37 Vice President, Investor Relations
G. Clark Woodford 49 Vice President, Business Development
John Blaine 34 Controller
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Sterling L. Williams has served as Chairman of the Board of the Company and
a director since December 1995 and served as Chief Executive Officer of the
Company from December 1995 until October 1996. Mr. Williams co-founded
Sterling Software in 1981, and since such time has served and continues to
serve as President, Chief Executive Officer and a director of Sterling
Software. Mr. Williams also currently serves as a director of INPUT, an
information technology market research company. Mr. Williams is a member of
the Executive Committee and the Stock Option Committee of the Board.
Warner C. Blow has served as Chief Executive Officer and a director of the
Company since October 1996 and as President since December 1995. From December
1995 until October 1996, Mr. Blow also served as Chief Operating Officer of
the Company. Prior to December 1995, Mr. Blow served as President of Sterling
Software's Electronic Commerce Group (the predecessor of the Company) from
July 1993 and as an Executive Vice President of Sterling Software from October
1989. Prior to July 1993, Mr. Blow also served as President of Sterling
Software's former EDI Group.
Jeannette P. Meier has served as Chief Financial Officer since June 1996 and
Executive Vice President, General Counsel and Secretary of the Company since
December 1995. Ms. Meier has served and continues to
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serve as Chief Financial Officer (since June 1996), Executive Vice President
(since July 1993) and General Counsel and Secretary (since 1985) of Sterling
Software. Prior to July 1993, Ms. Meier also served as Senior Vice President
of Sterling Software.
Phillip A. Moore has served as Executive Vice President of the Company since
December 1995. Mr. Moore co-founded Sterling Software in 1981 and since such
time has served and continues to serve as a director of Sterling Software. Mr.
Moore has served and continues to serve as an Executive Vice President of
Sterling Software since December 1994. From July 1993 until December 1994, Mr.
Moore served as Executive Vice President, Technology of Sterling Software.
Prior to July 1993, Mr. Moore served as Senior Vice President, Technology of
Sterling Software.
William W. Hymes has served as Senior Vice President and Group President of
the Company since December 1995. Prior to March 1996, Mr. Hymes served as
President of the Banking Systems Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from July 1993. Prior to July
1993, Mr. Hymes served as President of the former Directions Division of
Sterling Software.
Paul L. H. Olson has served as Senior Vice President and Group President of
the Company since December 1995. Prior to March 1996, Mr. Olson served as
President of the Network Services Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from August 1992. Prior to
August 1992, Mr. Olson served as Group Vice President of Business Development
for Sterling Software's former EDI Group.
Stephen R. Perkins has served as Senior Vice President and Group President
of the Company since December 1995. Prior to March 1996, Mr. Perkins served as
President of the Communications Software Division of Sterling Software's
Electronic Commerce Group (the predecessor of the Company) from July 1993.
Prior to July 1993, Mr. Perkins served as Vice President of Development for
Systems Center, Inc., a computer software company that was acquired by
Sterling Software in July 1993.
J. Brad Sharp has served as Senior Vice President and Group President of the
Company since December 1995. Prior to March 1996, Mr. Sharp served as
President of the Interchange Software Division of Sterling Software's
Electronic Commerce Group (the predecessor of the Company) from August 1992.
Prior to August 1992, Mr. Sharp served as Vice President of Development of
Sterling Software's former EDI Labs Division.
Thomas A. Lutz has served as Vice President and Group President of the
Company since December 1995. Prior to March 1996, Mr. Lutz served as President
of Sterling Software's Creative Data Systems Division from October 1991. Prior
to October 1991, Mr. Lutz served as Executive Vice President of Sterling
Software's Creative Data Systems Division. Mr. Lutz also served as Group Vice
President of Sterling Software's former EDI Group from August 1990 to July
1993.
Albert K. Hoover has served as Vice President, Legal of the Company since
December 1995. Prior to March 1996, Mr. Hoover served as Vice President of
Sterling Software from May 1994 and Assistant General Counsel of Sterling
Software from June 1990.
James W. Hoyt has served as Vice President, Technology of the Company since
July 1996. Mr Hoyt served as Director of Product Architecture of Sterling
Software's Communications Software Division from July 1993 until March 1996
and of the Company's Communications Software Group from March 1996 until June
1996. Prior to July 1993, Mr. Hoyt served as Director of Product Architecture
for Systems Center, Inc., a computer software company that was acquired by
Sterling Software in July 1993.
Steven P. Shiflet has served as Vice President, Finance of the Company since
December 1995. Prior to March 1996, Mr. Shiflet served as Group Vice
President, Finance & Administration of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from 1986.
Dawn Wheeler has served as Vice President, Investor Relations of the Company
since February 1996. Prior to March 1996, Ms. Wheeler served as Director of
Industry Relations of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from October 1994. Prior to October 1994, Ms.
Wheeler served in various capacities for Sterling Software's Network Services
Division from November 1988.
8
<PAGE>
G. Clark Woodford has served as Vice President, Business Development of the
Company since December 1995. Prior to March 1996, Mr. Woodford served as Vice
President, Business Development of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from November 1993. Prior to November
1993, Mr. Woodford served as Vice President, National Accounts for the Network
Services Division of Sterling Software's Electronic Commerce Group (the
predecessor of the Company).
John Blaine has served as Controller of the Company since April 1996. From
February 1995 until April 1996, Mr. Blaine served as Director, Finance &
Administration for the France Division of Sterling Software's International
Group. From July 1993 until February 1995, Mr. Blaine served as Vice President,
Finance and Administration for the former Americas Division of Sterling
Software's International Group. From September 1990 until July 1993, Mr. Blaine
served in various financial positions with Sterling Software.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Dallas, Texas. The
Company also leases offices and facilities in San Francisco and San Bernardino,
California; Atlanta, Georgia; Ann Arbor, Michigan; New York, New York;
Columbus, Ohio; Washington, D.C.; Toronto, Canada; London, England; Paris,
France; and Dusseldorf, Germany. The Company believes that its facilities will
be adequate for its immediate needs and that additional or substitute space is
available if needed to accommodate expansion.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to certain legal proceedings and
claims which arise in the normal course of its business. In the opinion of
management, the amount of any liability with respect to any existing actions
will not have a material effect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, $0.01 par value ("Commerce Stock"), has been
traded on the New York Stock Exchange since March 8, 1996, under the symbol
"SE." The high and low sales prices for Commerce Stock for the periods
indicated are set forth below.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended September 30, 1996:
Quarter Ended:
March 31, 1996................................................ $30 7/8 $28 3/4
June 30, 1996................................................. $45 $30 1/8
September 30, 1996............................................ $37 1/8 $28
</TABLE>
At November 15, 1996, the Company had approximately 1,175 holders of record
of Commerce Stock.
The Company did not pay dividends on Commerce Stock during the year ended
September 30, 1996. Under the terms of the Company's Revolving Credit and Term
Loan Agreement (established as of October 1, 1996), the Company is prohibited
from making distributions in the form of dividends on its Commerce Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenue...................... $267,773 $203,578 $155,916 $117,813 $88,926
Cost of sales................ 54,418 41,550 36,282 27,557 20,593
Product development and
enhancement................. 15,553 14,807 12,497 6,478 9,413
Selling, general and
administrative.............. 102,597 75,193 60,732 54,777 43,987
Restructuring charge......... 3,638
Net income................... 58,392 42,930 27,753 15,194 8,983
Income per common share:
Proforma (1)................ $ .59
Primary..................... $ .77
Fully diluted............... $ .77
Balance sheet data:
Working capital (2).......... $ 77,159 $ 3,692 $ 2,198 $ (3,438) $ 2,485
Total assets................. 241,680 128,978 100,638 87,271 77,319
Stockholder's net
investment.................. 53,187 43,051 37,498 38,650
Stockholders' equity......... 138,187
</TABLE>
- --------
(1) Assumes that 73,200,000 shares of Commerce Stock were outstanding.
(2) Prior to the consummation of the Offering, substantially all of the excess
cash generated by the Company's operations was regularly remitted to
Sterling Software pursuant to Sterling Software's centralized cash
management program.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company was incorporated in December 1995 as a subsidiary of Sterling
Software. The Company completed the Offering on March 13, 1996. Pursuant to
the Offering, the Company sold to the public 1,800,000 previously unissued
shares of Commerce Stock and Sterling Software sold to the public 12,000,000
of the 73,200,000 shares of Commerce Stock then owned by it.
In contemplation of the Offering, among other things: (i) Sterling Software
caused to be transferred to the Company certain assets relating to the
electronic commerce business previously conducted by Sterling Software, and
(ii) the Company entered into contractual arrangements with Sterling Software
related to, among other things, tax allocation, international marketing,
indemnification, space sharing and certain services. See "Shared Management
and Contractual Arrangements with Sterling Software".
On September 23, 1996, the Board of Directors of Sterling Software declared
the Distribution of all shares of Commerce Stock held by Sterling Software on
September 30, 1996, payable pro rata to the holders of record of Software
Stock as of the close of business on such date. As a result, effective
September 30, 1996, the Company ceased to be a subsidiary of Sterling
Software.
RESULTS OF OPERATIONS
Years Ended September 30, 1996 and 1995
Total revenue increased $64,195,000, or 32%, in 1996 over 1995. The revenue
increase was due to a $25,206,000 increase in services revenue, a $19,924,000
increase in products revenue, a $10,039,000 increase in product support
revenue and a $9,026,000 increase in royalties from affiliated companies.
Services revenue increased 32% in 1996 over 1995, primarily from growth in
existing network services customer volume and the addition of new customers,
primarily in the healthcare, grocery, retail and transportation markets. The
number of network services customers grew from approximately 11,300 at
September 30, 1995 to approximately 13,600 at September 30, 1996. Products
revenue increased 29%, product support revenue increased 22% and royalty
revenue increased 77% in 1996 over 1995. The Company's product lines
experienced growth in products revenue, product support revenue and royalty
revenue due to the addition of new customers, new product offerings, certain
product price increases and a continuing expansion of the installed customer
base for product support.
The Company's recurring revenue includes revenue recurring through annual
and multi-year product support agreements having terms ranging generally from
one to three years, fixed term product lease and rental agreements having
terms ranging generally from month-to-month to year-to-year and electronic
commerce service agreements cancelable upon 30 days notice. Based upon past
practices, the Company includes the entire portion of the commerce service
agreements in recurring revenue, but no assurances can be given that such
agreements will not be canceled. Recurring revenue increased $33,527,000, or
28%, in 1996 over 1995 and represented 57% and 59% of total revenue in 1996
and 1995, respectively. For 1996, 55% of the Company's products revenue was
for products designed for operating platforms other than mainframe operating
platforms, as compared to 43% for 1995.
Total cost of sales consists primarily of salaries and other related
expenses for product support, data center and communications personnel and
other related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total cost
of sales increased $12,868,000, or 31%, in 1996 over 1995. As a percentage of
total revenue, total cost of sales remained unchanged at 20% for 1996 and
1995. Cost of sales for services increased 44% due to higher network services
costs to support a growing customer base and greater customer volume. As a
percentage of total revenue, cost of sales for services increased to 10% in
1996 from 9% in 1995. Cost of sales for products and product support increased
$4,934,000 due to increased costs to support expanding software sales, a
larger installed customer base and higher amortization costs of capitalized
development for software products. Cost of sales for products and product
11
<PAGE>
support decreased as a percentage of total revenue to 11% in 1996 from 12% in
1995. Cost of sales includes $16,314,000 and $13,351,000 of depreciation and
amortization in 1996 and 1995, respectively.
Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with the
cost of facilities and equipment. Product development and enhancement expense
for 1996 of $15,553,000, net of $12,268,000 of amounts capitalized pursuant to
FAS No. 86, increased $746,000, or 5%, compared to 1995 product development and
enhancement expense of $14,807,000, net of $10,051,000 of amounts capitalized
pursuant to FAS No. 86. The increase was primarily due to the higher gross
product development expense relating to products under development during 1996.
As a percentage of total revenue, product development and enhancement expense
decreased to 6% in 1996 from 7% in 1995. Total capitalized costs represented
44% and 40% of total development and enhancement expense for 1996 and 1995,
respectively. Product development expense and the capitalization rate may
fluctuate from period to period depending in part upon the number and status of
software development projects in process.
Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees,
facilities and depreciation expenses. Selling, general and administrative
expense increased $27,404,000, or 36%, in 1996 over 1995 due primarily to
increases in personnel in sales, marketing and administration in support of the
Company's revenue growth. As a percentage of total revenue, selling, general
and administrative expenses increased to 38% in 1996 from 37% in 1995.
Income before income taxes increased $24,872,000, or 35%, in 1996 over 1995.
As a percentage of total revenue, income before income taxes increased to 36%
in 1996 from 35% in 1995. Net income increased $15,462,000, or 36%, in 1996
over 1995. As a percentage of total revenue, net income increased to 22% in
1996 from 21% in 1995. The increases were primarily due to a revenue increase
of 32%, compared to an increase in total costs and expenses of 31%.
Years Ended September 30, 1995 and 1994
Total revenue increased $47,662,000, or 31%, in 1995 over 1994. The revenue
increase was due to a $24,817,000 increase in services revenue, a $11,312,000
increase in products revenue, a $8,237,000 increase in product support revenue
and a $3,296,000 increase in royalties from affiliated companies. Services
revenue increased 47% in 1995 over 1994, primarily from growth in existing
network services customer volume and the addition of new customers, primarily
in the healthcare, grocery, retail, hardlines and transportation markets. The
number of network services customers grew from approximately 9,000 at September
30, 1994 to approximately 11,300 at September 30, 1995. Products revenue
increased 20% and product support revenue increased 22% in 1995 over 1994. All
of the Company's product lines experienced growth in products revenue and
product support revenue due to the addition of new customers, new product
offerings, certain product price increases and a continuing expansion of the
installed customer base for product support. Recurring revenue increased
$28,505,000, or 31%, in 1995 over 1994 and represented 59% of total revenue in
1995 and 1994. For 1995, 43% of the Company's products revenue was for products
designed for operating platforms other than mainframe operating platforms, as
compared to 32% for 1994.
Total cost of sales consists primarily of salaries and expenses for product
support, data center and communications personnel and other related expenses
for the Company's data center and other facilities, communications, product
media, duplication, packaging and shipping. Total cost of sales increased
$5,268,000, or 15%, in 1995 over 1994. As a percentage of total revenue, total
cost of sales decreased to 20% in 1995 from 23% in 1994. Cost of sales for
services increased 34% due to higher network services costs to support a
growing customer base and greater customer volume. As a percentage of total
revenue, cost of sales for services remained unchanged at 9% in 1995 from 1994.
Cost of sales for products and product support increased $693,000 due to
increased costs to support expanding software sales, a larger installed
customer base and higher amortization costs of capitalized development for
software products. Cost of sales for products and product support decreased as
a percentage of total revenue to 12% in 1995 from 15% in 1994. Cost of sales
includes $13,351,000 and $11,781,000 of depreciation and amortization in 1995
and 1994, respectively.
12
<PAGE>
Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with
the cost of facilities and equipment. Product development and enhancement
expense for 1995 of $14,807,000, net of $10,051,000 of amounts capitalized
pursuant to FAS No. 86, increased $2,310,000, or 18%, compared to 1994 product
development and enhancement expense of $12,497,000, net of $9,221,000 of
amounts capitalized pursuant to FAS No. 86. The increase was primarily due to
the higher gross product development expense relating to products under
development during 1995. As a percentage of total revenue, product development
and enhancement expense decreased to 7% in 1995 from 8% in 1994. Total
capitalized costs represented 40% and 42% of total development and enhancement
expense for 1995 and 1994, respectively. Product development expense and the
capitalization rate may fluctuate from period to period depending in part upon
the number and status of software development projects in process.
Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees,
facilities and depreciation expenses. Selling, general and administrative
expense increased $14,461,000, or 24%, in 1995 over 1994 due primarily to
increases in personnel in sales, marketing and administration in support of
the Company's revenue growth. As a percentage of total revenue, selling,
general and administrative expenses decreased to 37% in 1995 from 39% in 1994.
Income before income taxes increased $25,295,000, or 55%, in 1995 over 1994.
As a percentage of total revenue, income before income taxes increased to 35%
in 1995 from 30% in 1994. Net income increased $15,177,000, or 55%, in 1995
over 1994. As a percentage of total revenue, net income increased to 21% in
1995 from 18% in 1994. The increases were primarily due to a revenue increase
of 31%, compared to an increase in total costs and expenses of 20%.
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. Sterling
Software continued to provide cash management services to the Company on an
interim basis until the completion of the Distribution on September 30, 1996.
At September 30, 1996, outstanding net advances by the Company to Sterling
Software, including all amounts otherwise due, totaled $35,134,000, which were
collected subsequent to September 30, 1996.
Net cash flows from operations were $57,290,000 and $61,464,000 for 1996 and
1995, respectively. Net cash flows from operations were positively affected in
1996 by an increase in net income, an increase in depreciation and
amortization and an increase in accounts payable and accrued liabilities,
offset by an increase in net advances by the Company to Sterling Software. A
portion of the Company's cash flow from operations during 1996 and 1995 was
used to fund software additions and capital expenditures. Software
expenditures in 1996 were $12,016,000, the majority of which were costs
capitalized pursuant to FAS No. 86, compared to $10,244,000 in 1995. The
expenditures during 1996 were primarily for new products and enhancements of
existing products. Property and equipment purchases of $26,573,000 in 1996
included purchases made for equipment upgrades for network processing systems,
costs to add new network service features and computer and other equipment
purchases to support the Company's growth.
Effective October 1, 1996, the Company entered into a Revolving Credit and
Term Loan Agreement ("Loan Agreement") with a domestic borrowing capacity of
$20,000,000. The Loan Agreement also provides for an additional $10,000,000
international borrowing capacity. The Loan Agreement is unsecured and contains
various restrictions on the Company, including limitations on additional
borrowings, payment of dividends, acquisitions and capital expenditures. The
Loan Agreement also requires that the Company maintain certain financial
ratios. Borrowings under the Loan Agreement bear interest at the higher of the
lender's prime rate, the Federal Funds Effective Rate plus one-half percent (
1/2%) or LIBOR plus one and three-quarters percent (1 3/4%). Borrowings, if
13
<PAGE>
any, outstanding on October 1, 1998 will convert to a term loan which requires
payments in four substantially equal installments due at the end of each
subsequent quarter.
At September 30, 1996, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and
equipment. The Company intends to meet such obligations from cash flows from
operations. Although no significant commitments exist for future capital
expenditures, the Company has budgeted capital expenditures of approximately
$43,000,000 for fiscal 1997 (of which approximately $16,500,000 is expected to
consist of amounts capitalized pursuant to FAS No. 86). The Company believes
available balances of cash, cash equivalents and short-term investments
combined with cash flows from operations and amounts available under the Loan
Agreement are sufficient to meet the Company's cash requirements for the
foreseeable future.
OTHER MATTERS
Demand for many of the Company's products and services 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 is not able to recover increased
operating costs through increased prices and sales.
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency
exposure through decentralized sales, marketing and support operations in
which all costs are local currency based.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed 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.
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 beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, the words "anticipate,"
"believe", "estimate," "expect," "future," "intend," "plan" and similar
expressions as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the industries served by the Company, the
costs of product development and other risks and uncertainties , including, in
addition to any uncertainties specifically identified in the text surrounding
such statements, 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, competitors, and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may vary significantly from those anticipated,
believed, estimated, expected, intended or planned.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING COMMERCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ 16
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1996 and 1995.............. 17
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1995 and 1994.................................................... 18
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994...................................... 19
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.................................................... 20
Notes to Consolidated Financial Statements.............................. 21
</TABLE>
15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling Commerce, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Commerce, Inc. (the "Company") as of September 30, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audit also included the financial statement schedule listed under Item 14(a)
of the Company's Annual Report on Form 10-K for the year ended September 30,
1996. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Commerce, Inc. at September 30, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Dallas, Texas
November 20, 1996
16
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 23,484 $ 395
Marketable securities...................................... 21,203
Accounts and notes receivable, net......................... 61,292 49,155
Amounts due from Sterling Software......................... 35,134
Deferred income taxes...................................... 3,087 3,463
Prepaid expenses and other current assets.................. 5,794 3,041
-------- --------
Total current assets..................................... 149,994 56,054
Property and equipment, net.................................. 43,199 25,838
Computer software, net of accumulated amortization of $42,110
in 1996 and $34,112 in 1995................................. 34,404 32,263
Excess cost over net assets acquired, net of accumulated
amortization of $3,382 in 1996 and $3,087 in 1995........... 9,789 10,259
Other assets................................................. 4,294 4,564
-------- --------
$241,680 $128,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:.........................................
Accounts payable and accrued liabilities................... $ 34,317 $ 21,442
Deferred revenue........................................... 38,518 30,920
-------- --------
Total current liabilities................................ 72,835 52,362
Deferred income taxes........................................ 23,135 17,749
Other noncurrent liabilities................................. 7,523 5,680
Contingencies and commitments
Stockholders' equity:
Preferred stock $.01 par value, 50,000,000 shares
authorized; no shares issued and outstanding..............
Common stock $.01 par value, 150,000,000 shares authorized;
75,000,000 shares issued and outstanding.................. 750
Additional paid-in capital................................. 98,111
Retained earnings.......................................... 39,326
Stockholder's net investment............................... 53,187
-------- --------
Total stockholders' equity............................... 138,187 53,187
-------- --------
$241,680 $128,978
======== ========
</TABLE>
See accompanying notes.
17
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Products....................................... $ 87,527 $ 67,603 $ 56,291
Product support................................ 56,229 46,190 37,953
Services....................................... 103,269 78,063 53,246
Royalties from affiliated companies............ 20,748 11,722 8,426
-------- -------- --------
267,773 203,578 155,916
Costs and expenses:
Cost of sales:
Products and product support.................. 28,647 23,713 23,020
Services...................................... 25,771 17,837 13,262
-------- -------- --------
54,418 41,550 36,282
Product development and enhancement............ 15,553 14,807 12,497
Selling, general and administrative............ 102,597 75,193 60,732
-------- -------- --------
172,568 131,550 109,511
Income before other income (expense) and income
taxes........................................... 95,205 72,028 46,405
Other income (expense)........................... 1,217 (478) (150)
-------- -------- --------
Income before income taxes....................... 96,422 71,550 46,255
Provision for income taxes....................... 38,030 28,620 18,502
-------- -------- --------
Net income....................................... $ 58,392 $ 42,930 $ 27,753
======== ======== ========
Income per common share:
Pro forma...................................... $ 0.59
========
Primary........................................ $ 0.77
========
Fully diluted.................................. $ 0.77
========
Weighted average and proforma common shares
outstanding..................................... 74,233 73,200
======== ========
</TABLE>
See accompanying notes.
18
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL SHAREHOLDERS' TOTAL
NUMBER OF PAID-IN RETAINED NET STOCKHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS INVESTMENT EQUITY
--------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1993................... $ 37,498 $ 37,498
Net income............ 27,753 27,753
Net cash distributed
to Sterling
Software............. (22,534) (22,534)
Other................. 334 334
-------- --------
Balance at September 30,
1994................... 43,051 43,051
Net income............ 42,930 42,930
Net cash distributed
to Sterling
Software............. (32,354) (32,354)
Other................. (440) (440)
-------- --------
Balance at September 30,
1995................... 53,187 53,187
Formation
transactions......... 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............ $39,157 19,235 58,392
Other................. 4,140 169 4,309
------ ---- ------- ------- -------- --------
Balance at September 30,
1996................... 75,000 $750 $98,111 $39,326 $138,187
====== ==== ======= ======= ======== ========
</TABLE>
See accompanying notes.
19
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income.......................................... $58,392 $42,930 $27,753
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 21,943 17,517 14,497
Provision for losses on accounts receivable....... 1,068 (466) 1,883
Provision for deferred income taxes............... 5,762 4,537 (478)
Changes in operating assets and liabilities, net
of effects of business acquisitions:
Increase in accounts and notes receivable....... (13,149) (14,308) (8,982)
Increase in amounts due from Sterling Software.. (35,134)
Increase in prepaid expenses and other assets... (3,135) (989) (632)
Increase in accounts payable and accrued
liabilities.................................... 12,710 5,154 2,110
Increase in deferred revenue.................... 7,598 7,677 4,350
Other........................................... 1,235 (588) 2,658
------- ------- -------
Net cash provided by operating activities..... 57,290 61,464 43,159
Investing activities:
Purchases of property and equipment............... (26,573) (15,633) (10,346)
Purchases and capitalized cost of development of
computer software................................ (12,016) (10,244) (9,624)
Business acquisitions, net of cash acquired....... (185) (2,823)
Purchases of investments.......................... (21,203)
Other............................................. 192 (215)
------- ------- -------
Net cash used in investing activities......... (59,977) (28,508) (20,185)
Financing activities:
Net proceeds from stock issuance.................. 40,118
Other............................................. 3,477 (586) (521)
------- ------- -------
Net cash provided by (used in) financing
activities................................... 43,595 (586) (521)
Net cash distributed to Sterling Software........... (17,819) (32,354) (22,534)
------- ------- -------
Increase (decrease) in cash and cash equivalents.... 23,089 16 (81)
------- ------- -------
Cash and cash equivalents at beginning of year...... 395 379 460
------- ------- -------
Cash and cash equivalents at end of year............ $23,484 $ 395 $ 379
======= ======= =======
Supplemental cash flow information:
Income taxes paid to Sterling Software............ $32,268 $24,083 $18,980
======= ======= =======
</TABLE>
See accompanying notes.
20
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
1. GENERAL INFORMATION
General
Sterling Commerce, Inc., (the "Company") is a provider of electronic data
interchange ("EDI") and other electronic commerce products, services and
solutions worldwide. The Company develops, markets and supports electronic
commerce software products, and provides electronic commerce services, that
enable businesses to engage in business-to-business electronic communications
and transactions. The Company has been providing electronic commerce solutions
for over 20 years and has numerous customers in industries such as banking,
pharmaceuticals and retailing.
Initial Public Offering and Distribution
The Company was incorporated in December 1995 as a subsidiary of Sterling
Software, Inc. ("Sterling Software"). The Company completed its initial public
offering (the "Offering") on March 13, 1996. Pursuant to the Offering, the
Company sold to the public 1,800,000 previously unissued shares of Common
Stock, $0.01 par value, of the Company ("Commerce Stock") and Sterling
Software sold to the public 12,000,000 of the 73,200,000 shares of Commerce
Stock then owned by it.
In contemplation of the Offering, among other things: (i) Sterling Software
caused to be transferred to the Company certain assets relating to the
electronic commerce business previously conducted by Sterling Software, and
(ii) the Company entered into contractual arrangements with Sterling Software
related to, among other things, tax allocation, international marketing,
indemnification, space sharing and certain services. See "Shared Management
and Contractual Arrangements with Sterling Software".
On September 23, 1996, the Board of Directors of Sterling Software declared
a special dividend consisting of the distribution (the "Distribution") of all
shares of Commerce Stock held by Sterling Software on September 30, 1996,
payable pro rata to the holders of record of Sterling Software's common stock,
$0.10 par value ("Software Stock"), as of the close of business on such date.
As a result, effective September 30, 1996, the Company ceased to be a
subsidiary of Sterling Software.
Shared Management and Contractual Arrangements with Sterling Software
Management.
The Board of Directors of the Company (the "Board") currently has seven
members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are directors
of the Company and are also directors of Sterling Software. Mr. Sterling L.
Williams serves as Chairman of the Board of the Company and as President and
Chief Executive Officer and a member of the Board of Directors of Sterling
Software. In addition, Jeannette P. Meier serves as Executive Vice President,
Chief Financial Officer, General Counsel and Secretary of both companies; and
Phillip A. Moore serves as an Executive Vice President of both companies.
Neither the length service for any particular individual nor the capacity or
capacities in which he or she may serve either the Company or Sterling
Software (or both) has been determined as of the date of this report.
The Company and Sterling Software have significant contractual and other
ongoing relationships as discussed below under "Intercompany Agreements."
Conflicts of interest may arise between the Company and Sterling Software in a
number of areas relating to such ongoing relationships, including potential
competitive business activities, international marketing functions, tax and
employee benefit matters, indemnity arrangements, and the continued service of
certain directors and executive officers of each of the Company and Sterling
Software as directors and executive officers of the other company. The Board
will utilize such procedures in
21
<PAGE>
evaluating the terms and provisions of any material transactions between the
Company and Sterling Software and their respective affiliates as the Board may
determine appropriate in light of its fiduciary duties under state law.
Intercompany Agreements.
In anticipation of the Offering, the Company and Sterling Software entered
into a number of agreements (the "Intercompany Agreements") for the purpose of
defining certain relationships between them. As a result of Sterling
Software's ownership interest in the Company, the terms of such agreements
were not the result of arm's-length negotiation. The Intercompany Agreements
include a tax allocation agreement, an international marketing agreement and a
space sharing agreement. The tax allocation agreement states that for periods
during which the Company and/or its subsidiaries are included in Sterling
Software's consolidated federal income tax returns or consolidated, combined
or unitary state tax returns (which periods include the period between the
Offering and the Distribution), the Company is required to pay to or is
entitled to receive from Sterling Software its allocable portion of the
consolidated federal and state income tax liability or refunds, respectively.
Additionally, the tax allocation agreement contains provisions for the
handling of tax controversies. The international marketing agreement defines
the terms pursuant to which Sterling Software acts as the exclusive
distributor through March 1999 of certain of the Company's products and
services in markets outside the United States and Canada. The international
marketing agreement provides for the payment to the Company of royalties equal
to 50% of the net revenue that Sterling Software derives from licenses of the
Company's interchange and communications software products and related product
support services. The space sharing agreement defines the terms pursuant to
which the Company and Sterling Software are allowed to utilize a portion of
each other's office facilities.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's consolidated financial statements have been prepared using
Sterling Software's historical basis in the assets and liabilities of its
Electronic Commerce Group, including goodwill and other intangible assets
recognized by Sterling Software in the original acquisition of certain
businesses conducted by the Company. All significant intercompany accounts
among the Company and its consolidated subsidiaries have been eliminated.
Certain amounts for periods ended prior to September 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 requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and the disclosure of
contingencies at September 30, 1996 and 1995, and the results of operations
for the years ended September 30, 1996, 1995 and 1994. While management has
based its assumptions and estimates on the facts and circumstances known at
September 30, 1996, final amounts may differ from such estimates.
The Company's consolidated financial statements reflect the results of
operations, financial condition and cash flows of the Company as a component
or subsidiary of Sterling Software and may not be indicative of actual results
of operations and financial position of the Company under other ownership.
Management believes that the consolidated income statements include a
reasonable allocation of the incremental administrative costs previously
incurred by Sterling Software, including executive compensation and the
related costs of a corporate staff function. The allocations of such costs
were approximately $875,000 for the first quarter of 1996 and $3,500,000 in
each of 1995 and 1994 and represent management's estimate of the costs that
would have been incurred had the Company operated independently of Sterling
Software. Subsequent to the first quarter of 1996 these incremental
administrative costs were incurred directly by the Company and therefore no
further allocations of such costs were made by Sterling Software.
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
22
<PAGE>
right to receive future products, a portion of the software product revenue is
deferred and recognized as such 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 companies represent royalties earned from Sterling Software and
certain of its subsidiaries acting as 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.
Software Development Costs
The Company capitalizes the costs of developing and testing new or
significantly enhanced software products in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86").
Unamortized software development costs of $31,058,000 and $27,555,000 are
included in "Computer software, net" at September 30, 1996 and 1995,
respectively. Pursuant to FAS No. 86, costs are capitalized when technological
feasibility of the product is established. Technological feasibility is
established either upon the completion of a detailed program design or the
completion of a working model. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software
development costs require judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Software development capitalized costs include, among other things,
programmers' salaries and benefits, outside contractor costs, computer time
and allocated facilities costs.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to fifteen years.
Computer software costs are amortized on a product-by-product basis using the
greater of the amount determined by taking the ratio of current year net
revenue to estimated future net revenue or the straight-line method over
periods ranging from three to five years. Leasehold improvements are amortized
over the term of the lease. Excess costs over the net assets of businesses
acquired are amortized on a straight-line basis over periods of ten to forty
years. Other intangible assets are amortized on a straight-line basis over
periods of three to ten years.
Depreciation and amortization consists of the following for the years ended
September 30, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $10,817 $ 7,084 $ 4,579
Purchased computer software........................ 1,412 1,405 1,385
Capitalized computer software development costs.... 8,463 7,772 7,353
Excess costs over net assets of businesses
acquired.......................................... 427 426 407
Intangible assets.................................. 824 830 773
------- ------- -------
$21,943 $17,517 $14,497
======= ======= =======
</TABLE>
23
<PAGE>
Income Taxes
The Company computes its income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("FAS No.
109"), which requires the use of the asset and liability method of accounting
for income taxes. Under the asset and liability method, a deferred tax asset
or liability is recognized for estimated future tax effects attributable to
temporary differences and carryforwards. The measurement of deferred income
tax assets is adjusted by a valuation allowance, if necessary, to recognize
future tax benefit only to the extent, based on available evidence, it is more
likely than not it will be realized. The effect on deferred taxes of a change
in income tax rates is recognized in the period that includes the enactment
date.
The Company's operations have historically been included in consolidated
income tax returns filed by Sterling Software as part of its corporate group.
The Company has entered into a tax allocation agreement with Sterling Software
covering the periods through September 30, 1996, when the Company was included
in Sterling Software's consolidated tax returns. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
returns separately from the Sterling Software group of companies.
Stock Options
In October 1995, the Financial Accounting Standards Board issued FASB
Statement No. 123, "Accounting for Stock-Based Compensations" ("FASB No.
123"). The Company intends to continue applying the existing accounting
requirements for stock options and stock-based awards as contained in APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company will
provide pro forma disclosures as required under FASB No. 123.
Earnings Per Share
Pro forma net income per common share is calculated as though there were
73,200,000 shares outstanding for the year ended September 30, 1995. Primary
and fully diluted income per common share is calculated as though there were
73,200,000 shares outstanding, together with the weighted average of the
additional 1,800,000 shares issued in the Offering, and common stock
equivalents.
Foreign Currency Translation
The assets and liabilities of consolidated non-U.S. operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates. Revenue and expense accounts of those operations are
translated at average exchange rates prevailing during the period the
transactions occur. Unrealized translation gains and losses are included as an
adjustment to retained earnings.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments in
investment-grade commercial paper of various issuers, with maturities of three
months or less when purchased. Cash and cash equivalents are recorded at their
fair value.
Marketable Securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, and U.S. government
obligations. The fair values for marketable securities are based on quoted
market prices.
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS No.
115"), all marketable securities are classified as available-for-sale
securities. Unrealized holding gains and losses on securities available-for-
sale are recorded as a component of stockholders' equity, net of any related
tax effect. The amortized cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in values judged to be other-than-temporary on available-for-sale
securities are included in investment income.
24
<PAGE>
3. 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
royalties paid to the Company as a result of Sterling Software acting as an
international distributor, tax expense charged to the Company, other expenses
incurred on behalf of the Company and the Company's participation in Sterling
Software's central cash management program (which participation terminated
upon completion of the Distribution on September 30, 1996). At September 30,
1996, the Company had amounts due from Sterling Software of $35,134,000, which
were collected subsequent to September 30, 1996.
Certain costs and expenses were initially incurred by Sterling Software on
behalf of the Company, and charged to the Company. An analysis of significant
items (other than the expense allocations discussed in Note 2 under "Basis of
Presentation" and tax allocations) follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Summary of Expenses:
Legal, accounting and professional fees........... $ 1,139 $ 600 $1,376
Payroll related................................... 7,691 1,403 739
Occupancy......................................... 1,695 661 694
Miscellaneous..................................... 534 374 349
-------- ------- -------
$11,059 $3,038 $3,158
======== ======= =======
</TABLE>
4. BUSINESS COMBINATIONS
In August 1994, Sterling Software acquired, in a stock-for-stock
acquisition, accounted for as a pooling of interests, all of the outstanding
common stock of American Business Computer Company ("ABC"), a corporation
which developed, marketed and supported UNIX-based electronic data interchange
products, including products that provide sophisticated electronic commerce
gateway functionality. The business formerly conducted by ABC is included in
the results of operations of the Company.
5. LEGAL PROCEEDINGS AND CLAIMS
From time to time the Company is subject to certain legal proceedings and
claims which arise in the normal course of its business. In the opinion of
management, the amount of any liability with respect to any existing actions
will not have a material effect on the financial condition or results of
operations of the Company.
6. MARKETABLE SECURITIES
At September 30, 1996, all of the Company's marketable securities were
classified as available-for-sale and consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED
AGGREGATE AMORTIZED HOLDING
FAIR VALUE COST BASIS GAINS
---------- ---------- ----------
<S> <C> <C> <C>
September 30, 1996
Current:
U.S. government obligations, scheduled
maturity within one year................... $ 9,678 $ 9,652 $26
U.S. government obligations, scheduled
maturities between one
and five years............................. 11,525 11,463 62
------- ------- ---
$21,203 $21,115 $88
======= ======= ===
</TABLE>
25
<PAGE>
7. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Trade accounts receivable.................................. $63,708 $51,155
Less: Allowance for doubtful accounts...................... 2,416 2,000
------- -------
$61,292 $49,155
======= =======
</TABLE>
The Company's accounts and notes receivable are due principally from
corporations in diverse industries located in the United States and Canada.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Computer and peripheral equipment.......................... $57,231 $36,634
Furniture, fixtures and other equipment.................... 6,693 5,016
Building improvements...................................... 6,302 3,131
------- -------
70,226 44,781
Less accumulated depreciation.............................. 27,027 18,943
------- -------
$43,199 $25,838
======= =======
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Trade accounts payable.................................... $12,323 $ 7,204
Accrued compensation...................................... 16,945 11,113
Other accrued liabilities................................. 5,049 3,125
------- -------
$34,317 $21,442
======= =======
</TABLE>
10. INCOME TAXES
The provision for income taxes is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Foreign...................................... $ 176
Federal...................................... 26,225 $19,147 $15,363
State........................................ 5,867 4,936 3,617
Deferred:
Federal...................................... 4,975 3,970 (418)
State........................................ 787 567 (60)
-------- -------- --------
$38,030 $28,620 $18,502
======== ======== ========
</TABLE>
26
<PAGE>
The effective income tax rate on income before taxes differed from the
federal income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax expense at U.S. federal statutory rate.... $33,748 $25,043 $16,189
State income taxes, net of federal benefit.... 4,223 3,577 2,313
Other......................................... 59
-------- -------- --------
$38,030 $28,620 $18,502
======== ======== ========
</TABLE>
In accordance with the tax allocation agreement with Sterling Software, the
Company's income tax payments have been reduced and paid in capital has been
increased by approximately $5,148,000 due to income tax deductions associated
with the exercise, after the Offering, of Sterling Software stock options held
by Company employees.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax liability as of September 30 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
---------------
1996 1995
------- -------
<S> <C> <C>
Deferred income tax assets:
Deferred revenue......................................... $ 362 $ 843
Reserves and restructuring accruals...................... 2,725 2,620
------- -------
Deferred income tax assets............................. 3,087 3,463
------- -------
Deferred income tax liabilities:
Capitalized software costs............................... 15,214 11,361
Depreciation and amortization............................ 7,921 6,388
------- -------
Deferred income tax liabilities........................ 23,135 17,749
------- -------
Deferred income tax liability net of deferred income
tax assets............................................ $20,048 $14,286
======= =======
</TABLE>
11. COMMITMENTS
The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1996, 1995 and 1994 was
$10,000,000, $7,537,000 and $6,071,000, respectively. At September 30, 1996,
minimum future rental payments due under all operating leases, net of future
sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1997.......................................................... $11,662,000
1998.......................................................... 11,270,000
1999.......................................................... 10,372,000
2000.......................................................... 5,838,000
2001.......................................................... 5,667,000
Thereafter.................................................... 24,148,000
</TABLE>
12. STOCK OPTIONS
The Company has a stock option plan that provides for the grant of options
to purchase shares of Commerce Stock by officers, directors, key employees and
advisors. All option grants were made at the fair market value of the Commerce
Stock at the date of the grant. Options granted pursuant to the plan generally
become exerciseable at a rate of 25% per year or become exerciseable
immediately or within one year from the date of grant. Options granted
pursuant to the plan generally expire five or ten years from the date of
grant.
27
<PAGE>
Stock option transactions are summarized below for the year ended September
30, 1996:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER EXERCISE EXERCISE
OF SHARES PRICE PRICE
---------- -------------- ------------
<S> <C> <C> <C>
Outstanding at September 30, 1995
(0 shares exerciseable)
Granted during the year............. 12,285,000 $24.00--$43.88 $297,753,750
Terminated and canceled during the
year............................... (33,000) 24.00 (792,000)
---------- ------------
Outstanding at September 30, 1996
(0 shares exerciseable).............. 12,252,000 $24.00--$43.88 $296,961,750
========== ============
</TABLE>
At September 30, 1996, a maximum of 5,198,400 shares were reserved for
future grants of options under the plan. Subsequent to September 30, 1996,
options for 4,453,000 additional shares were granted under the plan.
13. DEFINED CONTRIBUTION PLAN
The Company participated in Sterling Software's plan that provides
retirement benefits under the provisions of Section 401(k) of the Internal
Revenue Code (the "Software Plan") for all full-time employees and for part-
time employees that have completed a specified term of service. Pursuant to
the Software Plan, eligible participants may elect to contribute a percentage
of their annual gross compensation and the Company contributed additional
amounts, as provided by the Software Plan. Benefits under the Software Plan
were limited to the assets of the Software Plan. Company contributions charged
to expense during 1996, 1995 and 1994 were $2,035,000, $930,000 and $861,000,
respectively. A provision of the Software Plan required a portion of the
Company contributions to be invested in Software Stock.
Effective September 30, 1996, the Company ceased participating in the
Software Plan. The Company established a plan with similar attributes (the
"Commerce Plan") effective October 1, 1996. The portion of the Commerce Plan
consisting of the Company's contribution has been designated as an employee
stock ownership plan. One half of the Company's contributions are invested in
Commerce Stock. The Company's pro-rata share of the assets of the Software
Plan were transferred to the Commerce Plan.
14. SUBSEQUENT EVENTS
Effective October 1, 1996, the Company entered into a Revolving Credit and
Term Loan Agreement ("Loan Agreement") with a domestic borrowing capacity of
$20,000,000. The Loan Agreement also provides for an additional $10,000,000
international borrowing capacity. The Loan Agreement is unsecured and contains
various restrictions on the Company, including limitations on additional
borrowings, payment of dividends, acquisitions and capital expenditures. The
Loan Agreement also requires that the Company maintain certain financial
ratios. Borrowings under the Loan Agreement bear interest at the higher of the
lender's prime rate, the Federal Funds Effective Rate plus one-half percent (
1/2%) or LIBOR plus one and three-quarters percent (1 3/4%). Borrowings, if
any, outstanding on October 1, 1998 will convert to four payments in
substantially equal installments due at the end of each subsequent quarter.
There were no amounts borrowed or outstanding under the Loan Agreement as of
November 15, 1996. At November 15, 1996, after utilization of approximately
$1,000,000 for standby letters of credit, approximately $29,000,000 was
available for borrowing on the Loan Agreement.
15. CHANGE-IN-CONTROL AND SEVERANCE AGREEMENTS
As of September 30, 1996, the Company had change-in-control agreements with
nineteen officers that grant the right to receive payments based on the
individual's respective salary, bonus and benefits in the event a change in
control (as defined) of the Company occurs and a covered officer's employment
is terminated. In addition, the stock option agreements with five of the
directors of the Company provide for certain other benefits in the event of a
change in control (as defined) of the Company. At September 30, 1996, the
maximum liability for salaries, bonuses and benefits under these agreements
would be approximately $22,000,000.
28
<PAGE>
As of September 30, 1996, the Company had entered into severance agreements
with twelve officers of the Company providing for payments based on the
individual officer's salary and bonus and continuation of benefits. In
addition, the Company has entered into an agreement with another officer that
provides for an annual base salary plus agreed-upon bonuses or benefits and
converts to a five-year consulting agreement upon the occurrence of certain
events. At September 30, 1996, the aggregate commitment for future salaries,
bonuses and benefits under these agreements would be approximately
$15,000,000.
16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1996 and
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Revenue............................ $56,150 $62,076 $69,225 $80,322
Cost of sales...................... 11,916 13,336 13,695 15,471
Product development and
enhancement....................... 3,288 3,777 4,187 4,301
Selling, general and
administrative.................... 20,255 22,904 27,684 31,754
Income before other expense and
income taxes...................... 20,691 22,059 23,659 28,796
------- ------- ------- -------
Net income......................... $12,289 $13,235 $14,750 $18,118
======= ======= ======= =======
Year ended September 30, 1995:
Revenue............................ $45,096 $46,275 $51,637 $60,570
Cost of sales...................... 9,592 9,648 10,233 12,077
Product development and
enhancement....................... 3,599 4,032 3,706 3,470
Selling, general and
administrative.................... 17,303 16,535 19,284 22,071
Income before other expense and
income taxes...................... 14,602 16,060 18,414 22,952
------- ------- ------- -------
Net income......................... $ 8,726 $ 9,568 $10,946 $13,690
======= ======= ======= =======
</TABLE>
29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item 10 concerning the directors of the Company
is set forth in the Proxy Statement to be provided to stockholders in
connection with the Company's 1997 Annual Meeting of Stockholders under the
heading "Election of Directors," which information is incorporated herein by
reference. The name, age and position of each executive officer of the Company
is set forth under the heading "Executive Officers" in Part I of this report,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item 11 concerning executive compensation is
set forth in the Proxy Statement under the heading "Management Compensation,"
which information is incorporated herein by reference. Information contained
in the Proxy Statement under the caption "Management Compensation--Report of
the Executive and Stock Option Committees of the Board of Directors on
Executive Compensation and --Stock Performance Chart" is not incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item 12 concerning security ownership of
certain beneficial owners and management is set forth in the Proxy Statement
under the heading "Principal Stockholders and Management Ownership," which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item 13 concerning certain relationships and
related transactions is set forth in the Proxy Statement under the headings
"Management Compensation--Executive and Stock Option Committee Interlocks and
Insider Participation" and "Certain Transactions," which information is
incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1996, 1995 and 1994
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
3. Exhibits
<TABLE>
<CAPTION>
<C> <S>
3.1 --Third Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 --Amended and Restated Bylaws of the Company (1)
10.1 --International Marketing Agreement dated March 4, 1996 between
Sterling Commerce International, Inc. and Sterling Software
International, Inc. (2)
10.2 --Tax Allocation Agreement dated March 4, 1996 between the Company
and Sterling
Software (1)
10.3 --Indemnification Agreement dated March 4, 1996 between the Company
and Sterling
Software (2)
10.4 --Master Software License Agreement dated March 4, 1996 among the
Company, Sterling Software and their respective subsidiaries
parties thereto (2)
10.5 --Data Processing Agreement dated March 13, 1996 between the Company
and Sterling Software (1)
10.6 --Space Sharing Agreement dated March 4, 1996 between the Company
and Sterling
Software (1)
10.7 --Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software (5)
10.8 --Form of Indemnification Agreement between the Company and each of
its officers and directors (1)
10.9 --CEO Agreement dated February 12, 1996 between the Company and
Sterling L. Williams (2), (4)
10.10 --Form of Change-in-Control Severance Agreement dated as of February
12, 1996 between the Company and each of Sterling L. Williams,
Warner C. Blow, Paul L.H. Olson, J. Brad Sharp, Stephen R. Perkins
and certain other executive officers and directors of the Company
(2), (4)
10.11 --Forms of Severance Agreements dated as of February 12, 1996
between the Company and each of Warner C. Blow, Paul L.H. Olson, J.
Brad Sharp, Stephen R. Perkins and certain other executive officers
and directors of the Company (other than Sterling L. Williams) (2),
(4)
10.12 --Form of Change-in-Control Severance Agreement between the Company
and a certain officer of the Company (4), (5)
10.13 --Form of Severance Agreement between the Company and a certain
officer of the Company (4), (5)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.14 --Supplemental Executive Retirement Plan II (1), (4)
10.15 --Amendment to Supplemental Executive Retirement Plan II (1), (4)
10.16 --Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan (3), (4)
10.17 --Revolving Credit and Term Loan Agreement dated as of October 1,
1996 among the Company and The First National Bank of Boston, as
agent, and Bank One, Texas, National Association (5)
11.1 --Computation of Earnings Per Share, Year Ended September 30, 1996
(5)
21.1 --Subsidiaries of the Company (5)
23.1 --Consent of Ernst & Young LLP (5)
27.1 --Financial Data Schedule (5)
</TABLE>
(b)Reports on Form 8-K.
During the three-month period ended September 30, 1996, the Company
filed two Current Reports on Form 8-K. The reports, dated September 23,
1996 and September 30, 1996, included information requested under Item
5--Other Events.
(c)Exhibits.
The response to this portion of Item 14 is submitted as a separate
section of this report
(d)Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate
section of this report
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-80595 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
333-13955 and incorporated herein by reference.
(4) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(5) Filed herewith.
32
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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: November 25, 1996 /s/ Warner C. Blow
By __________________________________
WARNER C. BLOW
President and Chief Executive
Officer
(Principal Executive Officer)
Date: November 25, 1996 /s/ Jeannette P. Meier
By __________________________________
JEANNETTE P. MEIER
Executive Vice President, Chief
Financial Officer, General Counsel
and Secretary
(Principal Financial and Accounting
Officer)
33
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: November 25, 1996 /s/ Sterling L. Williams
By __________________________________
STERLING L. WILLIAMS
Chairman of the Board and Director
Date: November 25, 1996 /s/ Warner C. Blow
By __________________________________
WARNER C. BLOW
Director
Date: November 25, 1996 /s/ Charles J. Wyly, Jr.
By __________________________________
CHARLES J. WYLY, JR.
Director
Date: November 25, 1996 /s/ Sam Wyly
By __________________________________
SAM WYLY
Director
Date: November 25, 1996 /s/ Evan A. Wyly
By __________________________________
EVAN A. WYLY
Director
Date: November 25, 1996 /s/ Honor R. Hill
By __________________________________
HONOR R. HILL
Director
Date: November 25, 1996 /s/ Robert E. Cook
By __________________________________
ROBERT E. COOK
Director
34
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
3.1 --Third Amended and Restated Certificate of Incorporation of the Company
(1)
3.2 --Amended and Restated Bylaws of the Company (1)
10.1 --International Marketing Agreement dated March 4, 1996 between Sterling
Commerce International, Inc. and Sterling Software International, Inc.
(2)
10.2 --Tax Allocation Agreement dated March 4, 1996 between the Company and
Sterling Software (1)
10.3 --Indemnification Agreement dated March 4, 1996 between the Company and
Sterling Software (2)
10.4 --Master Software License Agreement dated March 4, 1996 among the
Company, Sterling Software and their respective subsidiaries parties
thereto (2)
10.5 --Data Processing Agreement dated March 13, 1996 between the Company and
Sterling Software (1)
10.6 --Space Sharing Agreement dated March 4, 1996 between the Company and
Sterling Software (1)
10.7 --Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software (5)
10.8 --Form of Indemnification Agreement between the Company and each of its
officers and directors
(1), (4)
10.9 --CEO Agreement dated February 12, 1996 between the Company and Sterling
L. Williams (2), (4)
10.10 --Form of Change-in-Control Severance Agreement dated as of February 12,
1996 between the Company and each of Sterling L. Williams, Warner C.
Blow, Paul L.H. Olson, J. Brad Sharp, Stephen R. Perkins and certain
other executive officers and directors of the Company (2), (4)
10.11 --Forms of Severance Agreements dated as of February 12, 1996 between
the Company and each of Warner C. Blow, Paul L.H. Olson, J. Brad Sharp,
Stephen R. Perkins and certain other executive officers and directors
of the Company (other than Sterling L. Williams) (2), (4)
10.12 --Form of Change-in-Control Severance Agreement between the Company and
a certain officer of the Company (4), (5)
10.13 --Form of Severance Agreement between the Company and a certain officer
of the Company (4), (5)
10.14 --Supplemental Executive Retirement Plan II (1), (4)
10.15 --Amendment to Supplemental Executive Retirement Plan II (1), (4)
10.16 --Sterling Commerce, Inc. Amended and Restated 1996 Stock Option Plan
(3), (4)
10.17 --Revolving Credit and Term Loan Agreement dated as of October 1, 1996
among the Company and The First National Bank of Boston, as agent, and
Bank One, Texas, National Association (5)
11.1 --Computation of Earnings Per Share, Year Ended September 30, 1996 (5)
21.1 --Subsidiaries of the Company (5)
23.1 --Consent of Ernst & Young LLP (5)
27.1 --Financial Data Schedule (5)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-80595 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
333-13955 and incorporated herein by reference.
(4) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(5) Filed herewith.
35
<PAGE>
SCHEDULE II
STERLING COMMERCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS-- END OF
OF PERIOD EXPENSES DESCRIBE PERIOD
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
at September 30, 1996...... $2,000,000 $1,068,000 $ (652,000)(1) $2,416,000
========== ========== =========== ==========
Allowance for doubtful
accounts
at September 30, 1995...... $2,830,000 $ (466,000) $ (364,000)(1) $2,000,000
========== ========== =========== ==========
Allowance for doubtful
accounts
at September 30, 1994...... $2,116,000 $1,883,000 $(1,169,000)(1) $2,830,000
========== ========== =========== ==========
</TABLE>
- --------
(1) Accounts written off.
36
<PAGE>
EXHIBIT 10.07
AGREEMENT CONCERNING
REVENUE RULING
This Agreement Concerning Revenue Ruling (this "Agreement") is made
and entered into as of the 19th day of September 1996, by Sterling Commerce,
Inc., a Delaware corporation ("Commerce"), for the benefit of Sterling Software,
Inc., a Delaware corporation ("Software"), and the other parties herein
specified.
A. Subject to the receipt of the Revenue Ruling (as defined below)
and authorization by its Board of Directors, Software intends to distribute to
the holders of its Common Stock, par value $.10 per share, all of the shares of
Common Stock, par value $.01 per share, of Commerce ("Commerce Stock") held by
Software (the "Distribution").
B. Software has applied to the Internal Revenue Service (the "IRS")
for a revenue ruling (the "Revenue Ruling") as to the tax free nature of the
Distribution under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code").
C. As a condition to the issuance of the Revenue Ruling, Software has
made representations to the IRS regarding various matters, some of which involve
facts and circumstances after the Distribution over which Commerce will have
sole control and discretion.
NOW, THEREFORE, in consideration of the benefit to Commerce resulting
from the Distribution, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Commerce hereby agrees
as follows:
1. Options. Without the prior written consent of Software, Commerce
-------
will not amend or take any other action that would have the effect of
accelerating prior to the "Target Date" (as defined below) the time at which any
options to purchase Commerce Stock heretofore granted may be exercised. As used
herein, the term "Target Date" shall mean the second business day following the
first anniversary of the record date for the Distribution. Further, without the
prior written consent of Software, Commerce will not hereafter grant any
options, warrants or other securities evidencing the right to purchase, or
convertible into, shares of Commerce Stock that could be exercised or converted
prior to the Target Date. In addition, without the prior written consent of
Software, Commerce will not enter into any amendment to the Sterling Commerce,
Inc. Savings and Security Plan (the "Commerce Plan") which would have the effect
of increasing the amount of Commerce Stock transferred to the Commerce Plan
within twelve months following the Distribution.
2. Representations. Commerce represents and warrants to Software as
---------------
follows:
(a) to the best of the knowledge and belief of the management of
Commerce, there is no plan or intention by the shareholders of Commerce to
sell, exchange or
-1-
<PAGE>
otherwise dispose of any of their stock in, or securities of, Software or
Commerce subsequent to the Distribution;
(b) there is no plan or intention to liquidate Commerce, to merge
Commerce with any other corporation, or to sell, exchange, or otherwise
dispose of Commerce's assets or those of any of its subsidiaries subsequent
to the Distribution, except in the ordinary course of business;
(c) the representations with respect to Commerce set forth in the
submission from Software's outside counsel and accountants to the IRS dated
March 12, 1996 are true and correct in all material respects;
(d) except for those transactions described in Software's
submissions to the IRS requesting the Revenue Ruling, there have not been
and are not expected to be consummated by Commerce any other transactions
in connection with the Distribution;
(e) Commerce has not been and is not currently engaged in
negotiations with any party concerning any transaction involving the
acquisition by Commerce of assets or stock in consideration for the
issuance of stock by Commerce;
(f) following the Distribution, Commerce will continue the active
conduct of its business independently and, subject to the sharing of the
services of certain executive officers of Software and subject to Software
and its subsidiaries continuing to market software products of Commerce in
international markets, all as previously disclosed to the IRS, with
Commerce's separate employees;
(g) payments made in connection with all continuing transactions
entered into by Commerce with Software will be for fair market value and
based on arm's length terms and conditions; and
(h) except for inter-company payables incurred in the ordinary
course of business, Commerce will not incur indebtedness to Software and
will not extend credit to Software. None of the indebtedness owed by
Commerce to Software after the Distribution will constitute stock or
securities within the meaning of Section 355 of the Code.
Each representation set forth above shall be deemed to have been made by
Commerce effective as of the first time such representation was made to the IRS
in connection with Software's pursuit of the Revenue Ruling and effective as of
the date the IRS issues the Revenue Ruling.
3. Indemnification. Commerce agrees to indemnify and hold Software
---------------
and its directors, officers, employees, agents and representatives harmless from
and against any and all losses, claims, damages, costs, expenses, penalties,
taxes and the like to the extent resulting directly or indirectly from
Commerce's breach of any provision of this Agreement.
-2-
<PAGE>
4. Effectiveness of Agreement. This Agreement shall become effective
--------------------------
immediately upon Software's receipt of the Revenue Ruling and shall continue
thereafter without contractual limitation until the later to occur of (i) the
expiration of the period of limitations for the assessment of tax with respect
to the taxable year of Software or any of its stockholders in which the
Distribution occurs, and (ii) the final resolution of any claims asserted prior
to the expiration of the limitations period described in clause (i) above
against Commerce under this Agreement.
5. Miscellaneous. This Agreement (a) shall be governed by and
-------------
interpreted in accordance with the laws of the State of Texas, (b) constitutes
the entire agreement and understanding of Commerce concerning the subject matter
hereof and supersedes all prior agreements and understandings with respect
thereto; provided, however that the Indemnification Agreement dated as of March
4, 1996 (the "Indemnification Agreement"), and the Tax Allocation Agreement
dated as of March 4, 1996 (collectively, the "Prior Agreements"), both by and
between Software and Commerce, are not intended to be superseded by this
Agreement; provided further, however, that to the extent of any conflict between
the Prior Agreements and this Agreement, this Agreement shall control with
respect to such conflict, and (c) may be amended only by virtue of a writing
duly executed by Software and Commerce. Except for Software and the parties
entitled to indemnification pursuant to Section 3 hereof (Software and each of
such parties being each hereinafter called an "Indemnitee"), each of whom is an
intended third party beneficiary hereunder, nothing expressed or implied in this
Agreement shall be construed to give any person or entity other than such
Indemnitees any legal or equitable right hereunder. If an Indemnitee receives
notice of the assertion of any claim or the commencement of any action or
proceeding by any person or entity (a "Third Party Claim"), which claim or
action reasonably could be expected to form the basis for a claim of
indemnification under this Agreement, the procedures set forth in Section 5 of
the Indemnification Agreement shall apply to such Third Party Claim, and are
incorporated herein. For purposes of applying Section 5 of the Indemnification
Agreement, as used therein the term "Agreement" shall mean and refer to this
Agreement, the term "Third Party Claim" shall have the meaning set forth above,
and the term "Indemnifying Party" shall mean and refer to Commerce.
[Remainder of page intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, Commerce has executed and delivered this Agreement as
of the date first above written.
STERLING COMMERCE, INC.
By: /s/ Steven P. Shiflet
---------------------
Steven P. Shiflet,
Vice President, Finance
-4-
<PAGE>
EXHIBIT 10.12
[Form of Agreement for Executives with Severance Agreement]
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
________ __, 199_, by and between Sterling Commerce, Inc., a Delaware
corporation (the "Company"), and ______________________________ (the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and is expected
to make major contributions to the profitability, growth and financial strength
of the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not
less than the Executive's annual fixed or base compensation as in effect for the
Executive immediately prior to the occurrence of a Change in Control or such
higher rate as may be determined from time to time by the Board of Directors of
the Company (the "Board") or a committee thereof.
(b) "Change in Control" means the occurrence during the Term of any
of the following events:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of
<PAGE>
directors ("Voting Stock") of such corporation or person immediately
after such transaction are held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than two-thirds
of the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
Directors of the Company cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this clause
(v) each Director who is first elected, or first nominated for
election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company (or a committee thereof) then
still in office who were Directors of the Company at the beginning of
any such period will be deemed to have been a Director of the Company
at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), [OR] (C) any
Company-sponsored employee stock ownership plan or any other employee
benefit plan of the Company or any Subsidiary[, OR (D) STERLING SOFTWARE,
INC. OR ANY OF ITS WHOLLY OWNED SUBSIDIARIES (COLLECTIVELY, "SSW")] EITHER
FILES OR BECOMES OBLIGATED TO FILE A REPORT OR A PROXY STATEMENT UNDER OR
IN RESPONSE TO SCHEDULE 13D, SCHEDULE 14D-1, FORM 8-K
-2-
<PAGE>
OR SCHEDULE 14A (OR ANY SUCCESSOR SCHEDULE, FORM OR REPORT OR ITEM THEREIN)
UNDER THE EXCHANGE ACT DISCLOSING BENEFICIAL OWNERSHIP BY IT OF SHARES OF
VOTING STOCK OF THE COMPANY, WHETHER IN EXCESS OF 20% OR OTHERWISE, OR
BECAUSE THE COMPANY REPORTS THAT A CHANGE IN CONTROL OF THE COMPANY HAS
OCCURRED OR WILL OCCUR IN THE FUTURE BY REASON OF SUCH BENEFICIAL OWNERSHIP
OR ANY INCREASE OR DECREASE THEREOF[; PROVIDED HOWEVER, THAT THE EXCEPTION
CONTAINED IN CLAUSE (D) ABOVE WITH RESPECT TO THE BENEFICIAL OWNERSHIP OF
VOTING STOCK OF THE COMPANY BY SSW SHALL EXPIRE, WITHOUT FURTHER ACTION,
EFFECTIVE AS OF THE DATE ON WHICH SSW NO LONGER BENEFICIALLY OWNS MORE THAN
10% OF THE OUTSTANDING VOTING STOCK OF THE COMPANY].
(c) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement
income and welfare benefit policies, plans, programs or arrangements in
which Executive is entitled to participate, including without limitation
any stock option, stock purchase, stock appreciation, savings, pension,
401(k), employee stock ownership (ESOP), supplemental executive retirement,
or other retirement income or welfare benefit, deferred compensation,
incentive compensation, group or other life, health, medical/hospital or
other insurance (whether funded by actual insurance or self-insured by the
Company), disability, salary continuation, expense reimbursement, executive
automobile, tax and financial planning, club memberships, incentive travel,
tax reimbursement and other employee benefit policies, plans, programs or
arrangements that may now exist or any equivalent successor policies,
plans, programs or arrangements that may be adopted hereafter by the
Company, providing perquisites, benefits and service credit for benefits at
least as great in the aggregate as are payable thereunder prior to a Change
in Control.
(d) "Incentive Pay" means (i) if calculated at any time commencing
one year after the date first set forth above, an annual amount equal to
not less than the highest aggregate annual bonus, incentive or other
payments of cash compensation, in addition to Base Pay, made or to be made
in regard to services rendered in any calendar year during the three
calendar years (or such lesser number of calendar years as this Agreement
shall have been in effect) immediately preceding the year in which the
Change in Control occurred pursuant to any bonus, incentive, profit-
sharing, performance, discretionary pay or similar agreement, policy, plan,
program or arrangement (whether or not funded) of the Company or any
successor thereto, providing benefits at least as great as the benefits
payable thereunder prior to a Change in Control and (ii) if calculated at
any time prior to one year after the date first set forth above, an amount
equal to 100% of the aggregate of the budgeted annual bonus, incentive or
other budgeted payments of cash compensation, in addition to Base Pay, at
plan for such Executive.
(e) "Severance Period" means the period of time commencing on the
date of the first occurrence of a Change in Control and continuing until
the earliest of (i) the _____ anniversary of the occurrence of the Change
in Control, or (ii) the Executive's death; provided, however, that
commencing on each anniversary of the Change in Control, the Severance
Period will automatically be extended for an additional year unless, not
later than
-3-
<PAGE>
90 calendar days prior to such anniversary date, either the Company or the
Executive shall have given written notice to the other that the Severance
Period is not to be so extended.
(f) "Term" means the period commencing as of the date first set forth
above and expiring as of the later of (i) the close of business on December
31, 200_, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 199_ and each January 1
thereafter, the Term of this Agreement will automatically be extended for
an additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given notice that
it or the Executive, as the case may be, does not wish to have the Term
extended and (B) subject to the last sentence of Section 8, if, prior to a
Change in Control, the Executive ceases for any reason to be an employee of
the Company or any Subsidiary, thereupon without further action the Term
shall be deemed to have expired and this Agreement will immediately
terminate and be of no further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
benefits provided by Section 4 hereof.
(a) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period with the right to severance compensation as provided in Section
4 upon the occurrence of one or more of the following events (regardless of
whether any other reason for such termination exists or has occurred, including
without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
-4-
<PAGE>
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties attached to
the position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay and Incentive Pay, or (C) the termination or denial of the Executive's
rights to Employee Benefits or a reduction in the scope or value thereof,
any of which is not remedied by the Company within 10 calendar days after
receipt by the Company of written notice from the Executive of such change,
reduction or termination, as the case may be;
(iii) A determination by the Executive (which determination will
be conclusive and binding upon the parties hereto provided it has been made
in good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered
Executive's performance of, or has caused Executive to suffer a substantial
reduction in, any of the authorities, powers, functions, responsibilities
or duties attached to the position held by the Executive immediately prior
to the Change in Control, which situation is not remedied within 10
calendar days after written notice to the Company from the Executive of
such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities or duties hereunder at least 20% more (in terms of
aggregate days in any calendar year or in any calendar quarter when
annualized for purposes of comparison to any prior year) than was required
of Executive in any of the three full years immediately prior to the Change
in Control without, in either case, his prior written consent; or
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor
thereto.
(b) A termination by the Company pursuant to Section 3(a) or by
the Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any
-5-
<PAGE>
agreement, policy, plan, program or arrangement of the Company providing
Employee Benefits, which rights shall be governed by the terms thereof. The
Company and the Executive are parties to a Severance Agreement, dated as of
__________ __, 199_ (as such agreement may be amended from time to time, the
"Severance Agreement"). Notwithstanding anything contained in this Agreement to
the contrary, in the event the Executive's employment with the Company is
terminated under circumstances in which the Executive would otherwise be
entitled to receive payments and benefits under both this Agreement and the
Severance Agreement, the Executive shall have the right to elect to receive
payments and benefits under either this Agreement or the Severance Agreement,
but not both (except that the Executive may in all events receive all payments
and benefits to which he or she is entitled under the Severance Agreement during
the period between the Termination Date and the Election Date (as such terms are
defined below)). Within five business days following the date of the termination
of the Executive's employment with the Company under the circumstances described
in the preceding sentence (the "Termination Date"), which shall be the effective
date of such termination if the termination is pursuant to Section 3(a) or such
other date that may be specified by the Executive if the termination is pursuant
to Section 3(b), the Company shall provide the Executive, in writing, a
reasonably detailed determination of the payments and other benefits under each
of this Agreement and the Severance Agreement. Executive shall make the election
provided for in this Section 3(c) by providing the Company written notice
thereof within 30 days after the Executive's receipt of the written
determination referred to in the preceding sentence; provided, however, that if
such election is not so made within such 30-day period, the Executive shall be
irrevocably deemed to have elected to receive payments and benefits under this
Agreement (the date on which such election is so made or deemed to have been
made being the "Election Date").
4. Severance Compensation: (a) If, following the occurrence of a Change
----------------------
in Control, the Company terminates the Executive's employment during the
Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (or, in the event that the circumstance described in
Section 3(c) hereof is applicable, within five business days after the
Election Date), a lump sum payment (the "Severance Payment") in an amount
equal to _____ times the sum of (A) Base Pay (at the highest rate in effect
for any period prior to the Termination Date), plus (B) Incentive Pay
(determined in accordance with the standard set forth in Section 1(d));
provided however, that Severance Payment shall be reduced by the aggregate
amount of all cash payments, if any, previously received by the Executive
pursuant to his or her Severance Agreement prior to the Election Date.
(ii) (A) for _____ months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are benefits under welfare plans (as
that term is used in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) substantially similar to those which the Executive
was receiving or entitled to receive immediately prior to the Termination
Date, and (B) such Continuation Period will be considered service with the
Company for the
-6-
<PAGE>
purpose of determining service credits and benefits due and payable to the
Executive under the Company's retirement income, supplemental executive
retirement and other benefit plans of the Company applicable to the
Executive, his dependents or his beneficiaries immediately prior to the
Termination Date. If and to the extent that any benefit described in
subsection (A) or (B) of this Section 4(a)(ii) is not or cannot be paid or
provided under ERISA or any other applicable law or regulation or under any
policy, plan, program or arrangement of the Company, then the Company will
itself pay or provide for the payment to the Executive, his dependents and
beneficiaries, of such Employee Benefits. Without otherwise limiting the
purposes or effect of Section 5, Employee Benefits otherwise receivable by
the Executive pursuant to subsection (A) of this Section 4(a)(ii) will be
reduced to the extent comparable welfare benefits are actually received by
the Executive from another employer during the Continuation Period
following the Executive's Termination Date, and any such benefits actually
received by the Executive shall be reported by the Executive to the
Company. Notwithstanding the preceding sentence, in the event that the
Executive is required to pay any amounts in connection with the receipt of
such welfare benefits, the Company will be obligated to promptly reimburse
the Executive for the amounts paid by the Executive to receive such
benefits.
(b) Without limiting the rights of the Executive at law or in
equity, if the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will pay
interest on the amount or value thereof at an annualized rate of interest equal
to the so-called composite "prime rate" as quoted from time to time during the
relevant period in the Southwest Edition of The Wall Street Journal. Such
-----------------------
interest will be payable as it accrues on demand. Any change in such prime rate
will be effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such tax (such tax or taxes, together with any such
interest and penalties, being hereafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to receive an additional payment or
payments (collectively, a "Gross-Up Payment"); provided, however, that no Gross-
Up
-7-
<PAGE>
Payment shall be made with respect to the Excise Tax, if any, attributable to
(i) any incentive stock option, as defined by Section 422 of the Code ("ISO")
granted prior to the execution of this Agreement, or (ii) any stock appreciation
or similar right, whether or not limited, granted in tandem with an ISO
described in clause (i). The Gross-Up Payment shall be in an amount such that,
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment.
(a) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Payment to the Executive. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it shall, at the
same time as it makes such determination, furnish the Company and the Executive
a written opinion to the effect that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or other tax
return. As a result of the uncertainty in the application of Section 4999 of the
Code (or any successor provision thereto) and the possibility of similar
uncertainty regarding applicable state or local tax law at the time of any
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 5(f) and the Executive thereafter is required to make a payment of
any Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.
(b) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 5. Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company and the
Executive.
-8-
<PAGE>
(c) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and such
other documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(d) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this Section
5 shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within five business days after receipt from the Executive of
a statement therefor and reasonable evidence of his payment thereof.
(e) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim and the
Executive shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive, subject to the provisions of Section 5(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
-9-
<PAGE>
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 5(f), the Company shall control all proceedings taken in connection with
the contest of any claim contemplated by this Section 5(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(f) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without Executive's prior written consent except as required by law.
(6) No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult and may be impossible for the Executive to find reasonably
comparable employment
-10-
<PAGE>
within a reasonable time period following the Termination Date. In addition, the
Company acknowledges that its severance pay plans and policies applicable in
general to its salaried employees typically do not provide for mitigation,
offset or reduction of any severance payments received thereunder. Accordingly,
the payment of the severance compensation by the Company to the Executive in
accordance with the terms of this Agreement is hereby acknowledged by the
Company to be reasonable, and the Executive will not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor will any profits, income, earnings or other benefits from any
source whatsoever create any mitigation, offset, reduction or any other
obligation on the part of the Executive hereunder or otherwise, except as
expressly provided in the last two sentences of Section 4(a)(ii).
(7) Legal Fees and Expenses. It is the intent of the Company that the
-----------------------
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
(8) Employment Rights: Nothing expressed or implied in this Agreement
-----------------
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any Subsidiary
prior to or following any Change in Control. Any event or occurrence described
in Section 3(b)(i), (ii), (v) or (vi) hereof following the commencement of a
discussion with a third person that ultimately results in a Change in Control
shall be deemed to have occurred after a Change in Control for the purposes of
this Agreement.
(9) Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
-11-
<PAGE>
(10) Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but will
not otherwise be assignable, transferable or delegable by the Company.
(a) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(b) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 10(c), the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
(11) Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 8080 North
Central Expressway, Suite 1100, Dallas, Texas 75206 (to the attention of the
President of the Company) and to the Executive at the Company's address, with a
copy to the Executive at his or her principal residence, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
(12) Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
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<PAGE>
(13) Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
(14) Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are to references to Sections of this
Agreement.
(15) Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
(16) Termination of Prior Agreements. The [Title Agreement] between
-------------------------------
Executive and Sterling Commerce, dated _______________, as amended to the date
hereof (the "Prior Agreement"), shall terminate automatically and shall
thereafter be of no further force or effect; provided, however, that if this
Agreement is held wholly invalid, unenforceable or otherwise illegal, the
preceding clause shall have no effect and the Prior Agreement shall be deemed to
have continued at all times in force and effect. Subject to the foregoing
proviso, this Agreement supersedes all prior agreements, arrangements and
understandings with respect to the subject matter hereof.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered as of the date first above written.
STERLING COMMERCE, INC.
By______________________________________
Sterling L. Williams
Chairman of the Board &
Chief Executive Officer
________________________________________
[Executive]
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<PAGE>
EXHIBIT 10.13
[Form of Agreement]
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the
___ day of ________, 199_ by and between Sterling Commerce, Inc., a Delaware
corporation ("Sterling Commerce"), and ____________________, an individual
("Executive").
RECITALS:
WHEREAS, Sterling Commerce acquires, develops, markets and supports a broad
range of products and services; and
WHEREAS, Sterling Commerce desires to retain Executive as its
____________________; and
WHEREAS, Executive is willing to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Executive agrees to render such managerial services as
----------
are customarily required of the ____________________, and Sterling
Commerce agrees to utilize such services on the terms and conditions
contained herein.
2. Term. This Agreement shall commence on the date first set forth above
----
and shall continue in effect for _____ (__) months after the "Notice
Date" as defined in Section 3 hereof.
3. Termination of Employment. The parties acknowledge that Executive is
-------------------------
employed "at will" and may be terminated by Sterling Commerce at any
time with or without cause. The Executive shall be entitled to
termination pay calculated in accordance with Section 4 hereof upon
termination of Executive's employment by Sterling Commerce, with or
without cause.
The date on which a notice of termination is given to Executive by
Sterling Commerce shall be deemed the "Notice Date" with the
termination to be effective _____ (__) months following the Notice
Date. On the Notice Date, Executive shall be deemed to have been
assigned "no duties," shall vacate his or her office
<PAGE>
and shall resign as an officer of Sterling Commerce and its
subsidiaries. Since Executive will be assigned "no duties" with
Sterling Commerce, Executive shall be free to pursue other employment
or consulting opportunities during the _____ month period in which
Executive receives termination pay.
4. Termination Pay. For purposes of this Agreement, if Executive's
---------------
employment is terminated (or deemed to be terminated) pursuant to
Section 3, upon receipt from Executive (or Executive's estate or
personal representative) of a fully executed release in form
reasonably acceptable to counsel for Sterling Commerce, Sterling
Commerce shall pay, or cause one of its subsidiaries to pay, to
Executive as termination pay:
(a) an amount equal to _____ hundred percent of Executive's aggregate
monthly salary for the twelve (12) months immediately preceding
the Notice Date (or, if Executive shall not have been employed
for such twelve month period, an amount equal to _______ hundred
percent of Executive's annual salary rate in effect immediately
prior to the Notice Date); and
(b) an amount equivalent to the product of _____ times:
(i) if Executive shall have completed at least twelve months
employment with Sterling Commerce prior to the Notice Date,
the amount of Executive's aggregate bonuses during the
twelve months immediately prior to the Notice Date (the
"Last Bonus"), after deducting from such product one hundred
percent (100%) of the accrued but unpaid bonus amount
Executive is entitled to receive on the Notice Date,
pursuant to any bonus or incentive compensation plan of
Sterling Commerce, for periods of service after the period
for which Executive received or was entitled to receive the
Last Bonus or
(ii) if Executive shall not have completed at least twelve months
employment with Sterling Commerce prior to the Notice Date,
an amount equal to the greater of
(x) the amount of the Last Bonus, if any or
(y) 100% of the aggregate of the budgeted annual bonus,
incentive or other budgeted payments of cash
compensation, in addition to the Executive's annual
base salary, at plan for such Executive in effect
immediately prior to the Notice Date,
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<PAGE>
after deducting from such product under this clause
(ii) one hundred percent (100%) of the accrued but
unpaid bonus amount Executive is entitled to receive on
the Notice Date, pursuant to any bonus or incentive
plan of Sterling Commerce, for periods of service after
the period for which Executive received or was entitled
to receive the Last Bonus, if any.
In the event of Executive's death or disability following the Notice
Date, Executive, Executive's estate or Executive's personal
representative, as the case may be, shall continue to receive the
termination payments provided for in this Section 4.
5. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in
Section 4 hereof shall be determined in good faith by Sterling
Commerce within 15 days following the Notice Date, and such
termination payments shall be distributed by Sterling Commerce to
Executive in _____ (__) equal bi-monthly installments beginning thirty
(30) days following the Notice Date and continuing bi-monthly
thereafter.
6. Continuation of Medical and Health Benefits. For a period of _____
-------------------------------------------
(__) months following the Notice Date, Sterling Commerce shall arrange
to provide Executive, at no additional charge to Executive, with life,
medical, dental, health, accident and disability insurance benefits
substantially similar to those that Executive is receiving or is
entitled to receive immediately prior to the Notice Date, which
benefits shall in no event be less than those benefits in effect
immediately prior to the Notice Date.
7. Continued Participation in Employee Plans. For a period of _____ (__)
-----------------------------------------
months following the Notice Date, Executive shall continue to
participate in Sterling Commerce's Employee Stock Ownership Plan
and/or 401(k) Plan and any other such plans as may be adopted in the
future for the benefit and retention of Sterling Commerce's executive
officers. In no event will Sterling Commerce be required to make any
new grants of options to such Executive under Sterling Commerce's
Stock Option Plans after the Notice Date.
8. Change-in-Control. Sterling Commerce and the Executive are parties to
-----------------
a Change-in-Control Severance Agreement, dated as of _________ __,
199_ (as such agreement may be amended from time to time, the "Change-
in-Control Agreement"). Notwithstanding anything contained in this
Agreement to the contrary, in the event the Notice Date occurs under
circumstances in which the Executive would otherwise be entitled to
receive payments and benefits under both this Agreement and the
Change-in-Control Agreement, the Executive shall have the right to
elect to receive payments and benefits under either this Agreement or
the Change-in-Control Agreement, but not both. Within five
-3-
<PAGE>
business days following the Notice Date under circumstances in which
this Section 8 would apply, Sterling Commerce shall provide the
Executive, in writing, a reasonably detailed determination of the
payments and other benefits under each of this Agreement and the
Change-in-Control Agreement. The Executive shall make the election
provided for in this Section 8 within thirty calendar days after
Executive's receipt of the written determination referred to in the
preceding sentence; provided, however, that if such election is not so
made within such 30-day period, the Executive shall be irrevocably
deemed to have elected to receive payments and benefits under the
Change-in-Control Agreement. Prior to the date on which Executive
makes or is deemed to have made the election referred to above, he
shall receive all benefits under Sections 4, 5, 6 and 7 of this
Agreement as if the Executive had made the election to receive
benefits and payments under this Agreement.
9. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party
set forth below or such other places as may from time to time
be designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are
actually received.
If to Sterling Commerce, to: 8080 N. Central Expressway, Suite
1100
Dallas, Texas 75206
Attention: President
If to Executive, to:
(ii) This Agreement shall be binding upon Sterling Commerce and
Executive and their respective successors, assigns, heirs and
personal representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Agreement.
(iv) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and Sterling
Commerce. No waiver by either party hereto at any time of any
breach by the other party hereto or compliance with any
condition or provision of this Agreement to be
-4-
<PAGE>
performed by such other party will be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with
respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
References to Sections are to references to Sections of this
Agreement.
10. Termination of Prior Agreements. The [Title of Agreement] between
-------------------------------
Executive and Sterling Commerce, dated _______________, as amended to
the date hereof (the "Prior Agreement"), shall terminate automatically
and shall thereafter be of no further force or effect; provided,
however, that if this Agreement is held wholly invalid, unenforceable
or otherwise illegal, the preceding clause shall have no effect and
the Prior Agreement shall be deemed to have continued at all times in
force and effect. Subject to the foregoing proviso, this Agreement
supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
Executed by the parties hereto as of the date first set forth above.
EXECUTIVE
________________________________________
Name:___________________________________
STERLING COMMERCE, INC.
By: ____________________________________
Sterling L. Williams
Chairman of the Board and Chief
Executive Officer
-5-
<PAGE>
EXHIBIT 10.17
STERLING COMMERCE, INC.
REVOLVING CREDIT AND TERM LOAN AGREEMENT
DATED AS OF OCTOBER 1, 1996
AMONG
STERLING COMMERCE, INC.,
AND
THE FIRST NATIONAL BANK OF BOSTON,
AS AGENT,
------
AND
THE BANKS
LISTED ON SCHEDULE 1.1 HERETO
-------- ---
<PAGE>
STERLING COMMERCE, INC.
REVOLVING CREDIT AND TERM LOAN AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
SECTION 1. DEFINITIONS AND RULES OF
INTERPRETATION.............................................. 1
1.1. Definitions................................................. 1
1.2. Accounting Terms and Determinations......................... 14
1.3. Rules of Interpretation..................................... 14
SECTION 2. THE CREDIT.................................................. 15
2.1. Loans....................................................... 15
2.2. Reduction of Total Commitment............................... 15
2.3. The Notes................................................... 16
2.4. Interest.................................................... 16
2.5. Interest on Overdue Amounts................................. 17
2.6. Interest Rate Elections; Requests
for Loans.................................................. 17
2.7. Conversion Options.......................................... 17
2.8. Funds for Loans............................................. 18
2.9. Maturity of the Loans,
Repayment in Installments.................................. 19
2.10. Mandatory Repayments........................................ 20
2.11. Optional Prepayment of Principal............................ 20
2.12. Commitment Fee.............................................. 20
2.13. Agent's Fee................................................. 21
2.14. Closing Fee................................................. 21
SECTION 2A. LETTERS OF CREDIT......................................... 21
2A.1. Letter of Credit Commitments................................ 21
2A.2. Reimbursement Obligation of the Company..................... 22
2A.3. Letter of Credit Payments................................... 23
2A.4. Obligations Absolute........................................ 24
2A.5. Reliance By Issuer.......................................... 24
2A.6. Letter of Credit Fee........................................ 25
SECTION 3. CERTAIN GENERAL PROVISIONS.................................. 25
3.1. Funds for Payments......................................... 25
3.2. Computations................................................ 26
3.3. Additional Costs, Etc....................................... 26
</TABLE>
<PAGE>
ii
<TABLE>
<S> <C>
3.4. Indemnification for Losses.................................. 27
3.5. Capital Adequacy............................................ 28
3.6. Bank Certificate............................................ 29
3.7. Inability to Determine Eurodollar Rate...................... 29
3.8 Illegality.................................................. 30
SECTION 4. GUARANTY.................................................... 30
SECTION 5. REPRESENTATIONS AND WARRANTIES.............................. 30
5.1. Corporate Existence......................................... 30
5.2. Subsidiaries; Shares Owned By The Commerce Companies........ 31
5.3. Corporate Authority, Etc.................................... 31
5.4. Binding Effect of Documents, Etc............................ 32
5.5. No Defaults or Events of Default............................ 32
5.6. Chief Executive Offices; Mailing Addresses.................. 33
5.7. Financial Statements and Projections........................ 33
5.8. No Material Changes, Etc.................................... 33
5.9. Mortgages and Liens......................................... 34
5.10. Indebtedness................................................ 34
5.11. Litigation.................................................. 34
5.12. No Default.................................................. 34
5.13. Taxes....................................................... 35
5.14. True Copies of Charter and Other Documents.................. 35
5.15. Employee Benefit Plans...................................... 36
5.16. Other Representations....................................... 37
5.17. Disclosure.................................................. 37
5.18. Holding Company and Investment Company Acts................. 37
5.19. Regulations U and X......................................... 37
5.20. Franchises, Patents, Copyrights, Etc........................ 38
5.21 Non-Guarantor Subsidiaries.................................. 38
5.22. Environmental Compliance.................................... 38
5.23. Solvency.................................................... 39
SECTION 6. CONDITIONS TO THE FIRST LENDING............................. 39
6.1. Loan Documents, Etc......................................... 39
6.2. Legality of Transactions, Etc............................... 40
6.3. Representations and Warranties.............................. 40
6.4. Performance, Etc............................................ 40
6.5. Certified Copies of Charter Documents....................... 40
6.6. Proof of Corporate Action................................... 40
6.7. Incumbency Certificate...................................... 41
6.8. Proceedings and Documents................................... 41
6.9. Legal Opinions.............................................. 41
6.10. UCC Search Results.......................................... 41
6.11. Completion of Spin-Off...................................... 41
6.12. Insurance Certificates...................................... 41
6.13. Payment of Fees............................................. 42
</TABLE>
<PAGE>
iii
<TABLE>
<S> <C>
SECTION 7. CONDITIONS TO SUBSEQUENT LOANS.............................. 42
7.1. Legality of Transactions.................................... 42
7.2. Representations and Warranties
No Default or Event of Default............................. 42
7.3. Performance, Etc............................................ 43
7.4. Proceedings and Documents................................... 43
7.5. Continued Compliance with Certain Regulations............... 43
7.6. Governmental Regulation..................................... 43
SECTION 8. AFFIRMATIVE COVENANTS OF THE COMPANY........................ 43
8.1 Punctual Payment............................................ 43
8.2. Legal Existence, Etc........................................ 44
8.3. Use of Loan Proceeds........................................ 44
8.4. Financial Statements........................................ 44
8.5. Notice of Litigation and Judgment and Environmental Events.. 45
8.6. Notice of Default........................................... 46
8.7. Books and Records........................................... 46
8.8. Insurance................................................... 46
8.9. Taxes....................................................... 47
8.10. Conduct of Business......................................... 47
8.11. Compliance with Law, Contracts, Licenses and Permits........ 48
8.12. Access to Properties and Books; Commercial
Finance Examinations; Confidentiality..................... 48
8.13. Allowances.................................................. 49
8.14. Change of Corporate Name; Maintenance of Office............. 50
8.15. Employee Benefit Plan....................................... 50
8.16. Corporate Existence; Maintenance of Properties.............. 50
8.17. Activation of Non-Guarantor Subsidiaries.................... 51
8.18. Deactivation of Commerce Subsidiaries....................... 52
8.19. New Subsidiaries............................................ 52
8.20. Further Assurances.......................................... 52
SECTION 9. NEGATIVE COVENANTS OF THE COMPANY........................... 53
9.1. Indebtedness................................................ 53
9.2. Security Interests and Liens................................ 55
9.3. Restrictions on Investments................................. 56
9.4. Merger and Consolidation.................................... 56
9.5. Acquisitions................................................ 56
9.6. Capital Expenditures........................................ 58
9.7. Asset Dispositions.......................................... 58
9.8. Change of Location.......................................... 59
9.9. Employee Benefit Plans...................................... 59
9.10. Additional Shares........................................... 60
9.11. Negative Pledges............................................ 61
9.12. Compliance with Environmental Laws.......................... 61
</TABLE>
<PAGE>
iv
<TABLE>
<S> <C>
9.13 Distributions............................................... 61
SECTION 10. FINANCIAL COVENANTS......................................... 61
10.1. Profitability............................................... 62
10.2. Operating Cash Flow to Interest Charges..................... 62
10.3. Current Ratio............................................... 62
10.4. Consolidated Tangible Net Worth............................. 62
10.5. Liabilities to Net Worth Ratio.............................. 62
10.6. Total Debt To Operating Cash Flow Ratio..................... 62
SECTION 11. EVENTS OF DEFAULT; ACCELERATION............................. 62
SECTION 12. SETOFF...................................................... 66
SECTION 13. THE AGENT................................................... 67
13.1. Authorization............................................... 67
13.2. Employees and Agents........................................ 67
13.3. No Liability................................................ 67
13.4. No Representations.......................................... 68
13.5. Payments.................................................... 68
13.6. Holders of Notes............................................ 69
13.7. Indemnity................................................... 69
13.8. Agent As Bank............................................... 69
13.9. Resignation................................................. 69
13.10. Notification of Defaults and Events of Default.............. 70
SECTION 14. EXPENSES.................................................... 70
SECTION 15. INDEMNIFICATION............................................. 71
SECTION 16. SURVIVAL OF COVENANTS, ETC.................................. 71
SECTION 17. ASSIGNMENT AND PARTICIPATION................................ 72
17.1. Conditions to Assignment by Banks........................... 72
17.2. Certain Representations and Warranties;
Limitations; Covenants..................................... 72
17.3. Register.................................................... 73
17.4. New Note.................................................... 73
17.5. Participations.............................................. 74
17.6. Disclosure.................................................. 74
17.7. Assignee or Participant Affiliated with the
Commerce Companies......................................... 74
17.8. Miscellaneous Assignment Provisions......................... 75
17.9. Assignment by the Company................................... 75
</TABLE>
<PAGE>
v
<TABLE>
<S> <C>
SECTION 18. NOTICES, ETC....................... 75
SECTION 19. GOVERNING LAW...................... 76
SECTION 20. HEADINGS........................... 76
SECTION 21. COUNTERPARTS....................... 76
SECTION 22. ENTIRE AGREEMENT, ETC.............. 77
SECTION 23. CONSENTS, AMENDMENTS, WAIVERS, ETC. 77
SECTION 24. USURY PROVISION.................... 77
SECTION 25. WAIVER OF JURY TRIAL............... 78
SECTION 26. SEVERABILITY....................... 79
SECTION 27. DELIVERY IN MASSACHUSETTS.......... 78
</TABLE>
<PAGE>
vi
LIST OF SCHEDULES AND EXHIBITS
------------------------------
SCHEDULES
---------
SCHEDULE 1.1 - Banks
SCHEDULE 1.2 - Commerce Accounts Receivable Agreements
SCHEDULE 1.3 - Commerce Accounts Receivable Guaranties
SCHEDULE 1.4 - Commerce Subsidiaries
SCHEDULE 1.5 - Non-Guarantor Subsidiaries
SCHEDULE 5.2 - Subsidiaries; Shares owned by the Commerce
Companies
SCHEDULE 5.6 - Chief Executive Offices and Mailing Addresses
of the Company and each of the Commerce
Subsidiaries
SCHEDULE 5.9 - Locations of Commerce Companies
SCHEDULE 5.11 - Litigation
SCHEDULE 5.12 - Defaults
SCHEDULE 5.13 - Taxes
SCHEDULE 5.20 - Intellectual Property
SCHEDULE 5.22 - Environmental Matters
SCHEDULE 8.22 - Post-Closing UCC Search Jurisdictions
SCHEDULE 9.1 - Capitalized Leases; Indebtedness
SCHEDULE 9.2(a) - Existing Liens
EXHIBITS
--------
EXHIBIT A - Note
EXHIBIT B - Loan Request
EXHIBIT C - Opinion of Jones, Day, Reavis & Pogue
EXHIBIT D - Compliance Certificate
EXHIBIT E - Assignment and Acceptance
EXHIBIT F - Guaranty
<PAGE>
REVOLVING CREDIT AND TERM LOAN AGREEMENT
--------- ------ --- ---- ---- ---------
This REVOLVING CREDIT AND TERM LOAN AGREEMENT is made as of the 30th day
of September, 1996, by and among STERLING COMMERCE, INC., a Delaware corporation
(the "Company"), THE FIRST NATIONAL BANK OF BOSTON, a national banking
association ("FNBB) and the other lending institutions listed on Schedule 1.1
-------- ---
hereto, and THE FIRST NATIONAL BANK OF BOSTON, as agent for itself and such
other lending institutions (the "Agent").
(S)1. DEFINITIONS AND RULES OF INTERPRETATION.
----------- --- ----- -- --------------
(S)1.1. DEFINITIONS. The following terms shall have the meanings set
-----------
forth in this (S)1.1 or elsewhere in the provisions of this Agreement referred
to below:
Accounts Receivable. All rights of the Company and its Subsidiaries to
-------- ----------
payment for goods sold, leased or otherwise marketed in the ordinary course of
business and all rights of the Company and its Subsidiaries to payment for
services rendered in the ordinary course of business and all sums of money or
other proceeds due or to become due thereon pursuant to transactions with
Persons, recorded on books of account in accordance with generally accepted
accounting principles, excluding, however, from the foregoing definition of
Accounts Receivable, all intercompany accounts receivable and deducting from the
- -------- ----------
foregoing definition of Accounts Receivable the aggregate amount of all
-------------------
allowances therefor on the books of the Company and its Subsidiaries in
accordance with generally accepted accounting principles.
Affiliate. Any Person that would be considered to be an affiliate
---------
Company under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if the Company were
issuing securities.
Agent. The First National Bank of Boston, acting as agent for the Banks.
-----
Agent's Fee. See (S)2.13.
------- ---
Agent's Special Counsel. Bingham, Dana & Gould LLP of Boston,
------- ------- -------
Massachusetts, or such other counsel as may be approved by the Agent.
Agreement. This Revolving Credit and Term Loan Agreement, including the
---------
Exhibits and Schedules hereto.
<PAGE>
-2-
Assignment and Acceptance. See (S)17.1.
---------- --- ----------
Authorized Officer. Any corporate officer of the Company.
------------------
Balance Sheet Date. September 30, 1995, as specified in the Company's
------- ----- ----
pro forma balance sheet set forth in the S-1 Registration Statement of the
- ---------
Company filed with the Securities and Exchange Commission and originally dated
December 20, 1995.
Banks. FNBB and the other lending institutions listed on Schedule 1.1
----- -------- ---
hereto and any other Person who becomes an assignee of any rights and
obligations of a Bank pursuant to (S)17.
Base Rate. The greater of (i) the annual rate of interest announced from
---- ----
time to time by FNBB at its head office in Boston, Massachusetts as its "base
rate" (computed on the basis of a year of 360 days) and (ii) the annual rate of
interest equal to the sum of (A) the Federal Funds Effective Rate for overnight
funds in effect from time to time plus (B) one-half percent (1/2%). For the
purposes of this definition, "Federal Funds Effective Rate" shall mean for any
day, the rate per annum equal to the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York and reported in The Wall Street Journal or other publication of
--- ---- ------ -------
national circulation selected by the Agent, or, if such rate is not so published
and reported for any day that is a Business Day, the average of the quotations
for such day on such transactions received by the Agent from three funds brokers
of recognized standing selected by the Agent.
Base Rate Loan(s). Loans bearing interest calculated by reference to the
---- ---- -------
Base Rate.
Business Day. Any day on which commercial banking institutions in
-------- ---
Boston, Massachusetts and Dallas, Texas are open for the transaction of banking
business and, when dealing in the Eurodollar Interbank Market as contemplated
hereunder, also a day which is a Eurodollar Business Day.
Capital Assets. Fixed assets, tangible (such as land, building,
------- ------
fixtures, machinery and equipment) and intangible (such as intangible assets
included in Capitalized Computer Software Costs and marketing rights), provided
--------
that Capital Assets shall not include goodwill, non-compete agreements or
customer base lists; and provided further that Capital Assets shall not include
-------- -------
any item customarily charged directly to expense or depreciated over a useful
life of twelve (12) months or less in accordance with generally accepted
accounting principles.
Capital Expenditures. Amounts paid or indebtedness incurred by the
------- ------------
Company or any of its Subsidiaries in connection with the purchase or lease by
the Company or such Subsidiary of Capital Assets that would be required to be
<PAGE>
-3-
capitalized and shown on the balance sheet of such Person in accordance with
generally accepted accounting principles; provided, however, that amounts paid
-------- -------
or indebtedness incurred by the Company or any of its Subsidiaries in connection
with the purchase or lease by the Company or such Subsidiary of Capital Assets
pursuant to contracts or agreements with the United States government or any
agency thereof shall not be included in the foregoing definition of Capital
-------
Expenditures for so long as such amounts paid or indebtedness incurred is
- ------------
promptly reimbursed by the United States government or the applicable agency
thereof to the Company or such Subsidiary.
Capitalized Computer Software Costs. For any fiscal period of the
-----------------------------------
Company, the production costs for the development of computer software to be
sold, leased or otherwise marketed which have been capitalized in accordance
with generally accepted accounting principles and which otherwise would have
been an expense in determining Consolidated Earnings Before Interest and Taxes.
Closing Date. The day on which all conditions set forth in (S)(S)6 and 7
------- ----
hereof have been satisfied and any Loans may be made or any Letter of Credit may
be issued hereunder.
Code. The Internal Revenue Code of 1986, as amended and in effect from
----
time to time.
Commerce Accounts Receivable. Amounts receivable for products licensed
----------------------------
or leased, or for product support and services provided, by any of the Commerce
Companies.
Commerce Accounts Receivable Agreement Party(ies). Those entities (other
-------------------------------------------------
than any of the Commerce Companies) which are party to the Commerce Accounts
Receivable Agreements.
Commerce Accounts Receivable Agreements. Those agreements set forth on
---------------------------------------
Schedule 1.2 hereto, together with any agreement between any Commerce Subsidiary
- ------------
and another entity pursuant to which such entity agrees to purchase Commerce
Accounts Receivable of such Commerce Subsidiary.
Commerce Accounts Receivable Guaranties. The guaranty agreements issued
---------------------------------------
in connection with the Commerce Accounts Receivable Agreements and set forth on
Schedule 1.3 hereto, together with any guaranty issued by the Company in favor
- ------------
of a Commerce Accounts Receivable Agreement Party pursuant to which the Company
guaranties the obligations of any of the Commerce Subsidiaries under any of the
Commerce Receivable Agreements.
Commerce Companies. Collectively, the Company, the Commerce Subsidiaries
------------------
and the Non-Guarantor Subsidiaries.
Commerce Subsidiaries. Collectively, those Subsidiaries of the Company
---------------------
or any of the Company's Subsidiaries listed on Schedule 1.4 hereto, and any
-------- ---
other
<PAGE>
-4-
Subsidiary of the Company or any of its Subsidiaries which (i) is acquired or
created subsequent to the date hereof, (ii) is organized under the laws of the
District of Columbia or of any state of the United States, (iii) has its
principal place of business in the United States, (iv) does not do business
exclusively outside the United States; and (v) is a party to and guarantor under
the Guaranty.
Commitment. With respect to each Bank, that amount equal to the product
----------
of (i) the Total Commitment multiplied by (ii) such Bank's Commitment
Percentage, in each case as the same may be in effect from time to time; or if
such Commitment is terminated pursuant to the provisions hereof, zero.
Commitment Fee. See (S)2.12.
---------- ---
Commitment Percentage. With respect to each Bank, the percentage
---------- ----------
referred to on Schedule 1.1 hereto as such Bank's percentage of the aggregate
-------- ---
Commitments of the Banks to make Loans to the Company and to participate in the
issuance, extension and renewal of Letters of Credit for the account of the
Company and the Commerce Subsidiaries.
Company. Sterling Commerce, Inc., a Delaware corporation.
-------
Compliance Certificate. See (S)8.4(c).
---------- -----------
Consolidated or consolidated. With reference to any term defined herein,
------------ -- ------------
shall mean that term as applied to the financial statements of the Company and
all of its Subsidiaries, consolidated in accordance with generally accepted
accounting principles.
Consolidated Current Assets. All assets of the Company and its
---------------------------
Subsidiaries on a consolidated basis that, in accordance with generally accepted
accounting principles, are properly classified as current assets, provided that
--------
(a) notes and accounts receivable shall be included (i) only if good and
collectible as determined by the Company in accordance with established practice
consistently applied and, (ii) with respect to such notes, only if payable on
demand or within one (1) year from the date as of which Consolidated Current
Assets are to be determined and if not directly or indirectly renewable or
extendible at the option of the debtors, by their terms, or by the terms of any
instrument or agreement relating thereto, beyond such year, and (iii) with
respect to such accounts receivable, only if payable within one (1) year after
the date of shipment of goods or other transaction out of which any such
accounts receivable arose and only if not past due more than ninety (90) days;
and such notes and accounts receivable shall be taken at their face value less
reserves determined to be sufficient in accordance with generally accepted
accounting principles; and (b) inventory shall be included only if and to the
extent that the same shall consist of saleable finished goods ready and
available for shipment to purchasers thereof.
<PAGE>
-5-
Consolidated Current Liabilities. All liabilities of the Company and its
------------ ------- -----------
Subsidiaries on a consolidated basis which may properly be classified as current
liabilities in accordance with generally accepted accounting principles.
Consolidated Earnings Before Interest and Taxes. For any particular
------------ -------- ------ -------- --- -----
fiscal period, the consolidated income (or loss) of the Company and its
Subsidiaries before restructuring charges, extraordinary items and other non-
operating acquisition-related charges, interest expense and income taxes,
determined in accordance with generally accepted accounting principles.
Consolidated Net Income. With respect to any particular fiscal period,
------------ --- ------
the consolidated net income (or net loss) of the Company and its Subsidiaries
for such period, determined in accordance with generally accepted accounting
principles.
Consolidated Net Worth. The excess of Consolidated Total Assets of the
------------ --- -----
Company and its Subsidiaries over Consolidated Total Liabilities of the Company
and its Subsidiaries, in each case determined in accordance with generally
accepted accounting principles.
Consolidated Operating Income. Consolidated Net Income before income
------------ --------- ------
taxes, extraordinary items of gain or loss, the cumulative effect of a change in
generally accepted accounting principles and the effect of discontinued
operations, determined in accordance with generally accepted accounting
principles.
Consolidated Tangible Net Worth. The excess of Consolidated Total Assets
-------------------------------
of the Company and its Subsidiaries over Consolidated Total Liabilities of the
Company and its Subsidiaries, in each case determined in accordance with
generally accepted accounting principles, and less the sum of:
(a) The total book value of all assets of the Company and its
Subsidiaries properly classified as intangible assets under generally accepted
accounting principles, other than intangible assets included in Capitalized
Computer Software Costs, but otherwise including such items as good will, the
purchase price of acquired assets in excess of the fair market value thereof,
trademarks, trade names, service marks, brand names, copyrights, patents and
licenses, and rights with respect to the foregoing; plus
----
(b) all amounts representing any write-ups in the book value of any
assets of the Company or its Subsidiaries resulting from a revaluation thereof
subsequent to the Balance Sheet Date; plus
----
(c) to the extent otherwise includable in the computation of Consolidated
Tangible Net Worth, any stock subscriptions receivable.
Consolidated Total Assets. The consolidated assets of the Company and
------------ ----- ------
its Subsidiaries, as determined in accordance with generally accepted accounting
principles.
<PAGE>
-6-
Consolidated Total Liabilities. The consolidated liabilities of the
------------ ----- -----------
Company and its Subsidiaries, determined in accordance with generally accepted
accounting principles.
Conversion Date. October 1, 1998.
---------------
Conversion Request. A notice given by the Company to the Agent of the
---------- -------
Company's election to convert or continue a Loan in accordance with (S)2.7.
Default. Any event which, but for the giving of notice or the lapse of
-------
time, or both, would constitute an Event of Default.
Distribution. The declaration or payment of any dividend on or in
------------
respect of any shares of any class of capital stock of any Person, other than
dividends payable solely in shares of common stock of such Person; or the
repurchase, redemption, or other retirement of any class of capital stock of any
Person, directly or indirectly through a Subsidiary or otherwise; the return of
capital by any Person to its shareholders as such; or any other distribution on
or in respect of any shares of any class of capital stock of any Person.
Dollar or $. Dollars in lawful currency of the United States of America.
------ -- -
Drawdown Date. The date on which any Loan is made or is to be made or
-------- ----
any Letter of Credit is issued, extended or renewed or is to be issued, extended
or renewed and the date on which any Loan is converted or continued in
accordance with (S)2.7.
Eligible Assignee. Any of (a) a commercial bank or finance company
-------- --------
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (b) a
savings and loan association or savings bank organized under the laws of the
United States, or any State thereof or the District of Columbia, and having a
net worth of at least $100,000,000, determined in accordance with generally
accepted accounting principles; (c) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having total assets in excess of $1,000,000,000, provided that such
--------
bank is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD; (d) the central
bank of any country which is a member of the OECD; and (e) if, but only if, any
Event of Default has occurred and is continuing, any other bank, insurance
company, commercial finance company or other financial institution or other
Person approved by the Agent, such approval not to be unreasonably withheld.
Employee Benefit Plan. Any employee benefit plan within the meaning of
-------- ------- ----
(S)3(3) of ERISA maintained or contributed to by the Company or any ERISA
Affiliate, other than a Multiemployer Plan.
<PAGE>
-7-
Environmental Laws. The Resource Conservation and Recovery Act, the
------------- ----
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, the Superfund Amendments and Reauthorization Act of 1986, the Federal
Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or
any state or local statute, regulation, ordinance, order or decree relating to
health, safety or the environment.
EPA. The United States Environmental Protection Agency.
---
ERISA. The Employee Retirement Income Security Act of 1974.
-----
ERISA Affiliate. Any Person which is treated as a single employer with
----- ---------
the Company under (S)414 of the Code.
ERISA Reportable Event. A reportable event with respect to a Guaranteed
----- ---------- -----
Pension Plan within the meaning of (S)4043 of ERISA and the regulations
promulgated thereunder as to which the requirement of notice has not been
waived.
Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate
------------ ------- ----
Loan, the maximum rate (expressed as a decimal) at which any lender subject
thereto would be required to maintain reserves under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor or similar
regulations relating to such reserve requirements) against "Eurocurrency
Liabilities" (as that term is used in Regulation D), if such liabilities were
outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on
and as of the effective date of any change in the Eurocurrency Reserve Rate.
Eurodollar Business Day. Any Business Day on which commercial banks are
---------- -------- ---
open for international business (including dealings in dollar deposits) in
London or such other Eurodollar Interbank Market as may be selected by the Agent
in its sole discretion acting in good faith.
Eurodollar Interbank Market. Any lawful recognized market in which
---------- --------- ------
deposits of United States dollars are offered by international banking units of
United States banking institutions and by foreign banking institutions to each
other, and where the eurodollar and foreign currency and exchange operations of
the Agent are customarily conducted.
Eurodollar Lending Office. Initially, the office of each Bank designated
---------- ------- ------
as such in Schedule 1.1 hereto; thereafter, such other office of such Bank, if
-------- ---
any, that shall be making or maintaining Eurodollar Rate Loans.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar
---------- ----
Rate Loan, the rate of interest equal to (i) the rate per annum (rounded upwards
to the nearest 1/100 of one percent) at which FNBB's Eurodollar Lending Office
is offered Dollar deposits two (2) Eurodollar Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market where the
eurodollar and
<PAGE>
-8-
foreign currency and exchange operations of such Eurodollar Lending Office are
customarily conducted, for delivery on the first day of such Interest Period for
the number of days comprised therein and in an amount comparable to the amount
of the Eurodollar Rate Loan to which such Interest Period applies, divided by
(ii) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.
Eurodollar Rate Loan(s). Loans bearing interest calculated by reference
---------- ---- -------
to the Eurodollar Rate.
Event of Default. See (S)11.
----- -- -------
Final Maturity. October 1, 1999.
--------------
FNBB. The First National Bank of Boston, a national banking association,
----
in its individual capacity.
Foreign Obligations. All Indebtedness, obligations and liabilities of the
-------------------
Company to any of the Banks or any affiliate of any of the Banks in respect of
guaranties by, and other contingent obligations of, the Company, existing on the
Closing Date or arising thereafter, direct or indirect, joint or several,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
secured or unsecured, in respect of Indebtedness of any Subsidiary of the
Company or of its Subsidiaries which is not organized under the laws of any
jurisdiction of the United States of America and which does not have its
principal place of business in the United States of America.
Generally Accepted Accounting Principles or generally accepted accounting
--------- -------- ---------- ---------- --------- -------- ----------
principles. Except as provided in (S)1.2, principles which are (A) consistent
- ----------
with the principles promulgated or adopted by the Financial Accounting Standards
Board, the American Institute of Certified Public Accountants and the Securities
and Exchange Commission and their predecessors (or successor organizations), as
in effect from time to time and (B) consistently applied with past financial
statements of the Company and its Subsidiaries adopting the same principles
where required by generally accepted accounting principles, provided that in
--------
each case referred to in this definition of "generally accepted accounting
principles", a certified public accountant would, insofar as the use of such
accounting principles is pertinent, be in a position to deliver an unqualified
opinion (other than a qualification regarding changes in generally accepted
accounting principles) as to financial statements in which such principles have
been properly applied for any fiscal period end being reported.
Guaranteed Pension Plan. Any employee pension benefit plan within the
---------- ------- ----
meaning of (S)3.2(a) of ERISA maintained by the Company or any ERISA Affiliate,
or to which the Company or any ERISA Affiliate contributes, the benefits of
which are guaranteed on termination in full or in part by the PBGC pursuant to
Title IV of ERISA, other than a Multiemployer Plan required to pay plan
termination insurance premiums to the PBGC.
<PAGE>
-9-
Guaranty. The unlimited joint and several guaranty of the Commerce
-------
Subsidiaries, substantially in the form of Exhibit F hereto.
------- -
Hazardous Substances. Any toxic substances, oil or hazardous materials
--------- ----------
or other chemicals or substances regulated by any Environmental Laws.
Indebtedness. All obligations, contingent and otherwise, which in
------------
accordance with generally accepted accounting principles should be and are
classified upon the obligor's balance sheet as liabilities, or to which
reference should be and is made by footnotes thereto, including, in any event
and whether or not so classified: (a) all debt and similar monetary
obligations, whether direct or indirect; (b) all liabilities secured by any
mortgage, pledge, security interest, lien, charge, or other encumbrance existing
on property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; (c) all rental obligations under
capitalized leases, and (d) all guaranties, endorsements and other contingent
obligations which are probable and estimable, whether direct or indirect, in
respect of Indebtedness of others, and any obligation to supply funds to or in
any manner to invest in, directly or indirectly, the debtor, to purchase
Indebtedness, or to assure the owner of Indebtedness against loss, through an
agreement to purchase goods, supplies, or services for the purpose of enabling
the debtor to make payment of the Indebtedness held by such owner or otherwise,
and the obligations to reimburse the issuer of any letters of credit.
Indemnification Agreement. The Indemnification Agreement dated as of
-------------------------
March 4, 1996 among Sterling Software, Inc., the Company and one or more of
their Subsidiaries, as in effect on the Closing Date.
Intercompany Indebtedness. The aggregate amount of all Indebtedness of
------------ ------------
any Commerce Subsidiary to any other Commerce Subsidiary or to the Company, and
of the Company to any Subsidiary.
Interest Charges. For any period, the expenses of the Company and its
----------------
Subsidiaries for such period for interest on Indebtedness (including all finance
charges and accrued interest expense, in the case of any Indebtedness on which
interest is payable less frequently than quarterly, and the interest portion of
capitalized lease payments but excluding the interest portion of operating lease
payments and Intercompany Indebtedness), to the extent paid in cash or due and
payable in cash in such period (whether or not such payment is due but is
prohibited from being made pursuant to the terms of such Indebtedness).
Interest Payment Date. (i) As to any Base Rate Loan, the last day of the
-------- ------- ----
calendar quarter which includes the Drawdown Date thereof; and (ii) as to any
Eurodollar Rate Loan in respect of which the Interest Period is (A) 30, 60 or 90
days or less, the last day of such Interest Period and (B) more than 90 days,
the date that is 90 days from the first day of such Interest Period and, in
addition, the last day of such Interest Period.
<PAGE>
-10-
Interest Period. With respect to each Loan, (i) initially, the period
---------------
commencing on the Drawdown Date of such Loan and ending on the last day of one
of the periods set forth below, as selected by the Company in a Loan Request (A)
for any Base Rate Loan, the last day of the calendar quarter; and (B) for any
Eurodollar Rate Loan, 30, 60, 90 or 180 days; and (ii) thereafter, each period
commencing after the last day of the next preceding Interest Period applicable
to such Loan and ending on the last day of one of the periods set forth above,
as selected by the Company in a Conversion Request; provided that all of the
--------
foregoing provisions relating to Interest Periods are subject to the following:
(a) if any Interest Period with respect to a Eurodollar Rate Loan
would otherwise end on a day that is not a Eurodollar Business Day, that
Interest Period shall be extended to the next succeeding Eurodollar Business Day
unless the result of such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period shall end on the
immediately preceding Eurodollar Business Day;
(b) if any Interest Period with respect to a Base Rate Loan would end
on a day that is not a Business Day, that Interest Period shall end on the next
succeeding Business Day;
(c) if the Company shall fail to give notice as provided in (S)2.7,
the Company shall be deemed to have requested a conversion of the affected
Eurodollar Rate Loan to a Base Rate Loan and the continuance of all Base Rate
Loans as Base Rate Loans on the last day of the then current Interest Period
with respect thereto;
(d) any Interest Period relating to any Eurodollar Rate Loan that
begins on the last Eurodollar Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Eurodollar Business Day of a
calendar month;
(e) any Interest Period relating to any Loan that would otherwise
extend beyond the Final Maturity shall end on the Final Maturity; and
(f) no Interest Period may be selected by the Company if the
aggregate principal amount of all Loans subject to an Interest Period which ends
after any Repayment Date would be in excess of the aggregate principal amount of
the Loans permitted to be outstanding on such date (after giving effect to any
repayment of the principal of the Loans which may be required on such Repayment
Date).
Investments. All expenditures made and all liabilities incurred
-----------
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person, which expenditures, liabilities,
loans, advances, capital
<PAGE>
-11-
contributions, transfers of property, guaranties or obligations, in accordance
with generally accepted accounting principles, should be and are classified upon
such Person's balance sheet as an asset. In determining the aggregate amount of
Investments outstanding at any particular time: (i) the amount of any Investment
represented by a guaranty shall be taken at not less than the principal amount
of the obligations guaranteed and still outstanding; (ii) there shall be
included as an Investment all interest accrued with respect to Indebtedness
constituting an Investment unless and until such interest is paid; and (iii)
there shall be deducted in respect of each such Investment any amount received
as a return of capital (but only by repurchase, redemption, retirement,
repayment, liquidating dividend or liquidating distribution).
Letter of Credit. See (S)2A.1(a).
------ -- ------
Letter of Credit Application. See (S)2A.1(a).
------ -- ------ -----------
Letter of Credit Fee. See (S)2A.6.
------ -- ------ ---
Letter of Credit Participation. See (S)2A.1(d).
------ -- ------ -------------
Loan Documents. Collectively, this Agreement, the Notes, the Guaranty,
---- ---------
the Letter of Credit Applications, the Letters of Credit and any other
instruments or documents delivered or to be delivered pursuant to this
Agreement.
Loan Request. See (S)2.6.
---- -------
Loans. Loans made or to be made by the Banks to the Company pursuant to
-----
(S)2.
Majority Banks. As of any date, Banks holding at least 66.67% of the
-------- -----
outstanding principal amount of the Notes on such date; and if no principal is
outstanding, Banks whose aggregate Commitments constitute at least 66.67% of the
Total Commitment.
Maximum Drawing Amount. The maximum aggregate amount from time to time
------- ------- ------
that the beneficiaries may draw under outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
Multiemployer Plan. Any multiemployer plan within the meaning of
------------- ----
(S)3(37) of ERISA maintained or contributed to by the Company or any ERISA
Affiliate.
Non-Guarantor Subsidiaries. As of the date hereof, the Commerce
------------- ------------
Companies listed on Schedule 1.5 hereto and identified as Non-Guarantor
-------- ---
Subsidiaries, as such schedule may be modified from time to time pursuant to the
provisions of (S)8.17.
Notes. See (S)2.3.
-----
<PAGE>
-12-
Obligations. All Indebtedness, obligations and liabilities of the
-----------
Company to any of the Banks and the Agent, individually or collectively,
existing on the date of this Agreement or arising thereafter, direct or
indirect, joint or several, absolute or contingent, matured or unmatured,
liquidated or unliquidated, secured or unsecured, arising or incurred by
contract, operation of law, or otherwise, arising or incurred under this
Agreement or any of the other Loan Documents or in respect of Loans made,
Reimbursement Obligations incurred or any Note, Letter of Credit Application,
Letter of Credit or other instruments at any time evidencing any of the
foregoing.
Operating Cash Flow. For any fiscal period, Consolidated Earnings Before
--------- ---- ----
Interest and Taxes less Capitalized Computer Software Costs, less cash taxes,
---- ----
plus depreciation and amortization, less Capital Expenditures, calculated with
- ---- ----
respect to the Company and its Subsidiaries on a consolidated basis.
Outstanding or outstanding. With respect to the Loans, the unpaid
----------- -- -----------
principal thereof as of any date of determination.
PBGC. The Pension Benefit Guaranty Corporation created by (S)4002 of
----
ERISA and any successor entities having similar responsibilities.
Permitted Acquisitions. Asset or stock acquisitions permitted by (S)9.5.
----------------------
Permitted Investments. Investments permitted by (S)9.3.
---------------------
Permitted Liens. Liens, security interests and other encumbrances
---------------
permitted by (S)9.2.
Person. Any individual, corporation, association, partnership, trust,
------
unincorporated association, business, or other legal entity, and any government
or any governmental agency or political subdivision thereof.
Real Estate. All real property (1) owned or leased (as lessee or
---- ------
sublessee) by the Company or any of its Subsidiaries and (2) located within the
United States of America.
Record. The grid attached to a Note, or the continuation of such grid,
------
or any other similar record, including computer records, maintained by any Bank
with respect to any Loan referred to in such Note.
Reimbursement Obligation. The Company's obligation to reimburse the
------------- ----------
Agent and the Banks on account of any drawing under any Letter of Credit as
provided in (S)2A.2.
Repayment Date. As defined in (S)2.9.
--------------
<PAGE>
-13-
Subsidiary. Any corporation, association, trust, or other business
----------
entity, of which the designated parent shall at any time own directly or
indirectly through a Subsidiary or Subsidiaries at least a majority (by number
of votes) of the outstanding Voting Stock.
Tax Allocation Agreement. The Tax Allocation Agreement dated as of March
------------------------
4, 1996 among Sterling Software, Inc., the Company and one or more of their
Subsidiaries, as in effect on the Closing Date.
Total Commitment. The sum of the Commitments of the Banks, as in effect
----- ----------
from time to time.
Total Debt. At any time of determination, the sum of (a) the sum of (i)
----- ----
all Loans Outstanding (after giving effect to all amounts requested) plus (ii)
-----
the Maximum Drawing Amount plus (iii) all Unpaid Reimbursement Obligations, plus
----- ----
(b) the amount of any Foreign Obligations then outstanding, plus (c) any
----
Indebtedness of the Company or any of its Subsidiaries under any of the Commerce
Accounts Receivable Agreements or the Commerce Accounts Receivable Guaranties,
which Indebtedness is on a full or partial recourse basis.
Total Repurchase Event. The occurrence of any event or circumstance
----- ---------- -----
which would permit any Commerce Accounts Receivable Agreement Party to require
the Commerce Subsidiary party to the applicable Commerce Accounts Receivable
Agreement to repurchase all Commerce Accounts Receivable previously purchased by
such Commerce Accounts Receivable Agreement Party under the applicable Commerce
Accounts Receivables Agreement.
Type. As to any Loan, its nature as a Base Rate Loan or a Eurodollar
----
Rate Loan.
Uniform Customs. With respect to any Letter of Credit, the Uniform
------- -------
Customs and Practice for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500 or any successor version thereto adopted
by the Agent in the ordinary course of its business as a letter of credit issuer
and in effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation. Any Reimbursement Obligation for which
------ ------------- ----------
the Company does not reimburse the Agent and the Banks on the date specified in,
and in accordance with, the provisions of (S)2A.2.
Voting Stock. Stock or similar interests, of any class or classes
------ -----
(however designated), the holders of which are at the time entitled, as such
holders, to vote for the election of a majority of the directors (or persons
performing similar functions) of the corporation, association, trust or other
business entity involved, whether or not the right so to vote exists by reason
of the happening of a contingency.
<PAGE>
-14-
10-K Report. The report of the Company and its Subsidiaries filed
---- -----
annually on Form 10-K with the Securities and Exchange Commission.
10-Q Report. The report of the Company and its Subsidiaries filed
---- -----
quarterly on Form 10-Q with the Securities and Exchange Commission.
(S)1.2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified
---------- ----- --- --------------
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared in accordance with generally accepted
accounting principles as in effect from time to time, applied on a basis
consistent (except for changes concurred in by the Company's independent public
accountants) with the most recent audited consolidated financial statements of
the Company and its Subsidiaries; provided, however, that, if any change in
-------- -------
generally accepted accounting principles occurring after the Balance Sheet Date
in itself materially affects Capitalized Computer Software Costs, Capital
Expenditures, Consolidated Current Assets, Consolidated Earnings Before Interest
and Taxes, Consolidated Net Income, Consolidated Net Worth, Consolidated
Operating Income, Consolidated Total Assets, Consolidated Total Liabilities and
Operating Cash Flow, the Company may by notice to the Agent, or the Agent (on
its own or at the request of the Majority Banks) may by notice to the Company,
require that Capitalized Computer Software Costs, Capital Expenditures,
Consolidated Current Assets, Consolidated Earnings Before Interest and Taxes,
Consolidated Net Income, Consolidated Net Worth, Consolidated Operating Income,
Consolidated Total Assets, Consolidated Total Liabilities or Operating Cash
Flow, as the case may be, thereafter be calculated in accordance with generally
accepted accounting principles as in effect and applied by the Company
immediately before such change in generally accepted accounting principles
occurs. If such notice is given, the Compliance Certificates delivered pursuant
to (S)8.4(c) after such change occurs shall be accompanied by reconciliations of
the difference between the calculation set forth therein and a calculation made
in accordance with generally accepted accounting principles as in effect from
time to time after such change occurs.
(S)1.3. RULES OF INTERPRETATION.
----- -- --------------
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented and in effect from
time to time in accordance with its terms and the terms of this Agreement.
(b) The singular includes the plural and the plural includes
the singular.
(c) A reference to any law includes any amendment or modification
to such law.
(d) A reference to any Person includes its permitted successors
and permitted assigns.
<PAGE>
-15-
(e) Subject to (S)1.2 hereof, accounting terms not otherwise
defined herein have the meanings assigned to them by generally accepted
accounting principles applied on a consistent basis by the accounting entity to
which they refer.
(f) The words "include", "includes" and "including" are not
limiting.
(g) All terms not specifically defined herein or by generally
accepted accounting principles, which terms are defined in the Uniform
Commercial Code as in effect in the Commonwealth of Massachusetts, have the
meanings assigned to them therein.
(h) Reference to a particular "(S)", "Section" or "section"
refers to that section of this Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like
import shall refer to this Agreement as a whole and not to any particular
section or subdivision of this Agreement.
(S)2. THE CREDIT.
--- ------
(S)2.1. LOANS. Subject to the terms and conditions set forth in this
-----
Agreement, each of the Banks severally agrees to lend to the Company, and the
Company may borrow, repay, and reborrow from time to time between the Closing
Date and the Conversion Date, upon notice by the Company to the Agent given in
accordance with (S)2.6, such sums as may be requested by the Company for the
purposes set forth in (S)8.3 hereof, provided, however, that the maximum
-------- -------
aggregate principal amount of any Bank's Loans Outstanding (after giving effect
to all amounts requested) at any one time shall not exceed the amount of such
Bank's Commitment minus such Bank's Commitment Percentage of the sum of the
-----
Maximum Drawing Amount and all unpaid Reimbursement Obligations, and provided,
--------
further, that the maximum aggregate principal amount of the Loans of all of the
- -------
Banks Outstanding (after giving effect to all amounts requested) at any one time
plus the Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall
- ----
not at any time exceed the Total Commitment. The Loans shall be made pro rata
--- ----
in accordance with each Bank's Commitment Percentage. Each request for a Loan
hereunder shall constitute a representation by the Company that the conditions
set forth in (S)(S)6 and 7 hereof, in the case of the initial Loans to be made
on the Closing Date and (S)7, in the case of all other Loans, have been
satisfied on and as of the date of such request.
(S)2.2. REDUCTION OF TOTAL COMMITMENT.
--------- -- ----- ----------
(a) The Company shall have the right at any time and from time to
time, upon five Business Days' written notice to each of the Banks, to reduce by
$1,000,000 or integral multiples of $1,000,000, or terminate entirely, the
unutilized portion of the Total Commitment.
<PAGE>
-16-
(b) Upon the receipt by the Company or any of its Subsidiaries of
any net proceeds of any disposition described in (S)9.7(b)(i) and the payment
thereof to the Agent as contemplated by such section, the Total Commitment
shall, at the option of the Agent or at the request of the Majority Banks, be
reduced by the amount of such net proceeds.
(c) In the event of a reduction of the Total Commitment pursuant
to subparagraph (a) or (b) of this section, the Commitments of the Banks shall
be reduced pro rata in accordance with their respective Commitment Percentages
--- ----
by the amount specified in such notice or paid over to the Agent or, as the case
may be, terminated. Upon the effective date of any such reduction or termination
pursuant to this (S)2.2, the Company shall pay to the Agent, for the respective
accounts of the Banks, the full amount of any Commitment Fee then accrued on the
amount of the reduction. No reduction of the Commitments of the Banks may be
reinstated.
(S)2.3. THE NOTES. The obligation of the Company to repay to the Banks
--- -----
the principal amount of the Loans and interest accrued thereon shall be
evidenced by separate promissory notes of the Company, each in substantially the
form of Exhibit A hereto (the "Notes"), dated as of the Closing Date and
------- -
completed with appropriate insertions, one Note being payable to the order of
each Bank in a principal amount equal to such Bank's Commitment and representing
the obligation of the Company to pay to such Bank the amount of the Commitment
or, if less, the aggregate unpaid principal amount of all Loans made by such
Bank hereunder, plus interest accrued thereon as set forth below. The Company
hereby irrevocably authorizes each Bank to make or cause to be made, at or about
the time of the Drawdown Date of any Loan or at the time of receipt of any
payment of principal on such Bank's Note, an appropriate notation on such Bank's
Record reflecting the making of such Loan or (as the case may be) the receipt of
such payment. The aggregate unpaid amount of Loans made by such Bank set forth
on such Bank's Record, shall be prima facie evidence of the principal amount
----- -----
thereof owing and unpaid to such Bank, but the failure to record, or any error
in so recording, any such amount on such Bank's Record, shall not limit or
otherwise affect the obligations of the Company hereunder or under the Note to
make payments of principal of or interest on the Note when due.
(S)2.4. INTEREST. Except as otherwise provided in (S)2.5, the unpaid
--------
principal amount of the Loans outstanding from time to time shall bear interest
from the Drawdown Date thereof until Final Maturity at the annual rate which at
all times shall be determined in accordance with the following provisions:
(a) Each Base Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at a rate equal to the Base Rate in effect
from time to time.
<PAGE>
-17-
(b) Each Eurodollar Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the rate of one and three-quarters
percent (1-3/4%) per annum above the Eurodollar Rate determined for such
Interest Period.
(c) The Company hereby promises to pay interest on each Loan in
arrears on each Interest Payment Date with respect thereto.
(S)2.5 INTEREST ON OVERDUE AMOUNTS. Overdue principal and (to the
-------- -- ------- -------
extent permitted by applicable law) interest on the Loans and all other overdue
amounts payable hereunder shall bear interest compounded monthly and payable on
demand at a rate per annum equal to four percent (4%) above the Base Rate, until
such amount shall be paid in full (after as well as before judgment).
(S)2.6. INTEREST RATE ELECTIONS; REQUESTS FOR LOANS. At the option of
-------- ---- --------- -------- --- -----
the Company, so long as no Default or Event of Default has occurred and is
continuing, the Company may elect from time to time to have a portion of the
unpaid principal amount of the Loans outstanding from time to time bear interest
during any particular Interest Period calculated by reference to the Eurodollar
Rate. The Company shall give to the Agent written or telegraphic notice (or
telephonic notice promptly confirmed in writing) of each Loan requested
hereunder (a "Loan Request") not later than 10:00 a.m. (Boston time) on the
proposed Drawdown Date thereof, in the case of Base Rate Loans or not later than
10:00 a.m. (Boston time) three Eurodollar Business Days prior to the proposed
Drawdown Date thereof in the case of Eurodollar Rate Loans from Base Rate Loans.
Each such Loan Request shall be substantially in the form of Exhibit B attached
------- -
hereto and shall specify (A) the principal amount of the Loan Requested, (B) the
proposed Drawdown Date of such Loan, (C) the Interest Period for such Loan, (D)
the Type of such Loan, and (E) the bank account of the Company with the Agent's
head office to which the proceeds of the requested Loan are to be credited.
Each Loan Request shall be irrevocable and binding on the Company and shall
obligate the Company to accept the Loans requested from the Banks on the
proposed Drawdown Date thereof. Any election of a Eurodollar Rate Loan shall
lapse at the end of the expiring Interest Period unless extended by a further
Loan Request as hereinabove provided. The Agent shall forthwith, upon
determination of any Eurodollar Rate, provide notice thereof to each Bank and to
the Company. Each such notice shall, absent manifest error, be binding upon
each Bank and the Company.
(S)2.7. CONVERSION OPTIONS.
---------- -------
(A) CONVERSION TO DIFFERENT TYPE OF LOAN. The Company may elect
---------- -- --------- ---- -- ----
from time to time to convert any outstanding Loan to a Loan of another Type,
provided that (i) with respect to any such conversion of a Loan to a Base Rate
- --------
Loan, the Company shall give the Agent at least one (1) Business Day prior
written notice of such election; (ii) with respect to any such conversion of a
Base Rate Loan to a Eurodollar Rate Loan, the Company shall give the Agent at
least three (3) Eurodollar Business Days prior written notice of such election;
(iii) with respect to
<PAGE>
-18-
any such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such
conversion shall only be made on the last day of the Interest Period with
respect thereto and (iv) no Loan may be converted into a Eurodollar Rate Loan
when any Default or Event of Default has occurred and is continuing. On the date
on which such conversion is being made, each Bank shall take such action as is
necessary to transfer its Commitment Percentage of such Loans to its Domestic
Lending Office or its Eurodollar Lending Office, as the case may be. All or any
part of outstanding Loans of any Type may be converted into a Loan of another
Type as provided herein, provided that any partial conversion shall be in an
--------
aggregate principal amount of $1,000,000 or a whole multiple thereof. Each
Conversion Request relating to the conversion of a Loan to a Eurodollar Rate
Loan shall be irrevocable by the Company.
(C) CONTINUATION OF TYPE OF LOAN. Any Loan of any Type may be
------------ -- ---- -- ----
continued as a Loan of the same Type upon the expiration of an Interest Period
with respect thereto by compliance by the Company with the notice provisions
contained in (S)2.7(a); provided that no Eurodollar Rate Loan may be continued
--------
as such when any Default or Event of Default has occurred and is continuing, but
shall be automatically converted to a Base Rate Loan on the last day of the
first Interest Period relating thereto ending during the continuance of any
Default or Event of Default of which officers of the Agent active upon the
Company's account have actual knowledge. In the event that the Company fails to
provide any such notice with respect to the continuation of any Eurodollar Rate
Loan as such, then such Eurodollar Rate Loan shall be automatically converted to
a Base Rate Loan on the last day of the first Interest Period relating thereto.
The Agent shall notify the Banks promptly when any such automatic conversion
contemplated by this (S)2.7 is scheduled to occur.
(D) EURODOLLAR RATE LOANS. Any conversion to or from Eurodollar Rate
---------- ---- -----
Loans shall be in such amounts and be made pursuant to such elections so that,
after giving effect thereto, the aggregate principal amount of all Eurodollar
Rate Loans having the same Interest Period shall not be less than $1,000,000 or
a whole multiple of $500,000 in excess thereof.
(S)2.8. FUNDS FOR LOANS.
----- --- -----
(A) FUNDING PROCEDURES. Not later than 1:00 p.m. (Boston time)
------- ----------
on the proposed Drawdown Date of any Loans, each of the Banks will make
available to the Agent, at its head office, in immediately available funds, the
amount of such Bank's Commitment Percentage of the amount of the requested
Loans. Upon receipt from each Bank of the amount of its Loan, and upon receipt
of the documents required by (S)(S)6 and 7 hereof to be delivered on or prior to
such Drawdown Date, to the extent applicable, the Agent will make the aggregate
amount of such Loans available to the Company by crediting the Company's account
with the Agent's head office specified in the applicable Loan Request. The
failure or refusal of any Bank to make available to the Agent at the aforesaid
time on any Drawdown Date the amount of its Commitment Percentage of the
requested Loans shall not relieve any other Bank from its several obligation
hereunder to
<PAGE>
-19-
make its respective Commitment Percentage of any requested Loans available to
the Agent.
(B) ADVANCES BY AGENT. The Agent may (unless notified to the contrary
-------- -- -----
by a Bank prior to a Drawdown Date) assume that each Bank has made available to
the Agent on such Drawdown Date such Bank's Commitment Percentage of the Loans
to be made on such Drawdown Date, and the Agent may (but it shall not be
required to), in reliance upon such assumption, make available to the Company a
corresponding amount. The Agent shall notify the Company by telephone or
telecopy to the treasurer or another duly authorized financial officer of the
Company of the failure of any Bank to make available to the Agent its Commitment
Percentage on such Drawdown Date promptly after the account officer of the Agent
with responsibility for the Company's account obtains actual knowledge of such
failure. If any Bank makes available to the Agent such amount on a date after
such Drawdown Date, such Bank shall pay to the Agent on demand an amount equal
to the product of (i) the average computed for the period referred to in clause
(iii) below, of the weighted average interest rate paid by the Agent for federal
funds acquired by the Agent during each day included in such period, times (ii)
-----
the amount of such Bank's Commitment Percentage of such Loans, times (iii) a
-----
fraction, the numerator of which is the number of days that elapse from and
including such Drawdown Date to the date on which the amount of such Bank's
Commitment Percentage of such Loans shall become immediately available to the
Agent, and the denominator of which is 360. A statement of the Agent submitted
to such Bank with respect to any amounts owing under this paragraph shall be
prima facie evidence of the amount due and owing to the Agent by such Bank. If
- ----- -----
such Bank shall fail to make its Commitment Percentage of such Loans available
to the Agent, the Company agrees to pay to the Agent within three (3) Business
Days after demand, an amount equal to such corresponding amount, together with
interest thereon at the rate per annum applicable to the Loans made on such
Drawdown Date for each day from the date the Agent shall make such amount
available to the Company until the date such amount is paid or repaid to the
Agent, provided, however, that until and unless such payment has been made in
-------- -------
full by the Company, such Bank shall remain liable to the Agent for the full
amount of such payment, including interest as set forth above. Subject to
(S)2.1, the Company shall, unless the Company notifies the Agent otherwise, on
the first day of such three-day period, be deemed to have submitted a new Loan
Request to the Agent pursuant to (S)2.6 for a Base Rate Loan covering the amount
set forth in the Agent's demand for payment.
(S)2.9. MATURITY OF THE LOANS, REPAYMENT IN INSTALLMENTS. All Loans
-------- -- --- ------ --------- -- ------------
Outstanding at the close of business on the Conversion Date shall be payable in
four (4) equal (as nearly as may be) consecutive quarterly installments due on
the last day of each calendar quarter ending thereafter (or, if the last day of
any calendar quarter ends on a day which is not a Business Day, then on the next
succeeding Business Day), with a final payment at Final Maturity (each such date
being referred herein to as a "Repayment Date"), which final payment shall in
any event be in an amount sufficient to repay in full the remaining principal
balance of
<PAGE>
-20-
the Loans then outstanding, together with any Reimbursement Obligations
outstanding.
(S)2.10. MANDATORY REPAYMENTS. If, at any time prior to the Conversion
--------- ----------
Date, the sum of the Outstanding amount of the Loans, the Maximum Drawing Amount
and all Unpaid Reimbursement Obligations exceeds the Total Commitment, then the
Company shall immediately pay the amount of such excess to the Agent for the
respective accounts of the Banks for application: first, to any Unpaid
Reimbursement Obligations; second, to the Loans; and third, to provide to the
Agent cash collateral for Reimbursement Obligations as contemplated by
(S)2A.2(b) and (c). Each payment of any Unpaid Reimbursement Obligations or
prepayment of Loans shall be allocated among the Banks, in proportion, as nearly
as practicable, to each Reimbursement Obligation or (as the case may be) the
respective unpaid principal amount of each Bank's Note, with adjustments to the
extent practicable to equalize any prior payments or repayments not exactly in
proportion.
(S)2.11. OPTIONAL PREPAYMENT OF PRINCIPAL. The Company shall have the
-------- ---------- -- ---------
right at any time to prepay the outstanding principal amount of the Loans, as a
whole or in part, without premium or penalty, upon not less than one Business
Day's (with respect to Base Rate Loans) and three (3) Eurodollar Business Days'
(with respect to Eurodollar Rate Loans) written, telegraphic or telephonic
notice to the Agent; provided that (i) each partial prepayment shall be in the
--------
aggregate principal amount of (a) $1,000,000 or an integral multiple thereof
with respect to Eurodollar Rate Loans or (b) $500,000 or some greater integral
multiple of $100,000 with respect to Base Rate Loans, shall be accompanied by
the payment of accrued interest on the principal prepaid to the date of
prepayment and, if made after the Conversion Date, shall be applied to the then
maturing installment or installments of principal of the Notes in the inverse
order of maturity and, whether made before or after the Conversion Date, shall
be applied, in the absence of instruction by the Company, first to the principal
of Base Rate Loans and then to the principal of Eurodollar Rate Loans; (ii) each
partial prepayment shall be allocated by the Agent among all of the Banks, in
proportion, as nearly as practicable, to the respective unpaid principal amount
of each Bank's Note, with adjustments to the extent practical to equalize any
prior prepayments not exactly in proportion; (iii) prepayments on any Eurodollar
Rate Loan may be made only on the last day of the Interest Period applicable to
such Eurodollar Rate Loan; and (iv) no amount prepaid after the Conversion Date
may be reborrowed hereunder.
(S)2.12. COMMITMENT FEE. The Company agrees to pay to the Agent, for
---------- ---
the respective accounts of the Banks, in accordance with their respective
Commitment Percentages, a fee (the "Commitment Fee") calculated at the rate of
three-eighths of one percent (3/8%) per annum on the average daily amount during
each calendar quarter or portion thereof from the date hereof to the day
immediately preceding the Conversion Date by which the Total Commitment exceeds
the aggregate outstanding principal amount of Loans plus the Maximum Drawing
----
Amount and all Unpaid Reimbursement Obligations during such calendar quarter.
The Commitment Fee shall be payable quarterly in arrears on the tenth Business
Day
<PAGE>
-21-
of each calendar quarter for the immediately preceding calendar quarter,
commencing on the first such date following the date hereof, with a final
payment on the Conversion Date.
(S)2.13. AGENT'S FEE. So long as there are any Obligations or
------- ---
Commitments Outstanding, the Company shall pay to the Agent, annually in
advance, on the Closing Date and on each anniversary of the Closing Date, an
annual Agent's Fee in the amount of $25,000.
(S)2.14. CLOSING FEE. The Company agrees to pay to the Agent, for the
-----------
pro rata accounts of the Banks, on the Closing Date a closing fee in the amount
- --- ----
of $50,000.
(S)2A. LETTERS OF CREDIT.
------- -- ------
(S)2A.1. LETTER OF CREDIT COMMITMENTS.
------ -- ------ -----------
(A) COMMITMENT TO ISSUE LETTERS OF CREDIT. Subject to the terms
---------- -- ----- ------- -- ------
and conditions hereof and the execution and delivery by the Company of a letter
of credit application on the Agent's customary form (a "Letter of Credit
Application") by the Company, or any Commerce Subsidiary, the Agent on behalf of
the Banks and in reliance upon the agreement of the Banks set forth in
(S)2A.1(d) and upon the representations and warranties of the Company contained
herein, agrees, in its individual capacity, to issue, extend and renew for the
account of the Company, between the Closing Date and the Conversion Date, one or
more standby or documentary letters of credit (individually, a "Letter of
Credit"), in such form as may be requested from time to time by the Company and
agreed to by the Agent; provided, however, that, after giving effect to such
-------- -------
request, (i) the sum of the aggregate Maximum Drawing Amount and all Unpaid
Reimbursement Obligations shall not exceed $5,000,000 at any one time and (ii)
the sum of (A) the Maximum Drawing Amount on all Letters of Credit, (B) all
Unpaid Reimbursement Obligations, and (C) the amount of all Loans outstanding
shall not exceed the Total Commitment.
(B) LETTER OF CREDIT APPLICATIONS. Each Letter of Credit
------ -- ------ ------------
Application shall be completed to the satisfaction of the Agent. In the event
that any provision of any Letter of Credit Application shall be inconsistent
with any provision of this Loan Agreement, then the provisions of this Loan
Agreement shall, to the extent of any such inconsistency, govern, and each
Letter of Credit Application shall so indicate.
(C) TERMS OF LETTERS OF CREDIT. Each Letter of Credit issued,
----- -- ------- -- ------
extended or renewed hereunder shall, among other things, (i) provide for the
payment of sight drafts for honor thereunder when presented in accordance with
the terms thereof and when accompanied by the documents described therein, and
(ii) have an expiry date no later than the date which is fourteen (14) days (or,
if the Letter of Credit is confirmed or otherwise provides for one or more
nominated
<PAGE>
-22-
persons, forty-five (45) days) prior to the Conversion Date. Each Letter of
Credit so issued, extended or renewed shall be subject to the Uniform Customs.
(D) REIMBURSEMENT OBLIGATIONS OF BANKS. Each Bank severally agrees
------------- ----------- -- -----
that it shall be absolutely liable, without regard to the occurrence of any
Default or Event of Default or any other condition precedent whatsoever, to the
extent of such Bank's Commitment Percentage, to reimburse the Agent on demand
for the amount of each draft paid by the Agent under each Letter of Credit to
the extent that such amount is not reimbursed by the Company or the relevant
Commerce Subsidiary pursuant to (S)2A.2 (such agreement for a Bank being called
herein the "Letter of Credit Participation" of such Bank).
(E) PARTICIPATIONS OF BANKS. Each such payment made by a Bank shall
-------------- -- -----
be treated as the purchase by such Bank of a participating interest in the
Company's Reimbursement Obligation under (S)2A.2 in an amount equal to such
payment. Each Bank shall share in accordance with its participating interest in
any interest which accrues pursuant to (S)2A.2.
(S)2A.2. REIMBURSEMENT OBLIGATION OF THE COMPANY. In order to induce
------------- ---------- -- --- -------
the Agent to issue, extend and renew each Letter of Credit and the Banks to
participate therein, the Company hereby agrees to reimburse or pay to the Agent,
for the account of the Agent or (as the case may be) the Banks, with respect to
each Letter of Credit issued, extended or renewed by the Agent hereunder,
whether for the account of the Company or for the account of any Commerce
Subsidiary:
(a) except as otherwise expressly provided in (S)2A.2(b) and (c),
within one Business Day following each date that any draft presented under such
Letter of Credit is honored by the Agent and the Agent has provided to the
Company notice pursuant to (S)2A.3, or within one Business Day following any
date on which the Agent notifies the Company that it has otherwise made a
payment with respect thereto, (i) the amount paid by the Agent under or with
respect to such Letter of Credit, and (ii) the amount of any taxes, fees,
charges or other costs and expenses whatsoever incurred by the Agent or any Bank
in connection with any payment made by the Agent or any Bank under, or with
respect to, such Letter of Credit; provided, that if such reimbursement or
--------
payment is not otherwise made by the Company within one Business Day following
the honoring of any draft hereunder by the Agent, (x) the Company hereby
authorizes the Agent to debit its Account No. 53279529 maintained with the Agent
for the amount of such reimbursement or payment, and (y) in the event that, at
any time prior to the Conversion Date, such account does not contain sufficient
funds to cover such reimbursement or payment, the aggregate amount payable by
the Company pursuant to clauses (i) and (ii) above shall be deemed, for all
purposes of this Agreement and to the extent that the sum of such amount plus
----
the maximum aggregate principal amount of the Loans Outstanding (after giving
effect to all amounts requested) plus the Maximum Drawing Amount and all Unpaid
----
Reimbursement Obligations does not exceed the Total Commitment, a Base Rate Loan
made by the Banks to the Company on the date the Agent honored the relevant
draft; and
<PAGE>
-23-
(b) upon the termination of the Total Commitment, or the acceleration
of the Reimbursement Obligations with respect to all Letters of Credit in
accordance with (S)11, an amount equal to the then Maximum Drawing Amount on all
Letters of Credit, which amount shall be held by the Agent for the benefit of
the Banks and the Agent as cash collateral for all Reimbursement Obligations.
Upon the termination of the Total Commitment pursuant to (S)2.2 or at the
Conversion Date, the Agent agrees, so long as no Default or Event of Default has
occurred and is continuing, to hold such cash collateral in an interest-bearing
account in the name of the Company, to pay current interest on such cash
collateral to the Company and upon the payment by the Company of any
Reimbursement Obligations or the reduction of the Maximum Drawing Amount upon
the cancellation of any Letter of Credit, the Agent agrees to return to the
Company an amount equal to such payment or reduction together with unpaid
interest accrued thereon through the date of such return; and
(c) upon the reduction (but not termination) of the Total Commitment
to an amount less than the Maximum Drawing Amount, an amount equal to such
difference, which amount shall be held by the Agent for the benefit of the Banks
and the Agent as cash collateral for all Reimbursement Obligations.
Each such payment shall be made to the Agent at the Agent's head office in
immediately available funds. Interest on any and all amounts remaining unpaid
by the Company under this (S)2A.2 after application, in the case of amounts due
under clause (a) hereof, of the provisions contained in the proviso thereof, at
any time from the date such amounts become due and payable (whether so stated in
(S)2A.2, by acceleration or otherwise) until payment in full (whether before or
after judgment) shall be payable to the Agent on demand at the rate specified in
(S)2.5 for overdue principal on the Loans.
(S)2A.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or
------ -- ------ --------
other demand for payment shall be made under any Letter of Credit, the Agent
shall, promptly following its receipt thereof, notify the Company of the date
and amount of the draft presented or demand for payment and of the date and time
when it expects to pay such draft or honor such demand for payment. If the
Company fails to reimburse the Agent as provided in (S)2A.2 no later than one
Business Day following the date that such reimbursement is to be made, the Agent
may at any time thereafter notify the Banks of the amount of any such Unpaid
Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business
Day next following the receipt of such notice, each Bank shall make available to
the Agent, at its Head Office, in immediately available funds, such Bank's
Commitment Percentage of such Unpaid Reimbursement Obligation, together with an
amount equal to the product of (a) the average, computed for the period referred
to in clause (c) below, of the weighted average interest rate paid by the Agent
for federal funds acquired by the Agent during each day included in such period,
times (b) the amount equal to such Bank's Commitment Percentage of such Unpaid
- -----
Reimbursement Obligation, times (c) a fraction, the numerator of which is the
-----
number of days that elapse from and including the date the Agent paid the draft
<PAGE>
-24-
presented for honor or otherwise made payment to the date on which such Bank's
Commitment Percentage of such Unpaid Reimbursement Obligation shall become
immediately available to the Agent, and the denominator of which is 360. The
responsibility of the Agent to the Company, the Commerce Subsidiaries for the
respective accounts of which Letters of Credit are issued and the Banks shall be
only to determine that the documents (including each draft) delivered under each
Letter of Credit in connection with such presentment shall be in conformity in
all material respects with such Letter of Credit.
(S)2A.4. OBLIGATIONS ABSOLUTE. Subject to the provisions of (S)2A.5,
----------- --------
the Agent agrees with the Company that it will exercise and give the same care
and attention to each Letter of Credit as it gives to its other letters of
credit. Subject to the provisions of (S)2A.5, the Company agrees with the Agent
and the Banks that the Agent and the Banks shall not be responsible for, and the
Company's and the Commerce Subsidiaries' Reimbursement Obligations under (S)2A.2
are absolute and unconditional and shall not be affected by, among other things,
(a) the validity or genuineness of documents supplied or of any endorsements
thereon, even if such documents should in fact prove to be in any or all
respects invalid, fraudulent or forged, (b) any dispute between or among the
Company or the Commerce Subsidiary for whose account the relevant Letter of
Credit was issued, the beneficiary of any Letter of Credit or any financial
institution or other party to which any Letter of Credit may be transferred, (c)
any setoff, claims or defenses whatsoever of the Company or the Commerce
Subsidiary for the account of which such Letter of Credit was issued against the
Agent, any Bank or any beneficiary of any Letter of Credit or any such
transferee, or (d) the occurrence of any Default or Event of Default. The Agent
and the Banks shall not be liable for any error, omission, interruption or delay
in transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit. The Company agrees that
any action taken or omitted by the Agent or any Bank under or in connection with
each Letter of Credit and the related drafts and documents, if done in good
faith, shall be binding upon the Company and shall not result in any liability
on the part of the Agent or any Bank to the Company or any Commerce Subsidiary.
(S)2A.5. RELIANCE BY ISSUER. To the extent not inconsistent with
-------- -- ------
(S)2A.4 (except the first two sentences thereof), the Agent shall be entitled to
rely, and shall be fully protected in relying upon, any Letter of Credit, draft,
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, telex or teletype message, statement, order or other
document believed by it to be genuine and correct and to have been signed, sent
or made by the proper Person or Persons and upon advice and statements of legal
counsel, independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement unless it shall first have received such advice or concurrence of
the Majority Banks as it reasonably deems appropriate or it shall first be
indemnified to its reasonable satisfaction by the Banks against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under
<PAGE>
-25-
this Agreement in accordance with a request of the Majority Banks, and such
request and any action taken or failure to act pursuant thereto shall be binding
upon the Banks and all future holders of the Notes or of a Letter of Credit
Participation.
(S)2A.6. LETTER OF CREDIT FEE. The Company agrees to pay, on the date
------ -- ------ ---
of issuance or any extension or renewal of any Letter of Credit and at such
other time or times as such charges are customarily made by the Agent, a fee (in
each case, a "Letter of Credit Fee") to the Agent in respect of such Letter of
Credit equal to (i) three quarters of one percent (3/4%) per annum of the face
amount of such Letter of Credit, to be for the accounts of the Banks in
accordance with their respective Commitment Percentages, plus (ii) the Agent's
----
customary issuance or amendment fee, as the case may be, in the amount of one
quarter of one percent (1/4%) of the face amount of such standby Letter of
Credit, to be for the Agent's own account, plus (iii) the Agent's customary
----
negotiation fee as determined by the Agent, to be for the Agent's own account.
(S)3. CERTAIN GENERAL PROVISIONS.
------- ------- ----------
(S)3.1. FUNDS FOR PAYMENTS.
------------------
(A) PAYMENTS TO AGENT. All payments of principal of and interest
------------------
on the Loans, Reimbursement Obligations, the Agent's Fee, the Commitment Fees
and any other amounts due hereunder shall be made by the Company in United
States Dollars to the Agent for the respective accounts of the Banks, or (in the
case of the Agent's Fee), the Agent, in immediately available funds at the
Agent's head office at the address set forth therefor in Schedule 1.1 hereto or
-------- ---
at such other location in the Boston, Massachusetts area that the Agent may from
time to time designate.
(B) NO OFFSET, ETC. All payments by the Company and the Commerce
---------------
Subsidiaries hereunder and under any of the other Loan Documents shall be made
without setoff or counterclaim and free and clear of and without deduction for
any taxes, levies, imposts, duties, charges, fees, deductions, withholdings,
compulsory loans, restrictions or conditions of any nature now or hereafter
imposed or levied by any jurisdiction or any political subdivision thereof or
taxing or other authority therein unless the Company or such Subsidiary is
compelled by law to make such deduction or withholding. If any such obligation
is imposed upon the Company or the Commerce Subsidiaries with respect to any
amount payable by them hereunder or under any of the other Loan Documents, the
Company will pay to the Agent, for the account of the Banks or (as the case may
be) the Agent, on the date on which such amount is due and payable hereunder or
under such other Loan Document, such additional amount in Dollars as shall be
necessary to enable the Banks or the Agent to receive the same net amount which
the Banks or the Agent would have received on such due date had no such
obligation been imposed upon the Company or such Commerce Subsidiary. The
Company will deliver promptly to the Agent certificates or other valid vouchers
for all taxes or other charges deducted from or paid with respect to payments
made by
<PAGE>
-26-
the Company or such Commerce Subsidiary hereunder or under such other Loan
Document. Nothing contained in this (S)3.1(b) shall be deemed to impose upon the
Company any obligation to pay taxes based upon the income or profits of the
Agent or any Bank.
(S)3.2. COMPUTATIONS. All computations of interest on the Loans and of
------------
Commitment Fees, Letter of Credit Fees or other fees shall be based on a 360-day
year and paid for the actual number of days elapsed. Except as otherwise
provided in the definition of the term "Interest Period" with respect to
Eurodollar Rate Loans, whenever a payment hereunder or under the Notes becomes
due on a day which is not a Business Day, the due date for such payment shall be
(a) in the case of Base Rate Loans, the next succeeding Business Day, and (b) in
the case of Eurodollar Rate Loans, the Business Day next succeeding the day on
which such payment would otherwise have become due, such Business Day to be
selected (such selection to be made by the Agent two Business Days prior to the
Drawdown Date and notice thereof shall be given to the Company and the Banks not
later than five Business Days after the Drawdown Date or upon request by the
Company, provided, that any failure by the Agent to give such notice shall not
--------
in any way affect the obligation of the Company to make such payment when due)
by the Agent in accordance with the then current banking practice in any
Eurodollar Interbank Market selected by the Agent in its sole discretion acting
in good faith, as the case may be, and interest and commitment fees hereunder
shall be adjusted accordingly. The outstanding amount of the Loans as reflected
on the Records from time to time shall be considered correct and binding on the
Company unless within five (5) Business Days after receipt of any notice by the
Agent or any of the Banks of such outstanding amount, the Agent or such Bank
shall notify the Company to the contrary.
(S)3.3. ADDITIONAL COSTS, ETC. If any present or future applicable law,
---------- ----- ---
which expression, as used herein, includes statutes, rules and regulations
thereunder and interpretations thereof by any competent court or by any
governmental or other regulatory body or official charged with the
administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made upon or
otherwise issued to any Bank or the Agent by any central bank or other fiscal,
monetary or other authority (whether or not having the force of law), shall in
the case of any Loans, any Letters of Credit or any Commitment:
(a) subject any Bank or the Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Agreement, the other Loan Documents, such Bank's Commitment or the Loans or
Letters of Credit (other than taxes based upon or measured by the income or
profits of such Bank or the Agent), or
(b) materially change the basis of taxation (except for changes in
taxes on income or profits) of payments to any Bank of the principal of or the
interest on any Loans, any Reimbursement Obligations or any other amounts
<PAGE>
-27-
payable to any Bank or the Agent under this Agreement or any of the other Loan
Documents, or
(c) impose or increase or render applicable (other than to the
extent specifically provided for elsewhere in this Agreement) any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held by, or
deposits in or for the account of, or loans or letters of credit by, or
commitments of, any office of any Bank, or
(d) impose on any Bank or the Agent any other conditions or
requirements with respect to this Agreement, the other Loan Documents, the
Loans, any Letters of Credit, such Bank's Commitment, or any class of
commitments, letters of credit or loans of which any of the Loans, any Letters
of Credit or such Bank's Commitment forms a part,
and the result of any of the foregoing is
(i) to increase the cost to any Bank of making, funding,
issuing, renewing, extending or maintaining any of the Loans or such Bank's
Commitment or any Letter of Credit, or
(ii) to reduce the amount of principal, interest, fees,
Reimbursement Obligations or other amount payable to such Bank or the Agent
hereunder on account of such Bank's Commitment, any Letter of Credit or any
of the Loans, or
(iii) to require such Bank or the Agent to make any payment or
to forego any interest, principal, Reimbursement Obligation or other sum
payable hereunder, the amount of which payment or foregone interest or
Reimbursement Obligation, principal or other sum is calculated by reference
to the gross amount of any sum receivable or deemed received by such Bank
or the Agent from the Company hereunder,
then, and in each such case, the Company will, within five (5) days following
demand made by such Bank (through the Agent) or, as the case may be, the Agent
at any time and from time to time and as often as the occasion therefor may
arise, pay to the Agent for the respective accounts of the Banks or for the
Agent's own account such additional amounts as will be sufficient to compensate
such Bank or the Agent for such additional cost, reduction, payment or foregone
interest, principal or other sum. Each Bank or, as the case may be, the Agent
shall give the Company prompt notice of any event causing such additional cost,
reduction, payment or foregone interest, Reimbursement Obligation or other sum.
(S)3.4. INDEMNIFICATION FOR LOSSES. Without prejudice to any of the
--------------- --- ------
foregoing provisions of this Agreement, the Company will, on demand by any Bank
(through the Agent), at any time and from time to time and as often as the
occasion therefor may arise, indemnify such Bank against any losses, costs or
expenses
<PAGE>
-28-
which such Bank may at any time or from time to time sustain or incur with
respect to any Eurodollar Rate Loans as a consequence of
(a) the failure by the Company to borrow any Eurodollar Rate Loan on
the date of borrowing designated by the Company,
(b) the failure by the Company to pay, punctually on the due date
thereof, any amount payable by the Company under this Agreement,
(c) the accelerated payment of any of the Company's obligations under
this Agreement as a result of an Event of Default, or
(d) any voluntary or mandatory prepayment made with respect to any
Eurodollar Rate Loan other than on the last day of an Interest Period.
Such losses, costs or expenses, including interest or fees payable by such Bank
to lenders of funds obtained by it in order to maintain any such Loans, will be
determined by such Bank on a commercially reasonable basis and will include in
the case of any such accelerated payment, but not be limited to, the amount by
which:
(i) the total amount of interest which would have accrued on the
principal so repaid or prepaid during the period (in this (S)3.4 called the
"Reemployment Period") beginning on the date of such repayment or
prepayment and ending on the last day of the Interest Period relating to
the principal so repaid or prepaid, such total amount of interest to be
calculated on the basis of the Eurodollar Rate applicable to such Interest
Period:
exceeds
(ii) the total amount of interest which would accrue and become
payable to such Bank during the Reemployment Period on the principal repaid
or prepaid if such Bank, following such repayment or prepayment, were to
use its best efforts to reemploy as soon as possible the principal so
repaid or prepaid by (A) placing with a prime bank in the Eurodollar
Interbank Market selected by such Bank deposits of dollars in amounts equal
(as nearly as may be) to the principal so repaid or prepaid and for the
number of days equal (as nearly as may be) to the Reemployment Period, or
(as such Bank may elect) (B) buying at face value from a prime bank a
negotiable certificate of deposit issued by such prime bank in an amount
equal (as nearly as may be) to the principal so repaid or prepaid and
having a maturity comparable to the Reemployment Period.
(S)3.5. CAPITAL ADEQUACY. If any present or future law, governmental
------- --------
rule, regulation, policy, guideline or directive (whether or not having the
force of law) or the interpretation thereof by a court or governmental authority
with appropriate jurisdiction affects the amount of capital required or expected
to be maintained by any Bank or the Agent, or any corporation controlling such
Bank or the Agent and
<PAGE>
-29-
such Bank or the Agent determines that the amount of capital required to be
maintained by it is increased by or based upon the existence of such Bank's or
the Agent's commitment with respect to the credit facility established hereunder
or the Loans, Letter of Credit Participations or Letters of Credit made, issued,
maintained, extended or renewed pursuant hereto, then such Bank or the Agent may
notify the Company of such fact. To the extent that the costs of such increased
capital requirements are not reflected in the Base Rate or Eurodollar Rate, or
in amounts paid or payable by the Company pursuant to (S)(S)3.3 or 3.4 hereof,
the Company and such Bank or (as the case may be) the Agent shall thereafter
attempt to negotiate in good faith, within thirty (30) days of the day on which
the Company receives such notice, an adjustment payable hereunder which will
adequately compensate such Bank or the Agent in light of these circumstances. If
the Company and such Bank or the Agent are unable to agree to such adjustment
within thirty (30) days of the date on which the Company receives such notice,
then commencing on the date of such notice (but not earlier than the effective
date of any such increased capital requirement), the fees payable hereunder
shall increase by an amount that will, in such Bank's or the Agent's reasonable
determination, provide adequate compensation. Each Bank and the Agent shall
allocate such cost increases among its customers in good faith and on an
equitable basis. For the purposes of (S)3.3 and this (S)3.5, any costs
reimbursed to FNBB as a Bank shall not be reimbursable to FNBB as Agent, and to
the extent that costs attributable to any Bank's Loans, any Letter of Credit
Participation or Commitment are reimbursed by such Bank to the Agent, such costs
shall not be reimbursable by the Company to the Agent and any costs reimbursed
to the Agent which are attributable to the Commitment, Letter of Credit
Participations or Loans of any Bank shall not be reimbursed to such Bank.
(S)3.6. BANK CERTIFICATE. A certificate signed by an officer of any Bank,
---- -----------
setting forth any additional amount required to be paid by the Company to such
Bank under (S)(S)3.3, 3.4 or 3.5 hereof and the computations made by such Bank
to determine such additional amount, shall be submitted by such Bank to the
Company in connection with each demand made at any time by such Bank upon the
Company under (S)(S)3.3, 3.4 or 3.5. Without limiting the negotiation
requirements of (S)3.5 (with respect to certificates issued on account of
additional amounts required to be paid pursuant to (S)3.5), such certificate
shall constitute prima facie evidence as to the additional amount owed.
----- -----
(S)3.7. INABILITY TO DETERMINE EURODOLLAR RATE. In the event that, prior
--------- -- --------- ---------- ----
to the commencement of any Interest Period relating to any Eurodollar Rate Loan,
the Agent shall determine that adequate and reasonable methods do not exist for
ascertaining the Eurodollar Rate that would otherwise determine the rate of
interest to be applicable to any Eurodollar Rate Loan during any Interest
Period, the Agent shall forthwith give notice of such determination (which shall
be conclusive and binding on the Company and the Banks) to the Company and the
Banks. In such event (a) any Loan Request or Conversion Request with respect to
Eurodollar Rate Loans shall be deemed a request for Base Rate Loans, (b) each
Eurodollar Rate Loan will automatically, on the last day of the then current
Interest Period relating thereto, become a Base Rate Loan, unless the Agent has
<PAGE>
-30-
received timely notice of the Company's intent to prepay such Eurodollar Rate
Loan or any portion thereof pursuant to (S)2.9, and (c) the obligations of the
Banks to make Eurodollar Rate Loans shall be suspended until the Agent
determines that the circumstances giving rise to such suspension no longer
exist, whereupon the Agent shall so notify the Company and the Banks. Neither
the Agent nor any Bank shall in any event be responsible to the Company in any
way if it is not able for any reason beyond its control to quote a Eurodollar
Rate with respect to any proposed Interest Period.
(S)3.8. ILLEGALITY. Notwithstanding any other provisions herein, if any
----------
present or future law, regulation, treaty or directive or in the interpretation
or application thereof shall make it unlawful for any Bank to make or maintain
Eurodollar Rate Loans, such Bank shall forthwith give notice of such
circumstances to the Company and the other Banks and thereupon (a) the
commitment of such Bank to make Eurodollar Rate Loans or convert Base Rate Loans
to Eurodollar Rate Loans shall forthwith be suspended and (b) such Bank's Loans
then outstanding as Eurodollar Rate Loans, if any, shall be converted
automatically to Base Rate Loans on the last day of each Interest Period
applicable to such Eurodollar Rate Loans, unless the Agent has received timely
notice of the Company's intention to prepay such Eurodollar Rate Loan or any
portion thereof pursuant to (S)2.11, or within such earlier period as may be
required by law. The Company hereby agrees promptly to pay the Agent for the
account of such Bank, upon demand by such Bank, any additional amounts necessary
to compensate such Bank for any costs incurred by such Bank in making any
conversion in accordance with this (S)3.9, including any interest or fees
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its Eurodollar Loans hereunder.
(S)4. GUARANTY.
--------
The Obligations shall be guaranteed by each of the Commerce Subsidiaries
pursuant to the terms of the Guaranty.
(S)5. REPRESENTATIONS AND WARRANTIES. The Company, for itself and on
--------------- --- ----------
behalf of its Subsidiaries, hereby represents and warrants to the Banks and the
Agent as follows:
(S)5.1. CORPORATE EXISTENCE.
--------- ---------
(A) ORGANIZATION; CORPORATE POWER AND AUTHORITY. Each of the
-------------------------------------------
Commerce Companies (i) is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation, and (ii) has
adequate corporate power and authority and full legal right to own or to hold
under lease its properties and to carry on the business in which it is presently
engaged and will be engaged upon consummation of the transactions contemplated
hereby.
(B) FOREIGN QUALIFICATION. Each of the Commerce Companies is
---------------------
qualified and in good standing as a foreign corporation and is licensed,
admitted or approved to do business as a foreign corporation in each
jurisdiction wherein the
<PAGE>
-31-
character of the properties owned or held under lease by it, or the nature of
the business conducted by it, makes such qualification necessary, except where
(i) such failure to qualify would not have a material adverse effect on such
Commerce Company or on the enforceability against such Commerce Company of any
of the Loan Documents or (ii) (A) such Commerce Company is a Subsidiary which
was acquired pursuant to (S)9.5 within thirty (30) days prior to the date on and
as of which this representation and warranty is being made or repeated and (B)
the Company and such Subsidiary are using all reasonable efforts to obtain the
appropriate license, admission or qualification.
(c) Each of the Commerce Companies has adequate corporate power and
authority and has full legal right to enter into each of the Loan Documents to
which it is or is to become a party, to perform, observe and comply with all of
its agreements and obligations under each of such documents, and, with respect
to the Company, to make all of the borrowings contemplated by this Agreement.
(S)5.2. SUBSIDIARIES; SHARES OWNED BY THE COMMERCE COMPANIES. Schedule
---------------------------------------------------- --------
5.2 attached hereto sets forth all entities in which one or more of the Commerce
- ---
Companies (a) owns or holds of record and/or beneficially (whether directly or
indirectly) five percent (5%) or more of any class of the capital stock thereof,
(b) the aggregate purchase price of all capital stock owned or held of record
and/or beneficially (whether directly or indirectly) by such Commerce Company or
Commerce Companies in any one such entity equals or exceeds $200,000 or (c) the
aggregate purchase price of all capital stock owned or held of record and/or
beneficially (whether directly or indirectly) by such Commerce Company or
Commerce Companies in all such entities equals or exceeds $1,000,000. Schedule
--------
5.2 contains a complete description of all shares described in the preceding
- ---
sentence together with a complete list of all Subsidiaries of the Company and
sets forth the authorized capital of all classes of the capital stock of each
Commerce Subsidiary on the date hereof, together with the ownership on the date
hereof of all of the issued and outstanding shares of each such class. Other
than Subsidiaries of the Commerce Companies organized under the laws of
jurisdictions located outside the United States, none of the Commerce Companies
has any Subsidiaries which are not Commerce Subsidiaries or Non-Guarantor
Subsidiaries. On the Closing Date, Sterling Software, Inc. and its Subsidiaries
do not own in the aggregate, legally or beneficially, in excess of one percent
(1%) of all of the outstanding shares of the capital stock of the Company.
(S)5.3. CORPORATE AUTHORITY, ETC. The execution and delivery by each of
--------- --------- ---
the Commerce Companies of each of the Loan Documents to which it is or is to
become a party, the performance by each of the Commerce Companies of all of its
agreements and obligations under each of such documents, and the transactions
contemplated hereby and thereby, including the making by the Company of all of
the borrowings contemplated by this Agreement, have been duly authorized as of
the date hereof (except that in the case of a Commerce Subsidiary acquired
pursuant to (S)9.5, such execution, delivery and authorization shall have been
completed no later than the later to occur of (a) the date of such acquisition,
and
<PAGE>
-32-
(b) five Business Days following receipt by the Company or such Commerce
Subsidiary of forms of the Loan Documents, or amendments thereto, as
appropriate, to which such Commerce Subsidiary is to become a party), by all
necessary corporate action on the part of each Commerce Company and its
respective shareholders and are within the corporate authority of such Person,
and do not and will not (i) contravene or conflict with any provision of its
charter or by-laws (each as from time to time in effect), (ii) conflict with, or
result in a breach of any material term, condition or provision of, or
constitute a default under or result in the creation of any mortgage, lien,
pledge, charge, security interest or other encumbrance upon any of the property
of any of the Commerce Companies (other than the liens created under any of the
Loan Documents) under any agreement, trust deed, indenture, mortgage or other
instrument to which any of the Commerce Companies is or may become a party or by
which any of the Commerce Companies or any of the property of any of the
Commerce Companies is or may become bound or affected, the consequences of which
would reasonably be expected to have a material adverse effect on the Commerce
Companies taken as a whole or would have an effect in any material respect on
the enforceability of any of the Loan Documents, (iii) violate or contravene any
provision of any law, regulation, order, ruling or interpretation thereunder or
any decree, order or judgment of any court or governmental or regulatory
authority, bureau, agency or official (all as from time to time in effect and
applicable to any of the Commerce Companies), except where such violation or
contravention would not materially adversely affect the Commerce Companies taken
as a whole and would not have any effect in any material respect on the
enforceability of the Loan Documents, (iv) require any waivers, consents or
approvals by any of the creditors of any of the Commerce Companies which have
not been obtained, (v) require any consents or approvals by any shareholders of
any of the Commerce Companies, or (vi) require any approval, consent, order,
authorization or license by, or giving notice to, or taking any other action
with respect to, any governmental or regulatory authority or agency under any
provision of any applicable law, except those actions which have been taken or
will be taken prior to the Closing Date or where the failure to do so would not
result in a material adverse effect on the Commerce Companies taken as a whole
and would not have any effect in any material respect on the enforceability of
the Loan Documents.
(S)5.4. BINDING EFFECT OF DOCUMENTS, ETC. Each of the Commerce Companies
------- ------ -- --------- ---
has duly executed and delivered each of the Loan Documents to which it is a
party and each of such documents is in full force and effect. The agreements
and obligations of each of the Commerce Companies contained in each of the Loan
Documents to which it is a party constitute legal, valid and binding obligations
enforceable against it in accordance with their respective terms, except as
enforceability is limited by bankruptcy, insolvency, reorganization, moratorium
or other laws relating to or affecting generally the enforcement of creditors'
rights and except to the extent that the availability of the remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding therefor may be brought.
<PAGE>
-33-
(S)5.5. NO DEFAULTS OR EVENTS OF DEFAULT. No Default or Event of Default
-- ------------------ -- -------
has occurred and is continuing.
(S)5.6. CHIEF EXECUTIVE OFFICES; MAILING ADDRESSES. Until the Agent
----- --------- --------------------------
receives written notice of a change, the chief executive offices of the Company
and the offices where all material records and books of account of the Company
are kept, shall be located at 8080 North Central Expressway, Suite 1100, Dallas,
Texas 75206, and the Company's mailing address shall be as provided in (S)18
hereof, and the chief executive offices of each of the Commerce Subsidiaries,
the offices where all material records and books of account of each of the
Commerce Subsidiaries are kept, and the mailing addresses of each of the
Commerce Subsidiaries, shall be as set forth in Schedule 5.6 hereto.
-------- ---
(S)5.7. FINANCIAL STATEMENTS AND PROJECTIONS.
--------- --------------------------
(A) FINANCIAL STATEMENTS. The Company has furnished to each of the
--------------------
Banks a consolidated balance sheet of the Company and its Subsidiaries as at the
Balance Sheet Date, and consolidated statements of operations and income and
stockholders' equity of the Company and its Subsidiaries for the fiscal year
then ended, certified by Ernst & Young, LLP, and an unaudited consolidated
balance sheet of the Company and its Subsidiaries at June 30, 1996, and
unaudited consolidated statements of operations and retained earnings of the
Company and its Subsidiaries for the fiscal period then ended. Such financial
statements were prepared in accordance with generally accepted accounting
principles and fairly present the financial condition of the Company and its
Subsidiaries (on a pro forma basis with respect to the Balance Sheet Date) as at
--- ----
the close of business on the dates thereof and the results of operations for the
fiscal period then ended. There are no contingent liabilities of the Company and
its Subsidiaries as of either of such dates involving material amounts not
disclosed in such financial statements and the related notes thereto.
(B) PROJECTIONS. Copies of the most recently prepared projections
-----------
of the annual and quarterly operating budgets of the Company and its
Subsidiaries on a consolidated basis, balance sheets and cash flow statements
for the fiscal quarter of the Company and its Subsidiaries ending September 30,
1996 have been delivered to each Bank. To the knowledge of the Company or any of
its Subsidiaries, no facts exist that (individually or in the aggregate) would
result in any material change in any of such projections. The projections are
based upon reasonable estimates and assumptions and reflect the reasonable
estimates of the Company and its Subsidiaries of the results of operations and
other information projected therein.
(S)5.8. NO MATERIAL CHANGES, ETC. Except as disclosed in the Forms 10-Q
-- -------- ------- ---
and Forms 8-K of the Company and its Subsidiaries filed by Sterling Software,
Inc. and its Subsidiaries with the Securities and Exchange Commission and
previously delivered to the Agent and the Banks, since the Balance Sheet Date,
there has occurred no materially adverse change in the financial condition,
business or prospects of the Company and its Subsidiaries taken as a whole as
shown on or
<PAGE>
-34-
reflected in the consolidated balance sheet of the Company and its Subsidiaries
as at the Balance Sheet Date, or the consolidated statements of operations for
the fiscal year then ended. None of the Commerce Subsidiaries has made any
Distribution since the Balance Sheet Date, except to the Company or another
Commerce Subsidiary.
(S)5.9. MORTGAGES AND LIENS. None of the property, assets, income or
--------- --- -----
revenues of any character, or any rights relating thereto, of any of the
Commerce Companies is subject to any mortgage, lien, pledge, charge, security
interest or other encumbrance of any kind, other than Permitted Liens. Set
forth on Schedule 5.9 hereto is a true and correct list of each office or other
------------
location maintained by any of the Commerce Companies in the United States of
America. In all jurisdictions set forth on Schedule 5.9, and, to the best
------------
knowledge of the Company (without having conducted UCC searches), in all other
jurisdictions located in the United States of America, any state thereof or the
District of Columbia, no financing statement which names any of the Commerce
Companies as a debtor has been filed pursuant to Article 9 of the Uniform
Commercial Code of any state of the United States or the District of Columbia,
and none of the Commerce Companies has signed any financing statement or
security agreement or authorized any Person to file any such financing statement
in any such jurisdiction, except (a) for notice filings by lessors of personal
property or equipment under leases, or (b) with respect to Permitted Liens.
(S)5.10. INDEBTEDNESS. Neither the Company nor any of its Subsidiaries
------------
has any Indebtedness other than Indebtedness expressly permitted by the
provisions contained in (S)9.1 of this Agreement.
(S)5.11. LITIGATION. Except as set forth on Schedule 5.11 hereto as of
---------- -------- ----
the date hereof, or as previously disclosed to the Agent in writing (with the
Agent disclosing such information to the Banks promptly following receipt
thereof), there is no pending or, to the best of the knowledge of any of the
Company's officers and directors, threatened action, suit, proceeding or
investigation before any court, tribunal, governmental or regulatory authority,
agency, commission, or board of arbitration against the Company or any of its
Subsidiaries which seeks or demands damages in excess of $1,500,000 or which
would otherwise reasonably be expected materially adversely to affect the
transactions contemplated hereby or the operations or the financial condition of
the Company and its Subsidiaries taken as a whole or to materially impair the
right of the Company and its Subsidiaries, considered as a whole, to carry on
business substantially as now conducted by them, or to result in any material
liability not adequately covered by insurance or for which adequate reserves are
not maintained on the consolidated balance sheet of the Company and its
Subsidiaries, or which questions the validity of this Agreement or any of the
other Loan Documents or any action taken or to be taken pursuant hereto or
thereto, nor does the Company or any of its Subsidiaries know of any reasonable
basis for any such litigation to exist. Set forth on Schedule 5.11 hereto are
-------------
descriptions of all escrow arrangements to which the Company or any of its
Subsidiaries is a party with respect to pending litigation against the Company
or any of its Subsidiaries which must be disclosed pursuant to this (S)5.11.
<PAGE>
-35-
(S)5.12. NO DEFAULT. Except for alleged defaults relating to the matters
-- -------
set forth on Schedules 5.11 and 5.12 hereof as of the date hereof, or as
--------- ---- ----
previously disclosed to the Agent in writing, no material default under any
contract, agreement or instrument to which any Commerce Company is a party or by
which it or any of its property is bound, has occurred and is continuing beyond
the grace period specified therefore in such contract, instrument or agreement,
the consequence of which default would reasonably be expected materially
adversely to affect the financial condition, assets, or operations of any of the
Company and its Subsidiaries taken as a whole. The Agent shall disclose
information disclosed to it in writing pursuant to the preceding sentence to the
Banks promptly following receipt thereof. Notwithstanding the foregoing, the
information set forth on Schedules 5.11 and 5.12 is for disclosure purposes
--------- ---- ----
only, and nothing contained in Schedules 5.11 or 5.12 shall be deemed an
--------- ---- ----
admission by the Company or any Subsidiary that any default exists under any
contract, agreement or instrument to which such Commerce Company is a party or
by which such Commerce Company or any of its property is bound.
(S)5.13. TAXES. Except as set forth on Schedule 5.13, as of the date
----- -------- ----
hereof, the Company, for itself and on behalf of its Subsidiaries, has filed all
United States federal tax returns required to be filed by it, and each of the
Company and, to the best knowledge of the Company, its Subsidiaries has filed
all state and other tax returns required to be filed by it other than (i) those
returns relating to taxes (A) with respect to which the Company or any such
Subsidiary, as the case may be, in good faith and using due diligence and all
deliberate speed, is investigating or ascertaining the extent of its liability,
if any, and (B) with respect to which (1) no lien or notice has been filed in
any public recording office, and (2) neither the Company nor such Subsidiary has
received notice of a lien or the threat or initiation of an enforcement
proceeding or has reason to believe that such a lien or enforcement proceeding
is likely to occur or is specifically contemplated by appropriate authorities,
or (ii) those returns as to which the failure to so file would not, in the
opinion of the Company, create an outstanding liability for taxes due or
interest and penalties thereon in excess of $1,000,000 in the aggregate for the
Company and its Subsidiaries. As of the date hereof, each of the Company and
its Subsidiaries has paid, or has made reasonable provision for payment of, all
material taxes (if any) which have or may become due and payable with respect to
any past or present taxation period pursuant to any of the said returns or
pursuant to any matters raised by audits or for other reasons known to it, other
than those taxes referenced in subparagraphs (i) and (ii) above and taxes the
amount, applicability, or validity of which are currently being contested by it
in good faith by appropriate proceedings and with respect to which it has set
aside on its books reserves (to the extent required by generally accepted
accounting principles and practices) reasonably deemed by it to be adequate with
respect thereto. Neither the Company nor any of its Subsidiaries has consented
to be treated as a "consenting corporation" as defined in Section 341(f) of the
Code.
(S)5.14. TRUE COPIES OF CHARTER AND OTHER DOCUMENTS. Each of the Commerce
---- ------ -- ------- --- ----- ---------
Companies has furnished or caused to be furnished, except any
<PAGE>
-36-
Commerce Subsidiary acquired as permitted by (S)9.5 which Subsidiary shall,
within 30 days of such acquisition, have furnished or caused to be furnished, to
each of the Banks true and complete copies of (a) all of the charter and other
incorporation or association documents of each of the Commerce Companies
(together with any and all amendments thereto) and (b) the by-laws of each of
the Commerce Companies (together with any and all amendments thereto).
(S)5.15. EMPLOYEE BENEFIT PLANS.
-------- ------- -----
(a) IN GENERAL. Each Employee Benefit Plan has been maintained
-- -------
and operated in compliance in all material respects with the provisions of ERISA
and, to the extent applicable, the Code, including but not limited to the
provisions thereunder respecting prohibited transactions. The Company has
heretofore delivered to the Agent the most recently completed annual report,
Form 5500, with all required attachments, and actuarial statement required to be
submitted under (S)103(d) of ERISA, with respect to each Guaranteed Pension
Plan, if any.
(b) TERMINABILITY OF WELFARE PLANS. Under each Employee Benefit
------------- -- ------- -----
Plan which is an employee welfare benefit plan within the meaning of (S)3(1) or
(S)3(2)(B) of ERISA, no benefits are due unless the event giving rise to the
benefit entitlement occurs prior to plan termination (except as required by
Title I, Part 6 of ERISA). Subject to applicable legal requirements, the Company
or an ERISA Affiliate, as appropriate, may terminate each such Plan at any time
(or at any time subsequent to the expiration of any applicable bargaining
agreement) in the discretion of the Company or such ERISA Affiliate without
liability to any Person.
(c) GUARANTEED PENSION PLANS. Each contribution required to be
---------- ------- -----
made to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien provisions
of (S)302(f) of ERISA, or otherwise, has been timely made. No waiver of an
accumulated funding deficiency or extension of amortization periods has been
received with respect to any Guaranteed Pension Plan. No liability to the PBGC
(other than required insurance premiums, all of which have been paid) has been
incurred by the Company or any ERISA Affiliate with respect to any Guaranteed
Pension Plan and there has not been any ERISA Reportable Event, or any other
event or condition which presents a material risk of termination of any
Guaranteed Pension Plan by the PBGC. Based on the latest valuation of each
Guaranteed Pension Plan (which in each case occurred within twelve months prior
to the date of this representation), and on the actuarial methods and
assumptions employed for that valuation, the aggregate benefit liabilities of
all such Guaranteed Pension Plans within the meaning of (S)4001 of ERISA did not
exceed the aggregate value of the assets of all such Guaranteed Pension Plans by
a material amount, disregarding for this purpose the benefit liabilities and
assets of any Guaranteed Pension Plan with assets in excess of benefit
liabilities, except as otherwise permitted by (S)9.11(d).
<PAGE>
-37-
(d) MULTIEMPLOYER PLANS. Neither the Company nor any ERISA Affiliate
------------- -----
has incurred any material liability (including secondary liability) to any
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan under (S)4201 of ERISA or as a result of a sale of assets
described in (S)4204 of ERISA. Neither the Company nor any ERISA Affiliate has
been notified that any Multiemployer Plan is in reorganization or insolvent
under and within the meaning of (S)4241 or (S)4245 of ERISA or that any
Multiemployer Plan intends to terminate or has been terminated under (S)4041A of
ERISA.
(S)5.16. OTHER REPRESENTATIONS. Each of the representations and
----- ---------------
warranties made by each of the Commerce Companies in any of the Loan Documents
(to the extent that any such documents are in effect on any particular Drawdown
Date) was true and correct in all material respects when made and continues to
be true and correct in all material respects on the Closing Date, except to the
extent that, by the express terms thereof, any of such representations and
warranties relates solely to or is made as of a date falling prior to the
Closing Date, or except to the extent that any of such representations and
warranties may have been affected by the consummation of the transactions
contemplated and permitted or required by the Loan Documents.
(S)5.17. DISCLOSURE. No representation or warranty made by any of the
----------
Commerce Companies in this Agreement or in any agreement, instrument, document,
certificate, statement or letter furnished to the Agent by or on behalf of any
of the Commerce Companies in connection with any of the transactions
contemplated by any of the Loan Documents contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading in light of the circumstances in
which they are made. Except as disclosed in writing to the Agent, there is no
fact known to the Company or, to the best of the Company's knowledge, any of the
Commerce Subsidiaries which could reasonably be expected materially adversely to
affect, or which would reasonably be expected materially adversely to affect in
the future the condition, assets or operations of the Commerce Companies (other
than Non-Guarantor Subsidiaries) taken as a whole.
(S)5.18. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. None of the
------- ------- --- ---------- ------- ----
Commerce Companies is a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it a
"registered investment company", or an "affiliated company" (other than solely
by reason of the ownership of 5% or more of the Company's outstanding voting
securities by a "registered investment company") or a "principal underwriter" of
a "registered investment company", as such terms are defined in the Investment
Company Act of 1940, as amended.
(S)5.19. REGULATIONS U AND X. The proceeds of the Loans shall be used,
----------- - --- -
and the Letters of Credit shall be obtained solely for financing Permitted
Acquisitions and for working capital and general corporate purposes. No portion
of any Loan or Letter of Credit is to be used, for the purpose of purchasing or
carrying any
<PAGE>
-38-
"margin security" or "margin stock" as such terms are used in Regulations U and
X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221
and 224, nor is any portion of any Loan or Letter of Credit to be used in any
manner which, whether after giving effect to (S)8.17 or (S)8.19 or otherwise,
would be in violation of such Regulations U or X.
(S)5.20. FRANCHISES, PATENTS, COPYRIGHTS, ETC, Except as set forth on
---------- ------- ---------- ---
Schedule 5.20 hereto, each of the Commerce Companies possesses all franchises,
- -------- ----
patents, copyrights, trademarks, trade names, licenses and permits, and rights
in respect of the foregoing, adequate for the conduct of its business
substantially as now conducted and has not received notice of any conflict
(which conflict has not been resolved prior to the Closing Date) with any rights
of others. Attached hereto as Schedule 5.20 is a true, correct, and complete
-------- ----
list of all patents, patent applications, federally registered copyrights,
trademarks, trademark applications, trade names and other intellectual property
owned by any of the Commerce Companies as of the Closing Date.
(S)5.21. NON-GUARANTOR SUBSIDIARIES. No Non-Guarantor Subsidiary (a) is
--------------------------
presently engaged in business of any kind or nature (except that such Non-
Guarantor Subsidiary may have qualified to do business in a foreign
jurisdiction), (b) has a net worth in excess of $1,000,000 or, in the case of
Sterling Commerce Leasing, Inc., in excess of $5,000,000 for any period of
thirty-five (35) or more consecutive days or (c) has issued any capital stock to
any Person other than the Company or a Commerce Subsidiary. The Non-Guarantor
Subsidiaries, taken as a whole, do not have assets as a result of which such
Non-Guarantor Subsidiaries' net worth, in the aggregate, equals or exceeds
$6,000,000.
(S)5.22. ENVIRONMENTAL COMPLIANCE.
------------- ----------
(a) To the best of the Company's knowledge, none of the Commerce
Companies, nor any of their operations, is in violation or alleged violation of
any judgment, decree, order, law, license, rule and regulation pertaining to
environmental matters, including those arising under any Environmental Law,
except where the failure so to comply would not have a material adverse effect
on the business, assets or financial condition of the Commerce Companies taken
as a whole.
(b) None of the Commerce Companies has received notice from any
third party including, without limitation: any federal, state or local
governmental authority, (i) that any one of them has been identified by the EPA
as a potentially responsible party under the Comprehensive Environmental
Responser, Compensation and Liability Act of 1980, as amended, with respect to a
site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii)
that any hazardous waste, as defined by 42 U.S.C. (S)6903(5), any hazardous
substances as defined by 42 U.S.C. (S)9601(14), any pollutant or contaminant as
defined by 42 U.S.C. (S)9601(33) and any Hazardous Substances which any one of
them has generated, transported or disposed of has been found at any site at
which a federal, state or local agency or other third party has conducted or has
ordered that any of
<PAGE>
-39-
the Commerce Companies conduct a remedial investigation, removal or other
response action pursuant to any Environmental Law; or (iii) that it is or shall
be a named party to any claim, action, cause of action, complaint, or legal or
administrative proceeding (in each case, contingent or otherwise) arising out of
any third party's incurrence of costs, expenses, losses or damages of any kind
whatsoever in connection with the release of Hazardous Substances.
(c) Except as set forth on Schedule 5.22 attached hereto and to
-------- ----
the Company's knowledge: (i) no portion of the Real Estate has been used by any
of the Commerce Companies for the handling, processing, storage or disposal of
Hazardous Substances except in accordance with applicable Environmental Laws;
(ii) in the course of any activities conducted by the Commerce Companies, no
Hazardous Substances have been generated or are being used on the Real Estate
except in accordance with applicable Environmental Laws.
(d) None of the Commerce Companies, or, to the Company's
knowledge, any of the Real Estate is subject to any applicable Environmental Law
requiring the performance of Hazardous Substances site assessments, or the
removal or remediation of Hazardous Substances, or the giving of notice to any
governmental agency or the recording or delivery to other Persons of an
environmental disclosure document or statement by virtue of the transactions set
forth herein and contemplated hereby, or as a condition to the effectiveness of
any other transactions contemplated hereby.
(S)5.23. SOLVENCY. Each of the Commerce Companies other than Sterling
--------
Commerce Leasing, Inc., on an individual basis as of the Closing Date, each
Subsidiary which becomes a Commerce Subsidiary and a guarantor under the
Guaranty in accordance with the requirements of (S)8.17 or (S)8.19, on an
individual basis as of any Drawdown Date following the date on which such
Subsidiary becomes a Commerce Subsidiary and a guarantor under the Guaranty in
accordance with the requirements of (S)8.17 or (S)8.19, and the Commerce
Companies on a consolidated basis as of the Closing Date and each Drawdown Date
occurring thereafter, both before and after giving effect to the transactions
contemplated hereby, (a) is solvent, (b) has assets having a fair salable value
in excess of the amount required to pay its probable liabilities as such
liabilities become absolute and mature, and (c) has access to adequate capital
for the conduct of its business and the ability to pay its respective debts from
time to time incurred in connection therewith as such debts mature in the
reasonably foreseeable future.
(S)6. CONDITIONS TO THE FIRST LENDING. The obligations of the Banks to
---------- -- --- ----- -------
make the first Loan hereunder and of the Agent to issue any initial Letters of
Credit shall be subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions precedent:
(S)6.1. LOAN DOCUMENTS, ETC.
---- --------- ---
(a) Each of the Loan Documents shall have been duly and properly
authorized, executed and delivered by the respective party or parties thereto,
shall
<PAGE>
-40-
be in full force and effect on and as of the Closing Date, and shall be in form
and substance satisfactory to each of the Banks.
(b) Executed original counterparts of each of the Loan Documents
shall have been furnished to each of the Banks.
(S)6.2. LEGALITY OF TRANSACTIONS, ETC. No change in applicable law shall
-------- -- ------------ ---
have occurred as a consequence of which it shall have become and continue to be
unlawful (a) for any of the Banks to perform any of its agreements or
obligations under any of the Loan Documents to which it is a party on the
Closing Date or (b) for any of the Commerce Companies to perform any of its
agreements or obligations under any of the Loan Documents to which it is a party
on the Closing Date. The Banks shall have received such statements, including
applicable Forms U-1, in substance and form reasonably satisfactory to the Agent
as the Banks shall require for the purpose of compliance with any applicable
regulations of the Comptroller of the Currency or the Board of Governors of the
Federal Reserve Systems.
(S)6.3. REPRESENTATIONS AND WARRANTIES. Each of the representations and
--------------- --- ----------
warranties made by or on behalf of the Commerce Companies to the Banks or the
Agent in this Agreement or the other Loan Documents shall be true and correct in
all material respects when made, shall, for all purposes of this Agreement, be
repeated on and as of the Closing Date, and shall be true and correct in all
material respects on and as of such date except, in each case, as affected by
the consummation of the transactions contemplated by the Loan Documents and to
the extent that such representation or warranty may relate by its terms solely
to a prior date.
(S)6.4. PERFORMANCE, ETC. Each of the Commerce Companies shall have duly
----------- ---
and properly performed, complied with and observed in all material respects each
of its covenants, agreements and obligations contained in any of the Loan
Documents to which it is a party or by which it is bound which are required to
be performed on the Closing Date. No event shall have occurred on or prior to
the Closing Date and be continuing on the Closing Date, and no condition shall
exist on the Closing Date, which constitutes a Default or an Event of Default or
which would constitute a Default or an Event of Default after giving effect to
the Loan or Loans being made on the Closing Date.
(S)6.5. CERTIFIED COPIES OF CHARTER DOCUMENTS. The Agent shall have
--------- ------ -- ------- ---------
received from each of the Commerce Subsidiaries copies, in sufficient quantity
for delivery to each Bank, certified by a duly authorized officer of each of the
Commerce Companies to be true and complete on the Closing Date, of each of (a)
its charter or other incorporation or association documents as in effect on such
date of certification, and (b) its by-laws as in effect on such date.
(S)6.6. PROOF OF CORPORATE ACTION. The Agent shall have received from
----- -- --------- ------
each of the Commerce Subsidiaries copies, in sufficient quantity for delivery to
each Bank, certified by a duly authorized officer of each of the Commerce
<PAGE>
-41-
Subsidiaries to be true and complete on the Closing Date, of the records of all
corporate and shareholder action taken by each of the Commerce Subsidiaries to
authorize (a) its execution and delivery of each of the Loan Documents to which
it is or is to become a party, (b) its performance of all of its agreements and
obligations under each of such documents, and (c) the borrowings and other
transactions contemplated by this Agreement.
(S)6.7. INCUMBENCY CERTIFICATE. The Agent shall have received from each
---------- -----------
of the Commerce Subsidiaries incumbency certificates in sufficient quantity for
delivery to each Bank, dated the Closing Date, signed by a duly authorized
officer of each of the Commerce Subsidiaries, and giving the name and bearing a
specimen signature of each individual who shall be authorized: (i) to sign, in
the name and on behalf of each of the Commerce Subsidiaries, each of the Loan
Documents to which it is or is to become a party; (ii) in the case of the
Company, to make Loan Requests and Conversion Requests, and to apply for Letters
of Credit; and (iii) to give notices and to take other action on its behalf
under the Loan Documents.
(S)6.8. PROCEEDINGS AND DOCUMENTS. All corporate, governmental and other
----------- --- ---------
proceedings in connection with the transactions contemplated by the Loan
Documents and all instruments and documents incidental thereto, shall be in form
and substance reasonably satisfactory to the Agent, and the Agent shall have
received all such counterpart originals or certified or other copies of all such
instruments and documents as the Agent shall have reasonably requested.
(S)6.9. LEGAL OPINIONS. Each of the Agent and the Banks shall have
----- --------
received a written opinion, addressed to the Agent and each Bank, dated the
Closing Date, from Jones, Day, Reavis & Pogue, counsel to the Company and the
Commerce Subsidiaries, in substantially the form of Exhibit C hereto.
------- -
(S)6.10. UCC SEARCH RESULTS. The Agent shall have received the results of
------------------
recent UCC searches with respect to the assets of the Company and the Commerce
Companies in the jurisdictions listed on Schedule 5.9, indicating no liens other
------------
than Permitted Liens and otherwise in form and substance satisfactory to the
Agent.
(S)6.11. COMPLETION OF SPIN-OFF. The Company and Sterling Software, Inc.
----------------------
shall have taken all actions necessary or appropriate to complete the sale of
certain shares of the Company to the public and the distribution, on a tax-free
basis, to shareholders of Sterling Software, Inc. all shares of the capital
stock of the Company not so sold to the public so that neither Sterling
Software, Inc. nor any of its Subsidiaries or other Affiliates shall legally or
beneficially own in the aggregate in excess of one percent (1%) of all of the
outstanding shares of the capital stock of the Company. The Agent shall have
received from the Company, copies, in sufficient quantity for delivery to each
Bank, certified by a duly authorized officer of the Company to be true and
complete on the Closing Date, of the Tax Allocation Agreement and the
Indemnification Agreement.
<PAGE>
-42-
(S)6.12. INSURANCE CERTIFICATES. The Agent shall have received (a)
--------- ------------
certificates of insurance from independent insurance brokers dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of (S)8.8.
(S)6.13. PAYMENT OF FEES. The Company shall have paid to the Agent, for
---------------
the pro rata accounts of the Banks, the closing fee pursuant to (S)2.14, and
--------
shall have paid to the Agent, for its own account, the Agent's fee pursuant to
(S)2.13.
(S)7. CONDITIONS TO SUBSEQUENT LOANS. The obligation of the Banks to make
---------- -- ---------- -----
any Loans subsequent to the initial Loan or of the Agent to issue, extend or
renew any Letter of Credit after the Closing Date shall be subject to the
satisfaction of the following conditions precedent:
(S)7.1. LEGALITY OF TRANSACTIONS. It shall not be unlawful (a) for any
-------- -- ------------
of the Banks or the Agent to perform any of its agreements or obligations under
any of the Loan Documents to which the Banks or the Agent are a party on the
Drawdown Date of such Loan or such Letter of Credit, or (b) for any of the
Commerce Companies to perform any of its material agreements or obligations
under any of the Loan Documents to which such Commerce Company is a party on
such date.
(S)7.2. REPRESENTATIONS AND WARRANTIES; NO DEFAULT OR EVENT OF DEFAULT.
--------------- --- ------------------------------------------
Each of the representations and warranties made by or on behalf of any of the
Commerce Companies to the Banks or the Agent in this Agreement or any other Loan
Document or in any other document or instrument delivered pursuant to or in
connection with this Agreement shall be true and correct in all material
respects when made and shall, for all purposes of this Agreement, be deemed to
be repeated on and as of the date of the Company's notice of borrowing for such
Loan or the date of the Letter of Credit Application for such Letter of Credit
and on and as of the Drawdown Date of such Loan or such Letter of Credit and
shall be true and correct in all material respects on and as of each of such
dates, except, in each case, as affected by the consummation of the transactions
contemplated by the Loan Documents and to the extent that such representation or
warranty may relate by its terms solely to a prior date, and except that, within
the 30 day period following each acquisition consummated pursuant to (S)9.5,
Schedules 5.2, 5.6, 5.11 (but only to the extent that the Company would not be
- --------- --- --- ----
required to report the litigation to be included in Schedule 5.11 within 30 days
-------- ----
pursuant to (S)8.5), 5.12, 5.13 (but only to the extent that any changes to
---- ----
Schedule 5.13 arise solely from failure by the newly acquired Subsidiary to file
- -------- ----
state or local tax returns or pay state or local taxes and in no event arise as
a result of any failure to pay any federal taxes or failure to file any federal
tax returns or as a result of existence of any tax lien on any assets of such
newly acquired Subsidiary), and 5.20 may not be complete and accurate as a
----
result of such acquisition as set forth in (S)9.5(b), provided, that the Company
--------
shall, during such thirty (30) day period, take any and all necessary action to
bring such newly acquired Subsidiary into full compliance with each
representation and warranty set forth in (S)5 hereof, and provided,
--------
<PAGE>
-43-
further, that no change resulting from any acquisition would have a material
- -------
adverse affect on the Commerce Companies taken as a whole. No Default or Event
of Default shall have occurred and be continuing.
(S)7.3. PERFORMANCE, ETC. Each of the Commerce Companies shall have duly
----------- ---
and properly performed, complied with and observed in all material respects each
of its covenants, agreements and obligations contained in (S)(S)8, 9 and 10
hereof, and shall have duly and properly performed, complied with and observed
in all material respects its covenants, agreements and obligations in all other
sections of this Agreement and any of the other Loan Documents to which it is a
party or by which it is bound on the Drawdown Date for such Loan or such Letter
of Credit. No event shall have occurred on or prior to such date and be
continuing on such date, and no condition shall exist on such date, which
constitutes a Default or an Event of Default.
(S)7.4. PROCEEDINGS AND DOCUMENTS. All corporate, governmental and other
----------- --- ---------
proceedings in connection with the transactions contemplated by the Loan
Documents and all instruments and documents incidental thereto shall be in form
and substance reasonably satisfactory to the Agent and the Agent shall have
received all such counterpart originals or certified or other copies of all such
instruments and documents as the Agent shall have reasonably requested.
(S)7.5. CONTINUED COMPLIANCE WITH CERTAIN REGULATIONS. Without limiting
--------- ---------- ---- ------- -----------
the generality of (S)7.2, each of the Commerce Companies shall certify to the
Agent, in substantially the form of Exhibit D hereto, that such Commerce Company
------- -
is in full compliance with Regulations U and X of the Board of Governors of the
Federal Reserve System and shall, upon request of the Agent, attach to such
certificate all appropriate forms, including Form U-1, which evidence such
compliance. Notwithstanding the foregoing, the Banks shall not be required to
make Loans, and the Agent shall not be obligated to issue any Letters of Credit,
on any Drawdown Date if the Agent or any Bank independently, in its sole
judgment and having given due regard to the certificate delivered pursuant to
this paragraph, determines or reasonably believes that any Commerce Company is
not in compliance with Regulation U or X as of such Drawdown Date.
(S)7.6. GOVERNMENTAL REGULATION. Each Bank shall have received such
------------ ----------
statements in substance and form reasonably satisfactory to such Bank as such
Bank shall require for the purpose of compliance with any applicable regulations
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System.
(S)8. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company covenants and
----------- --------- -- --- -------
agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of
Credit or Note is outstanding or the Banks have any obligation to make Loans, or
the Agent has any obligation to issue, extend or renew any Letters of Credit
hereunder, unless the Majority Banks otherwise agree in writing:
<PAGE>
-44-
(S)8.1. PUNCTUAL PAYMENT. The Company will duly and punctually pay or
-------- -------
cause to be paid the principal and interest on the Loans, the Reimbursement
Obligations, the Letter of Credit Fees, the Commitment Fees, the Agent's Fee and
all other amounts provided for in this Agreement and the other Loan Documents to
which the Company or any of its Subsidiaries is a party, all in accordance with
the terms of this Agreement and such other Loan Documents.
(S)8.2. LEGAL EXISTENCE, ETC. Except for any Commerce Company which is
----- --------- ---
then a Non-Guarantor Subsidiary, which has been merged into another Subsidiary
or the Company in compliance with (S)9.4, or which has been disposed of in
compliance with the provisions of (S)9.9, the Company will, and will cause each
of the other Commerce Companies to, maintain its legal existence and good
standing under the laws of its jurisdiction of incorporation, maintain its
qualification to do business in each state in which the failure to do so would
have a material adverse effect on the condition, financial or other, of the
Company or any of the Commerce Subsidiaries and maintain all of its rights and
franchises reasonably necessary to the conduct of its business.
(S)8.3. USE OF LOAN PROCEEDS. The Company shall use the proceeds of the
--- -- ---- --------
Loans and will obtain Letters of Credit solely (a) to make Permitted
Acquisitions and (b) for general corporate and working capital purposes, and not
in violation of Regulations U or X of the Board of Governors of the Federal
Reserve System, 12 C.F.R. Parts 221 and 224.
(S)8.4. FINANCIAL STATEMENTS. The Company will furnish financial
--------- ----------
statements and other reports to each of the Banks as follows:
(a) promptly upon the filing of the Company's annual 10-K Report
with the Securities and Exchange Commission, the consolidated balance sheets and
the related consolidated statements of operations, stockholders' equity and cash
flows (the "consolidated financial statements") of the Company and its
Subsidiaries, as at the end of such fiscal year, in reasonable detail, each
setting forth in comparative form the corresponding figures for the preceding
year, prepared in accordance with generally accepted accounting principles
consistently applied, and accompanied by a report and unqualified opinion of a
nationally recognized firm of independent certified public accountants selected
by the Company and reasonably satisfactory to the Agent (except that a
qualification for a change in accounting principles with which such firm of
independent certified public accountants concurs shall be permitted);
(b) promptly upon the filing of the Company's quarterly 10-Q
Report with the Securities and Exchange Commission, unaudited consolidated
financial statements of the Company and its Subsidiaries for which a 10-Q Report
is required, prepared in accordance with generally accepted accounting
principles, together with a certification by an Authorized Officer of the
Company that the information contained in such financial statements fairly
presents the financial position of the Company and its Subsidiaries on the date
thereof (subject only to year-end adjustments);
<PAGE>
-45-
(c) contemporaneously with the delivery of the financial
statements referred to in subparagraphs (a) and (b) above but in no event later
than one hundred twenty (120) days after the close of the fiscal year of the
Company and seventy-five days after the end of each fiscal quarter of the
Company, a statement, substantially in the form of Exhibit D hereto, showing
------- -
compliance by the Company with the covenants set forth in (S)(S)9 and 10 hereof
and setting forth in reasonable detail computations evidencing such compliance
and (if applicable) reconciliations to reflect changes in generally accepted
accounting principles since the Balance Sheet Date, certified by an Authorized
Officer of the Company ("Compliance Certificate");
(d) at the time of delivery of each quarterly and annual
statement referred to in clauses (a) and (b) above, a certificate, executed by
an Authorized Officer, (i) stating that such officer has caused this Agreement
to be reviewed and has no knowledge of any default by the Company in the
performance or observance of any of the provisions of this Agreement, during
such quarter or at the end of such year, or, if such officer has such knowledge,
specifying each default and the nature thereof, and (ii) setting forth (A) each
pending or threatened action or suit of which the Company is aware affecting the
Company or any of its Subsidiaries or to which the Company or any of its
Subsidiaries is a party, involving an uninsured claim against any such Person
which is in excess of $1,500,000 or which could otherwise reasonably be expected
to have a material adverse effect on the Company and its Subsidiaries taken as a
whole and which was not previously reported pursuant to (S)8.5, or the last
quarterly certificate and (B) any Commerce Subsidiary deactivated in accordance
with (S)8.18 since the date of the last certificate delivered pursuant to this
clause (d);
(e) as soon as practicable but, in any event, within twenty (20)
Business Days after the issuance thereof, copies of all other financial
statements and reports as the Company or the Company shall send to its
stockholders as such, and copies of all regular and periodic reports which any
of the Commerce Companies may be required to file pursuant to federal securities
laws or regulations with the Securities and Exchange Commission or any similar
or corresponding federal or state governmental commission, department or agency
substituted therefor;
(f) (i) with reasonable promptness following the delivery of the
financial statements referred to in subsection (a) above, annual projections of
the Company and its Subsidiaries on a consolidated basis in the form previously
delivered pursuant to (S)5.7(b) for the fiscal year most recently commenced; and
(ii) upon completion thereof, any forecasts updating such annual projections
prepared by the Company; and
(g) with reasonable promptness, such other data as the Agent or
any of the Banks may reasonably request.
<PAGE>
-46-
(S)8.5. NOTICE OF LITIGATION AND JUDGMENT AND ENVIRONMENTAL EVENTS.
------ -- ---------- --- -------- --- ------------- ------
(A) LITIGATION AND JUDGMENTS. The Company will, for itself and
------------------------
on behalf of its Subsidiaries, give notice to the Agent in writing within thirty
(30) days of becoming aware of any pending or threatened action or suit
affecting the Company or any of its Subsidiaries or to which the Company or any
of its Subsidiaries is or becomes a party involving an uninsured claim against
the Company or any of its Subsidiaries which seeks or demands damages in excess
of $1,500,000, and stating the nature and status of such litigation or
proceedings. The Company will, for itself and on behalf of its Subsidiaries,
give notice to the Agent on behalf of the Banks, in writing, in form and detail
satisfactory to the Agent, within ten (10) days of any judgment not covered by
insurance, final or otherwise, against the Company or any of its Subsidiaries in
an amount in excess of $1,000,000.
(B) ENVIRONMENTAL EVENTS. The Company will promptly give notice
--------------------
to the Agent upon becoming aware of (i) of any violation of any Environmental
Law that any of the Commerce Companies reports in writing or is reportable by
such Person in writing (or for which any written report supplemental to any oral
report is made) to any federal, state or local environmental agency and (ii)
upon becoming aware thereof, of any inquiry, proceeding, investigation, or other
action, including a notice from any agency of potential environmental liability,
or any federal, state or local environmental agency or board, that has the
potential to materially affect the assets, liabilities, financial conditions or
operations of the Commerce Companies taken as a whole.
(S)8.6. NOTICE OF DEFAULT. The Company, on behalf of itself and its
------ -- -------
Subsidiaries, will promptly notify the Agent in writing upon becoming aware of
the occurrence of any Default or Event of Default. If any Person shall give any
notice or take any other action in respect of a claimed default (whether or not
constituting a Default or Event of Default) under this Agreement, the other Loan
Documents, or any note, evidence of indebtedness, indenture or other obligation
to which or with respect to which the Company or any of the Commerce
Subsidiaries is a party or obligor, whether as principal, guarantor, surety or
otherwise, such Company or the Commerce Subsidiary, as the case may be, shall
forthwith, upon becoming aware thereof, give written notice thereof to the
Agent, describing the notice or action and the nature of the claimed default.
(S)8.7. BOOKS AND RECORDS. The Company will, and will cause each of the
----- --- -------
Commerce Subsidiaries to, keep true and accurate records and books of account in
which full, true and correct entries, together with all financial statements
provided for herein, shall, to the extent generally accepted accounting
principles are applicable thereto, be made in accordance with generally accepted
accounting principles consistently applied.
<PAGE>
-47-
(S)8.8. INSURANCE. The Company will, for itself and on behalf of the
---------
Commerce Subsidiaries, maintain with financially sound and reputable insurers
insurance with respect to its properties and business against such casualties
and contingencies as shall be in accordance with the general practices of
businesses engaged in similar activities in similar geographic areas (which may
include reasonable self insurance) and in amounts, containing such terms, in
such forms and for such periods as may be reasonably satisfactory to the Agent.
Without limiting the foregoing, the Company will, for itself and on behalf of
the Commerce Subsidiaries, (i) keep all of its physical property insured against
fire and extended coverage risks in amounts and with deductibles equal to those
generally maintained by businesses engaged in similar activities in similar
geographic areas, (ii) maintain all such workers' compensation or similar
insurance as may be required by law, except in instances involving immaterial
operations of any Commerce Subsidiary and where the failure to maintain such
insurance would not have a material adverse effect on the Company and its
Subsidiaries taken as a whole, and (iii) maintain, in amounts and with
deductibles equal to those generally maintained by businesses engaged in similar
activities in similar geographic areas, general public liability insurance
against claims for bodily injury, death or property damage occurring on, in or
about the properties of the Company and the Commerce Subsidiaries (other than
Non-Guarantor Subsidiaries), and business interruption insurance. All such
policies of insurance shall provide for ten days' prior written minimum
cancellation notice to the Agent. In the event of failure to provide and
maintain insurance as herein provided, the Agent may, at its option, after
giving notice to the Company, provide such insurance and charge the amount
thereof to the Company. The Company shall furnish to the Agent promptly
following receipt of same certificates or other evidence satisfactory to the
Agent of compliance with the foregoing insurance provision, and shall, upon the
request of the Agent, provide certified copies of all policies evidencing such
insurance signed by the insurer or an agent authorized to bind the insurer.
(S)8.9. TAXES. The Company, for itself and on behalf of its
-----
Subsidiaries, will pay or cause to be paid all taxes or other assessments or
governmental charges or levies imposed upon it or upon its income or profits or
upon property belonging to it prior to the time when any penalties or interest
(except interest during extensions of time for filing of returns not in excess
of seven (7) months for taxes owed to United States taxing authorities and
twelve (12) months for taxes owed to taxing authorities located outside of the
United States) accrue with respect thereto, unless (a) in any such case, the
same is being contested in good faith by appropriate proceedings and an
appropriate reserve therefor has been established and is maintained in
accordance with generally accepted accounting principles, (b) in any such case,
the Company or any such Subsidiary, as the case may be, is in good faith and
using due diligence and all deliberate speed, investigating or ascertaining the
extent of the liability for such unpaid taxes, if any, and (i) no lien or notice
thereof has been filed in any public recording office with respect to such
unpaid taxes, and (ii) neither the Company nor any such Subsidiary has received
notice of a lien or the initiation of an enforcement proceeding with respect to
such unpaid taxes or has reason to believe that such a lien or enforcement
proceeding is
<PAGE>
-48-
likely to occur or is specifically contemplated by appropriate authorities or
(c) the failure to so pay would not have a material adverse effect on any of the
Commerce Companies individually, or on the Company and its Subsidiaries taken as
a whole.
(S)8.10. CONDUCT OF BUSINESS. The Company will, and will cause each of
------- -- --------
the other Commerce Companies to, continue to engage in the businesses engaged in
by such Commerce Companies on the Closing Date (except in the case of
dispositions permitted under (S)9.9); and will, and will cause each of the
Commerce Companies to, comply in all material respects with all federal, state
and local laws, regulations, rules and ordinances applicable to it or its
properties, noncompliance with which could reasonably be expected to materially
adversely affect its financial condition, assets or operations, but, except as
otherwise provided in (S)8.9 with respect to payment of taxes, other assessments
or governmental charges or levies, it shall not be a breach of this (S)8.10 if
any Commerce Company fails to comply with such laws, rules and regulations
during any period in which such Commerce Company is in good faith diligently
contesting the validity thereof by appropriate proceedings.
(S)8.11. COMPLIANCE WITH LAW, CONTRACTS, LICENSES AND PERMITS. The
---------- ---- ------------------------------------
Company will, and will cause each of the Commerce Companies to, (i) comply (A)
with all laws (including Environmental Laws), rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject,
noncompliance with which could reasonably be expected to have a material adverse
effect on its business, operations or financial condition or the ability of any
of the Commerce Companies to fulfill its obligations under the Agreement or the
other Loan Documents; (B) the provisions of its charter documents and by-laws,
(C) all agreements and instruments by which it or any of its properties may be
bound (including, without limitation, any of the escrow arrangements set forth
on Schedule 5.11 hereto), non-compliance with which would reasonably be expected
-------------
to have a materially adverse effect on the business, operations or financial
conditions of the Commerce Companies taken as a whole or on the ability of any
of the Commerce Companies to fulfill its obligations under this Agreement or the
other Loan Documents; and (D) all applicable decrees, orders and judgments, non-
compliance with which would reasonably be expected to have a materially adverse
effect on the business, operations or financial condition of the Commerce
Companies taken as a whole or the ability of any of the Commerce Companies to
fulfill its obligations under this Agreement or the other Loan Documents; and
(ii) promptly obtain, maintain, apply for renewal, and not allow to lapse, any
authorization, consent, approval, license or order, and accomplish any filing or
registration with any court or judicial, administrative or governmental
authority which may be or may become necessary in order that it perform in all
material respects all of its obligations under this Agreement or the other Loan
Documents and in order that the same may be valid and binding and effective in
accordance with their terms and in order that the Banks may be able freely to
exercise and enforce any and all of their rights under this Agreement or the
other Loan Documents.
<PAGE>
-49-
(S)8.12. ACCESS TO PROPERTIES AND BOOKS; COMMERCIAL FINANCE EXAMINATIONS;
------ -- ---------- --- ----- ---------- ------- -------------
CONFIDENTIALITY.
- ---------------
(a) Subject to all applicable federal laws and regulations
relating to the need for appropriate security clearance, the Company will, and
will cause each of the other Commerce Companies to, permit the Agent and each of
the Banks, by its representatives and agents, to inspect any of the properties,
including corporate books, computer files and tapes and financial records of
each Commerce Company, to examine and make copies of the books of accounts and
other financial records of each Commerce Company, and to discuss the affairs,
finances and accounts of each Commerce Company with, and to be advised as to the
same by, their respective officers at such reasonable times and intervals as the
Banks may designate. The Banks and the Agent agree that they will treat in
confidence all financial and proprietary information with respect to the
Commerce Companies, including financial projections delivered pursuant to
(S)5.7(b) and (S)8.4(f), and all other information obtained during such
inspection which is designated by the Company, either in advance (which may be
in the form of a master list of confidential information provided to the Agent)
or at such inspection as confidential and will not, without the consent of the
Company, disclose such information to any third party other than its attorneys
and auditors (who agree to be bound by the provisions of this (S)8.12) or at any
judicial or administrative proceeding and, if any representative or agent of the
Banks or the Agent shall not be an employee of one of the Banks or the Agent or
any affiliate of the Banks or the Agent, such designee shall be reputable and of
recognized standing and shall agree in writing to treat in confidence the
information obtained during any such inspection and, without the prior written
consent of the Company, not to disclose such information to any third party or
make use of such information for personal gain. For purposes of this Section,
the Agent and the Banks agree that all software licensed by the Company or its
Subsidiaries shall be deemed to be proprietary information. Notwithstanding the
foregoing, the Company hereby authorizes each of the Agent and Banks to disclose
information obtained pursuant to this Agreement to banks or other financial
institutions authorized in writing by the Company under (S)17 who are
participants or potential participants in the Loans made or to be made or
Letters of Credit issued or to be issued hereunder and who agree to be bound by
the provisions of this (S)8.12 together with their respective attorneys and
auditors (who agree to be bound by the provisions of this (S)8.12) and where
required or requested by governmental or regulatory authorities or in or as part
of any judicial or administrative proceeding.
(b) Subject to the confidentiality and security clearance
restrictions set forth in paragraph (a) of this (S)8.12, the Company will, and
will cause each of its Subsidiaries to, permit the Agent, the Banks or any of
their respective representatives, upon reasonable notice to the Company, to
conduct commercial finance examinations from time to time at the Company's
expense.
(S)8.13. ALLOWANCES. The Company will, and will cause each of its
----------
Subsidiaries (other than Non-Guarantor Subsidiaries) to, maintain, on the
respective books and records of each such Subsidiary, or cause to be maintained
on
<PAGE>
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behalf of each such Subsidiary, (a) appropriate allowances for depreciation,
depletion, obsolescence, amortization and bad debts and (b) adequate accrued
liabilities for taxes on income and other liabilities as required in accordance
with generally accepted accounting principles.
(S)8.14. CHANGE OF CORPORATE NAME; MAINTENANCE OF OFFICE. The Company
------ -- --------- ---------------------------
shall notify the Agent within thirty days of any change in its corporate name or
in the corporate names of any of the Commerce Companies. Until the Agent
receives notice of a change (i) the Company will maintain its chief executive
office and the offices where all of its material records and books of account
are kept, at 8080 North Central Expressway, Suite 1100, Dallas, Texas 75206, and
(ii) each of the Commerce Subsidiaries shall maintain its chief executive office
(which office shall also be the office where all of its material records and
books of account are kept), at the offices set forth in Schedule 5.6 hereto.
-------- ---
(S)8.15. EMPLOYEE BENEFIT PLAN. The Company will (i) promptly upon filing
---------------------
the same with the Department of Labor or Internal Revenue Service, furnish to
the Agent a copy of the most recent actuarial statement required to be submitted
under (S)103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Guaranteed Pension Plan and (ii) promptly upon
receipt or dispatch, furnish to the Agent any notice, report or demand sent or
received in respect of a Guaranteed Pension Plan under (S)(S)302, 4041, 4042,
4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan,
under (S)(S)4041A, 4202, 4219, 4242, or 4245 of ERISA.
(S)8.16. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES.
-----------------------------------------------
(A) CORPORATE EXISTENCE. Except for any Commerce Company which
-------------------
is then a Non-Guarantor Subsidiary, which has been merged into the Company or a
Commerce Subsidiary in compliance with (S)9.4, or which has been disposed of in
compliance with the provisions of (S)9.9, the Company will, and will cause each
of the other Commerce Companies to, maintain its legal existence and good
standing under the laws of its jurisdiction of incorporation, maintain its
qualification to do business in each state in which the failure to do so would
have a material adverse effect on the condition, financial or otherwise, of the
Commerce Companies, taken as a whole, and to maintain all of its rights and
franchises reasonably necessary to the conduct of its business.
(B) MAINTENANCE OF PROPERTIES. The Company will, and will cause
-------------------------
each of the other Commerce Companies to, (i) cause all of its properties
necessary or appropriate in the conduct of its business to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment, unless failure to do so would not have a materially adverse effect on
the financial condition, business or operations of the Company and its
Subsidiaries taken as a whole, (ii) cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of such Commerce Company may be necessary so that the business carried
on in connection therewith may be advantageously conducted at all times, unless
failure
<PAGE>
-51-
to do so would not have a materially adverse effect on the financial condition,
business or operations of the Company and its Subsidiaries taken as a whole,
(iii) comply in all material respects with all federal, state and local laws,
regulations, rules and ordinances applicable to it or its properties,
noncompliance with which would reasonably be expected to materially adversely
affect its financial condition, assets or operations, provided that it shall not
--------
be a breach of this (S)8.16(b) if any Commerce Company fails to comply with such
laws, rules and regulations during any period in which such Commerce Company is
in good faith diligently contesting the validity thereof by appropriate
proceedings, and (iv) continue to engage primarily in the businesses now
conducted by it (except in the case of dispositions permitted under (S)9.9) and
in related businesses; provided that nothing in this (S)8.16(b) shall prevent
-------- ----
any of the Commerce Companies from discontinuing the operation and maintenance
of any of its properties if such discontinuance is, in the judgment of such
Commerce Company, desirable in the conduct of its business and that do not in
the aggregate materially adversely affect the business of the Company and its
Subsidiaries on a consolidated basis.
(S)8.17. ACTIVATION OF NON-GUARANTOR SUBSIDIARIES. On any date upon which
---------- -- ------------- ------------
(a) any one or more of the Non-Guarantor Subsidiaries (i) commences to engage in
business of any kind or nature or (ii) acquires or otherwise receives assets as
a result of which such Non-Guarantor Subsidiary's net worth equals or exceeds
(A) $1,000,000, or (B) in the case of Sterling Commerce Leasing, Inc., in excess
of $5,000,000 for any period of thirty-five (35) or more consecutive days, or
(b) the Non-Guarantor Subsidiaries, taken as a whole, have or receive assets as
a result of which such Non-Guarantor Subsidiaries' net worth, in the aggregate,
equals or exceeds $6,000,000, the Company shall provide written notice thereof
to the Agent, and such Subsidiary or Subsidiaries shall, in accordance with the
provisions of this (S)8.17, be activated and shall be required to become a
Commerce Subsidiary and a guarantor under the Guaranty, except that in the case
of those Non-Guarantor Subsidiaries whose net worth is less than $1,000,000
individually (or, in the case of Sterling Commerce Leasing, Inc., less than
$5,000,000 for any period of thirty-five (35) or less consecutive days) but in
the aggregate is greater than $6,000,000, only such of the Non-Guarantor
Subsidiaries as shall reduce the aggregate net worth of all remaining Non-
Guarantor Subsidiaries to an amount less than $6,000,000 shall be required to
become guarantors under the Guaranty. As soon as practicable following receipt
of any such notice, the Agent or the Agent's Special Counsel shall provide such
activated Subsidiary or Subsidiaries with forms of the Loan Documents (including
the Guaranty) to which such activated Subsidiary is or such activated
Subsidiaries are to be a party, or appropriate amendments thereto, as well as
forms of acceptable legal opinions and other documents necessary to demonstrate
the due authorization, execution and delivery by such activated Subsidiary or
Subsidiaries of such Loan Documents or amendments thereto and the enforceability
thereof. The Company shall cause such activated Non-Guarantor Subsidiary or
Subsidiaries, as the case may be, to deliver executed copies of such Loan
Documents, amendments, legal opinions and other documents to the Agent within
fifteen (15) days following its or their receipt of the forms thereof from the
Agent or the Agent's Special Counsel. Upon the later to occur of (i) the date
of activation of such Non-Guarantor Subsidiary or (ii) the
<PAGE>
-52-
delivery of such executed counterparts of such Loan Documents, amendments, legal
opinions and other documents to the Agent, (A) each such Subsidiary shall cease
to be a Non-Guarantor Subsidiary for purposes of this Agreement and shall become
a Commerce Subsidiary and a guarantor under the Guaranty hereunder and shall
comply with and be bound by all of the terms and conditions of the Loan
Documents (including the Guaranty) to which it becomes a party, and (B) the
Company shall cause such activated Subsidiary or Subsidiaries to take all
actions which it or they would have been required to make or take had it not
been a Non-Guarantor Subsidiary or Non-Guarantor Subsidiaries on the Closing
Date including, without limitation, making all representations and warranties as
a Commerce Subsidiary under each of the Loan Documents as of the date such
representations and warranties are made.
(S)8.18. DEACTIVATION OF COMMERCE SUBSIDIARIES. Effective immediately
-------------------------------------
upon any Commerce Subsidiary ceasing to do business and ceasing to have a net
worth of $1,000,000 or more (or, in the case of Sterling Commerce Leasing, Inc.,
ceasing to have a net worth of $5,000,000 or more after any period of thirty-
five (35) or more consecutive days), such Commerce Subsidiary shall become a
Non-Guarantor Subsidiary for purposes of this Agreement, provided, that such
--------
Commerce Subsidiary may thereafter be activated again pursuant to (S)8.17
hereto. The Company shall notify the Agent of the deactivation of any Commerce
Subsidiary in accordance with (S)8.4(d) hereof.
(S)8.19. NEW SUBSIDIARIES. Contemporaneously with the creation or
--- ------------
acquisition (in accordance with the provisions of (S)9.5) of any new domestic
Subsidiary of the Company, other than a Non-Guarantor Subsidiary, the Company
will notify the Agent of such Subsidiary's name and the address of its chief
executive offices. No later than fifteen (15) Business Days following the later
to occur of (a) the creation of such new Subsidiary or (b) receipt by the
Company or such new Subsidiary from the Agent or the Agent's Special Counsel of
forms of the Loan Documents (including the Guaranty) to which such new domestic
Subsidiary is to be a party, or appropriate amendments thereto, as well as forms
of acceptable legal opinions and other documents necessary to demonstrate the
due authorization, execution and delivery by such new domestic Subsidiary of
such Loan Documents or amendments thereto, the Company shall cause such new
domestic Subsidiary to deliver executed counterparts of such Loan Documents,
amendments, legal opinions and other documents to the Agent. Upon delivery of
such executed counterparts of such Loan Documents, amendments, legal opinions
and other documents to the Agent, (y) such new domestic Subsidiary shall become
a Commerce Subsidiary and a party to the Guaranty and shall comply with and be
bound by all of the terms and conditions of the Loan Documents as a Commerce
Subsidiary thereunder, and (z) the Company shall cause such new domestic
Subsidiary to take all actions, which it would have been required to make or
take had it been a Commerce Subsidiary and a party to the Guaranty on the
Closing Date including, without limitation, making all representations and
warranties as a Commerce Subsidiary under each of the Loan Documents to which it
is a party as of the date such representations and warranties are made.
<PAGE>
-53-
(S)8.20. FURTHER ASSURANCES. The Company shall, and shall cause all
------- ----------
applicable Commerce Subsidiaries to, at any time or from time to time, execute
and deliver such further instruments and take such further action as may
reasonably be requested by the Agent, in each case further and more perfectly to
effect the purposes of this Agreement and the other Loan Documents.
(S)9. NEGATIVE COVENANTS OF THE COMPANY. The Company covenants and agrees
-------- --------- -- --- -------
that, so long as any Loan, Letter of Credit, Unpaid Reimbursement Obligation, or
Note is outstanding or any Bank has any obligations to make Loans, or the Agent
has any obligation to issue, extend or renew Letters of Credit hereunder, unless
the Majority Banks otherwise agree in writing:
(S)9.1. INDEBTEDNESS. The Company will not, and will not permit any of
------------
its Subsidiaries to, incur or permit to exist or remain outstanding any
Indebtedness to any Person, provided, however, that the Company and its
-------- -------
Subsidiaries may incur or permit to exist or remain outstanding:
(a) Indebtedness of the Commerce Companies arising under this
Agreement or the other Loan Documents;
(b) Indebtedness in respect of (i) operating leases, (ii) capitalized
leases existing as of the date hereof and listed on Schedule 9.1 and (iii) other
-------- ---
capitalized leases entered into in compliance with the provisions of (S)9.8;
(c) Indebtedness in respect of taxes, assessments, governmental
charges, and claims for labor, materials, services or supplies and liabilities
under employee benefit plans, including pension plans, to the extent that
payment thereof is not yet due, or to the extent that the amount, applicability,
or validity thereof is actively contested by the Company or its Subsidiaries in
good faith by appropriate proceedings and with respect to which, to the extent
required by generally accepted accounting principles, reserves have been set
aside on the books of the Company or its Subsidiaries (segregated to the extent
required by generally accepted accounting principles and practices) reasonably
deemed by the Company or its Subsidiaries to be adequate with respect thereto;
(d) Indebtedness in respect of the Guaranty;
(e) Intercompany Indebtedness;
(f) Indebtedness of the Company and its Subsidiaries under (i) the Tax
Allocation Agreement with respect to obligations incurred by the Company or any
of its Subsidiaries while the Company was a Subsidiary of Sterling Software,
Inc. and (ii) the Indemnification Agreement;
(g) Indebtedness up to $5,000,000 in the aggregate in respect of any
conditional sales agreements, security agreements, equipment leases intended as
security or otherwise in the nature of title retention agreements or security
agreements or other similar title retention agreements (not otherwise expressly
<PAGE>
-54-
permitted by any of the other terms of this Section 9.1) entered into in the
ordinary course of business on, prior to or after the date of this Agreement in
order to secure the payment of the purchase price of any equipment purchased,
leased or otherwise acquired by any Commerce Company for use in the ordinary
course of its business; provided, however, that (A) no such agreement or lease
-------- -------
shall extend to or cover any property other than the property, the payment of
the purchase price of which is secured by such agreement or lease and (B) the
aggregate principal amount of all of the Indebtedness secured by any such
agreement or lease shall not exceed one hundred percent (100%) of the purchase
price or fair market value at the time of purchase or lease, whichever shall be
lower, of the property covered by such agreement or lease, and (iii) performance
bonds and other similar indebtedness incurred in the ordinary course of
business;
(h) up to $10,000,000 in the aggregate of Foreign Obligations
(including the Indebtedness of Subsidiaries of the Company in respect of which
such Foreign Obligations have been incurred;
(i) Indebtedness and other liabilities incurred in the ordinary course
of business not incurred through the borrowing of money or the obtaining of
credit except for credit on an open account basis customarily extended to the
Company or its Subsidiaries in connection with normal purchases of goods and
services;
(j) Indebtedness consisting of contingent liabilities to which
reference is or should be made by a footnote to the consolidated balance sheets
of the Company and its Subsidiaries in accordance with generally accepted
accounting principles to the extent that such contingent liabilities are not
quantifiable and were not voluntarily incurred;
(k) Indebtedness not otherwise permitted by subparagraph (m) of this
(S)9.1 and not to exceed $2,000,000 in aggregate amount consisting of
Investments in any Person which is in a line of business the same or similar to
that of the Company or its Subsidiaries;
(l) Indebtedness existing on the date hereof and set forth on Schedule
--------
9.1;
- ---
(m) Indebtedness constituting the purchase price of acquisitions
permitted by (S)9.5(a)(i)(B), to the extent that such Indebtedness is payable to
any Person to whom the purchase price or any portion thereof is, at the time of
reference thereto, scheduled to become due and owing at a future date; and
<PAGE>
-55-
(n) So long as no Default or Event of Default has occurred and is
continuing or would occur after giving effect thereto, Indebtedness incurred by
the Company or any of its Subsidiaries in connection with the purchase by any of
the Commerce Accounts Receivable Agreement Parties of Commerce Accounts
Receivable in an aggregate amount outstanding at any time not to exceed
$20,000,000 for all Commerce Accounts Receivable Agreements.
Guaranties by the Company of the obligations of its Subsidiaries shall not
constitute Indebtedness to the extent that such obligations do not constitute
Indebtedness or are permitted in accordance with the above limitations.
(S)9.2. SECURITY INTERESTS AND LIENS. The Company will not, and will not
-------- --------- --- -----
permit any of its Subsidiaries to, (i) create or permit to exist any mortgage,
pledge, security interest or other lien or encumbrance on any of its property or
assets of any character whether now owned or hereafter acquired, or upon the
income or profits therefrom; (ii) transfer any of such property or assets or the
income or profits therefrom for the purpose of subjecting the same to the
payment of Indebtedness or performance of any other obligation in priority to
payment of its general creditors; (iii) acquire, or agree or have an option to
acquire, any property or assets upon conditional sale or other title retention
or purchase money security agreement, device or arrangement; (iv) suffer to
exist for a period of more than thirty (30) days after the same shall have been
incurred any Indebtedness or claim or demand against it that if unpaid might by
law or upon bankruptcy or insolvency, or otherwise, be given any priority
whatsoever over its general creditors; or (v) sell, assign, pledge or otherwise
transfer any accounts, contract rights, general intangibles or chattel paper
with or without recourse, except for the existence or creation of:
(a) existing liens, but, with respect to the Commerce Companies, only
to the extent described on Schedule 9.2(a) hereto;
-------- ------
(b) liens securing Indebtedness permitted by (S)9.1(n);
(c) liens arising from attachments or similar proceedings, pending
litigation, judgments or taxes or assessments in any such event whose validity
or amount is being contested in good faith by appropriate proceedings
satisfactory to the Agent and for which appropriate reserves have been
established and are maintained in accordance with generally accepted accounting
principles, or taxes and assessments which are not due and payable and which do
not have a material adverse effect on any of the Commerce Companies
individually, or against the Company and its Subsidiaries taken as a whole;
(d) liens of carriers, warehousemen, mechanics and materialmen and
other like liens;
(e) pledges or deposits made in connection with workmen's
compensation, unemployment or other insurance, old age pensions, or other Social
<PAGE>
-56-
Security benefits, and good faith deposits in connection with tenders, contracts
or leases to which it is a party or deposits to secure, or in lieu of, surety,
penalty or appeal bonds, performance bonds and other similar obligations;
(f) such minor defects, irregularities, encumbrances, easements,
rights of way, and clouds on title as normally exist with respect to similar
properties which do not materially impair the property affected thereby for the
purpose for which it was acquired;
(g) landlords' liens arising by statute or common law in respect of
real estate leases;
(h) liens in respect of Indebtedness described in (S)(S)9.1(g) hereof,
provided, in the case of Indebtedness described in (S)9.1(g), that no such lien
- --------
or security interest shall extend to or cover any property other than the
property the purchase of which is financed with such Indebtedness and the
aggregate principal amount of the Indebtedness secured by such liens, security
interests or mortgages shall not exceed the original fair market value of such
property;
(i) existing liens being assumed pursuant to or in connection with
acquisitions permitted pursuant to (S)9.5 and which do not extend to any assets
other than those specifically acquired and which were not created in
anticipation of such acquisition;
(j) liens on the authorized shares of the capital stock of the Company
held by the Company as treasury stock; and
(k) such other liens as are expressly permitted or otherwise consented
to by the Banks in writing.
(S)9.3. RESTRICTIONS ON INVESTMENTS. The Company may make Investments of
---------------------------
any kind or nature, except as otherwise limited by this Agreement, and provided
--------
that any Investment which is in the nature of a joint venture or general
partnership or similar investment vehicle shall be made with respect to a Person
in a similar line of business (or natural extensions thereof) as the Company and
its Subsidiaries.
(S)9.4. MERGER AND CONSOLIDATION. The Company will not at any time, and
------ --- -------------
will not cause or permit any of its Subsidiaries at any time to, become a party
to any merger or consolidation other than a disposition permitted pursuant to
(S)9.9, except that a Subsidiary (including a Subsidiary acquired or created
pursuant to permitted acquisitions under (S)9.5) may be merged or consolidated
with the Company if the Company shall be the continuing or surviving corporation
or with any one or more other Subsidiaries if the successor formed or resulting
from such consolidation or merger shall be a wholly-owned Subsidiary (except,
in the case of a Subsidiary not organized under the laws of the District of
Columbia or any state of the United States, for such third-party ownership as
may be permitted pursuant to (S)9.10) and, in each case, if no Default or Event
of Default shall have occurred
<PAGE>
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and be continuing or would occur upon consummation of such merger or
consolidation.
(S)9.5. ACQUISITIONS.
------------
(a) The Company will not at any time, and will not cause or permit any
of its Subsidiaries at any time to, agree to affect any asset acquisition (other
than an acquisition of inventory in the ordinary course of business or which is
a permitted capital expenditure pursuant to (S)9.8) or stock acquisition
representing a controlling interest in the issuer thereof, without the prior
consent of the Banks, except that, if no Default or Event of Default has
occurred and is continuing, or would occur immediately after giving affect
thereto:
(i) subject to the requirements of clause (b) hereof, the Company
may effect friendly acquisitions if (A) the total consideration for all
such acquisitions, including the sum of the cash, stock (as valued for the
purposes of such acquisitions) and other consideration comprising the
deferred (whether represented by promissory notes or otherwise) portion of
the purchase price, does not exceed, in the aggregate for all such
acquisitions made, $60,000,000 plus such additional amounts to which the
----
Agent and the Banks may from time to time agree, and (B) the amount of cash
or other deferred (whether represented by promissory notes or otherwise)
consideration constituting part or all of the purchase price of such
acquisitions does not exceed, in the aggregate for all such acquisitions
made, $20,000,000 plus such additional amounts to which the Agent and the
----
Banks may from time to time agree in writing; and
(ii) the Company or any of its Subsidiaries may acquire Commerce
Accounts Receivable to the extent required or permitted by any of the
Commerce Accounts Receivable Agreements (to the extent Indebtedness in
respect thereof is permitted by (S)9.1).
(b) All businesses acquired or commenced through any acquisition
referred to in paragraph (a) of this (S)9.5 shall be in the same or similar
lines of business (or natural extensions thereof) as current lines of business
of the Company and its Subsidiaries (provided that such businesses may include
--------
Subsidiaries or divisions which are not in such same lines of business, to the
extent that the preponderance of the assets acquired in connection with such
acquired business relate to, and the preponderance of the revenues historically
generated by such acquired business relate to, the same or similar lines of
business as currently engaged in by the Company and its Subsidiaries or natural
extensions thereof). No later than five (5) Business Days following the later
to occur of (a) any such Permitted Acquisition or (b) the receipt by the Company
or any newly acquired domestic Subsidiary from the Agent or the Agent's Special
Counsel of forms of the Loan Documents (including the Guaranty) to which such
newly acquired domestic Subsidiary is to be a party, or appropriate amendments
thereto, together with forms of acceptable legal opinions and other documents
necessary to demonstrate the due authorization, execution and delivery by such
newly acquired
<PAGE>
-58-
domestic Subsidiary of such Loan Documents or amendments thereto, such newly
acquired domestic Subsidiary shall deliver executed counterparts of such Loan
Documents, amendment, legal opinions and other documents to the Agent in
accordance with the requirements of (S)8.18. Upon such delivery of such executed
counterparts of such Loan Documents, amendments, legal opinions and other
documents to the Agent, such newly acquired domestic Subsidiary shall be a party
to the Guaranty and a Commerce Subsidiary and shall comply with and be bound by
all of the terms and conditions of the Loan Documents to which it is a party. To
the extent that any such acquisition alters the accuracy or completeness of any
of Schedules 5.2, 5.6, 5.11 (but only to the extent that the Company would not
--------- --- --- ----
be required to report the litigation to be included in Schedule 5.11 within 30
-------- ----
days pursuant to (S)8.5), 5.13 (but only to the extent that any alteration to
----
Schedule 5.13 results solely from the failure of the newly acquired domestic
- -------- ----
Subsidiary to file state or local tax returns, or the failure to pay state or
local taxes, and in no event arises from any failure to file any federal tax
returns or pay any federal taxes, or from the existence of any tax lien on any
assets of such newly acquired domestic Subsidiary), or 5.20, the Company shall
----
deliver to the Agent within 30 days of such acquisition, revised schedules
reflecting changes resulting from such acquisition, and during the 30 day period
immediately following such acquisition, the inaccuracy or incompleteness of the
representations and warranties relating to such schedules resulting from such
acquisition shall not constitute a Default or Event of Default, provided, that
--------
the Company shall, during such 30 day period, take any and all necessary action
to bring such newly acquired domestic Subsidiary into full compliance with each
representation and warranty set forth in (S)5 hereof, and provided, further,
-------- -------
that no change resulting from any acquisition would have a material adverse
affect on the Commerce Companies taken as a whole.
(S)9.6. CAPITAL EXPENDITURES. Capital Expenditures unrelated to
------- ------------
acquisitions permitted under (S)9.5 hereof shall not exceed, during any fiscal
period set forth in the table below, the amount set forth opposite such period
in the table below:
MAXIMUM
-------
PERIOD PERMISSIBLE AMOUNT
------ ------------------
October 1, 1995-- September 30, 1996 $35,000,000
October 1, 1996-- September 30, 1997 $46,000,000
October 1, 1997-- September 30, 1998 $60,000,000
October 1, 1998-- Final Maturity $75,000,000
(S)9.7. ASSET DISPOSITIONS. The Company will not at any time, and will
----- ------------
not cause or permit any of its Subsidiaries at any time to, become a party to
any disposition of assets without the consent of the Banks, except for:
(a) Dispositions of inventory and obsolescent equipment and
fixtures in the ordinary course of business;
<PAGE>
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(b) Sales or other dispositions of Subsidiaries, divisions or
product lines, provided, that:
--------
(i) (A) Contemporaneously with the signing of any binding letter of
intent with respect to such sale or other disposition, the Company (I)
notifies the Agent of such proposed sale or other disposition and (II)
provides preliminary financial information with respect to such proposed
sale or other disposition to the Agent and (B) the Company demonstrates to
the satisfaction of the Agent at least five (5) days in advance of the
consummation of such proposed sale or other disposition that, on a pro
---
forma basis (evidenced by projections and historical financial statements
-----
certified by the treasurer or another duly authorized financial officer of
the Company), it will continue to be in compliance with each of its
covenants set forth in (S)10 hereof following such disposition and that no
Default or Event of Default has occurred, is then existing, or would occur
as a result of or after giving effect to such disposition, and (C) if the
Subsidiary being disposed of is any of the Commerce Subsidiaries, all net
proceeds of such sale shall be paid over to the Agent for the respective
accounts of the Banks and the Agent as and when received by the Company or
any of its Subsidiaries to the extent of Outstanding Loans for application
against such Loans under this Agreement (with a reduction, at the option of
the Agent or upon the request of the Majority Banks, of the Total
Commitment in the amount of such proceeds); and
(ii) the aggregate annual revenues attributable to any such Subsidiary,
division or line (measured by the twelve full consecutive calendar months
most recently past as of the date of any such disposition) disposed of
shall not exceed $2,500,000;
(c) Sales or other dispositions of Investments which are Permitted
Investments;
(d) Sales of Commerce Accounts Receivable pursuant to the Commerce
Accounts Receivable Agreements in an aggregate amount outstanding at any time
not to exceed $20,000,000;
(e) Sales or other dispositions of assets by any of the Commerce
Companies (i) in an amount not to exceed $1,500,000 in any individual case or
(ii) $10,000,000 in the aggregate; and
(f) Sales or other dispositions of assets by the Company to any of the
Commerce Subsidiaries or by any of the Commerce Subsidiaries to the Company or
any other Commerce Subsidiary.
(S)9.8. CHANGE OF LOCATION. The Company will not at any time, and will
------ -- --------
not cause or permit any of the Commerce Subsidiaries at any time to, (a) change
the location of its chief executive offices, or (b) change the locations where
its records or books of account are kept without (in each case) giving at least
10 days'
<PAGE>
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prior written notice to the Agent specifying the new location of such office or
location.
(S)9.9. EMPLOYEE BENEFIT PLANS. Neither any Commerce Company nor any
-------- ------- -----
ERISA Affiliate will:
(a) engage in any "prohibited transaction" within the meaning of
(S)406 of ERISA or (S)4975 of the Code which could result in a material
liability for the Commerce Companies, which is not covered by a prohibited
transaction exemption granted by the Department of Labor; or
(b) (i) permit any Guaranteed Pension Plan to incur an "accumulated
funding deficiency" (as such term is defined in (S)302 of ERISA), in excess of
$1,000,000, whether or not such deficiency is or may be waived; or (ii) in the
case of any Person acquired pursuant to (S)9.5, with a Guaranteed Pension Plan
subject to an "accumulated funding deficiency" in excess of $1,000,000, permit
such "accumulated funding deficiency" to exist for a period of more than twelve
months from the date of such acquisition, provided, that the Company shall, in
--------
any such case, deliver to the Agent (A) a certificate evidencing the amount of
such "accumulated funding deficiency", (B) evidence satisfactory to the Agent
that, on a pro-forma basis, the Company will continue to be in compliance with
each of the covenants set forth in (S)10 hereof after such acquisition and that
no Default or Event of Default shall occur after giving effect to such
acquisition, and (C) evidence satisfactory to the Agent that such "accumulated
funding deficiency" could be cured through merger with another Guaranteed
Pension Plan or otherwise; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a manner which, could result
in the imposition of a lien or encumbrance on the assets of the Company pursuant
to (S)302(f) or (S)4068 of ERISA; or
(d) permit or take any action which would result in the aggregate
benefit liabilities (within the meaning of (S)4001 of ERISA) of all Guaranteed
Pension Plans exceeding the value of the aggregate assets of such Plans by a
material amount, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities, provided,
--------
that if merger of the affected Guaranteed Pension Plan would be permitted under
(S)414(l) of ERISA and would, if consummated, result in such Guaranteed Pension
Plan's aggregate assets equaling or exceeding in value such Guaranteed Pension
Plan's benefit liabilities, such Guaranteed Pension Plan's benefit liabilities
may exceed in value its aggregate assets for a period not to exceed twelve
months.
The Company will (i) promptly upon filing the same with the Department of
Labor or Internal Revenue Service and, upon request of the Agent, furnish to the
Agent a copy of the most recent actuarial statement required to be submitted
under (S)103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Guaranteed Pension Plan and (ii) promptly upon
receipt or dispatch, furnish to the Agent any notice, report or demand sent or
<PAGE>
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received in respect of a Guaranteed Pension Plan under (S)(S)302, 4041, 4042,
4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan,
under (S)(S)4041A, 4202, 4219, 4242, or 4245 of ERISA.
(S)9.10. ADDITIONAL SHARES. The Company will not at any time cause or
---------- ------
permit any of its Subsidiaries at any time, to issue any shares of any class of
capital stock of any Subsidiary without the prior written consent of the
Majority Banks, other than shares issued in connection with acquisitions
permitted by (S)9.5 or issued to the Company or to any directly or indirectly
wholly-owned Subsidiary of the Company; provided, however, that the shares of
-------- -------
any such Subsidiary not organized under the laws of the District of Columbia or
any of the states of the United States may be issued to third parties (i) which,
in the aggregate own not more than two percent of the shares of the capital
stock of such Subsidiary, or (ii) to the extent mandated by the laws of the
jurisdiction in which such Subsidiary is organized.
(S)9.11. NEGATIVE PLEDGES. Except as provided for herein, the Company
-------- -------
will not at any time, and will not cause or permit any of the Commerce
Subsidiaries at any time to, enter into any agreement or covenant with any
Person prohibiting the Company or such Commerce Subsidiary from mortgaging,
pledging, or subjecting to, or suffering to arise, any lien, charge or any other
encumbrance of, or against, any of its assets, tangible or intangible, real or
personal.
(S)9.12. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will not, and
---------- ---- ------------- ----
will not permit any of its Subsidiaries to, (i) use any of the Real Estate or
any portion thereof for the handling, processing, storage or disposal of
Hazardous Substances, (ii) cause to be located on any of the Real Estate any
underground tank or other underground storage receptacle for Hazardous
Substances, (iii) generate any Hazardous Substances on any of the Real Estate,
(iv) conduct any activity at any Real Estate or use any Real Estate in any
manner so as to cause a release (i.e. releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping) or threatened release of Hazardous Substances on, upon or
into the Real Estate or (v) otherwise conduct any activity at any Real Estate or
use any Real Estate in any manner that would violate any Environmental Law or
bring such Real Estate in violation of any Environmental Law.
<PAGE>
-62-
(S)9.13. DISTRIBUTIONS. The Company will not, and will not permit any of
-------------
its Subsidiaries to, make any Distributions, other than Distributions by any
Commerce Subsidiary to the Company or by any Subsidiary of a Commerce Subsidiary
to such Commerce Subsidiary; provided, however, that the Company may make
-------- -------
Distributions in respect of its preferred stock in an aggregate amount not to
exceed $500,000 in any fiscal year of the Company; and provided further that, so
----------------
long as no Default or Event of Default shall have occurred and be continuing,
the Company may repurchase shares of its own issued and outstanding capital
stock.
(S)10. FINANCIAL COVENANTS. The Company (which, for purposes of this
--------- ---------
(S)10, shall mean the Company and its Subsidiaries on a consolidated basis)
covenants and agrees that, so long as any Loan, Letter of Credit, Unpaid
Reimbursement Obligation or Note is outstanding or the Banks have any
obligations to make Loans, or the Agent has any obligation to issue, extend or
renew Letters of Credit, hereunder, unless the Majority Banks otherwise agree in
writing:
(S)10.1. PROFITABILITY. The Company shall not cause or permit
-------------
Consolidated Net Income or Consolidated Operating Income for any fiscal quarter
of the Company to be less than $1.00.
(S)10.2. OPERATING CASH FLOW TO INTEREST CHARGES. The Company shall not
---------------------------------------
cause or permit the ratio of Operating Cash Flow to Interest Charges for any
fiscal quarter of the Company to be less than 3.0:1.0.
(S)10.3. CURRENT RATIO. The Company shall not cause or permit the ratio
-------------
of Consolidated Current Assets to the sum of Consolidated Current Liabilities
plus Loans outstanding at the end of any fiscal quarter of the Company (a) from
- ----
October 1, 1995 through September 30, 1996 to be less than 1.0:1.0, (b) from
October 1, 1996 through September 30, 1997 to be less than 1.5:1.0 and (c) from
October 1, 1997 through Final Maturity, to be less than 2.0:1.0.
(S)10.4. CONSOLIDATED TANGIBLE NET WORTH. The Company shall not cause or
---------------------- --- -----
permit Consolidated Tangible Net Worth at the end of any fiscal quarter of the
Company to be less than the sum of (a) $75,000,000 plus (b) on a cumulative
----
basis, commencing with the fiscal quarter ending June 30, 1996, seventy-five
percent (75%) of the Consolidated Net Income for each fiscal quarter (calculated
without deduction for any net losses) through the fiscal quarter then ended,
after preferred stock dividends actually paid by the Company since June 30, 1996
(to the extent permitted by (S)9.13), and as adjusted from time to time to
reflect stock splits, distributions (other than repurchases by the Company of
its issued and outstanding capital stock, as permitted by (S)9.13), or
recapitalizations or reclassifications, plus (c) 100% of the net proceeds
received by the Company of any new equity (not including shares of the capital
stock of the Company reissued by the Company following the Company's repurchase
thereof as permitted by (S)9.13) issued by the Company since June 30, 1996.
<PAGE>
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(S)10.5. LIABILITIES TO NET WORTH RATIO. The Company shall not cause or
------------------------------
permit the ratio of Consolidated Total Liabilities to Consolidated Net Worth at
the end of any fiscal quarter of the Company to equal or exceed 1.0:1.0.
(S)10.6. TOTAL DEBT TO OPERATING CASH FLOW RATIO. The Company shall not
---------------------------------------
permit the ratio of Total Debt as of the end of any fiscal quarter to Operating
Cash Flow for the four consecutive fiscal quarter period ending on such fiscal
quarter to be greater than 1.0:1.0.
(S)11. EVENTS OF DEFAULT; ACCELERATION. If any of the following events
------ -- ------- ------------
("Events of Default" or, if the giving of notice or the lapse of time or both is
required, then, prior to such notice and/or lapse of time, "Defaults") shall
occur:
(a) if the Company shall fail to pay any principal of the Loans, or
the Company or any Commerce Subsidiary shall fail to pay any Reimbursement
Obligation owing by such Person, in each case within one (1) day following the
date on which the same becomes due and payable hereunder, whether at the stated
date of maturity or any accelerated date of maturity or at any other date fixed
for payment;
(b) if the Company shall fail to pay any interest on the Loans, any
Commitment Fee, any Agent's Fee, any Letter of Credit Fee, or any other sums, in
each case within two (2) days following the date on which the same becomes due
and payable hereunder, whether at the stated date of maturity or any accelerated
date of maturity or at any other date fixed for payment;
(c) if any of the Commerce Companies shall fail to comply with any of
its covenants contained in (S)(S)8 (excluding (S)8.12), 9 and 10 hereof;
(d) if any of the Commerce Companies shall fail to perform any term,
covenant or agreement contained herein or in any of the Loan Documents (other
than those specified elsewhere in this (S)11) for fifteen (15) days after
written notice of such failure has been given to the Company by the Agent or any
Bank;
(e) if any representation or warranty of any of the Commerce Companies
in this Agreement or in any of the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with this Agreement or the
Loan Documents shall prove to have been false in any material respect upon the
date when made;
(f) if any of the Commerce Companies shall fail to pay when due and
payable, or within any applicable period of grace, any obligations for borrowed
money or in respect of capitalized leases, which obligations exceed $1,000,000
in the aggregate, or fail to observe or perform in any material respect any
term, covenant or agreement contained in any material agreement by which it is
bound, evidencing or securing borrowed money for such period of time as would
permit
<PAGE>
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(assuming the giving of appropriate notice if required) the holder or holders
thereof or of any obligations issued thereunder to accelerate the maturity
thereof;
(g) if any of the Company or its Subsidiaries makes an assignment for
the benefit of creditors, or admits in writing its inability to pay or generally
fails to pay its debts as they mature or become due, or petitions or applies for
the appointment of a trustee or other custodian, liquidator or receiver of any
of the Company or its Subsidiaries or of any substantial part of the assets of
any of the Company or its Subsidiaries or commences any case or other proceeding
relating to any of the Company or its Subsidiaries under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation or similar law of any jurisdiction, now or hereafter in effect, or
takes any action to authorize or in furtherance of any of the foregoing, or if
any such petition or application is filed or any such case or other proceeding
is commenced against any of the Company or its Subsidiaries and any of the
Company or its Subsidiaries indicates its approval thereof, consent thereto or
acquiescence therein;
(h) if a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating any of the Company or its
Subsidiaries bankrupt or insolvent, or approving a petition in any such case or
other proceeding, or a decree or order for relief is entered in respect of the
Company or any Subsidiary of the Company in an involuntary case under Federal
bankruptcy laws as now or hereafter constituted;
(i) if there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty days, whether or not consecutive, any final
judgment against any of the Commerce Companies which, with other outstanding
final judgments, undischarged, against the Commerce Companies exceeds in the
aggregate $1,000,000;
(j) any of the Commerce Companies shall fail to comply with the
covenant contained in (S)8.12 hereof for one Business Day (in the case of the
Company) or for two Business Days (in the case of any of the Commerce
Subsidiaries), after written notice of such failure has been given to the
Company by the Agent or any Bank;
(k) with respect to any Guaranteed Pension Plan, an ERISA Reportable
Event shall have occurred (or in the event that a Subsidiary shall have been
acquired with an Employee Benefit Plan subject to an "accumulated funding
deficiency" and such "accumulated funding deficiency" shall not have been cured
within any grace period specified therefore in (S)9.11(b)) and the Majority
Banks shall have determined in their reasonable discretion that such event
reasonably could be expected to result in liability of the Company or any ERISA
Affiliate to the PBGC or such Guaranteed Pension Plan in an aggregate amount
exceeding the amount provided in (S)9.11(b)(i) or (ii), as applicable, and such
event in the circumstances occurring reasonably could constitute grounds for the
termination of such Guaranteed Pension Plan by the PBGC or for the appointment
by the appropriate United States District Court of a trustee to administer such
<PAGE>
-65-
Guaranteed Pension Plan; or a trustee shall have been appointed by the United
States District Court to administer such Guaranteed Pension Plan; or the PBGC
shall have instituted proceedings to terminate such Guaranteed Pension Plan;
(l) if any of the Loan Documents shall be canceled, terminated,
revoked or rescinded otherwise than in accordance with the terms thereof or with
the express prior written agreement, consent or approval of the Banks, or any
action at law, suit or in equity or other legal proceeding to cancel, revoke or
rescind any of the Loan Documents shall be commenced by or on behalf of any of
the Commerce Companies party thereto or any of their respective stockholders, or
any court or any other governmental or regulatory authority or agency of
competent jurisdiction shall make a determination that, or issue a judgment,
order, decree or ruling to the effect that, any one or more of the Loan
Documents is illegal, invalid or unenforceable in accordance with the terms
thereof;
(m) (i) any of the Commerce Companies shall be enjoined, restrained or
in any way prevented by the order of any court or any administrative or
regulatory agency from conducting any material part of its business and such
order shall continue in effect for more than thirty (30) days and such inability
to conduct its business shall have a material adverse effect on the business or
financial condition of the Commerce Companies taken as a whole, or (ii) there
shall occur any strike, lockout, labor dispute, embargo, condemnation, act of
God or public enemy or other casualty, which, in any such case, causes, for more
than fifteen (15) consecutive days, the cessation or substantial curtailment of
revenue producing activities at any facility of any of the Company or its
Subsidiaries and which has a material adverse effect or the business or
financial condition of the Commerce Companies taken as a whole;
(n) there shall occur the loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by any of
the Commerce Companies if such loss, suspension, revocation or failure to renew
would have a material adverse effect on the business or financial condition of
such Commerce Company;
(o) any of the Commerce Companies shall be indicted for a state or
federal crime, or any civil or criminal action shall otherwise have been brought
or threatened against any of the Commerce Companies, a punishment for which in
any such case could include the forfeiture of any assets of the such Commerce
Company having a fair market value in excess of $1,000,000;
(p) any person or group of persons (within the meaning of Section 13
or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or more of the
outstanding shares of common stock of the Company; or, during any period of
twelve consecutive calendar months, individuals who were directors of the
Company on the first day of such period shall cease to constitute a majority of
the board of directors of the Company; or the Company or one of the Commerce
<PAGE>
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Subsidiaries shall, except as a result of dispositions permitted by (S)9.9(c),
cease to own 100% of the capital stock of each of the Commerce Subsidiaries; or
(q) (i) the Company or any of its Subsidiaries is obligated to
repurchase Commerce Accounts Receivable arising under the Commerce Accounts
Receivable Agreement with Sanwa Business Credit Corporation in an aggregate
amount equal to or greater than fifty percent (50%) of the amount of Commerce
Accounts Receivable outstanding under such agreement at any time, or (ii) a
Total Repurchase Event with respect to Commerce Accounts Receivable other than
those specified in clause (i) hereof in an aggregate amount equal to or greater
than $1,000,000 shall have occurred under one or more of the Commerce Accounts
Receivable Agreements;
then, and in any such event, unless the same shall be cured or waived, the Agent
may, and, upon the request of the Majority Banks, shall, by notice in writing to
the Company, declare all amounts owing with respect to this Agreement and the
Notes or the other Loan Documents, and all Reimbursement Obligations to be, and
they shall thereupon forthwith become, immediately due and payable without
presentment, demand, notice of intent to accelerate, protest or other notice of
any kind, all of which are hereby expressly waived by the Company; provided that
--------
in the event of any Event of Default specified in (S)(S)11(g) and 11(h) hereof,
all such amounts shall become immediately due and payable automatically and
without any requirement of notice from either of the Agent or any Bank;
provided, however, that any amounts representing Reimbursement Obligations shall
- -------- -------
be held by the Agent as cash collateral pursuant to (S)2A.2(a). In case any one
or more of the Events of Default shall have occurred and shall not have been
cured or waived, and whether or not the Banks shall have accelerated the
maturity of the Loans and Reimbursement Obligations pursuant to the foregoing,
any Bank, if such Bank is owed any amount with respect to the Loans or
Reimbursement Obligations, may, with the consent of the Majority Banks but not
otherwise, proceed to protect and enforce its rights by suit in equity, action
at law and/or other appropriate proceeding, whether for the specific performance
of any covenant or agreement contained in this Agreement, any of the other Loan
Documents or any instrument pursuant to which the obligations of the Company or
any of its Subsidiaries to such Bank hereunder are evidenced, including as
permitted by applicable law the obtaining of the ex parte appointment of a
-- -----
receiver, and, if such amount shall have become due, by declaration or
otherwise, proceed to enforce the payment thereof or any other legal or
equitable right of such Bank. No remedy herein conferred upon any Bank or
holder of the Notes is intended to be exclusive of any other remedy and each and
every remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or by statute
or any other provision of law.
If any one or more of the Events of Default specified in (S)(S)11(g) and
(h) shall occur, any unused portion of the Total Commitment shall forthwith
terminate and each of the Banks shall be relieved of all further obligations to
make Loans, and the Agent shall be relieved of all further Obligations to issue,
extend or renew Letters of Credit; if any one or more of the Events of Default
specified in this (S)11
<PAGE>
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(other than those specified in (S)(S)11(g) and (h)) shall occur, then the Agent,
upon the request of the Majority Banks, shall, by notice to the Company,
terminate the unused portion of the Total Commitment, and upon such notice being
given such unused portion of the Total Commitment shall terminate immediately
and each of the Banks shall be relieved of all further obligations to make
Loans, and the Agent shall be relieved of all further Obligations to issue,
extend or renew Letters of Credit hereunder. If any such notice is given to the
Company, the Agent will forthwith furnish a copy thereof to each of the Banks.
No termination of the Total Commitment hereunder shall relieve the Company of
any of its existing Obligations to the Banks hereunder or elsewhere.
(S)12. SETOFF. Regardless of the adequacy of any collateral, during the
------
continuance of an Event of Default, any deposits or other sums credited by or
due from any of the Banks to the Company (but excluding accounts held by the
investment group of FNBB or any affiliate of FNBB, for investment services
provided to the Company) and any securities or other property of the Company in
the possession of such Bank may be applied to or set off against the payment of
obligations of the Company hereunder, or under the Notes and any and all other
liabilities, direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, of the Company to such Bank. Each Bank
agrees with the other Banks that (i) if an amount to be set off is to be applied
to Indebtedness of the Company to a Bank, other than Indebtedness evidenced by
the Notes held by all of the Banks, such amount shall be applied ratably to such
other Indebtedness and to the Indebtedness evidenced by all such Notes, and (ii)
if a Bank shall receive from the Company, whether by voluntary payment, exercise
of the right of set-off, counterclaim, cross action, enforcement of the claim
evidenced by the Notes held by a Bank by proceedings against the Company at law
or in equity or by proof thereof in bankruptcy, reorganization, liquidation,
receivership or similar proceedings, or otherwise, and shall retain and apply to
the payment of the Note held by a Bank any amount in excess of its ratable
portion of the payments received by all of the Banks, such Bank will make such
disposition and arrangements with the other Banks with respect to such excess,
either by way of distribution, pro tanto assignment of claims, subrogation or
--- -----
otherwise as shall result in each Bank receiving, in respect of the Notes held
by it, its proportionate payment as contemplated by this Agreement; provided,
---------
however, that if all or any part of such excess payment is thereafter recovered
- -------
from such Bank, such disposition and arrangements shall be rescinded and the
amount restored to the extent of such recovery, but without interest.
(S)13. THE AGENT.
--- -----
(S)13.1. AUTHORIZATION. The Agent is authorized to take such action on
-------------
behalf of each of the Banks and to exercise all such powers as are hereunder and
in related documents delegated to the Agent, together with such powers as are
reasonably incident thereto, provided that no duties or responsibilities not
--------
expressly assumed herein or therein shall be implied to have been assumed by the
Agent. The relationship between the Agent and the Banks is and shall be that of
agent and principal only, and nothing contained in this Agreement or any of the
<PAGE>
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other Loan Documents shall be construed to constitute the Agent as a trustee for
any Bank.
(S)13.2. EMPLOYEES AND AGENTS. The Agent may exercise its powers and
--------- --- ------
execute its duties hereunder by or through employees or agents and shall be
entitled to take, and to rely on, advice of counsel concerning all matters
pertaining to its rights and duties under this Agreement and the Notes. The
Agent may utilize the services of such Persons as the Agent in its sole
discretion may reasonably determine, and all reasonable fees and expenses of any
such Persons shall be paid by the Company.
(S)13.3. NO LIABILITY. Neither the Agent nor any of its shareholders,
-- ---------
directors, officers or employees nor any other Person assisting it in its duties
nor any agent or employee thereof, shall be liable for any waiver, consent or
approval given or any action taken, or omitted to be taken, in good faith by
them hereunder under the Notes or in connection herewith or therewith, or be
responsible for the consequences of any oversight or error of judgment
whatsoever, except that the Agent or such other Person, as the case may be, may
be liable for losses due to its willful misconduct or gross negligence.
(S)13.4. NO REPRESENTATIONS. The Agent shall not be responsible for the
-- ---------------
execution or validity or enforceability of this Agreement, the Notes or any
instrument at any time constituting, or intended to constitute, collateral
security for the Notes or for the value of any such collateral security or for
the validity, enforceability or collectibility of any such amounts owing with
respect to the Notes or for any recitals or statements, warranties or
representations herein or made in any certificate or instrument hereafter
furnished to either of them by or on behalf of the Company, or be bound to
ascertain or inquire as to the performance or observance of any of the terms,
conditions, covenants or agreements herein or in any instrument at any time
constituting, or intended to constitute, collateral security for the Notes. The
Agent shall not be bound to ascertain whether any notice, consent, waiver or
request delivered to it by the Company or any holder of any of the Notes shall
have been duly authorized or is true, accurate and complete. The Agent has not
made nor does it now make any representations or warranties, express or implied,
nor does it assume any liability to the Banks with respect to the
creditworthiness or financial condition of any Commerce Company. Each Bank
acknowledges that it has, independently and without reliance upon the Agent or
any other Bank, and based upon such information and documents as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement.
(S)13.5. PAYMENTS.
--------
(A) PAYMENTS TO AGENT. A payment by the Commerce Companies to
-------- -- ------
the Agent hereunder or under any of the other Loan Documents for the account of
any Bank shall constitute a payment to such Bank. The Agent agrees promptly to
distribute to each Bank such Bank's pro rata share of payments received by the
--- ----
<PAGE>
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Agent for the account of the Banks except as otherwise expressly provided herein
or in any of the other Loan Documents.
(B) DISTRIBUTIONS BY AGENT. If in the opinion of the Agent the
------------- -- ------
distribution of any amount received by it in such capacity hereunder, under the
Notes or under any of the other Loan Documents might involve it in liability, it
may refrain from making distribution until its right to make distribution shall
have been adjudicated by a court of competent jurisdiction. If a court of
competent jurisdiction shall adjudge that any amount received and distributed by
the Agent is to be repaid, each Person to whom any such distribution shall have
been made shall either repay to the Agent its proportionate share of the amount
so adjudged to be repaid or shall pay over the same in such manner and to such
Persons as shall be determined by such court.
(C) DELINQUENT BANKS. Notwithstanding anything to the contrary
---------- ------
contained in this Agreement or any of the other Loan Documents, any Bank that
fails (i) to make available to the Agent its pro rata share of any Loan or to
--- ----
purchase any Letter of Credit Participation when the conditions precedent to the
making of such Loan or the issuance, extension or renewal of such Letter of
Credit have been satisfied or (ii) to comply with the provisions of (S)12 with
respect to making dispositions and arrangements with the other Banks, where such
Bank's share of any payment received, whether by setoff or otherwise, is in
excess of its pro rata share of such payments due and payable to all of the
--- ----
Banks, in each case as, when and to the full extent required by the provisions
of this Agreement, shall be deemed delinquent (a "Delinquent Bank") and shall be
deemed a Delinquent Bank until such time as such delinquency is satisfied. A
Delinquent Bank shall be deemed to have assigned any and all payments due to it
from the Company, whether on account of outstanding Loans, Unpaid Reimbursement
Obligations, interest, fees or otherwise, to the remaining nondelinquent Banks
for application to, and reduction of, their respective pro rata shares of all
--- ----
outstanding Loans and Unpaid Reimbursement Obligations. The Delinquent Bank
hereby authorizes the Agent to distribute such payments to the nondelinquent
Banks in proportion to their respective pro rata shares of all outstanding Loans
--- ----
and Unpaid Reimbursement Obligations. A Delinquent Bank shall be deemed to have
satisfied in full a delinquency when and if, as a result of application of the
assigned payments to all outstanding Loans and Unpaid Reimbursement Obligations
of the nondelinquent Banks, the Banks' respective pro rata shares of all
--- ----
outstanding Loans and Unpaid Reimbursement Obligations have returned to those in
effect immediately prior to such delinquency and without giving effect to the
nonpayment causing such delinquency.
(S)13.6. HOLDERS OF NOTES. The Agent may deem and treat the payee of any
------- -- -----
Note as the absolute owner or purchaser thereof for all purposes hereof until it
shall have been furnished in writing with a different name by such payee or
obligor or by a subsequent holder, assignee or transferee.
<PAGE>
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(S)13.7. INDEMNITY. The Banks ratably agree hereby to indemnify and hold
---------
harmless the Agent from and against any and all claims, actions and suits
(whether groundless or otherwise), losses, damages, costs, expenses (including
any expenses for which the Agent has not been reimbursed by the Company as
required by (S)(S)14 and 15 hereof), and liabilities of every nature and
character arising out of or related to this Agreement, the Notes, or the
transactions contemplated or evidenced hereby or thereby, or the Agent's actions
taken hereunder or thereunder, except to the extent that any of the same shall
be directly caused by the Agent's willful misconduct or gross negligence.
(S)13.8. AGENT AS BANK. FNBB shall have the same obligations and the same
----- -- ----
rights, powers and privileges in respect to its Commitment and the Loans made by
it and as the holder of any of the Notes and as the purchaser of any Letter of
Credit Participations, as it would have were it not also the Agent.
(S)13.9. RESIGNATION. The Agent may resign at any time by giving sixty
-----------
(60) days' prior written notice thereof to the Banks and the Company. Upon any
such resignation, the Banks shall have the right to appoint a successor Agent
from among the Banks. Unless a Default or Event of Default shall have occurred
and be continuing, such successor shall be reasonably acceptable to the Company.
If no successor Agent shall have been so appointed by the Banks and shall have
accepted such appointment within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be any Bank or any other financial
institution reasonably satisfactory to the Banks and having a rating of not less
than B or its equivalent by Standard & Poor's Ratings Group or its successor.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation, the provisions of this Agreement shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as Agent. In the event of a material breach of its
duties hereunder, the Agent may be removed by the Majority Banks for cause and
the provisions of this (S)13 shall apply to the appointment of a successor.
(S)13.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Bank
------------ -- -------- --- ------ -- -------
hereby agrees that, upon any employee of such Bank active upon the Company's
account learning of the existence of a Default or an Event of Default, it shall
promptly notify the Agent thereof. The Agent hereby agrees that upon receipt of
any notice of the existence of any Default or Event of Default, it shall
promptly notify the other Banks of the existence of such Default or Event of
Default.
(S)14. EXPENSES. Whether or not the transactions contemplated hereby
--------
shall be consummated, the Company will pay (a) the reasonable cost of (i)
producing and reproducing this Agreement, the other Loan Documents and the other
instruments or agreements mentioned herein, (ii) any taxes (including any
<PAGE>
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interest and penalties in respect thereof) or filing fees payable by the Agent
or any of the Banks (other than taxes based upon the Agent's or any Bank's net
income) on or with respect to the transactions contemplated by this Agreement
(the Company hereby agreeing to indemnify the Agent and each Bank with respect
thereto); (b) the reasonable fees, expenses and disbursements of the Agent and
the Agent's Special Counsel and counsel for each Bank incurred in connection
with the preparation, administration or interpretation of this Agreement or the
other Loan Documents and other instruments mentioned herein, any prior
discussions between the Company and the Agent relating to proposed extensions of
credit to the Commerce Companies, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, including the
cost of Uniform Commercial Code and similar searches conducted with respect to
the Commerce Companies and the cost of commercial finance examinations as
provided in (S)8.12(b); (c) all reasonable out-of-pocket expenses (including
reasonable attorneys' fees and costs, which attorneys may be employees of the
Agent or any Bank) incurred by the Agent or any Bank in connection with (i) the
enforcement of or preservation of rights under this Agreement or any of the
other Loan Documents against the Company or any Subsidiary or the administration
thereof after the occurrence of a Default or Event of Default and (ii) any
litigation, proceeding or dispute whether arising hereunder or otherwise, in any
way related to the Agent's or the Banks' relationship with the Company or any of
its Subsidiaries hereunder. The covenants of this (S)14 shall survive payment
or satisfaction of payment of amounts owing with respect to the Notes.
(S)15. INDEMNIFICATION. The Company agrees to indemnify and hold harmless
---------------
the Agent and the Banks and their respective shareholders, directors, agents,
officers, subsidiaries and affiliates from and against any and all claims,
actions, causes of action and suits whether groundless or otherwise, and from
and against any and all liabilities, losses, damages, settlement payments,
obligations and expenses of every nature and character incurred, suffered,
sustained or required to be paid by reason of, resulting from or otherwise
arising out of this Agreement or any of the other Loan Documents or the
transactions contemplated hereby including (a) any actual or proposed use by the
Company or any of its Subsidiaries of the proceeds of any of the Loans or
Letters of Credit, (b) any actual or alleged infringement of any patent,
copyright, trademark, service mark or similar right of the Company or any of its
Subsidiaries, (c) the Company or any of its Subsidiaries entering into or
performing this Credit Agreement or any of the other Loan Documents or (d) with
respect to the Company and its Subsidiaries and their respective properties and
assets, the violation of any Environmental Law, or any action, suit, proceeding
or investigation brought or threatened with respect to any Hazardous Substances
(including claims with respect to wrongful death, personal injury or damage to
property), in each case including the reasonable fees and disbursements of
counsel and allocated costs of internal counsel incurred in connection with any
such investigation, litigation or other proceeding, in each case including,
without limitation, the reasonable fees and disbursements of counsel and
allocated costs of internal counsel incurred in connection with any such
investigation, litigation or other proceeding except to the extent that such
claims, actions, suits, liabilities, losses or damages arise solely as a result
of the Agent's or
<PAGE>
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any Bank's gross negligence or willful misconduct; provided, however, that the
-------- -------
gross negligence or willful misconduct of any Bank or the Agent shall not
impair, infringe on or limit the rights under this (S)15 of any other Bank or,
as the case may be, the Agent which has not committed any gross negligence or
willful misconduct. In litigation, or the preparation therefor, the Banks and
the Agent shall be entitled to select their own counsel and, in addition to the
foregoing indemnity, the Company agrees to pay promptly the reasonable fees and
expenses of such counsel as well as any related investment banking, appraisal
and other similar professional service fees and expenses. If, and to the extent
that the obligations of the Company under this (S)15 are unenforceable for any
reason, the Company hereby agrees to make the maximum contribution to the
payment in satisfaction of such obligations which is permissible under
applicable law. The covenants in this (S)15 shall survive payment in full of all
other Obligations.
(S)16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
-------- -- --------- ---
representations and warranties made herein, in the Notes or in any documents or
other papers delivered by or on behalf of the Company pursuant hereto shall be
deemed to have been relied upon by each of the Agent and the Banks,
notwithstanding any investigation heretofore or hereafter made by it, and shall
survive the making by the Banks of the Loans, and the issuance, extension and
renewal by the Agent of the Letters of Credit, as herein contemplated, and shall
continue in full force and effect so long as any amount due under this Agreement
or the Notes or any Reimbursement Obligations remains outstanding and unpaid or
any Bank has any obligation to make any Loans, or the Agent has any obligation
to issue, extend or renew any Letters of Credit, hereunder and for such further
time as may be otherwise expressly specified in this Agreement. All statements
contained in any certificate or other paper delivered to the Agent or any Bank
at any time by or on behalf of the Company pursuant hereto or in connection with
the transactions contemplated hereby shall constitute representations and
warranties by the Company hereunder.
(S)17. ASSIGNMENT AND PARTICIPATION.
---------- --- -------------
(S)17.1. CONDITIONS TO ASSIGNMENT BY BANKS.
---------- -- ---------- -- -----
(a) Except as otherwise provided herein, each Bank may assign to
one or more Eligible Assignees all or a portion of its interests, rights and
obligations under this Agreement (including all or a portion of its Commitment
Percentage and Commitment and the same portion of the Loans at the time owing to
it, and the Note held by it and the Letter of Credit Participations purchased by
it); provided that (i) each of the Agent and the Company shall have given its
--------
prior written consent to such assignment, which consent in the case of the
Company will not be unreasonably withheld, (ii) each such assignment shall be of
a constant, and not a varying, percentage of all the assigning Bank's rights and
obligations under this Agreement, (iii) each assignment shall be in an amount
that is at least $5,000,000 and (iv) the parties to such assignment shall
execute and deliver to the Agent, for recording in the Register (as hereinafter
defined), an Assignment and
<PAGE>
-73-
Acceptance, substantially in the form of Exhibit E hereto (an "Assignment and
------- -
Acceptance"), together with any Note subject to such assignment.
(b) Upon such execution, delivery, acceptance and recording,
from and after the effective date specified in each Assignment and Acceptance,
which effective date shall be at least five (5) Business Days after the
execution thereof, (i) the assignee thereunder shall be a party hereto and, to
the extent provided in such Assignment and Acceptance, have the rights and
obligations of a Bank hereunder and (ii) the assigning Bank shall, to the extent
provided in such assignment and upon payment to the Agent of the negotiation fee
referred to in (S)17.3, be released from its obligations under this Agreement
and the other Loan Documents.
(S)17.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS.
------- --------------- --- ---------- ----------- ---------
By executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other parties
hereto as follows: (a) other than the representation and warranty that it is
the legal and beneficial owner of the interest being assigned thereby free and
clear of any adverse claim, the assigning Bank makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement, the other Loan Documents or any other instrument or
document furnished pursuant hereto; (b) the assigning Bank makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Company or any other Person primarily or secondarily
liable in respect of any of the Obligations, or the performance or observance by
the Company or any other Person primarily or secondarily liable in respect of
any of the Obligations of any of their obligations under this Agreement or any
of the other Loan Documents or any other instrument or document furnished
pursuant hereto or thereto; (c) such assignee confirms that it has received a
copy of this Agreement, together with copies of the most recent financial
statements referred to in (S)5.7 and (S)8 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (d) such assignee will,
independently and without reliance upon any assigning Bank, the Agent or any
other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (e) such assignee represents and
warrants that it is an Eligible Assignee; (f) such assignee appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Loan Documents as are delegated
to the Agent by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto; (g) such assignee agrees that it will perform in
accordance with its terms all of the obligations that by the terms of this
Agreement are required to be performed by it as a Bank; (h) such assignee
represents and warrants that it is legally authorized to enter into such
Assignment and Acceptance; and (i) such assignee acknowledges that it has made
arrangements with the assigning Bank satisfactory to such assignee with respect
to its pro rata share of Letter of Credit Fees in respect of outstanding Letters
--------
of Credit.
<PAGE>
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(S)17.3. REGISTER. The Agent shall maintain a copy of each Assignment and
--------
Acceptance delivered to it and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and the Commitment
Percentages of, and principal amount of the Loans owing to, and the Letter of
Credit Participations purchased by the Banks from time to time. The entries in
the Register shall be conclusive, in the absence of manifest error, and the
Company, the Agent and the Banks may treat each Person whose name is recorded in
the Register as a Bank hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Company and the Banks at any
reasonable time and from time to time upon prior notice. Upon each such
recordation, the assigning Bank agrees to pay or cause the assignee to pay to
the Agent a registration fee in the sum of $2,500.
(S)17.4. NEW NOTE. Upon its receipt of an Assignment and Acceptance
--- ----
executed by the parties to such Assignment and Acceptance, together with the
Note subject to such Assignment and Acceptance, the Agent shall (a) record the
information contained therein in the Register, and (b) give prompt notice
thereof to the Company and the Banks (other than the assigning Bank). Within
five (5) Business Days after receipt of such notice, the Company shall execute
and deliver to the Agent, in exchange for its surrendered Note, a new Note to
the order of such Eligible Assignee, in an amount equal to the amount assumed by
such Eligible Assignee pursuant to such Assignment and Acceptance, and, if the
assigning Bank has retained some portion of its obligations hereunder, a new
Note to the order of such assigning Bank in an amount equal to the amount
retained by it hereunder. Such new Note shall provide that it is in replacement
of the surrendered Note, shall be in an aggregate principal amount equal to the
aggregate principal amount of the surrendered Note, shall be dated the effective
date of such Assignment and Acceptance and shall otherwise be in substantially
the form of Exhibit A hereto. Contemporaneously with the issuance of any new
------- -
Note pursuant to this (S)17.4, the Company shall deliver, at its own expense, an
opinion of counsel, addressed to the Banks and the Agent, relating to the due
authorization, execution and delivery of such new Note and the legality,
validity and binding effect thereof, in form and substance satisfactory to the
Banks. The surrendered Note shall be canceled and returned to the Company.
(S)17.5. PARTICIPATIONS. Each Bank may sell participations to one or more
--------------
banks or other entities in all or a portion of such Bank's rights and
obligations under this Agreement and the other Loan Documents; provided that (a)
--------
each such participation shall be in an amount of not less than $5,000,000, (b)
any such sale or participation shall not affect the rights and duties of the
selling Bank hereunder to the Company and (c) the only rights granted to the
participant pursuant to such participation arrangements with respect to waivers,
amendments or modifications of this Agreement or the other Loan Documents shall
be the rights to approve waivers, amendments or modifications that would reduce
the principal of or the interest rate on any Loans, or alter any Letter of
Credit Fees, extend the term or increase the amount of the Commitment of such
Bank as it relates to such participant, reduce the amount of any Commitment Fees
or other fees to which
<PAGE>
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such participant is entitled, or extend any regularly scheduled payment date for
principal or interest, provided, that the Banks may sell participations
--------
hereunder to their respective affiliates without restriction or limitation.
(S)17.6. DISCLOSURE. The Company agrees that any Bank may disclose
----------
information obtained by such Bank pursuant to this Agreement to assignees,
potential assignees, participants and potential participants hereunder, with the
prior written consent of the Company; provided that such assignees, potential
--------
assignees, participants or potential participants shall agree (a) to treat in
confidence such information unless such information otherwise becomes public
knowledge, (b) not to disclose such information to a third party and (c) not to
make use of such information for purposes of transactions unrelated to such
contemplated assignment.
(S)17.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE COMMERCE COMPANIES.
-------- -- ----------- ---------- ---- --- -------- ---------
If any assignee Bank is an Affiliate of any of the Commerce Companies, then any
such assignee Bank shall have no right to vote as a Bank hereunder or under any
of the other Loan Documents for purposes of granting consents or waivers or for
purposes of agreeing to amendments or other modifications to any of the Loan
Documents or for purposes of making requests to the Agent pursuant to (S)12.1 or
(S)12.2, and the determination of the Majority Banks shall for all purposes of
this Agreement and the other Loan Documents be made without regard to such
assignee Bank's interest in any of the Loans. If any Bank sells a participating
interest in any of the Loans or Reimbursement Obligations to a participant, and
such participant is any of the Commerce Companies or an Affiliate of any of the
Commerce Companies, then such transferor Bank shall promptly notify the Agent of
the sale of such participation. A transferor Bank shall have no right to vote
as a Bank hereunder or under any of the other Loan Documents for purposes of
granting consents or waivers or for purposes of agreeing to amendments or
modifications to any of the Loan Documents or for purposes of making requests to
the Agent pursuant to (S)12.1 or (S)12.2 to the extent that such participation
is beneficially owned by any of the Commerce Companies or any Affiliate of any
of the Commerce Companies, and the determination of the Majority Banks shall for
all purposes of this Agreement and the other Loan Documents be made without
regard to the interest of such transferor Bank in the Loans to the extent of
such participation information to a third party and (c) not to make use of such
information for purposes of transactions unrelated to such contemplated
assignment.
(S)17.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Bank shall
------------- ---------- ----------
retain its rights to be indemnified pursuant to (S)15 and to be reimbursed under
(S)14 with respect to any claims or actions arising prior to the date of such
assignments. If any assignee Bank is not incorporated under the laws of the
United States of America or any state thereof, it shall, prior to the date on
which any interest or fees are payable hereunder or under any of the other Loan
Documents for its account, deliver to the Company and the Agent certification as
to its exemption from deduction or withholding of any United States federal
income taxes. Anything contained in this (S)17 to the contrary notwithstanding,
any Bank may at
<PAGE>
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any time pledge all or any portion of its interest and rights under this
Agreement (including all or any portion of its Note) to any of the twelve
Federal Reserve Banks organized under (S)4 of the Federal Reserve Act, 12 U.S.C.
(S)341. No such pledge or the enforcement thereof shall release the pledgor Bank
from its obligations hereunder or under any of the other Loan Documents.
(S)17.9. ASSIGNMENT BY THE COMPANY. The Company shall not assign or
---------- -- --- -------
transfer any of its respective rights or obligations under this Agreement or any
of the other Loan Documents without the prior written consent of each of the
Banks.
(S)18. NOTICES, ETC. Except as otherwise expressly provided in this
------- ---
Agreement, all notices and other communications made or required to be given
pursuant to this Agreement or the Notes shall be in writing and shall be
delivered in hand, mailed by United States first-class mail, postage prepaid,
sent by overnight express courier, or sent by telecopier and confirmed by
letter, addressed:
(a) if to the Company, at
Sterling Commerce, Inc.
8080 North Central Expressway, Suite 1100
Dallas, TX 75206
Attention: George Ellis
and at
Sterling Commerce, Inc.
4600 Lakehurst Court
Dublin, Ohio 43017
Attention: Steve Shiflet
or
(b) if to the Agent or any Bank, at the address set forth for such
Person on Schedule 1.1 hereto.
-------- ---
Any such notice or demand shall be deemed to have been duly given or made and to
have become effective if delivered by hand or telecopied or otherwise
telecommunicated, to a responsible officer of the party to which it is directed,
at the time of the receipt thereof by such officer, or if sent by registered or
certified first-class mail, postage prepaid, three days after the date when
mailed, or if sent by overnight mail or overnight courier service to such a
responsible officer, when received by such officer.
(S)19. GOVERNING LAW. THIS AGREEMENT AND, EXCEPT AS OTHERWISE
--------- ---
SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE COMPANY
<PAGE>
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AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS
OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NON-EXCLUSIVE
JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE
UPON THE COMPANY BY HAND AT THE ADDRESS SPECIFIED IN (S)18. THE COMPANY HEREBY
WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
The parties hereto acknowledge that the foregoing shall not be construed to
impose the laws of the Commonwealth of Massachusetts on environmental disputes
arising solely under the environmental laws of any other jurisdiction.
(S)20. HEADINGS. The captions in this Agreement are for convenience of
--------
reference only and shall not define or limit the provisions hereof.
(S)21. COUNTERPARTS. This Agreement and any amendment hereof may be
------------
executed in several counterparts and by each party on a separate counterpart,
each of which when so executed and delivered shall be an original, and all of
which together shall constitute one instrument. In proving this Agreement it
shall not be necessary to produce or account for more than one such counterpart
signed by the party against whom enforcement is sought.
(S)22. ENTIRE AGREEMENT, ETC. THIS AGREEMENT, TOGETHER WITH THE NOTES,
------ --------- ---
THE OTHER LOAN DOCUMENTS AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH
OR THEREWITH REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
(S)23. CONSENTS, AMENDMENTS, WAIVERS, ETC. Neither this Agreement nor any
-------- ---------- ------- ---
term hereof may be changed, waived, discharged or terminated, except as provided
in this (S)23. Except as otherwise expressly provided in this Agreement, any
consent or approval required or permitted by this Agreement to be given by the
Banks may be given, and any term of this Agreement or of any other instrument
related hereto or mentioned herein may be amended, and the performance or
observance by the Company of any terms of this Agreement or such other
instrument or the continuance of any Default or Event of Default may be waived
(either generally or in a particular instance and either retroactively or
prospectively) with, but only with, the written consent of the Company and the
written consent of the Majority Banks. Notwithstanding the foregoing, the rate
of interest on the Notes (other than interest accruing pursuant to (S)2.5(b)
following the effective date of any waiver by the Majority Banks of the Default
or Event of Default relating thereto), the term of the Notes, the amount of the
Commitments of the Banks, the scheduled amortization of the Loans, and the
amount of Commitment Fees or Letter of Credit Fees hereunder may not be changed,
without
<PAGE>
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the written consent of all of the Banks; except for the deactivation of Commerce
Subsidiaries pursuant to (S)8.18 hereof and the sale of Subsidiaries permitted
by (S)9.7 hereof, no Commerce Subsidiary shall be released from its obligations
under the Guaranty without the written consent of all of the Banks; the
definitions of Conversion Date, Final Maturity and Majority Banks and the
provisions of this sentence may not be amended without the written consent of
all of the Banks; a Default or Event of Default under (S)(S)9.1 (but only to the
extent of Indebtedness in excess of $500,000), 9.6, 9.8 and 10 may not be
waived, and such sections may not be amended without the written consent of all
of the Banks; and (S)(S)2.13 and 13 and any Letter of Credit Fees payable to the
Agent hereof may not be amended without the written consent of the Agent. No
waiver shall extend to or affect any obligation not expressly waived or impair
any right consequent thereon. No course of dealing or delay or omission on the
part of the Agent or any Bank in exercising any right shall operate as a waiver
thereof or otherwise be prejudicial thereto. No notice to or demand upon the
Company shall entitle the Company to other or further notice or demand in
similar or other circumstances.
(S)24. USURY PROVISION. It is not the intention of any parties to this
----- ---------
Agreement to make an agreement in violation of the laws of any applicable
jurisdiction relating to usury. Regardless of any provision of this Agreement,
neither the Agent nor any Bank shall ever be entitled to receive, collect or
apply, as interest on the Loans, any amount in excess of the maximum amount
permitted by applicable law. If under the laws of any applicable jurisdiction
there is no legal limitation on the rate of interest that may be charged with
respect to an Obligation owing to any Bank or the Agent (including the
outstanding principal amount of the Loans, unpaid interest with respect to any
Loan, or any other Obligations due and payable under any Loan Document), there
shall be no maximum amount applicable to such Obligation, notwithstanding any
reference thereto herein or in any of the Loan Documents. The existence of a
maximum amount for Obligations owing to any one Bank or the Agent shall not
cause such maximum amount to apply to the Obligations owing to any other Bank or
the Agent, the maximum amount being independently determined with respect to
each Bank or the Agent. If at any time the rate at which interest is payable to
any Bank or the Agent on any Loan exceeds the maximum amount, such Loan shall
bear interest at the maximum amount only but shall continue to bear interest at
the maximum amount until such time as the total amount of interest accrued on
such Loan equals (but does not exceed) the total amount of interest which would
have accrued thereon had there been no maximum amount applicable thereto. If at
the maturity or final payment of such Loan (whether at stated maturity, by
acceleration or prepayment or otherwise) the total amount of interest which has
then accrued or been paid thereon as provided above (the "Collected Interest")
is less than the total amount of interest which would have accrued thereon had
there been no maximum amount applicable thereto (the "Unrestricted Interest"),
then the Company shall in addition to the Collected Interest pay to each Bank or
(as the case may be) the Agent an amount equal to (a) the lesser of the
Unrestricted Interest owed or accrued for the benefit of such Bank or (as the
case may be) the Agent or the total amount of interest which would have accrued
thereon for the benefit of each Bank and the Agent had such Loan at all times
borne interest at the maximum amount, minus (b) the
<PAGE>
-79-
Collected Interest paid for the account of each Bank and the Agent). This
Section 24 shall control every other provision of all agreements pertaining to
the transactions contemplated by or contained in this Agreement and the other
Loan Documents.
(S)25. WAIVER OF JURY TRIAL. The Company hereby waives its right to a
------ -- ---- -----
jury trial with respect to any action or claim arising out of any dispute in
connection with this Agreement, the Notes or any of the other Loan Documents,
any rights or obligations hereunder or thereunder or the performance of such
rights and obligations. The Company (a) certifies that neither any
representative, agent or attorney of any Bank has represented, expressly or
otherwise, that such Bank would not, in the event of litigation, seek to enforce
the foregoing waivers and (b) acknowledges that it has been induced to enter
into this Agreement and the other Loan Documents to which it is a party by,
among other things, the mutual waivers and certifications herein.
(S)26. SEVERABILITY. The provisions of this Agreement are severable and
------------
if any one clause or provision hereof shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or unenforceability
shall affect only such clause or provision, or part thereof, in such
jurisdiction, and shall not in any manner affect such clause or provision in any
other jurisdiction, or any other clause or provision of this Agreement in any
jurisdiction.
(S)27. DELIVERY IN MASSACHUSETTS. This Agreement will not take effect
-------- -- -------------
until it has been duly executed by all parties and delivered, whether in one
fully executed document or in counterparts which together comprise one fully
executed document, to the Agent at its head office in Boston, Massachusetts.
<PAGE>
-80-
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement under
seal as of the date first set forth above.
STERLING COMMERCE, INC.
By: ______________________________
Title:
THE FIRST NATIONAL BANK
OF BOSTON, individually and
as Agent
By: ______________________________
Title:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By: ______________________________
Title:
<PAGE>
EXHIBIT 11.1
STERLING COMMERCE, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
Primary:
Average shares outstanding...................................... 74,233
Net effect of dilutive stock options--based on the treasury
stock method using average market price........................ 1,243
-------
Total......................................................... 75,475
=======
Net income...................................................... $58,392
=======
Per share amount................................................ $.77
=======
Fully diluted:
Average shares outstanding...................................... 74,233
Net effect of dilutive stock options--based on the treasury
stock method using the higher of average or year-end market
price.......................................................... 1,243
-------
Total......................................................... 75,475
=======
Net income...................................................... $58,392
=======
Per share amount................................................ $.77
=======
</TABLE>
<PAGE>
EXHIBIT 21.1
STERLING COMMERCE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
<S> <C>
DOMESTIC
- --------
Sterling Commerce, Inc., a Wyoming corporation Wyoming
Sterling Commerce (America), Inc. Delaware
Sterling Commerce (Mid America), Inc. Michigan
Sterling Commerce (Northern America), Inc. Delaware
Sterling Commerce (U.S.), Inc. Delaware
Sterling Commerce International, Inc. Delaware
Sterling Commerce Leasing, Inc. Delaware
INTERNATIONAL
- -------------
Sterling Commerce B.V. Netherlands
Sterling Commerce International SARL France
Sterling Commerce (France), SARL France
Sterling Commerce GmbH Germany
Sterling Commerce (UK) Ltd. United Kingdom
Sterling Electronic Commerce (Canada), Inc. Canada
</TABLE>
- --------
NOTES:
1. Indented names are subsidiaries of the subsidiary listed immediately above
such subsidiary.
2. Inclusion in this exhibit is not a representation that the subsidiary is a
significant subsidiary.
3. The voting shares of all subsidiaries are 100% owned by Sterling Commerce,
Inc., its subsidiaries or employee nominees.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (File No. 333-13955 and No. 333-13959) of Sterling Commerce, Inc.,
and in the related Prospectuses of our report dated November 20, 1996, with
respect to the consolidated financial statements and schedule of Sterling
Commerce, Inc. included in this Annual Report on Form 10-K for the year ended
September 30, 1996.
Ernst & Young LLP
Dallas, Texas
November 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
COMMERCE'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 23,484
<SECURITIES> 21,203
<RECEIVABLES> 61,292
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 149,994
<PP&E> 70,226
<DEPRECIATION> 27,027
<TOTAL-ASSETS> 241,680
<CURRENT-LIABILITIES> 72,835
<BONDS> 0
0
0
<COMMON> 750
<OTHER-SE> 137,437
<TOTAL-LIABILITY-AND-EQUITY> 241,680
<SALES> 267,773
<TOTAL-REVENUES> 267,773
<CGS> 54,418
<TOTAL-COSTS> 172,568
<OTHER-EXPENSES> 1,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 96,422
<INCOME-TAX> 38,030
<INCOME-CONTINUING> 58,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,392
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
