<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 1-14196
STERLING COMMERCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2623341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS 75201
(Address of principal executive offices, including zip code)
(214) 981-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of July 31, 1997
- ---------------------------- --------------------------------------
Common Stock, $.01 par value 89,643,986
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to Financial Statements
Page
----
Sterling Commerce, Inc. Consolidated Balance Sheets at June 30, 1997 and
September 30, 1996..................................................... 3
Sterling Commerce, Inc. Consolidated Statements of Operations for the
Three and Nine Months ended June 30, 1997 and 1996..................... 4
Sterling Commerce, Inc. Consolidated Statements of Stockholders' Equity
for the Nine Months Ended June 30, 1997 and 1996....................... 5
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1997 and 1996............................... 6
Sterling Commerce, Inc. Notes to Consolidated Financial Statements....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 17
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STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
A S S E T S
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $328,796 $ 23,484
Marketable securities........................ 159,351 21,203
Accounts and notes
receivable, net............................. 81,469 61,292
Amounts due from Sterling
Software.................................... 35,134
Deferred income taxes........................ 10,743 3,087
Prepaid expenses and
other current assets........................ 9,131 5,794
-------- --------
Total current assets........................ 589,490 149,994
Property and equipment, net
of accumulated depreciation
of $38,682 at June 30, 1997
and $27,027 at September 30,
1996........................................ 55,938 43,199
Computer software, net of accumulated
amortization of $48,066 at June 30,
1997 and $42,110 at September 30, 1996...... 47,605 34,404
Excess cost over net assets acquired,
net of accumulated amortization of
$3,903 at June 30, 1997 and $3,382 at
September 30, 1996.......................... 15,972 9,789
Other assets.................................. 8,273 4,294
-------- --------
$717,278 $241,680
======== ========
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Current liabilities:
Accounts payable and
accrued liabilities......................... $ 59,173 $ 34,317
Amounts due to Sterling Software............. 684
Income taxes payable......................... 6,019
Deferred revenue............................. 53,095 38,518
-------- --------
Total current liabilities.................. 118,971 72,835
Deferred income taxes......................... 16,493 23,135
Other noncurrent
liabilities.................................. 11,726 7,523
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; 89,568,986 shares
issued and outstanding June 30, 1997;
75,000,000 shares issued and outstanding
at September 30, 1996...................... 896 750
Additional paid-in capital................... 502,781 98,111
Retained earnings............................ 66,411 39,326
-------- --------
Total stockholders' equity................. 570,088 138,187
-------- --------
$717,278 $241,680
======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
<S> <C> <C> <C> <C>
Products............................... $ 27,241 $22,295 $ 72,551 $ 57,503
Product support........................ 17,447 14,093 49,748 41,354
Services............................... 36,954 27,384 103,044 74,974
Royalties from affiliated companies.... 6,156 5,453 16,758 13,620
-------- -------- -------- --------
87,798 69,225 242,101 187,451
Costs and expenses:
Cost of sales:
Products and product support.......... 9,107 6,977 25,392 20,406
Services.............................. 8,966 6,718 24,808 18,541
-------- -------- -------- --------
18,073 13,695 50,200 38,947
Product development and enhancement.... 7,147 4,187 18,409 11,252
Selling, general and administrative.... 32,484 27,684 90,805 70,844
Purchased research and development.... 31,879 31,879
Reorganization costs................... 15,810 15,810
-------- -------- -------- --------
105,393 45,566 207,103 121,043
-------- -------- -------- --------
Income (loss) before other income and
income taxes........................... (17,595) 23,659 34,998 66,408
Other income............................ 6,022 521 9,895 312
-------- -------- -------- --------
Income (loss) before income taxes....... (11,573) 24,180 44,893 66,720
Provision for (benefit of) income taxes. (4,097) 9,430 17,492 26,446
-------- -------- -------- --------
Net income (loss)....................... $ (7,476) $14,750 $ 27,401 $ 40,274
======== ======== ======== ========
Income (loss) per common share:
Net income (loss):
Primary................................ $(.08) $.19 $.33 $.54
======== ======== ======== ========
Fully diluted.......................... $(.08) $.19 $.33 $.53
======== ======== ======== ========
Average common shares outstanding....... 89,492 75,000 81,516 73,975
======== ======== ======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NUMBER ADDITIONAL TOTAL
OF PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------ ----- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996............. 75,000 $750 $ 98,111 $39,326 $138,187
Net income............................... 27,401 27,401
Issuance of common stock for cash........ 14,375 144 400,001 400,145
Issuance of common stock for acquisition. 194 2 4,998 5,000
Other.................................... (329) (316) (645)
------ ---- -------- ------- --------
Balance at June 30, 1997.................. 89,569 $896 $502,781 $66,411 $570,088
====== ==== ======== ======= ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30
--------------------
1997 1996
--------- --------
<S> <C> <C>
Operating activities:
Net income............................. $ 27,401 $40,274
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 21,953 15,833
Provision for losses on accounts
receivable........................... 1,223 635
Provision for (benefit of) deferred
income taxes......................... (14,298) 4,443
Purchased research and development.... 31,879
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Increase in accounts and notes
receivable............................. (21,145) (10,078)
Decrease (increase) in amounts due from
Sterling Software...................... 35,818 (11,750)
Increase in prepaids and other assets... (6,549) (1,668)
Increase in accounts payable, accrued
liabilities and income taxes payable... 14,858 4,862
Increase in deferred revenue............ 10,162 6,235
Other................................... 4,203 478
--------- --------
Net cash provided by operating
activities............................. 105,505 49,264
Investing activities:
Purchases of property and equipment.... (23,995) (18,755)
Purchases and capitalized cost of
development of computer software...... (10,076) (9,286)
Purchases of investments............... (145,139) (21,428)
Maturities of investments.............. 10,003
Business acquisitions, net of cash
acquired.............................. (30,486) (185)
--------- --------
Net cash used in investing activities... (199,693) (49,654)
Financing activities:
Issuance of common stock............... 400,145 40,118
Net cash distributed to Sterling
Software.............................. (17,819)
Other.................................. (645) (598)
--------- --------
Net cash provided by financing
activities............................. 399,500 21,701
--------- --------
Increase in cash and cash equivalents... 305,312 21,311
Cash and cash equivalents at beginning
of period.............................. 23,484 395
--------- --------
Cash and cash equivalents at end of
period................................. $ 328,796 $ 21,706
========= ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Commerce, Inc. and its wholly owned subsidiaries (collectively the "Company")
after elimination of all significant intercompany balances and transactions.
Certain amounts for periods ended prior to June 30, 1997 have been reclassified
to conform to the current year presentation. The financial statements have been
prepared in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results may
differ from the assumptions used by management in preparation of the financial
statements.
Revenue
Revenue from license fees for software products is recognized when the
software is delivered, provided no significant future vendor obligations exist
and collection is probable. If software product transactions include the right
to receive future products, a portion of the software product revenue is
deferred and recognized as products are delivered. Services revenue and revenue
from products involving installation or other services are recognized as the
services are performed. Royalties revenue represents royalties earned from
Sterling Software, Inc. and certain of its subsidiaries (collectively "Sterling
Software") 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.
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2. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments
(consisting only of normal recurring entries) necessary for a fair presentation
of the financial position, results of operations and cash flow for the periods
presented. Results of operations for the periods presented herein are not
necessarily indicative of results of operations for the entire year.
3. GENERAL INFORMATION
Initial Public Offering and Distribution
The Company was incorporated in December 1995 as a subsidiary of Sterling
Software. The Company completed its initial public offering (the "Offering") of
Common Stock, $.01 par value, of the Company ("Common Stock") on March 13,
1996. Pursuant to the Offering, the Company sold to the public 1,800,000
previously unissued shares of Common Stock and Sterling Software sold to the
public 12,000,000 of the 73,200,000 shares of Common 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 Common Stock held by Sterling Software on September 30, 1996, payable
pro rata to the holders of record of Sterling Software's common stock, $.10 par
value, 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.
Follow-On Public Offering
On February 28, 1997, the Company completed a public offering (the "Follow-
On Offering") of 14,375,000 previously unissued shares of Common Stock. The net
proceeds of $400,145,000 were added to the Company's working capital and are
being used for general corporate purposes, which includes acquisitions. Pending
such use, the funds are invested in investment grade debt securities and other
marketable securities.
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
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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 and Phillip A. Moore serve as Executive Vice Presidents of both
companies. Neither the specific time period nor the capacity or capacities in
which such executive officers may continue to 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, 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 utilizes 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 applicable 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
then-existing ownership interest in the Company, the terms of such agreements
were not the result of arm's-length negotiation. The Intercompany Agreements
include an International Marketing Agreement, a Tax Allocation Agreement, an
Indemnification Agreement and a Space Sharing Agreement. The International
Marketing Agreement, which was scheduled to expire in March 1999, was terminated
effective as of June 30, 1997 by mutual agreement of the parties (see "Note 4.
Termination of International Marketing Agreement" below). Pursuant to the
International Marketing Agreement, Sterling Software had acted as the exclusive
distributor of certain of the Company's products in markets outside the United
States and Canada. The International Marketing Agreement provided for the
payment of royalties by Sterling Software to the Company equal to 50% of the
revenue that Sterling Software derived from licenses of the Company's
interchange and communications software products and related product support
services. The Tax Allocation Agreement provides that for periods during which
the Company and/or its subsidiaries were included in Sterling Software's
consolidated federal income tax returns or consolidated, combined or unitary
state tax returns, 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 Indemnification Agreement provides 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 ruling request that would cause the
Distribution to be taxable to Sterling Software or its stockholders. The
Indemnification Agreement also provides that each party will indemnify the other
party for
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<PAGE>
certain other liabilities, including those relating to the business, operations
or assets conducted or owned by the indemnifying party. The Space Sharing
Agreement defines the terms pursuant to which the Company and Sterling Software
are allowed to utilize a portion of certain of each other's office facilities
for a fee.
4. TERMINATION OF INTERNATIONAL MARKETING AGREEMENT
Sterling Commerce B.V. ("SCBV"), a wholly owned subsidiary of the Company,
entered into an agreement (the "Termination Agreement") with Sterling Software
International, Inc. ("SSII"), a wholly owned subsidiary of Sterling Software,
terminating the International Distributor Agreement between SCBV and SSII dated
March 4, 1996, as amended (the "International Marketing Agreement") effective
as of June 30, 1997. SCBV, together with other Company subsidiaries, are now
responsible for distributing the Company's products outside the United States
and Canada. Under the Termination Agreement, SCBV, directly or through other
Company subsidiaries, acquired certain assets and assumed certain liabilities
associated with the distribution of the Company's products by SSII. SCBV and
other Company subsidiaries also hired certain Sterling Software employees, most
of whom had been dedicated to the sales and marketing of the Company's products.
Under the terms of the Termination Agreement, SCBV paid SSII $5,226,000 for
early termination of the International Marketing Agreement. Under the terms of
the Termination Agreement, SCBV is also obligated to pay to SSII approximately
$10,076,000, which amount is equal to the net book value of certain assets of
SSII acquired (principally accounts receivable), and certain liabilities of SSII
assumed, by SCBV and other Company subsidiaries related to the international
distribution of the Company's products. In addition, SCBV and SSII entered into
certain short-term transitional arrangements related to the use of certain
facilities and certain administrative and other services.
The Company has recorded the $5,226,000 payment and other costs of
approximately $9,252,000 to integrate the international distribution business
formerly conducted by SSII into the Company's operations as reorganization
costs in the accompanying statement of operations for the three-and nine-month
periods ended June 30, 1997.
5. BUSINESS COMBINATIONS
In February 1997, the Company acquired for cash all of the outstanding
stock of Comfirst S.A. ("Comfirst") a Paris, France based provider of
communication and file transfer software. The acquisition has been accounted
for using the purchase method of accounting.
In May, 1997, the Company acquired Automated Catalogue Services L.P.
("ACS"), a provider of electronic product catalogs and information databases
delivered via CD-ROM and the Internet. The aggregate purchase price was
approximately $45,000,000 consisting of $28,800,000 in cash, 193,986 shares of
Common Stock valued at approximately $5,000,000, and promissory notes due
January 2, 1998, having an aggregate principal amount of approximately
$11,200,000. In addition, the Company incurred cash costs directly related to
the acquisition of
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approximately $585,000. The acquisition has been accounted for using the
purchase method of accounting.
The results of operations of Comfirst and ACS are included in the Company's
results of operations from the dates of the respective acquisitions. In
addition, the results of operations for the three- and nine-month periods ended
June 30, 1997 include a charge of $31,879,000, representing the portion of the
purchase prices of Comfirst and ACS attributed to in-process research and
development, which is charged to expense in accordance with purchase accounting.
The results of operations for the three- and nine-month periods ended June 30,
1997 also include a charge for costs of approximately $1,332,000 to integrate
the Comfirst and ACS businesses into the Company's operations.
6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share" ("FASB No. 128"). The Company will be
required to adopt FASB No. 128 for periods ending after December 15, 1997. Until
that time, the Company will continue to apply the requirements of APB No. 15 for
earnings per share.
Pro forma earnings (loss) per share as calculated under FASB No. 128 would
be as follows
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma earnings (loss) per share:
Basic......................................... $(.08) $ .20 $ .34 $ .54
Diluted....................................... $(.08) $ .19 $ .33 $ .54
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Total revenue increased $18,573,000 or 27%, in the third quarter of 1997
over the same period of 1996 due to a 22% increase in products revenue, a 24%
increase in product support revenue, a 35% increase in services revenue and a
13% increase in royalties from Sterling Software. The increase in products
revenue is primarily the result of increased sales of communications and
interchange software products. For the three months ended June 30, 1997, 71%
of the Company's software product revenue was for products that run on hardware
platforms other than mainframe hardware. This compares to 66% for the three
months ended June 30, 1996. Product support revenue increased primarily as a
result of an increase in the installed customer base across all product lines.
The increase in services revenue is primarily due to an increase in the commerce
services customer base, increases in the processing volume for existing
customers and certain price increases applied to processed transactions. The
increase in royalties revenue is the result of an increase in product sales and
product support revenue outside of the United States and Canada.
Total costs and expenses increased $59,827,000 in the third quarter of 1997
over the same period of 1996 due in large part to the charge of $47,689,000 for
purchased in-process research and development and reorganization costs in the
third quarter of 1997 related to the acquisition of Comfirst, ACS and the
international distribution operations acquired from Sterling Software.
The components of the reorganization costs consist of:
<TABLE>
<S> <C>
Early termination payment............................ $ 5,226,000
Transaction costs and professional fees.............. 3,100,000
Severance and transition costs....................... 2,400,000
Other................................................ 5,084,000
-----------
$15,810,000
</TABLE>
Excluding this charge, total costs and expenses increased $12,138,000 or
27%, on revenue growth of 27%. This percentage increase in total costs and
expenses is due to a 32% increase in costs of sales, a 17% increase in selling,
general and administrative costs and to a lesser extent a 71% increase in
product development and enhancement expense compared with the same period of
last year.
Cost of sales increased $4,378,000 or 32%, when compared with the same
period of last year, primarily due to increases in depreciation and
amortization. These increases are the result of an increase in property and
equipment purchases as well as the amortization associated with the release of
new software products. In addition, cost of sales increased commensurately with
higher levels of products, product support and services revenue.
Product development and enhancement expense increased $2,960,000 or 71%,
when compared with the same period of last year. Product development and
enhancement expense of $7,147,000 for the third quarter of 1997 is net of
$3,496,000 of capitalized software development costs. This compares to product
development and enhancement expense of $4,187,000 for the third quarter of 1996,
which is net of $3,048,000 of capitalized software development costs for that
period. The increase in product development and enhancement expense is due to
the increased investment in developing new and enhanced products primarily to
address new technologies, including client-server and the Internet. Total
software development costs capitalized during the third quarter of 1997 and 1996
represent 33% and 42% of total product
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development and enhancement costs for the quarter ended June 30, 1997 and 1996,
respectively. Software amortization expense is $2,928,000 and $2,371,000 for the
third quarter of 1997 and 1996, respectively.
Selling, general and administrative expense increased $4,800,000 or 17%,
when compared with the same period of last year, primarily due to an increase in
sales, marketing and administrative support activities needed to support the
revenue growth and also due to higher administrative expenses associated with
being a separate public company.
Loss before other income and income taxes was $17,595,000 in the third
quarter of 1997 as compared to income before other income and income taxes of
$23,659,000 for the same period of 1996 due to the $18,573,000 increase in
revenues offset by the $59,827,000 increase in total costs and expenses
including non-recurring charges of $47,689,000 for purchased in-process research
and development and reorganization costs in the third quarter of 1997 related to
the acquisition of Comfirst, ACS and the international distribution operations
acquired from Sterling Software. Other income increased $5,501,000 in the third
quarter of 1997 over the same period of 1996, primarily due to an increase in
investment income resulting from a higher average balance of investments in
cash, cash equivalents and marketable securities. Excluding the non-recurring
charges, income before income taxes increased $11,936,000, or 49%, in the third
quarter of 1997 compared to the same period of 1996.
Provision for (benefit of) income taxes decreased $13,527,000 in the third
quarter of 1997 over the same period of 1996, primarily due to the benefit of
income taxes related to the non-recurring charges as detailed above, offset by
increased income taxes on income excluding these non-recurring charges.
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
Total revenue increased $54,650,000 or 29%, in the first nine months of
1997 over the same period of 1996 due to a 26% increase in products revenue, a
20% increase in product support revenue, a 37% increase in services revenue and
a 23% increase in royalties from Sterling Software. The increase in products
revenue is primarily the result of increased sales of communications and
interchange software products. For the nine months ended June 30, 1997, 64% of
the Company's software product revenue was for products that run on hardware
platforms other than mainframe hardware, the same percentage as for the nine
months ended June 30, 1996. Product support revenue increased primarily as a
result of an increase in the installed customer base across all product lines.
The increase in services revenue is primarily due to an increase in the commerce
services customer base, increases in the processing volume for existing
customers and certain price increases applied to processed transactions. The
increase in royalties revenue is the result of an increase in product sales and
product support revenue outside of the United States and Canada.
Total costs and expenses increased $86,060,000 in the first nine months of
1997 over the same period of 1996 due in part to the charge of $47,689,000 for
purchased in-process research
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and development and reorganization costs in the third quarter of 1997 related to
the acquisition of Comfirst, ACS and the international distribution operations
acquired from Sterling Software. Excluding this charge, total costs and expenses
increased $38,371,000 or 32%, on revenue growth of 29%. This percentage increase
in total costs and expenses is due to a 29% increase in cost of sales, a 28%
increase in selling, general and administrative costs and to a lesser extent a
64% increase in product development and enhancement expense compared with the
same period last year.
Cost of sales increased $11,253,000 or 29%, when compared with the same
period of last year, primarily due to increases in depreciation and
amortization. These increases are the result of an increase in property and
equipment purchases as well as the amortization associated with the release of
new software products. In addition, cost of sales increased commensurately with
higher levels of products, product support and services revenue.
Product development and enhancement expense increased $7,157,000 or 64%,
when compared with the same period of last year. Product development and
enhancement expense of $18,409,000 for the first nine months of 1997 is net of
$9,832,000 of capitalized software development costs. This compares to product
development and enhancement expense of $11,252,000 for the first nine months of
1996, which is net of $8,789,000 of capitalized software development costs for
that period. The increase in product development and enhancement expense is due
to the increased investment in developing new and enhanced products primarily to
address new technologies, including client-server and the Internet. Total
software development costs capitalized during the first nine months of 1997 and
1996 represent 35% and 44% of total product development and enhancement costs
for the nine-month period ended June 30, 1997 and 1996, respectively. Software
amortization expense is $8,751,000 and $7,273,000 for the first nine months of
1997 and 1996, respectively.
Selling, general and administrative expense increased $19,961,000 or 28%,
when compared with the same period of last year, primarily due to an increase in
sales, marketing and administrative support activities needed to support the
revenue growth and also due to higher administrative expenses associated with
being a separate public company.
Income before other income and income taxes was $34,998,000 in the first
nine months of 1997 as compared to income before other income and income taxes
of $66,408,000 for the same period of 1996 due to the $54,650,000 increase in
revenues offset by the $86,060,000 increase in total costs and expenses
including non-recurring charges of $47,689,000 for purchased in-process research
and development and reorganization costs in the third quarter of 1997 related to
the acquisition of Comfirst, ACS and the international distribution operations
acquired from Sterling Software. Other income increased $9,583,000 in the first
nine months of 1997 over the same period of 1996, primarily due to an increase
in investment income resulting from a higher average balance of investments in
cash, cash equivalents and marketable securities. Excluding the non-recurring
charges, income before income taxes increased $25,862,000, or 39%, in the first
nine months of 1997 compared to the same period of 1996.
-14-
<PAGE>
Provision for income taxes decreased $8,954,000 in the first nine months of
1997 over the same period of 1996, primarily due to the benefit of income taxes
related to the non-recurring charges as detailed above, offset by increased
income taxes on income excluding these non-recurring charges.
LIQUIDITY AND CAPITAL RESOURCES
On February 28, 1997, the Company completed the Follow-On Offering of
14,375,000 shares of Common Stock. The net proceeds of $400,145,000 were added
to the Company's working capital and are being used for general corporate
purposes, including acquisitions. Pending such use, the funds are invested in
investment grade debt securities and other marketable securities.
The Company had $470,519,000 of working capital at June 30, 1997, including
$328,796,000 of cash and cash equivalents and $159,351,000 of marketable
securities. Days sales outstanding, measured on a quarterly basis, increased
from 72 days for the quarter ended March 31, 1997 to 90 days for the quarter
ended June 30, 1997 due in large part to the receivables purchased from Sterling
Software pursuant to the termination of the International Marketing Agreement.
Excluding the impact of these purchased receivables, days sales outstanding,
measured on a quarterly basis, improved from 72 days for the quarter ended March
31, 1997 to 70 days for the quarter ended June 30, 1997. Net cash flows from
operations increased $56,241,000 to $105,505,000 in the first nine months of
1997 as compared to the first nine months of 1996, primarily due to collection
of amounts due from Sterling Software combined with higher non-cash operating
costs, accounts payable, accrued liabilities, income taxes and deferred
revenues, offset by higher accounts receivable, prepaid expenses and other
current assets. Cash flows from operations were used to fund operations and
capital expenditures including capitalized software. Property and equipment
purchases of $23,995,000 in the first nine months of 1997 include purchases made
for equipment upgrades for processing systems and computer equipment purchases
to support the continuing growth in revenue.
The Company has amended its existing Revolving Credit and Term Loan
Agreement ("Amended Loan Agreement"). The Amended Loan Agreement provides for a
domestic borrowing capacity of $20,000,000 and an additional $10,000,000
international borrowing capacity. Pursuant to the amendment, an underlying
letter of credit facility was expanded to provide for letters of credit up to
the full domestic borrowing capacity. The Amended Loan Agreement, with final
maturity October 1, 1999, is unsecured and contains various restrictive
covenants on the Company, including limitations on additional borrowings,
payment of dividends and acquisitions. The Amended Loan Agreement also requires
that the Company maintain certain financial ratios. Borrowings under the Amended
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, for borrowings
obtained for fixed periods of time, LIBOR plus one-half percent (1/2 %). There
were no amounts borrowed or outstanding under the Amended Loan Agreement, nor
the underlying letter of credit facility, as of June 30, 1997.
At June 30, 1997, the Company's capital resource commitments consisted of
commitments under lease arrangements for office space and equipment. The Company
presently
-15-
<PAGE>
intends to meet such obligations from internally generated funds and available
cash balances. In connection with the acquisition of ACS (see "Note 5. Business
Combinations"), the Company issued notes in the aggregate principal amount of
approximately $11,200,000 maturing January 2, 1998 bearing interest, payable in
arrears, at a fixed rate of 5.5% per annum. Subsequent to June 30, 1997, these
notes, plus accrued interest, were paid in full. The Company has no significant
commitments for future capital expenditures. The Company believes available
balances of cash, cash equivalents and short-term investments combined with cash
flows from operations and amounts available under the Amended Loan Agreement are
sufficient to meet the Company's working capital requirements relating to its
existing operations for the foreseeable future.
OTHER MATTERS
Demand for many of the Company's products tends to improve with increased
inflation as customers strive to increase employee productivity and reduce
costs. However, the effect of inflation on the Company's relatively labor-
intensive cost structure could adversely affect its results of operations to the
extent the Company is not able to recover increased operating costs through
increased prices and product licensing.
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 contributes
in part to the Company's growth in revenue and operating profit. The impact of
any 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, words such as "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
-16-
<PAGE>
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 estimates or
assumptions prove incorrect, actual results or outcomes may vary significantly
from those anticipated, believed, estimated, expected, intended or planned.
-17-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
10.1 -- Termination Agreement, dated June 30, 1997, by and between
Sterling Software International, Inc. and Sterling Commerce
B.V. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 30, 1997.)
10.2 -- Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan.
10.3 -- Amendment and Modification Agreement to the Revolving Credit
and Term Loan Agreement
11.1 -- Computation of Earnings per Share
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
During the three-month period ended June 30, 1997, the Company
filed a current report on Form 8-K dated May 7, 1997 reporting
information under Item 5.
On July 1, 1997, the Company filed a current report on Form 8-K
dated June 30, 1997 reporting information under Item 5.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING COMMERCE, INC.
Date: August 13, 1997 /s/ Warner C. Blow
-----------------------------------------------
Warner C. Blow
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1997 /s/ Steven P. Shiflet
-----------------------------------------------
Steven P. Shiflet
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
INDEX TO EXHIBITS
10.1 -- Termination Agreement, dated June 30, 1997, by and between Sterling
Software International, Inc. and Sterling Commerce B.V. (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated June 30, 1997.)
10.2 -- Sterling Commerce, Inc. Amended and Restated 1996 Stock Option Plan.
10.3 -- Amendment and Modification Agreement to the Revolving Credit and Term
Loan Agreement
11.1 -- Computation of Earnings per Share
27.1 -- Financial Data Schedule
<PAGE>
EXHIBIT 10.2
STERLING COMMERCE, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
----------------------
Sterling Commerce, Inc., a Delaware corporation (the "Company"),
established the Sterling Commerce, Inc. 1996 Stock Option Plan (the "Plan"),
effective as of February 12, 1996. The Plan was last amended and restated,
effective as of June 30, 1997.
1. Purpose. The purpose of the Plan is to attract and retain the best
-------
available talent and encourage the highest level of performance by executive
officers, key employees, Prospective Key Employees (as defined below),
directors, advisors and consultants, and to provide them with incentives to put
forth maximum efforts for the success of the Company's business, in order to
serve the best interests of the Company and its stockholders. All options
granted under the Plan are intended to be nonstatutory stock options.
2. Definitions. The following terms, when used in the Plan with initial
-----------
capital letters, will have the following meanings:
(a) "Act" means the Securities Exchange Act of 1934, as in effect from
time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as in effect from
time to time.
(d) "Common Stock" means the common stock, par value $.01 per share,
of the Company or any security into which such common stock may be changed
by reason of any transaction or event of the type described in Paragraph 6.
(e) "Date of Grant" means the date specified by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable,
on which a grant of Stock Options will become effective (which date will
not be earlier than the date on which such committee or the Board takes
action with respect thereto).
(f) "Market Value per Share" means the fair market value per share of
the Common Stock on the Date of Grant as determined by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable.
(g) "Option Price" means the purchase price per share payable on
exercise of a Stock Option.
<PAGE>
(h) "Participant" means a person who is selected by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable,
to receive Stock Options under Paragraph 5 of the Plan and who is at that
time (i) an executive officer or other key employee or Prospective Key
Employee of the Company or any Subsidiary, (ii) an advisor or consultant to
the Company or any Subsidiary, or (iii) a member of the Board.
(i) "Prospective Key Employee" means a person to whom the Company or
any Subsidiary has extended or intends to extend an offer of employment.
(j) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act, as such
Rule is in effect from time to time.
(k) "Special Stock Option Committee" means the 1996 Special Stock
Option Committee which is a committee of the Board whose members are
appointed by the Board from time to time. All of the members of the Special
Stock Option Committee, which may not be less than two, are intended at all
times to qualify as "outside directors" within the meaning of
Section 162(m) of the Code and as "Non-Employee Directors" within the
meaning of Rule 16b-3; provided, however, that the failure of a member of
-------- -------
such committee to so qualify shall not be deemed to invalidate any Stock
Option granted by such committee. Although the Special Stock Option
Committee has the authority under the Plan to make grants of Stock Options
to any Participant, it is anticipated that the Special Stock Option
Committee will make grants of Stock Options to those Participants who are
executive officers of the Company and/or members of the Board, and as a
result thereof are subject to Section 16 of the Act and the rules
promulgated thereunder.
(l) "Stock Option" means the right to purchase a share of Common Stock
upon exercise of an option granted pursuant to Paragraph 5.
(m) "Stock Option Committee" means the 1996 Stock Option Committee,
which is a committee of the Board whose members are appointed by the Board
from time to time. Although the Stock Option Committee has the authority
under the Plan to make grants of Stock Options to any Participant, it is
anticipated that the Stock Option Committee will make grants of Stock
Options to those Participants who are neither executive officers of the
Company nor members of the Board, and as a result thereof are not subject
to Section 16 of the Act and the rules promulgated thereunder.
(n) "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Company owns or controls, directly or indirectly,
not less than 50% of the total combined voting power or equity interests
represented by all classes of stock issued by such corporation,
partnership, joint venture or other entity.
3. Shares Available Under Plan. The shares of Common Stock which may be
---------------------------
issued under the Plan will not exceed in the aggregate 15,000,000 shares,
subject to adjustment as provided in this Paragraph 3. Such shares may be
shares of original issuance or treasury shares or a combination of the
foregoing.
(a) Any shares of Common Stock which are subject to Stock Options that
are terminated unexercised, forfeited or surrendered or that expire for any
reason will again be available for issuance under the Plan.
2
<PAGE>
(b) If, as of the close of business on the last day of each fiscal
quarter of the Company following the initial public offering of the Common
Stock, the sum of (i) the total number of shares of Common Stock previously
issued upon the exercise of Stock Options, (ii) the total number of shares
of Common Stock then subject to outstanding Stock Options, and (iii) the
total number of shares of Common Stock then remaining available for future
Stock Option grants under the Plan (such sum being the "Plan Shares") is
less than 20% of the total number of shares of Common Stock then
outstanding computed on a fully diluted basis (such total number being the
"Outstanding Shares"), the number of shares of Common Stock available for
issuance under the Plan will be increased (but not decreased) so that the
number of Plan Shares will be equal to 20% of the number of Outstanding
Shares. For purposes of the foregoing adjustment, all outstanding Stock
Options will be treated as fully exercised in computing the number of
outstanding shares of Common Stock on a fully diluted basis, without regard
to whether the Stock Options are then fully exercisable.
(c) The shares available for issuance under the Plan also will be
subject to adjustment as provided in Paragraph 6.
4. Individual Limitation on Stock Options. The maximum aggregate number
--------------------------------------
of shares of Common Stock with respect to which Stock Options may be granted to
any Participant during the term of the Plan will not exceed 10,000,000 shares.
5. Grants of Stock Options. The Stock Option Committee, the Special
-----------------------
Stock Option Committee or the Board may from time to time authorize grants to
any Participant of Stock Options upon such terms and conditions as such
committee or the Board, as applicable, may determine in accordance with the
provisions set forth below.
(a) Each grant will specify the number of shares of Common Stock to
which it pertains.
(b) Each grant will specify the Option Price, which will not be less
than 100% of the Market Value per Share on the Date of Grant.
(c) Each grant will specify whether the Option Price will be payable
(i) in cash or by check acceptable to the Company, (ii) by the transfer to
the Company of shares of Common Stock owned by the Participant for at least
six months (or, with the consent of the Stock Option Committee, the Special
Stock Option Committee or the Board, as applicable, for less than six
months) having an aggregate fair market value per share at the date of
exercise equal to the aggregate Option Price, (iii) with the consent of the
Stock Option Committee, the Special Stock Option Committee or the Board, as
applicable, by authorizing the Company to withhold a number of shares of
Common Stock otherwise issuable to the Participant having an aggregate fair
market value per share on the date of exercise equal to the aggregate
Option Price or (iv) by a combination of such methods of payment; provided,
--------
however, that the payment methods described in clauses (ii) and (iii) will
-------
not be available at any time that the Company is prohibited from purchasing
or acquiring such shares of Common Stock. Any grant may provide for
deferred payment of the Option Price from the proceeds of sale through a
bank or broker of some or all of the shares to which such exercise relates.
3
<PAGE>
(d) Successive grants may be made to the same Participant whether or
not any Stock Options previously granted to such Participant remain
unexercised.
(e) Each grant will specify the required period or periods (if any) of
continuous service by the Participant with the Company or any Subsidiary
and/or any other conditions to be satisfied before the Stock Options or
installments thereof will become exercisable, and any grant may provide, or
may be amended to provide, for the earlier exercise of the Stock Options in
the event of a change in control of the Company (as defined in the stock
option agreement evidencing such grant or in any agreement referred to in
such stock option agreement) or in the event of any other similar
transaction or event.
(f) Each Stock Option granted pursuant to this Paragraph 5 may be made
subject to such transfer restrictions as the Stock Option Committee, the
Special Stock Option Committee or the Board, as applicable, may determine.
(g) Each Stock Option granted to a Prospective Key Employee shall
contain terms providing that such Stock Option (i) will automatically
terminate if the Participant shall not have been offered and shall not have
accepted employment with the Company or any Subsidiary within ninety (90)
days after the Date of Grant, (ii) shall in no event be exercisable prior
to the date on which the Participant becomes an employee of the Company or
any Subsidiary and (iii) shall not be transferable prior to such date.
(h) Each grant will be evidenced by a stock option agreement executed
on behalf of the Company by the Chief Executive Officer (or another officer
designated by the Stock Option Committee, the Special Stock Option
Committee or the Board, as applicable) and delivered to the Participant and
containing such further terms and provisions, consistent with the Plan, as
such committee or the Board, as applicable, may approve.
6. Adjustments. The Stock Option Committee, the Special Stock Option
-----------
Committee or the Board may make or provide for such adjustments in the maximum
number of shares specified in Paragraph 3, in the number of shares of Common
Stock covered by outstanding Stock Options granted hereunder, in the Option
Price applicable to any such Stock Options, and/or in the kind of shares covered
thereby (including shares of another issuer), as such committee or the Board, as
applicable, in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of
Participants that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities or
any other corporate transaction or event having an effect similar to any of the
foregoing. In the event the Stock Option Committee and the Special Stock Option
Committee shall disagree (or either or both shall disagree with the Board) with
respect to the foregoing adjustments, the Board's determination will be final
and conclusive. Any fractional shares resulting from the foregoing adjustments
will be eliminated.
4
<PAGE>
7. Withholding of Taxes. To the extent that the Company is required to
--------------------
withhold federal, state, local or foreign taxes in connection with any benefit
realized by an optionee under the Plan, or is requested by an optionee to
withhold additional amounts with respect to such taxes, and the amounts
available to the Company for such withholding are insufficient, it will be a
condition to the realization of such benefit that the optionee make arrangements
satisfactory to the Company for payment of the balance of such taxes required or
requested to be withheld. In addition, if permitted by the Stock Option
Committee, the Special Stock Option Committee or the Board, an optionee may
elect to have any withholding obligation of the Company satisfied with shares of
Common Stock that would otherwise be transferred to the optionee on exercise of
the Stock Option.
8. Administration of the Plan. (a) The Plan will be administered by the
--------------------------
Stock Option Committee, the Special Stock Option Committee and the Board. For
purposes of any action taken by the Stock Option Committee, the Special Stock
Option Committee or the Board, whichever is applicable, a majority of the
members will constitute a quorum, and the action of the members present at any
meeting at which a quorum is present, or acts unanimously approved in writing,
will be the acts of the Stock Option Committee, the Special Stock Option
Committee or the Board.
(b) The Stock Option Committee, the Special Stock Option Committee and
the Board have the full authority and discretion to administer the Plan and
to take any action that is necessary or advisable in connection with the
administration of the Plan, including without limitation the authority and
discretion to interpret and construe any provision of the Plan or of any
agreement, notification or document evidencing the grant of a Stock Option.
The interpretation and construction by the Stock Option Committee, the
Special Stock Option Committee or the Board, as applicable, of any such
provision and any determination by the Stock Option Committee, the Special
Stock Option Committee or the Board pursuant to any provision of the Plan
or of any such agreement, notification or document will be final and
conclusive; provided, that in the event the Stock Option Committee and the
--------
Special Stock Option Committee shall disagree (or either or both shall
disagree with the Board) with respect to such interpretation, construction
or determination, the Board's determination will be final and conclusive.
No member of the Stock Option Committee, the Special Stock Option Committee
or the Board will be liable for any such action or determination made in
good faith.
(c) Notwithstanding any provision of the Plan to the contrary, the
Special Stock Option Committee will have the exclusive authority and
discretion to take any action required or permitted to be taken under the
provisions of Paragraph 6, Paragraph 8(a), Paragraph 8(b), Paragraph 9(a)
and Paragraph 9(b) with respect to Stock Options granted under the Plan
that are intended to comply with the requirements of Section 162(m) of the
Code.
9. Amendments, Etc. (a) The Stock Option Committee, the Special Stock
----------------
Option Committee or the Board, as applicable, may, without the consent of the
optionee, amend any agreement evidencing a Stock Option granted under the Plan,
or otherwise take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock Option, to
waive any other condition or restriction applicable to such Stock Option or to
the exercise of such Stock Option, to reduce the exercise price of such Stock
Option, to amend the definition of a change in control of the Company (if such a
definition is contained in such agreement) to expand the events that would
result in a change
5
<PAGE>
in control of the Company and to add a change in control provision to such
agreement (if such provision is not contained in such agreement) and may amend
any such agreement in any other respect with the consent of the optionee.
(b) The Plan may be amended from time to time by the Board or any duly
authorized committee thereof. In the event any law, or any rule or
regulation issued or promulgated by the Internal Revenue Service, the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., any stock exchange upon which the Common Stock is listed for
trading, or any other governmental or quasi-governmental agency having
jurisdiction over the Company, the Common Stock or the Plan, requires the
Plan to be amended, or in the event Rule 16b-3 is amended or supplemented
(e.g., by addition of alternative rules) or any of the rules under Section
----
16 of the Act are amended or supplemented, in either event to permit the
Company to remove or lessen any restrictions on or with respect to Stock
Options, the Stock Option Committee, the Special Stock Option Committee and
the Board each reserves the right to amend the Plan to the extent of any
such requirement, amendment or supplement, and all Stock Options then
outstanding will be subject to such amendment.
(c) The Plan may be terminated at any time by action of the Board.
The termination of the Plan will not adversely affect the terms of any
outstanding Stock Option.
(d) The Plan will not confer upon any Participant any right with
respect to continuance of employment or other service with the Company or
any Subsidiary, nor will it interfere in any way with any right the Company
or any Subsidiary would otherwise have to terminate a Participant's
employment or other service at any time.
STERLING COMMERCE, INC.
By
---------------------------------
Name: Warner C. Blow
Title: President and Chief
Executive Officer
6
<PAGE>
EXHIBIT 10.3
AMENDMENT AND MODIFICATION AGREEMENT
AMENDMENT AND MODIFICATION AGREEMENT dated as of June 2, 1997 (this
"Amendment") by and among STERLING COMMERCE, INC., a Delaware corporation (the
"Company"); the direct and indirect subsidiaries of the Company listed on the
signature pages hereto (collectively, the "Commerce Subsidiaries"); BANKBOSTON,
N.A., formerly known as THE FIRST NATIONAL BANK OF BOSTON, AND BANK ONE, TEXAS,
NATIONAL ASSOCIATION (together the "Banks"); and BANKBOSTON, N.A., formerly
known as THE FIRST NATIONAL BANK OF BOSTON, AS AGENT (the "Agent") for the
Banks, amending certain provisions of the Revolving Credit and Term Loan
Agreement dated as of October 1, 1996 (as amended and in effect from time to
time, the "Agreement") among the Company, the Banks and the Agent and the other
Loan Documents (as defined in the Agreement). Capitalized terms not otherwise
defined herein which are defined in the Agreement shall have the respective
meanings assigned to such terms in the Agreement.
WHEREAS, the Company has requested that the Agent and the Banks amend
certain provisions of the Agreement; and
WHEREAS, upon the terms and subject to the conditions contained herein, the
Agent and the Banks are willing to amend such provisions of the Agreement and
provide such consent;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Agreement, the other Loan Documents and this Amendment and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
(S)1. AMENDMENT OF TITLE PAGE AND PREAMBLE. The title page and the
------------------------------------
preamble of the Agreement are hereby amended by deleting the text "THE FIRST
NATIONAL BANK OF BOSTON" in each place in which it appears and substituting in
lieu thereof the following text: "BANKBOSTON, N.A., formerly known as THE FIRST
NATIONAL BANK OF BOSTON".
(S)2. AMENDMENT OF (S)1.1 OF THE AGREEMENT. Section 1.1 of the
------------------------------------
Agreement is hereby amended by:
(a) deleting the definition of "Balance Sheet Date" in its
entirety and substituting in lieu thereof the following new definition:
<PAGE>
-2-
"Balance Sheet Date. September 30, 1996."
------------------
(b) deleting the definitions of "Capital Assets" and "Capital
Expenditures" in its entirety.
(c) inserting, in the place required by alphabetical order, the
following new definition:
"Cash and Cash Equivalents. Cash and cash equivalents, as
-------------------------
defined by and determined in accordance with generally accepted accounting
principles."
(d) deleting the definition of "Consolidated Current Assets" in
its entirety and substituting in lieu thereof the following new definition:
"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 treated as current assets."
(e) deleting the definition of "Consolidated Earnings Before
Interest and Taxes" in its entirety and inserting in lieu thereof the
following new definition:
"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, non-cash research and
development write-offs, interest expense and income taxes, determined in
accordance with generally accepted accounting principles."
(f) inserting in the place required by alphabetical order, the
following new definition:
"Consolidated Earnings Before Interest, Taxes, Depreciation
----------------------------------------------------------
and Amortization. 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 expenses, income taxes, non-cash research and development
write-offs, depreciation and amortization, determined in accordance with
generally accepted accounting principles."
(g) deleting the definitions of "Consolidated Net Worth",
"Consolidated Operating Income", "Consolidated Tangible Net Worth" and
"Conversion Date" in their entirety.
<PAGE>
-3-
(h) deleting the definition of "Distribution" in its entirety
and substituting in lieu thereof the following new definition:
"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, or of any rights
or options to acquire 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."
(i) inserting in the place required by alphabetical order the
following new definition:
"Environmental Governmental Rule. Any judgment, decree,
-------------------------------
order, law, license, rule or regulation pertaining to environmental
matters, including those arising under any Environmental Law."
(j) inserting in the place required by alphabetical order the
following new definition:
"FNBB. BankBoston, N.A., formerly known as The First
----
National Bank of Boston, a national banking association, in its individual
capacity."
(k) deleting the definition of "Hazardous Substances" in its
entirety and substituting in lieu thereof the following new definition.
"Hazardous Substances. 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 other toxic substances, oil or hazardous materials or
other chemicals or substances regulated by any Environmental Laws."
(l) (i) inserting the word "and" at the end of subparagraph (d)
of the definition of "Interest Period"; (ii) deleting the text ";and" at
the end of subparagraph (e) of the definition of Interest Period and
substituting in lieu thereof a period ("."); and (iii) deleting
subparagraph (f) of the definition of "Interest Period" thereof in its
entirety.
(m) inserting, in the places required by alphabetical order, the
following new definitions:
<PAGE>
-4-
"Marketable Securities. Marketable securities, as defined
---------------------
by and determined in accordance with generally accepted accounting
principles."
"Material Foreign Subsidiary. Any Subsidiary of the Company
---------------------------
or any of its Subsidiaries which (a)(i) is organized under the laws of a
jurisdiction located outside the United States or (ii) has its principal
place of business outside of the United States and (b)(i) is engaged in
business of any kind or nature, (ii) has a net worth in excess of
$5,000,000 or (iii) has issued any capital stock to any Person other than
(A) the Company or a Subsidiary of the Company, (B) de minimis directors'
----------
qualifying shares, (C) as required by law or (D) employees of such
Subsidiary in connection with stock option plans of such Subsidiary."
(n) deleting the definition of "Operating Cash Flow" in its
entirety.
(o) inserting in the places required by alphabetical order the
following new definitions:
"Potentially Responsible Party. A potentially responsible
-----------------------------
party under the Comprehensive Environmental Response, 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."
"Proceeding. A claim, action, cause of action, complaint or
----------
legal or administrative proceeding, in each case, contingent or otherwise."
"Rights. Rights issued in respect of each share of the
------
Company's common stock, par value $0.10 per share, by the Company pursuant
to the Rights Agreement."
"Rights Agreement. The Rights Agreement dated as of
----------------
December 13, 1996 between the Company and The First National Bank of Boston
(now BankBoston, N.A.), as Rights Agent, as in effect on December 13,
1996."
"Total Revenues. For any fiscal period, the total gross
--------------
revenues of the Company and its Subsidiaries, determined in accordance with
generally accepted accounting principles."
(p) deleting the definition of "Repayment Date" in its entirety.
<PAGE>
-5-
(S)3. AMENDMENT OF (S)1.2 OF THE AGREEMENT. Section 1.2 of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)1.2 is
hereby substituted in lieu thereof:
"(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 the calculation or definition of Capitalized Computer
Software Costs, Consolidated Current Assets, Consolidated Current
Liabilities, Consolidated Earnings Before Interest and Taxes, Consolidated
Earnings Before Interest, Taxes, Depreciation and Amortization,
Consolidated Net Income, Consolidated Total Assets, Consolidated Total
Liabilities, Interest Charges or Total Revenues, 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, Consolidated Current Assets, Consolidated Current
Liabilities, Consolidated Earnings Before Interest and Taxes, Consolidated
Earnings Before Interest, Taxes, Depreciation and Amortization,
Consolidated Net Income, Consolidated Total Assets, Consolidated Total
Liabilities, Interest Charges and Total Revenues, 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 Certificate delivered pursuant to (S)8.4(c) hereof
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)4. AMENDMENT OF REFERENCES TO "CONVERSION DATE" WITHIN THE
-------------------------------------------------------
AGREEMENT. Each reference to the term "Conversion Date" contained in (S)(S)2.1
- ---------
and 2.10 is hereby deleted and the term "Final Maturity" is hereby substituted
in lieu thereof.
(S)5. AMENDMENT OF (S)2.4(B) OF THE AGREEMENT. Section 2.4(b) of the
---------------------------------------
Agreement is hereby deleted in it entirety, and the following new (S)2.4(b) is
hereby substituted in lieu thereof:
<PAGE>
-6-
"(c) Each Eurodollar Rate Loan shall bear interest for the period
commending with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the rate of one-half of one percent
(1/2%) per annum above the Eurodollar Rate determined for such Interest
Period".
(S)6. AMENDMENT OF (S)2.5 OF THE AGREEMENT. Section 2.5 of the
------------------------------------
Agreement is hereby amended by deleting the text "four percent (4%)" in the
fourth line thereof, after the text "on demand at a rate per annum equal to" and
before the text "above the Base Rate" and substituting in lieu thereof the text
"two percent (2%)".
(S)7. AMENDMENT OF (S)2.9 OF THE AGREEMENT. Section 2.9 of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)2.9 is
hereby substituted in lieu thereof:
"(S)2.9. MATURITY OF THE LOANS. The Company promises to pay on
---------------------
the Final Maturity, and there shall become absolutely due and payable on
the Final Maturity, all of the Loans Outstanding on such date, together
with any and all unpaid interest thereon."
(S)8. AMENDMENT OF (S)2.11 OF THE AGREEMENT. Section 2.11 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting from clause (i) thereof the text ", if made after
the Conversion Date, shall be applied to the then maturing installments or
installments of principal of the Notes in the inverse order of maturity
and, whether made before or after the Conversion Date,".
(b) deleting clause (iv) thereof in its entirety and
substituting in lieu thereof the following new clause (iv): "(iv) amounts
so prepaid prior to the Final Maturity may be reborrowed hereunder until
the Final Maturity."
(S)9. AMENDMENT OF (S)2.12 OF THE AGREEMENT. Section 2.12 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting the text "three-eighths of one percent" from the
third and fourth lines thereof and substituting therefor the text "one-
fifth of one percent (1/5%)".
(b) deleting the text "day immediately preceding the Conversion
Date" from the fifth and sixth lines thereof and substituting in lieu
thereof the text "Final Maturity".
(c) deleting the text "Conversion Date" from the final line
thereof and substituting in lieu thereof the text "Final Maturity".
<PAGE>
-7-
(S)10. AMENDMENT OF (S)2A.1 OF THE AGREEMENT. Section 2A.1 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting the text "by the Company" from the second line of
subparagraph (a) thereof, after the text "terms and conditions hereof and
the execution and delivery" and before the text "of a".
(b) deleting the text "Conversion Date" from the eighth line of
subparagraph (a) thereof and substituting in lieu thereof the text "Final
Maturity".
(c) deleting the dollar amount "$5,000,000" from the thirteenth
line of subparagraph (a) thereof and substituting in lieu thereof the text
"the Total Commitment".
(d) deleting the text "Conversion Date" from the seventh line of
subparagraph (c) thereof and substituting in lieu thereof the text "Final
Maturity".
(S)11. AMENDMENT OF (S)2A.2 OF THE AGREEMENT. Section 2A.2 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting subparagraph (a) thereof in its entirety and
substituting in lieu thereof the following text:
"(a) except as otherwise expressly provided in (S)2A.2(b)
and (c), within one (1) 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 (1) 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 reasonable 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 (1) Business Day following the honoring of any draft
hereunder by the Agent, (x) subject to the Company's compliance
with the conditions precedent set forth in (S)6 (to the extent
applicable) and (S)7 hereof and so long as the sum of the
aggregate amount payable by the Company pursuant to clauses (i)
and (ii) above 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
----
<PAGE>
-8-
Reimbursement Obligations does not exceed the Total Commitment,
then the aggregate amount payable by the Company pursuant to
clauses (i) and (ii) above shall be deemed, at any time prior to
the Final Maturity and for all purposes of this Agreement, a Base
Rate Loan made by the Banks to the Company on the date the Agent
honored the relevant draft; and (y) in the event that no such
Base Rate Loan can be made because the sum of the amount of such
Loan 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 exceeds the Total Commitment or because the Company
has not complied or is unable to comply with the conditions
precedent set forth in (S)6 (to the extent applicable) and (S)7
hereof, 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".
(b) deleting the text "or at the Conversion Date," in the
sixth and seventh lines of subparagraph (b) thereof and
substituting in lieu thereof a comma (",").
(c) deleting the word "Each" at the end of the last
paragraph thereof and substituting in lieu thereof the following
text: "Unless funded by a Base Rate Loan or a debit of Account
No. 53279529 pursuant to (S)2A.2(a) hereof, each".
(S)12. AMENDMENT OF (S)2A.6 OF THE AGREEMENT. Section 2A.6 of the
-------------------------------------
Agreement is hereby amended by deleting the text "three quarters of one percent
(3/4%)" in the fifth line thereof and substituting in lieu thereof the text
"one-half of one percent (1/2%)".
(S)13. AMENDMENT OF (S)3.3 OF THE AGREEMENT. Section 3.3 of the
------------------------------------
Agreement is hereby amended by deleting the period (".") at the end thereof and
substituting in lieu thereof the following text:
"; provided, however, that if such Bank or, as the case may be,
-------- -------
the Agent shall fail to notify the Company or make demand within one
hundred twenty (120) days following the occurrence of any such event, such
Bank, or, as the case may be, the Agent shall not be entitled to claim any
additional amounts pursuant to this (S)3.3 for any period ending on a date
which is prior to one hundred twenty (120) days before such notification or
demand."
<PAGE>
-9-
(S)14. AMENDMENT OF (S)3.4 OF THE AGREEMENT. Section 3.4 of the
------------------------------------
Agreement is hereby amended by inserting a new paragraph at the end thereof with
the following text:
"In the event that the Agent or any Bank shall fail to notify the
Company of such losses, costs or expenses within one hundred twenty (120)
days following the incurrence of any thereof, the Agent or, as the case may
be, such Bank shall not be entitled to claim any additional amounts
pursuant to this (S)3.4 for any period ending on a date which is prior to
one hundred twenty (120) days before such notification."
(S)15. AMENDMENT OF (S)3.5 OF THE AGREEMENT. Section 3.5 of the
------------------------------------
Agreement is hereby amended by adding, at the end thereof, the following text:
"Notwithstanding anything to the contrary contained in this
(S)3.5, in the event that the Agent or any Bank shall fail to notify the
Company of any such costs of increased capital requirements within one
hundred twenty (120) days following the Agent's or such Bank's
determination thereof, the Agent or, as the case may be, such Bank shall
not be entitled to claim any additional amounts pursuant to this (S)3.5 for
any period ending on a date which is prior to one hundred twenty (120) days
before such notification.
(S)16. AMENDMENT OF (S)5.1 OF THE AGREEMENT. Section 5.1 of the
------------------------------------
Agreement is hereby amended by:
(a) deleting the text "Commerce Companies" from subparagraph (a)
thereof and inserting in lieu thereof the text "Company and the Commerce
Subsidiaries".
(b) deleting subparagraph (b) thereof in its entirety and
substituting in lieu thereof the following new subparagraph (b):
"(b) Foreign Qualification. Each of the Company and the
---------------------
Commerce Subsidiaries 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 character of the properties owned or held under lease by it,
or the nature of the business conducted by it, make such
qualification necessary, except where (i) such failure to qualify
would not have a material adverse effect on the Company or such
Commerce Subsidiary or on the enforceability against the Company
or such Commerce Subsidiary of any of the Loan Documents or (ii)
(A) such Commerce Subsidiary 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
<PAGE>
-10-
Company and such Subsidiary are using all reasonable efforts to
obtain the appropriate license, admission or qualification."
(c) deleting the text "Commerce Companies" from subparagraph (c)
thereof and inserting in lieu thereof the text "Company and the Commerce
Subsidiaries".
(S)17. AMENDMENT OF (S)5.2 OF THE AGREEMENT. Section 5.2 of the
------------------------------------
Agreement is hereby deleted in it entirety, and the following new (S)5.2 is
hereby substituted in lieu thereof.
"(S)5.2. SUBSIDIARIES. Schedule 5.2 contains 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."
(S)18. AMENDMENT OF (S)5.3 OF THE AGREEMENT. Section 5.3 of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)5.3 is
hereby substituted in lieu thereof:
"(S)5.3. CORPORATE AUTHORITY, ETC. The execution and delivery by each of
--------- --------- ---
the Company and the Commerce Subsidiaries of each of the Loan Documents to which
it is or is to become a party, the performance by each of the Company and the
Commerce Subsidiaries 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 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 (b) fifteen (15) Business Days following
receipt by the Company or such Subsidiary of forms of the Loan Documents, or
amendments thereto, as appropriate, to which such Subsidiary is to become a
party in order to become a Commerce Subsidiary), by all necessary corporate
action on the part of each of the Company and the Commerce Subsidiaries 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 Company or the Commerce Subsidiaries (other than the liens created
under any of the Loan Documents) under any agreement, trust deed,
<PAGE>
-11-
indenture, mortgage or other instrument to which any of the Company or the
Commerce Subsidiaries is or may become a party or by which any of the Company or
the Commerce Subsidiaries or any of the property of any of the Company or the
Commerce Subsidiaries is or may become bound or affected, the consequences of
which would reasonably be expected to have a material adverse effect on the
Company and the Commerce Subsidiaries 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 Company or the Commerce
Subsidiaries), except where such violation or contravention would not materially
adversely affect the Company and the Commerce Subsidiaries 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 Company or the Commerce Subsidiaries which have not been
obtained, (v) require any consents or approvals by any shareholders of any of
the Company or the Commerce Subsidiaries, 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 Company and the Commerce
Subsidiaries taken as a whole and would not have any effect in any material
respect on the enforceability of the Loan Documents."
(S)19. AMENDMENT OF (S)5.4 OF THE AGREEMENT. Section 5.4 of the
------------------------------------
Agreement is hereby amended by deleting the text "Commerce Companies" in each
place in which it appears in the first and second sentences thereof and
substituting in lieu thereof in each such place the text "Company and the
Commerce Subsidiaries".
(S)20. AMENDMENT OF (S)5.6 OF THE AGREEMENT. Section 5.6 of the
------------------------------------
Agreement is hereby amended by deleting the address "8080 North Central
Expressway, Suite 1100, Dallas, Texas 75206," and substituting in lieu thereof.
The address "300 Crescent Court, Suite 1200, Dallas, Texas 75201-7832."
(S)21. AMENDMENT OF (S)5.7 OF THE AGREEMENT. Section 5.7 of the
------------------------------------
Agreement is hereby amended by (a) deleting the date "June 30, 1996" in
subparagraph (a) thereof and substituting in lieu thereof the date "December 31,
1996", and (b) deleting the date "September 30, 1996" in subparagraph (b)
thereof and substituting in lieu thereof the date "September 30, 1997".
(S)22. AMENDMENT OF (S)5.9 OF THE AGREEMENT. Section 5.9 of the
------------------------------------
Agreement is hereby amended by deleting the text "Commerce Companies" in
<PAGE>
-12-
the second sentence thereof and substituting in lieu thereof the following text:
"Company or the Commerce Subsidiaries".
(S)23. AMENDMENT OF (S)5.11 OF THE AGREEMENT. Section 5.11 of the
-------------------------------------
Agreement is hereby amended by deleting the text "damages in excess of
$1,500,000 or which would otherwise" in the eighth line thereof and substituting
in lieu thereof the text "damages in an amount which would".
(S)24. AMENDMENT OF (S)5.13 OF THE AGREEMENT. Section 5.13 of the
-------------------------------------
Agreement is hereby amended by deleting the text "in excess of $1,000,000 in the
aggregate for the Company and its Subsidiaries" in the fifteenth and sixteenth
lines thereof and substituting in lieu thereof the text "which would reasonably
be expected materially adversely to effect the operations or the financial
condition 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 for which adequate reserves are not maintained on the consolidated
balance sheet of the Company and its Subsidiaries".
(S)25. AMENDMENT OF (S)5.14 OF THE AGREEMENT. Section 5.14 of the
-------------------------------------
Agreement is hereby amended by deleting the text "Commerce Companies" in each
place in which it appears therein and substituting in lieu thereof in each such
place the text "Company and the Commerce Subsidiaries".
(S)26. AMENDMENT OF (S)5.15 OF THE AGREEMENT. Section 5.15 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)5.15 is
hereby substituted in lieu thereof:
"(S)5.15. EMPLOYEE BENEFIT PLANS.
-------- ------- -----
(a) IN GENERAL. Each Employee Benefit Plan and each Guaranteed
-- -------
Pension 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 and the bonding of fiduciaries and other persons handling plan
funds as required by (S)412 of ERISA.
(b) TERMINABILITY OF WELFARE PLANS. No Employee Benefit Plan
------------- -- ------- -----
which is an employee welfare benefit plan within the meaning of (S)3(1) or
(S)3(2)(B) of ERISA provides benefit coverage subsequent to termination of
employment, except as required by Title I, Part 6 of ERISA or applicable state
insurance laws. 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 other than for claims arising prior to termination.
<PAGE>
-13-
(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, and neither the Borrower
nor any ERISA Affiliate is obligated to or has posted security in connection
with an amendment of a Guaranteed Pension Plan pursuant to (S)307 of ERISA or
(S)401(a)(29) of the Code. 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)9.9(e).
(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 is at risk of
entering reorganization or becoming insolvent, or that any Multiemployer Plan
intends to terminate or has been terminated under (S)4041A of ERISA."
(S)27. AMENDMENT OF (S)5.16 OF THE AGREEMENT. Section 5.16 of the
-------------------------------------
Agreement is hereby amended by deleting the text "Commerce Companies" in the
second line thereof and substituting in lieu thereof the text "Company and the
Commerce Subsidiaries".
(S)28. AMENDMENT OF (S)5.17 OF THE AGREEMENT. Section 5.17 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting the text "Commerce Companies" in each place it
occurs in the first sentence thereof and substituting in lieu thereof in
each such place the text "Company or the Commerce Subsidiaries".
<PAGE>
-14-
(b) deleting the text "Commerce Companies (other than Non-
Guarantor Subsidiaries)" in the penultimate and final lines thereof and
substituting in lieu thereof the text "Company and the Commerce
Subsidiaries".
(S)29. AMENDMENT OF (S)5.18 OF THE AGREEMENT. Section 5.18 of the
-------------------------------------
Agreement is hereby deleted in its entirety and the following new (S)5.18 is
hereby substituted in lieu thereof:
"(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 an "investment company" or a company "controlled" by an "investment
company", as such terms are defined in the Investment Company Act of 1940,
as amended."
(S)30. AMENDMENT OF (S)5.20 OF THE AGREEMENT. Section 5.20 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting the text "Commerce Companies" in the first sentence
thereof and substituting in lieu thereof the text "Company and the Commerce
Subsidiaries".
(b) deleting the text "Commerce Companies" in the second
sentence thereof and substituting in lieu thereof the text "Company or the
Commerce Subsidiaries".
(S)31. AMENDMENT OF (S)5.22 OF THE AGREEMENT. Section 5.22 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)5.22 is
hereby substituted in lieu thereof:
"(S)5.22. ENVIRONMENTAL COMPLIANCE.
------------------------
(a) To the best of the Company's knowledge, none of the Company
or the Commerce Subsidiaries, nor any of their operations, is in violation
or alleged violation of any Environmental Governmental Rule, except where
the failure so to comply would not have a material adverse effect on the
business, assets or financial condition of the Company and the Commerce
Subsidiaries taken as a whole;
(b) none of the Company or the Commerce Subsidiaries has
received notice from any third party that (i) it has been identified as a
Potentially Responsible Party, (ii) that any Hazardous Substances which any
of them has generated, transported or disposed of has been found at
<PAGE>
-15-
any site at which any third party has conducted or ordered any of the
Company or the Commerce Subsidiaries to conduct a remedial investigation,
action or response action pursuant to any Environmental Law, or (iii) that
it is or shall be named party to any Proceeding 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) to the Company's knowledge, (i) no portion of the Real
Estate has been used by any of the Company or the Commerce Subsidiaries for
the handling, processing, storage or disposal of Hazardous Substances
except in accordance with applicable Environmental Laws; and (ii) in the
course of any activities conducted by the Company or the Commerce
Subsidiaries, no Hazardous Substances have been generated on the Real
Estate or are being used except in accordance with applicable Environmental
Laws; and
(d) none of the Company or the Commerce Subsidiaries, 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)32. AMENDMENT OF (S)5.23 OF THE AGREEMENT. Section 5.23 of the
-------------------------------------
Agreement is hereby amended by:
(a) deleting the text "Commerce Companies" in the first line
thereof and substituting in lieu thereof the text "Company and the Commerce
Subsidiaries".
(b) adding the text "or are" in subparagraph (a) thereof after
the word "is" and before the word "solvent".
(c) adding the text "or have" in subparagraph (b) thereof after
the word "has" and before the text "assets having a fair salable value in
excess of ...".
(d) deleting subparagraph (c) thereof in its entirety and
substituting in lieu thereof the text "(c) has or have access to adequate
capital for the conduct of its or their business and the ability to pay its
or their debts from time to time incurred in connection therewith as such
debts mature in the reasonably foreseeable future."
<PAGE>
-16-
(S)33. AMENDMENT OF (S)8.4(d) OF THE AGREEMENT. Section 8.4(d) of the
---------------------------------------
Agreement is hereby amended by deleting the text "which is in excess of
$1,500,000" or from the tenth line thereof.
(S)34. AMENDMENT OF (S)8.5 OF THE AGREEMENT. Section 8.5 of the
------------------------------------
Agreement is hereby amended by:
(a) deleting from subparagraph (a) thereof the text "in excess
of $1,500,000," from the sixth and seventh lines thereof and inserting in
lieu thereof the text "in an amount which would reasonably be expected to
have a material adverse effect on the Company and its Subsidiaries taken as
a whole."
(b) deleting from subparagraph (b)(i) thereof the text "Commerce
Companies" and substituting in lieu thereof the text "Company or the
Commerce Subsidiaries."
(c) deleting from subparagraph (b)(ii) thereof the text
"Commerce Companies" and substituting in lieu thereof the text "Company and
the Commerce Subsidiaries."
(S)35. AMENDMENT OF (S)8.7 OF THE AGREEMENT. Section 8.7 of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)8.7 is
hereby substituted in lieu thereof:
"(S)8.7. BOOKS AND RECORDS. The Company will, and will cause
----- --- -------
each of the Commerce Subsidiaries to, (a) 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, and (b) at
all times have engaged a firm of nationally recognized independent certified
public accountants as its accountants, with no more than thirty (30) days
elapsing between the termination of any such accountants as the Company's
accountants and the engagement of successor accountants (from a firm of
nationally recognized certified public accountants)."
(S)36. AMENDMENT OF (S)8.10 OF THE AGREEMENT. Section 8.10 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)8.10 is
hereby substituted in lieu of:
"(S)8.10. CONDUCT OF BUSINESS. The Company will, and will cause
-------------------
each of the Commerce Subsidiaries to, continue to engage in the businesses
engaged in by the Company or, as the case may be, such Commerce Subsidiary,
on the Closing Date (except in the case of dispositions permitted under
(S)9.9)."
<PAGE>
-17-
(S)37. AMENDMENT OF (S)8.12(a) OF THE AGREEMENT. Section 8.12(a) of the
----------------------------------------
Agreement is hereby amended by inserting, after the text "the same by, their
respective officers" and before the text "at such reasonable times and intervals
as the Banks may designate." In the ninth and tenth lines thereof, the following
text: "and by the Company's independent certified public accountants (provided
--------
that all such discussions with the Company's independent certified public
accountants shall be made upon notice to and with the consent of the Company,
which consent shall not be unreasonably withheld),".
(S)38. AMENDMENT OF (S)8.14 OF THE AGREEMENT. Section 8.14 of the
-------------------------------------
Agreement is hereby amended by deleting the address "8080 North Central
Expressway, Suite 1100, Dallas, Texas 75206" and substituting in lieu thereof
the address "300 Crescent Court, Suite 1200, Dallas, Texas 75201-7832".
(S)39. AMENDMENT OF (S)8.16 OF THE AGREEMENT. Section 8.16 of the
--------------------------------------
Agreement is amended by:
(a) deleting from subparagraph (a) thereof (i) the text of "any
Commerce Company" from the first line thereof and substituting in lieu thereof
the text "any Commerce Subsidiary"; (ii) the text "the other Commerce Companies"
from the fifth line thereof and substituting in lieu thereof the text "the
Commerce Subsidiaries"; and (iii) the text "of the Commerce Companies" from the
eighth and ninth lines thereof and substituting in lieu thereof the text "of the
Company and the Commerce Subsidiaries".
(b) deleting from subparagraph (b) thereof (i) the text "other
Commerce Companies" in the second line thereof and substituting in lieu thereof
the text "Commerce Subsidiaries"; (ii) the text "Company and its Subsidiaries"
from the sixth, twelfth and final lines thereof and substituting in lieu thereof
the text "Company and the Commerce Subsidiaries"; (iii) the text "such Commerce
Company" from the ninth line thereof and substituting in lieu thereof the text
"the Company or such Commerce Subsidiary"; (iv) deleting the text "any Commerce
Company" from the sixteenth and seventeenth lines thereof and substituting in
lieu thereof the text "the Company or any Commerce Subsidiary"; (v) deleting the
text "such Commerce Subsidiary" from the eighteenth line thereof and
substituting in lieu thereof the text "the Company or such Commerce Subsidiary";
(vi) deleting the text "shall prevent any of the Commerce Companies" from the
twenty-second line thereof and substituting in lieu thereof the text "shall
prevent any of the Company or the Commerce Subsidiaries""; and (vii) deleting
the text "judgment of such Commerce Company" from the twenty-fourth line thereof
and substituting in lieu thereof the text "judgment of the Company or such
Commerce Subsidiary".
(S)40. AMENDMENT OF (S)9.1 OF THE AGREEMENT. Section 9.1 of the
------------------------------------
Agreement is hereby amended by:
<PAGE>
-18-
(a) deleting subsection (b) thereof in its entirety and
substituting in lieu thereof the following new subsection (b):
"(b) Indebtedness in respect of operating leases and
capitalized leases;".
(b) deleting from subsection (m) thereof (i) the text
"(S)9.5(a)(i)(B)" and substituting in lieu thereof the text "(S)9.5(a)(i)"; and
(ii) the text "and" at the end thereof.
(c) (i) deleting the text "not to exceed $20,000,000" in
subsection (n) thereof and substituting in lieu thereof the following text: "not
to exceed, when combined with sales permitted by (S)9.7(b) and (S)9.7(d)(ii),
twenty percent (20%) of Total Revenues"; and (ii) deleting the period (".") at
the end thereof and substituting in lieu thereof the text "; and".
(d) inserting, at the end thereof, a new subsection (o) with the
following text:
"(o) Indebtedness to one or more of the Banks in an
aggregate amount not to exceed $10,000,000 in respect of one or more letters of
credit issued for the account of the Company or any of the Commerce
Subsidiaries."
(S)41. AMENDMENT OF (S)9.5 OF THE AGREEMENT. Section 9.5 of the
------------------------------------
Agreement is hereby amended by:
(a) deleting the text "or which is a permitted capital
expenditure pursuant to (S)9.8)" in the third and fourth lines of (S)9.5(a)
and substituting in lieu thereof the text "or which is a capital
expenditure)".
(b) deleting (S)9.5(a)(i) in its entirety and substituting in
lieu thereof the following text:
"(i) subject to the requirements of clause (b) hereof, the
Company may effect friendly acquisitions if 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) does not exceed, in the
aggregate for all such acquisitions made, (A) as long as the sum
of Cash and Cash Equivalents plus Marketable Securities held by
----
the Company equals or exceeds $150,000,000, an amount equal to
fifty percent (50%) of the sum of Cash and Cash Equivalents plus
----
Marketable Securities held by the Company, and (B) in the event
that the sum of Cash and Cash Equivalents plus Marketable
----
Securities held by the Company is less than $150,000,000,
$75,000,000, in each case
<PAGE>
-19-
plus such additional amounts to which the Agent and the Banks may
----
from time to time agree; provided, however, that in the event
-------- -------
that the sum of Cash and Cash Equivalents plus Marketable
----
Securities is less than $150,000,000, the amount of cash or other
deferred (whether represented by promissory notes or otherwise)
portion of the purchase price shall not exceed, in the aggregate,
for all such acquisitions made, $25,000,000."
(c) deleting the text "No later than five (5) Business
Days" in the tenth line of (S)9.5(b) and substituting in lieu thereof the
text "No later than fifteen (15) Business Days".
(d) deleting the text "To the extent that any such
acquisition alters the accuracy or completeness of any of" in the twenty-
fourth and twenty-fifth lines of (S)9.5(b) and substituting in lieu thereof
the text "To the extent that any such acquisition alters in any material
respect the accuracy or completeness of any of".
(S)42. AMENDMENT OF (S)9.6 OF THE AGREEMENT. Section 9.6 of the
------------------------------------
Agreement is hereby deleted in its entirety and the following text is hereby
substituted in lieu thereof: "(S)9.6. Intentionally omitted."
(S)43. AMENDMENT OF (S)9.7 OF THE AGREEMENT. Section 9.7 of the
------------------------------------
Agreement is hereby amended by deleting subsections (b) - (f) in their entirety
and substituting in lieu thereof the following text:
"(b) Sales or other dispositions of Subsidiaries, divisions or
product lines, provided that no Default or Event of Default shall have
--------
occurred and be continuing or would occur after giving effect thereto, and
provided further that 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, when combined with other dispositions pursuant to
(S)9.7(d), exceed twenty percent (20%) of Total Revenues for such
immediately preceding twelve (12 months);
(c) Sales or other dispositions of Investments which are
Permitted Investments;
(d) (i) Sales of Commerce Accounts Receivable pursuant to the
Commerce Accounts Receivable Agreements and (ii) sales or other
dispositions of assets by any of the Commerce Companies which sales under
these clauses (d)(i) and (d)(ii), in the aggregate when combined with sales
or other dispositions of Subsidiaries, divisions or product lines
<PAGE>
-20-
permitted by (S)9.7(b), do not exceed twenty percent (20%) of Total
Revenues; and
(e) 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)44. AMENDMENT OF (S)9.9 OF THE AGREEMENT. Section 9.9 of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)9.9 is
hereby substituted in lieu thereof:
"(S)9.9. EMPLOYEE BENEFIT PLANS. Neither the 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 an amount which would reasonably be expected to have a material adverse
effect on the Company and its Subsidiaries taken as a whole, whether or not such
deficiency is or may be waived; or (ii) in the case of any Person acquired
pursuant to the terms hereof, with a Guaranteed Pension Plan subject to an
"accumulated funding deficiency" in an amount which would reasonably be expected
to have a material adverse effect on the Company and its Subsidiaries taken as a
whole, 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, pursuant to (S)302(f) or (S)4068 of ERISA, of a lien
or encumbrance on the assets of the Company in an amount which would reasonably
be expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole;
<PAGE>
-21-
(d) amend any Guaranteed Pension Plan in circumstances requiring
the posting of security pursuant to (S)307 of ERISA or (S)401(a)(29) of the Code
in an amount which would reasonably be expected to have a material adverse
effect on the Company and its Subsidiaries taken as a whole; or
(e) 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
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)45. AMENDMENT OF (S)9.12 OF THE AGREEMENT. Section 9.12 of the
--------------------------------------
Agreement is hereby amended by deleting the text "its Subsidiaries" in the
second line thereof and substituting in lieu thereof the text "the Commerce
Subsidiaries".
(S)46. AMENDMENT OF (S)9.13 OF THE AGREEMENT. Section 9.13 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)9.13 is
hereby substituted in lieu thereof:
"(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, so
-------- --------
long as no Default or Event of Default has occurred and is continuing or would
occur as a result thereof (a) the Company may repurchase shares of its own
issued and outstanding capital stock; (b) the Company may redeem Rights in
accordance with the provisions of the Rights Agreement; and (c) the Company may
make Distributions in respect of its capital stock in an aggregate amount not to
exceed $5,000,000 in any fiscal year of the Company."
<PAGE>
-22-
(S)47. AMENDMENT OF (S)10.1 OF THE AGREEMENT. Section 10.1 of the
-------------------------------------
Agreement is hereby deleted in its entirety and the following new (S)10.1 is
substituted in lieu thereof:
"(S)10.1. PROFITABILITY. The Company shall not cause or
-------------
permit (a) Consolidated Earnings Before Interest and Taxes for any fiscal
quarter of the Company to be less than $1.00 or (b) Consolidated Net Income for
any two consecutive fiscal quarters of the Company to be less than $1.00."
(S)48. AMENDMENT OF (S)10.2 OF THE AGREEMENT. Section 10.2 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)10.2 is
hereby substituted in lieu thereof:
"(S)10.2. EBIT TO INTEREST CHARGES. The Company shall not cause
------------------------
or permit the ratio of Consolidated Earnings Before Interest and Taxes to
Interest Charges for any fiscal quarter of the Company to be less than 3.0:1.0."
(S)49. AMENDMENT OF (S)10.3 OF THE AGREEMENT. Section 10.3 of the
-------------------------------------
Agreement is hereby deleted in its entirety and the following new (S)10.3 is
hereby substituted in lieu thereof:
"(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 to be less than 1.5:1.0".
(S)50. AMENDMENT OF (S)10.4 OF THE AGREEMENT. Section 10.4 of the
-------------------------------------
Agreement is hereby substituted in lieu thereof:
"(S)10.4. INTENTIONALLY OMITTED."
(S)51. AMENDMENT OF (S)10.5 OF THE AGREEMENT. Section 10.5 of the
-------------------------------------
Agreement is hereby deleted in its entirety and the following text is hereby
substituted in lieu thereof:
"(S)10.5. INTENTIONALLY OMITTED."
(S)52. AMENDMENT OF (S)10.6 OF THE AGREEMENT. Section 10.6 of the
-------------------------------------
Agreement is hereby deleted in its entirety, and the following new (S)10.6 is
hereby substituted in lieu thereof:
"(S)10.6. TOTAL DEBT TO CONSOLIDATED EARNINGS BEFORE INTEREST,
----------------------------------------------------
TAXES, DEPRECIATION AND AMORTIZATION. The Company shall not permit the ratio of
- ------------------------------------
Total Debt as of the end of any fiscal quarter to Consolidated Earnings Before
Interest, Taxes, Depreciation and Amortization for the four
<PAGE>
-23-
consecutive fiscal quarter period ending on such fiscal quarter to be greater
than 1.0:1.0."
(S)53. AMENDMENT OF (S)11 OF THE AGREEMENT. Section 11 of the Agreement
-----------------------------------
is hereby amended by:
(a) deleting the text "Commerce Companies" from subparagraph (c)
and substituting in lieu thereof the text "Company or the Commerce
Subsidiaries".
(b) deleting the text "Commerce Companies" from subparagraph (d)
thereof and substituting in lieu thereof the text "Company or the Commerce
Subsidiaries".
(c) deleting the text "Commerce Companies" from subparagraph (e)
thereof and substituting in lieu thereof the text "Company or the Commerce
Subsidiaries".
(d) (i) deleting the dollar amount "$1,000,000" in subsection
(f) thereof and substituting in lieu thereof the dollar amount
"$5,000,000"; and (ii) deleting the text "evidencing or securing borrowed
money" in the sixth line thereof and substituting in lieu thereof the text
"evidencing or securing obligations for borrowed money or in respect of
capitalized leases, which obligations exceed $5,000,000 in the aggregate,".
(e) deleting the text "any of the Company or its Subsidiaries"
from each place it appears in subparagraph (g) thereof and substituting in
lieu thereof in each such place the text "any of the Company, the Commerce
Subsidiaries or the Material Foreign Subsidiaries".
(f) deleting subparagraph (h) thereof in its entirety and
substituting in lieu thereof the following new subparagraph (h):
"(h) if a decree or order is entered appointing any such
trustee, custodian, liquidator or receiver or adjudicating any of the
Company, the Commerce Subsidiaries or the Material Foreign 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, any Commerce Subsidiary or any Material Foreign Subsidiary in an
involuntary case under Federal bankruptcy laws as now or hereafter
constituted; ".
(g) deleting the text "exceeds in the aggregate $1,000,000;" in
subsection (i) thereof and substituting in lieu thereof the following text:
"equals or exceeds an amount which could reasonably be expected materially
adversely to affect the transactions contemplated hereby or the operations
or
<PAGE>
-24-
the financial condition of the Company and its Subsidiaries, taken as a
whole, or materially to impair the right of the Company and its
Subsidiaries, considered as a whole, to carry on business substantially as
now conducted by them;".
(h) deleting the text "Commerce Companies" from subparagraph (j)
thereof and substituting in lieu thereof the text "Company or the Commerce
Subsidiaries".
(i) deleting the text "Commerce Companies" in subparagraph (l)
thereof and substituting in lieu thereof the text "Company or the Commerce
Subsidiaries".
(j)(i) deleting the text "Commerce Companies" from the first
line of subparagraph (m) thereof and substituting in lieu thereof the text
"Company or the Commerce Subsidiaries", (ii) deleting the text "Commerce
Companies" from the sixth line thereof and substituting in lieu thereof the
text "Company and the Commerce Subsidiaries"; and (iii) deleting the text
"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" and substituting in lieu thereof the
text "at any facility of any of the Company or the Commerce Subsidiaries
and which has a material adverse effect on the business or financial
condition of the Company and the Commerce Subsidiaries taken as a whole;".
(k)(i) deleting the text "Commerce Companies" from subparagraph
(n) thereof and substituting in lieu thereof the text "Company or the
Commerce Subsidiaries"; and (ii) deleting the text "such Commerce Company"
and substituting in lieu thereof the text "the Company or such Commerce
Subsidiary".
(l) deleting subparagraph (o) in its entirety and substituting
in lieu thereof the following new subparagraph (o):
"(o) any of the Company or the Commerce Subsidiaries shall
be indicted for a state or federal crime, or any civil or
criminal action shall otherwise have been brought or threatened
in writing (with the basis for such threatened action specified
therein) against any of the Company or the Commerce Subsidiaries,
a punishment for which in any such case could include the
forfeiture of any assets of the Company or such Commerce
Subsidiary having a fair market value in excess of an amount
which could reasonably be expected materially adversely to affect
the transactions contemplated hereby or the operations or the
financial condition of the Company and the Commerce Subsidiaries,
taken as a whole, or materially to impact the
<PAGE>
-25-
right of the Company and the Commerce Subsidiaries considered as
a whole, to carry on business substantially as now conducted by
them;".
(m) deleting from subparagraph q(ii) thereof the dollar
amount "$1,000,000" and substituting in lieu thereof the dollar
amount "$5,000,000;"
(S)54. AMENDMENT OF (S)14 OF THE AGREEMENT. Section 14 of the Agreement
-----------------------------------
is hereby amended by: (a) deleting the text "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)" in the fifth and sixth lines thereof and substituting in lieu
thereof the following text: "or filing fees payable by the Agent, any of its
Affiliates, or any of the Banks (other than taxes based upon the Agent's, such
Affiliate's or any Bank's net income)"; and (b) inserting the text ",
syndication" in the eleventh line thereof after the words "preparation,
administration" and before the words "or interpretation of this Agreement".
(S)55. AMENDMENT OF (S)18(a) OF THE AGREEMENT. Section 18(a) of the
--------------------------------------
Agreement is hereby amended by (a) deleting the address "8080 North Central
Expressway, Suite 1100, Dallas, Texas 75206, Attention: George Ellis" and
substituting in lieu thereof the following new address: "300 Crescent Court,
Suite 1200, Dallas, Texas 75201-7832, Attention: Steven P. Shiflet"; and (b)
deleting the remaining reference to "Steve Shiflet" in subparagraph (a) thereof
and substituting in lieu thereof the name "Steven P.Shiflet".
(S)56. AMENDMENT OF (S)23 OF THE AGREEMENT. Section 23 of the Agreement
-----------------------------------
is hereby amended by (a) deleting the text "Conversion Date" in the twenty-first
line thereof and (b) deleting the text "9.8" in the twenty-fourth line thereof
and substituting in lieu thereof the text "9.13".
(S)57. AMENDMENT OF SCHEDULES 1.1, 1.4, 1.5, 5.2, 5.6, 5.9, 5.11, 5.13
---------------------------------------------------------------
AND 5.20 TO THE AGREEMENT AND EXHIBIT D TO THE AGREEMENT. Schedules 1.1, 1.4,
- -------------------------------------------------------- -------------- ----
1.5, 5.2, 5.6, 5.9, 5.11, 5.13 and 5.20 to the Agreement and Exhibit D to the
- --------------------------------------- ---------
Agreement are hereby deleted in their entirety, and Schedules 1.1, 1.4, 1.5,
------------------------
5.2, 5.6, 5.9, 5.11, 5.13 and 5.20 and Exhibit D attached hereto are
- ---------------------------------- ---------
respectively hereby substituted in lieu thereof. The substitution of additional
schedules in connection with this Amendment shall be deemed to satisfy the
Company's obligations under the waiver letter dated as of May 5, 1997 among the
Company, the Agent, the Banks and the Commerce Subsidiaries which were
signatories thereto to provide updated versions of Schedules 5.2, 5.6, 5.11,
-------------------------
5.13 and 5.20 to the Agreement.
- --------------
(S)58. AGREEMENT REGARDING NEW GUARANTORS. Each of the Company, the
----------------------------------
Commerce Subsidiaries, the Agent and the Banks hereby acknowledges and agrees
that, pursuant to the Amendment to Guaranty dated as of May 30, 1997 among
Sterling Commerce (U.S.), Inc. ("Sterling Commerce (U.S.)"), Sterling Commerce
(Eastern), Inc. ("Eastern") and Sterling Commerce (U.S.), L.P. (Sterling
<PAGE>
-26-
Commerce, L.P."), and together with Sterling Commerce (U.S.) and Eastern, the
("New Commerce Subsidiaries"), the Company, the Commerce Subsidiaries originally
party to the Guaranty and the Agent, each of the New Commerce Subsidiaries is a
guarantor under the Guaranty and a Commerce Subsidiary, as defined in and for
all purposes of the Agreement and the other Loan Documents.
(S)59. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to
---------------------------
be effective as of June 2, 1997 (the "Effective Date") upon the Agent's receipt
on or before June 30, 1997, of each of the following, in form and substance
satisfactory to the Agent and the Banks:
(a) facsimile copies of original counterparts (to be followed
promptly by original counterparts) or original counterparts of this
Amendment, duly executed by each of the Company, the Commerce Subsidiaries,
the Agent and the Banks;
(b) authorizing resolutions and incumbency certificates for each
of the Company and the Commerce Subsidiaries, authorizing such entity's
execution and delivery of, and the performance of its obligations under,
this Amendment, certified by the Secretary or other authorized officer of
such entity;
(c) copies of the charter documents and by-laws or partnership
agreement of each of the Company and the Commerce Subsidiaries, certified
by the Secretary or other authorized officer of such entity or a
certificate of the Secretary or other authorized officer of each of the
Company and the Commerce Subsidiaries, certifying that the copies of the
charter documents and by-laws or partnership agreement of such entity
previously delivered to the Agent and the Banks remain in effect and have
not been modified, amended, rescinded or revoked; and (d) recent good
standing certificates for each of the Company and the Commerce Subsidiaries
from the jurisdiction of its incorporation.
(d) recent good standing certificates for each of the Company
and the Commerce Subsidiaries from the jurisdiction of its incorporation.
(S)60. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each
---------------------------------------------------------
of the Company and the Commerce Subsidiaries hereby represents and warrants to
each of the Agent and the Banks as follows:
(a) Each of the representations and warranties of the Company
and the Commerce Subsidiaries contained in the Agreement, the other Loan
Documents or in any document or instrument delivered pursuant to or in
connection with the Agreement, the other Loan Documents or this Amendment
was true as of the date as of which it was made, and no Default or Event of
Default has occurred and is continuing as of the date of this Amendment;
and
<PAGE>
-27-
(b) This Amendment has been duly authorized, executed and
delivered by the Company and each of the Commerce Subsidiaries, and shall
be in full force and effect upon the satisfaction of the conditions set
forth in (S)59 hereof, and the agreements of the Company and each of the
Commerce Subsidiaries, contained herein, in the Agreement, as herein or
heretofore amended, or in the other Loan Documents, as heretofore amended,
respectively constitute the legal, valid and binding obligations of the
Company and each of the Commerce Subsidiaries, party hereto or thereto,
enforceable against the Company or such Commerce Subsidiary, in accordance
with their respective terms.
(S)61. RATIFICATION, ETC. Except as expressly amended hereby, the
-----------------
Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. All references in the Agreement or
such other Loan Documents or in any related agreement or instrument to the
Agreement or such other Loan Documents shall hereafter refer to such agreements
as amended hereby, pursuant to the provisions of the Agreement.
(S)62. NO IMPLIED WAIVER, ETC. Except as expressly provided herein,
----------------------
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any of the Obligations, any other obligations of the Company or any of
the Commerce Subsidiaries or any right of the Agent or the Banks consequent
thereon. The amendments provided herein are limited strictly to their terms.
Neither the Agent nor any of the Banks shall have any obligation to issue any
further amendment with respect to the subject matter hereof or any other matter.
(S)63. COUNTERPARTS. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)64. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED
-------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CHOICE OR CONFLICTS OF LAWS).
<PAGE>
-28-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
BANKBOSTON, N.A.,
FORMERLY KNOWN AS
THE FIRST NATIONAL BANK
OF BOSTON, individually
and as Agent
By:
----------------------------------------------------
Title:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
----------------------------------------------------
Title:
STERLING COMMERCE, INC.
By: /s/ Steven P. Shiflet
----------------------------------------------------
Steven P. Shiflet
Senior Vice President, CFO and Treasurer
<PAGE>
-29-
Each of the undersigned hereby acknowledges the foregoing Amendment as of the
Effective Date and agrees that its obligations under the Guaranty will extend to
the Agreement, as so amended, and the other Loan Documents, as so amended.
STERLING COMMERCE
(NORTHERN AMERICA), INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
STERLING COMMERCE
(AMERICA), INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
STERLING COMMERCE
INTERNATIONAL, INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
STERLING COMMERCE (MID AMERICA),
INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
<PAGE>
-30-
STERLING COMMERCE (U.S.), INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
STERLING COMMERCE (EASTERN), INC.
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
STERLING COMMERCE (U.S.), L.P.,
BY: STERLING COMMERCE (U.S.), INC.,
ITS GENERAL PARTNER
By: /s/ DAVID A. MYERS
----------------------------------------------------
David A. Myers
Assistant Treasurer
<PAGE>
STERLING COMMERCE, INC. EXHIBIT 11.1
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, 1997 ENDED JUNE 30, 1997
------------------- -------------------
<S> <C> <C>
Primary:
Average shares outstanding.............. 89,492 81,516
Net effect of dilutive stock
options-based on the treasury stock
method using average market price...... 2,150
------- -------
Total................................... 89,492 83,666
======= =======
Net income (loss)....................... $(7,476) $27,401
======= =======
Per share amount........................ $ (.08) $ .33
======= =======
Fully diluted:
Average shares outstanding.............. 89,492 81,516
Net effect of dilutive stock
options-based on the treasury stock
method using the higher of average or
quarter-end market price............... 2,564
------- -------
Total................................... 89,492 84,080
======= =======
Net income (loss)....................... $(7,476) $27,401
======= =======
Per share amount........................ $ (.08) $ .33
======= =======
</TABLE>
Computational Note:
In connection with the computation of loss per share for the three months
ended June 30, 1997, all otherwise dilutive common share equivalents have been
excluded because the impact on the Company's net loss per share is anti-
dilutive. In the absence of this net loss, 1,936 and 2,633 additional dilutive
common share equivalents would be included in the computation of primary and
fully-diluted earnings per share, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
COMMERCE INC FROM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 328,796
<SECURITIES> 159,351
<RECEIVABLES> 81,469
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,874
<PP&E> 94,620
<DEPRECIATION> 38,682
<TOTAL-ASSETS> 717,278
<CURRENT-LIABILITIES> 118,971
<BONDS> 0
0
0
<COMMON> 896
<OTHER-SE> 569,192
<TOTAL-LIABILITY-AND-EQUITY> 717,278
<SALES> 242,101
<TOTAL-REVENUES> 242,101
<CGS> 50,200
<TOTAL-COSTS> 207,103
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 44,893
<INCOME-TAX> 17,492
<INCOME-CONTINUING> 27,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,401
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
