<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 December 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 1-14196
STERLING COMMERCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2623341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(Address of principal executive offices, including zip code)
(214) 891-8680
(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 January 15, 1997
- ---------------------------- -----------------------------------------
Common Stock, $.01 par value 75,000,000
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to Financial Statements
Page
----
Sterling Commerce, Inc. Consolidated Balance Sheets at
December 31, 1996 and September 30, 1996......................... 3
Sterling Commerce, Inc. Consolidated Statements of Income for the
Three Months Ended December 31, 1996 and 1995.................... 4
Sterling Commerce, Inc. Consolidated Statements of Stockholders'
Equity for the Three Months Ended December 31, 1996 and 1995..... 5
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1996 and 1995.................... 6
Sterling Commerce, Inc. Notes to Consolidated Financial Statements....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 12
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION............................................... 16
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)
(UNAUDITED)
A S S E T S
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1996
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......... $ 79,060 $ 23,484
Marketable securities............. 11,200 21,203
Accounts and notes
receivable, net.................. 59,027 61,292
Amounts due from Sterling
Software......................... 3,050 35,134
Deferred income taxes............. 2,507 3,087
Prepaid expenses and
other current assets............. 8,133 5,794
-------- --------
Total current assets............. 162,977 149,994
Property and equipment,
net of accumulated
depreciation of $29,872 at
December 31, 1996 and
$27,027 at September 30,
1996.............................. 47,373 43,199
Computer software, net of
accumulated amortization
of $45,092 at
December 31, 1996 and
$42,110 at September 30,
1996.............................. 34,673 34,404
Excess cost over net
assets acquired, net of
accumulated amortization
of $3,489 at December 31,
1996 and $3,382 at
September 30, 1996................ 9,682 9,789
Other assets....................... 5,182 4,294
-------- --------
$259,887 $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.............. $ 29,512 $ 34,317
Income taxes payable.............. 8,509
Deferred revenue.................. 37,163 38,518
-------- --------
Total current
liabilities.................... 75,184 72,835
Deferred income taxes.............. 23,420 23,135
Other noncurrent
liabilities....................... 7,420 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;
75,000,000 shares issued
and outstanding.................. 750 750
Additional paid-in capital........ 97,780 98,111
Retained earnings................. 55,333 39,326
-------- --------
Total stockholders'
equity......................... 153,863 138,187
-------- --------
$259,887 $241,680
======== ========
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31
------------------
1996 1995
-------- --------
<S> <C> <C>
Revenue:
Products............................... $22,189 $16,063
Product support........................ 15,549 13,477
Services............................... 32,417 23,127
Royalties from affiliated companies.... 4,614 3,483
------- -------
74,769 56,150
Costs and expenses:
Cost of sales:
Products and product support.......... 7,992 6,348
Services.............................. 7,743 5,568
------- -------
15,735 11,916
Product development and enhancement.... 5,071 3,288
Selling, general and administrative.... 28,950 20,255
------- -------
49,756 35,459
------- -------
Income before other income (expense)
and income taxes....................... 25,013 20,691
Other income (expense).................. 1,058 (210)
------- -------
Income before income taxes.............. 26,071 20,481
Provision for income taxes.............. 10,011 8,192
------- -------
Net income.............................. $16,060 $12,289
======= =======
Income per common share:
Net income:
Pro forma.............................. $0.17
=======
Primary................................ $0.21
=======
Fully diluted.......................... $0.21
=======
Weighted average and pro forma common
shares outstanding..................... 75,000 73,200
======= =======
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NUMBER ADDITIONAL SHAREHOLDERS' TOTAL
OF PAR PAID-IN RETAINED NET STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS INVESTMENT EQUITY
-------- ------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995........... $53,187 $ 53,187
Net income............................. 12,289 12,289
Net cash distributed to Sterling
Software.............................. (6,189) (6,189)
Other................................. 315 315
------- --------
Balance at December 31, 1995............ $59,602 $ 59,602
======= ========
Balance at September 30, 1996........... 75,000 $750 $98,111 $39,326 $138,187
Net income............................. 16,060 16,060
Other.................................. (331) (53) (384)
------ ---- ------- ------- --------
Balance at December 31, 1996............ 75,000 $750 $97,780 $55,333 $153,863
====== ==== ======= ======= ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31
------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income............................. $16,060 $12,289
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 6,747 4,887
Provision for losses on accounts
receivable.......................... 743 153
Provision for deferred income taxes.. 865 921
Changes in operating assets and
liabilities:
Decrease in accounts and notes
receivable....................... 366 108
Decrease in amounts due from
Sterling Software................ 32,084
Increase in prepaids and other
assets........................... (2,279) (2,202)
Increase in accounts payable,
accrued liabilities and income
taxes payable.................... 3,713 279
(Decrease) increase in deferred
revenue.......................... (1,355) 221
Other............................. 18 123
------- -------
Net cash provided by operating
activities...................... 56,962 16,779
Investing activities:
Purchases of property and equipment.... (7,584) (4,597)
Purchases and capitalized cost of
development of computer software...... (3,257) (2,935)
Sales of investments, net............ 10,003
Other................................ (185)
------- -------
Net cash used in investing
activities...................... (838) (7,717)
Financing activities:
Other.................................. (548) 259
------- -------
Net cash (used in) provided by
financing activities............ (548) 259
Net cash distributed to Sterling
Software............................... (6,189)
------- -------
Increase in cash and cash equivalents... 55,576 3,132
Cash and cash equivalents at beginning
of period.............................. 23,484 395
------- -------
Cash and cash equivalents at end of
period................................. $79,060 $ 3,527
======= =======
</TABLE>
See accompanying notes.
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STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Commerce, Inc. and its wholly owned subsidiaries (collectively the "Company")
after elimination of all significant intercompany balances and transactions.
Certain amounts for periods ended prior to December 31, 1996 have been
reclassified to conform to the current year presentation. The financial
statements have been prepared in conformity with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from the 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 international distributors of certain of the Company's
products outside of the United States and Canada.
Product support contracts entitle the customer to telephone support,
bug fixing and the right to receive software updates as they are released.
Revenue from product support contracts, including product support included in
initial license fees, is recognized ratably over the contract period. All
significant costs and expenses associated with product support contracts are
expensed as incurred, which approximates ratable expenses over the contract
period.
When products, product support and services are billed prior to the
time the related revenue is recognized, deferred revenue is recorded and related
costs paid in advance are deferred.
Earnings Per Share
Pro forma net income per common share is calculated as though there
were 73,200,000 shares outstanding throughout the period presented. Primary and
fully diluted income per common share is calculated as though there were
75,000,000 shares outstanding together with common stock equivalents.
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<PAGE>
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 and results of operations for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year.
3. 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 ("Commerce Stock")
on March 13, 1996. Pursuant to the Offering, the Company sold to the public
1,800,000 previously unissued shares of Commerce Stock and Sterling Software
sold to the public 12,000,000 of the 73,200,000 shares of Commerce Stock then
owned by it.
In contemplation of the Offering, among other things: (i) Sterling
Software caused to be transferred to the Company certain assets relating to the
electronic commerce business previously conducted by Sterling Software, and (ii)
the Company entered into contractual arrangements with Sterling Software related
to, among other things, tax allocation, international marketing,
indemnification, space sharing and certain services. See "Shared Management and
Contractual Arrangements with Sterling Software."
On September 23, 1996, the Board of Directors of Sterling Software
declared a special dividend consisting of the distribution (the "Distribution")
of all shares of Commerce Stock held by Sterling Software on September 30, 1996,
payable pro rata to the holders of record of Sterling Software's common stock,
$0.10 par value, as of the close of business on such date. As a result,
effective September 30, 1996, the Company ceased to be a subsidiary of Sterling
Software.
Shared Management and Contractual Arrangements with Sterling Software.
Management
The Board of Directors of the Company (the "Board") currently has
seven members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are
directors of the Company and are also directors of Sterling Software. Mr.
Sterling L. Williams serves as Chairman of the Board of the Company and as
President and Chief Executive Officer and a member of the Board of Directors of
Sterling Software. In addition, Jeannette P. Meier serves as Executive Vice
President, General Counsel and Secretary of both companies and the Chief
Financial Officer of Sterling Software, and Phillip A. Moore serves as an
Executive Vice President 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.
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The Company and Sterling Software have significant contractual and
other ongoing relationships as discussed below under "Intercompany Agreements."
Conflicts of interest may arise between the Company and Sterling Software in a
number of areas relating to such ongoing relationships, including potential
competitive business activities, international marketing functions, tax and
employee benefit matters, indemnity arrangements, and the continued service of
certain directors and executive officers of each of the Company and Sterling
Software as directors and executive officers of the other company. The Board
will utilize such procedures in evaluating the terms and provisions of any
material transactions between the Company and Sterling Software and their
respective affiliates as the Board may determine appropriate in light of its
fiduciary duties under 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 defines the terms pursuant to which Sterling
Software acts as the exclusive distributor through March 1999 of certain of the
Company's products in markets outside the United States and Canada. The
International Marketing Agreement provides for the payment of royalties by
Sterling Software to the Company equal to 50% of the revenue that Sterling
Software derives 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 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.
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<PAGE>
4. CHANGE IN CONTROL AND SEVERANCE AGREEMENTS
As of December 31, 1996, the Company had change-in-control agreements
with fourteen officers that provide for payments, based on each such officer's
respective salary, bonus and cash incentive compensation, and certain other
benefits in the event a change in control (as defined) of the Company occurs and
such officer's employment is terminated. In addition, pursuant to the change-in-
control agreements with such officers and separate agreements with two
directors, if any payments (including payments under the change-in-control
agreements) to any such individual are determined to be "excess parachute
payments" under the Internal Revenue Code of 1986, as amended (the "Code"), such
individual would be entitled to receive an additional payment to compensate such
individual for the excise tax imposed by the Code on such payments. (See Item 5
of Part II of this report) As of December 31, 1996, the maximum liability for
amounts payable under all of these agreements would have been approximately
$35,500,000.
As of December 31, 1996, the Company had severance agreements with
thirteen officers of the Company that provide for payments, based on each such
officer's respective salary and bonus, and for continuation of certain benefits.
In addition, the Company has entered into an agreement with the Chairman of the
Board of the Company that provides for an annual base salary plus agreed-upon
bonuses and benefits, which agreement converts to a seven-year consulting
agreement upon the occurrence of certain events. (See Item 5 of Part II of this
report) As of December 31, 1996, the aggregate commitment for future salaries,
bonuses and benefits under all of these agreements would have been approximately
$18,600,000.
5. RIGHTS PLAN
On December 18, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Commerce Stock
of the Company outstanding at the close of business on December 31, 1996 (the
"Record Date"), pursuant to the terms of a Rights Agreement, dated as of
December 18, 1996 (the "Rights Plan"). The Rights Plan also provides, subject
to specified exceptions and limitations, that shares of Commerce Stock issued
after the Record Date will be entitled to and accompanied by Rights. Pursuant
to the Rights Plan, one Right to purchase 1/100th of a share of Series A Junior
Participating Preferred Stock ("Junior Preferred Share") (structured so as to be
substantially the equivalent of a share of Commerce Stock) is attached to each
issued and outstanding share of Commerce Stock. Subject to certain conditions,
each Right entitles the holder to purchase 1/100th of a Junior Preferred Share
at a price (the "Purchase Price") of $200.00 per 1/100th of a Junior Preferred
Share (subject to adjustment).
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In general, the Rights will not become exercisable, or transferable
apart from the shares of Commerce Stock, unless a person or group of affiliated
or associated persons becomes the beneficial owner of, or commences a tender
offer that would result in beneficial ownership of, 15% or more of the
outstanding shares of Commerce Stock (any such person or group of persons being
referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under
certain circumstances, each Right (other than any Rights that are or were
beneficially owned by an Acquiring Person, which Rights will be void) could
become exercisable to purchase at the Purchase Price a number of shares of
Commerce Stock (or, in certain circumstances, the common stock of a company into
which the Company is merged or consolidated or to which the Company sells all or
substantially all of its assets) having a market value equal to two times the
Purchase Price. The Rights will expire on December 31, 2006, unless earlier
redeemed by the Company at a redemption price of $.01 per Right (subject to
adjustment), or otherwise exchanged or amended in accordance with the terms of
the Rights Plan.
6. SUBSEQUENT EVENT
The Company has filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the purpose of effecting a public
offering of 12,500,000 shares of Commerce Stock, plus up to an additional
1,875,000 shares of Commerce Stock issuable pursuant to an over-allotment option
to be granted to the underwriters by the Company. The net proceeds of such
proposed offering will be added to the Company's working capital and used for
general corporate purposes, which may include acquisitions. Pending such use,
the Company currently intends to invest the proceeds in short-term, investment
grade debt securities and other marketable securities. Such proposed offering is
presently expected to be completed in the second quarter of 1997.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Total revenue increased $18,619,000, or 33%, in the first quarter of
1997 over the same period of 1996 due to a 38% increase in products revenue, a
15% increase in product support revenue, a 40% increase in services revenue and
a 32% 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 December 31, 1996,
51% of the Company's software product revenue was for products that run on
hardware platforms other than mainframe hardware. This compares to 62% for the
three months ended December 31, 1995. This deviation from prior trends was
caused primarily by increased sales of mainframe communications software to the
federal government in the current quarter compared to the same quarter of the
prior year where, due in part to the federal government shutdowns, there were no
significant sales to the federal government. 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 $14,297,000, or 40%, on revenue
growth of 33%. The percentage increase in total costs and expenses is primarily
due to a 43% increase in selling, general and administrative costs and to a
lesser extent a 54% increase in product development and enhancement expense.
Cost of goods sold increased $3,819,000, or 32%, when compared with
the same period of last year 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 $1,783,000, or
54%, when compared with the same period of last year. Product development and
enhancement expense of $5,071,000 for the first quarter of 1997 is net of
$3,232,000 of capitalized software development costs. This compares to product
development and enhancement expense of $3,288,000 for the first quarter of 1996,
which is net of $2,934,000 of capitalized software development costs for the
same period. Total software development costs capitalized during the first
quarter of 1997 and 1996 represent 39% and 47% of total product development and
enhancement expense for the quarter ended December 31, 1996 and 1995,
respectively. Software amortization expense is $2,988,000 and $2,183,000 for
the first quarter of 1997 and 1996, respectively.
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Selling, general and administrative expense increased $8,695,000, or
43%, 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.
Other income increased $1,268,000 in the first 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $87,793,000 of working capital at December 31, 1996,
including $79,060,000 of cash and cash equivalents. Days sales outstanding,
measured on a quarterly basis, remained virtually unchanged at 76 days for the
quarter ended December 31, 1996, when compared with 75 days for the quarter
ended September 30, 1996. Net cash flows from operations increased $40,183,000
to $56,962,000 in the first three months of 1997 as compared to the first three
months of 1996, primarily due to collection of amounts due from Sterling
Software combined with higher operating profits and higher non-cash charges.
Cash flows from operations were used to fund operations and capital expenditures
including capitalized software. Property and equipment purchases of $7,584,000
in the first three months of 1997 include purchases made for equipment upgrades
for processing systems and computer equipment purchases to support the
continuing growth in revenue.
Effective October 1, 1996, the Company entered into a Revolving Credit
and Term Loan Agreement ("Loan Agreement") with a domestic borrowing capacity of
$20,000,000. The Loan Agreement also provides for an additional $10,000,000
international borrowing capacity. The Loan Agreement is unsecured and contains
various restrictions on the Company, including limitations on additional
borrowings, payment of dividends, acquisitions and capital expenditures. The
Loan Agreement also requires that the Company maintain certain financial ratios.
Borrowings under the Loan Agreement bear interest at the higher of the lender's
prime rate, the Federal Funds Effective Rate plus one-half percent (1/2%) or
LIBOR plus one and three-quarters percent (1 3/4%). Borrowings, if any,
outstanding on October 1, 1998 will convert to a term loan requiring four
payments in substantially equal installments due at the end of each subsequent
quarter. There were no amounts borrowed or outstanding under the Loan Agreement
as of December 31, 1996. At December 31, 1996, after utilization of
approximately $300,000 for standby letters of credit, approximately $29,700,000
was available for borrowing on the Loan Agreement.
At December 31, 1996, the Company's capital resource commitments
consisted of commitments under lease arrangements for office space and
equipment. The Company presently intends to meet such obligations from
internally generated funds and available cash balances. No significant
commitments exist for future capital expenditures. The Company believes
available balances of cash, cash equivalents and short term investments combined
with cash flows from operations and amounts available under the Loan Agreement
are sufficient to meet the
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<PAGE>
Company's working capital requirements relating to its existing operations for
the foreseeable future.
The Company has filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the purpose of effecting a public
offering of 12,500,000 shares of Commerce Stock, plus up to an additional
1,875,000 shares of Commerce Stock issuable pursuant to an over-allotment option
to be granted to the underwriters by the Company. The net proceeds of such
proposed offering will be added to the Company's working capital and used for
general corporate purposes, which may include acquisitions. Pending such use,
the Company currently intends to invest the proceeds in short-term, investment
grade debt securities and other marketable securities. Such proposed offering is
presently expected to be completed in the second quarter of 1997.
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
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<PAGE>
development and other risks and uncertainties including, in addition to any
uncertainties specifically identified in the text surrounding such statements,
uncertainties with respect to changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances and conditions
and actions taken or omitted to be taken by third parties, including the
Company's stockholders, customers, suppliers, business partners, competitors and
legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying estimates or assumptions prove incorrect, actual results
or outcomes may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.
- 15 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The Company has amended (i) the agreement (the "Chairman Agreement")
with Sterling L. Williams (Chairman of the Board), which converts to a
consulting agreement and provides certain employment and other benefits in the
event the Company or, in certain circumstances, Mr. Williams terminates his
employment as Chairman of the Board of the Company, (ii) the agreements
("Severance Agreements") with each of Warner C. Blow (President and Chief
Executive Officer), Jeannette P. Meier (Executive Vice President, General
Counsel and Secretary) and Steven P. Shiflet (Senior Vice President and Chief
Financial Officer), which provide certain compensation and benefits in the event
the Company terminates such executive officers' employment with the Company, and
(iii) the agreements (the "Change-in-Control Agreements") with each of Sterling
L. Williams, Warner C. Blow, Jeannette P. Meier and Steven P. Shiflet, which
provide certain compensation and benefits in the event of the termination of
such executive officers' employment with the Company following a change in
control (as defined). Copies of the Chairman Agreement and the forms of
Severance Agreement and Change-in-Control Agreement have been filed as exhibits
to the Company's Annual Report on Form 10-K for the year ended September 30,
1996 and are incorporated herein by this reference. The amendments referred to
above, in general, increase the amount of compensation and benefits which such
executive officers would be entitled to receive following the termination of
their employment with the Company from five years (or five times) to seven years
(or seven times), respectively, for Mr. Williams; from four years (or four
times) to five years (or five times), respectively, for Mr. Blow; from three
years (or three times) to four years (or four times), respectively, for Ms.
Meier; and from one year (or one time) to two years (or two times),
respectively, for Mr. Shiflet.
The Company has also entered into an agreement with each of Sam Wyly
and Charles J. Wyly, Jr., directors of the Company (the "Director Agreements").
The Director Agreements provide that if any amounts paid or payable by the
Company to such directors following a change in control (as defined) are
determined to be "excess parachute payments" under the Code, such directors
would be entitled to receive an additional payment to compensate such directors
for the excise tax imposed by the Code on such payments.
The foregoing descriptions of (i) the amendments to the Chairman
Agreement and (ii) the Director Agreements, are qualified in their entirety by
reference to the copies of such agreements, which are filed as exhibits to this
report and incorporated herein by this reference.
Effective January 31, 1997, the Company and Sterling Software entered
into an amendment to the International Marketing Agreement which, in part,
confirms the right of the Company's International Group to market, only in
connection with its services offerings, certain GENTRAN PC products that enable
and facilitate usage of such services.
- 16 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report
on Form 10-Q:
3.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Registration No. 333-
20565))
4.1 -- Rights Agreement, dated December 18, 1996, by and between the
Company and The First National Bank of Boston, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated December 18, 1996)
10.1 -- Revolving Credit and Term Loan Agreement dated as of October 1,
1996 among the Company and The First National Bank of Boston,
as agent, and Bank One, Texas, National Association
(incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended September 30,
1996)
10.2 -- Amendment No. 1 to the International Distributor Agreement
dated as of January 31, 1997, between Sterling Commerce B.V.
and Sterling Software International, Inc. (a/k/a the
International Marketing Agreement)
10.3 -- Form of Director Agreement dated as of January 27, 1997,
between the Company and each of Sam Wyly and Charles J. Wyly,
Jr.
10.4 -- Amendment to CEO Agreement dated as of December 1, 1996,
between the Company and Sterling L. Williams
11.1 -- Computation of Earnings Per Share
27 -- Financial Data Schedule
(b) Reports on Form 8-K.
During the three-month period ended December 31, 1996, the Company
filed Current Reports on Form 8-K, dated September 30, 1996 and
December 18, 1996. Each such report included information requested
under Item 5--Other Events.
- 17 -
<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: January 31, 1997 /s/ Warner C. Blow
--------------------------------------------
Warner C. Blow
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 31, 1997 /s/ Steven P. Shiflet
--------------------------------------------
Steven P. Shiflet
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
- 18 -
<PAGE>
INDEX TO EXHIBITS
3.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Registration No. 333-20565))
4.1 -- Rights Agreement, dated December 18, 1996, by and between the
Company and The First National Bank of Boston, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated December 18, 1996)
10.1 -- Revolving Credit and Term Loan Agreement dated as of October 1,
1996 among the Company and The First National Bank of Boston, as
agent, and Bank One, Texas, National Association (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the year ended September 30, 1996)
10.2 -- Amendment No. 1 to the International Distributor Agreement dated
as of January 31, 1997, between Sterling Commerce B.V. and
Sterling Software International, Inc. (a/k/a the International
Marketing Agreement)
10.3 -- Form of Director Agreement dated as of January 27, 1997, between
the Company and each of Sam Wyly and Charles J. Wyly, Jr.
10.4 -- Amendment to CEO Agreement dated as of December 1, 1996, between
the Company and Sterling L. Williams
11.1 -- Computation of Earnings Per Share
27 -- Financial Data Schedule
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 1
---------------
TO
INTERNATIONAL DISTRIBUTOR AGREEMENT
BETWEEN
STERLING COMMERCE INTERNATIONAL, INC.
AND
STERLING SOFTWARE INTERNATIONAL, INC.
THIS AMENDMENT NO. 1 (this "Amendment") is made and entered into as of
January 31, 1997, by and between Sterling Commerce B.V., a private limited
liability company organized and existing under the laws of The Netherlands
("SCII"), and Sterling Software International, Inc., a Delaware corporation
("Distributor"). Capitalized terms used herein that are not otherwise defined
shall have the meanings ascribed to them in the Agreement (as hereinafter
defined).
WHEREAS, Sterling Commerce International, Inc., a Delaware corporation
("SC International"), was an original party to the Agreement;
WHEREAS, effective January 1, 1997, SC International assigned all of its
rights and obligations under the Agreement to SCII, a wholly owned subsidiary of
SCI; and
WHEREAS, SCII and Distributor desire to clarify and/or correct certain
provisions under the Agreement;
NOW, THEREFORE, effective as of the date hereof, the International
Distributor Agreement, dated as of March 4, 1996, between SC International and
Distributor (together with all exhibits and schedules thereto, the "Agreement"),
is hereby amended as follows:
1. References in the Agreement to SCII shall mean and refer to Sterling
Commerce B.V., a private limited liability company organized and existing under
the laws of The Netherlands.
2. The first "WHEREAS" clause of the Agreement is deleted in its entirety
and replaced with the following:
WHEREAS, Sterling Commerce (Mid America), Inc. ("ISG"), a subsidiary of
SCI, and the Communications Software Group ("CSG"), an operating group of
SCI (ISG and CSG, collectively the "SCI Companies"), market, license,
install, maintain and support certain computer software products, including
the Products (as defined below);
3. Section 1.a.: The first sentence of Section l.a. is deleted and
------------
replaced with the following:
<PAGE>
Except as otherwise provided in Section 1.d., SCII hereby grants to
Distributor, and Distributor hereby accepts from SCII, the exclusive right
to market, sublicense, install, maintain and support the Products within
the Territory, either directly and/or through such wholly owned
subsidiaries of SSW (collectively, "SSW Subdistributors") and unaffiliated
third parties (collectively, "Third-Party Subdistributors" and, together
with SSW Subdistributors, "Subdistributors") as may be appointed by
Distributor in accordance with this Section 1.a.
4. Section 1.b.: Reference to "that SCII makes available to Distributor"
------------
in the second line of Section 1.b. is deleted and replaced with "that SCII makes
available for third-party distribution within the Territory".
5. Section 1.c.: The first sentence of Section 1.c. is deleted and
------------
replaced with the following:
"Territory" means everywhere in the world except the United States of
America, its territories, Puerto Rico and Canada.
6. Section 1.d. The following Section 1.d. shall be inserted:
------------
d. Services. Distributor acknowledges that SCII markets and provides,
--------
and is not prohibited under this Agreement from marketing or
providing, directly or through third parties, Commerce Services (as
herein defined) to entities located in the Territory, and that
Distributor is not authorized to market or provide the Commerce
Services. Furthermore, Distributor acknowledges that specialized
software, such as the Enabling Software (as herein defined), is
required to enable and facilitate the use and provision of, and is an
integral part of, certain of the Commerce Services. Accordingly, and
notwithstanding anything in this Agreement to the contrary, SCII
specifically shall have the right within the Territory to directly or
indirectly market, sublicense, install, maintain and support:
(A) GENTRAN:Basic, GENTRAN:Director, GENTRAN: Integrator,
GENTRAN: SmartForms and any other similar PC software products
marketed under the GENTRAN tradename (collectively, the "Enabling
Software") the principal purpose of which is to enable or facilitate
SCII's service offerings, marketed under the COMMERCE tradename,
including without limitation COMMERCE:Network, COMMERCE:Exchange and
other substantially similar service offerings (all such services
collectively, "Commerce Services"); provided that the Enabling
Software is marketed in the Territory by SCII and/or its
subdistributors only in connection with the Commerce Services; and
(B) Products that are a component of, integrated with, embedded
in or provided as an add-on to COMMERCE:Exchange or any substantially
similar service offering of SCII or its subdistributors (collectively,
"Exchange
2
<PAGE>
Components"). Distributor shall not be entitled to any payment
hereunder with respect to Exchange Components and shall not market or
sublicense Products as Exchange Components to licensees of Commerce
Exchange or substantially similar service offerings ("Exchange
Customers"). Notwithstanding the foregoing provisions of this clause
(B), if Distributor or any Subdistributor independently brings to
SCII's attention a potential purchaser of Exchange Components not
theretofore known to SCII (or its subdistributors or affiliates),
Distributor or such Subdistributor shall be entitled to a royalty from
SCII for those Products (I) actually delivered to and licensed by such
purchaser, and (II) with respect to which Distributor or such
Subdistributor would have had full right to market and sublicense if
not a component of, embedded in or provided as an add-on to
COMMERCE:Exchange or any substantially similar service offering of
SCII or its subdistributors (the "Exchange Offerings"). The amount of
such royalty for any such referral shall be fifty percent (50%) of the
relative value attributable to such Exchange Components within the
particular Exchange Offering. In determining such value, consideration
will be given to the relative functionality and significance of the
different pieces of software contained in such Exchange Offering
(including such Exchange Components), the relative list prices of such
software and overall discounts, if any. The parties shall cooperate
and work in good faith in making such determinations.
In order to avoid interfering with SCII's Commerce Services business,
neither Distributor nor any Subdistributor shall market or sublicense
Enabling Software to the following persons or entities:
(i) A person or entity that is a party to or an express third-
party beneficiary under an agreement for the provision of
Commerce Services; or
(ii) A person or entity that is a subdistributor or remarketer of
Commerce Services or a Prospect (as herein defined). A
Prospect shall be any person or entity that is in
discussions or negotiations with SCII (or an affiliate of
SCII) to become a subdistributor or remarketer of Commerce
Services, as identified in a written notice to Distributor.
From time to time, SCII shall provide Distributor with the
list of such subdistributors and remarketers and Prospects.
Subject to the prohibitions set forth in clauses (i) and (ii) above,
Distributor and its Subdistributors may market, sublicense, install,
maintain and support Enabling Software within the Territory. Without
limiting the provisions above, in the event Distributor, an SSW
Subdistributor or Third-Party Subdistributor sublicenses (x) Enabling
Software to any of the persons or entities in clauses (i) or (ii)
above or (y) Products as Exchange Components to Exchange Customers,
the percentage royalty payable to SCII pursuant to Section 6 of this
Agreement shall be 100% in the case of a sublicense by Distributor or
an SSW Subdistributor, and 200%, in
3
<PAGE>
the case of a sublicense by a Third-Party Subdistributor.
SCII and Distributor and its Subdistributors acknowledge and agree
that they will cooperate and communicate with one another in good
faith and in a timely and responsive manner in order to promote full
compliance with the provisions of this Section 1(d) and to avoid
interfering with, and to in fact maximize, their respective marketing
efforts within the Territory. Without limiting the generality of the
preceding sentence, when SCII or Distributor (or any Subdistributor)
is uncertain as to whether a prospective customer (whether end-user,
reseller or otherwise) has a relationship that would be subject to the
foregoing provisions of this Section 1(d), the party confronting such
uncertainty shall make due inquiry of the other party hereunder in
order to resolve such uncertainty as promptly as possible.
7. Section 2.e.: The fifth sentence of Section 2.e. is deleted and
------------
replaced with the following:
Neither Distributor nor any Subdistributor will make any material
modification or amendment to the Product Use Contract without SCII's prior
written approval, such approval to be given on a case-by-case basis and not
to be unreasonably withheld. For purposes of this Agreement, and without
limiting the foregoing, any modification or amendment that has the effect
of modifying the provisions of Sections 2 (Grant and Use of Software), 3
(Title and Confidentiality, 5 (Warranty and Liability), and 7 (Services)
of the Product Use Contract shall be deemed material.
8. Section 2.f.: Reference to "then current maintenance agreements" in
------------
the first sentence of Section 2.f. shall be deleted and replaced with "under
then current Product Use Contracts."
9. Section 4.b.: The first sentence of Section 4.b. is deleted and
------------
replaced with the following:
SCII may accept or reject at its discretion any non-standard order or non-
standard Product Use Contract that has been materially modified or amended
without SCII's prior written consent as required under Section 2.e, subject
to any written and binding commitment that SCII may hereafter make to
Distributor outside of this Agreement.
10. Exhibit C: The third paragraph under the heading DISTRIBUTOR PROFILE
---------
is hereby deleted and replaced with the following:
Future financials both with and, to the extent publicly available, without
SCII Product representation;
11. Exhibit D: Exhibit D of the Agreement is hereby amended as follows:
---------
4
<PAGE>
(i) Paragraph 2.1: Paragraph 2.1 is deleted in its entirety and replaced
-------------
with the following:
In consideration of the payment by Customer of the Product Use
Charge(s) as provided for in this Contract and more specifically
defined in the Schedule and subject to the terms and conditions set
forth in this Contract, Licensor hereby grants to Customer a personal,
non-transferable and non-exclusive right to execute one copy of the
applicable Software only at the designated Computer Installation(s)
specified in the Schedule.
(ii) Paragraph 2.6: The phrase "during the term of this Contract," in the
-------------
first line of Paragraph 2.6 is hereby deleted. The brackets
surrounding the word "Australia" are hereby deleted.
(iii) Paragraph 4.2: The brackets surrounding the phrase "the currency of
-------------
the Installation Country" in Paragraph 4.2 are hereby deleted.
(iv) Paragraph 6.3: The reference to "Paragraph 7.3" in the last line of
-------------
Paragraph 6.3 is hereby deleted and replaced with "Paragraph 6.3."
(v) Paragraph 6.5. After "Paragraph 2.6," insert "Section 3.0."
-------------
As soon as practicable after date hereof, SCII will prepare an amended and
restated Exhibit D incorporating solely those amendments set forth in this
Section 9.
12. On and after the date hereof, each reference in the Agreement to "this
Agreement," "hereunder," "herein" or words of like import referring to the
Agreement will be a reference to the Agreement as amended by this Amendment
No.1.
13. Except as specifically amended by this Amendment No.1, the Agreement
will remain in full force and effect and is hereby ratified and confirmed.
STERLING COMMERCE B.V. STERLING SOFTWARE
INTERNATIONAL, INC.
By: /s/ Albert K. Hoover By: /s/ James E. Jenkins, Jr.
------------------------------ -----------------------------------
Name: Albert K. Hoover Name: James E. Jenkins, Jr.
Title: Managing Director Title: Vice President
5
<PAGE>
EXHIBIT 10.3
DIRECTOR AGREEMENT
THIS DIRECTOR AGREEMENT (this "Agreement"), dated as of January __, 1997,
by and between Sterling Commerce, Inc., a Delaware corporation (the "Company"),
and ______________________________ (the "Director").
WITNESSETH:
WHEREAS, the Director is a director of the Company; and
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a change in control exists; and
WHEREAS, the Company desires to preserve the economic benefits intended to
be provided to the Director pursuant to the compensation plans and arrangements
of the Company with the Director in the event of a change in control;
NOW, THEREFORE, the Company and the Director agree as follows:
1. Certain Payments by the Company: (a) In the event that it shall be
-------------------------------
determined (as hereafter provided) that all or any portion of any payment or
distribution by the Company or any of its affiliates to or for the benefit of
the Director, including under any stock option or other agreement, plan, policy,
program or arrangement (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")
(or any successor provision thereto), by reason of being considered "contingent
on a change in ownership or control" of the Company, within the meaning of
Section 280G of the Code (or any successor provision thereto), or to any similar
tax imposed by state or local law, or any interest or penalties with respect to
such tax (such tax or taxes, together with any such interest and penalties,
being hereafter collectively referred to as the "Excise Tax"), then the Director
shall be entitled to receive an additional payment or payments (collectively, a
"Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that,
after payment by the Director of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed upon the
Gross-Up Payment, the Director retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 1(f), all determinations
required to be made under this Section 1, including whether an Excise Tax is
payable by the Director and the amount of such Excise Tax and whether a Gross-Up
Payment is required to be paid by the Company to the Director and the amount of
such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Director in his sole
discretion. The Director shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Director
<PAGE>
within 30 calendar days after the date on which the "change in ownership or
control" (within the meaning of Section 280G of the Code) occurs, and any such
other time or times as may be requested by the Company or the Director. If the
Accounting Firm determines that any Excise Tax is payable by the Director, the
Company shall pay the required Gross-Up Payment to the Director within five
business days after receipt of such determination and calculations with respect
to any Payment to the Director. If the Accounting Firm determines that no
Excise Tax is payable by the Director, it shall, at the same time as it makes
such determination, furnish the Company and the Director a written opinion to
the effect that the Director has substantial authority not to report any Excise
Tax on his federal, state or local income or other tax return. As a result of
the uncertainty in the application of Section 4999 of the Code (or any successor
provision thereto) and the possibility of similar uncertainty regarding
applicable state or local tax law at the time of any determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts or fails to pursue its remedies pursuant to Section
1(f) and the Director thereafter is required to make a payment of any Excise
Tax, the Director shall direct the Accounting Firm to determine the amount of
the Underpayment that has occurred and to submit its determination and detailed
supporting calculations to both the Company and the Director as promptly as
possible. Any such Underpayment shall be promptly paid by the Company to, or
for the benefit of, the Director within five business days after receipt of such
determination and calculations.
(c) The Company and the Director shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Director, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 1. Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company and the
Director.
(d) The federal, state and local income or other tax returns filed by
the Director shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Director. The Director shall make proper payment of the amount of any Excise
Payment, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Director's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Director shall within five
business days pay to the Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this Section
1 shall be
-2-
<PAGE>
borne by the Company. If such fees and expenses are initially advanced by the
Director, the Company shall reimburse the Director the full amount of such fees
and expenses within five business days after receipt from the Director of a
statement therefor and reasonable evidence of his payment thereof.
(f) The Director shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Director actually receives notice of such claim and the
Director shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Director). The Director shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Director in writing prior to the expiration of such period that it desires to
contest such claim, the Director, subject to the provisions of Section 1(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Director, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 1(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 1(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Director may participate therein at his own cost
and expense) and may, at its option, either direct the Director to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Director agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company
-3-
<PAGE>
directs the Director to pay the tax claimed and sue for a refund, the Company
shall advance the amount of such payment to the Director on an interest-free
basis and shall indemnify and hold the Director harmless, on an after-tax basis,
from any Excise Tax or income or other tax, including interest or penalties with
respect thereto, imposed with respect to such advance; and provided further,
however, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Director with respect to which the contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of any such contested claim shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder
and the Director shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(g) If, after the receipt by the Director of an amount advanced by the
Company pursuant to Section 1(f), the Director receives any refund with respect
to such claim, the Director shall (subject to the Company's complying with the
requirements of Section 1(f)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Director of an amount
advanced by the Company pursuant to Section 1(f), a determination is made that
the Director shall not be entitled to any refund with respect to such claim and
the Company does not notify the Director in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Director pursuant to this Section 1.
(h) Any information provided by Director to the Company under this
Section 1 shall be treated confidentially by the Company and shall not be
provided by the Company to any other person than the Company's professional
advisors without Director's prior written consent except as required by law.
2. Legal Fees and Expenses. It is the intent of the Company that the
-----------------------
Director not be required to incur legal fees and the related expenses associated
with the interpretation, enforcement or defense of Director's rights under this
Agreement by litigation or otherwise because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the Director
hereunder. Accordingly, if it should appear to the Director that the Company
has failed to comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take any action
to declare this Agreement void or unenforceable, or institutes any litigation or
other action or proceeding designed to deny, or to recover from, the Director
the benefits provided or intended to be provided to the Director hereunder, the
Company irrevocably authorizes the Director from time to time to retain counsel
of Director's choice, at the expense of the Company as hereafter provided, to
advise and represent the Director in connection with any such interpretation,
enforcement or defense, including without limitation the initiation or defense
of any litigation or other legal action, whether by or against the Company or
any director, officer, stockholder or other person affiliated with the Company,
in any jurisdiction. Notwithstanding any existing or prior
-4-
<PAGE>
attorney-client relationship between the Company and such counsel, the Company
irrevocably consents to the Director's entering into an attorney-client
relationship with such counsel, and in that connection the Company and the
Director agree that a confidential relationship shall exist between the Director
and such counsel. Without respect to whether the Director prevails, in whole or
in part, in connection with any of the foregoing, the Company will pay and be
solely financially responsible for any and all attorneys' and related fees and
expenses incurred by the Director in connection with any of the foregoing.
3. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, local or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
4. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Director, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but will
not otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Director's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) The Director's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Director's will or by the
laws of descent and distribution and, in the event of any attempted assignment
or transfer contrary to this Section 4(c), the Company shall have no liability
to pay any amount so attempted to be assigned, transferred or delegated.
5. Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 8080 North
Central Expressway, Suite 1100, Dallas, Texas 75206 (to the attention of the
President of the Company) and to the Director
-5-
<PAGE>
at his or her principal residence, or to such other address as any party may
have furnished to the other in writing and in accordance herewith, except that
notices of changes of address shall be effective only upon receipt.
6. Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
7. Validity: If any provision of this Agreement or the application of any
--------
provision hereof to any person or circumstances is held invalid, unenforceable
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances will not be affected, and
the provision so held to be invalid, unenforceable or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid or legal.
8. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Director and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. Except as otherwise provided, references to Sections are to
references to Sections of this Agreement.
9. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
STERLING COMMERCE, INC.
By ----------------------------------------
Sterling L. Williams
Chairman of the Board
-------------------------------------------
[Director]
-7-
<PAGE>
EXHIBIT 10.4
AMENDMENT TO CEO AGREEMENT
--------------------------
This Amendment to CEO Agreement (this "Amendment") is entered into by and
between Sterling Commerce, Inc., a Delaware corporation (the "Company"), and
Sterling L. Williams (the "Executive").
A. The Company and the Executive entered into a CEO Agreement, dated as of
February 12, 1996 (the "Agreement").
B. For good and valuable consideration, receipt of which is hereby
acknowledged, the Company and the Executive desire to amend the Agreement as set
forth below.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Effective October 11, 1996, the words "CEO Agreement" in the title and
introduction of the Agreement are hereby deleted and replaced with the words
"Chairman Agreement."
2. Effective October 11, 1996, the words "and Chief Executive Officer" in
the second recital of the Agreement and in the second and third lines of Section
1 of Agreement are hereby deleted.
3. The time period "five years" in Section 3 of the Agreement is hereby
deleted and replaced with the time period "seven years."
4. The words "five (5) year" in Section 6 of the Agreement are hereby
deleted and replaced with the words "seven (7) year."
5. In all other respects, the terms of the Agreement will remain in full
force and effect.
Except as provided above, this Amendment is effective as of December 1,
1996.
STERLING COMMERCE, INC.
By: /s/ Warner C. Blow
---------------------------------------------
Warner C. Blow, President and CEO
EXECUTIVE
/s/ Sterling L. Williams
--------------------------------------------------
Sterling L. Williams
<PAGE>
EXHIBIT 11.1
STERLING COMMERCE, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
1996
------------
<S> <C>
Primary:
Average shares outstanding............................. 75,000
Net effect of dilutive stock
options-based on the treasury stock
method using average market price..................... 1,855
-------
Total.................................................. 76,855
=======
Net income............................................. 16,060
=======
Per share amount....................................... $ 0.21
=======
Fully diluted:
Average shares outstanding............................. 75,000
Net effect of dilutive stock options-
based on the treasury stock method
using the higher of average or
quarter-end market price.............................. 2,941
-------
Total.................................................. 77,941
=======
Net income............................................. 16,060
=======
Per share amount....................................... $ 0.21
=======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
COMMERCE, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 79,060
<SECURITIES> 11,200
<RECEIVABLES> 59,027
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 162,977
<PP&E> 77,245
<DEPRECIATION> 29,872
<TOTAL-ASSETS> 259,887
<CURRENT-LIABILITIES> 75,184
<BONDS> 0
0
0
<COMMON> 750
<OTHER-SE> 153,113
<TOTAL-LIABILITY-AND-EQUITY> 259,887
<SALES> 74,769
<TOTAL-REVENUES> 74,769
<CGS> 15,735
<TOTAL-COSTS> 49,756
<OTHER-EXPENSES> 1,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,071
<INCOME-TAX> 10,011
<INCOME-CONTINUING> 16,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,060
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
