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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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 NO.)
300 CRESCENT COURT, SUITE 1200 DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 981-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, $0.01 Par Value New York Stock Exchange
Rights to Purchase Series A Junior
Participating
Preferred Stock, $0.01 Par Value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of November 7, 1997, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $3,076,041,049,
based on the closing sales price of $35 1/16 of the Registrant's Common Stock
on the New York Stock Exchange.
As of November 7, 1997, 89,712,861 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the Registrant to
be held during 1998 are incorporated by reference in Part III.
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STERLING COMMERCE, INC.
TABLE OF CONTENTS
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FORM 10-K ITEM PAGE
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PART I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 13
Item 3. Legal Proceedings............................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 14
Item 6. Selected Financial Data...................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 21
Item 8. Financial Statements and Supplementary Data.................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant........... 42
Item 11. Executive Compensation....................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 42
Item 13. Certain Relationships and Related Transactions............... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Sterling Commerce, Inc. (the "Company") was incorporated in December 1995 as
a wholly owned subsidiary of Sterling Software, Inc. ("Sterling Software"). The
Company completed its initial public offering (the "Offering") on March 13,
1996. Pursuant to the Offering, the Company sold to the public 1,800,000
previously unissued shares of Common Stock, $0.01 par value, of the Company
("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. As used in this report, the
term Company includes Sterling Commerce, Inc. and its wholly owned
subsidiaries.
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, indemnification and
international marketing. 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, $0.10
par value ("Software Stock"), as of the close of business on such date. As a
result, effective September 30, 1996, the Company ceased to be a subsidiary of
Sterling Software.
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, including acquisitions. Pending such
use, the funds are being invested in investment grade debt securities and other
marketable securities.
In February 1997, the Company acquired for cash all of the issued and
outstanding capital 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 (the "Notes") due
January 2, 1998, having an aggregate principal amount of approximately
$11,200,000. The Notes were paid in full in July 1997. The acquisition has been
accounted for using the purchase method of accounting.
In June 1997, the Company entered into an agreement (the "Termination
Agreement") with Sterling Software, terminating effective as of June 30, 1997,
the International Distributor Agreement dated March 4, 1996, as amended (the
"International Marketing Agreement"), between the Company and Sterling
Software. Under the Termination Agreement, the Company acquired certain assets
and assumed certain liabilities associated with the distribution of certain of
the Company's products by Sterling Software outside the United States and
Canada. The Company 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, the Company paid Sterling
Software (i) $5,226,000 for early termination of the International Marketing
Agreement and (ii) approximately $10,076,000, which amount was equal to the net
book value of certain assets of Sterling Software acquired (principally
accounts receivable) less certain liabilities assumed by the Company related to
the international distribution of certain of the Company's products. In
addition, the Company and Sterling Software entered into certain short-term
transitional arrangements related to the use of certain facilities and certain
administrative and other services.
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GENERAL
The Company is a leading provider of electronic data interchange ("EDI") and
other electronic commerce products, services and solutions worldwide. The
Company develops, markets and supports electronic commerce software products,
and provides electronic commerce services that enable businesses to engage in
business-to-business electronic communications and transactions. The Company
has been providing electronic commerce solutions for over 20 years and has
numerous customers in many industries including banking, healthcare,
manufacturing, pharmaceuticals, retailing and transportation.
The Company offers a comprehensive range of electronic commerce business
solutions for the business-to-business electronic commerce market. The Company
continually strives to understand the business requirements of the global
electronic commerce market; to address these requirements with flexible,
reliable and secure electronic commerce solutions; and, to deliver these
solutions in an effective and efficient manner. The Company believes that many
of today's business organizations operate as extended enterprises that include
an entity's divisions, plant sites and sales offices, and also involve close
partnering relationships with customers, suppliers, banks and other trading
partners. This extension of the enterprise is often referred to as a supply
chain. The Company's electronic commerce solutions help to automate this
supply chain by linking disparate systems (such as various computing
platforms, protocols and business document formats), and assist in building
and managing trading community relationships and effecting the electronic
transfer of funds among corporations and banks. These solutions focus on the
business-to-business market and take advantage of multiple technologies,
including Internet-related technologies, to address the needs of customers.
The Company operates primarily through three separate groups which all offer
distinct families of products and services to the worldwide business-to-
business electronic commerce market: the Commerce Services Group, the
Interchange Software Group and the Communications Software Group. The Company
believes that its decentralized organizational structure promotes operating
flexibility, improves responsiveness to customer requirements and focuses
management on achieving revenue and profit objectives.
The Company generates revenue from four sources: products, product support,
services and royalties. Products revenue is primarily derived from license
fees from the Company's GENTRAN, CONNECT and VECTOR software product families
and is recognized at the time of product delivery, provided no significant
vendor obligations exist and collection is probable. Product support revenue
consists primarily of fees from product support agreements that generally
provide customers with updated or enhanced versions of the Company's software
products and telephone and Internet access to the Company's technical
personnel. Product support revenue is deferred and recognized ratably over the
term of the applicable product support agreement, which is generally from one
to three years. Services revenue consists primarily of transaction fees for
services offered as part of the COMMERCE family and is recognized at the time
the service is performed. Royalty revenue consisted primarily of royalties
from Sterling Software relating to international licenses of the Company's
software products and related product support agreements. See "--Shared
Management and Contractual Arrangements with Sterling Software."
A majority of the Company's software customers enter into product support
agreements and renew such agreements upon expiration. Moreover, although most
COMMERCE services agreements are cancelable upon 30 days' notice, the
Company's experience is that once customers initiate use of the Company's
COMMERCE services, they generally continue to use such services. Accordingly,
the Company considers revenue from product support and COMMERCE services as
recurring revenue. Recurring revenue represented 57% of the Company's total
revenue in both 1997 and 1996.
PRODUCTS AND SERVICES
The foundation for transacting business electronically throughout the supply
chain is reliable and secure communications software. Upon this foundation,
solutions are provided for message management, data translation, managed
services and automated payment integration. The Company's four families of
software products and services address targeted market segments. As of
September 30, 1997, most of the Company's
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supported software products and services accommodated four character year
dating required for the Year 2000. For those supported software products or
services that do not, the Company has established plans to upgrade such
products or to offer alternative software products, services or solutions.
These plans have been integrated into the Company's normal development cycles.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Other Matters." A brief description of each family of products
is included in the following table.
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COMMERCE GENTRAN CONNECT VECTOR
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A family of electronic A family of gateway A family of automated A family of bank
commerce value-added message handling and file transfer and automation software
services, software, data translation communications
catalogs and related software management and
products security software
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The COMMERCE family, provided by the Commerce Services Group, offers over a
dozen service and software solutions to facilitate the electronic exchange of
business transactions and documents. These solutions are marketed into
targeted vertical industry groups which include pharmaceuticals, hardlines,
grocery, healthcare, insurance, retail, train-truck-ship transportation,
automotive, entertainment, telecommunications, chemical and petroleum, paper
and packaging, banking and governments. COMMERCE:Network provides an
electronic messaging system with mailbox facilities to accommodate the
exchange of EDI documents, electronic business forms, e-mail messages and
attachments and the posting of technical or reference data. COMMERCE:Network
accepts all of the most commonly used protocols for EDI and e-mail exchanges.
Along with many standard services, COMMERCE:Network also offers value-added
services that help companies build, manage and service their trading
communities. These services include the programs that assist companies in
implementing electronic commerce with their trading partners; strategic
consulting to help define electronic commerce solutions that address a
company's needs; and shared applications to help trading communities and
companies leverage common applications. Other value-added services include
extended customer support, product training and education. COMMERCE:Network
customers include GTE Telecommunications, Inc., Home Depot, Nestle USA and
United Parcel Service General Services Co.
In 1997, the Company acquired ACS, a provider of business-to-business
electronic product catalogs and information databases delivered via CD-ROM and
the Internet. Together with COMMERCE:Interact, a Web-based search-select-
transact catalog solution, the COMMERCE family of products and services now
offers electronic catalogs with industry reference, buying and selling
capabilities. As of September 30, 1997, there were more than 4,000
manufacturers and distributors using COMMERCE catalogs. Customers include
Allegiance Corporation, American Supply Association, Cummins Engine Co. Inc.,
Owens Corning, Pirelli Cables North America, NCR and the National Paper Trade
Association.
Through its COMMERCE:Resource suite of products, the Company is able to
offer customers a full set of electronic commerce outsourcing solutions,
including products and education and consulting services. The Company also
offers COMMERCE:Exchange, a suite of products and services that allows a
company to support a complete electronic commerce messaging environment.
COMMERCE:Exchange enables enterprises to effectively operate an integrated,
virtual network and facilitates the cost-effective delivery of all forms of
electronic commerce data, including EDI, e-mail, e-forms and technical data
formats such as CAD/CAM drawings. Customers include Satyam Infoway (Private)
Limited, one of the largest systems integrators in India, and FORTHnet S.A.,
the largest Internet service provider in Greece.
The Commerce Services Group also offers products that enable banks to
provide their corporate customers with financial electronic commerce services.
COMMERCE:Connexion provides financial EDI payment services and COMMERCE:Banker
provides PC-based cash management and electronic payment software for medium
and small-sized banks. As of September 30, 1997, there were over 23,000
COMMERCE customers worldwide.
The GENTRAN family of products, provided by the Interchange Software Group,
offers software solutions for electronic commerce gateway messaging and data
translation. GENTRAN software automates the flow of business transactions
within organizations and between organizations and their customers and
suppliers. GENTRAN translators and messaging servers are available for all
major operating systems and platforms
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including UNIX, Windows, Windows NT, AS/400 and IBM mainframes. GENTRAN was
designed for high-volume, commercial traffic and supports any-to-any formatted
message exchange and translation across platforms. As noted below, the Company
believes this makes GENTRAN an excellent tool for linking disparate
applications and for the dissemination of information exchanged via the World
Wide Web (the "Web"). The GENTRAN family of products is closely interfaced
with applications systems provided by major Enterprise Resource Planning
("ERP") vendors such as Baan, Oracle, PeopleSoft and SAP. In addition,
companies such as JBA, Lawson Software, QAD and Symix resell GENTRAN solutions
into their customer bases. As of September 30, 1997 GENTRAN products were
licensed to over 7,000 customers worldwide.
The CONNECT family of software products, offered by the Communications
Software Group, is a suite of automated file transfer and communications
management solutions that support a wide variety of protocols. The CONNECT
family of products provides an enterprise-wide solution that integrates with
existing operations and supports the addition of new applications, databases,
hardware and software. These products offer prompt access to information and
the highest levels of security for a company's computer data and network. The
CONNECT family of products are widely used as the communications solution
within many companies and industries including telecommunications, banking,
financial services and government. CONNECT customers include British Telecom,
Bankers Automated Clearing Service and Hewitt Associates. CONNECT:Direct is
primarily used to move large volumes of data with a focus on high performance,
security, reliability and intelligent automation. CONNECT:Direct addresses the
information needs of electronic commerce between internal departments and
offices and external customer and client locations. CONNECT:Mailbox is used
primarily to move information between companies with a focus on wide
connectivity. The software works independently of applications, platforms and
protocols, and provides open connections throughout the network to any host,
midrange or remote workstation or value-added service provider.
CONNECT:Conceal is a desktop encryption, key management and user
authentication software product that provides confidentiality for information
stored or transmitted across any network, including the Internet. As of
September 30, 1997, CONNECT products were licensed to over 4,900 customers
worldwide.
The VECTOR family of products, offered by the Banking Systems Division,
automates several key functions in banks, including item processing
applications such as statement sorting, research and adjustments, check fraud
control, electronic check presentment, return item processing and signature
verification. At September 30, 1997, over 2,100 copies of VECTOR products have
been licensed to customers worldwide, including 99 of the top 100 U.S. banks,
as ranked by deposits as of December 31, 1996 in American Banker magazine.
The Company recognizes that businesses use multiple technologies and
solutions to address their electronic commerce needs. For instance, many
companies are still using mainframe legacy systems to run applications, while
at the same time piloting projects on client-server systems and the Internet.
The Company believes that one of its strengths is its ability to assist its
customers in connecting these disparate systems and in helping them implement
new technologies. The Company achieves this by utilizing new technologies in
its electronic commerce business solutions, such as the Internet and Web-based
capabilities it offers.
INTERNET SOLUTIONS
According to the AberdeenGroup, the market for electronic commerce products
and services is projected to grow to over $8 billion by the year 2000, with
more than half that figure attributable to Internet-enabled electronic
commerce products and services. The Company is addressing this large and
expanding market by providing Internet-related electronic commerce solutions
across its product and services families. These solutions fall into five
categories: (i) using the Internet as an additional transport mechanism, (ii)
providing security solutions for the transport of business information over
the Internet, (iii) providing Web EDI software and services solutions, (iv)
providing Web commerce software solutions, and (v) providing business-to-
business electronic catalogs.
A basic function of the Internet is for the transport of data over public
lines. While most enterprises use private lines to conduct business
electronically with their trading partners and within their organizations,
some
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companies are starting to use the Internet as the basis of transport for
electronic commerce. Consequently, the Company has enabled its products and
services to send and receive messages sent via the Internet.
Security is one of the key issues in using the Internet for transport of
business information. Most companies do not use the Internet to send and
receive business documents because of the security risks involved. To address
this issue, the Company has developed and released a desktop encryption
product called CONNECT:Conceal. This product provides key management and user
authentication to ensure the confidentiality of information that is stored or
transmitted across any network, including the Internet.
Historically, EDI has generally been adopted and utilized by large
enterprises and their larger trading partners. To help these enterprises
extend their EDI operations to their smaller trading partners and customers,
the Company has leveraged its expertise in EDI and the Internet to develop Web
EDI software and services solutions. Web EDI is an easy to use, low cost
solution that utilizes Web browsers as an interface for small companies to
send pre-configured electronic forms to their large trading partners over the
Internet. Web EDI products include COMMERCE:Webforms and the GENTRAN Websuite
product lines. Customers of these solutions include Cummins Engine Co. Inc.,
Hardware Wholesalers, Inc., Snap-On Inc. and Trade Compass.
The Company also offers Web commerce solutions through its GENTRAN Websuite
product line. These products use Internet and Web technologies to automate
non-EDI processes, including Internet transport, merchandising over the Web
and the exchange of non-EDI business documents. Customers include Bindley
Western, Knowledge Flow, and Video Network.
The Web has enabled companies to build and maintain electronic product
catalogs. While existing electronic catalogs offer search and select features,
few, if any, offer an automated transaction capability that links to a
company's internal applications system. With the acquisition of ACS and the
introduction of the COMMERCE:Interact Web-based catalog service, the Company
provides complete search, select, and transact catalog solutions. These
catalogs are used by customers for industry reference information, for selling
products to their business customers and for making MRO (maintenance, repair
and operations) purchases. In addition, the Company's GENTRAN Websuite
products can be linked to a company's internal database or electronic catalog.
Customers of the Company's electronic catalogs include the Allegiance
Corporation, the National Wholesale Druggists' Association, Pirelli Cables
North America and Owens Corning.
To the extent that the Internet gains further acceptance as a method of
conducting electronic commerce, the Company believes the Internet will broaden
the electronic commerce market and provide additive business to the Company.
SHARED MANAGEMENT AND CONTRACTUAL ARRANGEMENTS WITH STERLING SOFTWARE
Management
The Board of Directors of the Company (the "Board") currently has seven
members. Messrs. Sterling L. Williams, Sam Wyly, Charles J. Wyly, Jr. and Evan
A. Wyly are directors of the Company and are also directors of Sterling
Software. In addition, Mr. Sterling L. Williams serves as Chairman of the
Board of the Company and as President and Chief Executive Officer of Sterling
Software and Jeannette P. Meier serves as an Executive Vice President and
Secretary of both companies.
The Company and Sterling Software have certain 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.
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Intercompany Agreements
In anticipation of the Offering, the Company and Sterling Software entered
into a number of agreements (the "Intercompany Agreements") for the purpose of
defining certain relationships between them. As a result of Sterling
Software's ownership interest in the Company, the terms of such agreements
were not the result of arm's-length negotiation.
The Intercompany agreements included a tax allocation agreement, an
indemnification agreement and the International Marketing Agreement. The tax
allocation agreement states that for periods during which the Company and/or
its subsidiaries are included in Sterling Software's consolidated federal
income tax returns or consolidated, combined or unitary state tax returns
(which periods included the period between the Offering and the Distribution),
the Company is required to pay to or is entitled to receive from Sterling
Software its allocable portion of the consolidated federal and state income
tax liability or refunds, respectively. The indemnification agreement
provides, among other things, that each party thereto (the "Indemnifying
Party") will indemnify the other party thereto and its directors, officers,
employees, agents and representatives (each, an "Indemnified Party") for
liabilities that may be incurred by an Indemnified Party relating to (i) the
businesses, operations or assets conducted or owned or formerly conducted or
owned by the Indemnifying Party and its subsidiaries (except, in the case
where Sterling Software is the Indemnifying Party, the businesses, operations
and assets of the Company and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering. In addition, the indemnification agreement 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 cause the Distribution to be taxable to Sterling
Software or its stockholders. The indemnification agreement also provides that
each party thereto (the "Obligor Party") (i) will use reasonable efforts to
obtain the release of the other party thereto (the "Guarantor Party") from its
obligation under or in respect of all material guarantees, surety and
performance bonds, letters of credit and other arrangements guaranteeing or
securing any liability or obligation of the Obligor Party, (ii) will indemnify
the Guarantor Party for any liabilities incurred under such guarantees, bonds,
letters of credit and other arrangements, and (iii) will reimburse the
Guarantor Party for its direct costs (or, in certain circumstances, the
Obligor Party's pro rata share of such direct costs) of maintaining such
guarantees, bonds, letters of credit and other arrangements pending the
release of the Guarantor Party thereunder. The International Marketing
Agreement, which was terminated effective as of June 30, 1997, defined the
terms pursuant to which Sterling Software acted as the exclusive distributor
of certain of the Company's products in markets outside the United States and
Canada. (See Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction" in this report.)
EMPLOYEES
The Company's business is dependent upon its ability to attract and retain
highly qualified personnel, who are in limited supply. The Company's
operations could be adversely affected if it were to lose the services of a
significant number of qualified employees or if it were unable to obtain
additional qualified personnel when needed. The market for highly qualified
personnel in the software and electronic commerce industries is extremely
competitive making it difficult for companies in these industries, including
the Company, to attract and retain qualified employees. To attract and retain
qualified employees, the Company strives to maintain excellent employee
relations, attractive office facilities and challenging working environments,
and offers competitive compensation and benefits packages. None of the
Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its employee relations to be
excellent.
At September 30, 1997, the Company employed approximately 1,700 full-time
employees.
SALES AND MARKETING
Each of the Company's Commerce Services Group, Interchange Software Group
and Communications Software Group has its own sales and marketing
organizations. These organizations license and market the
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Company's products and services on a worldwide basis through a combination of
direct sales, indirect sales via distributors and resellers, telesales and
telemarketing. The Company has implemented a performance-based system of sales
commissions, awards and recognition designed to compensate and motivate its
sales force.
CUSTOMERS
The Company has a worldwide customer base of companies in more than 15
industries including, banking, manufacturing, insurance, healthcare,
automotive, retail, transportation, pharmaceutical and consumer products.
While the Company's customer base includes some of the largest multinational
companies in the world, it also includes numerous large regional and local
companies. As of September 30, 1997, the Company's customers included 96 of
the 100 largest U.S. industrial corporations, as ranked by 1996 sales in
Fortune magazine, and 99 of the top 100 U.S. commercial banks, as ranked by
deposits as of December 31, 1996, in American Banker magazine.
Many of these customers use several of the Company's products and services,
including electronic commerce solutions based on newly available technologies
such as the Internet. Because large companies drive electronic commerce across
the supply chain, the Company often works with these large companies to market
its electronic commerce solutions to their trading partners. As a result, the
Company's customer base also includes many small to medium-sized companies,
and the Company strives to develop and market products for companies of all
sizes.
PRODUCT LICENSES AND PRODUCT SUPPORT
The Company's software products are licensed for perpetual use or for a
fixed term. The Company typically does not sell or otherwise transfer title to
its software products. The license agreements generally restrict the use of
the underlying product to designated sites or central processing units and
prohibit reproduction, transfer or disclosure of the product. However, some
license agreements may cover multiple sites or multiple central processing
units at one site.
In addition to licensing the use of its software products to its customers,
the Company also often sells product support services to its customers.
Typically, the Company provides these services pursuant to product support
agreements having terms ranging generally from one to three years. The
Company's product support agreements generally allow customers to receive
updated or enhanced versions of the Company's software products as they become
available and also allow telephone and Internet access to the Company's
technical personnel.
PRODUCT DEVELOPMENT
The Company's product development strategy is to enhance existing products
and to introduce new products based upon current and anticipated customer
needs. The Company's approach to product development includes, among other
things, evaluating anticipated customer needs, analyzing the cost of
developing new products versus the cost of acquiring new products and
analyzing anticipated revenues from new and enhanced products. For example,
the Company may seek to acquire an existing product or to acquire a company
that owns an existing product rather than develop the product internally, and
in other instances the Company may contract with a third-party developer to
develop the product on the Company's behalf. Because of these and other
factors, the Company is unable to estimate future product development costs.
Each of the Company's Commerce Services Group, Interchange Software Group
and Communications Software Group performs its own product development
function. The Company believes that this organizational structure facilitates
development cost control and focuses the development function on customer
needs. Gross product development costs in 1997, 1996 and 1995 were
$38,400,000, $27,800,000 and $24,900,000, respectively, of which the Company
capitalized $13,500,000, $12,300,000 and $10,100,000, respectively, as the
cost of developing and testing new or significantly enhanced software
products. Product development expense and the capitalization rate may
fluctuate from period to period depending, in part, upon the number and status
of software development projects in process.
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COMPETITION
The electronic commerce market is very competitive. Numerous companies
supply electronic commerce products and services, and several competitors
target specific customer requirements for which the Company presently is, or
may seek to become, a provider. The Company's competitors include both large
companies with substantially greater resources than the Company and small,
specialized companies that may compete in one or more particular market
niches. Competitors that offer products and/or services that compete with
various of the Company's products and services include, among others, Advantis
Systems, Inc.; AT&T; Computer Associates International, Inc.; Electronic Data
Systems Corporation; General Electric Information Systems; Harbinger
Corporation; MCI Communications Corporation, Premenos Technology Corp.; and
QuickResponse Services, Inc.; as well as the internal programming staffs of
various businesses engaging in electronic commerce.
The Company believes that its ability to compete successfully in the
electronic commerce industry depends on numerous factors, both within and
outside its control, including product performance, functionality and
reliability, price and customer service and support. The Company's strategy is
to offer total solutions, including sophisticated interchange and
communication software, software solutions for financial electronic commerce
and bank automation, reliable network services and other value-added services
designed to meet the needs of the various segments of the electronic commerce
market. The Company seeks to differentiate itself through superior products
and services, its reputation for quality and value and its ability to respond
quickly and efficiently to the changing needs of its electronic commerce
customers.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright, patent and
trademark laws, confidentiality procedures and contractual provisions to
protect its intellectual property rights. The Company routinely enters into
nondisclosure and confidentiality agreements with employees, contractors,
consultants, vendors and customers. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of
the Company's products or to obtain and use information that the Company
regards as proprietary. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of the
United States. However, the Company believes that, due to the rapid pace of
innovation within the electronic commerce industry, factors such as the
technological and creative skills of its personnel are more important in
establishing and maintaining a leadership position within this industry than
are the various legal protections afforded its technology.
The Company does not believe that any of its products or services infringe
on the valid proprietary rights of third parties in any material respect.
However, a large number of patents, trademarks and copyrights have been, and
are being, issued, registered or asserted in the software and electronic
commerce industries and there can be no assurance that the Company is aware of
all such intellectual property rights that may pose a risk of infringement by
the Company's products or services, especially with respect to United States
patents which can cover extremely broad concepts and the applications for
which are confidential until the patents are issued. Furthermore, the Company
from time to time has received communications from third parties alleging that
the Company is infringing intellectual property rights and there can be no
assurance that third parties will not assert infringement claims in the future
or that the Company would prevail in any litigation to enjoin the Company from
offering affected products or services or be able to obtain a license with
respect to such rights on terms acceptable to the Company.
Licenses for a number of software products have been granted to the Company
for its own use or for remarketing to its customers. In the aggregate, these
licenses are material to the business of the Company, but the Company believes
that the loss of any one of these licenses would not materially affect the
Company's financial position or results of operations.
The COMMERCE, GENTRAN, CONNECT and VECTOR product and service names used
herein are registered or unregistered trademarks owned by the Company.
10
<PAGE>
EXECUTIVE AND OTHER OFFICERS
The following information regarding the executive officers of the Company is
as of November 7, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sterling L. Williams................. 54 Chairman of the Board
Warner C. Blow....................... 60 President and Chief Executive Officer;
Director
Jeannette P. Meier................... 50 Executive Vice President and Secretary
Paul L. H. Olson..................... 47 Executive Vice President and Group
President
Stephen R. Perkins................... 53 Executive Vice President and Group
President
J. Brad Sharp........................ 40 Executive Vice President and Group
President
Albert K. Hoover..................... 37 Senior Vice President and General
Counsel
Steven P. Shiflet.................... 50 Senior Vice President and Chief
Financial Officer
</TABLE>
Sterling L. Williams has served as Chairman of the Board of the Company and
a director since December 1995 and served as Chief Executive Officer of the
Company from December 1995 until October 1996. Mr. Williams co-founded
Sterling Software in 1981, and since such time has served and continues to
serve as President, Chief Executive Officer and a director of Sterling
Software. Mr. Williams also currently serves as a director of INPUT, an
information technology market research company. Mr. Williams is a member of
the Executive Committee and the Stock Option Committee of the Board.
Warner C. Blow has served as President of the Company since December 1995
and as Chief Executive Officer and a director since October 1996. From
December 1995 until October 1996, Mr. Blow also served as Chief Operating
Officer of the Company. Prior to December 1995, Mr. Blow served as President
of Sterling Software's Electronic Commerce Group (the predecessor of the
Company) from July 1993 and as an Executive Vice President of Sterling
Software from October 1989. Prior to July 1993, Mr. Blow also served as
President of Sterling Software's former EDI Group.
Jeannette P. Meier has served as Executive Vice President and Secretary of
the Company since December 1995. Ms. Meier also served as General Counsel of
the Company from December 1995 until June 1997 and as Chief Financial Officer
of the Company from June 1996 until January 1997. Ms. Meier has served and
continues to serve as Executive Vice President--Finance and Administration
(since June 1997) and Secretary (since 1985) of Sterling Software. Also at
Sterling Software, Ms. Meier served as Executive Vice President from July 1993
until May 1997, Chief Financial Officer from June 1996 until May 1997 and as
General Counsel from 1985 until May 1997. Prior to July 1993, Ms. Meier also
served as Senior Vice President of Sterling Software.
Paul L. H. Olson has served as Executive Vice President of the Company since
November 1997 and as President of the Commerce Services Group since December
1995. From December 1995 to November 1997, Mr. Olson served as a Senior Vice
President of the Company. Prior to March 1996, Mr. Olson served as President
of the Network Services Division of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from August 1992. Prior to August 1992,
Mr. Olson served as Group Vice President of Business Development for Sterling
Software's former EDI Group.
Stephen R. Perkins has served as Executive Vice President of the Company
since November 1997 and as President of the Communications Software Group
since December 1995. From December 1995 to November 1997, Mr. Perkins served
as a Senior Vice President of the Company. Prior to March 1996, Mr. Perkins
served as President of the Communications Software Division of Sterling
Software's Electronic Commerce Group (the predecessor of the Company) from
July 1993. Prior to July 1993, Mr. Perkins served as Vice President of
Development for Systems Center, Inc., a computer software company that was
acquired by Sterling Software in July 1993.
J. Brad Sharp has served as Executive Vice President of the Company since
November 1997 and as President of the Interchange Software Group since
December 1995. From December 1995 to November 1997, Mr. Sharp served as a
Senior Vice President of the Company. Prior to March 1996, Mr. Sharp served as
President
11
<PAGE>
of the Interchange Software Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from August 1992. Prior to
August 1992, Mr. Sharp served as Vice President of Development of Sterling
Software's former EDI Labs Division.
Albert K. Hoover has served as Senior Vice President and General Counsel of
the Company since June 1997. From December 1995 until June 1997, Mr. Hoover
served as Vice President, Legal of the Company. Prior to March 1996, Mr.
Hoover served as Vice President of Sterling Software from May 1994 and
Assistant General Counsel of Sterling Software from June 1990.
Steven P. Shiflet has served as Senior Vice President and Chief Financial
officer of the Company since January 1997. From December 1995 until January
1997, Mr. Shiflet served as Vice President, Finance of the Company. Prior to
March 1996, Mr. Shiflet served as Group Vice President, Finance &
Administration of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from 1986.
The following information regarding certain other vice presidents of the
Company is also as of November 7, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William W. Hymes...................... 61 Senior Vice President and Division
President
James W. Hoyt......................... 50 Vice President, Technology
Thomas A. Lutz........................ 57 Vice President and Division President
Dawn Wheeler.......................... 38 Vice President, Investor Relations
G. Clark Woodford..................... 50 Vice President, Business Development
</TABLE>
William W. Hymes has served as a Senior Vice President of the Company since
December 1995 and as President of the Banking Systems Division since June
1997. From December 1995 to June 1997, Mr. Hymes served as President of the
Company's former Banking Systems Group. Prior to March 1996, Mr. Hymes served
as President of the Banking Systems Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from July 1993. Prior to July
1993, Mr. Hymes served as President of the former Directions Division of
Sterling Software.
James W. Hoyt has served as Vice President, Technology of the Company since
July 1996. Mr. Hoyt served as Director of Product Architecture of Sterling
Software's Communications Software Division from July 1993 until March 1996
and of the Company's Communications Software Group from March 1996 until June
1996. Prior to July 1993, Mr. Hoyt served as Director of Product Architecture
for Systems Center, Inc., a computer software company that was acquired by
Sterling Software in July 1993.
Thomas A. Lutz has served as a Vice President of the Company since December
1995 and as President of the International Division of the Commerce Services
Group since June 1997. Mr. Lutz served as President of the Company's former
International Group from December 1995 until June 1997. Prior to March 1996,
Mr. Lutz served as President of Sterling Software's Creative Data Systems
Division from October 1991. Prior to October 1991, Mr. Lutz served as
Executive Vice President of Sterling Software's Creative Data Systems
Division. Mr. Lutz also served as Group Vice President of Sterling Software's
former EDI Group from August 1990 to July 1993.
Dawn Wheeler has served as Vice President, Investor Relations of the Company
since February 1996. Prior to March 1996, Ms. Wheeler served as Director of
Industry Relations of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from October 1994. Prior to October 1994, Ms.
Wheeler served in various capacities for Sterling Software's Network Services
Division from November 1988.
G. Clark Woodford has served as Vice President, Business Development of the
Company since December 1995. Prior to March 1996, Mr. Woodford served as Vice
President, Business Development of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from November 1993. Prior to November
1993, Mr. Woodford served as Vice President, National Accounts for the Network
Services Division of Sterling Software's Electronic Commerce Group (the
predecessor of the Company).
12
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Dallas, Texas. The
Company also leases offices and facilities in or near San Francisco and
Sacramento, California; Atlanta, Georgia; Honolulu, Hawaii; Ann Arbor,
Michigan; Wayne, Pennsylvania; New York, New York; Columbus, Ohio; Washington,
D.C.; Sydney and Melbourne, Australia; Brussels, Belgium; Sao Paulo, Brazil;
Toronto, Canada; Broendby, Denmark; London, England; Paris, France; Frankfurt,
Munich and Dusseldorf, Germany; Rome, Milan and Turin, Italy; Tokyo, Japan;
Oslo, Norway; Singapore; and, Danderyd, Sweden. The Company believes that its
facilities will be adequate for its immediate needs and that additional or
substitute space is available if needed to accommodate expansion.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to certain legal proceedings and
claims which arise in the normal course of its business. Pending matters
include claims against the Company involving alleged breaches of contract or
other nonperformance with respect to customer sales, alleged employment
discrimination and other matters. Such routine litigation matters are normally
settled or defended, depending on the circumstances of each claim.
Also, on February 20, 1997, David B. Shaev, who alleges he is a stockholder
of the Company, filed a derivative action in the Chancery Court in the State
of Delaware against the Company and each of the Company's directors, Sam Wyly,
Charles J. Wyly, Jr., Evan A. Wyly, Sterling L. Williams, Warner C. Blow,
Honor R. Hill and Robert E. Cook, alleging that such directors breached their
fiduciary duties by approving grants of excessive stock options to the
individual defendants. The plaintiff seeks rescission of such grants of stock
options, injunctive relief prohibiting the exercise of the options, the award
of damages to the Company and attorneys' fees and costs. The defendants have
denied the allegations in the complaint and intend to vigorously defend this
action.
While any legal proceeding has elements of uncertainty, in the opinion of
management, based on presently available information, the amount of any
liability with respect to any existing claims, net of any applicable reserves
and available insurance, will not have a material effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the New York Stock Exchange
since March 8, 1996, under the symbol "SE." The high and low sales prices for
the Company's Common Stock for the periods indicated are set forth below.
<TABLE>
<CAPTION>
PRICE RANGE
----------------
HIGH LOW
-------- -------
<S> <C> <C>
Year Ended September 30, 1996:
Quarter Ended:
March 31, 1996......................................... $30 7/8 $28 3/4
June 30, 1996.......................................... $45 $30 1/8
September 30, 1996..................................... $37 1/8 $28
Year Ended September 30, 1997:
Quarter Ended:
December 31, 1996...................................... $35 3/4 $25 1/2
March 31, 1997......................................... $38 5/8 $26 3/4
June 30, 1997.......................................... $34 7/8 $24 1/8
September 30, 1997..................................... $40 5/16 $29 1/2
</TABLE>
At November 7, 1997, the Company had approximately 1,020 holders of record
of Common Stock.
The Company did not pay dividends on its Common Stock during the year ended
September 30, 1997. Under the terms of the Company's Revolving Credit and Term
Loan Agreement, as amended (the "Credit Agreement"), the Company is prohibited
from making distributions in the form of cash dividends on its Common Stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue......................... $350,597 $267,773 $203,578 $155,916 $117,813
Cost of sales................... 70,615 54,418 41,550 36,282 27,557
Product development and
enhancement.................... 24,853 15,553 14,807 12,497 6,478
Selling, general and
administrative................. 134,849 102,597 75,193 60,732 54,777
Income before other income
(expense) and income taxes(1).. 72,591 95,205 72,028 46,405 25,363
Net income...................... 55,444 58,392 42,930 27,753 15,194
Income per common share:
Pro forma(2).................. $ .59
Primary....................... $ .64 $ .77
Fully diluted................. $ .64 $ .77
BALANCE SHEET DATA:
Working capital(3).............. $491,801 $ 77,159 $ 3,692 $ 2,198 $ (3,438)
Total assets.................... 748,566 241,680 128,978 100,638 87,271
Stockholder's net investment.... 53,187 43,051 37,498
Stockholders' equity............ 600,862 138,187
</TABLE>
- --------
(1) Net of $31,879,000 of purchased in-process research and development and
$15,810,000 of reorganization costs charged to expense in 1997; and
$3,638,000 of restructuring costs charged to expense in 1993.
(2) Assumes that 73,200,000 shares of Common Stock were outstanding during the
entire period.
(3) Prior to the consummation of the Offering, substantially all of the excess
cash generated by the Company's operations was regularly remitted to
Sterling Software pursuant to Sterling Software's centralized cash
management program.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company was incorporated in December 1995 as a wholly owned subsidiary
of Sterling Software. Pursuant to the Offering, which was completed in March
1996, 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, indemnification and
international marketing. 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 of all shares of Common
Stock held by Sterling Software on September 30, 1996, payable pro rata to the
holders of record of Software Stock as of the close of business on such date.
As a result, effective September 30, 1996, the Company ceased to be a
subsidiary of Sterling Software.
On February 28, 1997, the Company completed 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
15
<PAGE>
are being used for general corporate purposes, including acquisitions. Pending
such use, the funds are being invested in investment grade debt securities and
other marketable securities.
In February 1997, the Company acquired for cash all of the issued and
outstanding capital stock of 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 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 the Notes due January 2, 1998, having an aggregate principal
amount of approximately $11,200,000. The Notes were paid in full in July 1997.
The acquisition has been accounted for using the purchase method of accounting.
In June 1997, the Company entered into the Termination Agreement with
Sterling Software, terminating effective as of June 30, 1997, the International
Marketing Agreement. Under the Termination Agreement, the Company acquired
certain assets and assumed certain liabilities associated with the distribution
of certain of the Company's products by Sterling Software outside the United
States and Canada. The Company 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, the Company paid
Sterling Software (i) $5,226,000 for early termination of the International
Marketing Agreement and (ii) approximately $10,076,000, which amount was equal
to the net book value of certain assets of Sterling Software acquired
(principally accounts receivable) less certain liabilities assumed by the
Company relating to the international distribution of certain of the Company's
products. In addition, the Company and Sterling Software entered into certain
short-term transitional arrangements related to the use of certain facilities
and certain administrative and other services.
RESULTS OF OPERATIONS
Years Ended September 30, 1997 and 1996
Total revenue increased $82,824,000 or 31%, in 1997 over 1996. The revenue
increase was due to a $39,296,000 increase in services revenue, a $32,431,000
increase in products revenue and a $15,087,000 increase in product support
revenue, offset partially by a $3,990,000 decrease in royalties from Sterling
Software. Services revenue increased 38% in 1997 over 1996, primarily from
growth in existing commerce services customer volume and the addition of new
customers, primarily in the hardlines, retail, grocery and healthcare markets.
Products revenue increased 37%, product support revenue increased 27% and
royalty revenue decreased 19% in 1997 over 1996. The decrease in royalty
revenue is largely due to the termination of the International Marketing
Agreement effective June 30, 1997. Royalty revenue had increased 13% in the
first nine months of 1997 over the same period of 1996. The Company's product
lines experienced growth in products revenue, product support revenue and
royalty revenue due to the addition of new customers, new product offerings,
certain product price increases and a continuing expansion of the installed
customer base for product support. The increase in products and product support
revenue is primarily the result of increased sales of communications and
interchange software products and is also the result of having direct sales of
these products outside of the United States and Canada for the fourth quarter
of 1997 as opposed to having royalty revenue in the fourth quarter of 1996.
The Company's recurring revenue includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed term product lease and rental agreements having terms ranging
generally from month-to-month to year-to-year and electronic commerce service
agreements cancelable upon 30 days notice. The Company includes the entire
portion of the recognized revenue from commerce service agreements in recurring
revenue, although no assurances can be given that such agreements will not be
canceled. Recurring revenue increased $46,623,000, or 30%, in 1997 over 1996
and represented 57% of total revenue in both 1997 and 1996. For 1997, 48% of
the Company's products revenue was for products designed for operating
platforms other than mainframe operating platforms, as compared to 53% for
1996. This increase in the relative percentage of products revenue for products
operating on mainframe platforms is due primarily to an increase in sales of
CONNECT products for the mainframe platform, primarily in the Company's
16
<PAGE>
fourth quarter. The Company believes that this change in the relative mix of
mainframe and non-mainframe products revenue is temporary and the long-term
trend will continue toward products designed for non-mainframe operating
platforms. Revenue outside of the United States, as a percentage of total
revenue, increased to 14% in 1997 from 12% in 1996.
Total costs and expenses increased $105,438,000 in 1997 over 1996 due in part
to charges in the third quarter of 1997 of $31,879,000 for purchased in-process
research and development acquired primarily from ACS and $15,810,000 of
reorganization costs related to the acquisition of Comfirst, ACS and the
international distribution operations acquired from Sterling Software.
Excluding these charges, total costs and expenses increased $57,749,000 or 33%,
on revenue growth of 31%. This percentage increase in total costs and expenses
is primarily due to a 30% increase in cost of sales, a 31% increase in selling,
general and administrative costs and to a lesser extent a 60% increase in
product development and enhancement expense compared with the prior year. The
Company believes further expenditures of approximately $3,300,000 during the
following 18 months primarily for salaries, wages and benefits of development
personnel will be required to develop the in-process research and development
purchased primarily from ACS into commercially viable products.
The components of the reorganization costs consist of:
<TABLE>
<S> <C>
Early termination payment to Sterling Software............... $ 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>
Total cost of sales consists primarily of salaries and other related expenses
for product support, data center and communications personnel and other related
expenses for the Company's data center and other facilities, communications,
product media, duplication, packaging and shipping. Total cost of sales
increased $16,197,000, or 30%, in 1997 over 1996. As a percentage of total
revenue, total cost of sales remained unchanged at 20% for 1997 and 1996. Cost
of sales for services increased $8,981,000 or 35% due to higher network
services costs to support a growing customer base and greater customer volume.
As a percentage of total revenue, cost of sales for services remained unchanged
at 10% for 1997 and 1996. Cost of sales for products and product support
increased $7,216,000 or 25% due to increased costs to support expanding
software sales, a larger installed customer base and higher amortization costs
of capitalized development for software products. Cost of sales for products
and product support decreased as a percentage of total revenue to 10% in 1997
from 11% in 1996. Cost of sales includes $21,611,000 and $16,314,000 of
depreciation and amortization in 1997 and 1996, respectively.
Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with the
cost of facilities and equipment. Product development and enhancement expense
for 1997 of $24,853,000, net of $13,519,000 of amounts capitalized pursuant to
FAS No. 86, increased $9,300,000, or 60%, compared to 1996 product development
and enhancement expense of $15,553,000, net of $12,268,000 of amounts
capitalized pursuant to FAS No. 86. The increase was primarily due to the
higher gross product development expense relating to products under development
during 1997. As a percentage of total revenue, product development and
enhancement expense increased to 7% in 1996 from 6% in 1996. Total capitalized
costs represented 35% and 44% of total development and enhancement expense for
1997 and 1996, respectively. Product development expense and the capitalization
rate may fluctuate from period to period depending in part upon the number and
status of software development projects in process.
Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees,
facilities and depreciation expenses. Selling, general and administrative
expense increased $32,252,000, or 31%, in 1997 over 1996 due primarily to
increases in personnel in sales, marketing and administration in support of the
Company's revenue growth. As a percentage of total revenue, selling, general
and administrative expenses remained unchanged at 38% for 1997 and 1996.
17
<PAGE>
Income before other income and income taxes was $72,591,000 for 1997 as
compared to income before other income and income taxes of $95,205,000 for the
same period of 1996 due to the $82,824,000 increase in revenues offset by the
$105,438,000 increase in total costs and expenses including nonrecurring
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 $15,476,000 in 1997 over 1996,
primarily due to an increase in investment income resulting generally from a
higher average balance of investments in cash, cash equivalents and marketable
securities resulting primarily from the net cash proceeds received by the
Company from the Follow-On Offering. Excluding the nonrecurring charges,
income before income taxes increased $40,551,000, or 42%, in 1997 compared to
1996.
Provision for income taxes decreased $4,190,000 in 1997 over 1996, primarily
due to the decrease in income before taxes in 1997 as compared to 1996.
Years Ended September 30, 1996 and 1995
Total revenue increased $64,195,000, or 32%, in 1996 over 1995. The revenue
increase was due to a $25,206,000 increase in services revenue, a $19,924,000
increase in products revenue, a $10,039,000 increase in product support
revenue and a $9,026,000 increase in royalties from Sterling Software.
Services revenue increased 32% in 1996 over 1995, primarily from growth in
existing network services customer volume and the addition of new customers,
primarily in the healthcare, grocery, retail and transportation markets.
Products revenue increased 29%, product support revenue increased 22% and
royalty revenue increased 77% in 1996 over 1995. The Company's product lines
experienced growth in products revenue, product support revenue and royalty
revenue due to the addition of new customers, new product offerings, certain
product price increases and a continuing expansion of the installed customer
base for product support.
The Company's recurring revenue includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed term product lease and rental agreements having terms ranging
generally from month-to-month to year-to-year and electronic commerce service
agreements cancelable upon 30 days notice. The Company includes the entire
portion of the recognized revenue from commerce service agreements in
recurring revenue, although no assurances can be given that such agreements
will not be canceled. Recurring revenue increased $33,527,000, or 28%, in 1996
over 1995 and represented 57% and 59% of total revenue in 1996 and 1995,
respectively. For 1996, 55% of the Company's products revenue was for products
designed for operating platforms other than mainframe operating platforms, as
compared to 43% for 1995.
Total cost of sales consists primarily of salaries and other related
expenses for product support, data center and communications personnel and
other related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total cost
of sales increased $12,868,000, or 31%, in 1996 over 1995. As a percentage of
total revenue, total cost of sales remained unchanged at 20% for 1996 and
1995. Cost of sales for services increased 44% due to higher network services
costs to support a growing customer base and greater customer volume. As a
percentage of total revenue, cost of sales for services increased to 10% in
1996 from 9% in 1995. Cost of sales for products and product support increased
$4,934,000 due to increased costs to support expanding software sales, a
larger installed customer base and higher amortization costs of capitalized
development for software products. Cost of sales for products and product
support decreased as a percentage of total revenue to 11% in 1996 from 12% in
1995. Cost of sales includes $16,314,000 and $13,351,000 of depreciation and
amortization in 1996 and 1995, respectively.
Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with
the cost of facilities and equipment. Product development and enhancement
expense for 1996 of $15,553,000, net of $12,268,000 of amounts capitalized
pursuant to FAS No. 86, increased $746,000, or 5%, compared to 1995 product
development and enhancement expense of $14,807,000, net of $10,051,000 of
amounts capitalized pursuant to FAS No. 86. The increase was primarily due to
the higher gross product development expense relating to products under
development during 1996. As a
18
<PAGE>
percentage of total revenue, product development and enhancement expense
decreased to 6% in 1996 from 7% in 1995. Total capitalized costs represented
44% and 40% of total development and enhancement expense for 1996 and 1995,
respectively. Product development expense and the capitalization rate may
fluctuate from period to period depending in part upon the number and status
of software development projects in process.
Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees,
facilities and depreciation expenses. Selling, general and administrative
expense increased $27,404,000, or 36%, in 1996 over 1995 due primarily to
increases in personnel in sales, marketing and administration in support of
the Company's revenue growth. As a percentage of total revenue, selling,
general and administrative expenses increased to 38% in 1996 from 37% in 1995.
Income before income taxes increased $24,872,000, or 35%, in 1996 over 1995.
As a percentage of total revenue, income before income taxes increased to 36%
in 1996 from 35% in 1995. Net income increased $15,462,000, or 36%, in 1996
over 1995. As a percentage of total revenue, net income increased to 22% in
1996 from 21% in 1995. The increases were primarily due to a revenue increase
of 32%, compared to an increase in total costs and expenses of 31%.
LIQUIDITY AND CAPITAL RESOURCES
On February 28, 1997, the Company issued and sold 14,375,000 shares of
Commerce Stock in the Follow-On Offering for net proceeds of $400,145,000,
after deducting underwriting discounts and commissions and the Follow-On
Offering expenses.
Net cash flows from operations were $122,067,000 and $57,290,000 for 1997
and 1996, respectively. Net cash flows from operations were positively
affected in 1997 by net income which included increased noncash expenses in
depreciation and amortization and purchased in-process research and
development, increases in accounts payable and accrued liabilities and
deferred revenue, collection of amounts due from Sterling Software, offset by
increases in accounts and notes receivable and prepaid and other assets. A
portion of the Company's cash flow from operations during 1997 and 1996 was
used to fund software additions and capital expenditures. Software
expenditures in 1997 were $13,855,000, the majority of which were costs
capitalized pursuant to FAS No. 86, compared to $12,016,000 in 1996. The
expenditures during 1997 were primarily for new products and enhancements of
existing products. Property and equipment purchases of $32,148,000 in 1997
included purchases made for equipment upgrades for network processing systems,
costs to add new network service features and computer and other equipment
purchases to support the Company's growth.
The Company maintains the Credit Agreement which provides for a domestic
borrowing capacity of $20,000,000 and an additional $10,000,000 international
borrowing capacity. An underlying letter of credit facility provides for
letters of credit up to the full domestic borrowing capacity. The Credit
Agreement, with final maturity October 1, 1999, is unsecured and contains
various restrictive covenants including limitations on additional borrowings,
payment of cash dividends and acquisitions. The Credit Agreement also requires
that the Company maintain certain financial ratios. Borrowings under the
Credit 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 Credit Agreement, nor
the underlying letter of credit facility, as of September 30, 1997.
At September 30, 1997, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and
equipment. The Company intends to meet such obligations from cash flows from
operations. Although no significant commitments exist for future capital
expenditures, the Company has presently budgeted capital expenditures of
approximately $63,000,000 for fiscal 1998 (of which approximately $18,000,000
is expected to consist of amounts capitalized pursuant to FAS No. 86). The
Company believes available balances of cash, cash equivalents and short-term
investments combined with cash flows from operations and amounts available
under the Credit Agreement are sufficient to meet the Company's cash
requirements for the foreseeable future.
19
<PAGE>
OTHER MATTERS
Demand for many of the Company's products and services tends to improve with
increased inflation as customers strive to increase employee productivity and
reduce costs. However, the effect of inflation on the Company's relatively
labor-intensive cost structure could adversely affect its results of
operations to the extent the Company is not able to recover increased
operating costs through increased prices and sales.
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency
exposure through decentralized sales, marketing and support operations in
which all costs are local currency based.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed in part to the Company's growth in revenue and operating profit.
The impact of future acquisitions on continued growth in revenue and operating
profit cannot presently be determined.
The Company strives to maintain its internal systems as necessary to conduct
its business efficiently and is addressing the potential impact of the Year
2000 issue on these systems. Although there can be no assurance that there
will not be interruption of operations or other limitations of systems
functionality or that the Company will not incur substantial cost to avoid
such problems, the Company believes it is well positioned to address Year 2000
issues related to its internal systems and further believes any additional
costs related to changes required to address these issues will not have a
material impact on the Company's financial position or results of operations.
In connection with its product and service offerings, the Company is
proactively working with its customers and vendors, trade associations and
electronic commerce standards committees and is engaged in extensive testing
of its products and services and related systems with respect to Year 2000
issues. As of September 30, 1997, most of the Company's supported software
products and services accommodated four character year dating required for the
Year 2000. For those software products or services that do not, the Company
has established plans to upgrade them or to offer alternative software
products, services or solutions. These plans have been integrated into the
Company's normal development cycles. The Company uses third party hardware and
software in providing certain services and the Company's software products
operate on and in systems consisting of third party hardware and software.
Some of such third party hardware and software may not be fully Year 2000
compliant by 2000 and, whether or not the Company's offerings are Year 2000
compliant by then, there can be no assurance that customers will not assert
Year 2000 related claims against the Company or that the Company would prevail
in any resulting litigation.
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 the 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 changes or developments in social, economic, business,
industry, market, legal and regulatory
20
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK:
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The Company does not use derivative financial
instruments in its investment portfolio. The stated objectives of the Company's
investment guidelines are: safety of principal; liquidity; maximization of
yield; and diversification of risk. The Company places its investments with
high credit quality issuers, principally states of the United States, political
subdivisions of the states and corporate debt issuers, and limits the amount of
credit exposure to any one issuer. The marketable securities portfolio includes
only those securities with active secondary or resale markets to ensure
portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio.
Weighted average interest rates include the after-tax yield on debt securities
of states of the United States and political subdivisions of the states. The
total investment portfolio effectively matures in 180 days or less.
<TABLE>
<CAPTION>
MATURITY
-----------------------------------
FAIR VALUE AT
1998 1999 2000 TOTAL SEPTEMBER 30, 1997
-------- ------- ------ -------- ------------------
<S> <C> <C> <C> <C> <C>
Cash equivalents........ $253,726 $253,726 $250,348
Average interest
rate................. 5.63% 5.63%
Commercial paper........ 39,000 39,000 38,744
Average interest
rate................. 5.67% 5.67%
Debt securities......... 108,685 $80,084 $2,500 191,269 195,570
-------- ------- ------ -------- --------
Average interest
rate................. 6.03% 6.51% 6.88% 6.23%
Total investment
portfolio.............. $401,411 $80,084 $2,500 $483,995 $484,662
Average interest
rate................. 5.74% 6.51% 6.88% 5.87%
</TABLE>
FOREIGN CURRENCY RISK:
The Company conducts business in various foreign currencies, primarily in
Canada, Europe, Australia, Japan and other Asian countries. As of September 30,
1997 the Company had not established a foreign currency hedging program.
Historically, the Company's direct foreign operations have been a relatively
small component of the Company's total direct operations, due primarily to
Sterling Software acting as the Company's distributor in markets outside the
United States and Canada (See --"Shared Management and Contractual Arrangements
with Sterling Software" in Item 1 of this report.) The Company has mitigated,
and will continue to mitigate, a portion of its currency exposure through
decentralized sales, marketing and support operations in which all costs are
local currency based.
Subsequent to September 30, 1997, the Company has initiated a foreign
currency hedging program to reduce the Company's exposure to currency
fluctuations as they relate to anticipated foreign profits. The Company's
current hedging strategy limits the Company's exposure to the cost of the
program, which is not material to the Company's operations.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING COMMERCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ 23
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1997 and 1996.............. 24
Consolidated Statements of Income for the Years Ended September 30,
1997, 1996 and 1995.................................................... 25
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995...................................... 26
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.................................................... 27
Notes to Consolidated Financial Statements.............................. 28
</TABLE>
22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling Commerce, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Commerce, Inc. (the "Company") as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. Our
audit also included the financial statement schedule listed under Item 14(a)
of the Company's Annual Report on Form 10-K for the year ended September 30,
1997. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Commerce, Inc. at September 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Dallas, Texas
November 7, 1997
23
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $250,348 $ 23,484
Marketable securities...................................... 234,314 21,203
Accounts and notes receivable, net......................... 103,692 61,292
Amounts due from Sterling Software......................... 35,134
Deferred income taxes...................................... 10,431 3,087
Prepaid expenses and other current assets.................. 16,332 5,794
-------- --------
Total current assets..................................... 615,117 149,994
Property and equipment, net.................................. 59,723 43,199
Computer software, net of accumulated amortization of $51,306
in 1997 and $42,110 in 1996................................. 48,163 34,404
Excess cost over net assets acquired, net of accumulated
amortization of $4,212 in 1997 and $3,382 in 1996........... 17,156 9,789
Other assets................................................. 8,407 4,294
-------- --------
$748,566 $241,680
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................... $ 57,397 $ 34,317
Income taxes payable....................................... 5,919
Deferred revenue........................................... 60,000 38,518
-------- --------
Total current liabilities................................ 123,316 72,835
Deferred income taxes........................................ 13,592 23,135
Other noncurrent liabilities................................. 10,796 7,523
Contingencies and commitments
Stockholders' equity:
Preferred stock $.01 par value, 50,000,000 shares
authorized; no shares issued and outstanding..............
Common stock $.01 par value, 150,000,000 shares authorized;
89,644,000 and 75,000,000 shares issued and outstanding in
1997 and 1996, respectively............................... 896 750
Additional paid-in capital................................. 505,855 98,111
Retained earnings.......................................... 94,111 39,326
-------- --------
Total stockholders' equity............................... 600,862 138,187
-------- --------
$748,566 $241,680
======== ========
</TABLE>
See accompanying notes.
24
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Products........................................ $119,958 $ 87,527 $ 67,603
Product support................................. 71,316 56,229 46,190
Services........................................ 142,565 103,269 78,063
Royalties from Sterling Software................ 16,758 20,748 11,722
-------- -------- --------
350,597 267,773 203,578
Costs and expenses:
Cost of sales:
Products and product support.................. 35,863 28,647 23,713
Services...................................... 34,752 25,771 17,837
-------- -------- --------
70,615 54,418 41,550
Product development and enhancement............. 24,853 15,553 14,807
Selling, general and administrative............. 134,849 102,597 75,193
Purchased research and development.............. 31,879
Reorganization costs............................ 15,810
-------- -------- --------
278,006 172,568 131,550
Income before other income (expense) and income
taxes............................................ 72,591 95,205 72,028
Other income (expense)............................ 16,693 1,217 (478)
-------- -------- --------
Income before income taxes........................ 89,284 96,422 71,550
Provision for income taxes........................ 33,840 38,030 28,620
-------- -------- --------
Net income........................................ $ 55,444 $ 58,392 $ 42,930
======== ======== ========
Income per common share:
Pro forma....................................... $ 0.59
========
Primary......................................... $ 0.64 $ 0.77
======== ========
Fully diluted................................... $ 0.64 $ 0.77
======== ========
Weighted average and pro forma common shares
outstanding...................................... 83,561 74,233 73,200
======== ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL SHAREHOLDERS' TOTAL
NUMBER OF PAID-IN RETAINED NET STOCKHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS INVESTMENT EQUITY
--------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1994................... $ 43,051 $ 43,051
Net income............. 42,930 42,930
Net cash distributed to
Sterling Software..... (32,354) (32,354)
Other.................. (440) (440)
-------- --------
Balance at September 30,
1995................... 53,187 53,187
Formation
transactions.......... 73,200 $732 $ 53,871 (54,603)
Issuance of common
stock for cash........ 1,800 18 40,100 40,118
Net cash distributed to
Sterling Software..... (17,819) (17,819)
Net income............. $39,157 19,235 58,392
Other.................. 4,140 169 4,309
------ ---- -------- ------- -------- --------
Balance at September 30,
1996................... 75,000 750 98,111 39,326 138,187
Issuance of common
stock for cash........ 14,375 144 400,001 400,145
Issuance of common
stock for
acquisitions.......... 194 2 4,998 5,000
Issuance of common
stock pursuant to
stock options
including tax benefit
of $1,200............. 75 3,000 3,000
Net income............. 55,444 55,444
Other.................. (255) (659) (914)
------ ---- -------- ------- -------- --------
Balance at September 30,
1997................... 89,644 $896 $505,855 $94,111 $600,862
====== ==== ======== ======= ======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income...................................... $ 55,444 $ 58,392 $ 42,930
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 30,214 21,943 17,517
Provision for losses on accounts receivable.... 3,567 1,068 (466)
Provision for (benefit of) deferred income
taxes......................................... (15,586) 5,762 4,537
Purchased research and development............. 31,879
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Increase in accounts and notes receivable..... (45,885) (13,149) (14,308)
Decrease (increase) in amounts due from
Sterling Software............................ 35,134 (35,134)
Increase in prepaid expenses and other
assets....................................... (13,917) (3,135) (989)
Increase in accounts payable, accrued
liabilities and income taxes payable......... 20,877 12,710 5,154
Increase in deferred revenue.................. 17,067 7,598 7,677
Other......................................... 3,273 1,235 (588)
--------- -------- --------
Net cash provided by operating activities.... 122,067 57,290 61,464
Investing activities:
Purchases of property and equipment............ (32,148) (26,573) (15,633)
Purchases and capitalized cost of development
of computer software.......................... (13,855) (12,016) (10,244)
Business acquisitions, net of cash acquired.... (38,320) (185) (2,823)
Purchases of investments....................... (224,627) (21,203)
Maturities of investments...................... 11,516
Other.......................................... 192
--------- -------- --------
Net cash used in investing activities........ (297,434) (59,977) (28,508)
Financing activities:
Issuance of common stock....................... 401,945 40,118
Net cash distributed to Sterling Software...... (17,819) (32,354)
Other.......................................... 286 3,477 (586)
--------- -------- --------
Net cash provided by (used in) financing
activities.................................. 402,231 25,776 (32,940)
Increase in cash and cash equivalents........... 226,864 23,089 16
--------- -------- --------
Cash and cash equivalents at beginning of year.. 23,484 395 379
--------- -------- --------
Cash and cash equivalents at end of year........ $ 250,348 $ 23,484 $ 395
========= ======== ========
Supplemental cash flow information:
Income taxes paid.............................. $ 49,278 $ 32,268 $ 24,083
========= ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
1. GENERAL INFORMATION
General
Sterling Commerce, Inc. (together with its wholly owned subsidiaries, the
"Company") is a provider of electronic data interchange ("EDI") and other
electronic commerce products, services and solutions worldwide. The Company
develops, markets and supports electronic commerce software products, and
provides electronic commerce services, that enable businesses to engage in
business-to-business electronic communications and transactions. The Company
has been providing electronic commerce solutions for over 20 years and has
numerous customers in industries such as banking, healthcare, manufacturing,
pharmaceuticals, retailing and transportation.
The Company was incorporated in December 1995 as a wholly owned subsidiary
of Sterling Software, Inc. ("Sterling Software"). The Company completed its
initial public offering (the "Offering") on March 13, 1996. Pursuant to the
Offering, the Company sold to the public 1,800,000 previously unissued shares
of Common Stock, $0.01 par value, of the Company ("Common Stock") and Sterling
Software sold to the public 12,000,000 of the 73,200,000 shares of the
Company's 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, indemnification, and
international marketing. See Note 3--Transactions 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,
$0.10 par value ("Software Stock"), as of the close of business on such date.
As a result, effective September 30, 1996, the Company ceased to be a
subsidiary of Sterling Software.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's consolidated financial statements for the years ended
September 30, 1996 and 1995 have been prepared using Sterling Software's
historical basis in the assets and liabilities of its Electronic Commerce
Group, including goodwill and other intangible assets recognized by Sterling
Software in the original acquisition of certain businesses conducted by the
Company. All significant intercompany accounts among the Company and its
consolidated subsidiaries have been eliminated. Certain amounts for periods
ended prior to September 30, 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 requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingencies at September 30,
1997 and 1996, and the results of operations for the years ended September 30,
1997, 1996 and 1995. While management has based its assumptions and estimates
on the facts and circumstances currently known, final amounts may differ from
such estimates.
The Company's consolidated financial statements for the years ended
September 30, 1996 and 1995 reflect the results of operations, financial
condition and cash flows of the Company as a component or subsidiary of
Sterling Software and may not be indicative of actual results of operations
and financial position of the Company
28
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
which may have been obtained under other ownership. Management believes that
the consolidated income statements include a reasonable allocation of the
incremental administrative costs previously incurred by Sterling Software,
including executive compensation and the related costs of a corporate staff
function. The allocations of such costs were approximately $875,000 for the
first quarter of 1996 and $3,500,000 in 1995 and represent management's
estimate of the costs that would have been incurred had the Company operated
independently of Sterling Software. Subsequent to the first quarter of 1996,
these incremental administrative costs were incurred directly by the Company
and therefore no further allocations of such costs were made by Sterling
Software.
Revenue
Revenue from license fees for software products is recognized when the
software is delivered, provided no significant future vendor obligations exist
and collection is probable. If software product transactions include the right
to receive future products, a portion of the software product revenue is
deferred and recognized as such products are delivered. Services revenue and
revenue from products involving installation or other services are recognized
as the services are performed. Services revenue earned but not invoiced at the
end of a month is recognized as revenue in such month and recorded as unbilled
accounts receivable until invoiced in the following month. Royalties from
Sterling Software represent royalties earned from Sterling Software and
certain of its subsidiaries acting as distributors of certain of the Company's
products outside of the United States and Canada.
Product support contracts generally entitle the customer to telephone
support, bug fixing and the right to receive software updates as they are
released. Revenue from product support contracts, including product support
included in initial license fees, is recognized ratably over the contract
period. All significant costs and expenses associated with product support
contracts are expensed as incurred, which approximates ratable expenses over
the contract period.
When products, product support and services are billed prior to the time the
related revenue is recognized, deferred revenue is recorded and related costs
paid in advance are deferred.
Software Development Costs
The Company capitalizes the costs of developing and testing new or
significantly enhanced software products in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86").
Unamortized software development costs of $34,095,000 and $31,058,000 are
included in "Computer software, net" at September 30, 1997 and 1996,
respectively. Pursuant to FAS No. 86, costs are capitalized when technological
feasibility of the product is established. Technological feasibility is
established either upon the completion of a detailed program design or the
completion of a working model. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software
development costs require judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Software development capitalized costs include, among other things,
programmers' salaries and benefits, outside contractor costs, computer time
and allocated facilities costs.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to fifteen years.
Capitalized computer software costs are amortized on a product-by-product
basis using the greater of the amount determined by taking the ratio of
current year net revenue to estimated future net revenue or the straight-line
method over periods ranging from three to five years. Leasehold improvements
are amortized over the term of the lease. Excess costs over the net assets of
businesses acquired
29
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
are amortized on a straight-line basis over periods of seven to forty years.
Other intangible assets are amortized on a straight-line basis over periods of
three to ten years.
Depreciation and amortization consists of the following for the years ended
September 30, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $16,617 $10,817 $ 7,084
Purchased computer software........................ 1,720 1,412 1,405
Capitalized computer software development costs.... 10,252 8,463 7,772
Excess costs over net assets of businesses
acquired.......................................... 830 427 426
Intangible assets.................................. 795 824 830
------- ------- -------
$30,214 $21,943 $17,517
======= ======= =======
</TABLE>
Income Taxes
The Company computes its provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," ("FAS 109") which requires the use of the asset and liability method of
accounting for income taxes. Under the asset and liability method, a deferred
tax asset or liability is recognized for estimated future tax effects
attributable to temporary differences and carryforwards. The measurement of
deferred income tax assets is adjusted by a valuation allowance, if necessary,
to recognize future tax benefit only to the extent, based on available
evidence, it is more likely than not it will be realized. The effect on
deferred taxes of a change in income tax rates is recognized in the period that
includes the enactment date.
Through September 30, 1996, income from the Company's operations was included
in consolidated income tax returns filed by Sterling Software as part of its
corporate group. The Company has entered into a tax allocation agreement with
Sterling Software covering the reporting periods through September 30, 1996.
Income tax expense in the accompanying financial statements for periods prior
to October 1, 1996, has been computed assuming the Company filed returns
separately from Sterling Software.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options and stock based awards. Under APB 25, if the exercise
price of an employee stock option equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Earnings Per Share
Pro forma net income per common share for the year ended September 30, 1995
is calculated as though there were 73,200,000 shares outstanding during the
entire year. Primary and fully diluted income per common share data for the
years ended September 30, 1997 and 1996 is calculated as though there were
73,200,000 shares outstanding during the entire period, together with the
weighted average of the additional 1,800,000 shares issued in the Offering, the
additional 14,375,000 shares issued in a public offering of previously unissued
shares of Common Stock (the "Follow-On Offering") for the year ended September
30, 1997, and common stock equivalents from the respective dates of their
issuances.
30
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
Foreign Currency Translation
The assets and liabilities of consolidated non-U.S. operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates. Revenue and expense accounts of those operations are
translated at average exchange rates prevailing during the period the
transactions occur. Unrealized translation gains and losses are included as an
adjustment to retained earnings.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments in
investment-grade commercial paper of various issuers, with maturities of three
months or less when purchased. Cash and cash equivalents are recorded at their
fair value.
Marketable Securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate debt securities
and debt securities issued by states of the United States and political
subdivisions of the states. The fair values for marketable securities are
based on quoted market prices.
All marketable securities are classified as available-for-sale securities.
Unrealized holding gains and losses on securities available-for-sale are
recorded as a component of stockholders' equity, net of any related tax
effect. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in values judged to be other-than-temporary are included in
investment income.
Recent Pronouncements
There have been recent pronouncements by the Financial Accounting Standards
Board ("FASB") and the American Institute of Certified Public Accountants
("AICPA") that may require certain changes in accounting policies of the
Company and which may also affect disclosure requirements. These recent
pronouncements do not affect the current year's accounting or reporting
requirements and are mentioned here for informational purposes only.
FAS No. 128: "Earnings per Share". Issued by the FASB in February 1997. FAS
No. 128 will require the Company to restate all prior periods beginning with
those periods ending after December 15, 1997.
Adoption of FAS No. 128 is expected to result in earnings per share as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma earnings per share:
Basic...................................................... $.66 $.77 $.59
Diluted.................................................... $.64 $.77 $.59
</TABLE>
FAS No. 130: "Reporting Comprehensive Income". Issued by the FASB in June,
1997, FAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. The adoption of FAS 130 will require additional disclosure in the
Company's financial statements, but will not have any impact on the financial
position or results of operations of the Company.
FAS No. 131: "Disclosures about Segments of an Enterprise and Related
Information". Issued by the FASB in June, 1997, FAS 131 establishes standards
for the way that public business enterprises report
31
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The adoption of
FAS 131 will require additional disclosure in the Company's financial
statements, but will not have any impact on the financial position or results
of operations of the Company.
SOP 97-2: "Software Revenue Recognition". Issued by the AICPA in October
1997, SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company's accounting policy on software
revenue recognition is generally in compliance with SOP 97-2 and its adoption
is not expected to have a material impact on the financial position or results
of operation of the Company.
3. TRANSACTIONS WITH STERLING SOFTWARE
As a result of Sterling Software's ownership interest in the Company, the
terms of the agreements entered into by the Company and Sterling Software in
contemplation of the Offering were not the result of arm's-length negotiation.
Two such agreements were the tax allocation agreement and the indemnification
agreement. The tax allocation agreement states that for periods during which
the Company and/or its subsidiaries are included in Sterling Software's
consolidated federal income tax returns or consolidated, combined or unitary
state tax returns (which periods included the period between the Offering and
the Distribution), the Company is required to pay to or is entitled to receive
from Sterling Software its allocable portion of the consolidated federal and
state income tax liability or refunds, respectively. The 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.
Amounts payable and receivable from Sterling Software arose as a result of
various transactions between the Company and Sterling Software, including
royalties paid to the Company as a result of Sterling Software acting as an
international distributor, tax expense charged to the Company, other expenses
incurred on behalf of the Company and the Company's participation in Sterling
Software's central cash management program (which participation terminated
upon completion of the Distribution on September 30, 1996).
Certain costs and expenses were initially incurred by Sterling Software on
behalf of the Company, and charged to the Company. An analysis of significant
items (other than the expense allocations discussed in Note 2 under "Basis of
Presentation", tax allocations and the early termination payment discussed
below in Note 4 under "Termination of International Marketing Agreement")
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Summary of expenses:
Legal, accounting and professional fees.......... $ 153 $ 1,139 $ 600
Payroll related.................................. 3,557 7,691 1,403
Occupancy........................................ 1,558 1,695 661
Miscellaneous.................................... 1,163 534 374
------- -------- -------
$ 6,431 $ 11,059 $ 3,038
======= ======== =======
</TABLE>
32
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
4. TERMINATION OF INTERNATIONAL MARKETING AGREEMENT
In June 1997, the Company entered into an agreement (the "Termination
Agreement") with Sterling Software, terminating effective as of June 30, 1997
the International Distributor Agreement dated March 4, 1996, as amended (the
"International Marketing Agreement"). Under the Termination Agreement, the
Company acquired certain assets and assumed certain liabilities associated
with the distribution of certain of the Company's products by Sterling
Software outside the United States and Canada. The Company 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, the Company paid Sterling
Software (i) $5,226,000 for early termination of the International Marketing
Agreement and (ii) approximately $10,076,000, which amount was equal to the
net book value of certain assets of Sterling Software acquired (principally
accounts receivable) less certain liabilities assumed by the Company related
to the international distribution of certain of the Company's products. In
addition, the Company and Sterling Software 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, principally
incurred to integrate the international distribution business formerly
conducted by Sterling Software into the Company's operations, as
reorganization costs in the accompanying statement of income for the year
ended September 30, 1997.
The components of the reorganization costs consist of:
<TABLE>
<S> <C>
Early termination payment to Sterling Software.................. $ 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>
At September 30, 1997, approximately $8,991,000 of these costs remain in
accounts payable and accrued liabilities and are expected to be disbursed
during the first half of fiscal 1998.
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
(the "Notes"), having an aggregate principal amount of approximately
$11,200,000. The Notes were paid in full in July 1997. In addition, the
Company incurred costs directly related to the acquisition of approximately
$3,191,000. The acquisition has been accounted for using the purchase method
of accounting.
The excess of cost over net assets acquired in these two acquisitions is
being amortized on a straight line basis over 7 and 10 years respectively. The
effect of the acquisitions, individually and in the aggregate, was not
material to the Company's results of operations for 1997.
33
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
6. LEGAL PROCEEDINGS AND CLAIMS
From time to time the Company is subject to certain legal proceedings and
claims which arise in the normal course of its business. Pending matters
include claims against the Company involving alleged breaches of contract or
other nonperformance with respect to customer sales, alleged employment
discrimination and other matters. Such routine litigation matters are normally
settled or defended, depending on the circumstances of each claim.
Also, on February 20, 1997, David B. Shaev, who alleges he is a stockholder
of the Company, filed a derivative action in the Chancery Court in the State
of Delaware against the Company and each of the Company's directors, Sam Wyly,
Charles J. Wyly, Jr., Evan A. Wyly, Sterling L. Williams, Warner C. Blow,
Honor R. Hill and Robert E. Cook, alleging that such directors breached their
fiduciary duties by approving grants of excessive stock options to the
individual defendants. The plaintiff seeks rescission of such grants of stock
options, injunctive relief prohibiting the exercise of the options, the award
of damages to the Company and attorneys' fees and costs. The defendants have
denied the allegations in the complaint and intend to vigorously defend this
action.
While any legal proceeding has elements of uncertainty, in the opinion of
management, based on presently available information, the amount of any
liability with respect to any existing claims, net of any applicable reserves
and available insurance, will not have a material effect on the financial
condition or results of operations of the Company.
7. MARKETABLE SECURITIES
At September 30, 1997 and 1996, all of the Company's marketable securities
were classified as available-for-sale and consist of the following (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AGGREGATE AMORTIZED HOLDING HOLDING
FAIR VALUE COST BASIS GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Corporate commercial paper,
scheduled maturities within
one year..................... $ 38,744 $ 38,744
Corporate debt securities,
scheduled maturities within
one year..................... 33,839 33,816 $ 23
Government obligations,
scheduled maturities within
one year..................... 75,588 75,503 94 $ 9
Government obligations,
scheduled maturities between
one and five years........... 86,143 85,937 265 59
-------- -------- ---- ---
$234,314 $234,000 $382 $68
======== ======== ==== ===
SEPTEMBER 30, 1996
U.S. government obligations,
scheduled maturity within one
year......................... $ 9,678 $ 9,652 $ 26
U.S. government obligations,
scheduled maturities between
one and five years........... 11,525 11,463 62
-------- -------- ----
$ 21,203 $ 21,115 $ 88
======== ======== ====
</TABLE>
Government obligations are debt securities of states of the United States
and political subdivisions of the states. In the table above, the Company has
reflected debt securities whose issuers may call the debt prior to the
scheduled maturity date as maturing on the earliest call date.
34
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
8. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Trade accounts receivable.................................. $108,481 $63,708
Less: Allowance for doubtful accounts...................... 4,789 2,416
-------- -------
$103,692 $61,292
======== =======
</TABLE>
The Company's accounts receivable are due principally from corporations in
diverse industries located in North America and Europe and are generally
unsecured.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Computer and peripheral equipment.......................... $ 82,690 $57,231
Furniture, fixtures and other equipment.................... 9,471 6,693
Building improvements...................................... 10,548 6,302
-------- -------
102,709 70,226
Less accumulated depreciation.............................. 42,986 27,027
-------- -------
$ 59,723 $43,199
======== =======
</TABLE>
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Trade accounts payable...................................... $19,092 $12,323
Accrued compensation........................................ 22,899 16,945
Accrued reorganization costs................................ 8,991
Other accrued liabilities................................... 6,415 5,049
------- -------
$57,397 $34,317
======= =======
</TABLE>
35
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
11. INCOME TAXES
The provision for income taxes is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Current:
Foreign.......................................... $ 436 $ 176
Federal.......................................... 41,547 26,225 $19,147
State............................................ 7,443 5,867 4,936
Deferred:
Federal.......................................... (13,174) 4,975 3,970
State............................................ (2,412) 787 567
-------- ------- -------
$ 33,840 $38,030 $28,620
======== ======= =======
</TABLE>
The provision for income taxes differs from the income taxes computed at the
federal income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax expense at U.S. federal statutory rate..... $ 31,249 $ 33,748 $ 25,043
State income taxes, net of federal benefit..... 3,384 4,223 3,577
Other.......................................... (793) 59
-------- -------- --------
$ 33,840 $ 38,030 $ 28,620
======== ======== ========
</TABLE>
The Company's income tax payments have been reduced and paid in capital has
been increased by approximately $1,200,000 due to income tax deductions for
employee compensation income associated with certain transactions, including
the exercise of stock options to purchase shares of the Company's Common
Stock.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax liability as of September 30 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred current income tax assets:
Deferred revenue............................... $ 1,301 $ 362
Reserves and restructuring accruals............ 9,130 2,725
------------ ------------
10,431 3,087
------------ ------------
Deferred non-current income tax assets:
Deferred revenue............................... 1,241
Accrued employee benefits...................... 1,257
------------
2,498
------------
Deferred non-current income tax liabilities:
Capitalized software costs..................... 13,536 15,214
Depreciation and amortization.................. 2,554 7,921
------------ ------------
16,090 23,135
------------ ------------
Deferred income tax liability net of deferred
income tax assets............................... $ 3,161 $ 20,048
============ ============
</TABLE>
36
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
12. COMMITMENTS
Lease Obligations
The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1997, 1996 and 1995 was
$17,252,000, $10,000,000, and $7,537,000, respectively. At September 30, 1997,
minimum future rental payments due under all operating leases, net of future
sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1998................................. $15,480
1999................................. 12,002
2000................................. 11,058
2001................................. 9,305
2002................................. 6,712
Thereafter........................... 27,945
</TABLE>
Credit Agreement
The Company maintains a Revolving Credit and Term Loan Agreement, as
amended, (the "Credit Agreement"), which provides for a domestic borrowing
capacity of $20,000,000 and an additional $10,000,000 international borrowing
capacity. An underlying letter of credit facility provides for letters of
credit up to the full domestic borrowing capacity. The Credit Agreement, with
final maturity October 1, 1999, is unsecured and contains various restrictive
covenants, including limitations on additional borrowings, payment of cash
dividends and acquisitions. The Credit Agreement also requires that the
Company maintain certain financial ratios. Borrowings under the Credit
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%). As of
September 30, 1997 there were no amounts borrowed or outstanding under the
Credit Agreement, nor the underlying letter of credit facility.
13. PREFERRED STOCK
The Company is authorized to issue up to 50,000,000 shares of preferred
stock, par value $0.01 per share ("Preferred Stock"). The Board of Directors
of the Company has authorized the issuance of up to 1,500,000 shares of
Preferred Stock, designated as Series A Junior Participating Preferred Stock
("Series A Junior Preferred Stock") pursuant to the terms of the Rights
Agreement, dated as of December 18, 1996 (the "Rights Plan") (Note 14). The
Board of Directors of the Company is also authorized, without action by the
stockholders, to issue Preferred Stock and fix for each series the number of
shares, designation, dividend rights, voting rights, redemption rights, and
other rights.
14. 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 Common Stock
outstanding at the close of business on December 31, 1996 (the "Record Date"),
pursuant to the terms of the Rights Plan. The Rights Plan also provides,
subject to specified exceptions and limitations, that shares of Common 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 Preferred Stock (structured so as to be substantially the
equivalent of a share of Common Stock) is attached to each issued and
outstanding share of Common Stock. Subject to certain conditions, each Right
entitles the holder to purchase 1/100th of a share of Series A Junior
Preferred Stock at a price (the "Purchase Price") of $200.00 per 1/100th of a
share of Series A Junior Preferred Stock (subject to adjustment).
37
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
In general, the Rights will not become exercisable, or transferable apart
from the shares of Common 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 Common 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
Common 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.
15. STOCK OPTIONS
The Company has a stock option plan that provides for the grant of options
to purchase shares of Common Stock by officers, directors, key employees and
advisors. All option grants were made at the fair market value of the Common
Stock at the date of the grant. Options granted pursuant to the plan generally
become exercisable at a rate of 25% per year or become exercisable immediately
or within one year from the date of grant. Options granted pursuant to the
plan generally expire five or ten years from the date of grant.
Stock option transactions are summarized below for the two years ended
September 30, 1997:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year.................. 12,252 $24
Granted................. 5,640 $27 12,285 $24
Exercised............... (75) $24
Canceled................ (90) $26 (33) $24
------ ------
Outstanding at end of
year..................... 17,727 $26 12,252 $24
====== ======
Options exercisable at
year-end................. 1,000 $24
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (000'S) CONTRACTUAL LIFE EXERCISE PRICE (000'S) EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$24
to
$26 16,212 7.8 $24 1,000 $24
$29
to
$31 581 4.8 $29
$32
to
$44 934 5.4 $33
------ -----
$24
to
$44 17,727 7.7 $26 1,000 $24
====== =====
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", ("FAS No. 123") requires disclosure of pro forma net
earnings and net earnings per common share information computed as if the
Company had accounted for its employee stock options under the fair value
method as set forth in FAS No. 123.
38
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
The fair value of the Company's employee stock awards was estimated using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 4.8%
to 6.7%; stock price volatility factors of 0.368% and 0.368%; and expected
option lives of 1 year to 5 years. The Company does not have a history of
paying dividends, and none have been assumed in estimating the fair value of
the options.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because, among other things, changes in the subjective input assumptions can
materially affect the fair value estimate, in the Company's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share
information):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net income:
As reported.............................................. $55,444 $58,392
Pro forma................................................ 10,570 40,600
Primary earnings per share:
As reported.............................................. .64 .77
Pro forma................................................ .12 .54
Fully diluted earnings per share:
As reported.............................................. .64 .77
Pro forma................................................ .12 .54
Weighted-average fair value of options granted during the
year...................................................... $ 8.45 $ 7.41
</TABLE>
16. DEFINED CONTRIBUTION PLAN
Prior to October 1, 1996, the Company participated in Sterling Software's
plan that provides retirement benefits under the provisions of Section 401(k)
of the Internal Revenue Code (the "Software Plan") for all full-time employees
and for part-time employees that have completed a specified term of service.
Pursuant to the Software Plan, eligible participants may elect to contribute a
percentage of their annual gross compensation and the Company contributed
additional amounts, as provided by the Software Plan. Company contributions
charged to expense during 1996 and 1995 were $2,035,000 and $930,000,
respectively.
Effective September 30, 1996, the Company ceased participating in the
Software Plan. The Company established a plan with similar attributes (the
"Commerce Plan") effective October 1, 1996. The portion of the Commerce Plan
consisting of the Company's contribution has been designated as an employee
stock ownership plan. One half of the Company's contributions are invested in
Common Stock. The Company's pro-rata share of the assets of the Software Plan
were transferred to the Commerce Plan. Company contributions charged to
expense during 1997 were $1,951,000.
39
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
17. CHANGE-IN-CONTROL AND SEVERANCE AGREEMENTS
As of September 30, 1997, the Company had change-in-control agreements with
17 executive and other officers that grant the right to receive payments based
on the individual's respective salary, bonus and benefits in the event a
change in control (as defined) of the Company occurs and a covered officer's
employment is terminated. The change-in-control agreements further provide
that the Company will make certain payments to the officer to compensate such
officer for the economic effect of the individual's liability to pay excise
taxes to the extent such payments received by such officer, pursuant to the
change-in-control agreements, stock option agreements or otherwise, are
considered contingent on a change in ownership or control under Section 280G
of the Internal Revenue Code (a "Tax Payment"). Based on certain assumptions,
at September 30, 1997, the maximum liability for salaries, bonuses, benefits
and Tax Payments under these agreements was estimated to be approximately
$31,000,000. The actual liability, if any, under these agreements will depend
on a number of factors, including the level of salaries, bonuses and benefits
being received by the covered officers prior to a change in control and the
price at which any change-in-control transaction occurs.
As of September 30, 1997, the Company had entered into severance agreements
with 16 executive and other officers of the Company providing for payments
based on the individual officer's salary and bonus and continuation of
benefits. In addition, the Company has entered into an agreement with another
officer that provides for an annual base salary plus agreed-upon bonuses or
benefits and converts to a seven-year consulting agreement upon the occurrence
of certain events. At September 30, 1997, the maximum estimated liability for
future salaries, bonuses and benefits under these agreements was estimated to
be approximately $20,000,000.
40
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1997 and
1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997:
Revenue....................... $74,769 $79,534 $87,798 $108,496
Cost of sales................. 15,735 16,392 18,073 20,415
Product development and
enhancement.................. 5,071 6,191 7,147 6,444
Selling, general and
administrative............... 28,950 29,371 32,484 44,044
Income (loss) before other
income and income taxes(1)... 25,013 27,580 (17,595) 37,593
------- ------- ------- --------
Net income (loss)............. $16,060 $18,817 $(7,476) $ 28,043
======= ======= ======= ========
Earnings (loss) per share:
Primary..................... $ 0.21 $ 0.23 $ (0.08) $ 0.30
======= ======= ======= ========
Fully diluted............... $ 0.21 $ 0.23 $ (0.08) $ 0.30
======= ======= ======= ========
Year ended September 30, 1996:
Revenue....................... $56,150 $62,076 $69,225 $ 80,322
Cost of sales................. 11,916 13,336 13,695 15,471
Product development and
enhancement.................. 3,288 3,777 4,187 4,301
Selling, general and
administrative............... 20,255 22,904 27,684 31,754
Income before other expense
and income taxes............. 20,691 22,059 23,659 28,796
------- ------- ------- --------
Net income.................... $12,289 $13,235 $14,750 $ 18,118
======= ======= ======= ========
Earnings per share:
Pro forma(2)................ $ 0.17
=======
Primary..................... $ 0.18 $ 0.19 $ 0.24
======= ======= ========
Fully diluted............... $ 0.18 $ 0.19 $ 0.24
======= ======= ========
</TABLE>
- --------
(1) Net of $31,879,000 of purchased in-process research and development and
$15,810,000 of reorganization costs charged to expense in the quarter ended
June 30, 1997.
(2) Assumes that 73,200,000 shares of Common Stock were outstanding during the
entire period.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 concerning the directors of the Company
is set forth in the Proxy Statement to be provided to stockholders in
connection with the Company's 1998 Annual Meeting of Stockholders, under the
heading "Proposal I--Election of Directors," which information is incorporated
herein by reference. Information concerning compliance with Section 16 of the
Securities Act of 1934, as amended, by persons subject to such Section is set
forth in the Proxy Statement under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is incorporated herein by
reference. The name, age and position of each executive officer of the Company
is set forth under the heading "Executive Officers" in Part I of this report,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 concerning executive compensation is
set forth in the Proxy Statement under the heading "Management Compensation,"
which information is incorporated herein by reference. Information contained
in the Proxy Statement under the caption "Management Compensation--Report of
the Executive and Option Committees on Executive Compensation" and "Stock
Performance Chart" is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 concerning security ownership of
certain beneficial owners and management is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 concerning certain relationships and
related transactions is set forth in the Proxy Statement under the headings
"Management Compensation--Executive and Stock Option Committee Interlocks and
Insider Participation" and "Certain Transactions," which information is
incorporated herein by reference.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1997, 1996 and 1995
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Third Amended and Restated Certificate of Incorporation of the
Company, as amended(1)
3.2 Amended and Restated Bylaws of the Company(2)
4.1 Rights Agreement dated December 18, 1996 by and between the Company
and The First National Bank of Boston, as Rights Agent(3)
10.1 International Marketing Agreement dated March 4, 1996 between
Sterling Commerce International, Inc. and Sterling Software
International, Inc., as amended by Amendment No. 1 to the
International Distributor Agreement dated as of January 31, 1997
between Sterling Commerce B.V. and Sterling Software International,
Inc.(4),(5)
10.2 Termination Agreement dated June 30, 1997 between Sterling Commerce
B.V. and Sterling Software International, Inc.(6)
10.3 Tax Allocation Agreement dated March 4, 1996 between the Company and
Sterling Software(2)
10.4 Indemnification Agreement dated March 4, 1996 between the Company
and Sterling Software(4)
10.5 Master Software License Agreement dated March 4, 1996 among the
Company, Sterling Software and their respective subsidiaries parties
thereto(4)
10.6 Data Processing Agreement dated March 13, 1996 between the Company
and Sterling Software(2)
10.7 Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software(7)
10.8 Form of Indemnification Agreement between the Company and each of
its officers and directors(2),(8)
10.9 Form of Director Agreement dated as of January 27, 1997 between the
Company and each of Sam Wyly and Charles J. Wyly, Jr.(5),(8)
10.10 Agreement dated February 12, 1996 between the Company and Sterling
L. Williams, as amended by Amendment to Agreement dated as of
December 1, 1996(4),(5),(8)
10.11 Form of Change-in-Control Severance Agreement dated as of February
12, 1996 between the Company and each of Sterling L. Williams,
Warner C. Blow, Jeannette P. Meier, Paul L.H. Olson, Stephen R.
Perkins and certain other executive officers and directors of the
Company(4),(8)
10.12 Forms of Severance Agreements dated as of February 12, 1996 between
the Company and each of Warner C. Blow, Jeannette P. Meier, Paul
L.H. Olson, Stephen R. Perkins and certain other executive officers
and directors of the Company (other than Sterling L.
Williams)(4),(8)
10.13 Supplemental Executive Retirement Plan(8),(11)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.14 Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan(8),(9)
10.15 Sterling Commerce, Inc. Deferred Compensation Plan, as amended by
Amendment to Deferred Compensation Plan dated as of October 30,
1997(8),(10),(11)
10.16 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, as amended by Amendment
and Modification Agreement to the Revolving Credit and Term Loan
Agreement(7),(9)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1997(11)
21.1 Subsidiaries of the Company(11)
23.1 Consent of Ernst & Young LLP(11)
27.1 Financial Data Schedule(11)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement
No. 333-20565 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
No. 33-80595 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Current Report on Form 8-K dated
December 18, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Current Report on Form 8-K dated
June 30, 1997 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Annual Report on Form 10-K, as
amended, for the fiscal year ended September 30, 1996 and incorporated
herein by reference.
(8) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(9) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement
No. 333-37523 and incorporated herein by reference.
(11) Filed herewith.
(b) Reports on Form 8-K.
During the three-month period ended September 30, 1997, the Company filed
a Current Report on Form 8-K. The report, dated June 30, 1997, included
information requested under Item 5--Other Events.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate
section of this report.
44
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Sterling Commerce, Inc.
/s/ Warner C. Blow
By __________________________________
WARNER C. BLOW
President and Chief Executive
Officer
Date: November 18, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
November 18, /s/ Sterling L. Williams
1997 By __________________________________
STERLING L. WILLIAMS
Chairman of the Board and Director
November 18, /s/ Warner C. Blow
1997 By __________________________________
WARNER C. BLOW
President and Chief Executive
Officer and Director (Principal
Executive Officer)
November 18, /s/ Charles J. Wyly, Jr.
1997 By __________________________________
CHARLES J. WYLY, JR.
Director
November 18, /s/ Sam Wyly
1997 By __________________________________
SAM WYLY
Director
November 18, /s/ Evan A. Wyly
1997 By __________________________________
EVAN A. WYLY
Director
November 18, /s/ Honor R. Hill
1997 By __________________________________
HONOR R. HILL
Director
November 18, /s/ Robert E. Cook
1997 By __________________________________
ROBERT E. COOK
Director
November 18, /s/ Steven P. Shiflet
1997 By __________________________________
STEVEN P. SHIFLET
Senior Vice President, and Chief
Financial Officer (Principal
Financial and Accounting Officer)
45
<PAGE>
SCHEDULE II
STERLING COMMERCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS - END OF
OF PERIOD EXPENSES DESCRIBE PERIOD
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts at September 30,
1997...................... $2,416,000 $3,567,000 $(1,194,000)(1) $4,789,000
========== ========== ============== ==========
Allowance for doubtful
accounts at September 30,
1996...................... $2,000,000 $1,068,000 $ (652,000)(1) $2,416,000
========== ========== ============== ==========
Allowance for doubtful
accounts at September 30,
1995...................... $2,830,000 $ (466,000) $ (364,000)(1) $2,000,000
========== ========== ============== ==========
</TABLE>
- --------
(1) Accounts written off.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Third Amended and Restated Certificate of Incorporation of the
Company, as amended(1)
3.2 Amended and Restated Bylaws of the Company(2)
4.1 Rights Agreement dated December 18, 1996 by and between the Company
and The First National Bank of Boston, as Rights Agent(3)
10.1 International Marketing Agreement dated March 4, 1996 between Sterling
Commerce International, Inc. and Sterling Software International,
Inc., as amended by Amendment No. 1 to the International Distributor
Agreement dated as of January 31, 1997 between Sterling Commerce B.V.
and Sterling Software International, Inc.(4), (5)
10.2 Termination Agreement dated June 30, 1997 between Sterling Commerce
B.V. and Sterling Software International, Inc.(6)
10.3 Tax Allocation Agreement dated March 4, 1996 between the Company and
Sterling Software(2)
10.4 Indemnification Agreement dated March 4, 1996 between the Company and
Sterling Software(4)
10.5 Master Software License Agreement dated March 4, 1996 among the
Company, Sterling Software and their respective subsidiaries parties
thereto(4)
10.6 Data Processing Agreement dated March 13, 1996 between the Company and
Sterling Software(2)
10.7 Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software(7)
10.8 Form of Indemnification Agreement between the Company and each of its
officers and directors(2), (8)
10.9 Form of Director Agreement dated as of January 27, 1997 between the
Company and each of Sam Wyly and Charles J. Wyly, Jr.(5), (8)
10.10 Agreement dated February 12, 1996 between the Company and Sterling L.
Williams, as amended by Amendment to Agreement dated as of December 1,
1996(4), (5), (8)
10.11 Form of Change-in-Control Severance Agreement dated as of February 12,
1996 between the Company and each of Sterling L. Williams, Warner C.
Blow, Jeannette P. Meier, Paul L.H. Olson, Stephen R. Perkins and
certain other executive officers anddirectors of the Company(4), (8)
10.12 Forms of Severance Agreements dated as of February 12, 1996 between
the Company and each of Warner C. Blow, Jeannette P. Meier, Paul L.H.
Olson, Stephen R. Perkins and certain other executive officers and
directors of the Company (other thanSterling L. Williams)(4), (8)
10.13 Supplemental Executive Retirement Plan(8), (11)
10.14 Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan(8), (9)
10.15 Sterling Commerce, Inc. Deferred Compensation Plan, as amended by
Amendment to Deferred Compensation Plan dated as of October 30,
1997(8), (10), (11)
10.16 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, as amended by Amendment and
Modification Agreement to the RevolvingCredit and Term Loan
Agreement(7), (9)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1997(11)
21.1 Subsidiaries of the Company(11)
23.1 Consent of Ernst & Young LLP(11)
27.1 Financial Data Schedule(11)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
333-20565 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
33-80595 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Current Report on Form 8-K dated
December 18, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996 and incorporated herein by reference.
<PAGE>
(6) Previously filed as an exhibit to the Current Report on Form 8-K dated
June 30, 1997 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Annual Report on Form 10-K, as
amended, for the fiscal year ended September 30, 1996 and incorporated
herein by reference.
(8) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(9) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement
No. 333-37523 and incorporated herein by reference.
(11) Filed herewith.
<PAGE>
Exhibit 10.13
STERLING COMMERCE, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
PREAMBLE
--------
The purpose of this Supplemental Executive Retirement Plan is to continue the
benefits accrued for Warner C. Blow under the Informatics General Corporation
Supplemental Executive Retirement Plan II (the "Prior Plan"). This Plan amends
and supersedes, effective as of January 1, 1997, the Prior Plan in its entirety
with respect to the Prior Plan benefits of Warner C. Blow.
SECTION I
---------
Definitions
-----------
1.1 "Basic Plan Benefit" has the meaning set forth in Section 3.1.
1.2 "Change in Control Agreement" means the Change in Control and Severance
Agreement between the Company and the Participant, effective February 12,
1996, as well as any amendments made to such agreement.
1.3 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.4 "Committee" means the Executive Committee of the Board of Directors of
the Company (excluding, however, the Participant), which has been given
authority by the Board of Directors to administer this Plan.
1.5 "Company" means Sterling Commerce, Inc., a Delaware corporation.
1.6 "CPI" means the Consumer Price Index or appropriate equivalent index as
determined by the Committee.
1.7 "Earnings" means base salary payable plus cash incentive compensation
payable for a calendar year, but excluding all incentive cash
compensation in excess of 50% of base salary in the calendar year in
which such incentive awards are received by the Participant or, if the
Participant elects to defer receipt of all or part of such incentive
awards pursuant to the Company's Deferred Compensation Plan or otherwise,
in the calendar year in which such incentive awards first would have been
otherwise received by the Participant, all such amounts averaged over the
highest consecutive three calendar years of Service. Notwithstanding any
provision contained herein, the limitation for recognition of incentive
cash compensation as "Earnings" contained in the previous sentence shall
be applied to the Participant's base salary for his last full calendar
year of Service in
<PAGE>
determining such limitation with respect to the Participant's incentive
compensation for his last full calendar year of Service. Salary deferred
by the election of the Participant pursuant to the Company's Deferred
Compensation Plan or otherwise shall be included in Earnings in the
calendar year for which such salary relates (i.e., the year in which the
related services are performed), cash incentive compensation so deferred
shall be included in Earnings in the calendar year in which, but for such
deferral, such incentive compensation first would have been received, and
deferred compensation (both salary and incentive compensation) that is
included in Earnings pursuant to this sentence shall not be included in
Earnings when it is later actually received by the Participant. For
example, annual incentive cash compensation is earned in calendar year
1995 in the amount of $80,000 and is paid in calendar year 1996. The
$80,000 paid in 1996 is compared to a $120,000 1996 base salary. Since
$80,000 is greater than $60,000 (50% of 1996 base salary) only $60,000 of
the award will be used towards Earnings for 1995 under the Plan. The
Earnings for 1995 would be the same even if the Participant deferred
receipt of all or a portion of the $80,000 or $120,000 until some time
after 1996. As used herein, "monthly Earnings" means one-twelfth of
Earnings.
1.8 "Informatics Plan" means the Informatics General Corporation Retirement
Plan II, a terminated money purchase pension plan.
1.9 "Participant" means Warner C. Blow.
1.10 "Plan" means the Sterling Commerce, Inc. Supplemental Executive
Retirement Plan.
1.11 "Retirement" means the termination of the Participant's employment with
the Company on one of the retirement dates specified in Section 2.1.
1.12 "Service" means the Participant's months of service from September 30,
1974, his date of hire by Informatics General Corporation, to Retirement.
Such service will include without duplication periods of employment with
Informatics General Corporation; Sterling Software, Inc.; the Company;
and any of their subsidiaries, affiliates, or successors. If the
Participant becomes disabled and is receiving long-term disability
benefits from the Company's Long-Term Disability Plan, such period shall
be considered Service under this Plan.
1.13 "Severance Agreement" means the Severance Agreement between the Company
and the Participant, dated February 12, 1996, as well as any amendments
made to such agreement.
1.14 "Surviving Spouse" means the Participant's spouse married to him for at
least one year prior to the earlier of the Participant's death or
Retirement.
1.15 The singular may include the plural, unless the context clearly indicates
the contrary.
-2-
<PAGE>
SECTION II
----------
Eligibility for Benefits
------------------------
2.1 Subject to Section IV of this Plan, the Participant is eligible to retire
and receive a benefit under this Plan beginning on one of the following
dates.
(a) "Normal Retirement Date," which is the first day of the month
following the month in which the Participant reaches age 65.
(b) "Early Retirement Date," which is the first day of any month
hereafter before the Normal Retirement Date or Disability Retirement
Date.
(c) "Postponed Retirement Date," with the Committee's consent, which is
the first day of the month following the Participant's Normal
Retirement Date in which the Participant terminates employment with
the Company.
(d) "Disability Retirement Date," which is the first day of the month in
which the Participant begins receiving a long-term disability
benefit from the Company's Long-Term Disability Plan.
-3-
<PAGE>
SECTION III
-----------
Amount of Benefit
-----------------
3.1 The monthly retirement benefit payable to the Participant if he retires
at his Normal Retirement Date or his Postponed Retirement Date under the
Plan will equal the lesser of (i) or (ii), where
(i) is equal to 1/6 of 1% times Service times monthly Earnings; and
(ii) is equal to 50% of monthly Earnings less the Basic Plan Benefit (as
hereinafter defined).
For purposes of the Plan, the term "Basic Plan Benefit" means the monthly
annuity payment (as hereinafter determined), payable (x) in the form of a
50% joint and survivor annuity to the Participant if he has a Surviving
Spouse at the Normal Retirement Date or Postponed Retirement Date; or (y)
if the Participant does not have a Surviving Spouse at such time, in the
form of a single life annuity, that could be provided by the sum of:
(a) $241,425 (which is equal to the accumulation with interest of 3% of
Compensation for each calendar year of the Participant's Service
beginning with the calendar year in which he first participated in
the Informatics Plan and ending on December 31, 1995), together with
interest on such amount at the Applicable Rate (as hereinafter
defined) from January 1, 1996 to the later of the Participant's
Normal Retirement Date or his Postponed Retirement Date; and
(b) with respect to each calendar year of the Participant's Service after
December 31, 1995, the accumulation (with interest thereon at the
Applicable Rate) of 3% of Compensation for each such calendar year to
the later of the Participant's Normal Retirement Date or his
Postponed Retirement Date.
For purposes of this Section, (1) the term "Applicable Rate" means an
annual rate of interest equal to 5%; (2) the term "Compensation" means
the Participant's taxable wages as reported on Form W-2 up to any limit
under Section 401(a)(17) of the Code or any successor provision; and (3)
all annuity amounts will be determined by using the annual rate of
interest on 30-year Treasury securities for the month of November
preceding the calendar year in which benefit payments begin and the
applicable mortality table as prescribed by the Secretary of the Treasury
under Section 417(e)(3) of the Code or any successor provision.
3.2 The monthly benefit payable to the Participant if he retires on an Early
Retirement Date will equal the benefit determined in Section 3.1, except
that the benefit described in Section 3.1(ii) will be multiplied by a
fraction, the numerator of which is Service as of his
-4-
<PAGE>
Early Retirement Date and the denominator of which is his Service
projected to his Normal Retirement Date. For example, if the Participant
was 35 when hired and retired early at age 55, his annual benefit would
be determined as the lessor of (i) or (ii), where
(i) is equal to 1/6 of 1% times Service at Early Retirement Date times
monthly Earnings at Early Retirement Date; and
(ii) is equal to 33-1/3% of monthly Earnings less the Basic Plan Benefit;
where 33-1/3% is equal to 50% multiplied by the fraction 240/360; and
where 240 is his Service to age 55 and 360 is the service he would have
had if he had continued to work to age 65, his Normal Retirement Date.
The monthly benefit determined under this Section 3.2 will become payable
on the Participant's Normal Retirement Date. For purposes of determining
the Basic Plan Benefit under this section, all amounts to be determined
under paragraphs (a) and (b) of Section 3.1 shall be determined as of the
Participant's Early Retirement Date. At the Committee's discretion,
payments may begin any time after the Participant's Early Retirement Date
and prior to his Normal Retirement Date and such monthly benefit shall be
actuarially reduced based on the interest and mortality assumptions
contained in clause (3) of the last sentence of Section 3.1.
3.3 The monthly benefit payable at a Postponed Retirement Date, will be equal
to the monthly benefit determined in accordance with Section 3.1 based on
Service, Earnings, and the Participant's Basic Plan Benefit, as of the
Participant's Postponed Retirement Date.
3.4 If the Participant becomes disabled and if he receives long-term
disability benefits from the Company's Long-Term Disability Plan, the
monthly benefit payable at Normal Retirement Date to the Participant
under this Plan will be equal to the monthly benefit determined in
accordance with Section 3.1 based on Service to Normal Retirement Date
and Earnings and the Participant's Basic Plan Benefit as of the
Participant's date of disability.
3.5 The monthly benefit payable at a Disability Retirement Date, will be
equal to 66-2/3% of the Participant's monthly Earnings as of his
Disability Retirement Date, in excess of $7,500. Such benefit, payable
monthly, shall commence on the date the Participant begins receiving a
long-term disability benefit from the Company's Long-Term Disability Plan
and will be payable as long as the Participant continues to receive a
long-term disability benefit from such plan. Benefits from this Plan,
payable as a result of a disability, will stop when benefits from the
Long-Term Disability Plan cease. At age 65, benefits will commence in
accordance with Section 3.4.
3.6 The benefits payable under the Plan, as determined in accordance with the
appropriate preceding section of this Section III, except those
determined in accordance with Section 3.5, will be payable in equal
monthly installments, adjusted if appropriate as provided in
-5-
<PAGE>
Section 3.7, during the Participant's lifetime with benefits ceasing upon
the Participant's death; however, if, at the time of the Participant's
death, he has a Surviving Spouse, such Surviving Spouse shall receive a
benefit equal to 50% of the Participant's benefit as so adjusted,
commencing on the first day of the month following the later of the month
in which the surviving Spouse reaches age 55 or the month in which the
Participant dies with such payments continuing to the death of the
Surviving Spouse.
3.7 Any benefits payable hereunder, except those determined in Section 3.5,
shall be adjusted upward annually, effective each March 1, beginning with
the March 1 occurring at least 12 months after entitlement to benefit
payments first occurs, to the extent that the CPI for the preceding
calendar year exceeds a 5% increase from the next preceding calendar
year.
Any benefits payable hereunder shall be adjusted downward annually,
effective each March 1, beginning with the March 1 occurring at least 12
months after entitlement to benefit payments first occurs, to the extent
that any decrease in the CPI for the preceding calendar year over the CPI
for the next preceding calendar year exceeds 5%; provided, however, that,
in no event shall the Participant's monthly benefit be less than the
monthly benefit paid to him during the first month after entitlement to
benefit payments first occurs.
3.8 To the extent that the Participant's employment is terminated in a manner
that entitles him to severance benefits under the provisions of the
Severance Agreement, (a) his benefit under this Plan shall be calculated
by giving the Participant credit as Service the number of months for
which the Participant is entitled to severance benefits pursuant to the
terms of the Severance Agreement; and (b) any severance benefits to which
the Participant is entitled pursuant to the terms of the Severance
Agreement shall not be included in the calculation of "Earnings."
3.9 In the event of a Change in Control (as hereinafter defined), the
following provisions shall apply to the Participant's benefit under this
Plan:
(a) his monthly benefit shall be calculated by (i) giving the Participant
credit as Service the number of months for which the Participant is
or would be entitled to severance benefits upon termination of his
employment following a Change in Control pursuant to the terms of the
Change in Control Agreement and (ii) giving the Participant credit
for Earnings during each such year of Service at the rate of Earnings
in effect for the year in which the Change in Control occurred;
(b) except as provided in paragraph (a) above, no benefits to which the
Participant is entitled as a result of termination of his employment
following a Change in Control pursuant to the terms of the Change in
Control Agreement shall be included in Earnings;
(c) the present value of his benefit at the time of the Change in Control
(determined
-6-
<PAGE>
by using his Service, Earnings and Basic Plan Benefit as of such date
(including any adjustments required under paragraphs (a) and/or (b)
above) and the interest and mortality assumptions contained in clause
(3) of the last sentence of Section 3.1) shall be paid to the
Participant in a single lump sum payment on the first day of the
month following the Change in Control; and
(d) a Gross-Up Payment (as defined in the Change in Control Agreement)
with respect to any portion of the payment required under paragraph
(c) of this Section 3.9 that is determined to be subject to Excise
Tax (as defined in the Change in Control Agreement) shall be paid to
the Participant in a single lump sum payment on the first day of the
third month following the occurrence of the Change in Control, but
only to the extent that the payment required under such paragraph (c)
is not taken into account in determining the amount of the
Participant's Gross-Up Payment under the Change in Control Agreement.
To the extent that the Participant's employment is terminated upon a
Change in Control, the provisions of this Section 3.9 shall supersede the
provisions of Section 3.8 in determining the treatment of the
Participant's benefit under this Plan.
As used in this Plan, the term "Change in Control" means a Change in
Control as defined in the Change in Control Agreement (whether or not
such agreement has been terminated or has expired), except that "50%"
will be substituted for "20%" in Section 1(b)(iii) of the Change in
Control Agreement.
-7-
<PAGE>
SECTION IV
----------
Payment of Retirement Benefits
------------------------------
4.1 Benefits payable in accordance with Section III, except Section 3.5, will
commence on the Participant's Normal or Postponed Retirement Date or upon
a date determined by the Committee in accordance with Section 3.2. The
last payment will be on the first day of the month in which the
Participant dies unless he has a Surviving Spouse in accordance with
Section 3.6.
-8-
<PAGE>
SECTION V
---------
Death Benefits Payable
----------------------
5.1 If the Participant dies before Retirement, excluding Disability
Retirement, his Surviving Spouse will receive a monthly benefit equal to
50% of the amount of the Participant's monthly benefit determined in
accordance with Section 3.1 as if the Participant had retired and
commenced receiving a benefit on the first day of the month following the
date of his death.
5.2 A surviving Spouse's benefits will be payable monthly, and will commence
on the first day of the month following the later of the month in which
the Surviving Spouse reaches age 55 or the month in which the Participant
dies. The last payment will be on the first day of the month in which the
Surviving Spouse dies.
-9-
<PAGE>
SECTION VI
----------
Miscellaneous
-------------
6.1 Nothing contained herein will confer upon the Participant the right to be
retained in the service of the Company, nor will it interfere with the
right of the Company to discharge or otherwise deal with the Participant
without regard to the existence of this Plan.
6.2 The Committee shall establish a trust fund to provide for contributions
made by the Company to satisfy its obligations to the Participant under
this Plan. Except as may be provided in the agreement governing such
trust, all assets held in the trust shall be assets of the Company
subject to its general creditors.
6.3 To the maximum extent permitted by law, no benefit under this Plan shall
be assignable or subject in any manner to alienation, sale, transfer,
claims of creditors, pledge, attachment, or encumbrance of any kind.
6.4 The Committee may adopt rules and regulations to assist it in the
administration of the Plan.
6.5 The Participant shall receive a copy of this Plan and the Committee will
make available for inspection by the Participant a copy of the rules and
regulations used by the Committee in administering the Plan.
6.6 The Plan will be construed and governed in all respects in accordance
with applicable federal law and, to the extent not preempted by such
federal law, in accordance with the laws of the State of Texas, including
without limitation, the Texas statute of limitations, but without giving
effect to the principles of conflicts of laws of such State.
STERLING COMMERCE, INC.
By /s/ ALBERT K. HOOVER
------------------------------------------
-10-
<PAGE>
EXHIBIT 10.15
FIRST AMENDMENT
TO
STERLING COMMERCE, INC.
DEFERRED COMPENSATION PLAN
--------------------------
This First Amendment to the Sterling Commerce, Inc. Deferred
Compensation Plan (the "Plan") is made and entered into as of the 30th day of
October, 1997, with reference to the following facts:
A. The Company implemented the Plan effective as of February 1, 1997.
B. The Committee wishes to amend Section 3.2(a) of the Plan and both
the Committee and the Trustee have been furnished with an opinion of counsel, as
required by Section 8.4(e) of the Plan, to the effect that such amendment
complies with the amendment requirements of Section 8.4 of the Plan.
NOW, THEREFORE, it is agreed as follows:
1. The fourth and fifth sentences of Section 3.2(a) of the Plan are
deleted and shall be replaced in their entirety by the following:
The Committee may in its discretion change from time to time the Funds
available for hypothetical investment, provided Participants are given at
least 90 days' prior written notice of the effective date of the deletion
of any Fund (including, without limitation, the deletion of a Fund in
connection with the substitution of a new Fund in its place; it being
understood, however, that where the deletion of a Fund is beyond the
control of the Committee (e.g., where the provider of a Matching Investment
unilaterally effects such a deletion), the Committee's obligation shall be
to give Participants written notice of the effective date of such deletion
as promptly as practicable after the Committee obtains knowledge thereof.
The Committee may in its discretion add new Funds at any time and
Participants shall be given written notice of such additions as promptly as
practicable after the Committee decides to add a new Fund. The Interest
Rate of each Fund shall be used to determine the amount of earnings to be
credited to Participant's Accounts under Section 4.1(ii).
2. The second sentence of Section 3.2(b) of the Plan is amended to
read in its entirety:
Effective as of the beginning of any calendar month, a Participant may
change the Fund designations made under this Section 3.2 by filing a new
designation, on a form provided by the Committee, at least 15 days prior to
the end of the immediately preceding calendar month.
<PAGE>
3. The foregoing amendment will be effective as of the date
first set forth above. As amended hereby, the Plan is in all respects ratified,
confirmed and approved and shall continue in full force and effect.
4. Capitalized terms used and not otherwise defined herein
shall have the respective meanings ascribed to such terms in the Plan.
STERLING COMMERCE, INC.
By: /s/ Albert K. Hoover
-----------------------------
Albert K. Hoover
Senior Vice President and
General Counsel
2
<PAGE>
EXHIBIT 11.1
STERLING COMMERCE, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Primary:
Average shares outstanding........................ 83,561 74,233
Net effect of dilutive stock options-based on the
treasury stock method using average market
price............................................ 2,421 1,243
Total............................................. 85,983 75,475
======= =======
Net income........................................ $55,444 $58,392
======= =======
Per share amount.................................. $ .64 $ .77
======= =======
Fully diluted:
Average shares outstanding........................ 83,561 74,233
Net effect of dilutive stock options-based on the
treasury stock method using the higher of average
or year-end market price......................... 3,239 1,243
------- -------
Total............................................. 86,800 75,475
======= =======
Net income........................................ $55,444 $58,392
======= =======
Per share amount.................................. $ .64 $ .77
======= =======
</TABLE>
<PAGE>
EXHIBIT 21.1
STERLING COMMERCE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
Domestic
Sterling Commerce, Inc., a Wyoming corporation................ Wyoming
Sterling Commerce (America), Inc.............................. Delaware
Sterling Commerce (Mid America), Inc........................ Michigan
Sterling Commerce (Northern America), Inc..................... Delaware
Sterling Commerce (U.S.), Inc................................. Delaware
Sterling Commerce International, Inc.......................... Delaware
Sterling Commerce Leasing, Inc................................ Delaware
Sterling Commerce (Eastern), Inc.............................. Delaware
Sterling Commerce (U.S.), LP..................................
International
Sterling Commerce B.V......................................... Netherlands
Sterling Commerce International Sales Corporation............. Barbados
Sterling Commerce International SARL.......................... France
Sterling Commerce (France), SARL.............................. France
Sterling Commerce GmbH........................................ Germany
Sterling Commerce (UK) Limited................................ United Kingdom
Sterling Electronic Commerce (Canada), Inc.................... Canada
Sterling Commerce (Australia) Pty Limited..................... Australia
Sterling Commerce (Belgium) BVBA.............................. Belgium
Sterling Commerce do Brasil Ltda.............................. Brazil
Sterling Commerce (Hong Kong) Limited......................... Hong Kong
Sterling Commerce (Italy) S.r.l............................... Italy
Sterling Commerce K.K......................................... Japan
Sterling Commerce (Singapore) Pte. Ltd........................ Singapore
Sterling Commerce (Switzerland) AG............................ Switzerland
Nybyggarren 35:829 AB unat Sterling Commerce (Sweden) AB...... Sweden
</TABLE>
Notes:
1. Indented names are subsidiaries of the subsidiary listed immediately above
such subsidiary.
2. Inclusion in this exhibit is not a representation that the subsidiary is a
significant subsidiary.
3. The voting shares of all subsidiaries are 100% owned by Sterling Commerce,
Inc., its subsidiaries or employee nominees.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (File No. 333-13955 and No. 333-13959) and in the Registration
Statement on Form S-8 (File No. 333-37523) of Sterling Commerce, Inc., and in
the related Prospectuses of our report dated November 7, 1997, with respect to
the consolidated financial statements and schedule of Sterling Commerce, Inc.
included in this Annual Report on Form 10-K for the year ended September 30,
1997.
Ernst & Young LLP
Dallas, Texas
November 18, 1997
<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> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 250,348
<SECURITIES> 234,314
<RECEIVABLES> 103,692
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 615,117
<PP&E> 59,723
<DEPRECIATION> 0
<TOTAL-ASSETS> 748,566
<CURRENT-LIABILITIES> 123,316
<BONDS> 0
0
0
<COMMON> 896
<OTHER-SE> 599,966
<TOTAL-LIABILITY-AND-EQUITY> 748,566
<SALES> 350,597
<TOTAL-REVENUES> 350,597
<CGS> 70,615
<TOTAL-COSTS> 278,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 89,284
<INCOME-TAX> 33,840
<INCOME-CONTINUING> 55,444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,444
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
