<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1999
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)
<TABLE>
<S> <C>
DELAWARE 75-2623341
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
300 CRESCENT COURT, SUITE 1200 DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(214) 981-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Registrant's web page: WWW.STERLINGCOMMERCE.COM
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 Par Value New York Stock Exchange
Rights to Purchase Series A Junior Partici- New York Stock Exchange
pating
Preferred Stock, $0.01 Par Value
</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 December 7, 1999, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $2,383,122,220,
based on the closing sales price of $30.3125 of the Registrant's Common Stock
on the New York Stock Exchange. All executive officers and directors of the
Registrant have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the Registrant.
As of December 7, 1999, the number of shares outstanding of the Registrant's
Common Stock was 79,969,498.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the Registrant to
be held during 2000 are incorporated by reference in Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
STERLING COMMERCE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FORM 10-K ITEM PAGE
-------------- ----
<C> <S> <C>
PART I
ITEM 1. BUSINESS................................................ 1
ITEM 2. PROPERTIES.............................................. 12
ITEM 3. LEGAL PROCEEDINGS....................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 13
ITEM 6. SELECTED FINANCIAL DATA................................. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK................................................... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 62
ITEM 11. EXECUTIVE COMPENSATION.................................. 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K............................................... 63
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Sterling Commerce, Inc. (together with its predecessors and subsidiaries, the
"Company") is a worldwide leader in providing E-Business integration solutions
for Global 5000 and other companies and their commerce communities. The Company
develops, markets and supports software products and provides services and
consulting that enable businesses to engage in E-Business communications and
transactions with their partners and other E-Community constituents. During
1999, the Company began a program of realigning its resources to new
initiatives to address what it believes are future growth areas: E-Business
Process Integration, E-Business Communications Infrastructure, E-Community
Management and E-Sourcing. The Company has been providing solutions to allow
businesses to conduct transactions electronically with other businesses for
more than 25 years and has customers in many industries, including banking, "E-
tailing," healthcare, insurance, manufacturing, pharmaceuticals, retailing,
telecommunications, government and transportation. The Company has direct
operations in 20 countries outside of the United States, a Pan-European support
center in Amsterdam, a Pan-Asian support and development center in Singapore
and more than 40 distributors worldwide.
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, $.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.
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 of 14,375,000
previously unissued shares of Common Stock.
ACQUISITIONS AND OTHER TRANSACTIONS
Throughout the Company's history, and particularly since the Distribution,
the Company has complemented its internal growth by actively pursuing strategic
acquisitions and investments to expand its technologies, product offerings and
distribution capabilities.
During fiscal 1999, the Company acquired Electronic Commerce Group Limited,
an E-Business solutions provider based in the United Kingdom. Additionally,
during 1999, the Company made strategic investments in businesses operated,
directly or indirectly, by the following companies: ParaRede Tecnologias de la
Communicacion, S.A., a Portugal based business that provides information
technology products and services, including E-commerce products and services;
FORTHnet S.A., the largest Internet services provider in Greece, where it is
based; Satyam Infoway Limited, the second largest national provider of Internet
access and services to consumers and businesses in India, where it is based;
Information Access, Inc., a United States based provider of E-Community
management services; and Oberon Software Incorporated, a United States based
provider of E-Business integration software and services for the enterprise
application integration and business process integration marketplaces.
Also in 1999, the Company determined that the product lines acquired in the
July 21, 1998 acquisition of XcelleNet, Inc. ("XcelleNet") are not sufficiently
strategic to the Company's future growth plans. Therefore, the Company has
decided to divest itself of the XcelleNet business.
<PAGE>
In fiscal 1998, the Company made several acquisitions, including the E-
Community management unit and the E-Business software and services unit of
o.tel.o Communications GmbH & Co., a Dusseldorf, Germany based
telecommunications company; The Electronic Data Exchange Service Limited, a
London, England based provider of value-added E-Community management network
services and related PC-based enabling software; and Network Integration
Systems Pte Ltd. and iCommerce Pte Ltd., both Singapore based providers of
electronic commerce software and services, including Web-based community
management software and services.
In anticipation of the Distribution the Company and Sterling Software entered
into an International Distributor Agreement dated March 4, 1996 (as amended,
the "International Marketing Agreement"). The International Marketing Agreement
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. In order for the Company to establish direct licensing of
its products outside the United States and Canada, the Company and Sterling
Software agreed to terminate the International Marketing Agreement, effective
June 30, 1997, and the Company acquired from Sterling Software certain assets
and assumed certain liabilities associated with the distribution of its
products. The Company also hired certain Sterling Software employees, most of
whom had been dedicated to the sales and marketing of the Company's products.
The Company made several additional acquisitions in fiscal 1997, including
the acquisition of Comfirst S.A. ("Comfirst"), a Paris, France based provider
of communications and file transfer software.
For more information with respect to business acquisitions and other
transactions, see Notes 4 and 5--Notes to Consolidated Financial Statements.
ORGANIZATIONAL STRUCTURE
The Company operates primarily through groups and divisions that offer broad-
based, distinct families of products and/or services to E-Business communities
worldwide. The Company believes that its organizational structure promotes
operating flexibility, improves responsiveness to customer requirements and
focuses management on achieving revenue and profit objectives. Each group and
division has its own sales and marketing organization. These organizations are
complimented with the Company's enterprise-wide strategic account sales and
marketing program that promotes all Company products and services to selected
customers. The Company licenses and markets its products and services on a
worldwide basis through a combination of direct sales, indirect sales through
distributors and resellers, telesales and telemarketing. The Company utilizes
enterprise-wide product development to allow its product families to create
products in conjunction with each other, which shortens the time to market for
new products and promotes integrated solutions.
TARGETED MARKET
The Company intends to continue its business growth by further penetrating
Global 5000 companies and their E-Communities. Global 5000 companies are
located throughout the world, have annual revenues of at least $1 billion and
operate in more than 15 industries, including automotive, banking, consumer
products, healthcare, insurance, pharmaceuticals, retail and
telecommunications. The Company targets its offerings to these worldclass,
leading organizations and believes that having these organizations as customers
is highly advantageous when pursuing mid-tier and smaller industry participants
as customers. The Company has also begun targeting ".com"-type companies which
are rapidly building E-Business infrastructures and communities.
The advent of the Internet and related technologies has created unprecedented
opportunities for business organizations to extend their E-Business
relationships beyond traditional electronic commerce. The Company
2
<PAGE>
believes that the Global 5000 business organizations represent the leaders in
each of their industries in operating as extended communities that include not
only their divisions, plant sites and distributed sales offices, but also their
customers, suppliers, banks, carriers, governments and other trading partners.
To fully achieve the benefits from their extended E-Communities, business
organizations need to streamline their internal business processes and extend
them beyond their enterprise to interact and collaborate with their business
partners. The Company's experience with customers is that they intend to focus
on their core competencies and business activities. These business
organizations require vendors that can provide comprehensive solutions to
assist them in integrating applications involved in their business processes as
well as building, enabling and servicing the E-Communities involved with these
processes. The Company has found that both traditional and Internet-based
technologies must be incorporated into these solutions since the business
processes of Global 5000, ".com" and other companies involve multiple E-
Communities, often global in scope, and span a wide range of automation
platforms, communication protocols and varying business rules among the
numerous business enterprises and other organizations involved.
In response to these needs, the Company offers a comprehensive range of E-
Business integration solutions on a global basis.
PRODUCTS AND SERVICES
The Company provides comprehensive E-Business integration solutions for its
customers through the following offerings:
. E-Community Management;
. E-Business Process Integration;
. E-Business Communications Infrastructure; and
. E-Sourcing.
The Company provides products and services through these offerings in varying
combinations, depending upon the solution required by the customer. The Company
believes that it is uniquely qualified to provide these solutions because of
the breadth of products and services available through these offerings, in
addition to its extensive industry specific experience and focus in each of the
industries it serves.
These offerings incorporate more than 90 separate products and services
delivered by the Company. Furthermore, the offerings are all focused on
providing Internet-based solutions and integrating processes across automation
platforms with "any-to-any" connection capabilities.
E-COMMUNITY MANAGEMENT
The Company's E-Community Management service offerings build, manage and
service integrated business partner communities for Global 5000 and other
companies. Businesses are able to interact with a greater range of constituents
than was practicably possible through traditional electronic data interchange
("EDI") due to the proliferation of the Internet for business communications.
Today, businesses are seeking solutions that extend their business processes
beyond the supply chain to include customers, alliance partners, banks,
governments and carriers. Instead of E-Communities with a small number of E-
Business partners, companies are now participating in E-Communities consisting
of thousands to tens of thousands of E-Business partners. These interactions
are layered upon business processes that companies have automated over the past
decade, including supply, selling, procurement, logistics, billing and payment
processes. Companies are deploying both Web- and EDI-based technologies in
order to interact with these E-Business partners and to manage the many
transactions that occur on a daily basis. The task of establishing and managing
these E-Communities is complicated by the fact that these communities are
global and often industry specific in nature.
3
<PAGE>
The Company's E-Community Management offerings are marketed and sold under
the COMMERCE service family name. The Company meets the needs of these E-
Communities by providing solutions based upon its demonstrated E-Community
building, managing and servicing capabilities and extensive industry-specific
expertise. The Company provides three categories of solutions for E-Community
Management, which can be either Web- or EDI-based, or both, depending on the
customer's needs.
. E-Community Development consists of solutions to build E-Communities in
sizes ranging from hundreds to tens of thousands of E-Business partners.
The solutions are comprised of techniques (know-how and methodology),
tools (Web-based software) and technology (E-Business forms). During
fiscal 1999, over 300 E-Community Development programs were sold and
implemented for targeted companies to build E-Business partnerships with
their suppliers, distributors, carriers, customers and banks. The
increasing use of Internet technologies has led to an exponential
increase in the size of E-Communities. The Company believes that its
ability to manage massive E-Communities is a key competitive strength.
. E-Community Services represent core technology and services for E-
Community Management and include:
<TABLE>
<S> <C>
Commerce policy management Extranet systems management
Business process integration services Connectivity management
Information exchange Customer management
Security and access control Billing management
</TABLE>
The configurations that the Company can deliver with these E-Community
Services include: (i) extranet hosted communities (Web- or EDI-based over the
Internet) and (ii) node-to-node communities (based on traditional EDI or EDI
over the Internet). The Company also offers COMMERCE:Centre, a highly scalable
software and services package that is being utilized as the platform for E-
Community Services in ten countries by the Company and several of its
distributors. Also, the Company offers help desk outsourcing for support of
these E-Communities.
. E-Community Solutions are packaged services with features required by
specific industries or company-level business processes. For example,
the Company offers a Web-based E-Community Solution to the
pharmaceutical industry that enables wholesale distributors to track
product deliveries via carriers such as United Parcel Service from
manufacturers such as Merck. Over 20 distinct E-Community Solutions are
used in over ten industries. The Company has created a library of over
3,000 company-level business processes for companies such as Ford Motor
Company and Wal-Mart.
The Company is already managing and servicing over 280 extranet hosted
communities. The Company has deployed Web- and EDI-based communities in the
Americas, Europe and Asia. The Company currently has more than 29,000 contracts
with E-Community Management customers in multiple industries who maintain over
650,000 business partner relationships. Furthermore, the Company has
established these communities for multiple industries. The global
infrastructure of the Company, with presence in 37 cities, including 19 outside
the United States, allows it to effectively design, implement and manage these
large, complex communities.
E-BUSINESS PROCESS INTEGRATION
The Company's E-Business Process Integration ("BPI") offerings are software
products and related services that facilitate end-to-end integration of
business processes within and among enterprises and organizations. Since the
environments into which these offerings are applied span a broad range of
technologies and systems, the Company's BPI solutions accommodate ever-
expanding requirements for a consistent and robust integration framework that
provides the business benefits of both enterprise application integration
("EAI") and EDI. The Company views BPI as a mission-critical component of the
enterprise and a keystone element of the extended enterprise. As a result, the
Company's solutions are scalable and designed for robust operation in high-
performance business environments, twenty-four hours a day, seven days a week.
4
<PAGE>
The Company's BPI offerings are marketed and sold under the GENTRAN product
family name. These products are available for all major operating systems and
platforms, including UNIX, Windows, Windows NT, AS/400 and IBM mainframe and
for use with various business standards, including X.12, EDIFACT, CII and XML.
Moreover, these offerings can be closely interfaced with applications systems
provided by major enterprise resource planning ("ERP") vendors such as Baan,
Oracle, PeopleSoft and SAP. Companies such as Lawson Software and Symix resell
GENTRAN solutions to their customers. Key GENTRAN BPI product offerings are as
follows:
. GENTRAN:Server--a high performance E-Business solution product serving
approximately 8,100 installation sites in more than 50 countries
worldwide. The GENTRAN:Server XML product allows native application
formats (including EDI) to be translated to and from XML data types.
. GENTRAN:WebSuite--a Web-based solution serving approximately 120
installation sites that allows businesses to exchange data using a
variety of methods including Web-based forms, EDI-INT standards and
real-time integration for highly interactive processes.
. GENTRAN:Catalyst--released in November 1999, an application broker
solution that allows for message brokering to support a variety of
business application data access and distribution requirements coupled
with automation and message tracking services.
E-BUSINESS COMMUNICATIONS INFRASTRUCTURE
The Company's E-Business Communications Infrastructure ("EBCI") offerings are
software products and services focused specifically on the complexities of
managing data delivery within and between enterprises and organizations. As BPI
grows more ubiquitous, a communications infrastructure to support increasingly
interactive and complex processes becomes necessary. The Company's EBCI
solutions are based upon an architecture where applications are isolated from
the complexities of managing and transporting data. The resulting EBCI
solutions are coordinated sets of platform-, protocol- and network-independent
communication infrastructure products that are highly reliable and robust over
private and public networks as well as the Internet.
The Company's EBCI offerings are marketed and sold under the CONNECT product
family name. These products are available for all major operating systems,
platforms and business standards. Currently, the Company's EBCI solutions
support more than 12 automation platforms, 30 operating systems and seven
protocols. These solutions provide extensive interactivity between multiple,
divergent systems and provide a solid foundation upon which customers can
leverage their existing applications and network architectures into new and
expanded BPI applications. These solutions are widely used in several
industries including financial services, government, insurance and
telecommunications. Once implemented, these solutions often become a de facto
standard for the user's data communication functions. There are approximately
7,300 EBCI installation sites worldwide. Key EBCI product offerings include:
. CONNECT:Direct--a high performance Advanced File Transfer solution that
enables the secure, automated exchange of information between
distributed applications. It enables organizations to reduce
implementation time for the exchange of data between applications with
the flexibility to easily embrace new business processes and
technologies.
. CONNECT:Mailbox--a data collection and distribution software solution
that enables E-Business by managing and securing the exchange of data
over private and public networks, as well as the Internet.
. CONNECT:Enterprise--the Company's new Managed Data Delivery solution, an
adaptive communications infrastructure that can support moving data of
any type, anywhere, at any time. The new product, released in October
1999, features common management, security and administration features
and supports the exchange of information within and between enterprises
utilizing private networks, public networks and the Internet.
5
<PAGE>
E-SOURCING
The Company's E-Sourcing offerings consist of consulting, implementation,
education and outsourcing services in support of its other E-Business
integration solutions. The Company believes that establishing an E-Community
strategy is a critical element of the current business environment. E-Sourcing
allows companies to implement E-Community solutions while remaining focused on
their core competencies. As a result, companies increasingly rely on third-
party providers to deliver E-Community solutions. International Data
Corporation ("IDC") estimates that worldwide Internet-related services spending
will grow from $8 billion in 1998 to $79 billion in 2003, a compound annual
growth rate of 59%. IDC further estimates that EDI consulting spending
worldwide will grow from $967 million in 1998 to $2.3 billion in 2003, a
compound annual growth rate of 19%.
The Company provides its E-Sourcing offerings through its Managed Services
Division. Through the Managed Services Division, the Company has the capability
to deliver a broad range of consulting and other services, including the
comprehensive outsourcing of an enterprise's E-Business systems, and functions
on a global basis.
The Company offers E-Sourcing solutions that include (i) software and
education services, (ii) integrated E-Business consulting services and (iii)
outsourcing. Software and education services include installation, consulting,
implementation and education services provided in relation to the Company's
products. Integrated E-Business consulting services involve assessments of
business processes and long-term projects to integrate E-Business into
customers' business, ERP, legacy and Web commerce systems. The Company provided
E-Sourcing solutions to over 1,300 customers during fiscal 1999.
The Company's outsourcing options consist of on-site, remote and centralized
services and are designed to help companies successfully implement E-Business
strategies on a global basis. On-site outsourcing consists of resources
provided at the customer site to manage and support day-to-day E-Business
operations and related customer personnel. The hardware and software for the
on-site outsourcing are located at the customer site. Remote outsourcing
consists of similar management and support where the resources provided by the
Company are located at the Company's facilities and the hardware and software
are located at the customer site. Central outsourcing is a service provided
using the Company's systems and data center, with resources provided both on-
site and at the Company's facilities. With the flexibility to outsource
implementation of E-Business solutions at any level, companies can gain
operational improvement without losing control over costs, timelines and major
business decisions.
The Company's unique services model leverages a combination of internal
consultants with an external partner network to provide a scalable service
solution. The Company believes there is tremendous opportunity in the E-
Sourcing market and has experienced significant growth in demand for those
services. The Company has established strategic relationships with consulting
organizations that train and provide implementation and integration services to
organizations using the Company's solutions. The Company's E-Sourcing business
is exclusively focused on, and has developed an expertise in, providing E-
Business solutions. Since the Company's E-Sourcing is focused on its products,
the Company, primarily through its Managed Services Division, has developed a
highly efficient implementation methodology. Also, the Company's arrangement
with service partners allows staff to be efficiently deployed without incurring
substantial fixed costs.
BANKING SYSTEMS
In addition to its E-Business integration solutions, the Company provides
industry-specific solutions that enable banks and other financial institutions
to automate banking transaction processes. The Company's offerings include
software products and related services, which are marketed under the VECTOR
product family name. The VECTOR products serve as the industry standard in the
banking industry in providing the following:
. Software products that automate key item processing applications for
financial institutions, such as check fraud control, currency control,
electronic check order sort and presentment, research functions, return
item processing and statement sorting;
6
<PAGE>
. Software products that enable banks to offer integrated item-processing
services to their retail and corporate customers; and
. Services to assist banks and other financial institutions plan,
implement and maintain their software solutions.
The Company has licensed more than 570 copies of VECTOR products to customers
worldwide, including ABN AMRO, Bank of America, Chase Manhattan and Wells
Fargo.
SEGMENT AND GEOGRAPHIC INFORMATION
Segment and geographic information are included in Note 13--Notes to
Consolidated Financial Statements included in Item 8, Part II of this report.
EMPLOYEES
The Company's business is dependent upon its ability to attract and retain
highly qualified personnel. The Company's operations could be adversely
affected if it were to lose the services of a significant number of its
employees or if the Company was unable to obtain additional qualified personnel
when needed. Since the market for highly qualified personnel in the software
and electronic commerce industries is extremely competitive, it is difficult
for companies in these industries, including the Company, to attract and retain
qualified employees. To attract and retain qualified employees, the Company
offers competitive compensation and benefits packages, and strives to maintain
excellent employee relations, attractive office facilities and challenging
working environments. 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, 1999, the Company
employed approximately 2,300 full-time employees.
CUSTOMERS
The Company has a worldwide customer base in more than 15 industries,
including banking, "E-tailing," telecommunications, manufacturing, government,
insurance, healthcare, automotive, retail, transportation, pharmaceuticals and
consumer products. While the Company's customer base includes some of the
largest multinational companies in the world, it also includes numerous
regional and local companies. As of September 30, 1999, the Company's customers
included 98 of the 100 largest U.S. industrial corporations and 95 of the 100
largest global industrial corporations, as ranked by 1998 sales in Fortune
magazine and 94 of the top 100 U.S. commercial banks, as ranked by deposits as
of December 31, 1998, in American Banker magazine.
Many of these customers use several of the Company's products and services,
including Internet-related electronic commerce solutions. The Company develops
and markets products for companies of all sizes.
PRODUCT LICENSES AND PRODUCT SUPPORT
The Company's software products are licensed for perpetual use or a fixed
term. The Company typically does not sell its software products. The license
agreements generally restrict the use of the underlying product to designated
sites or central processing units and prohibit the reproduction, transfer or
disclosure of the product. However, some license agreements may cover multiple
sites or multiple central processing units at one site.
In conjunction with the licensing of the Company's software products, the
Company also markets 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.
7
<PAGE>
SERVICES
The Company's services revenue includes transaction fees in accordance with
COMMERCE services agreements and are recognized at the time the service is
performed. These agreements have terms ranging from month-to-month, which are
cancelable upon 30 days' notice, to three years. COMMERCE services agreements
may have guaranteed revenue streams which correspond to the term of the
agreement. Services revenue also includes fees generated through the Company's
Managed Services Division which are recognized at the time the service is
performed. These services include specific project agreements or extended
services agreements.
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 license an existing product rather
than develop the product internally. In other instances, the Company may
contract with a third-party developer to develop the product for the Company.
Due to these and other factors, it is difficult for the Company to estimate
future product development costs.
The Company employs an enterprise-wide product development approach that
focuses on the opportunities in specific markets for each product family. The
Company believes that organizing development functions this way facilitates
development cost control and focuses the development function on customer
needs.
Total product development and enhancement costs for fiscal 1999, 1998 and
1997 were $38.5 million, $29.7 million and $24.9 million, respectively, net of
capitalized costs of $24.7 million, $17.6 million and $13.5 million,
respectively.
The Company has addressed, and continues to address, year 2000 issues that
may have a material adverse impact on its product and services offerings. In
this regard, see "Year 2000" in Item 7, Part II of this report.
COMPETITION
E-Business integration is a worldwide industry which is rapidly evolving and
highly competitive. The Company has many competitors which range from large
companies with substantially greater resources than the Company, to small,
specialized companies that compete in a particular geographic region or market
niche. The Company also competes with internal programming staffs of companies
and with certain hardware manufacturers.
The Company believes that its ability to compete successfully in the E-
Business integration industry depends upon 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 a broad range of E-Business integration solutions that can meet a
range of customer needs, from specific applications to broader process
integration and E-Community related activities to complete E-Business
outsourcing capabilities. The Company offers E-Business integration solutions
that are designed to meet the needs of the various segments of the E-Business
markets on a local, regional and worldwide basis. 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 E-Business customers. See "Risk Factors--Competition" in
Item 7, Part II of this report for additional information regarding the
Company's competitive environment, including a list of certain of the Company's
competitors.
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
8
<PAGE>
into nondisclosure and confidentiality agreements with employees, contractors,
consultants, vendors and customers to protect its proprietary rights.
The Company does not believe that any of its products or services infringe on
the valid rights of third parties in any material respect. Licenses for a
number of software products have been granted to the Company for its own use or
for remarketing to its customers.
See "Risk Factors--Limited Protection of Proprietary Rights; Risks of
Infringement and Loss of Licenses" in Item 7, Part II of this report for
additional information relating to the intellectual property rights of the
Company.
The COMMERCE, GENTRAN, CONNECT and VECTOR product and service names used
herein are registered or unregistered trademarks owned by the Company.
SHARED MANAGEMENT AND CONTRACTUAL ARRANGEMENTS WITH STERLING SOFTWARE
Shared Management
The Board of Directors of the Company (the "Board") currently has seven
members. Messrs. Sterling L. Williams (Chairman), Sam Wyly, Charles J. Wyly,
Jr. and Evan A. Wyly are directors of the Company and are also directors of
Sterling Software. Mr. Williams, who serves as President and Chief Executive
Officer of Sterling Software, ceased his employment with the Company in May
1998, whereupon he and the Company entered into a consulting agreement.
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 of each of the Company and
Sterling Software as directors 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.
Contractual Arrangements
In anticipation of the Distribution, 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 at such time, the terms of such
agreements were not the result of arm's-length negotiation.
The Intercompany Agreements included, among others, a tax allocation
agreement and an indemnification agreement, each of which is briefly described
below:
. The tax allocation agreement provides that for periods during which the
Company is 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 (1) 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
9
<PAGE>
subsidiaries) or (2) 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") (1) 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, (2) will indemnify the Guarantor Party for any
liabilities incurred under such guarantees, bonds, letters of credit and
other arrangements and (3) 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.
EXECUTIVE AND OTHER OFFICERS
The following information regarding the executive officers of the Company is
as of December 7, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Warner C. Blow.......... 62 Chief Executive Officer; Director
J. Brad Sharp........... 42 President and Chief Operating Officer
Albert K. Hoover........ 39 Executive Vice President and General Counsel; Secretary
Steven P. Shiflet....... 52 Senior Vice President and Chief Financial Officer
Paul L. H. Olson........ 49 Executive Vice President and Group President
Stephen R. Perkins...... 55 Executive Vice President and Group President
David R. Dodge.......... 52 Senior Vice President and Group President
</TABLE>
Warner C. Blow has served as Chief Executive Officer and a director of the
Company since October 1996. From December 1995 until October 1999, Mr. Blow
also served as President of the Company and, from December 1995 until October
1996, 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.
J. Brad Sharp has served as President and Chief Operating Officer of the
Company since October 1999. Prior to October 1999, Mr. Sharp served as
Executive Vice President of the Company since November 1997, and also as Chief
Operating Officer since October 1998. From December 1995 until November 1997,
Mr. Sharp served as Senior Vice President of the Company and as President of
the Company's Interchange Software Group. Prior to March 1996, Mr. Sharp served
as President of the Interchange Software Division of Sterling Software's
Electronic Commerce Group (the predecessor of the Company) from August 1992.
Albert K. Hoover has served as Executive Vice President of the Company since
October 1999, General Counsel of the Company since June 1997 and as Secretary
since June 1998. From June 1997 until October 1999, Mr. Hoover served as Senior
Vice President of the Company. From December 1995 until June 1997, Mr. Hoover
served as Vice President, Legal of the Company. Prior to March 1996, Mr. Hoover
also served as a Vice President of Sterling Software from May 1994 and as
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 and
Administration of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from 1986.
10
<PAGE>
Paul L. H. Olson has served as Executive Vice President of the Company since
November 1997 and as President of the Company's Commerce Services Group since
December 1995. From December 1995 until November 1997, Mr. Olson served as
Senior Vice President of the Company. Prior to March 1996, Mr. Olson served as
President of the Commerce Services Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from August 1992.
Stephen R. Perkins has served as Executive Vice President of the Company
since November 1997 and as President of the Company's Communications Software
Group since December 1995. From December 1995 until November 1997, Mr. Perkins
served as 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 Services Group (the predecessor of the Company)
from July 1993.
David R. Dodge has served as Senior Vice President of the Company and
President of the Company's Interchange Software Group since July 1999. From
October 1995 to July 1999, Mr. Dodge served as Senior Vice President of Global
Sales for the Commerce Services Group. Prior to October 1995, Mr. Dodge served
as Vice President, Sales for the Commerce Services Division of Sterling
Software's Electronic Commerce Group (the predecessor of the Company) from
February 1986.
The following information regarding certain other officers of the Company is
also as of December 7, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lon Baugh..................... 39 Vice President, Investor Relations
Dennis P. Byrnes.............. 36 Vice President and Assistant General Counsel
Karen J. Dover................ 37 Vice President, Planning
James W. Hoyt................. 51 Vice President, Technology
William W. Hymes.............. 62 Senior Vice President and Division President
Esther L. McDowell............ 49 President, Managed Services Division
David A. Myers................ 36 Vice President and Treasurer
Kevin D. Sibbring............. 39 Vice President, Marketing
I. Stephen Wolken............. 57 Vice President, Strategic Accounts
G. Clark Woodford............. 52 Vice President, Business Development
</TABLE>
Lon Baugh has served as Vice President, Investor Relations of the Company
since May 1999. Prior to May 1999, Mr. Baugh served as Director of Tax of the
Company since March 1996. Prior to March 1996, Mr. Baugh was employed most
recently by Ernst & Young, LLP, as Tax Senior Manager from October 1993.
Dennis P. Byrnes has served as Vice President of the Company since September
1999 and as Assistant General Counsel since June 1997. Prior to June 1997, Mr.
Byrnes served as corporate counsel of the Company from April 1996. Prior to
April 1996, Mr. Byrnes was an attorney in the business group of Baker &
Hostetler LLP from June 1991.
Karen J. Dover has served as Vice President, Planning of the Company since
October 1999. From December 1995 to October 1999, Ms. Dover served as Director
of Planning of the Company. Prior to December 1995, Ms. Dover served as
Director of Finance of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from October 1994.
James W. Hoyt has served as Vice President, Technology of the Company since
July 1996. Mr. Hoyt served as Director of Product Architecture of the Company's
Communications Software Group from March 1996 until June 1996 and of Sterling
Software's Communications Software Division from July 1993 until March 1996.
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
11
<PAGE>
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.
Esther L. McDowell has served as President of the Managed Services Division
since July 1998. Prior to July 1998, Ms. McDowell was Vice President of
Customer Services for the Company's Interchange Software Group from March 1996.
Prior to March 1996, Ms. McDowell was Vice President of the Interchange
Software Division of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from February 1993.
David A. Myers has served as Vice President and Treasurer of the Company
since October 1999. Prior to October 1999, Mr. Myers served as Assistant
Treasurer of the Company from June 1998 and as Director of Treasury from March
1996. Prior to March 1996, Mr. Myers served as Senior Treasury Analyst for
Sterling Software from August 1994.
Kevin D. Sibbring has served as Vice President, Marketing of the Company
since October 1999. Prior to October 1999, Mr. Sibbring served as Director,
Industry Relations since March 1996. Prior to March 1996, Mr. Sibbring served
as Director, Strategic Alliances from March 1995 and Director, Midrange Sales
for the Interchange Software Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from February 1994 to March
1995.
I. Stephen Wolken has served as Vice President, Strategic Accounts of the
Company since June 1999. Prior to June 1999, Mr. Wolken served as President of
Sterling Software's Creative Data Systems Division from March 1996. Prior to
March 1996, Mr. Wolken served as Vice President, Sales and Marketing for
Sterling Software's Creative Data Systems Division from October 1991.
G. Clark Woodford has served as Vice President, Business Development of the
Company since December 1995. Prior to December 1995, Mr. Woodford served as
Vice President, Business Development of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from November 1993.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Dallas, Texas. The
Company's principal administrative offices are located in Columbus, Ohio. Both
facilities are leased under operating leases. The Company also leases offices
and facilities in more than 46 other locations in the United States and various
other countries under operating leases. The primary services, support and
product development efforts for the COMMERCE and GENTRAN product families and
Managed Services are performed at facilities in Columbus, Ohio and the primary
services, support and product development efforts for the CONNECT products
family are located in facilities at Irving, Texas, all of which are leased
under operating leases. 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.
The information set forth in Note 6 of the Notes to Consolidated Financial
Statements included in Item 8, Part II of this report is incorporated herein by
reference.
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.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange 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>
FISCAL QUARTERS YEAR ENDED SEPTEMBER 30, 1999:
December 31, 1998........................................... $46.00 $20.13
March 31, 1999.............................................. $46.44 $24.13
June 30, 1999............................................... $44.50 $26.00
September 30, 1999.......................................... $38.13 $18.50
FISCAL QUARTERS YEAR ENDED SEPTEMBER 30, 1998:
December 31, 1997........................................... $39.13 $31.50
March 31, 1998.............................................. $50.25 $33.50
June 30, 1998............................................... $48.75 $37.50
September 30, 1998.......................................... $48.50 $30.00
</TABLE>
At December 7, 1999, the Company had 1,193 holders of record of Common Stock.
The Company has historically not paid dividends on its Common Stock. The
Company currently intends to retain earnings and reinvest such earnings in its
business. Additionally, the Company currently has a covenant related to an
operating lease that restricts the payment of dividends.
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,
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................ $623,072 $490,302 $350,597 $267,773 $203,578
Costs of sales.................. 129,295 96,161 70,615 54,418 41,550
Product development and
enhancement expenses........... 38,457 29,717 24,853 15,553 14,807
Selling, general and
administrative expenses........ 260,674 201,689 134,849 102,597 75,193
Income (loss) before other
income and income taxes (1).... 174,546 (21,161) 72,591 95,205 72,028
Net income (loss)............... 123,889 (61,156) 55,444 58,392 42,930
Income (loss) per common share:
Basic......................... $ 1.34 $ (0.67) $ 0.66 $ 0.79
Diluted....................... 1.31 (0.67) 0.64 0.77
BALANCE SHEET DATA:
Working capital (2)............. $294,000 $546,816 $491,801 $ 77,159 $ 3,692
Total assets.................... 780,731 967,004 748,566 241,680 128,978
Stockholders' equity............ 517,905 747,915 600,862 138,187
Stockholder's net investment.... 53,187
</TABLE>
- --------
(1) Includes $20.1 million of reorganization and unusual costs charged to
expense in 1999, $116.5 million of purchased research and development and
$67.4 million of reorganization and unusual costs charged to expense in
1998, and $31.9 million of purchased research and development and $15.8
million of reorganization and unusual costs charged to expense in 1997 (see
Notes 3 and 4--Notes to Consolidated Financial Statements).
13
<PAGE>
(2) Prior to fiscal 1996, 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 is a worldwide leader in providing E-Business integration
solutions for Global 5000 and other companies and their E-Communities. The
Company develops, markets and supports software products and provides services
and consulting that enable businesses to engage in E-Business communications
and transactions with their trading partners and other E-Community
constituents. The Company is focused on providing E-Business integration
solutions through its COMMERCE, GENTRAN and CONNECT product families. Software
and services to build, manage and service integrated business partner
communities are provided by the Company's E-Community management (COMMERCE
service family). The Company's E-Business Process Integration (GENTRAN product
family) provides software products and related services that facilitate end-to-
end integration of business processes within and among enterprises and
organizations Through the Company's E-Business Communications Infrastructure
(CONNECT product family), the Company provides software and services focused
specifically on the complexities of managing data delivery within and between
enterprises and organizations. Consulting, implementation, education and
outsourcing services in support of the Company's other E-Business integration
solutions are provided through the Company's E-Sourcing services (Managed
Services). The Company provides bank automation solutions to financial
institutions through its VECTOR product family.
The Company was incorporated in December 1995. The Company, through its
predecessors and subsidiaries, has been providing solutions to allow businesses
to conduct transactions electronically with their business partners and other
E-Community consultants for more than 25 years and has customers in many
industries, including banking, "E-tailing," healthcare, insurance,
manufacturing, pharmaceuticals, retailing, telecommunications, government and
transportation. The Company has direct operations in 20 countries outside of
the United States, a Pan-European support center in Amsterdam, a Pan-Asian
support and development center in Singapore and more than 40 distributors
worldwide.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
notes thereto which are in Part II, Item 8 of this report.
The Company operates within four reportable business segments: COMMERCE,
GENTRAN, CONNECT and Managed Services, which are organized based upon products
sold and/or services provided (see Note 13--Notes to Consolidated Financial
Statements). Each business segment offers a distinct family of products and/or
services to E-Business communities worldwide. Although each business segment
offers a distinct family of products and/or services, a business segment may
sell another business segment's products and/or services. During 1999, the
Company determined that the product lines acquired in the 1998 acquisition of
XcelleNet are not sufficiently strategic to its future growth plans.
The Company's recurring revenues includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed-term product license agreements having terms ranging generally
from month-to-month to year-to-year and COMMERCE services agreements that are
cancelable upon 30 days' notice. The Company includes the entire portion of the
recognized revenue from COMMERCE services agreements in recurring revenues,
although no assurances can be given that such agreements will not be canceled.
Internet-related revenues are revenues derived primarily from products and
services in the COMMERCE, GENTRAN and CONNECT families that are implemented
directly on the Internet or used with Internet-based technologies, including
extranet and intranet configurations. Examples include Web-based electronic
commerce message management software, software for the movement and management
of information over extranets and intranets, management of business communities
over extranets and related consulting services. The Company did not track
Internet-related revenue during fiscal 1997.
14
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998
Total revenues increased $132.8 million or 27%, in 1999 compared to 1998. The
revenue increase was due to a $45.1 million or 24% increase in products
revenue, a $41.9 million or 42% increase in product support revenue and a $45.8
million or 23% increase in services revenue. The increase in products and
product support revenues was due primarily to an increase in licensing of
CONNECT software products, a $45.1 million increase in remote and mobile
management software products and related product support resulting from the
acquisition of XcelleNet completed July 21, 1998, and an increase in the
licensing of GENTRAN software products. The increase in services revenue was
primarily due to growth in customer volume in COMMERCE services, an increase in
the number of customers purchasing services from the Company's Managed Services
business segment and the addition of new customers in other groups. Products
revenue, product support revenue and services revenue represented 38%, 23% and
39%, respectively, of total 1999 revenues compared to 39%, 21% and 40%,
respectively, of total 1998 revenues. The Company's recurring revenues
increased $65.2 million or 26% in 1999 compared to 1998 and represented 51% of
total revenues during 1999 and 1998. The Company's Internet-related revenues
increased 54% to $202.2 million for 1999 from $131.7 million for 1998.
The Company's products revenue growth rate for 1999 is lower, as compared to
1998, primarily due to a slowdown in product licensing as a result of customers
delaying new licensing decisions until their internal year 2000 ("Y2K") issues
are addressed and lower than expected growth from certain of the Company's more
traditional EDI and file transfer products due to the maturity of these market
segments combined with the penetration of the Company's products in these
segments. The Company expects the dampening effects of Y2K on products revenue
to continue possibly into its second fiscal quarter of 2000. The Company has
been providing services specific to Y2K consulting and testing for customers
and their trading communities. However, these Y2K specific services were not
sufficient to offset the lower growth trend in products revenue due to the
effects of Y2K as described above.
Revenue from the COMMERCE business segment increased $27.4 million or 15%, in
1999 over 1998, primarily due to a 16% increase in products revenue, a 19%
increase in product support revenue and a 14% increase in services revenue. The
increase in products and product support revenues was primarily due to an
increase in international software licensing and a larger customer base. The
increase in services revenue was primarily due to an increase in customer
transaction volume, the addition of new customers and to a lesser extent,
certain price increases. Approximately 17% of the Company's total international
revenue was generated by the COMMERCE business segment in 1999, compared to 16%
in 1998.
Revenue from the GENTRAN business segment increased $9.3 million or 12%, in
1999 over 1998, primarily due to a 20% increase in product support revenue and
to a lesser extent, an increase in services revenue. Products revenue increased
slightly in 1999. The increase in product support revenue was primarily due to
an expansion of the installed customer base. The increase in services revenue
was primarily due to an increase in services provided to international
customers. Approximately 18% of the Company's total international revenue was
generated by the GENTRAN business segment in 1999, compared to 20% in 1998.
Revenue from the CONNECT business segment increased $29.2 million or 17%, in
1999 over 1998 due to a 16% increase in products revenue and a 26% increase in
product support revenue. CONNECT services revenue was not significant for
either year. The increase in products and product support revenues was
primarily due to increased software licensing to new and existing customers,
new product offerings and certain price increases. Approximately 49% of the
Company's total international revenue was generated by the CONNECT business
segment in 1999, compared to 57% in 1998.
Revenue from the Managed Services business segment increased $19.2 million or
55%, in 1999 over 1998. The increase in services revenue was due primarily to
an increase in the number of customers from the Company's GENTRAN and CONNECT
business segments that purchased services, expansion of the business segment's
services offerings and international services and to a lesser extent certain
price increases. Approximately 6% of the Company's total international revenue
was generated by the Managed Services business segment in 1999, compared to 4%
in 1998.
15
<PAGE>
Total revenue generated from the Company's international operations was
$140.8 million and $101.3 million in 1999 and 1998, respectively, representing
an increase of $39.5 million or 39%. This was due primarily to a 54% year over
year increase in international revenue generated by the COMMERCE business
segment, a 30% increase by the GENTRAN business segment, an 18% increase by the
CONNECT business segment and a 100% increase by the Managed Services business
segment. Revenue from the Company's international operations represented 23% of
total revenue for 1999 as compared to 21% in 1998.
Total costs and expenses decreased $62.9 million in 1999 as compared to 1998
due primarily to charges in 1999 of $20.1 million for reorganization and
unusual costs compared to charges in 1998 of $116.5 million for purchased
research and development acquired primarily from XcelleNet and $67.4 million of
reorganization and unusual costs. The reorganization and unusual costs and
purchased research and development costs are hereinafter referred to as
"Special Charges." See Reorganization and Unusual Costs and Research and
Development Costs below. Excluding these charges in 1999 and 1998, total costs
and expenses increased $100.9 million or 31% (including $47.8 million of
XcelleNet costs and expenses) on revenue growth of 27%. The increase in total
costs and expenses of the COMMERCE, GENTRAN, CONNECT and Managed Services
business segments are 10%, 32%, 10% and 46%, respectively. The increase in
total costs and expenses of the COMMERCE, CONNECT and Managed Services business
segments resulted from higher revenues generated by these segments, although
the increases are not as great as the revenue growth generated in these
segments. The increase in total costs and expenses of the GENTRAN business
segment resulted from higher revenues and international expansion.
Total cost of sales consists primarily of salaries and related expenses for
product support, managed services, data center and communications personnel,
and related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total costs
of sales increased $33.1 million or 34%, in 1999 as compared to 1998. As a
percentage of total revenues, total costs of sales increased to 21% in 1999
from 20% for 1998. Costs of sales for products and product support increased
$19.2 million or 46%, due to $16.6 million of XcelleNet costs not included in
the prior year since XcelleNet was not acquired until July 21, 1998, an
increase of costs associated with supporting expanding software licensing and a
larger installed customer base. Costs of sales for products and product support
as a percentage of revenues increased to 10% in 1999 from 9% in 1998. Costs of
sales for services increased $13.9 million or 26%, primarily due to higher
costs associated with providing Managed Services education and consulting and
also includes $3.9 million related to XcelleNet. As a percentage of total
revenues, costs of sales for services remained unchanged at 11%. Cost of sales
includes $37.9 million of depreciation and amortization for 1999 (including
$11.6 million from the XcelleNet acquisition) and $28.6 million of depreciation
and amortization for 1998.
Product development and enhancement expenses consists primarily of salaries
and related expenses from product development personnel and outside contractor
costs, together with the cost of facilities and equipment. Product development
and enhancement expenses for 1999 were $38.5 million, net of $24.7 million
capitalized pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("FAS 86"), an increase of $8.8 million or 30% compared to 1998
product development and enhancement expenses of $29.7 million, net of $17.6
million capitalized pursuant to FAS 86. The increase was primarily due to
higher product development and enhancement expenses of $5.9 million, net of
$3.1 capitalized pursuant to FAS 86 from the XcelleNet acquisition and higher
gross product development expense relating to products under development during
1999 including those under the Company's new growth initiatives. As a
percentage of total revenues, product development and enhancement expenses
remained unchanged at 6% for 1999 and 1998. As a percentage of total
development and enhancement expenses, total capitalized costs increased to 39%
in 1999 from 37% in 1998. Product development and enhancement expenses 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 expenses consists primarily of salaries,
commissions and related expenses of sales, marketing, administrative, executive
and financial personnel, as well as outside professional fees, facilities and
depreciation expenses. Selling, general and administrative expenses increased
$59.0 million or 29%, in 1999 compared to 1998, primarily due to $21.4 million
of costs from the XcelleNet acquisition not
16
<PAGE>
included in 1998 and an increase in sales, marketing and administrative support
activities needed to support the corresponding growth in revenue. As a
percentage of total revenues, selling, general and administrative expenses
increased to 42% for 1999 from 41% for 1998.
Income before other income and income taxes was $174.5 million for 1999 as
compared to a loss before other income and income taxes of $21.2 million for
the same period of 1998 due to a $132.8 million increase in revenue and a $62.9
million decrease in total costs due primarily to reorganization and unusual
charges of $20.1 million in 1999 compared to charges in 1998 of $116.5 million
for purchased research and development acquired primarily from XcelleNet and
$67.4 million of reorganization and unusual costs. Excluding these charges in
1999 and 1998, income before other income and income taxes was $194.6 million
and $162.7 million, respectively. Other income decreased $1.1 million primarily
due to lower investment income.
Provision for income taxes increased $9.6 million for 1999 compared to 1998,
primarily due to the increase in income before income taxes for 1999. XcelleNet
contributed $2.1 million to this increase.
Fiscal 1998 Compared to Fiscal 1997
Total revenues increased $139.7 million or 40%, in 1998 as compared to 1997.
The revenues increase was due to a $67.8 million or 55% increase in products
revenue, a $25.9 million or 34% increase in product support revenue and a $46.0
million or 30% increase in services revenue. The growth in products and product
support revenues is due to the addition of new customers, new product
offerings, certain price increases, the expansion of the installed customer
base for product support, remote and mobile management software products and
related product support acquired with the XcelleNet business, and the result of
having direct licensing of products outside of the United States and Canada in
1998 as opposed to having royalty revenue during the first three quarters of
1997. The increase in products and product support revenues is the result of
increased software product licensing for CONNECT and GENTRAN, and $11.1 million
of products and product support revenues related to the acquisition of
XcelleNet. The increase in services revenue is due primarily to growth in
existing COMMERCE services customer transaction volume, the addition of new
COMMERCE customers, and an increase in education and consulting services
provided by Managed Services. Products revenue, product support revenue and
services revenue represented 39%, 21% and 40%, respectively, of total 1998
revenues compared to 35%, 21% and 43%, respectively, of total 1997 revenues.
The Company's recurring revenues increased $48.0 million or 24%, in 1998
compared to 1997 and represented 51% of total revenues during 1998 compared to
58% during 1997. The Company's revenue from sources outside the United States
represented 20% of total revenues for 1998, compared to 13% for 1997.
Total revenue generated from the Company's international operations was
$101.3 million and $46.2 million in 1998 and 1997, respectively, representing
an increase of $55.1 million or 119%. The increase in the relative percentage
for the GENTRAN and CONNECT business segments is due largely to the Company
receiving 100% of the revenues from the licensing of products outside the
United States and Canada in 1998 as opposed to a 50% royalty on such revenues
from Sterling Software in the first three quarters of 1997 pursuant to the
International Marketing Agreement. This increase in revenue is due primarily to
a 41% year over year increase in international revenue generated by the
COMMERCE business segment, a 156% increase by the GENTRAN business segment, a
118% increase by the CONNECT business segment and a 605% increase by the
Managed Services business segment. Revenue from the Company's international
operations represented 21% of total revenue for 1998 as compared to 13% in
1997.
Revenue from the COMMERCE business segment increased $32.4 million or 21%, in
1998 over 1997, primarily due to a 36% increase in products revenue, a 33%
increase in product support revenue and a 19% increase in services revenue. The
increase in products and product support revenue is primarily due to an
increase in software licensing and a larger customer base. The increase in
services revenue is primarily due to an increase in customer transaction
volume, the addition of new customers and to a lesser extent, certain price
increases. Approximately 16% of the Company's total international revenue was
generated by the COMMERCE business segment in 1998, compared to 24% in 1997.
17
<PAGE>
Revenue from the GENTRAN business segment increased $19.6 million or 35%, in
1998 over 1997, primarily due to a 38% increase in products revenue a 29%
increase in product support revenue and to a lesser extent, an increase in
services revenue. The increase in products and product support revenues is
primarily due to an increase in software licensing and a larger customer base.
The increase in service revenue is primarily due to an increase in services
provided to international customers and to a lesser extent, certain price
increases. Approximately 20% of the Company's total international revenue was
generated by the GENTRAN business segment in 1998, compared to 17% in 1997.
Revenue from the CONNECT business segment increased $57.9 million or 51%, in
1998 over 1997 primarily due to a 54% increase in products revenue and a 38%
increase in product support revenue. CONNECT services revenue was not
significant for either year. The increase in products and product support
revenues is primarily due to an increase in international software licensing,
increased sales to new and existing customers, a larger customer base and
certain price increases. The CONNECT business segment generated 57% of the
Company's revenue from international operations in 1999 and 1998.
Revenue from the Managed Services business segment increased $16.5 million or
88%, in 1998 over 1997. The increase in services revenue was primarily due to
an increase in the number of customers in the Company's GENTRAN and CONNECT
business segments that purchased services, expansion of the business segment's
services offerings and expansion of international services. Approximately 4% of
the Company's total international revenue was generated by the Managed Service
business segment in 1998, compared to 1% in 1997.
Total costs and expenses increased $233.5 million in 1998 as compared to 1997
due primarily to charges in the fourth quarter of 1998 of $116.5 million for
purchased research and development acquired primarily from XcelleNet and $67.4
million of reorganization and unusual costs. Costs for purchased research and
development and reorganization and unusual costs for 1997 were $31.9 million
and $15.8 million, respectively. See Reorganization and Unusual Costs and
Research and Development Costs below. Excluding these charges in 1998 and 1997,
total costs and expenses increased $97.3 million or 42% on revenue growth of
40%. XcelleNet accounted for $9.7 million of this increase. The increase in
total costs and expenses of the COMMERCE, GENTRAN, CONNECT and Managed Services
business segments were 15%, 36%, 68% and 107%, respectively. The increase in
total costs and expenses of the COMMERCE business segment resulted from higher
revenues generated by this segment, although the cost and expense increases
were not as great as the revenue growth generated in this segment. The increase
in total costs and expense of the GENTRAN, CONNECT and Managed Services
business segments resulted from higher revenues and international expansion.
Total cost of sales consists primarily of salaries and related expenses for
product support, managed services, data center and communications personnel,
and related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total costs
of sales increased $25.5 million or 36% in 1998 compared to 1997. As a
percentage of total revenues, total costs of sales remained unchanged at 20%
for 1998 and 1997. Costs of sales for products and product support increased
$7.6 million or 22% due to increased costs to support expanding software
licensing activities, an increase of $4.7 million related to supporting a
larger installed customer base and the acquisition of XcelleNet. The increase
in costs of sales for products and product support includes an increase of $1.8
million of amortization costs for software products of which $1.4 million is
due to the acquisition of XcelleNet. As a percentage of revenue, cost of sales
for products and product support decreased to 9% in 1998 from 10% in 1997.
Costs of sales for services increased $17.9 million or 49% primarily due to
growth in Managed Services and increased costs to support a growing customer
base and greater customer volume. As a percentage of total revenues, costs of
sales for services increased to 11% in 1998 from 10% in 1997. Costs of sales
includes $28.6 million of depreciation and amortization in 1998 compared to
$21.4 million of depreciation and amortization in 1997.
Product development and enhancement expenses consists primarily of salaries
and related expenses from product development personnel and outside contractor
costs, together with the cost of facilities and equipment.
18
<PAGE>
Product development and enhancement expense for 1998 of $29.7 million, net of
$17.6 million capitalized pursuant to FAS 86 increased $4.8 million or 19%,
compared to 1997 product development and enhancement expense of $24.9 million,
net of $13.5 million capitalized pursuant to FAS 86. The increase was primarily
due to the higher gross product development expense relating to products under
development during 1998. As a percentage of total revenue, product development
and enhancement expenses decreased to 6% in 1998 from 7% in 1997. Total
capitalized costs represented 37% and 35% of total product and enhancement
expense for 1998 and 1997, 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 expenses increased $66.8 million or 50%,
in 1998 as compared to 1997, primarily due to an increase in sales, marketing
and administrative support activities needed to support the corresponding
growth in revenue, increases in personnel following the termination of the
International Marketing Agreement in June, 1997 and a $6.4 million increase in
costs due to the acquisition of XcelleNet. Selling, general and administrative
expenses, as a percentage of total revenues, were 41% and 38% for 1998 and
1997, respectively.
Loss before other income and income taxes was $21.2 million for 1998 as
compared to income before other income and income taxes of $72.6 million for
the same period of 1997 due to a $139.7 million increase in revenues offset by
a $233.5 million increase in total costs and expenses including nonrecurring
charges of $183.9 million for purchased research and development and
reorganization and other unusual costs in the fourth quarter of 1998 related to
the acquisitions and other activities noted below. Excluding the Special
Charges in 1998 and 1997, income before other income and income taxes was
$162.7 million and $120.3 million in 1998 and 1997, respectively.
Other income increased $7.5 million in 1998 as compared to 1997, primarily
due to an increase in investment income resulting generally from a higher
average balance of investments. Provision for income taxes increased $30.3
million in 1998 as compared to 1997, primarily due to the increase in taxable
income which includes greater nondeductible charges in 1998 as compared to
1997.
REORGANIZATION AND UNUSUAL COSTS
1999 Reorganization and Unusual Costs
Based in part on changes in the Company's marketplace, during 1999 the
Company began a program of realigning its resources to new initiatives to
address what it believes are future growth areas: E-Business Process
Integration, E-Business Communications Infrastructure, E-Community Management
and E-Sourcing. Based on the Company's third quarter results, during the fourth
quarter the Company also determined that a realignment of additional resources,
exiting of certain businesses and discontinuance of certain product lines was
necessary to maximize future operating results, revenue and earnings growth and
stockholder value. As a result, in the fourth quarter of 1999 approximately 200
positions were eliminated from the Company's global workforce.
Primarily due to the realignment, the Company recorded a charge of $26.1
million (see 1998 Reorganization and Unusual Costs below) in 1999 ("1999
Reorganization and Unusual Costs"). The Company has reassigned approximately
450 employees and has redirected the use of $75 million to $100 million to be
utilized for the new initiatives in fiscal 2000 which would have otherwise been
used in more traditional product lines and product lines which have been
discontinued. Additionally, in calendar 2000, the Company plans to reassign an
additional 300 people from more traditional product lines and other product
lines that have been discontinued or reduced to focus on the new initiatives.
19
<PAGE>
The components of the 1999 Reorganization and Unusual Costs are as follows
(in thousands):
<TABLE>
<S> <C>
Excess facilities costs.......................................... $12,346
Write-down of software products which will no longer be actively
marketed or supported and related assets........................ 6,578
Employee termination costs....................................... 5,382
Other............................................................ 1,801
-------
$26,107
=======
</TABLE>
Excess facilities costs of $12.3 million consist of $9.9 million of
continuing obligations under operating leases and other cash payments and $2.4
million of leasehold improvement write-offs. During the third quarter of fiscal
1999, the Company decided to relocate operations from a facility which it
currently leases to a new leased facility which was occupied in October 1999.
As the Company is required to continue its operating lease payments for the
vacated facility, it recorded a charge for the future lease commitments of the
vacated facility and asset write-offs for related leasehold improvements
totaling $3.0 million. The $3.0 million charge is included in the excess
facilities costs of the previously mentioned 1999 Reorganization and Unusual
Costs.
At September 30, 1999 the unpaid balance of the 1999 Reorganization and
Unusual Costs was $14.2 million and is included in accounts payable and accrued
liabilities (see Note 8--Notes to Consolidated Financial Statements). The
balance is comprised of $10.2 million of excess facilities costs, $3.0 million
of employee termination costs and $1.0 million related to other items.
1998 Reorganization and Unusual Costs
The Company's results of operations for 1998 include reorganization and
unusual costs of $67.4 million. These costs were primarily related to the
reorganization of the Company's operations in connection with the fiscal 1998
acquisitions discussed below, the write-off of certain assets and excess cost
over net assets acquired and the accrual of costs in connection with the
Company's decision to exit the business of publishing CD-ROM-based catalogs and
the write-off of certain other software products which the Company no longer
intends to actively market and support.
The components of the 1998 Reorganization and Unusual Costs were as follows
(in thousands):
<TABLE>
<S> <C>
Write-down of software products and other assets and recognition of
liabilities associated with software products and services which
will no longer be actively marketed or supported and related
assets............................................................. $21,806
Write-off of software and other assets and recognition of
liabilities associated with exiting the business of publishing CD-
ROM based catalogs................................................. 18,204
Write-off of excess costs over net assets acquired.................. 8,488
Employee termination costs.......................................... 7,993
Out of pocket costs related to the reorganization................... 4,784
Other............................................................... 6,161
-------
$67,436
=======
</TABLE>
The costs associated with exiting the business of publishing CD-ROM based
catalogs and other estimated charges were, and are expected to remain, less
than the Company originally estimated, resulting in a $6.0 million reversal
during fiscal 1999 of the costs originally reserved for this purpose. This
reversal is included in 1999 Reorganization and Unusual costs of $20.1 million.
During 1999, $20.0 million, including $3.5 million of employee termination
costs, were disbursed or reversed from the September 30, 1998 balance of
accrued reorganization and unusual costs. The unpaid balance
20
<PAGE>
remaining for the 1998 Reorganization and Unusual Costs at September 30, 1999
was $3.6 million, which is included in accounts payable and accrued
liabilities.
1997 Reorganization and Unusual Costs
In June 1997, the Company established direct operations outside the United
States and Canada to distribute its products and services by acquiring certain
assets and assuming certain liabilities associated with the distribution of
certain of the Company's products by Sterling Software outside the United
States and Canada. Additionally, the Company terminated the International
Marketing Agreement.
The Company paid Sterling Software $5.2 million for the early termination of
the International Marketing Agreement and $10.1 million for the net book value
of the assets the Company acquired less the liabilities assumed. The Company
recorded the $5.2 million payment and other costs, principally incurred to
integrate the international distribution business formerly conducted by
Sterling Software into the Company's operations, as reorganization and unusual
costs in fiscal year 1997.
The components of the 1997 Reorganization and Unusual Costs consist of (in
thousands):
<TABLE>
<S> <C>
Early termination payment to Sterling Software.................... $ 5,226
Transaction costs and professional fees........................... 3,100
Severance and transition costs.................................... 2,400
Other............................................................. 5,084
-------
$15,810
=======
</TABLE>
At September 30, 1997, the remaining balance of the 1997 Reorganization and
Unusual Costs was $8.9 million which was paid in fiscal 1998.
BUSINESS COMBINATIONS
On July 21 1998, the Company completed the acquisition of all of the issued
and outstanding stock of XcelleNet, an Atlanta, Georgia based provider of
remote systems management software products and services (see Notes 4 and 5--
Notes to Consolidated Financial Statements and Research and Development Costs
and Supplemental Results of Operations below). The acquisition was accounted
for pursuant to the purchase method of accounting; therefore, the Company's
consolidated statements of operations reflect the results of operations of
XcelleNet from the date of the acquisition. The aggregate purchase price paid
was $224.2 million consisting of $83.2 million of cash, 2.4 million shares of
Common Stock and 1.3 million stock options to purchase the Company's Common
Stock which replaced outstanding options held by XcelleNet employees and
directors to purchase XcelleNet stock.
In February 1997, the Company acquired for cash all of the outstanding stock
of Comfirst, a Paris, France based provider of communication and file transfer
software. In May 1997, the Company acquired Automated Catalogue Services L.P.,
a provider of electronic product catalogs and information databases delivered
via CD-ROM and the Internet. The aggregate purchase price was $48.2 million,
which consisted of $32.0 million in cash, 0.2 million shares of Common Stock
valued at $5 million and promissory notes due January 2, 1998 (the "Notes"), in
the amount of $11.2 million. The Notes were paid in full in July 1997. Both
acquisitions were accounted for under the purchase method of accounting. The
effects of the acquisitions were not material to the Company's results of
operations for 1997.
RESEARCH AND DEVELOPMENT COSTS
The purchase price of the XcelleNet acquisition was allocated based on the
estimated fair value of assets acquired and liabilities assumed at the date of
acquisition. The estimates of fair value were determined by the Company's
management based on information furnished by the management of XcelleNet and an
independent
21
<PAGE>
valuation of developed software, core technology and purchased research and
development. The Company allocated $114.7 million of the purchase price to
purchased research and development. The Company recorded a nondeductible charge
for such amount, which represented the appraised value of products still in the
development stage that were not considered to have reached technological
feasibility based on the status of design and development activities that
required further refinement and testing. The development activities required to
complete the acquired in-process technologies include additional coding, cross-
platform porting and validation, quality assurance procedures and beta testing.
The Company relied primarily on the income approach to determine the fair
market value of the developed software, core technology and research and
development, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses. The income
approach focuses on the income producing capability of the developed software,
core technology and purchased research and development projects and best
represents the present value of the future economic benefits expected to be
derived. In determining the amount of the purchase price to allocate to
purchased research and development, factors such as stage of completion and
technological uncertainties were considered by the Company and its independent
appraiser in determining the present value of the future benefits to be
received.
The Company had estimated at September 30, 1998 that further expenditures of
$8.5 million would be required during the succeeding 18 months to develop the
XcelleNet acquired research and development into commercially viable products.
Due to changes in business priorities, four projects that were originally
planned to use the research and development were cancelled. Therefore, the
above mentioned estimate for further expenditures was reduced in fiscal 1999 to
$6.1 million and as of the end of 1999, such amount had been expended resulting
in new products which are currently being marketed.
22
<PAGE>
SUPPLEMENTAL RESULTS OF OPERATIONS
During 1999, the Company determined that the XcelleNet product lines were not
sufficiently strategic to its future growth plans primarily because the
products are primarily utilized for information technology systems management
and the customers and sales processes utilized are different than those for the
Company's other infrastructure products. Therefore, the Company has decided to
sell the XcelleNet business (see Notes 3, 4 and 5--Notes to Consolidated
Financial Statements). The results of operations of the Company without the
XcelleNet business, purchased research and development and reorganization and
unusual charges for fiscal years 1999, 1998 and 1997 are supplementally
presented below in order to provide meaningful information which will represent
the continuing operations of the Company after the divestiture (in thousands,
except per share information).
<TABLE>
<CAPTION>
PERCENT OF
CHANGE FROM CHANGE FROM PERCENT OF
PRIOR YEAR PRIOR YEAR TOTAL REVENUE
---------------- ------------ ----------------
1999 1998 1997 99/98 98/97 99/98 98/97 1999 1998 1997
-------- -------- -------- ------- ------- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products............... $202,580 $183,583 $123,594 $18,997 $59,989 10% 49% 36% 39% 35%
Product support........ 120,549 97,656 75,114 22,893 22,542 23% 30% 22% 20% 22%
Services............... 238,332 197,164 151,889 41,168 45,275 21% 30% 42% 41% 43%
-------- -------- -------- ------- ------- --- --- ---
561,461 478,403 350,597 83,058 127,806 17% 36% 100% 100% 100%
Costs and expenses:
Cost of sales:
Products and product
support............... 43,058 40,488 34,217 2,570 6,271 6% 18% 8% 9% 10%
Services............... 63,745 53,697 36,398 10,048 17,299 19% 48% 11% 11% 10%
-------- -------- -------- ------- ------- --- --- ---
106,803 94,185 70,615 12,618 23,570 13% 33% 19% 20% 20%
Product development and
enhancement expenses.. 31,285 28,455 24,853 2,830 3,602 10% 14% 6% 5% 7%
Selling, general and
administrative
expenses.............. 232,872 195,268 134,849 37,604 60,419 19% 45% 41% 41% 39%
-------- -------- -------- ------- ------- --- --- ---
370,960 317,908 230,317 53,052 87,591 17% 38% 66% 66% 66%
-------- -------- -------- ------- ------- --- --- ---
Income before other
income and income
taxes................. 190,501 160,495 120,280 30,006 40,215 19% 33% 34% 34% 34%
Other income........... 23,053 24,152 16,693 (1,099) 7,459 (5%) 45% 4% 5% 5%
-------- -------- -------- ------- ------- --- --- ---
Income before income
taxes................. 213,554 184,647 136,973 28,907 47,674 16% 35% 38% 39% 39%
Provision for income
taxes................. 75,960 66,827 51,409 9,133 15,418 14% 30% 13% 14% 15%
-------- -------- -------- ------- ------- --- --- ---
Net income............. $137,594 $117,820 $ 85,564 $19,774 $32,256 17% 38% 25% 25% 24%
======== ======== ======== ======= ======= === === ===
Income per common
share:
Basic.................. $ 1.49 $ 1.29 $ 1.02
======== ======== ========
Diluted................ $ 1.45 $ 1.24 $ 0.99
======== ======== ========
</TABLE>
A reconciliation from the amounts reported in the consolidated statements of
operations to the amounts reported above is as follows (in thousands):
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE OTHER
INCOME AND INCOME TAXES NET INCOME (LOSS)
---------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As reported............. $174,546 $(21,161) $ 72,591 $123,889 $(61,156) $55,444
XcelleNet business...... (4,145) (2,240) (1,270) (1,378)
Purchased research and
development related to
XcelleNet business..... 114,650 114,650
Purchased research and
development............ 1,810 31,879 1,810 20,135
Reorganization and
unusual costs.......... 20,100 67,436 15,810 14,975 63,894 9,985
-------- -------- -------- -------- -------- -------
$190,501 $160,495 $120,280 $137,594 $117,820 $85,564
======== ======== ======== ======== ======== =======
</TABLE>
23
<PAGE>
The Company is supplementally presenting the quarterly financial information
below based upon the continuing operations of the Company and excluding the
results of the XcelleNet and Special Charges for 1999 and 1998 (in thousands,
except per share information). See Note 14--Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MARCH
DECEMBER 31, 31, JUNE 30, SEPTEMBER 30,
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Year ended September 30, 1999:
Revenues........................ $128,049 $135,829 $137,193 $160,390
Costs of sales.................. 24,085 26,883 27,690 28,145
Product development and
enhancement expenses........... 7,455 7,866 7,238 8,726
Selling, general and
administrative expenses........ 52,259 53,938 55,426 71,249
Income before other income and
income taxes................... 44,250 47,142 46,839 52,270
Net income...................... 32,429 34,323 35,222 35,620
Income per common share:
Basic......................... $ 0.34 $ 0.36 $ 0.37 $ 0.42
Diluted....................... 0.33 0.35 0.36 0.42
Year ended September 30, 1998:
Revenues........................ $106,283 $111,076 $122,095 $138,949
Costs of sales.................. 20,462 24,030 24,099 25,594
Product development and
enhancement expenses........... 7,648 6,392 7,343 7,072
Selling, general and
administrative expenses........ 45,577 44,789 47,666 57,236
Income before other income and
income taxes................... 32,596 35,865 42,987 49,047
Net income...................... 24,200 26,978 31,226 35,146
Income per common share:
Basic......................... $ 0.27 $ 0.30 $ 0.34 $ 0.38
Diluted....................... 0.26 0.29 0.33 0.36
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had $294.0 million of working capital at September 30, 1999,
including $61.7 million of cash and cash equivalents and $200.4 million of
marketable securities. At September 30, 1998, the Company had $546.8 million of
working capital. The decrease in working capital is principally due to the
Company's expenditure of $415.1 million during fiscal 1999 pursuant to its
stock repurchase program (see below).
Net cash flows from operations increased $48.7 million to $159.6 million in
1999 as compared to 1998 primarily due to higher operating profits and an
increase in deferred revenue which was offset by a decrease in noncash charges,
an increase in accounts receivable, an increase in prepaid expenses and other
assets and a decrease in accounts payable, accrued liabilities and income taxes
payable. Income tax payments decreased $11.8 million in 1999 compared to 1998.
The decrease in tax payments is primarily due to the write-off of assets for
tax purposes in 1999 due to exiting the business of publishing CD-ROM based
catalogs in 1998. A portion of the Company's cash flow from operations during
1999 and 1998 was used to fund software additions and capital expenditures.
Software expenditures during 1999 were $26.5 million as compared to $19.3
million in 1998. The software expenditures during the current year were
primarily for new products and enhancements of existing products. Property and
equipment purchases of $57.8 million for 1999 were primarily for purchases of
equipment upgrades for processing systems and computer equipment purchases to
support the continuing growth in revenue.
During 1999, the Company's Board of Directors approved a stock repurchase
program which authorizes the repurchase of up to 25 million shares of the
Company's Common Stock. Purchases may be made in open market, negotiated or
block transactions from time to time as market and business conditions warrant.
As of September 30, 1999, the Company had purchased 16.8 million shares of
Common Stock at an average price of $24.76 per share.
24
<PAGE>
The Company cancelled its Revolving Credit and Term Loan Agreement on June
30, 1999. At September 30, 1999, the Company's capital resource commitments
consisted primarily of commitments under lease arrangements for office space
and equipment activities (see Note 10--Notes to Consolidated Financial
Statements). The Company currently intends to meet such obligations from cash
flows from operations. There are no significant commitments for future capital
expenditures. The Company believes available balances of cash and cash
equivalents and marketable securities, combined with cash flows from
operations, are sufficient to meet the Company's working capital requirements
for the foreseeable future.
EFFECTS OF INFLATION
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 affect 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.
YEAR 2000
General
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Accordingly,
computer programs that perform date-related functions may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The following discussion regarding year 2000
matters constitutes a "Year 2000 Readiness Disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Act of 1998.
The Company continues to assess and resolve year 2000 issues associated with
its product and services offerings, material internal systems, such as
information technology ("IT") systems and non-IT systems, and material third-
party relationships. The Company has established web pages to update customers
on the year 2000 status of its offerings and to assist them in understanding
the Company's year 2000 strategy. This information may be accessed on the
Company's website at www.sterlingcommerce.com/y2kstatement.
Product and Services Offerings
The Company has completed a year 2000 assessment of its currently offered
products and services. This assessment included internal testing of the year
2000 capabilities of the Company's product and services offerings. The Company
has not had, and does not plan to have, its products or services tested by an
independent source. Based on its assessment, the Company believes that all
required steps have been taken to prepare its currently offered products and
services for year 2000 compliant operation. The increased amount of testing
related to the year 2000 resulted in some delays in the release of new products
or product versions. However, because year 2000 compliance was generally
integrated into its normal product development activities, the Company has not
incurred any significant incremental expenses in addressing the year 2000 issue
in its product or E-Business services offerings.
The Company believes that a small percentage of its customers who receive
product support from the Company are operating product versions that may not be
year 2000 compliant or products or product versions that the Company has
replaced with comparable year 2000 compliant products. The Company believes
that the majority of these customers have migrated to year 2000 compliant
versions and products through new releases, which the Company has strongly
encouraged. In addition, certain customers may be operating non-compliant
versions of products in respect of which the Company's agreed-upon product
support and warranty periods have expired. The Company has not undertaken an
assessment of whether these customers are taking appropriate steps to address
any related year 2000 issues.
25
<PAGE>
The Company provides a significant amount of its E-Community Management
services through its data center located in Columbus, Ohio. The data center
utilizes third-party software and hardware, as well as some Company software.
Furthermore, the data center requires electricity and other utilities and
relies on the Internet and third-party communications providers for the
transmission of data to and from its customers. The Company has made provision
for back-up systems and established contingency plans. The Company has also
conducted extensive assessment and testing of the data center, including
operating a back-up system in a post year 2000 mode, and has taken appropriate
remedial actions, all in an effort to avoid year 2000 failures.
The Company does not believe that customers who license or migrate to year
2000 compliant versions of its products, or customers who purchase the
Company's E-Community Management or other services, will experience any year
2000 failures caused by such products or services. In addition, the Company
believes that its licenses and other agreements contain customary and
appropriate limitations on the Company's obligations with respect to any year
2000 failures its current or former products and services may cause. However,
there can be no assurance that the Company's expectations and beliefs as to
these matters will prove to be accurate. Moreover, the Company's products are
used in, and the provision of its services requires the use of, systems
comprised of third-party hardware and software, some of which may not be year
2000 compliant.
Internal Systems
The Company has conducted a year 2000 assessment of its material internal
systems, both IT and non-IT, on a risk-priority basis. That assessment included
an assessment of certain embedded systems. Based on the results of that
assessment, the Company has taken certain remedial action with respect to its
internal systems. The remediation effort for these systems was completed in
June 1999. Any newly discovered remediation requirements have been, or will be,
addressed. Based upon its experience to date, the Company does not anticipate
that the internal and external costs of such remediation will have a material
adverse effect on the Company.
There can be no assurance that the remediation of the Company's material
internal systems will be completed in a timely manner or that such remediated
systems will function as anticipated. Interruption of normal business
operations, including the Company's ability to effectively provide E-Community
Management and other services to customers, in such events could have a
material adverse effect on the Company's business, operating results and
financial condition.
Third-Party Relationships
The Company has conducted a year 2000 assessment of its material third-party
supplier relationships. The assessment was conducted through communications
with such suppliers, testing of supplier equipment, systems or interfaces, and
a review of the year 2000 information made publicly available by such
suppliers. As a result of this assessment, certain actions were taken by the
Company to obtain assurances as to the correct future operation of third-party
systems. There can be no assurance, however, that the Company has received all
information necessary to fully evaluate the year 2000 readiness of all material
suppliers. Moreover, the Company relies in various ways, both domestically and
internationally, on government, utility and communications service providers to
conduct normal business operations. There can be no assurance that such
suppliers will not suffer business interruptions caused by a year 2000 issue.
Such interruptions could have a material adverse effect on the Company's
business, operating results and financial condition.
Additional Risks
Additional aspects of the year 2000 issue may pose risks to be considered in
evaluating the future growth of the Company. The Company believes that it has
experienced lower than expected growth from certain products, in part as a
result of customers addressing internal year 2000 issues, and there can be no
assurance that year 2000 issues will not continue to affect future customer
purchasing patterns, possibly resulting in lower demand for the Company's
products and services. For example, certain industry analysts believe that many
26
<PAGE>
customers and potential customers chose to defer system investments during
calendar 1999 and may choose to defer such investments in early calendar 2000
as they test and correct year 2000 problems in their systems. Other analysts
have indicated that many enterprises that have completed their year 2000
corrective measures may still defer system investments until after the early
part of calendar 2000. Conversely, the Company may have experienced greater
demand for certain of its products and services, particularly document
verification and year 2000 testing services, in calendar 1999 as customers
sought to replace, upgrade and test their systems to address year 2000 issues.
The Company anticipates that demand for such services will diminish in calendar
2000.
Furthermore, some commentators have also predicted that a significant amount
of litigation may arise out of year 2000 compliance issues. While the Company
has not been subject to any year 2000 claims or lawsuits to date, there can be
no assurance that customers or former customers will not bring claims or
lawsuits against the Company seeking compensation for losses associated with
year 2000-related failures. A material adverse outcome in a year 2000 claim or
lawsuit could have a material adverse effect on the Company's business,
financial condition and results of operations.
Contingency Planning
Although the Company believes that it has executed a timely, effective plan
for addressing material year 2000 issues that may affect the Company, there can
be no assurance that the Company or a third party on which the Company
significantly relies will not experience unanticipated consequences or material
expenses which could have a material adverse effect on the Company's business,
operating results or financial condition. The Company believes that it is
difficult to specifically describe its most likely "worst case" year 2000
scenario. One "worst case" scenario is the failure of the Company's products to
correctly perform date-related functions through the year 2000, causing
customer systems or operations dependent upon such products or services to fail
or be disrupted. Other "worst case" scenarios involve the Company's E-Community
Management offerings. Failure of the Company's internal systems to correctly
perform date-related functions through the year 2000, or disruptions in those
systems, could result in errors or delays in the provision of the Company's E-
Community Management and other services. Another "worst case" year 2000
scenario is the failure of a material third-party supplier, such as a
communications or utility provider, to address its year 2000 issues, resulting
in errors or delays in the provision of the Company's E-Community and other
services. In the event of such failures or disruptions, customers may commence
legal action against the Company or otherwise seek compensation for their
losses.
The Company has established a set of "contingency plans" to address potential
consequences of the year 2000 issue. These plans include documented action to
take in the event of any outage, a response chain-of-command to be used in
managing any outage, and the reporting that is required. The Company has
evaluated, and intends to continue to evaluate, both existing and newly
identified year 2000 risks and to develop and implement such further responsive
measures as it deems appropriate.
No Assurance Concerning Year 2000 Readiness Efforts
Although the Company believes that its year 2000 readiness efforts are
designed to appropriately identify and address those year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully effective.
Moreover, year 2000 issues present many risks that are simply beyond the
Company's control, such as the potential effects of year 2000 issues on the
economy in general and on the Company's business partners and customers in
particular.
OTHER MATTERS
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
27
<PAGE>
are translated at average exchange rates during the month in which the
underlying transaction occurs. Unrealized translation gains and losses are
included as an adjustment to accumulated other comprehensive income (loss). The
Company has mitigated a portion of its currency exposure through decentralized
sales, marketing and support operations in which costs are local currency
based. In addition, the Company may from time to time employ external hedging
strategies. The Company believes that its results of operations and financial
condition will not be materially affected by the recent decrease in the
relative value of certain foreign currencies compared to the U.S. dollar.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy contributes
in part to the Company's growth in revenue and operating profit. The impact of
any future acquisitions on continued growth in revenue and operating profit
cannot currently be determined.
NEW EUROPEAN CURRENCY
Eleven of the fifteen member countries of the European Union established
fixed conversion rates between their sovereign currencies and a new currency,
the "Euro", and adopted the Euro as their common currency effective January 1,
1999. Under the Euro introduction plan, sovereign currencies of the Euro
participants will be phased out beginning January 1, 2002 and eliminated by
June 30, 2002. In the meantime, the Euro is an acceptable legal business
currency (as a "book" currency) as well as the sovereign currencies although
the actual introduction of Euro notes and coins will not occur until January 1,
2002. The Company continues to review its products and business operations with
respect to the Euro's requirements in order to determine pricing strategies in
the new economic environment, implement changes to the legal and contractual
implications for contracts, ensure systems are Euro capable, and ensure vendors
can support the Company's operations with respect to Euro transactions. The
Company's currently offered products are currency neutral; therefore, the
Company has not had to make material modifications, nor does it expect to make
material modifications, to its products or internal systems used to support
Euro transactions. The cost of minor modifications have not had, nor are they
expected to have, a material adverse effect on the Company's results of
operations or financial condition. There can be no assurance, however, that the
Company will be able to complete such modifications to comply with Euro
requirements or that any failure to complete such modifications would not have
an adverse effect on the Company's business, results of operations or financial
condition. In addition, the Company faces risks to the extent that third-party
suppliers upon which the Company relies, or their suppliers, are unable to make
appropriate modifications to support Euro transactions. Currently, the Company
does not know of any appropriate modifications to support Euro transactions
which need to be made by suppliers.
FORWARD-LOOKING INFORMATION
This report and other reports and statements published by the Company from
time to time (collectively, "Published Reports") 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 Published Reports, 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 risks and uncertainties
specifically identified in the text surrounding such statements, those risks
discussed herein under the section titled "Risk Factors," uncertainties with
respect to changes or developments in social, economic, business, industry,
market, legal and regulatory circumstances and conditions and actions taken or
omitted to be taken by third parties, including the Company's stockholders,
customers, suppliers, business partners, competitors and legislative,
regulatory, judicial and other governmental authorities and officials.
28
<PAGE>
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. The Company does not intend to update the forward-looking
statements contained in this or other Published Reports.
RISK FACTORS
General
The Company and its businesses are subject to a number of risks, including
those enumerated below. Any or all of such risks could have a material adverse
effect on the business, financial condition, results of operations and
prospects of the Company and on market prices for the Company's Common Stock.
See also "Forward-Looking Information" above.
Competition
The market for electronic commerce solutions 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 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, AT&T;
Computer Associates International, Inc.; General Electric Information Services;
Harbinger Corporation; IBM; MCI WorldCom; Quick Response Services, as well as
certain hardware companies and the internal programming staffs of various
businesses engaging in electronic commerce.
The Company expects competition to increase in the future from both existing
competitors and other companies that may enter the Company's existing or future
markets. The Company believes that its ability to compete successfully in the
electronic commerce market depends on numerous factors, some of which are
outside its control, including product performance, functionality and
reliability, price and customer service and support. There can be no assurance
that new or established competitors will not offer products and services that
are superior to and/or lower in price than those of the Company. In addition,
the Company could face increased competition as the Internet continues to gain
acceptance as a method of conducting electronic commerce.
Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results
The Company's future quarterly operating results may vary and reduced levels
of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including changes in the levels of revenue derived from
licensing of software products and E-Community Management, E-Sourcing and other
services, the timing of new product and service announcements by the Company or
its competitors, changes in pricing policies by the Company or its competitors,
changes in accounting requirements dictated by regulatory agencies or standards
bodies (including possibly retroactive changes), market acceptance of new and
enhanced versions of the products and services of the Company or its
competitors, the size and timing of significant orders, changes in operating
expenses, changes in the Company's strategy, the introduction of alternative
technologies, the effect of potential acquisitions and industry and general
economic factors.
The Company has limited or no control over many of these factors. In
addition, a somewhat greater portion of the Company's revenues tends to be
recognized in the fourth fiscal quarter as a result of a number of factors,
including the Company's incentive compensation structure for its sales
personnel (under which opportunities to earn higher commissions applicable to
sales in excess of annual quotas and to realize other benefits associated with
the achievement of such quotas are at their greatest during the fourth fiscal
quarter).
The Company operates with virtually no product order backlog because its
software products typically are shipped shortly after orders are received. As a
result, product revenues in any quarter are substantially
29
<PAGE>
dependent on the quantity of such products licensed in that quarter.
Additionally, as a result of potentially lengthy sales cycles, revenues
associated with products and services may not actually be recognized until a
later fiscal quarter.
The Company's expense levels are based in part on its expectations as to
future revenues. If revenue levels are below expectations, the Company's
operating results are likely to be adversely affected unless the Company is
willing and able to reduce its expenses proportionately.
As a result of the foregoing factors, comparisons of results of operations
between particular periods are not necessarily meaningful and historical
results of operations are not necessarily indicative of future performance.
Technological Change; Dependence on New Products and Related Risks
The electronic commerce industry is characterized by rapid technological
change, frequent new product and service introductions and evolving industry
standards. The Company's future success will depend in significant part on its
ability to anticipate and guide industry standards, to continue to apply
advances in electronic commerce product and service technologies, to enhance
existing products and services and to introduce and acquire new products and
services on a timely basis to keep pace with technological developments.
In this regard, there can be no assurance that the Company will be successful
in developing, acquiring or marketing new or enhanced products or services that
respond to technological change or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, acquisition or marketing of such products or services
or that the Company's new or enhanced products and services will adequately
meet the requirements of the marketplace or achieve market acceptance.
Any delay or failure in the introduction of new or enhanced products or
services, or the failure of such products or services to achieve market
acceptance, could have a material adverse effect on the business, results of
operations and financial condition of the Company.
The introduction and marketing of new or enhanced products and services
requires management of the transition from existing products and services in
order to minimize the disruption in customer purchasing patterns. There can be
no assurance that the Company will successfully manage the transition to new or
enhanced products and services. Further, there can be no assurance that
products, services or technologies developed by others will not render the
Company's products, services or technologies obsolete.
From time to time, the Company or its competitors may announce new products,
services, capabilities or technologies that have the potential to replace or
shorten the life cycle of the Company's existing products and services
offerings. There can be no assurance that announcements of product enhancements
or new product or service offerings will not cause customers to defer or cancel
purchasing existing products and services. Any such deferrals or cancellations
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Software products as complex as those used in the electronic commerce
industry may contain undetected errors or failures when first introduced or
when new versions are released. If software errors are discovered after
introduction, the Company could experience delays or lost revenues during the
period required to correct these errors. There can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of, or delay in, market acceptance, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company faces certain risks relating to year 2000 issues. In this regard,
see the information set forth in "Year 2000" above, which is incorporated
herein by reference.
30
<PAGE>
Growth Through Acquisitions
A key element of the Company's growth strategy has been strategic
acquisitions. There can be no assurance that, in the future, acquisition
candidates will be found on terms suitable to the Company or that the Company
will have adequate resources to consummate any acquisition. Acquisitions
involve a number of other special risks, including time and expenses associated
with identifying and evaluating acquisitions, the diversion of management's
attention, the difficulty in the integration of acquired products and services,
the difficulty in combining different company cultures and the potential loss
of key employees of the acquired company. In addition, customer satisfaction or
performance problems at a single acquired firm could have a material adverse
effect on the reputation of the Company as a whole.
Acquisitions may also result in potentially dilutive issuance of equity
securities, the incurrence of debt, the write-off of research and development
and capitalized product costs, integration costs and the amortization of
expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the results of operations and financial
condition of the Company.
The guidelines and requirements for the accounting of acquisitions, including
those for the pooling-of-interests method of accounting, the expensing of
certain costs and the write-down of certain assets, are currently being changed
or under consideration for change by various regulatory agencies and standards
bodies. Those changes and the related uncertainties could make acquisitions
less beneficial or attractive to the Company and could impact the Company's
ability to make future acquisitions.
International Growth and Marketing
Prior to June 1997, Sterling Software acted as the exclusive distributor of
certain of the Company's products outside the United States and Canada pursuant
to the International Marketing Agreement. In June 1997, the Company and
Sterling Software terminated the International Marketing Agreement.
Concurrently therewith, the Company acquired certain assets and assumed certain
liabilities associated with the distribution of its products, and the Company
hired certain Sterling Software employees, most of whom had been dedicated to
the sales and marketing of those products. The Company's ability to maintain
and expand this business and its E-Community Management and E-Sourcing
businesses internationally will depend upon, among other things, its ability to
attract and retain both talented and qualified managerial, technical and sales
personnel as well as customers outside the United States and Canada and its
ability to continue to effectively manage its domestic operations while
focusing on international expansion. Moreover, the Company's ability to
successfully implement its international strategy will require additional
improvements to its infrastructure and management information systems, and
particularly to its international customer support systems.
International operations are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, local political and
economic developments, difficulties in staffing and managing foreign
operations, exchange controls, expropriation, longer payment cycles, increased
difficulties in collecting accounts receivable, changes in foreign currency
exchange rates and potentially adverse tax consequences.
To the extent international sales are denominated in foreign currencies,
fluctuations in the exchange rates between the U.S. dollar and applicable
international currencies may contribute to fluctuations in the Company's
results of operations. The Company has in the past, on a limited basis, entered
into hedging arrangements for the purpose of reducing the risk of currency
fluctuations. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third calendar quarter of each year
because many customers reduce their business activities in the summer months.
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 a component of
comprehensive income and transaction gains and losses are included in the
determination of net income.
31
<PAGE>
In the event of any dispute arising from international operations, the
Company may be subject to the exclusive jurisdiction of foreign courts and may
not be successful in subjecting foreign persons or entities to the jurisdiction
of the courts in the United States. The Company may also be hindered in or
prevented from enforcing its rights with respect to foreign governments because
of the doctrine of sovereign immunity. There can be no assurance that the laws,
regulations or administrative practices of foreign countries relating to the
Company's ability to do business in that country will not change. Any such
change could have a material adverse effect on the business, results of
operations and financial condition of the Company.
The Company faces certain risks relating to the adoption of the Euro as a new
currency in Europe. In this regard, see the information set forth in "New
European Currency" above. Such information is incorporated herein by reference.
Ability to Attract Qualified Personnel
The Company's business is dependent upon its ability to attract and retain
highly qualified managerial, technical and sales personnel. Competition for
such personnel is intense. There can be no assurance that the Company can
retain its key managerial, technical and sales personnel or that it can
attract, assimilate or retain such personnel in the future. The inability of
the Company to attract and retain such personnel could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
Dependence on Data Center
The Company's services offerings, especially its E-Community Management
services offerings, are dependent upon the Company's ability to protect its
computer equipment and the information stored in its data center against damage
that may be caused by fire, power loss, telecommunications failures,
unauthorized intrusion, computer viruses and disabling devices and other
similar events. The data center is located in a single facility in Columbus,
Ohio and the Company has no present intention of establishing an additional
data center in a separate location.
The Company is party to a disaster recovery agreement that provides
alternative off-site computer systems for use in such disastrous events. In
addition, the Company has taken precautions to protect itself and its customers
from events that could interrupt delivery of certain of the Company's E-
Community Management and other services. These precautions include, among
others, backup power generation equipment, fire protection and physical
security systems and an early warning detection and fire extinguishing system.
Notwithstanding such precautions, there can be no assurance that a fire or
other natural disaster, including national, regional or local
telecommunications disruptions, would not result in a prolonged disruption of
the Company's E-Community Management or other services.
The Company is currently covered under a business interruption insurance
policy. However, even if lost revenues or increased costs experienced by the
Company during the pendency of any disruption of its services business were
substantially recovered under any such insurance policy (as to which, depending
upon the circumstances, there can be no assurance), longer term revenue losses
not recoverable under such policies could result from possible losses of
customers and, consequently, could have a material adverse effect on the
business, results of operations and financial condition of the Company.
The Company faces certain risks relating to year 2000 issues. In this regard,
see information set forth in "Year 2000" above. Such information is
incorporated herein by reference.
Limited Protection of Proprietary Rights; Risks of Infringement and Loss of
Licenses
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 through reverse
engineering or otherwise. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar
32
<PAGE>
technology. 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 proprietary rights.
The Company does not believe that any of its products or services infringe
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. 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.
The Company from time to time has received communications from third parties
alleging that the Company is infringing intellectual property rights. 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. Such
events could have a material adverse effect on the business, results of
operations and financial condition of the Company.
Licenses for a number of third-party 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. Although
management believes that the risk that the Company will lose a significant
number of licenses is remote, such a loss could have a material adverse effect
on the business, results of operations and financial condition of the Company.
Government Regulatory and Industrial Policy Risks
Current United States and Canadian regulations and laws governing the
telecommunications industry generally do not apply to providers of electronic
commerce services and products. Except for government regulations in certain
foreign countries (which may affect the provision of certain of the Company's
services or use of certain of its products) and regulations governing the
ability of the Company to disclose the contents of communications by its
customers, there are no government regulations pertaining to the pricing,
service characteristics or capabilities, geographic distribution or quality
control features of the Company's electronic commerce services or products.
There exists, however, the risk that governmental policies affecting the
electronic commerce industry could be implemented by executive order,
legislation, administrative order or otherwise. If such policies are adopted,
they could have a material adverse effect on the business, results of
operations and financial condition of the Company.
Although the Company does not believe that import and export control
regulations currently create significant impediments to the Company's
international growth strategy, such regulations are applicable to certain of
the Company's software products and could interfere with such growth in the
future.
Certain Anti-takeover Provisions
Certain provisions of the Company's Fourth Amended and Restated Certificate
of Incorporation ("Certificate of Incorporation"), the Company's Amended and
Restated Bylaws ("Bylaws") and the Delaware General Corporation Law may have
the effect of delaying, deterring or preventing a change in control of the
Company. The Certificate of Incorporation authorizes the issuance of up to
300,000,000 shares of Common Stock and up to 50,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). The Board of Directors of
the Company has the power to determine the price and terms under which any such
additional capital stock may be issued and to fix the terms of such Preferred
Stock, and existing stockholders of the Company will not have preemptive rights
with respect thereto.
33
<PAGE>
The Company is a party to a Rights Agreement, dated as of December 18, 1996
(the "Rights Agreement"), between the Company and The First National Bank of
Boston, as rights agent. The existence of the Rights Agreement and the
provisions thereunder could also have the effect of delaying, or deterring or
preventing, a change in control of the Company.
Amendment to Bylaws
The Board of Directors of the Company have amended certain provisions of the
Company's Bylaws, including, among others, the provision relating to bringing
business before an annual meeting. The Bylaws provide that for business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof. The Bylaws have been amended to require
that, in order for a stockholder's notice to be timely, it must be delivered to
or mailed to and received at the principal executive offices of the Company not
less than eighty days and no earlier than 110 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders. The notice
must also contain the information required by Article II, Section 2 of the
Bylaws.
The foregoing description of the Bylaws does not purport to be complete and
is qualified in its entirety by reference to the Bylaws filed herewith.
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 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 in order to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's marketable securities.
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 had an effective maturity of 258 days at September
30, 1999.
<TABLE>
<CAPTION>
MATURITY
(IN THOUSANDS, EXCEPT PERCENTAGES)
---------------------------------------- FAIR VALUE AT
2000 2001 2002 TOTAL SEPTEMBER 30, 1999
--------- -------- -------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Commercial paper........ $ 89,440 $ 89,440 $ 89,001
Average interest
rate................. 5.74% 5.74%
Debt securities......... 79,673 $ 16,602 $ 14,950 111,225 111,443
Average interest
rate................. 5.38% 5.61% 5.80% 5.47%
Total marketable
securities............. $ 169,113 $ 16,602 $ 14,950 $ 200,665 $200,444
Average interest
rate................. 5.57% 5.61% 5.80% 5.59%
</TABLE>
<TABLE>
<CAPTION>
MATURITY
(IN THOUSANDS, EXCEPT PERCENTAGES)
------------------------------------- FAIR VALUE AT
1999 2000 TOTAL SEPTEMBER 30, 1998
----------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Commercial paper........ $ 52,650 $ 52,650 $ 51,972
Average interest
rate................. 5.64% 5.64%
Debt securities......... 118,223 $ 12,658 130,881 131,479
Average interest
rate................. 5.90% 6.11% 5.92%
Total marketable
securities............. $ 170,873 $ 12,658 $ 183,531 $183,541
Average interest
rate................. 5.82% 6.11% 5.84%
</TABLE>
34
<PAGE>
FOREIGN CURRENCY RISK
The Company conducts business in various foreign currencies, primarily in
Canada and Europe and to a lesser extent in Australia, Japan and other Asian
countries. The Company monitors its foreign currency exposure and, from time to
time, will attempt to reduce its exposure through hedging. As of September 30,
1999, the Company had no foreign currency hedges outstanding. The Company has
mitigated, and expects to continue to mitigate, a portion of its currency
exposure through decentralized sales, marketing and support operations in which
all costs are local currency based. Additionally, the Company operates in U.S.
dollars with its third-party distributors, thereby eliminating currency
exposure from these relationships.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING COMMERCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 37
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and 1998.............. 38
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997.................................................... 39
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997...................................... 40
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997.................................................... 41
Notes to Consolidated Financial Statements.............................. 42
</TABLE>
36
<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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. 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, 1999.
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 audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at September 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999 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.
/s/ Ernst & Young LLP
Dallas, Texas
November 17, 1999
37
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 61,689 $354,948
Marketable securities................................... 200,444 183,451
Accounts receivable, net................................ 189,703 151,256
Deferred income taxes................................... 9,748 11,627
Prepaid expenses and other current assets............... 30,321 15,869
--------- --------
Total current assets.................................. 491,905 717,151
Property and equipment, at cost:
Computers and peripheral equipment...................... 138,572 87,942
Furniture, fixtures and other equipment................. 22,906 27,991
Leasehold improvements.................................. 17,792 18,144
--------- --------
179,270 134,077
Accumulated depreciation................................ (80,103) (57,542)
--------- --------
Property and equipment, net............................. 99,167 76,535
Computer software, net.................................... 92,123 91,409
Excess cost over net assets acquired, net................. 56,342 63,382
Other assets.............................................. 41,194 18,527
--------- --------
$ 780,731 $967,004
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities................ $ 90,749 $ 90,599
Income taxes payable.................................... 20,512 7,992
Deferred revenue........................................ 86,644 71,744
--------- --------
Total current liabilities............................. 197,905 170,335
--------- --------
Deferred income taxes..................................... 38,481 30,335
Other noncurrent liabilities.............................. 26,440 18,419
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 50,000 shares autho-
rized; no shares issued and outstanding................
Common stock, $.01 par value; 300,000 and 150,000 shares
authorized at September 30, 1999 and 1998,
respectively; 96,124 and 94,511 shares issued at
September 30, 1999 and 1998, respectively.............. 961 945
Additional paid-in capital.............................. 763,639 714,156
Retained earnings....................................... 153,030 31,756
Accumulated other comprehensive income (loss)........... (2,010) 1,058
Treasury stock, at cost; 16,160 shares at September 30,
1999................................................... (397,715)
--------- --------
Total stockholders' equity............................ 517,905 747,915
--------- --------
$ 780,731 $967,004
========= ========
</TABLE>
See accompanying notes.
38
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Products........................................ $236,432 $191,380 $123,594
Product support................................. 142,925 101,005 75,114
Services........................................ 243,715 197,917 151,889
-------- -------- --------
623,072 490,302 350,597
Costs and expenses:
Costs of sales:
Products and product support.................. 61,044 41,842 34,217
Services...................................... 68,251 54,319 36,398
-------- -------- --------
129,295 96,161 70,615
Product development and enhancement expenses.... 38,457 29,717 24,853
Selling, general and administrative expenses.... 260,674 201,689 134,849
Purchased research and development.............. 116,460 31,879
Reorganization and unusual costs................ 20,100 67,436 15,810
-------- -------- --------
448,526 511,463 278,006
-------- -------- --------
Income (loss) before other income and income
taxes............................................ 174,546 (21,161) 72,591
Other income...................................... 23,129 24,152 16,693
-------- -------- --------
Income before income taxes........................ 197,675 2,991 89,284
Provision for income taxes........................ 73,786 64,147 33,840
-------- -------- --------
Net income (loss)................................. $123,889 $(61,156) $ 55,444
======== ======== ========
Income (loss) per common share:
Basic........................................... $ 1.34 $ (0.67) $ 0.66
======== ======== ========
Diluted......................................... $ 1.31 $ (0.67) $ 0.64
======== ======== ========
</TABLE>
See accompanying notes.
39
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
------------- PAID-IN RETAINED COMPREHENSIVE ----------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES AMOUNT EQUITY
------ ------ ---------- -------- ------------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996................... 75,000 $750 $ 98,111 $ 39,282 $ 44 $138,187
Net income............. 55,444 55,444
Foreign currency
translation
adjustment............ (442) (442)
Unrealized gain on
marketable securities,
net of tax............ 260 260
--------
Total comprehensive
income................ 55,262
--------
Issuance of Common
Stock................. 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
employee stock plans,
including tax benefit
of $1,200............. 75 3,000 3,000
Other.................. (255) (477) (732)
------ ---- -------- -------- ------- ------ --------- --------
Balance at September 30,
1997................... 89,644 896 505,855 94,249 (138) 600,862
Net loss............... (61,156) (61,156)
Foreign currency
translation
adjustment............ 1,420 1,420
Unrealized loss on
marketable securities,
net of tax............ (224) (224)
--------
Total comprehensive
loss.................. (59,960)
--------
Issuance of Common
Stock and stock
options for
acquisitions.......... 2,442 24 140,987 141,011
Issuance of Common
Stock pursuant to
employee stock plans,
including tax benefit
of $9,946............. 2,425 25 67,408 67,433
Other.................. (94) (1,337) (1,431)
------ ---- -------- -------- ------- ------ --------- --------
Balance at September 30,
1998................... 94,511 945 714,156 31,756 1,058 747,915
Net income............. 123,889 123,889
Foreign currency
translation
adjustment............ (2,455) (2,455)
Unrealized loss on
marketable securities,
net of tax............ (613) (613)
--------
Total comprehensive
income................ 120,821
--------
Issuance of Common
Stock pursuant to
employee stock plans,
including tax benefit
of $8,323............. 1,613 16 49,483 (2,615) (602) $ 17,369 64,253
Purchase of treasury
stock................. 16,762 (415,084) (415,084)
------ ---- -------- -------- ------- ------ --------- --------
Balance at September 30,
1999................... 96,124 $961 $763,639 $153,030 $(2,010) 16,160 $(397,715) $517,905
====== ==== ======== ======== ======= ====== ========= ========
</TABLE>
See accompanying notes.
40
<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $ 123,889 $ (61,156) $ 55,444
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 56,955 40,718 30,214
Provision for losses on accounts receivable.. 11,302 8,952 3,567
Provision for (benefit of) deferred income
taxes....................................... 10,025 1,481 (15,586)
Purchased research and development........... 116,460 31,879
Noncash reorganization and unusual costs..... 9,762 36,192
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable......................... (49,749) (47,073) (10,751)
Prepaid expenses and other assets........... (39,027) (9,383) (13,917)
Accounts payable, accrued liabilities and
income taxes payable....................... 12,670 14,371 19,677
Deferred revenue............................ 14,900 7,823 17,067
Other....................................... 8,825 2,474 3,559
--------- --------- ---------
Net cash provided by operating activities.. 159,552 110,859 121,153
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment.......... (57,835) (48,598) (32,148)
Purchases and capitalized cost of development
of computer software........................ (26,539) (19,320) (13,855)
Business acquisitions, net of cash acquired.. (56,637) (38,320)
Purchases of investments..................... (345,964) (257,730) (313,460)
Sales of investments......................... 328,358 308,593 100,349
--------- --------- ---------
Net cash used in investing activities...... (101,980) (73,692) (297,434)
--------- --------- ---------
FINANCING ACTIVITIES:
Issuance of Common Stock..................... 64,253 67,433 403,145
Purchase of treasury stock................... (415,084)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................ (350,831) 67,433 403,145
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................. (293,259) 104,600 226,864
Cash and cash equivalents at beginning of
year......................................... 354,948 250,348 23,484
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 61,689 $ 354,948 $ 250,348
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid........................... $ 39,434 $ 51,216 $ 49,278
========= ========= =========
</TABLE>
See accompanying notes.
41
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
1. GENERAL INFORMATION
General
Sterling Commerce, Inc. (the "Company") provides E-Business integration
solutions for Global 5000 and other companies and their commerce communities.
The Company develops, markets and supports software products and provides
services and consulting that enable businesses to engage in E-Business
communications and transactions with their trading partners and other E-
Community constituents. The Company is focused on providing E-Business
integration solutions through its COMMERCE, CONNECT and GENTRAN product
families. Through the Company's E-Business Communications Infrastructure
(CONNECT product family), the Company provides software and services which
focus on managed data delivery within and between enterprises. The Company's E-
Business Process Integration (GENTRAN product family) provides software and
services to integrate business processes within an enterprise and among its E-
Business communities. Software and services to build, manage and service
integrated E-Communities is provided by the Company's E-Community Management
(COMMERCE product family). Resources and expertise to solve customers' business
problems are provided through the Company's E-Sourcing (Managed Services). The
Company also provides bank automation solutions to financial institutions
through its VECTOR product family.
The Company was incorporated in December 1995. The Company, through its
predecessors and subsidiaries, has been providing solutions to allow businesses
to conduct transactions electronically with their trading partners for more
than 25 years and has customers in many industries, including banking, "E-
tailing," healthcare, insurance, manufacturing, pharmaceuticals, retailing,
telecommunications, government and transportation. The Company has direct
operations in 20 countries outside of the United States, a Pan-European support
center in Amsterdam, a Pan-Asian support and development center in Singapore
and more than 40 distributors worldwide.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts for the comparative periods
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies at September 30, 1999 and 1998, and the results of
operations for the years ended September 30, 1999, 1998 and 1997. While
management has based its assumptions and estimates on the facts and
circumstances currently known, final amounts may differ from such estimates.
Revenue
Revenue from license fees for software products is recognized when the
software is delivered, when there is persuasive evidence that an arrangement
exists, when the fee is fixed and determinable and when collection is probable.
If software products transactions include the right to receive future products,
a portion of the software products revenue is deferred and recognized when such
products are delivered. Revenue from services is recognized as the services are
performed.
If software product licensing transactions include multiple elements, each
element of the software licensing is separately identified and accounted for
based on the relative fair value of such element. Revenue is
42
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
not recognized on any element of the license arrangement if undelivered
elements are essential to the functionality of the delivered elements.
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. Returns, allowances and other similar adjustments
to revenue involving software licensing have historically not been material to
the Company's results of operations.
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 $42.6 million and $39.0 million are
included in computer software, net at September 30, 1999 and 1998,
respectively. Pursuant to FAS 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 requires 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, product
development personnel salaries and related expenses, outside contractor costs
and allocated facilities and equipment 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 two to five years. Leasehold improvements are amortized
over the term of the lease. Excess costs over the net assets of businesses
acquired are amortized on a straight-line basis over periods of 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, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $29,589 $22,022 $16,617
Purchased computer software........................ 5,866 3,122 1,720
Capitalized computer software development costs.... 11,600 11,535 10,252
Excess costs over net assets of businesses
acquired.......................................... 8,001 2,194 830
Other intangible assets............................ 1,899 1,845 795
------- ------- -------
$56,955 $40,718 $30,214
======= ======= =======
</TABLE>
43
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accumulated amortization related to computer software, net was $67.0 million
and $62.3 million at September 30, 1999 and 1998, respectively. At September
30, 1999 and 1998, accumulated amortization for excess costs over net assets
acquired, net was $12.4 million and $2.3 million, respectively.
Income Taxes
The Company computes its provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," which requires the use of an asset and liability approach of accounting
for income taxes. Under the asset and liability approach, a deferred tax asset
or liability is recognized for estimated future tax effects attributable to
temporary differences and carryforwards. Deferred tax assets are reduced by a
valuation allowance when it is more likely than not the entire amount of the
deferred tax asset will not be realized. The effect on deferred taxes of a
change in income tax rates is recognized in the period that includes the
enactment date.
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 plans. For fixed stock option grants 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.
Income Per Common Share
The following table sets forth the computation of basic and diluted income
per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1999 1998(1) 1997
-------- -------- -------
<S> <C> <C> <C>
Basic:
Net income (loss).................................. $123,889 $(61,156) $55,444
======== ======== =======
Weighted average common shares outstanding......... 92,625 91,307 83,561
======== ======== =======
Income (loss) per common share..................... $ 1.34 $ (0.67) $ 0.66
======== ======== =======
Diluted:
Net income (loss).................................. $123,889 $(61,156) $55,444
======== ======== =======
Weighted average common shares outstanding......... 92,625 91,307 83,561
Net effect of dilutive stock options (2)........... 2,089 3,254
-------- -------- -------
Diluted weighted average common shares
outstanding....................................... 94,714 91,307 86,815
======== ======== =======
Income (loss) per common share..................... $ 1.31 $ (0.67) $ 0.64
======== ======== =======
</TABLE>
- --------
(1) In connection with the computation of the loss per share for the year ended
September 30, 1998, all otherwise dilutive stock options have been excluded
since the impact on the Company's net loss per common share is
antidilutive. In the absence of this net loss, 3.8 million additional
shares related to dilutive stock options would be included in the
computation of diluted income per common share.
(2) For 1999, 1998 and 1997, 2.5 million, 0.4 million, 0.3 million,
respectively, of antidilutive stock options are excluded from the
calculation since the option exercise prices were greater than the average
market prices.
44
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Translation gains and losses are included as a component of comprehensive
income and transaction gains and losses are included in the determination of
net income.
Comprehensive Income
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
requires the presentation of comprehensive income and its components in the
financial statements. The purpose of reporting comprehensive income is to
report changes in equity that result from transactions and other economic
events, excluding transactions with owners in their capacity as owners. The
Company's comprehensive income consists of net income, foreign currency
translation adjustments and unrealized gains or losses on marketable
securities. The adoption of FAS 130 had no impact on the financial position or
results of operations of the Company.
The components of accumulated other comprehensive income (loss) as of
September 30, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -----
<S> <C> <C> <C>
Foreign currency translation adjustment........... $(1,487) $ 968 $(452)
Unrealized gain (loss) on marketable securities,
net of tax....................................... (523) 90 314
------- ------ -----
$(2,010) $1,058 $(138)
======= ====== =====
</TABLE>
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 surplus 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 in accumulated other comprehensive income (loss), net of any related
tax effect. The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to their effective maturity date. 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.
Accounts Receivable
The Company's accounts receivable are due principally from corporations in
diverse industries primarily located in North America and Europe and are
generally unsecured. Accounts receivable are shown in the accompanying
consolidated balance sheets net of an allowance for doubtful accounts of $15.2
million and $10.3 million as of September 30, 1999 and 1998, respectively.
45
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Excess Cost Over Net Assets Acquired
The carrying amount of such costs which are not associated with other assets
acquired in a purchase business combination is reassessed by management if
facts and circumstances suggest that such amount may be impaired. If such
assessment indicates that the costs will not be recoverable, as determined
based on the estimated discounted future cash flows of the business acquired
over the remaining amortization period, the carrying amount is reduced by the
estimated shortfall of cash flows. The carrying amount of costs associated with
other assets acquired in a purchase business combination is included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
Recent Pronouncements
Effective October 1, 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition," as amended by Statement of Position 98-4
"Deferral of the Effective Date of Certain Provisions of SOP 97-2" ("SOP 97-
2"), which requires each element of a software license arrangement to be
separately identified and accounted for based on the relative fair value of
each element. Revenue cannot be recognized on any element of the license
arrangement if undelivered elements are essential to the functionality of the
delivered elements. Adoption of SOP 97-2 did not significantly affect the
Company's results of operations for the year ended September 30, 1999, since
the Company's revenue recognition policies have historically been in
substantial compliance with the practices required by SOP 97-2.
On December 15, 1998, Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-
9") was released. SOP 98-9 amends SOP 97-2 to require that an entity recognize
revenue for multiple element arrangements by means of the "residual method"
when (1) there is vendor-specific objective evidence ("VSOE") of the fair
values of all the undelivered elements that are not accounted for by means of
long-term contract accounting (2) VSOE of fair value does not exist for one or
more of the delivered elements and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. VSOE is determined by the price charged when each item
is sold separately, or by deducting the fair value of one or more items from
the total fair value of the agreement or by using objective evidence based upon
the vendor's facts and circumstances.
The residual method requires revenue for multiple element arrangements to be
recognized as follows: (1) the total fair value of the undelivered elements, as
indicated by VSOE, is deferred and subsequently recognized in accordance with
SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related
to the delivered elements.
The provisions of SOP 98-9 extend the deferral of certain provisions of SOP
97-2. All other provisions of SOP 98-9 will be effective for the Company's
fiscal year beginning October 1, 1999. Retroactive application is prohibited.
The adoption of SOP 98-9 is not expected to significantly impact the Company.
FAS No. 133: "Accounting for Derivative Instruments and Hedging Activities."
FAS 133, as amended, requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. FAS 133 will be effective for the Company's fiscal year beginning
October 1, 2000. Currently the Company does not use derivatives to a
significant extent; therefore, the adoption of FAS 133 is not expected to have
a material impact on the financial position or results of operations of the
Company.
46
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SOP 98-1: "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
SOP 98-1 will be effective for the Company's fiscal year beginning October 1,
1999. The adoption of SOP 98-1 is not expected to have a material impact on the
financial position or results of operations of the Company.
3. REORGANIZATION AND UNUSUAL COSTS
1999 Reorganization and Unusual Costs
Based in part on the changes in the Company's marketplace, during 1999 the
Company began a program of realigning its resources to new initiatives to
address what it believes are future growth areas: E-Business Process
Integration, E-Business Communications Infrastructure, E-Community Management
and E-Sourcing. Based on the Company's third quarter results, during the fourth
quarter the Company also determined that a realignment of additional resources,
exiting of certain businesses and discontinuance of certain product lines, was
necessary to maximize future operating results, revenue and earnings growth and
stockholder value. As a result, in the fourth quarter of fiscal 1999
approximately 200 positions were eliminated from the Company's global
workforce. Primarily due to the realigning of efforts, the Company has recorded
a charge of $26.1 million (see 1998 Reorganization and Unusual Costs below) in
fiscal 1999 ("1999 Reorganization and Unusual Costs").
The components of the 1999 Reorganization and Unusual Costs are as follows
(in thousands):
<TABLE>
<S> <C>
Excess facilities costs.......................................... $12,346
Write-down of software products which will no longer be actively
marketed or supported and related assets........................ 6,578
Employee termination costs....................................... 5,382
Other............................................................ 1,801
-------
$26,107
=======
</TABLE>
Excess facilities costs of $12.3 million consist of $9.9 million of
continuing obligations under operating leases and other cash payments and $2.4
of leasehold improvement write-offs. During the third quarter of fiscal 1999,
the Company decided to relocate operations from one facility, which it leased,
to a new leased facility which was occupied in October 1999. The Company is
required to continue its operating lease payments for the vacated facility,
therefore, it recorded a charge for the future lease commitments of the vacated
facility and asset write-offs for related leasehold improvements totaling $3.0
million. The $3.0 million charge is included in the excess facilities costs of
the previously mentioned 1999 Reorganization and Unusual Costs.
At September 30, 1999 the unpaid balance of the 1999 Reorganization and
Unusual Costs was $14.2 million and is included in accounts payable and accrued
liabilities (see Note 8). The balance is comprised of $10.2 million of excess
facilities costs, $3.0 million of employee termination costs and $1.0 million
related to other items.
1998 Reorganization and Unusual Costs
The Company's results of operations for 1998 include reorganization and
unusual costs of $67.4 million. These costs are primarily related to the
reorganization of the Company's operations in connection with the fiscal 1998
acquisitions discussed below, the write-off of certain assets and excess cost
over net assets acquired and the accrual of costs in connection with the
Company's decision to exit the business of publishing CD-ROM
47
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based catalogs and the write-off of certain other software products which the
Company no longer intends to actively market and support.
The components of the 1998 Reorganization and Unusual Costs were as follows
(in thousands):
<TABLE>
<S> <C>
Write-down of software products and other assets and recognition of
liabilities associated with software products and services which
will no longer be actively marketed or supported................... $21,806
Write-off of software and other assets and recognition of liabili-
ties associated with exiting the business of publishing CD-ROM
based catalogs..................................................... 18,204
Write-off of excess costs over net assets acquired.................. 8,488
Employee termination costs.......................................... 7,993
Out of pocket costs related to the reorganization................... 4,784
Other............................................................... 6,161
-------
$67,436
=======
</TABLE>
The costs associated with exiting the business of publishing CD-ROM based
catalogs and other estimated charges were, and are expected to remain, less
than the Company originally estimated, resulting in a $6.0 million reversal
during 1999 of the costs originally reserved for this purpose. This reversal is
included in 1999 reorganization and unusual costs of $20.1 million.
During the fiscal year ended September 30, 1999, $20.0 million, including
$3.5 million of employee termination costs, were disbursed or reversed from the
September 30, 1998 balance of accrued reorganization and unusual costs. The
unpaid balance remaining for the 1998 Reorganization and Unusual Costs at
September 30, 1999 was $3.6 million and is included in accounts payable and
accrued liabilities.
1997 Reorganization and Unusual Costs
In June 1997, the Company established direct operations outside the United
States and Canada to distribute its products and services by acquiring certain
assets and assuming certain liabilities associated with the distribution of
certain of the Company's products by Sterling Software outside the United
States and Canada. Additionally, the Company terminated the International
Marketing Agreement with Sterling Software.
The Company paid Sterling Software $5.2 million for the early termination of
the International Marketing Agreement and $10.1 million for the net book value
of the assets the Company acquired less the liabilities assumed. The Company
recorded the $5.2 million payment and other costs, principally incurred to
integrate the international distribution business formerly conducted by
Sterling Software into the Company's operations, as reorganization and unusual
costs in the fiscal year ended September 30, 1997.
The components of the 1997 Reorganization and Unusual Costs consist of (in
thousands):
<TABLE>
<S> <C>
Early termination payment to Sterling Software...................... $ 5,226
Transaction costs and professional fees............................. 3,100
Severance and transition costs...................................... 2,400
Other............................................................... 5,084
-------
$15,810
=======
</TABLE>
At September 30, 1997, the remaining balance of the 1997 Reorganization and
Unusual Costs was $8.9 million which was paid in fiscal 1998.
48
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. BUSINESS COMBINATIONS
1998 Business Combinations
On July 21, 1998, the Company completed the acquisition of all of the issued
and outstanding stock of XcelleNet, Inc. ("XcelleNet"), an Atlanta, Georgia
based provider of remote systems management software products and services (see
Note 5). The acquisition was accounted for pursuant to the purchase method of
accounting; therefore, the Company's consolidated statements of operations
reflect the results of operations of XcelleNet from the date of the
acquisition. The aggregate purchase price paid was $224.2 million consisting of
$83.2 million of cash, 2.4 million shares of Common Stock and 1.3 million stock
options to purchase the Company's Common Stock which replaced outstanding
options held by XcelleNet employees and directors to purchase XcelleNet stock.
The purchase price of the XcelleNet acquisition was allocated based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. The estimates of fair value were determined by the
Company's management based on information furnished by the management of
XcelleNet and an independent valuation of developed software, core technology
and purchased research and development. The excess of cost over net assets
acquired is being amortized on a straight-line basis over ten years. The
Company allocated $114.7 million of the purchase price to purchased research
and development. The Company recorded a nondeductible charge for such amount,
which represented the appraised value of products still in the development
stage that were not considered to have reached technological feasibility based
on the status of design and development activities that required further
refinement and testing. The development activities required to complete the
acquired in-process technologies included additional coding, cross-platform
porting and validation, quality assurance procedures and beta testing.
The Company relied primarily on the income approach to determine the fair
market value of the developed software, core technology and research and
development, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses. The income
approach focuses on the income producing capability of the developed software,
core technology and purchased research and development projects and best
represents the present value of the future economic benefits expected to be
derived. In determining the amount of the purchase price to allocate to
purchased research and development, factors such as stage of completion and
technological uncertainties were considered by the Company and its independent
appraiser in determining the present value of the future benefits to be
received.
The Company had estimated at September 30, 1998 that further expenditures of
$8.5 million would be required during the succeeding 18 months to develop the
XcelleNet acquired research and development into commercially viable products.
Due to changes in business priorities, four projects that were originally
planned to use the research and development were cancelled. Therefore, the
above mentioned estimate for further expenditures was reduced in 1999 to $6.1
million and as of the end of 1999, such amount had been expended, resulting in
new products which are currently being marketed.
49
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma information presents the Company's results
of operations as if the XcelleNet acquisition had occurred at October 1, 1996
(in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue.................................................. $534,173 $401,884
Income (loss) before other income and income taxes....... $(54,682) $ 59,920
Net income (loss)........................................ $(83,435) $ 46,258
Income (loss) per common share:
Basic.................................................. $ (0.89) $ 0.54
======== ========
Diluted................................................ $ (0.89) $ 0.52
======== ========
</TABLE>
The Company also completed certain other acquisitions during 1998 for
aggregate cash consideration of $10 million. The effect of these acquisitions
was not material to the Company's results of operations for 1998. The excess
cost over net assets acquired in connection with these acquisitions is being
amortized in accordance with the Company's amortization policy for such costs.
1997 Business Combinations
In February 1997, the Company acquired for cash all of the outstanding stock
of Comfirst, a Paris, France based provider of communication and file transfer
software. In May 1997, the Company acquired Automated Catalogue Services L.P.,
a provider of electronic product catalogs and information databases delivered
via CD-ROM and the Internet. The aggregate purchase price was $48.2 million,
which consisted of $32.0 million in cash, 0.2 million shares of Common Stock
valued at $5 million and promissory notes due January 2, 1998 (the "Notes"), in
the amount of $11.2 million. The Notes were paid in full in July 1997. Both
acquisitions were accounted for under the purchase method of accounting. The
effect of the acquisitions were not material to the Company's results of
operations for 1997.
5. PLANNED DIVESTITURE
The Company has determined that the product lines acquired in the 1998
XcelleNet acquisition are not sufficiently strategic to its future growth
plans. The Company found that the XcelleNet products are still primarily
utilized for information technology systems management, and the customers and
sales processes utilized are different than those for the Company's other
infrastructure products. Therefore, the Company has decided to sell the
XcelleNet business.
Revenues and expenses for XcelleNet for 1999 were $61.6 million and $57.5
million, respectively. During 1998, revenues were $11.9 million and expenses
were $9.7 million, excluding $114.7 million of purchased research and
development costs.
The carrying amount of the net assets of XcelleNet at September 30, 1999 was
$94.1 million excluding deferred income taxes. Assets held by XcelleNet were as
follows: $20.0 million of current assets, which consists primarily of accounts
receivable; $48.5 million of property, plant and equipment, net and computer
software, net; and $40.3 million of other assets, which primarily consists of
excess costs over net assets acquired, net. Liabilities of XcelleNet at
September 30, 1999, were as follows: $9.1 million primarily related to accounts
payable and accrued liabilities, and $5.6 million of deferred revenue. In
addition, the Company's deferred tax liabilities as of September 30, 1999
include $16.4 million relating to XcelleNet.
50
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
On February 20, 1997, David B. Shaev (the "Plaintiff") filed a derivative
complaint in the Court of Chancery in the State of Delaware (the "Delaware
Chancery Court") against the Company and its directors challenging the
Company's initial grant of stock options to the Company's directors. On April
6, 1998, the Plaintiff filed a motion to amend the complaint to challenge the
Company's grants of additional stock options to certain of the Company's
directors. In his complaint, the Plaintiff alleged that the individual
defendants breached their fiduciary duties and wasted corporate assets by
granting themselves an excessive number of options pursuant to the Company's
1996 Stock Option Plan. The complaint sought recission and injunctive relief
with respect to the stock options, as well as compensatory damages in an
unspecified amount.
On June 3, 1997, the individual defendants in the action filed a motion for
summary judgement. The Delaware Chancery court denied the motion, which
decision was upheld on appeal. On March 5, 1999, the parties entered into a
Stipulation of Settlement which was amended as of September 1, 1999 (the
"Settlement"). The Settlement provides for, among other things, the terms of
certain options granted pursuant to the Company's 1996 Stock Option Plan to be
reduced from ten to seven years and the Company to follow certain procedural
requirements in connection with any future stock option grants to executive
officers and directors of the Company. The Delaware Chancery Court approved the
Settlement by order dated September 2, 1999, after notice to the Company's
stockholders and a hearing.
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.
51
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MARKETABLE SECURITIES
The Company's marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------
AGGREGATE AMORTIZED HOLDING HOLDING
FAIR VALUE COST BASIS GAINS LOSSES
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Corporate commercial paper,
scheduled maturities within one
year........................... $ 9,982 $ 9,982
Government obligations,
scheduled maturities within one
year........................... 26,067 26,072 $ 5
Corporate debt securities,
scheduled maturities within one
year........................... 19,904 19,959 $ 11 66
Government obligations,
scheduled maturities between
one and five years............. 94,181 94,548 2 368
Corporate debt securities,
scheduled maturities between
one and five years............. 50,310 50,692 2 385
-------- -------- -------- --------
$200,444 $201,253 $ 15 $ 824
======== ======== ======== ========
SEPTEMBER 30, 1998
Corporate commercial paper,
scheduled maturities within one
year........................... $ 51,972 $ 51,972
Government obligations,
scheduled maturities within one
year........................... 118,644 118,576 $ 78 $ 10
Government obligations,
scheduled maturities between
one and five years............. 12,835 12,813 22
-------- -------- -------- --------
$183,451 $183,361 $ 100 $ 10
======== ======== ======== ========
</TABLE>
Government obligations are debt securities of states of the United States and
political subdivisions of the states. Debt Securities whose issuers may call
the debt prior to the scheduled maturity date are reflected in the above table
as maturing on the earliest call date.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Trade accounts payable...................................... $23,763 $30,096
Accrued compensation........................................ 31,511 28,039
Accrued reorganization and unusual costs.................... 17,888 18,925
Other accrued liabilities................................... 17,587 13,539
------- -------
$90,749 $90,599
======= =======
</TABLE>
52
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The provision for income taxes is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal....................................... $ 49,482 $ 52,917 $ 41,547
State......................................... 8,072 8,848 7,443
Foreign....................................... 6,207 901 436
Deferred:
Federal....................................... 7,574 609 (13,174)
State......................................... 2,451 872 (2,412)
-------- -------- ---------
$ 73,786 $ 64,147 $ 33,840
======== ======== =========
</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,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax expense at U.S. federal statutory rate... $ 69,187 $ 1,047 $ 31,249
State income taxes, net of federal benefit... 6,840 6,318 3,384
Reorganization and unusual costs............. 544 20,061
Nondeductible goodwill and purchased research
and development............................. 1,950 40,761
Tax exempt interest income................... (2,363) (3,324) (1,032)
Other........................................ (2,372) (716) 239
-------- -------- --------
$ 73,786 $ 64,147 $ 33,840
======== ======== ========
</TABLE>
Income before income taxes includes foreign pretax earnings of $9.0 million,
$2.5 million, and $1.0 million for 1999, 1998 and 1997, respectively.
53
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1999 1998
-------- --------
<S> <C> <C>
Deferred current income tax assets:
Deferred revenue...................................... $ 626 $ 361
Allowance for doubtful accounts....................... 3,649 3,052
Reserves and accruals................................. 3,267 5,836
Loss and credit carryforwards......................... 2,378
Other................................................. 2,206
-------- --------
9,748 11,627
-------- --------
Deferred noncurrent income tax assets:
Deferred revenue...................................... 1,330 484
Accrued employee benefits............................. 4,169 2,454
Other................................................. 3,137
-------- --------
8,636 2,938
-------- --------
Deferred noncurrent income tax liabilities:
Capitalized software costs............................ (17,199) (14,963)
Depreciation and amortization......................... (29,918) (18,310)
-------- --------
(47,117) (33,273)
-------- --------
Deferred noncurrent income tax liability, net........... (38,481) (30,335)
-------- --------
Deferred income tax liability, net...................... $(28,733) $(18,708)
======== ========
</TABLE>
10. COMMITMENTS
Lease Obligations
The Company leases certain facilities and equipment under operating leases.
Total rent expense, net of sublease income, for 1999, 1998 and 1997 was $25.1
million, $21.0 million and $17.3 million, respectively. At September 30, 1999,
minimum future rental payments due under all operating leases, net of future
sublease income, were as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................ $ 26,689
2001............................................................ 22,340
2002............................................................ 18,253
2003............................................................ 16,089
2004............................................................ 15,249
Thereafter...................................................... 57,670
--------
$156,290
========
</TABLE>
The above minimum future rental payments due under all operating leases
includes $9.3 million which has been accrued as a component of the 1999
Reorganization and Unusual Costs (see Note 3) and will be paid in fiscal years
2000 through 2004.
Additionally, the minimum future rental payments due under all operating
leases presented above includes an operating lease for an office facility in
Irving, Texas. The initial term of the lease expires October 2004,
54
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with two optional five-year renewal periods. At the end of each renewal period
the Company is required to renew the lease (if a renewal option exists),
purchase the property for its original cost or arrange for the sale of the
property to a third party, with the Company remaining responsible for 85% of
the original cost of the leased facility. The total original cost is expected
to be $76.6 million. The Company could also be required to purchase the
property if the Company is in default with respect to certain obligations or
covenants contained in the lease or related agreements.
Credit Agreement
The Company cancelled its Revolving Credit and Term Loan Agreement on June
30, 1999.
11. STOCKHOLDER'S EQUITY
Common Stock
At the Company's Annual Meeting of Stockholders held on March 4, 1999, the
stockholders of the Company approved an amendment to the Company's Certificate
of Incorporation which increased the number of shares of common stock, par
value $0.01 per share ("Common Stock"), authorized for issuance from 150
million shares to 300 million shares.
During 1999, the Company's Board of Directors approved a stock repurchase
program which authorizes the repurchase of up to 25 million shares of the
Company's Common Stock. Purchases may be made in open market, negotiated or
block transactions from time to time as market and business conditions warrant.
As of September 30, 1999, the Company had purchased 16.8 million shares of
Common Stock at an average price of $24.76 per share.
Preferred Stock
On March 4, 1999, pursuant to the terms of the Rights Agreement, dated as of
December 18, 1996, the Board of Directors of the Company designated an
additional 1.5 million shares of preferred stock, par value $0.01 per share
("Preferred Stock"), as Series A Junior Participating Preferred Stock ("Series
A Junior Preferred Stock"). At September 30, 1999, 3 million shares of Series A
Junior Preferred Stock were authorized to be issued. 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.
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 per 1/100th of a share of Series A Junior Preferred
Stock (subject to adjustment).
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
55
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Employee Stock Purchase Plan
In March 1998, the Company's stockholders approved the Company's Employee
Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase
Common Stock at a specified price through payroll deductions during an offering
period, currently established on a semi-annual basis. During 1999, the Company
issued 0.1 million shares for $5.1 million and during 1998, the Company issued
0.1 million shares for $3.8 million. Under the ESPP, the Company can issue up
to 4 million shares. At September 30, 1999, 3.8 million shares were reserved
for issuance.
Stock Options
The Company has stock option plans that provide for the grant of options to
officers, directors, employees and advisors to purchase shares of Common Stock.
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 plans 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 plans
generally expire five or ten years from the date of grant. At September 30,
1999, 9.0 million shares were reserved for future grants of options under the
stock option plans.
Stock option transactions are summarized below for the three years ended
September 30, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 17,479 $26 17,727 $26 12,252 $24
Granted................ 3,061 $30 1,241 $44 5,640 $27
Options issued for
XcelleNet
acquisition........... 1,287 $25
Exercised.............. (2,079) $24 (2,349) $24 (75) $24
Canceled............... (709) $35 (427) $33 (90) $26
------ ------ ------
Outstanding at end of
year.................... 17,752 $27 17,479 $26 17,727 $26
====== ====== ======
Options exercisable at
year end................ 11,698 $25 11,672 $24 1,000 $24
====== ====== ======
</TABLE>
56
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
NUMBER 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>
$1 to $23............... 732 6.2 $18 40 $14
$24..................... 8,764 5.8 $24 7,753 $24
$25 to $27.............. 4,116 6.9 $26 3,117 $26
$28 to $48.............. 4,140 4.4 $35 788 $36
------ ------
17,752 5.8 $27 11,698 $25
====== ======
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 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 and ESPP under the fair value method
as set forth in FAS 123.
The fair value of the Company's employee stock options and ESPP was estimated
using a Black-Scholes option pricing model using the following weighted-average
assumptions for 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
OPTIONS ESPP
--------------------------- ----------------
1999 1998 1997 1999 1998 1997
--------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)...... 1.43-4.43 2.0-5.0 2.0-5.0 0.5 0.5 N/A
Expected volatility........... 38.7% 40.5% 36.8% 44.1% 40.5% N/A
Risk free interest rate....... 5.0% 5.6% 6.1% 4.7% 5.4% N/A
</TABLE>
No dividend payments have been assumed in estimating the fair value of the
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 is as follows (in thousands, except per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net income (loss):
As reported................................... $123,889 $(61,156) $55,444
Pro forma..................................... $102,584 $(86,426) $10,570
Basic income (loss) per common share:
As reported................................... $ 1.34 $ (0.67) $ 0.66
Pro forma..................................... $ 1.11 $ (0.95) $ 0.12
Diluted income (loss) per common share:
As reported................................... $ 1.31 $ (0.67) $ 0.64
Pro forma..................................... $ 1.08 $ (0.95) $ 0.12
Weighted-average fair value of options granted
during the year:
Stock options................................. $ 9.51 $ 15.28 $ 8.45
ESPP.......................................... $ 11.26 $ 10.60
</TABLE>
12. DEFINED CONTRIBUTION PLAN
The Company maintains a plan (the "Plan") that provides retirement benefits
under the provisions of Section 401(k) of the Internal Revenue Code for all
full-time employees and for part-time employees that have
57
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
completed a specified term of service. Pursuant to the Plan, eligible
participants may elect to contribute a percentage of their annual gross
compensation and the Company contributes additional amounts. A portion of the
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. Company contributions charged to expense during 1999,
1998 and 1997 were $2.7 million $2.5 million and $2.0 million, respectively.
Change-in-Control and Severance Agreements
As of September 30, 1999, the Company had change-in-control agreements with
29 current or former officers that grant the right to receive payments based on
the individual's respective cash compensation and benefits in the event a
change in control (as defined in such change-in-control agreements) of the
Company occurs and a covered officer's employment is terminated. In addition,
the Company has entered into a consulting agreement with its chairman that
grants similar rights as the change-in-control agreements described above. The
change-in-control agreements further provide that the Company will make certain
payments to the individual to compensate such individual for the economic
effect of the individual's liability to pay excise taxes to the extent such
payments received by such individual, 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, 1999,
the maximum liability for cash compensation, benefits and Tax Payments under
these agreements was estimated to be $35.6 million. The actual liability, if
any, under these agreements will depend on a number of factors, including the
level of compensation and benefits being received by the covered individuals
prior to a change in control and the price at which any change-in-control
transaction occurs.
As of September 30, 1999, the Company had entered into severance agreements
with 24 executive and other officers of the Company providing for payments
based on the individual officer's cash compensation and benefits. In addition,
the Company has entered into a consulting agreement with its chairman that
provides for annual base compensation plus agreed-upon bonuses. At September
30, 1999, the maximum estimated liability for future compensation including
bonuses and benefits under these agreements was estimated to be $26.0 million.
13. BUSINESS SEGMENTS
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards, No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for public business
enterprises to report 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.
The Company has identified its Chief Executive Officer as the chief operating
decision maker ("CODM"). The CODM evaluates the business segments' performance
and allocates resources based upon the segments' revenues from external
customers, intersegment revenues and income before taxes. The accounting
policies followed by the business segments are the same as those followed by
the Company which are described in Note 2. Intersegment transactions are
accounted for at the current market rate charged to external customers.
The Company's four reportable business segments are COMMERCE, GENTRAN,
CONNECT and Managed Services. The business segments are organized based upon
products sold and services provided. These business segments are individually
managed. Each business segment offers a distinct family of products and/or
services to E-Business communities worldwide. Although each business segment
offers a distinct family of products and/or services, a business segment may
sell another business segment's products and services.
58
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMERCE markets and sells the Company's E-Community Management offerings. E-
Community Management offerings are services to build, manage and service
integrated business partner communities for Global 5000 and other companies.
GENTRAN is responsible for E-Business Process Integration ("BPI"). BPI is
software products and related services that facilitate end-to-end integration
of business processes within and among enterprises and organizations. CONNECT
offers the Company's E-Business Communications Infrastructure ("EBCI") products
and services. The Company's EBCI products and services focus specifically on
the complexities of managing data delivery within and between enterprises and
organizations. Managed Services provides E-Sourcing which consists of
consulting, implementation, education and outsourcing services in support of
the Company's other business segments. These services are marketed along with
products and services provided by the Company's other E-Business integration
solutions offered by the above mentioned business segments.
The reportable business segment information is presented below (in
thousands).
<TABLE>
<CAPTION>
MANAGED
1999 COMMERCE GENTRAN CONNECT SERVICES OTHER (1) CONSOLIDATED
---- -------- ------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $213,732 $77,290 $199,974 $54,182 $ 77,894 $623,072
Revenues from
intersegment
transactions........... 8,407 272 (8,679)
Depreciation and
amortization........... 18,293 7,769 12,764 490 17,639 56,955
Interest income
(expense), net (2)..... (1) 4 170 22,893 23,066
Income (loss) before
income taxes (3)....... 90,955 13,963 79,395 16,420 (3,058) 197,675
Assets.................. 320,346 127,591 306,128 23,797 2,869 780,731
Capital expenditures.... 29,291 12,321 20,527 770 21,465 84,374
<CAPTION>
1998
----
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $186,311 $70,078 $170,792 $35,218 $ 27,903 $490,302
Revenues from
intersegment
transactions........... 6,289 (6,289)
Depreciation and
amortization........... 19,286 7,452 10,895 423 2,662 40,718
Interest income
(expense), net (2)..... (19) (7) 281 25,214 25,469
Income (loss) before
income taxes (3)....... 75,876 22,251 61,610 8,980 (165,726) 2,991
Assets.................. 248,529 106,537 226,351 11,886 373,701 967,004
Capital expenditures.... 28,126 9,479 25,758 1,057 3,498 67,918
<CAPTION>
1997
----
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $153,917 $52,424 $112,896 $18,698 $ 12,662 $350,597
Revenues from
intersegment
transactions........... 3 4,331 (4,334)
Depreciation and
amortization........... 14,338 6,688 7,885 310 993 30,214
Interest income
(expense), net (2)..... (83) (15) 154 16,900 16,956
Income (loss) before
taxes income (3)....... 58,085 18,851 48,832 3,426 (39,910) 89,284
Assets.................. 172,748 74,922 154,358 4,773 341,765 748,566
Capital expenditures.... 18,182 8,750 15,620 557 2,894 46,003
</TABLE>
- --------
(1) Other is primarily comprised of corporate items which are not allocated to
business segments (see 3 below), elimination of intersegment transactions
and business segments which are not separately reported.
(2) Interest expense was not significant for any period presented.
(3) Income (loss) before taxes in the other column, includes for 1998 and 1997,
purchased research and development charges of $116.5 million and $31.9
million, respectively, and for 1999, 1998 and 1997, includes reorganization
and unusual costs of $20.1 million, $67.4 million and $15.8 million,
respectively (see Notes 3 and 4).
59
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company operates on a worldwide basis and attributes its revenues on the
basis of its customers' location. Long-lived assets are comprised of property
and equipment, net and computer software, net. The table presented below
displays the Company's major geographic data (in thousands):
<TABLE>
<CAPTION>
REVENUE FROM EXTERNAL CUSTOMERS
-------------------------------------------------------
CANADA
UNITED & LATIN ASIA
STATES AMERICA EUROPE PACIFIC OTHER (1) CONSOLIDATED
-------- ------- ------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999................ $491,463 $32,686 $85,512 $22,556 $(9,145) $623,072
1998................ 395,199 27,737 63,884 9,714 (6,232) 490,302
1997................ 308,697 13,430 28,168 4,628 (4,326) 350,597
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
-------------------------------------------------------
CANADA
UNITED & LATIN ASIA
STATES AMERICA EUROPE PACIFIC OTHER (2) CONSOLIDATED
-------- ------- ------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999................ $158,468 $1,089 $14,591 $3,432 $13,710 $191,290
1998................ 146,455 610 13,630 2,000 5,249 167,944
1997................ 103,736 761 2,660 289 440 107,886
</TABLE>
- --------
(1) Elimination of intersegment accounts.
(2) Corporate items which are not allocated to a segment.
60
<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter during 1999 and
1998 are summarized as follows (in thousands, except per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
Year ended September 30, 1999:
Revenues....................... $140,778 $152,616 $152,191 $177,487
Costs of sales................. 29,292 32,641 33,327 34,035
Product development and
enhancement expenses.......... 9,220 9,597 8,781 10,859
Selling, general and
administrative expenses....... 58,204 61,235 62,330 78,905
Income before other income and
income taxes (1).............. 44,062 49,143 50,203 31,138
Net income..................... 31,933 35,173 36,957 19,826
Income per common share:
Basic........................ $ 0.34 $ 0.37 $ 0.39 $ 0.23
Diluted...................... 0.33 0.36 0.38 0.23
Year ended September 30, 1998:
Revenues....................... $106,283 $111,076 $122,095 $150,848
Costs of sales................. 20,462 24,030 24,099 27,570
Product development and
enhancement expenses.......... 7,648 6,392 7,343 8,334
Selling, general and
administrative expenses....... 45,577 44,789 47,666 63,657
Income (loss) before other
income and income taxes (2)... 32,596 35,865 42,987 (132,609)
Net income (loss).............. 24,200 26,978 31,226 (143,560)
Income (loss) per common share:
Basic........................ $ 0.27 $ 0.30 $ 0.34 $ (1.53)
Diluted...................... 0.26 0.29 0.33 (1.53)
</TABLE>
- --------
(1) Includes $5.5 million and $0.5 million of reorganization and unusual costs
reversed during the quarters ended June 30, 1999 and September 30, 1999,
respectively, and $3.0 million and $23.1 million of reorganization and
unusual costs charged to expense during the quarters ended June 30, 1999
and September 30, 1999, respectively (see Notes 3 and 4).
(2) Includes $116.4 million of purchased research and development and $67.4
million of reorganization and unusual costs charged to expense in the
quarter ended September 30, 1998 (see Notes 3 and 4).
61
<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
will be set forth in the Proxy Statement to be provided to stockholders in
connection with the Company's 2000 Annual Meeting of Stockholders (the "Proxy
Statement"), under the heading "Election of Directors," which information is
incorporated herein by reference. Information concerning compliance with
Section 16 of the Securities Exchange Act of 1934, as amended, by persons
subject to such Section will be 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 will
be set forth in the Proxy Statement under the headings "Management
Compensation" and "Election of Directors," 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 will be 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 will be 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.
62
<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, 1999, 1998 and 1997
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 Fourth Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 Amended and Restated Bylaws of the Company(14)
4.1 Rights Agreement dated December 18, 1996 by and between the Company
and The First National Bank of Boston, as Rights Agent(3)
10.1.1 International Marketing Agreement dated March 4, 1996 between Sterling
Commerce International, Inc. and Sterling Software International,
Inc.(4)
10.1.2 Amendment No. 1 to the International Distributor Agreement dated as of
January 31, 1997 between Sterling Commerce B.V. and Sterling Software
International, Inc. (a.k.a. the International Marketing Agreement)(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(7)
10.4 Indemnification Agreement dated March 4, 1996 between the Company and
Sterling Software(4)
10.5 Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software(8)
10.6.1 Form of Indemnification Agreement between the Company and each of its
officers and directors(7), (9)
10.6.2 Form of Amendment to Indemnification Agreement between the Company and
each of its officers and directors(2), (9)
10.7 Form of Director Agreement dated as of January 27, 1997 between the
Company and each of Sam Wyly and Charles J. Wyly, Jr.(5), (9)
10.8.1 Agreement dated May 31, 1998 between the Company and Sterling L.
Williams(9), (13)
10.8.2 Amendment dated September 1, 1999 to Agreement dated May 31, 1998
between the Company and Sterling L. Williams(2), (9)
10.9.1 Form of Change-in-Control Severance Agreement between the Company and
each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
Perkins, Steven P. Shiflet and certain other executive officers of
the Company(4), (9)
10.9.2 Form of Amendment to Change-in-Control Severance Agreement between the
Company and each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson,
Stephen R. Perkins, Steven P. Shiflet and certain other executive
officers of the Company(2), (9)
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.10.1 Form of Severance Agreement between the Company and each of Warner C.
Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R. Perkins, Steven P.
Shiflet and certain other executive officers of the Company(4), (9)
10.10.2 Form of Amendment to Severance Agreement between the Company and each
of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
Perkins, Steven P. Shiflet and certain other executive officers of
the Company(2), (9)
10.11 Supplemental Executive Retirement Plan(9), (10)
10.12 Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan(9), (11)
10.13.1 Sterling Commerce, Inc. Deferred Compensation Plan(9), (12)
10.13.2 First Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
dated as of October 30, 1997(9), (10)
10.13.3 Second Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
dated as of June 1, 1998(9), (13)
10.14.1 Revolving Credit and Term Loan Agreement dated as of October 1, 1996
among the Company and The First National Bank of Boston, as agent,
and Bank One, Texas, National Association(8)
10.14.2 Amendment and Modification Agreement to the Revolving Credit and Term
Loan Agreement among the Company and The First National Bank of
Boston, as agent, and Bank One, Texas, National Association(11)
10.15 Master Agreement, dated as of February 26, 1998, among Sterling
Commerce, Inc., Atlantic Financial Group Ltd., the financial
institutions party thereto, BankBoston, N.A. and SunTrust Bank,
Atlanta and related agreements(2)
21.1 Subsidiaries of the Company(2)
23.1 Consent of Ernst & Young LLP(2)
27.1 Financial Data Schedule(2)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
333-74345 and incorporated herein by reference.
(2) Filed herewith.
(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 Company's Registration Statement No.
33-80595 and incorporated herein by reference.
(8) 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.
(9) 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.
(10) Previously filed as an exhibit to the Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by reference.
64
<PAGE>
(11) 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.
(12) Previously filed as an exhibit to the Company's Registration Statement No.
333-37523 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Annual Report on form 10-K
for the fiscal year ended September 30, 1998.
(14) Previously filed as an exhibit to the Current Report on Form 8-K dated
November 15, 1999 and incorporated by reference herein.
(b) Reports on Form 8-K.
On July 22, 1999 the Company filed a Current Report on Form 8-K dated July
22, 1999 which included information under Item 5 (Other Events).
On August 16, 1999 the Company filed a Current Report on Form 8-K dated
August 16, 1999 which included information under Item 5 (Other Events).
On September 2, 1999 the Company filed a Current Report on Form 8-K dated
September 2, 1999 which included information 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.
65
<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
Chief Executive Officer
Date: December 21, 1999
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.
<TABLE>
<S> <C> <C>
/s/ Sterling L. Williams Chairman of the Board and December 21, 1999
____________________________________ Director
Sterling L. Williams
/s/ Warner C. Blow Chief Executive Officer and December 21, 1999
____________________________________ Director
Warner C. Blow (Principal Executive
Officer)
/s/ Charles J. Wyly, Jr. Director December 21, 1999
____________________________________
Charles J. Wyly, Jr.
/s/ Sam Wyly Director December 21, 1999
____________________________________
Sam Wyly
/s/ Evan A. Wyly Director December 21, 1999
____________________________________
Evan A. Wyly
/s/ Honor R. Hill Director December 21, 1999
____________________________________
Honor R. Hill
/s/ Robert E. Cook Director December 21, 1999
____________________________________
Robert E. Cook
/s/ Steven P. Shiflet Senior Vice President and December 21, 1999
____________________________________ Chief Financial Officer
Steven P. Shiflet (Principal Financial and
Accounting Officer)
</TABLE>
66
<PAGE>
SCHEDULE II
STERLING COMMERCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING ADDITION FROM COSTS AND BALANCE AT END
OF PERIOD ACQUISITION EXPENSES DEDUCTIONS OF PERIOD
---------- ------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
1999.................. $10,331 $11,302 $(6,468)(1) $15,165
1998.................. 4,789 $2,096 6,013 (2,567)(2) 10,331
1997.................. 2,416 3,567 (1,194)(2) 4,789
</TABLE>
- --------
(1) Includes $5.1 million for accounts written off and $1.4 million as an
adjustment to the excess costs over net assets acquired related to the
XcelleNet acquisition.
(2) Accounts written off.
II-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 Amended and Restated Bylaws of the Company(14)
4.1 Rights Agreement dated December 18, 1996 by and between the Company
and The First National Bank of Boston, as Rights Agent(3)
10.1.1 International Marketing Agreement dated March 4, 1996 between Sterling
Commerce International, Inc. and Sterling Software International,
Inc.(4)
10.1.2 Amendment No. 1 to the International Distributor Agreement dated as of
January 31, 1997 between Sterling Commerce B.V. and Sterling Software
International, Inc. (a.k.a. the International Marketing Agreement)(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(7)
10.4 Indemnification Agreement dated March 4, 1996 between the Company and
Sterling Software(4)
10.5 Agreement dated as of September 19, 1996 by the Company for the
benefit of Sterling Software(8)
10.6.1 Form of Indemnification Agreement between the Company and each of its
officers and directors(7), (9)
10.6.2 Form of Amendment to Indemnification Agreement between the Company and
each of its officers and directors(2), (9)
10.7 Form of Director Agreement dated as of January 27, 1997 between the
Company and each of Sam Wyly and Charles J. Wyly, Jr.(5), (9)
10.8.1 Agreement dated May 31, 1998 between the Company and Sterling L.
Williams(9), (13)
10.8.2 Amendment dated September 1, 1999 to Agreement dated May 31, 1998
between the Company and Sterling L. Williams(2), (9)
10.9.1 Form of Change-in-Control Severance Agreement between the Company and
each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
Perkins, Steven P. Shiflet and certain other executive officers of
the Company(4), (9)
10.9.2 Form of Amendment to Change-in-Control Severance Agreement between the
Company and each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson,
Stephen R. Perkins, Steven P. Shiflet and certain other executive
officers of the Company(2), (9)
10.10.1 Form of Severance Agreement between the Company and each of Warner C.
Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R. Perkins, Steven P.
Shiflet and certain other executive officers of the Company(4), (9)
10.10.2 Form of Amendment to Severance Agreement between the Company and each
of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
Perkins, Steven P. Shiflet and certain other executive officers of
the Company(2), (9)
10.11 Supplemental Executive Retirement Plan(9), (10)
10.12 Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
Plan(9), (11)
10.13.1 Sterling Commerce, Inc. Deferred Compensation Plan(9), (12)
10.13.2 First Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
dated as of October 30, 1997(9), (10)
10.13.3 Second Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
dated as of June 1, 1998(9), (13)
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.14.1 Revolving Credit and Term Loan Agreement dated as of October 1, 1996
among the Company and The First National Bank of Boston, as agent,
and Bank One, Texas, National Association(8)
10.14.2 Amendment and Modification Agreement to the Revolving Credit and Term
Loan Agreement among the Company and The First National Bank of
Boston, as agent, and Bank One, Texas, National Association(11)
10.15 Master Agreement, dated as of February 26, 1998, among Sterling
Commerce, Inc., Atlantic Financial Group Ltd., the financial
institutions party thereto, BankBoston, N.A. and SunTrust Bank,
Atlanta and related agreements(2)
21.1 Subsidiaries of the Company(2)
23.1 Consent of Ernst & Young LLP(2)
27.1 Financial Data Schedule(2)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
333-74345 and incorporated herein by reference.
(2) Filed herewith.
(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 Company's Registration Statement No.
33-80595 and incorporated herein by reference.
(8) 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.
(9) 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.
(10) Previously filed as an exhibit to the Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by reference.
(11) 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.
(12) Previously filed as an exhibit to the Company's Registration Statement No.
333-37523 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Annual Report on form 10-K
for the fiscal year ended September 30, 1998.
(14) Previously filed as an exhibit to the Current Report on Form 8-K dated
November 15, 1999 and incorporated by reference herein.
2
<PAGE>
EXHIBIT 10.6.2
AMENDMENT TO
INDEMNITY AGREEMENT
THIS AMENDMENT to Indemnity Agreement (this "Amendment") is entered into by
and between Sterling Commerce, Inc., a Delaware corporation (the "Corporation"),
and _______________ ("Indemnitee"), a Director and/or Officer of the
Corporation.
WHEREAS, the Corporation and Indemnitee entered into an Indemnity
Agreement, dated as of ___________ (the "Agreement");
WHEREAS, capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed to them in the Agreement; and
WHEREAS, for good and valuable consideration, the receipt of which is
hereby acknowledged, the Corporation and Indemnitee desire to amend the
Agreement as set forth below.
NOW, THEREFORE, the Corporation and Indemnitee agree as follows:
1. The first paragraph of Paragraph 7 of the Agreement shall be deemed to
be deleted in its entirety and replaced with the following:
7. Right of Indemnitee to Indemnification Upon Application: Procedure
------------------------------------------------------------------
Upon Application. Without limiting the obligation of the Corporation to
----------------
promptly make payments in respect of Expenses in accordance with Paragraph
6, any indemnification under Paragraphs 3 and 4 shall be made no later than
45 days after receipt by the Corporation of the written request of
Indemnitee, unless a determination is made within said 45-day period by (1)
the Board of Directors of the Corporation by a majority vote of a quorum
consisting of Directors who are not and were not parties to the relevant
Proceeding, or (2) independent legal counsel in a written opinion (which
counsel shall be appointed if such a quorum is not obtainable) that
Indemnitee has not met the relevant standards for indemnification set forth
in Paragraphs 3 and 4; provided, however, that following a Change in
Control of the Corporation, any determination that Indemnitee has not met
the relevant standards for indemnification may only be made by independent
counsel selected by Indemnitee (and reasonably satisfactory to the
Corporation) in a written opinion. The fees and expenses of such counsel
shall be paid by the Corporation. As used herein, the term "Change in
Control" shall have the meanings set forth in Annex 1.
2. In all other respects, the terms of the Agreement will remain in full
force and effect.
<PAGE>
This Amendment is effective as of September 1, 1999.
STERLING COMMERCE, INC.
By:
-------------------------------------
Albert K. Hoover
Senior Vice President and General
Counsel
INDEMNITEE
----------------------------------------
<PAGE>
ANNEX1
"CHANGE IN CONTROL" DEFINED
---------------------------
"Change in Control" means the occurrence of any of the following events:
(i) The Corporation is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than two-thirds of the
combined voting power of the then-outstanding securities entitled to vote
generally in the election of directors ("Voting Stock") of such corporation
or person immediately after such transaction are held in the aggregate by
the holders of Voting Stock of the Corporation immediately prior to such
transaction;
(ii) The Corporation sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as result of such sale or transfer less than two-thirds of the
combined voting power of the then-outstanding Voting Stock of such
corporation or person immediately after such sale or transfer is held in
the aggregate by the holders of Voting Stock of the Corporation immediately
prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
disclosing that any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) had become the beneficial
owner (as the term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act) of
securities representing 20% or more of the combined voting power of the
then-outstanding Voting Stock of the Corporation.
(iv) The Corporation files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing
in response to Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of the Corporation has
occurred or will occur in the future pursuant to any then-existing contract
or transmission; or
(v) If, at any time during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
directors of the Corporation cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this Section (v)
each director who is first elected, or first nominated for election by the
Corporation's stockholders, by a vote of at least two-thirds of the
directors of the Corporation (or a committee thereof) then still in office
who were directors of the Corporation at the beginning of any such period
will be deemed to have been a director of the Corporation at the beginning
of such period.
Notwithstanding the foregoing provision of Sections (iii) or (iv), unless
otherwise determined in a specific case by majority vote of the board of
directors of the Corporation, a "Change in Control" shall not be deemed to have
occurred for purposes of Section (iii) or (iv) solely because (A) the
<PAGE>
Corporation, (B) an entity in which the Corporation directly or indirectly
beneficially owns 50% or more of the outstanding Voting Stock (a "Subsidiary"),
or (C) any Corporation-sponsored employee stock ownership plan or any other
employee benefit plan of the Corporation or any Subsidiary either files or
becomes obligated to file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D-1, Form 8-K, or Schedule 14A (or any successor
schedule, form or report or item therein) under the Exchange Act disclosing
beneficial ownership by it of shares of Voting Stock of the Corporation, whether
in excess of 20% or otherwise, or because the Corporation reports that a change
in control of the Corporation has occurred or will occur in the future by reason
of such beneficial ownership or any increase or decrease thereof.
4
<PAGE>
Exhibit 10.8.2
AMENDMENT TO
CHAIRMAN/CONSULTING/SEVERANCE
AGREEMENT
This Amendment to Chairman/Consulting/Severance Agreement (this
"Amendment") is entered into by and between Sterling Commerce, Inc., a Delaware
corporation ("Sterling Commerce"), and Sterling L. Williams ("Williams").
A. Sterling Commerce and Williams entered into a
Chairman/Consulting/Severance Agreement, dated as of May 31, 1998 (the
"Agreement").
B. For good and valuable consideration, receipt of which is hereby
acknowledged, Sterling Commerce and Williams desire to amend the Agreement as
set forth below.
NOW, THEREFORE, Sterling Commerce and Williams agree as follows:
1. The final sentence of Section 3 of the agreement is hereby deleted and
replaced with the following:
"Williams' obligations under the second sentence of this Section 3 shall
terminate on the earlier of (i) 24 months after giving any notice of
termination under Section 4 hereof and (ii) the giving of the Acceleration
Notice (as defined in Section 5 hereof)."
2. In all other respects, the terms of the Agreement will remain in full
force and effect.
This Amendment is effective as of September 1, 1999.
STERLING COMMERCE, INC.
By: /s/ Albert K. Hoover
------------------------------------------
Albert K. Hoover
Senior Vice President and General Counsel
/s/ Sterling L. Williams
-------------------------------------------
Sterling L. Williams
<PAGE>
EXHIBIT 10.9.2
AMENDMENT TO CHANGE IN CONTROL
SEVERANCE AGREEMENT
THIS AMENDMENT to Change in Control Severance Agreement (this
"Amendment") is entered into by and between Sterling Commerce, Inc., a Delaware
corporation (the "Company"), and ____________ (the "Executive").
WHEREAS, the Company and the Executive entered into a Change in Control
Severance Agreement, dated as of _____________ (the "Agreement");
WHEREAS, capitalized terms used herein that are not otherwise defined
shall have the meanings ascribed to them in the Agreement; and
WHEREAS, for good and valuable consideration, the receipt of which is
hereby acknowledged, the Company and the Executive desire to amend the Agreement
as set forth below.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Section 1(c) of the Agreement is hereby amended by deleting
"retirement income and welfare" in line 2 and Section 1(d) of the Agreement is
hereby deleted in its entirety and replaced with the following:
(d) "Incentive Pay" means the aggregate amount (calculated
to avoid duplication, on an annualized basis and with respect only to
the fiscal year of the Company in which a Change in Control occurs) of
the budgeted or otherwise authorized or contemplated bonus, incentive or
other cash compensation, in addition to (but not including) the
Executive's Base Pay, to be paid to the Executive under any bonus,
incentive compensation, performance, discretionary pay or similar
agreement, policy, plan, program or arrangement (whether or not funded)
of the Company upon attainement of the objective(s) or 100% of the plan
or target amount specified in such agreement, policy, plan, program or
arrangement, whether or not attained at the time of termination.
2. The parenthetical phrase "(determined in accordance with the
standard set forth in Section 1(d))" within Section 4(a)(i) is hereby deleted.
3. The first sentence of Section 4(a)(ii) of the Agreement is hereby
deleted in its entirety and replaced with the following:
(ii) (A) for ________ months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the Executive
with Employee Benefits, including without limitation, benefits under welfare
plans (as
<PAGE>
that term is used in the Employee Retirement Income Security Act of
1974, as amended ("ERISA")), substantially similar to those which the
Executive was receiving or entitled to receive immediately prior to the
Change in Control, and (B) such Continuation Period will be considered
service with the Company for the purpose of determining service credits
and benefits due and payable to the Executive under the Company's
retirement income, supplemental executive retirement and other benefit
plans of the Company applicable to the Executive, his or her dependents
or his or her beneficiaries immediately prior to the Change in Control;
provided that for purposes of this Section 4(a)(ii), Employee Benefits
shall not include Incentive Pay provided for in Section 4(a)(i) and
nothing in this Section 4(a) shall be construed to require the Company
to make any new grants of stock options.
4. In all other respects, the terms of the Agreement will remain in
full force and effect.
This Amendment is effective as of September 1, 1999.
By:
------------------------------------
Its:
------------------------------------
EXECUTIVE
----------------------------------------
2
<PAGE>
Exhibit 10.10.2
AMENDMENT TO SEVERANCE AGREEMENT
This Amendment to Severance Agreement (this "Amendment") is entered into by
and between Sterling Commerce, Inc., a Delaware corporation (the "Company"), and
______________________ (the "Executive").
A. The Company and the Executive entered into a Severance Agreement,
dated as of __________________ (the "Agreement").
B. For good and valuable consideration, receipt of which is hereby
acknowledged, the Company and the Executive desire to amend the Agreement as set
forth below.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Sections 4(a) and 4(b) of the Agreement are hereby deleted in their
entirety and replaced with the following:
(a) an amount equal to ______ hundred percent of Executive's annual
salary; which annual salary shall be based upon the annual rate in
effect immediately prior to the Notice Date; and
(b) an amount equal to the product of ______ times 100% of the Plan Bonus
Amount (as hereinafter defined) in effect immediately prior to the
Notice Date.
As used herein, the term "Plan Bonus Amount" means the aggregate amount
(calculated to avoid duplication, on an annualized basis and with respect
only to the fiscal year of Sterling Commerce in which the Notice Date
occurs) of the budgeted or otherwise authorized or contemplated bonus,
incentive or other cash compensation, in addition to (but not including)
the Executive's base salary, to be paid to the Executive under any bonus,
incentive compensation, performance, discretionary pay or similar
agreement, policy, plan, program or arrangement (whether or not funded) of
Sterling Commerce upon attainment of the objective(s) or 100% of the plan
or target amount specified in such agreement, policy, plan, program or
arrangement, whether or not attained at the time of termination.
2. In all other respects, the terms of the Agreement will remain in full
force and effect.
This Amendment is effective as of September 1, 1999.
STERLING COMMERCE, INC.
By:
--------------------------------------
Albert K. Hoover
Senior Vice President and General Counsel
EXECUTIVE
----------------------------------------
<PAGE>
EXHIBIT 10.15
================================================================================
MASTER AGREEMENT
Dated as of February 26, 1998
among
STERLING COMMERCE, INC.,
as Lessee and Guarantor,
ATLANTIC FINANCIAL GROUP, LTD., as Lessor,
THE FINANCIAL INSTITUTIONS PARTY HERETO, as Lenders,
BANKBOSTON, N.A., as Documentation Agent
and
SUNTRUST BANK, ATLANTA, as Agent
-------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1 DEFINITIONS; INTERPRETATION ...................................... 1
SECTION 2 ACQUISITION, CONSTRUCTION AND LEASE; FUNDINGS;
NATURE OF TRANSACTION............................................. 2
SECTION 2.1 Agreement to Acquire, Construct,
Fund and Lease ............................................... 2
SECTION 2.2
Fundings of Purchase Price, Development
Costs and Construction Costs ................................. 2
SECTION 2.3
Funded Amounts and Interest and Yield
Thereon; Commitment Fee ...................................... 4
SECTION 2.4
Nature of the Transactions ............................................... 6
SECTION 2.5
Amounts Due Under Lease .................................................. 7
SECTION 3 CONDITIONS PRECEDENT; DOCUMENTS .................................. 7
SECTION 3.1 Conditions to the Obligations of the Funding
Parties on the Closing Date .................................. 7
SECTION 3.2
Conditions to the Obligations of Lessee ................................. 12
SECTION 3.3
Conditions to the Obligations of the Funding
Parties on each Funding Date following the
Closing Date ................................................ 12
SECTION 3.4
Completion Date Conditions .............................................. 13
SECTION 3.5
Security Agreement ...................................................... 15
SECTION 4 REPRESENTATIONS ................................................. 15
SECTION 4.1 Representations of Lessee ................................... 15
SECTION 4.2
Representations of the Lessor ........................................... 24
SECTION 4.3
Representations of each Lender .......................................... 26
<PAGE>
SECTION 5 COVENANTS ....................................................... 26
SECTION 5.1 Legal Existence, etc. ....................................... 26
SECTION 5.2
Use of Loan Proceeds .................................................... 26
SECTION 5.3
Financial Statements .................................................... 26
SECTION 5.4
Notice of Litigation and Judgment and
Environmental Events ....................................... 28
SECTION 5.5
Books and Records ....................................................... 28
SECTION 5.6
Insurance ............................................................... 29
SECTION 5.7
Taxes ................................................................... 29
SECTION 5.8
Conduct of Business ..................................................... 30
SECTION 5.9
Compliance with Law, Contracts, Licenses
and Permits ................................................ 30
SECTION 5.10 Access to Properties and Books; Commercial
Finance Examinations; Confidentiality ..................... 30
SECTION 5.11 Allowances ................................................ 31
SECTION 5.12 Change of Corporate Name; Maintenance of
Office .................................................... 31
SECTION 5.13 Employee Benefit Plan ..................................... 31
SECTION 5.14 Corporate Existence; Maintenance of
Properties ................................................ 32
SECTION 5.15 Activation of Non-Guarantor Subsidiaries .................. 32
SECTION 5.16 Deactivation of Commerce Subsidiaries ..................... 33
SECTION 5.17 New Subsidiaries .......................................... 33
SECTION 5.18 Further Assurances ........................................ 34
SECTION 5.19 Indebtedness .............................................. 34
SECTION 5.20 Security Interests and Liens .............................. 36
SECTION 5.21 Restrictions on Investments ............................... 38
SECTION 5.22 Merger and Consolidation .................................. 38
SECTION 5.23 Acquisitions .............................................. 38
SECTION 5.24 Asset Dispositions ........................................ 40
SECTION 5.25 Change of Location ........................................ 40
SECTION 5.26 Employee Benefit Plans .................................... 40
SECTION 5.27 Additional Shares ......................................... 42
SECTION 5.28 Negative Pledges .......................................... 42
SECTION 5.29 Compliance with Environmental Laws ........................ 42
SECTION 5.30 Distributions ............................................. 42
-ii-
<PAGE>
SECTION 5.31 Profitability ............................................. 43
SECTION 5.32 EBIT to Interest Charges .................................. 43
SECTION 5.33 Current Ratio ............................................. 43
SECTION 5.34 Total Debt To Consolidated Earnings Before Interest,
Taxes, Depreciation and Amortization ...................... 43
SECTION 5.35 Further Assurances ........................................ 43
SECTION 5.36 Additional Required Appraisals ............................ 43
SECTION 5.37 Lessor's Covenants ........................................ 43
SECTION 6 TRANSFERS BY LESSOR AND LENDER .................................. 45
SECTION 6.1 Lessor Transfers .......................................... 45
SECTION 6.2 Lender Transfers .......................................... 45
SECTION 7 INDEMNIFICATION ................................................. 45
SECTION 7.1
General Indemnification ................................................. 45
SECTION 7.2
Environmental Indemnity ................................................. 47
SECTION 7.3
Proceedings in Respect of Claims ........................................ 49
SECTION 7.4
General Tax Indemnity ................................................... 50
SECTION 7.5
Increased Costs, etc. ................................................... 56
SECTION 7.6
End of Term Indemnity ................................................... 60
SECTION 8 MISCELLANEOUS ................................................... 61
SECTION 8.1
Survival of Agreements .................................................. 61
SECTION 8.2
Notices ................................................................. 62
SECTION 8.3
Counterparts ............................................................ 62
SECTION 8.4
Amendments .............................................................. 62
SECTION 8.5
Headings, etc. .......................................................... 63
SECTION 8.6
Parties in Interest ..................................................... 63
SECTION 8.7
GOVERNING LAW ........................................................... 63
SECTION 8.8
Expenses ................................................................ 63
-iii-
<PAGE>
SECTION 8.9
Severability ........................................................... 63
SECTION 8.10 Liabilities of the Funding Parties ......................... 64
SECTION 8.11 Submission to Jurisdiction; Waivers ........................ 64
SECTION 8.12 liabilities of the Agent ................................... 64
SECTION 8.13 Interest and Charges ....................................... 64
SECTION 8.14 Documentation Agent ........................................ 65
-iv-
<PAGE>
APPENDIX A Definitions and Interpretation
SCHEDULES
SCHEDULE 1.2 Commerce Accounts Receivable Agreements
SCHEDULE 1.3 Commerce Accounts Receivable Guaranties
SCHEDULE 1.4 Commerce Subsidiaries
SCHEDULE 1.5 Non-Guarantor Subsidiaries
SCHEDULE 2.2 Commitments
SCHEDULE 5.2 Subsidiaries
SCHEDULE 5.6 Mailing Addresses
SCHEDULE 5.9 Offices
SCHEDULE 5.11 Litigation/Escrow Arrangements
SCHEDULE 5.12 Alleged Defaults
SCHEDULE 5.13 Taxes
SCHEDULE 5.20 Franchises, Patents, Copyrights
SCHEDULE 8.2 Notice Information
SCHEDULE 9.1 Indebtedness
SCHEDULE 9.2(a) Liens
EXHIBITS
EXHIBIT A Form of Funding Request
EXHIBIT B Form of Assignment of Lease and Rents
EXHIBIT C Form of Security Agreement and Assignment
EXHIBIT D Form of Mortgage
EXHIBIT E Form of Compliance Certificate
EXHIBIT F Form of Subsidiary Guaranty
EXHIBIT G Forms of Opinions of Counsel
EXHIBIT H Form of Lessee Certification of Construction
Completion
EXHIBIT I Form of Assignment and Assumption Agreement
EXHIBIT J Form of Payment Date Notice
-v-
<PAGE>
MASTER AGREEMENT
THIS MASTER AGREEMENT, dated as of February 26, 1998 (as it may be amended
or modified from time to time in accordance with the provisions hereof, this
"Master Agreement"), is among STERLING COMMERCE, INC., a Delaware corporation
----------------
("Lessee"), ATLANTIC FINANCIAL GROUP, LTD., a Texas limited partnership, as
------
Lessor (the "Lessor"), the financial institutions parties hereto as lenders
------
(together with any other financial institution that becomes a party hereto as a
lender, collectively referred to as "Lenders" and individually as a "Lender"),
------ ------
BANKBOSTON, N.A., a national banking association, as documentation agent (in
such capacity, the "Documentation Agent") and SUNTRUST BANK, ATLANTA, a Georgia
banking corporation, as agent for the Lenders (in such capacity, the "Agent").
-----
PRELIMINARY STATEMENT
In accordance with the terms and provisions of this Master Agreement, the
Lease, the Loan Agreement and the other Operative Documents, (i) the Lessor
contemplates acquiring the Land, and leasing such Land to the Lessee, (ii) the
Lessee wishes to construct a Building on such Land for the Lessor and, when
completed, to lease such Building from the Lessor as part of the Leased Property
under the Lease, (iii) the Lessee, as agent, wishes to obtain, and the Lessor is
willing to provide, funding for the acquisition of the Land and the construction
of the Building, (iv) the Lessor wishes to obtain, and Lenders are willing to
provide, from time to time, financing of a portion of the funding of the
acquisition of the Land and the construction of the Building, and (v) the Lessee
is willing to provide its Guaranty to the Lenders and the Lessor.
In consideration of the mutual agreements contained in this Master
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
<PAGE>
SECTION 1
DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and not
defined herein shall have the meanings assigned thereto in Appendix A hereto for
----------
all purposes hereof; and the rules of interpretation set forth in Appendix A
----------
hereto shall apply to this Master Agreement.
SECTION 2
ACQUISITION, CONSTRUCTION AND LEASE; FUNDINGS;
NATURE OF TRANSACTION
SECTION 2.1 Agreement to Acquire, Construct, Fund and Lease.
-----------------------------------------------
(a) Land. Subject to the terms and conditions of this Master
----
Agreement, with respect to the Land, on the Closing Date (i) the Lessor agrees
to acquire such interest in the Land from the Seller as is transferred, sold,
assigned and conveyed to the Lessor pursuant to the Deed, (ii) the Lessor hereby
agrees to lease such Land to the Lessee pursuant to the Lease, and (iii) the
Lessee hereby agrees to lease such Land from the Lessor pursuant to the Lease.
(b) Building. Subject to the terms and conditions of this Master
--------
Agreement, from and after the Closing Date (i) the Construction Agent agrees,
pursuant to the terms of the Construction Agency Agreement, to construct and
install the Building on the Land for the Lessor prior to the Scheduled
Construction Termination Date, (ii) the Lenders and the Lessor agree to fund all
or a portion of the costs of such construction and installation (and interest
and yield thereon), (iii) the Lessor shall lease such Building as part of the
Leased Property to the Lessee pursuant to the Lease, and (iv) the Lessee shall
lease such Building as part of the Leased Property from the Lessor pursuant to
the Lease.
SECTION 2.2 Fundings of Purchase Price, Development Costs and Construction
--------------------------------------------------------------
Costs.
- -----
(a) Initial Funding and Payment of Purchase Price for Land and
----------------------------------------------------------
Development Costs on Closing Date. Subject to the terms and conditions of this
- ---------------------------------
Master Agreement, on the
2
<PAGE>
Closing Date each Lender shall make available to the Lessor its initial
Loan with respect to the Land in an amount equal to the product of such Lender's
Commitment Percentage times the sum of the purchase price for the Land, plus the
----
development, transaction and closing costs incurred by the Lessee through the
Closing Date, which funds the Lessor shall use, together with Lessor funds in an
amount equal to the product of the Lessor's Commitment Percentage times the sum
of the purchase price for the Land, plus the development, transaction and
----
closing costs incurred by the Lessee, as agent for the Lessor, through the
Closing Date, to purchase the Land from the Seller and to pay to the Lessee the
amount of such development, transaction and closing costs, and the Lessor shall
lease such Land to the Lessee pursuant to the Lease.
(b) Subsequent Fundings and Payments of Construction Costs during
-------------------------------------------------------------
Construction Term. Subject to the terms and conditions of this Master Agreement,
- -----------------
on each Funding Date following the Closing Date until the Construction Term
Expiration Date, (i) each Lender shall make available to the Lessor a Loan in an
amount equal to the product of such Lender's Commitment Percentage times the
amount of Funding requested by the Lessee for such Funding Date, which funds the
Lessor hereby directs each Lender to pay over directly to the Lessee as set
forth in paragraph (d) below, and (ii) the Lessor shall pay over to the Lessee
-------------
its own funds (which shall constitute a part of and an increase in the Lessor's
Invested Amount) in an amount equal to the product of the Lessor's Commitment
Percentage times the amount of Funding requested by the Lessee for such Funding
Date.
(c) Aggregate Limits on Funded Amounts. The aggregate amount that the
----------------------------------
Funding Parties shall be committed to provide as Funded Amounts under this
Master Agreement and the Loan Agreement shall not exceed the lesser of (x) the
costs of purchase and construction of the Leased Property and the related
closing and financing costs, or (y) $65,000,000 in the aggregate. The aggregate
amount that any Funding Party shall be committed to fund under this Master
Agreement and the Loan Agreement shall not exceed the lesser of (i) such Funding
Party's Commitment and (ii) such Funding Party's Commitment Percentage of the
aggregate Fundings requested under this Master Agreement.
3
<PAGE>
(d) Notice, Time and Place of Fundings. With respect to each Funding,
----------------------------------
the Lessee shall give the Lessor and the Agent an irrevocable prior written
notice, or irrevocable telephonic notice followed immediately by written notice
(provided that the Lessee's failure to confirm any telephonic notice in writing
--------
shall not invalidate any notice so given) not later than 12:00 noon, Atlanta,
Georgia time two Business Days (or one Business Day, provided the related
Funding shall be treated as Alternative Rate Advances) prior to the proposed
Closing Date or other Funding Date, as the case may be, pursuant, in each case,
to a Funding Request in the form of Exhibit A (a "Funding Request"), signed by a
--------- ---------------
Responsible Officer, specifying the Closing Date or subsequent Funding Date, as
the case may be, and the amount of Funding requested. All documents and
instruments required to be delivered on the Closing Date or such subsequent
Funding Date pursuant to this Master Agreement shall be delivered to the offices
of Mayer, Brown & Platt, 190 South LaSalle Street, Chicago, Illinois 60603, or
at such other location as may be determined by the Lessor, the Lessee and the
Agent. Each Funding shall occur on a Business Day and shall be in an amount
equal to $500,000 or an integral multiple of $100,000 in excess thereof. All
remittances made by any Lender and the Lessor for any Funding shall be made in
immediately available funds by wire transfer to or, as is directed by, the
Lessee, with receipt by the Lessee not later than 12:00 noon, Atlanta, Georgia
time, on the applicable Funding Date, upon satisfaction or waiver of the
conditions precedent to such Funding set forth in Section 3; such funds shall
(1) in the case of the initial Funding on the Closing Date, be used to pay the
purchase price to the Seller for the Land and pay to the Lessee development,
transaction and closing costs related to such Land, and (2) in the case of each
subsequent Funding be used to pay to the Lessee as the Construction Agent for
the payment or reimbursement of Construction costs.
(e) Lessee's Deemed Representation for Each Funding. Each Funding
-----------------------------------------------
Request by the Lessee shall be deemed a reaffirmation of the Lessee's indemnity
obligations in favor of the Indemnitees under the Operative Documents and a
representation by the Lessee to the Lessor, the Agent and the Lenders that on
the proposed Closing Date or Funding Date, as the case may be, (i) the amount of
Funding requested represents amounts owing in respect of the purchase price of
the Land and development, transaction and closing costs in
4
<PAGE>
respect of the Leased Property (in the case of the Funding on the Closing Date)
or amounts that the Lessee reasonably believes will be due in the 30 days
following such Funding from the Lessee to third parties in respect of the
Construction, or amounts paid by the Lessee to third parties in respect of the
Construction for which the Lessee has not previously been reimbursed by a
Funding (in the case of any Funding), (ii) no Event of Default or Potential
Event of Default exists, and (iii) the representations of the Lessee set forth
in Section 4.1 are true and correct in all material respects as though made on
-----------
and as of such Funding Date, except to the extent such representations or
warranties relate solely to an earlier date, in which case such representations
and warranties shall have been true and correct in all material respects on and
as of such earlier date.
(f) Several Obligations. Notwithstanding anything to the contrary set
-------------------
forth herein or in the other Operative Documents, each Lender's and the Lessor's
commitments shall be several, and not joint. In no event shall any Funding
Party be obligated to fund an amount in excess of such Funding Party's
Commitment Percentage of any Funding, or to fund amounts in the aggregate in
excess of such Funding Party's Commitment. The failure or refusal by any Lender
or by the Lessor to make any Funding shall not relieve any Lender or the Lessor
from its several obligation to make available its Commitment Percentage of any
Funding.
(g) Non-Pro Rata Fundings. Notwithstanding anything to the contrary
---------------------
set forth in this Master Agreement or any other Operative Document, at the
Agent's option, Fundings may be made by drawing on the Lessor's Commitment until
such Commitment is fully funded before drawing on the Lenders' Commitments. In
such event, when the Lessor's Commitment is fully funded, the Lenders will fund,
on a pro rata basis as among themselves, 100% of the amount of the Fundings
thereafter. In no event shall any Funding Party have any obligation to fund any
amount in excess of the amount of such Funding Party's Commitment.
SECTION 2.3 Funded Amounts and Interest and Yield Thereon; Commitment Fee.
-------------------------------------------------------------
(a) The Lessor's Invested Amount outstanding from time to time shall
be allocated, on a pro rata basis, to the
5
<PAGE>
Eurodollar Advances and Alternative Rate Advances and shall accrue yield
("Yield") in an amount, for each Rent Period, equal to (i) the Eurodollar Rate
-----
for such Rent Period, plus 1.00% per annum in the case of a Eurodollar Advance
--- -----
and (ii) the Alternative Rate in effect from time to time, plus 1.00% per annum,
in the case of an Alternative Rate Advance. If all or a portion of the
principal amount of or Yield on the Lessor's Invested Amounts shall not be paid
when due (whether at the stated maturity, by acceleration or otherwise), such
overdue amount shall, without limiting the rights of the Lessor under the Lease,
to the maximum extent permitted by Applicable Law, accrue Yield at the Overdue
Rate, in each case from the date of nonpayment until paid in full (as well after
as before judgment).
(b) Each Lender's Funded Amount outstanding from time to time shall
accrue interest as provided in the Loan Agreement.
(c) During the Construction Term, in lieu of paying accrued interest,
on each Payment Date, each Lender's Funded Amount shall automatically be
increased by the amount of interest accrued on the Loans pursuant to the Loan
Agreement during the Rent Period ending on such Payment Date (except to the
extent that at any time such increase would cause such Lender's Funded Amount to
exceed such Lender's Commitment, in which event the Lessee shall pay such excess
amount to such Lender in immediately available funds). Similarly, during the
Construction Term, in lieu of paying accrued Yield, on each Payment Date, the
Lessor's Invested Amount shall automatically be increased by the amount of Yield
accrued on the Lessor's Invested Amount during the Rent Period ending on such
Payment Date (except to the extent that at any time such increase would cause
the Lessor's Invested Amount to exceed the Lessor's Commitment, in which event
the Lessee shall pay such excess amount to the Lessor in immediately available
funds). Such increases in Funded Amounts shall occur without any disbursement of
funds by the Funding Parties.
(d) At the Lessee's option, the Lessee may deposit with the Agent an
amount equal to the outstanding principal of the A Notes. Such deposit shall be
held in a segregated account at the Agent (the "Cash Collateral Account");
-----------------------
provided, however that in the event that as a result of a change in Applicable
- -------- -------
Law (including, without limitation
6
<PAGE>
banking regulations) occurring after the Closing Date, in order for the Loans to
qualify as secured loans for purposes of risk based capital treatment for any
Lender, such deposit must be held by such Lender, the portion of such deposit
equal to the outstanding principal of the A Loans made by such Lender shall be
deposited with such Lender. The Lessee hereby grants to the Agent, for the
benefit of the Lenders, a first priority, continuing security interest in such
Cash Collateral Account, all funds and investments therein, all interest thereon
and all proceeds thereof; provided, however, that to the extent that the
-------- -------
aggregate amount of the funds in the Cash Collateral Account and on deposit with
any Lender pursuant to the proviso contained in the first sentence of this
paragraph (d) exceeds the outstanding principal amount of the A Notes, such
- -------------
excess amount shall not be subject to such security interest. The funds in the
Cash Collateral Account and on deposit with any Lender pursuant to the proviso
contained in the first sentence of this paragraph (d) may be invested, at the
-------------
written direction of the Lessee, in Permitted Investments. The earnings on such
investments shall be for the account of the Lessee and, provided that no Event
of Default shall have occurred, may be released to the Lessee on each Payment
Date. So long as no Potential Event of Default or Event of Default has occurred
and is continuing, the funds in the Cash Collateral Account and on deposit with
any Lender pursuant to the proviso contained in the first sentence of this
paragraph (d) shall be released to the Lessee upon delivery by the Lessee to the
- -------------
Agent of a certificate, signed by a duly Responsible Officer of the Lessee,
which certificate shall state that no Event of Default or Potential Event of
Default shall have occurred and be continuing and that the Lessee is not
requesting the release of the funds in the Cash Collateral Account and on
deposit with any Lender pursuant to the proviso contained in the first sentence
of this paragraph (d) in anticipation of a Potential Event of Default or an
-------------
Event of Default. Upon the occurrence of any Event of Default, the Agent, upon
written notice to the Lessee (unless an Event of Default shall have occurred
pursuant to Article XII(f) or (g) of the Lease, in which case no such notice
shall be required) may, at the option of the Required Lenders, withdraw the
funds from the Cash Collateral Account and apply them to the outstanding
principal of, and accrued interest on, the A Loans in accordance with the
provisions of the Loan Agreement. To the extent that the aggregate amount of the
funds in the Cash Collateral Account and on deposit with any Lender pursuant to
7
<PAGE>
the proviso contained in the fist sentence of this paragraph (d) exceeds the
-------------
outstanding principal amount of the A Notes, such excess amount shall not be
subject to any set-off rights of any Funding Party.
(e) The Lessee hereby agrees to pay to the Agent, for the benefit of
the Funding Parties, from the Closing Date until the Funding Termination Date, a
fee (the "Commitment Fee") for each day equal to (i) the difference between the
--------------
aggregate Commitments and the Funded Amounts on such day, times (ii) 0.125%
-----
times (iii) 1/360. Such Commitment Fee shall be paid in arrears on the last
- -----
Business Day of each Fiscal Quarter.
(f) The Alternative Rate Advances may be converted to Eurodollar
Advances at any time, so long as no Potential Event of Default or Event of
Default has occurred and is continuing, and, on the last day of the applicable
Rent Period, each Eurodollar Advance may be converted to an Alternative Rate
Advance, or, so long as no Potential Event of Default or Event of Default has
occurred and is continuing, continued as a Eurodollar Advance with a Rent Period
as specified in the applicable Payment Date Notice, in any case, as set forth in
the next sentence. Two Business Days prior to the last day of each Rent Period
(or, in the case of the conversion of Alternative Rate Advances to Eurodollar
Advances, two Business Days prior to the date of such conversion), the Lessee
shall deliver to the Lessor and the Agent a notice substantially in the form of
Exhibit J (each, a "Payment Date Notice"), appropriately completed, specifying
- --------- -------------------
the allocation of the Funded Amounts related to such Rent Period (or, in the
case of the conversion of Alternative Rate Advances to Eurodollar Advances, the
Funded Amounts related to such Alternative Rate Advances) to Eurodollar Advances
and Alternative Rate Advances and, in the case of Eurodollar Advances, the
immediately succeeding Rent Period(s) therefor, provided that no such allocation
--------
shall be in an amount less than $500,000. Each such Payment Date Notice shall
be irrevocable. If no such notice is given, the Funded Amounts shall be
allocated to a Eurodollar Advance with a Rent Period of three (3) months.
SECTION 2.4 Nature of the Transactions. Lessee and the Funding Parties
--------------------------
intend that the transactions evidenced by this Agreement and the other Operative
Documents constitute an
8
<PAGE>
operating leases pursuant to FASB 13 for accounting purposes and loans secured
by the Leased Property for all other purposes, including federal, state and
local income tax purposes and commercial, real estate and bankruptcy law
purposes. To the extent that this Agreement and the other Operative Documents
reflect the lease form alone, they do so for convenience only. Lessee and the
Funding Parties intend that the Operative Documents have the dual form referred
to in the first sentence of this paragraph, notwithstanding the use of the lease
form alone.
(a) Tax Treatment. For purposes of all income, franchise and other
-------------
taxes imposed upon or measured by income, Lessee and the Funding Parties intend
that the transactions evidenced by the Operative Documents shall be treated as
loans by the Funding Parties to Lessee secured by the Leased Property, with
Lessee as owner of the Leased Property. Lessee and the Funding Parties may only
take deductions, credits, allowances and other reporting positions on their
respective returns, reports and statements which are consistent with such
treatment, unless required to do otherwise by an appropriate taxing authority or
after a change in Applicable Law; provided, however that if an appropriate
-------- -------
taxing authority or a change in Applicable Law requires any Funding Party to
take such an inconsistent position, such Funding Party shall promptly notify
Lessee.
(b) Other Legal Treatment. For purposes of commercial law, real
---------------------
property law, bankruptcy law and other applicable laws, Lessee and Funding
Parties also intend that the transactions evidenced by the Operative Documents
shall be treated as loans by the Funding Parties to Lessee secured by the Leased
Property, with Lessee as owner of the Leased Property.
Nevertheless, the Lessee acknowledges and agrees that no Funding Party
or any other Person has made any representations or warranties concerning the
tax, financial, accounting or legal characteristics or treatment of the
Operative Documents and that the Lessee has obtained and relied solely upon the
advice of its own tax, accounting and legal advisors concerning the Operative
Documents and the accounting, tax, financial and legal consequences of the
transactions contemplated therein.
9
<PAGE>
SECTION 2.5 Amounts Due Under Lease. Anything else herein or elsewhere to
-----------------------
the contrary notwithstanding, it is the intention of the Lessee and the Funding
Parties that: (i) the amount and timing of Basic Rent due and payable from time
to time from the Lessee under the Lease shall be equal to the aggregate payments
due and payable with respect to interest on, and principal of, the Loans and
Yield on, and principal of, the Lessor's Invested Amounts, on each Payment Date;
(ii) if the Lessee elects (or is deemed to have elected) the Purchase Option
with respect to the Leased Property, or the Lessee's obligation to purchase the
Leased Property is accelerated as a result of an Event of Default, the Funded
Amounts in respect of the Leased Property, all interest and Yield thereon and
all other obligations of the Lessee owing to the Funding Parties in respect of
the Leased Property shall be paid in full by the Lessee; and (iii) if the Lessee
properly elects the Remarketing Option or the Surrender Option, the principal
amount of, and accrued interest on, the A Loans will be fully paid out of the
Recourse Deficiency Amount, and the Lessee shall only be required to make
payments to the Lenders in respect of the principal amount of the B Loans and to
the Lessor in respect of the Lessor's Invested Amounts out of the proceeds of
the sale of such Leased Property.
SECTION 3
CONDITIONS PRECEDENT; DOCUMENTS
SECTION 3.1 Conditions to the Obligations of the Funding Parties on the
-----------------------------------------------------------
Closing Date. The obligations of the Lessor and each Lender to carry out their
- ------------
respective obligations under Section 2 of this Master Agreement to be performed
---------
on the Closing Date shall be subject to the fulfillment to the reasonable
satisfaction of, or waiver by, each such party hereto (acting directly or
through its counsel) on or prior to the Closing Date of the following conditions
precedent, provided that the obligations of any Funding Party shall not be
--------
subject to any conditions contained in this Section 3.1 which are required to be
-----------
performed by such Funding Party:
(a) Documents. The following documents shall have been executed and
---------
delivered by the respective parties thereto:
(i) Guaranty. Counterparts of the Guaranty, duly executed by the
--------
Lessee, and of the Subsidiary
10
<PAGE>
Guaranty, duly executed by the Commerce Subsidiaries, shall have been delivered
to the Agent and the Lessor.
(ii) Loan Agreement. Counterparts of the Loan Agreement, duly executed
--------------
by the Lessor, the Agent and each Lender shall have been delivered to each of
the Lessor and the Agent. An A Note and a B Note for each Lender, duly executed
by the Lessor, shall have been delivered to the Agent for delivery to each
Lender.
(iii) Master Agreement. Counterparts of this Master Agreement, duly
----------------
executed by the parties hereto, shall have been delivered to the Lessee, the
Lessor and the Agent.
(iv) Construction Agency Agreement. Counterparts of the Construction
-----------------------------
Agency Agreement, duly executed by the parties thereto shall have been delivered
to the Lessee, the Lessor and the Agent.
(v) Lease. Counterparts of the Lease, duly executed by the Lessee and
-----
the Lessor, shall have been delivered to the Lessee, the Lessor and the Agent
and the original, chattel paper copy of the Lease shall have been delivered to
the Agent.
(vi) Lessee's Resolutions and Incumbency Certificate, etc. Each of the
-----------------------------------------------------
Agent and the Lessor shall have received (x) a certificate of the Secretary or
an Assistant Secretary of the Lessee, attaching and certifying as to (i) the
Board of Directors' resolution duly authorizing the execution, delivery and
performance by it of each Operative Document to which it is or will be a party,
(ii) the incumbency and signatures of persons authorized to execute and deliver
such documents on its behalf, (iii) its articles of incorporation, certified as
of a recent date by the Secretary of State of the state of its incorporation and
(iv) its by-laws, and (y) good standing certificates for the Lessee from the
appropriate offices of the States of such Person's incorporation and principal
place of business and of Texas.
11
<PAGE>
(vii) Opinions of Counsel. The opinion of Jones, Day, Reavis & Pogue,
--------------------
dated the Closing Date, substantially in the form set forth in Exhibit G-1,
-----------
shall have been delivered to the Lessor and the Agent and addressed to each of
the Lessor, the Agent, and the Lenders. The opinion of Grogan & Browner PC,
dated the Closing Date, substantially in the form set forth in Exhibit G-3, and
-----------
containing such other matters as the parties to whom it is addressed shall
reasonably request, shall have been delivered to each of the Agent, the Lessee
and the Lenders.
(viii) Deed. The original Deed duly executed by the Seller and in
----
recordable form, shall have been delivered to the Agent, with a copy thereof to
the Lessor and the Lessee.
(ix) Mortgage and Assignment of Lease and Rents. Counterparts of the
------------------------------------------
Mortgage substantially in the form of Exhibit D attached hereto, duly executed
---------
by the Lessor and in recordable form, shall have been delivered to the Agent;
and the Assignment of Lease and Rents substantially in the form of Exhibit B
---------
attached hereto, duly executed by the Lessor and in recordable form, shall have
been delivered to the Agent.
(x) Survey. The Lessee shall have delivered, or shall have caused to be
------
delivered, to the Lessor and the Agent, at the Lessee's expense, an accurate
survey certified to the Lessor and the Agent in a form reasonably satisfactory
to the Lessor and the Agent and showing no state of facts unsatisfactory to the
Lessor or the Agent and prepared within ninety (90) days of the Closing Date by
a Person reasonably satisfactory to the Lessor and the Agent. Such survey shall
(1) be acceptable to the Title Insurance Company for the purpose of deletion of
the survey exception on the Title Policy, (2) show no encroachments on the Land
by structures owned by others, and no encroachments from any part of the Leased
Property onto any land owned by others, and (3) disclose no state of facts
reasonably objectionable to the Lessor, the Agent or the Title
12
<PAGE>
Insurance Company, and be reasonably acceptable to each such Person.
(xi) Title and Title Insurance. On the Closing Date, the Lessor shall
-------------------------
receive from a title insurance company acceptable to the Lessor and the Agent a
TLTA Form T-1 Owner's Policy of Title Insurance issued by such title insurance
company and the Agent shall receive from such title insurance company an ALTA
Mortgagee's Policy of Title Insurance issued by such title insurance company, in
each case, in the amount of $65,000,000, reasonably acceptable in form and
substance to the Lessor and the Agent, respectively (collectively, the "Title
Policy"). The Title Policy shall be dated as of the Closing Date, and shall
conform to TLTA Procedural Rule P-8.
(xii) Appraisal. The Lessor and the Agent shall have received a report of
---------
the Appraiser (an "Appraisal"), paid for by the Lessee, which shall meet the
---------
requirements of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, shall be reasonably satisfactory to the Lessor and the Agent and shall
state in a manner reasonably satisfactory to the Lessor and the Agent the
estimated "as vacant" value of such Land and the Building to be constructed
thereon. Such Appraisal must show that (1) the estimated Fair Market Sales
Value of the Leased Property (determined as if the Building had already been
completed in accordance with the Plans and Specifications and excluding from
such value the amount of assessments on such Leased Property) at the
commencement of the Lease Term with respect thereto is equal to the projected
cost of acquisition and construction of such Leased Property, and (2) the "as
vacant" value described above is at least 45% of the total cost of the Leased
Property (determined as if the Building had already been completed in accordance
with the Plans and Specifications).
(xiii) Environmental Audit and related Reliance Letter. The Lessor and
-----------------------------------------------
the Agent shall have received an Environmental Audit showing that no
13
<PAGE>
Hazardous Materials are present and otherwise satisfactory to the Lessor and the
Agent; and the firm that prepared the Environmental Audit shall have delivered
to the Lessor and the Agent a letter stating that the Lessor, the Agent, and the
Lenders may rely upon such firm's Environmental Audit of such Land, it being
--------
understood that the Lessor's and the Agent's acceptance of any such
- ----------
Environmental Audit shall not release or impair the Lessee's obligations under
the Operative Documents with respect to any environmental liabilities relating
to the Leased Property.
(xiv) Evidence of Insurance. The Lessor and the Agent shall have received
---------------------
from the Lessee certificates of insurance evidencing compliance with the
provisions of Article VIII of the Lease (including the naming of the Lessor, the
Agent and the Lenders as additional insured or loss payee with respect to such
insurance), in form and substance reasonably satisfactory to the Lessor and the
Agent.
(xv) Officer's Certificate. Each of the Agent and the Lessor shall have
---------------------
received an Officer's Certificate of the Lessee stating that, to the best of
such officer's knowledge, (A) each and every representation and warranty of the
Lessee contained in the Operative Documents is true and correct in all material
respects on and as of the Closing Date as though made on and as of the Closing
Date, except to the extent such representations or warranties relate solely to
an earlier date, in which case such representations and warranties were true and
correct on and as of such earlier date; (B) no Event of Default, Potential Event
of Default or Construction Force Majeure Event has occurred and is continuing;
(C) each Operative Document to which the Lessee is a party is in full force and
effect with respect to it; and (D) no event that could reasonably be expected to
have a Material Adverse Effect has occurred since September 30, 1997.
(xvi) UCC Financing Statement; Recording Fees; Transfer Taxes. The Lessor
-------------------------------------------------------
and the Agent shall have received satisfactory evidence of (i) the execution
14
<PAGE>
and delivery to Agent of UCC-1 financing statements naming Lessee, as debtor,
Lessor, as secured party, and the Agent, as assignee and naming Lessor, as
debtor, and the Agent, as secured party, to be filed with the Secretary of State
of Texas (or other appropriate filing office) and the county where the Land is
located, respectively, and such other Uniform Commercial Code financing
statements as the Lessor and the Agent deems necessary or desirable in order to
protect such Funding Party's interests and (ii) the payment of all recording and
filing fees and taxes with respect to any recordings or filings made of the
Deed, the Lease, the Mortgage and the Assignment of Lease and Rents.
(xvii) Opinions. The opinion of local counsel for the Lessee qualified in
--------
the State of Texas, substantially in the form set forth in Exhibit G-2, shall
have been delivered to the Agent and the Lessor and addressed to each of the
Lessor, the Agent and the Lenders.
(xviii) Officer's Certificate. The Agent and the Lessee shall have
---------------------
received an Officer's Certificate of the Lessor stating that, to the best of
such officer's knowledge, (A) each and every representation and warranty of the
Lessor contained in the Operative Documents is true and correct in all material
respects on and as of the Closing Date as though made on and as of the Closing
Date, except to the extent such representations or warranties relate solely to
an earlier date, in which case such representations and warranties shall have
been true and correct in all material respects on and as of such earlier date;
(B) no Event of Default or Potential Event of Default has occurred and is
continuing; (C) each Operative Document to which the Lessor is a party is in
full force and effect with respect to it; and (D) no event that could have a
Material Adverse Effect has occurred since the date of the most recent financial
statements of the Lessor delivered or required to be delivered to the Agent.
15
<PAGE>
(xix) Good Standing Certificates. The Agent and the Lessee
--------------------------
shall have received good standing certificates for the Lessor from the
appropriate offices of the State of Texas.
(xx) Lessor's Consents and Incumbency Certificate, etc. The
-------------------------------------------------
Agent and the Lessee shall have received a certificate of the
Secretary or an Assistant Secretary of the General Partner of the
Lessor attaching and certifying as to (i) the consents of the partners
of the Lessor duly authorizing the execution, delivery and performance
by it of each Operative Document to which it is or will be a party,
(ii) the incumbency and signatures of persons authorized to execute
and deliver such documents on the General Partner's behalf, in its
capacity as sole general partner of the Lessor, (iii) the Partnership
Agreement, (iv) the Board of Directors' resolution duly authorizing
the execution, delivery and performance by the General Partner in its
capacity as sole general partner of the Lessor, of each Operative
Document to which the Lessor is or will be a party, (v) the articles
of incorporation of the General Partner, certified as of a recent date
by the Secretary of State of the state of its incorporation, and (vi)
the by-laws of the General Partner.
(b) Litigation. No action or proceeding shall have been instituted or
----------
threatened nor shall any governmental action, suit, proceeding or investigation
be instituted or threatened before any Governmental Authority, nor shall any
order, judgment or decree have been issued or proposed to be issued by any
Governmental Authority, to set aside, restrain, enjoin or prevent the
performance of this Master Agreement or any transaction contemplated hereby or
by any other Operative Document or which could reasonably be expected to result
in a Material Adverse Effect.
(c) Legality. The transactions contemplated by the Operative
--------
Documents shall not violate any Applicable Law, and no change shall have
occurred or been proposed in Applicable Law that would make it illegal for any
Funding Party to participate in any of the transactions contemplated by the
Operative Documents.
16
<PAGE>
(d) No Events. (i) No Event of Default, Potential Event of Default,
---------
Event of Loss or Event of Taking relating to such Leased Property shall have
occurred and be continuing, (ii) no action shall be pending or threatened by a
Governmental Authority to initiate a Condemnation or an Event of Taking, and
(iii) there shall not have occurred any event that could reasonably be expected
to have a Material Adverse Effect since September 30, 1997.
(e) Representations. Each representation and warranty of the parties
---------------
hereto or to any other Operative Document contained herein or in any other
Operative Document shall be true and correct in all material respects as though
made on and as of the Closing Date.
(f) Cutoff Date. The Closing Date shall occur on or prior to March
-----------
31, 1998.
(g) Transaction Expenses. The Lessee shall have paid the Transaction
--------------------
Costs then accrued and invoiced which the Lessee has agreed to pay pursuant to
Section 8.8.
SECTION 3.2 Conditions to the Obligations of Lessee. The obligations of
---------------------------------------
the Lessee to lease from the Lessor are subject to the fulfillment on the
Closing Date to the satisfaction of, or waiver by, the Lessee, of the following
conditions precedent:
(a) General Conditions. The conditions set forth in Section 3.1 that
------------------ -----------
require fulfillment by the Lessor or the Lenders shall have been satisfied.
(b) Legality. The transactions contemplated by the Operative
--------
Documents shall not violate any Applicable Law applicable to the Lessee, and no
change shall have occurred or been proposed in Applicable Law that would make it
illegal for the Lessee to participate in any of the transactions contemplated by
the Operative Documents.
SECTION 3.3 Conditions to the Obligations of the Funding Parties on each
------------------------------------------------------------
Funding Date following the Closing Date. The obligations of the Lessor and each
- ---------------------------------------
Lender to carry out their respective obligations under Section 2 of this Master
---------
Agreement to be performed on each Funding Date following the Closing Date shall
be subject to the fulfillment to the
17
<PAGE>
reasonable satisfaction of, or waiver by, each such party hereto (acting
directly or through their respective counsel) or prior to each such Funding Date
of the following conditions precedent, provided that the obligations of any
--------
Funding Party shall not be subject to any conditions contained in this
Section 3.3 which are required to be performed by such Funding Party:
- -----------
(a) Funding Request. The Lessor and the Agent shall have received
---------------
from the Lessee the Funding Request therefor pursuant to Section 2.2(d).
--------------
(b) Condition Fulfilled. As of such Funding Date, the condition set
-------------------
forth in Section 3.1(d) shall have been satisfied.
--------------
(c) Representations. As of such Funding Date, both before and after
---------------
giving effect to the Funding requested by the Lessee on such date, the
representations and warranties that the Lessee is deemed to make pursuant to
Section 2.2(e) shall be true and correct in all material respects on and as of
- --------------
such Funding Date as though made on and as of such Funding Date, except to the
extent such representations or warranties relate solely to an earlier date, in
which case such representations and warranties shall have been true and correct
in all material respects on and as of such earlier date.
(d) No Bonded Stop Notice or Filed Mechanic's Lien. As of each Funding
----------------------------------------------
Date, (i) neither the Lessor, the Agent, nor any Lender has received a bonded
notice to withhold Loan funds that has not been discharged by the Lessee, and
(ii) no mechanic's liens or materialman's liens have been filed against the
Leased Property that have not been discharged by the Lessee, bonded over in a
manner reasonably satisfactory to the Agent or insured over by the Title
Insurance Company.
SECTION 3.4 Completion Date Conditions. The occurrence of the Completion
--------------------------
Date with respect to the Leased Property shall be subject to the fulfillment to
the satisfaction of, or waiver by, each party hereto (acting directly or through
its counsel) of the following conditions precedent:
(a) Title Policy Endorsements; Architect's Certificate. The Lessee
--------------------------------------------------
shall have furnished to the Lessor and the Agent (1) the following endorsement
to the related
18
<PAGE>
Title Policy (each of which shall be subject to no exceptions other than those
reasonably acceptable to the Agent): a down-date endorsement (redating and
confirming the coverage provided under the Title Policy) effective as of a date
not earlier than the date of completion of the Construction, and (2) a
certificate of the Architect dated at or about the Completion Date, in form and
substance reasonably satisfactory to the Agent and the Lessor and stating that
(i) the Building has been completed substantially in accordance with the Plans
and Specifications therefor, and the Leased Property is ready for occupancy,
(ii) such Plans and Specifications comply in all material respects with all
Applicable Laws in effect at such time, and (iii) to the best of the Architect's
knowledge, such Leased Property, as so completed, complies in all material
respects with all Applicable Laws in effect at such time. The Lessee shall also
deliver to the Agent true and complete copies of: (A) an "as built" or "record"
set of the Plans and Specifications, (B) a plat of survey of the Leased Property
"as built" to a standard reasonably acceptable to the Agent showing all
easements, paving, driveways, fences and exterior improvements, and (C) copies
of a certificate or certificates of occupancy for the Leased Property or other
legally equivalent permission to occupy such Leased Property.
(b) Construction Completion. The Construction shall have been
-----------------------
completed substantially in accordance with the Plans and Specifications, the
Deed and all Applicable Laws, and such Leased Property shall be ready for
occupancy and operation. All fixtures, equipment and other property contemplated
under the Plans and Specifications to be incorporated into or installed in the
Leased Property shall have been substantially incorporated or installed, free
and clear of all Liens except for Permitted Liens.
(c) Lessee Certification. The Lessee shall have furnished the Lessor
--------------------
and the Agent with a certification of the Lessee (substantially in the form of
Exhibit H) that:
- ---------
(i) all amounts owing to third parties for the Construction have
been paid in full (other than contingent obligations for which the Lessee
has made adequate reserves), and no litigation or proceedings are pending,
or to the best of the Lessee's knowledge, are threatened, against the
Leased Property or the Lessee
19
<PAGE>
which could reasonably be expected to have a Material Adverse Effect;
(ii) all consents, licenses and permits and other governmental
authorizations or approvals required for the Construction and operation of
the Leased Property have been obtained and are in full force and effect;
(iii) the Leased Property has available all services of public
facilities and other utilities necessary for use and operation of the
Leased Property for its intended purposes including, without limitation,
adequate water, gas and electrical supply, storm and sanitary sewerage
facilities, telephone, other required public utilities and means of access
between the Building and public highways for pedestrians and motor
vehicles;
(iv) all material agreements, easements and other rights, public
or private, which are necessary to permit the lawful use and operation of
the Leased Property as the Lessee intends to use the Leased Property under
the Lease and which are necessary to permit the lawful intended use and
operation of all then intended utilities, driveways, roads and other means
of egress and ingress to and from the same have been obtained and are in
full force and effect and the Lessee has no knowledge of any pending
modification or cancellation of any of the same; and the use of the Leased
Property does not depend on any variance, special exception or other
municipal approval, permit or consent that has not been obtained and is in
full force and effect for its continuing legal use;
(v) all of the requirements and conditions set forth in
Section 3.4(b) hereof have been completed and fulfilled with respect to the
--------------
Leased Property and the Construction; and
(vi) the Leased Property is in compliance in all material
respects with all applicable zoning laws and regulations.
SECTION 3.5 Security Agreement. The Lessee shall use its best efforts to
------------------
deliver counterparts of the Security Agreement and Assignment (substantially in
the form of Exhibit C), duly
---------
20
<PAGE>
executed by the Lessee, with an acknowledgment and consent thereto executed by
Lincoln Property Company, CSE, Inc. and a complete copy of the Development
Agreement, as promptly as practicable after the Closing Date.
SECTION 4
REPRESENTATIONS
SECTION 4.1 Representations of Lessee. Effective as of the date of
-------------------------
execution hereof, as of the Closing Date and as of each Funding Date, the Lessee
represents and warrants to each of the other parties hereto as follows:
(a) Corporate Existence.
-------------------
(1) Organization; Corporate Power and Authority. Each of the Lessee
-------------------------------------------
and the Commerce Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
and (ii) has adequate corporate power and authority and full legal right to own
or to hold under lease its properties and to carry on the business in which it
is presently engaged and will be engaged upon consummation of the transactions
contemplated hereby.
(2) Foreign Qualification. Each of the Lessee and the Commerce
---------------------
Subsidiaries is qualified and in good standing as a foreign corporation and is
licensed, admitted or approved to do business as a foreign corporation in each
jurisdiction wherein the character of the properties owned or held under lease
by it, or the nature of the business conducted by it, makes such qualification
necessary, except where (i) such failure to qualify would not have a Material
Adverse Effect or (ii) (A) such Commerce Subsidiary is a Subsidiary which was
acquired pursuant to Section 5.23 within thirty (30) days prior to the date on
------------
and as of which this representation and warranty is being made or repeated and
(B) the Lessee and such Subsidiary are using all reasonable efforts to obtain
the appropriate license, admission or qualification.
(3) Corporate Power. Each of the Lessee and the Commerce Subsidiaries
---------------
has adequate corporate power and authority and has full legal right to enter
into each of the Operative Documents to which it is or is to become a party, to
perform, observe and comply with all of its agreements and
21
<PAGE>
obligations under each of such documents, and, with respect to the Lessee, to
lease the Leased Property as contemplated by the Lease.
(b) Subsidiaries; Shares Owned By The Commerce Companies. Schedule
---------------------------------------------------- --------
5.2 contains a complete list of all Subsidiaries of the Lessee and sets forth
- ---
the authorized capital of all classes of the capital stock of each Commerce
Subsidiary on the date hereof, together with the ownership on the date hereof of
all of the issued and outstanding shares of each such class. Other than
Subsidiaries of the Commerce Companies organized under the laws of jurisdictions
located outside the United States, none of the Commerce Companies has any
Subsidiaries which are not Commerce Subsidiaries or Non-Guarantor Subsidiaries.
(c) Corporate Authority, etc. The execution and delivery by each of
------------------------
the Lessee and the Commerce Subsidiaries of each of the Operative Documents to
which it is or is to become a party, the performance by each of the Lessee and
the Commerce Subsidiaries of all of its agreements and obligations under each of
such documents, and the transactions contemplated hereby and thereby, including
the lease of the Leased Property by the Lessee, have been duly authorized as of
the date hereof (except that in the case of a Commerce Subsidiary acquired
pursuant to Section 5.23, such execution, delivery and authorization shall have
------------
been completed no later than the later to occur of (a) the date of such
acquisition, and (b) fifteen (15) Business Days following receipt by the Lessee
or such Subsidiary of forms of the Operative Documents, or amendments thereto,
as appropriate, to which such Subsidiary is to become a party in order to become
a Commerce Subsidiary), by all necessary corporate action on the part of each of
the Lessee and the Commerce Subsidiaries and its respective shareholders and are
within the corporate authority of such Person, and do not and will not (i)
contravene or conflict with any provision of its charter or by-laws (each as
from time to time in effect), (ii) conflict with, or result in a breach of any
material term, condition or provision of, or constitute a default under or
result in the creation of any mortgage, lien, pledge, charge, security interest
or other encumbrance upon any of the property of any of the Lessee or the
Commerce Subsidiaries (other than the liens created under any of the Operative
Documents) under any agreement, trust deed, indenture, mortgage or other
instrument to which any of
22
<PAGE>
the Lessee or the Commerce Subsidiaries is or may become a party or by which any
of the Lessee or the Commerce Subsidiaries or any of the property of any of the
Lessee or the Commerce Subsidiaries is or may become bound or affected, the
consequences of which would reasonably be expected to have a Material Adverse
Effect, (iii) violate or contravene any provision of any law, regulation, order,
ruling or interpretation thereunder or any decree, order or judgment of any
court or governmental or regulatory authority, bureau, agency or official (all
as from time to time in effect and applicable to any of the Lessee or the
Commerce Subsidiaries), except where such violation or contravention would not
have a Material Adverse Effect, (iv) require any waivers, consents or approvals
by any of the creditors of any of the Lessee or the Commerce Subsidiaries which
have not been obtained, (v) require any consents or approvals by any
shareholders of any of the Lessee or the Commerce Subsidiaries, or (vi) require
any approval, consent, order, authorization or license by, or giving notice to,
or taking any other action with respect to, any governmental or regulatory
authority or agency under any provision of any Applicable Law, except those
actions which have been taken or will be taken prior to the Closing Date or
where the failure to do so would not result in a Material Adverse Effect.
(d) Binding Effect of Documents, etc. Each of the Lessee and the
--------------------------------
Commerce Subsidiaries has duly executed and delivered each of the Operative
Documents to which it is a party and each of such documents is in full force and
effect. The agreements and obligations of each of the Lessee and the Commerce
Subsidiaries contained in each of the Operative Documents to which it is a party
constitute legal, valid and binding obligations enforceable against it in
accordance with their respective terms, except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to the
extent that the availability of the remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
therefor may be brought.
(e) No Potential Event of Defaults or Events of Default. No Potential
---------------------------------------------------
Event of Default or Event of Default has occurred and is continuing.
23
<PAGE>
(f) Chief Executive Offices; Mailing Addresses. Until the Agent
------------------------------------------
receives written notice of a change, the chief executive offices of the Lessee
and the offices where all material records and books of account of the Lessee
are kept, shall be located at 300 Crescent Court, Suite 1200, Dallas, Texas
75201-7832, and the Lessee's mailing address shall be as provided in Section 8.2
-----------
hereof, and the chief executive offices of each of the Commerce Subsidiaries,
the offices where all material records and books of account of each of the
Commerce Subsidiaries are kept, and the mailing addresses of each of the
Commerce Subsidiaries, shall be as set forth in Schedule 5.6 hereto.
------------
(g) Financial Statements. The Lessee has furnished to each of the
--------------------
Lenders a consolidated balance sheet of the Lessee and its Subsidiaries as at
the Balance Sheet Date, and consolidated statements of operations and income and
stockholders' equity of the Lessee and its Subsidiaries for the fiscal year then
ended, certified by a firm of nationally recognized independent certified public
accountants as its accountants. Such financial statements were prepared in
accordance with generally accepted accounting principles and fairly present the
financial condition of the Lessee and its Subsidiaries as at the close of
business on the dates thereof and the results of operations for the fiscal
period then ended. There are no contingent liabilities of the Lessee and its
Subsidiaries as of either of such dates involving material amounts not disclosed
in such financial statements and the related notes thereto.
(h) No Material Changes, Etc. Except as disclosed in the Forms 10-Q
------------------------
and Forms 8-K of the Lessee and its Subsidiaries filed by the Lessee and its
Subsidiaries with the Securities and Exchange Commission and previously
delivered to the Agent and the Funding Parties, since the Balance Sheet Date,
there has occurred no materially adverse change in the financial condition,
business or prospects of the Lessee and its Subsidiaries taken as a whole as
shown on or reflected in the consolidated balance sheet of the Lessee and its
Subsidiaries as at the Balance Sheet Date, or the consolidated statements of
operations for the fiscal year then ended. None of the Commerce Subsidiaries
has made any Distribution since the Balance Sheet Date, except to the Lessee or
another Commerce Subsidiary.
24
<PAGE>
(i) Mortgages and Liens. None of the property, assets, income or
-------------------
revenues of any character, or any rights relating thereto, of any of the
Commerce Companies is subject to any mortgage, lien, pledge, charge, security
interest or other encumbrance of any kind, other than Permitted Liens and other
Liens permitted pursuant to Section 5.20. Set forth on Schedule 5.9 hereto is a
------------ ------------
true and correct list of each office or other location maintained by any of the
Lessee or the Commerce Subsidiaries in the United States of America. In all
jurisdictions set forth on Schedule 5.9, and, to the best knowledge of the
------------
Lessee (without having conducted UCC searches), in all other jurisdictions
located in the United States of America, any state thereof or the District of
Columbia, no financing statement which names any of the Commerce Companies as a
debtor has been filed pursuant to Article 9 of the Uniform Commercial Code of
any state of the United States or the District of Columbia, and none of the
Commerce Companies has signed any financing statement or security agreement or
authorized any Person to file any such financing statement in any such
jurisdiction, except (a) for notice filings by lessors of personal property or
equipment under leases, or (b) with respect to Permitted Liens and other Liens
permitted pursuant to Section 5.20.
------------
(j) Indebtedness. Neither the Lessee nor any of its Subsidiaries has
------------
any Indebtedness other than Indebtedness expressly permitted by the provisions
contained in Section 5.19.
------------
(k) Litigation. Except as set forth on Schedule 5.11 hereto as of the
---------- -------------
date hereof, or as previously disclosed to the Agent in writing, there is no
pending or, to the best of the knowledge of any of the Lessee's officers and
directors, threatened action, suit, proceeding or investigation before any
court, tribunal, governmental or regulatory authority, agency, commission, or
board of arbitration against the Lessee or any of its Subsidiaries which seeks
or demands damages in an amount which would reasonably be expected to have a
Material Adverse Effect or to materially impair the right of the Lessee and its
Subsidiaries, considered as a whole, to carry on business substantially as now
conducted by them, or to result in any material liability not adequately covered
by insurance or for which adequate reserves are not maintained on the
consolidated balance sheet of the Lessee and its Subsidiaries, or which
25
<PAGE>
questions the validity of this Agreement or any of the other Operative Documents
or any action taken or to be taken pursuant hereto or thereto, nor does the
Lessee or any of its Subsidiaries know of any reasonable basis for any such
litigation to exist. Set forth on Schedule 5.11 hereto are descriptions of all
-------------
escrow arrangements to which the Lessee or any of its Subsidiaries is a party
with respect to pending litigation against the Lessee or any of its Subsidiaries
which must be disclosed pursuant to this Section 4.1(j).
--------------
(l) No Default. Except for alleged defaults relating to the matters
----------
set forth on Schedules 5.11 and 5.12 hereof as of the date hereof, or as
--------- ---- ----
previously disclosed to the Agent in writing, no material default under any
contract, agreement or instrument to which any Commerce Company is a party or by
which it or any of its property is bound, has occurred and is continuing beyond
the grace period specified therefore in such contract, instrument or agreement,
the consequence of which default would reasonably be expected to have a Material
Adverse Effect. Notwithstanding the foregoing, the information set forth on
Schedules 5.11 and 5.12 is for disclosure purposes only, and nothing contained
- --------- ---- ----
in Schedules 5.11 or 5.12 shall be deemed an admission by the Lessee or any
--------- ---- ----
Subsidiary that any default exists under any contract, agreement or instrument
to which such Commerce Company is a party or by which such Commerce Company or
any of its property is bound.
(m) Taxes. Except as set forth on Schedule 5.13, as of the date
----- -------------
hereof, the Lessee, for itself and on behalf of its Subsidiaries, has filed all
United States federal tax returns required to be filed by it, and each of the
Lessee and, to the best knowledge of the Lessee, its Subsidiaries has filed all
state and other tax returns required to be filed by it other than (i) those
returns relating to taxes (A) with respect to which the Lessee or any such
Subsidiary, as the case may be, in good faith and using due diligence and all
deliberate speed, is investigating or ascertaining the extent of its liability,
if any, and (B) with respect to which (1) no Lien or notice has been filed in
any public recording office, and (2) neither the Lessee nor such Subsidiary has
received notice of a lien or the threat or initiation of an enforcement
proceeding or has reason to believe that such a lien or enforcement proceeding
is likely to occur or is specifically contemplated by appropriate authorities,
or (ii) those returns
26
<PAGE>
as to which the failure to so file would not, in the opinion of the Lessee,
create an outstanding liability for taxes due or interest and penalties thereon
which would reasonably be expected to have a Material Adverse Effect or to
result in any material liability for which adequate reserves are not maintained
on the consolidated balance sheet of the Lessee and its Subsidiaries. As of the
date hereof, each of the Lessee and its Subsidiaries has paid, or has made
reasonable provision for payment of, all material taxes (if any) which have or
may become due and payable with respect to any past or present taxation period
pursuant to any of the said returns or pursuant to any matters raised by audits
or for other reasons known to it, other than those taxes referenced in
subparagraphs (i) and (ii) above and taxes the amount, applicability, or
- ----------------- ----
validity of which are currently being contested by it in good faith by
appropriate proceedings and with respect to which it has set aside on its books
reserves (to the extent required by generally accepted accounting principles and
practices) reasonably deemed by it to be adequate with respect thereto. Neither
the Lessee nor any of its Subsidiaries has consented to be treated as a
"consenting corporation" as defined in Section 341(f) of the Code.
(n) True Copies of Charter and Other Documents. Each of the Lessee and
------------------------------------------
the Commerce Subsidiaries has furnished or caused to be furnished, except any
Commerce Subsidiary acquired as permitted by Section 5.23 which Subsidiary
------------
shall, within 30 days of such acquisition, have furnished or caused to be
furnished, to the Agent and each of the Lenders true and complete copies of (a)
all of the charter and other incorporation or association documents of each of
the Lessee and the Commerce Subsidiaries (together with any and all amendments
thereto) and (b) the by-laws of each of the Lessee and the Commerce Subsidiaries
(together with any and all amendments thereto).
(o) Employee Benefit Plans.
----------------------
(1) In General. Each Employee Benefit Plan and each Guaranteed
----------
Pension Plan has been maintained and operated in compliance in all material
respects with the provisions of ERISA and, to the extent applicable, the Code,
including but not limited to the provisions thereunder respecting prohibited
transactions and the bonding of
27
<PAGE>
fiduciaries and other persons handling plan funds as required by (S)412 of
ERISA.
(2) Terminability of Welfare Plans. No Employee Benefit Plan which is
------------------------------
an employee welfare benefit plan within the meaning of (S)3(1) or (S)3(2)(B) of
ERISA provides benefit coverage subsequent to termination of employment, except
as required by Title I, Part 6 of ERISA or applicable state insurance laws and
except as set forth in the Sterling Commerce, Inc. Employee Health Benefit Plan
with respect to certain employees who are eligible for retiree medical benefits
as set forth therein. Subject to applicable legal requirements, the Lessee or an
ERISA Affiliate, as appropriate, may terminate each such Plan, other than the
Sterling Commerce, Inc. Employee Health Benefit Plan, at any time (or at any
time subsequent to the expiration of any applicable bargaining agreement) in the
discretion of the Lessee or such ERISA Affiliate without liability to any Person
other than for claims arising prior to termination.
(3) Guaranteed Pension Plans. Each contribution required to be made
------------------------
to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien provisions
of (S)302(f) of ERISA, or otherwise, has been timely made. No waiver of an
accumulated funding deficiency or extension of amortization periods has been
received with respect to any Guaranteed Pension Plan and neither the Lessee nor
any ERISA Affiliate is obligated to or has posted security in connection with an
amendment of a Guaranteed Pension Plan pursuant to (S)307 of ERISA or
(S)401(a)(29) of the Code. No liability to the PBGC (other than required
insurance premiums, all of which have been paid) has been incurred by the Lessee
or any ERISA Affiliate with respect to any Guaranteed Pension Plan and there has
not been any ERISA Reportable Event, or any other event or condition which
presents a material risk of termination of any Guaranteed Pension Plan by the
PBGC. Based on the latest valuation of each Guaranteed Pension Plan (which in
each case occurred within twelve months prior to the date of this
representation), and on the actuarial methods and assumptions employed for that
valuation, the aggregate benefit liabilities of all such Guaranteed Pension
Plans within the meaning of (S)4001 of ERISA did not exceed the aggregate value
of the assets of all such Guaranteed Pension Plans by a material amount,
disregarding for this purpose the benefit
28
<PAGE>
liabilities and assets of any Guaranteed Pension Plan with assets in excess of
benefit liabilities, except as otherwise permitted by Section 5.26(e).
---------------
(4) Multiemployer Plans. Neither the Lessee nor any ERISA Affiliate
-------------------
has incurred any material liability (including secondary liability) to any
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan under (S)4201 of ERISA or as a result of a sale of assets
described in (S)4204 of ERISA. Neither the Lessee nor any ERISA Affiliate has
been notified that any Multiemployer Plan is in reorganization or insolvent
under and within the meaning of (S)4241 or (S)4245 of ERISA or is at risk of
entering reorganization or becoming insolvent, or that any Multiemployer Plan
intends to terminate or has been terminated under (S)4041A of ERISA.
(p) Other Representations. Each of the representations and warranties
---------------------
made by each of the Lessee and the Commerce Subsidiaries in any of the Operative
Documents (to the extent that any such documents are in effect on any particular
Funding Date) was true and correct in all material respects when made and
continues to be true and correct in all material respects on the Closing Date,
except to the extent that, by the express terms thereof, any of such
representations and warranties relates solely to or is made as of a date falling
prior to the Closing Date, or except to the extent that any of such
representations and warranties may have been affected by the consummation of the
transactions contemplated and permitted or required by the Operative Documents.
(q) Disclosure. No representation or warranty made by any of the
----------
Lessee or the Commerce Subsidiaries in this Master Agreement or in any
agreement, instrument, document, certificate, statement or letter furnished to
the Agent by or on behalf of any of the Lessee or the Commerce Subsidiaries in
connection with any of the transactions contemplated by any of the Operative
Documents contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading in light of the circumstances in which they are made. Except as
disclosed in writing to the Agent, there is no fact known to the Lessee or, to
the best of the Lessee's knowledge, any of the Commerce Subsidiaries which could
reasonably be
29
<PAGE>
expected materially adversely to affect, or which would reasonably be expected
materially adversely to affect in the future the condition, assets or operations
of the Lessee and the Commerce Subsidiaries taken as a whole.
(r) Holding Company and Investment Company Acts. None of the Commerce
-------------------------------------------
Companies is a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company", as such terms are defined in
the Public Utility Holding Company Act of 1935; nor is it an "investment
company" or a company "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.
(s) Regulations U and X. The proceeds of the Fundings shall be used
-------------------
solely for financing the acquisition and Construction of the Leased Property,
and to pay related development, transaction and closing costs incurred by the
Lessee. No portion of any Funding is to be used by the Lessee for the purpose
of purchasing or carrying any "margin security" or "margin stock" as such terms
are used in Regulations U and X of the Board of Governors of the Federal Reserve
System, 12 C.F.R. Parts 221 and 224, nor is any portion of any Funding to be
used by the Lessee in any manner which, whether after giving effect to Section
-------
5.15 or Section 5.17 or otherwise, would be in violation of such Regulation U or
- ---- ------------
X.
(t) Franchises, Patents, Copyrights, Etc. Except as set forth on
------------------------------------
Schedule 5.20 hereto, each of the Lessee and the Commerce Subsidiaries possesses
- -------------
all franchises, patents, copyrights, trademarks, trade names, licenses and
permits, and rights in respect of the foregoing, adequate for the conduct of its
business substantially as now conducted and has not received notice of any
conflict (which conflict has not been resolved prior to the Closing Date or
which conflict, either individually or in the aggregate with other conflicts,
would, if adversely determined, have a Material Adverse Effect) with any rights
of others. Attached hereto as Schedule 5.20 is a true, correct, and complete
-------- ----
list of all patents, patent applications, federally registered copyrights,
trademarks, trademark applications, trade names and other intellectual property
owned by any of the Lessee or the Commerce Subsidiaries as of May 13, 1997 for
foreign intellectual property and May 14, 1997 for domestic intellectual
property.
30
<PAGE>
(u) Non-Guarantor Subsidiaries. No Non-Guarantor Subsidiary (a) is
--------------------------
presently engaged in business of any kind or nature (except that such Non-
Guarantor Subsidiary may have qualified to do business in a foreign
jurisdiction), (b) has a net worth in excess of $1,000,000 or, in the case of
Sterling Commerce Leasing, Inc., in excess of $5,000,000 for any period of
thirty-five (35) or more consecutive days or (c) has issued any capital stock to
any Person other than the Lessee or a Commerce Subsidiary. The Non-Guarantor
Subsidiaries, taken as a whole, do not have assets as a result of which such
Non-Guarantor Subsidiaries' net worth, in the aggregate, equals or exceeds
$6,000,000.
(v) Environmental Compliance.
------------------------
(1) To the best of the Lessee's knowledge, none of the Lessee or
the Commerce Subsidiaries, nor any of their operations, is in violation or
alleged violation of any Environmental Governmental Rule, except where the
failure so to comply would not have a Material Adverse Effect;
(2) none of the Lessee or the Commerce Subsidiaries has received
notice from any third party that (i) it has been identified as a Potentially
Responsible Party; (ii) any Hazardous Substances which any one of them has
generated, transported or disposed of has been found at any site at which any
third party has conducted or ordered any of the Lessee or the Commerce
Subsidiaries to conduct a remedial investigation, action or response action
pursuant to any Environmental Law; or (iii) it is or shall be named party to any
Proceeding arising out of any third party's incurrence of costs, expenses,
losses or damages of any kind whatsoever in connection with the release of
Hazardous Substances;
(3) to the Lessee's knowledge, (i) no portion of the Real Estate
has been used by any of the Lessee or the Commerce Subsidiaries for the
handling, processing, storage or disposal of Hazardous Substances except in
accordance with applicable Environmental Laws; and (ii) in the course of any
activities conducted by the Commerce Subsidiaries, no Hazardous Substances have
been generated or on the Real Estate or are being used except in accordance with
applicable Environmental Laws; and
(4) none of the Lessee or the Commerce Subsidiaries, or, to the
Lessee's knowledge, any of the Real
31
<PAGE>
Estate is subject to any applicable Environmental Law requiring the performance
of Hazardous Substances site assessments, or the removal or remediation of
Hazardous Substances, or the giving of notice to any governmental agency or the
recording or delivery to other Persons of an environmental disclosure document
or statement by virtue of the transactions set forth herein and contemplated
hereby, or as a condition to the effectiveness of any other transactions
contemplated hereby.
(w) Solvency. Each of the Lessee and the Commerce Subsidiaries other
--------
than Sterling Commerce Leasing, Inc., on an individual basis as of the Closing
Date, each Subsidiary which becomes a Commerce Subsidiary and a guarantor under
the Subsidiary Guaranty in accordance with the requirements of Section 5.15 or
------------
5.17, on an individual basis as of any Funding Date following the date on which
- ----
such Subsidiary becomes a Commerce Subsidiary and a guarantor under the
Subsidiary Guaranty in accordance with the requirements of Section 5.15 or 5.17,
------------ ----
and the Commerce Companies on a consolidated basis as of the Closing Date and
each Funding Date occurring thereafter, both before and after giving effect to
the transactions contemplated hereby, (a) is or are solvent, (b) has or have
assets having a fair salable value in excess of the amount required to pay its
probable liabilities as such liabilities become absolute and mature, and (c) has
or have access to adequate capital for the conduct of its or their business and
the ability to pay its or their respective debts from time to time incurred in
connection therewith as such debts mature in the reasonably foreseeable future.
(x) Rights in Respect of the Leased Property. The Lessee is not a
----------------------------------------
party to any contract or agreement to sell any interest in the Leased Property
or any part thereof, other than pursuant to the Operative Documents.
(y) Hazardous Materials - Leased Property. (i) To the best knowledge
-------------------------------------
of the Lessee, on the Closing Date, there are no Hazardous Materials present at,
upon, under or within the Leased Property or released or transported to or from
the Leased Property (except in compliance in all material respects with all
Applicable Law).
(ii) On the Closing Date, no Governmental Actions have been taken
or are in process or have been
32
<PAGE>
threatened, which could reasonably be expected to subject the Leased Property,
any Lender or the Lessor with respect to the Leased Property to any Claims or
Liens under any Environmental Law which would have a materially adverse effect
on the Lessee, the Lessor, any Lender or the Leased Property.
(iii) The Lessee has, or will obtain on or before the date required
by Applicable Law, all Environmental Permits necessary to operate the Leased
Property in accordance with Environmental Laws and is complying with and has at
all times complied with all such Environmental Permits, except to the extent the
failure to obtain such Environmental Permits or to so comply would not have a
Material Adverse Effect.
(iv) No notice, notification, demand, request for information,
citations, summons, complaint or order has been issued or filed to or with
respect to the Lessee, no penalty has been assessed on the Lessee and no
investigation or review is pending or, to its best knowledge, threatened by any
Governmental Authority or other Person in each case relating to the Leased
Property with respect to any alleged material violation or liability of the
Lessee under any Environmental Law. No material notice, notification, demand,
request for information, citations, summons, complaint or order has been issued
or filed to or with respect to any other Person, no material penalty has been
assessed on any other Person and no investigation or review is pending or, to
its best knowledge, threatened by any Governmental Authority or other Person
relating to the Leased Property with respect to any alleged material violation
or liability under any Environmental Law by any other Person.
(v) The Leased Property and each portion thereof are presently in
compliance in all material respects with all Environmental Laws, and there are
no present or, to the Lessee's best knowledge, past facts, circumstances,
activities, events, conditions or occurrences regarding the Leased Property
(including without limitation the release or presence of Hazardous Materials)
that could reasonably be anticipated to (A) form the basis of a material Claim
against the Leased Property, any Funding Party or the Lessee, (B) cause the
Leased Property to be subject to any restrictions on ownership, occupancy, use
or transferability under any Environmental Law, (C) require the filing or
recording of any notice or restriction relating to the
33
<PAGE>
presence of Hazardous Materials in the real estate records in the county or
other appropriate municipality in which the Leased Property is located, or (D)
prevent or interfere with the continued operation and maintenance of the Leased
Property as contemplated by the Operative Documents.
(z) Leased Property. The present condition and use of the Leased
---------------
Property conforms in all material respects with all conditions or requirements
of all existing permits and approvals issued with respect to the Leased
Property, and the present use of the Leased Property and the Lessee's future
intended use of the Leased Property under the Lease does not, in any material
respect, violate any Applicable Law. No material notices, complaints of orders
or violation or non-compliance have been issued or, to the Lessee's best
knowledge, threatened or contemplated by any Governmental Authority with respect
to the Leased Property or any present or intended future use thereof. All
agreements, easements and other rights, public or private, which are necessary
to permit the lawful use and operation of the Leased Property as the Lessee
intends to use the Leased Property under the Lease and which are necessary to
permit the lawful intended use and operation of all presently intended
utilities, driveways, roads and other means of egress and ingress to and from
the same have been, or to the Lessee's best knowledge will be, obtained and are
in full force and effect, and the Lessee has no knowledge of any pending
modification or cancellation of any of the same.
SECTION 4.2 Representations of the Lessor. Effective as of the date of
-----------------------------
execution hereof, as of the Closing Date and as of each Funding Date, the Lessor
represents and warrants to the Agent, the Lenders and the Lessee as follows:
(a) Securities Act. The interest being acquired or to be acquired by
--------------
the Lessor in the Leased Property is being acquired for its own account, without
any view to the distribution thereof or any interest therein, provided that the
--------
Lessor shall be entitled to assign, convey or transfer its interest in
accordance with Section 6.1.
-----------
(b) Due Organization, etc. The Lessor is a limited partnership duly
---------------------
organized and validly existing under the laws of Texas and has full power,
authority and legal right to own or to hold under lease its properties and to
carry on the
34
<PAGE>
business in which it is presently engaged and will be engaged upon consummation
of the transactions contemplated hereby or to execute, deliver and perform its
obligations under the Lease, this Master Agreement and each other Operative
Document to which it is or will be a party.
(c) Due Authorization; Enforceability, etc. This Master Agreement and
--------------------------------------
each other Operative Document to which the Lessor is or will be a party have
been or will be duly authorized, executed and delivered by or on behalf of the
Lessor and are, or upon execution and delivery will be, legal, valid and binding
obligations of the Lessor enforceable against it in accordance with their
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting creditors' rights generally
and by general equitable principles.
(d) No Conflict. The execution and delivery by the Lessor of the
-----------
Lease, this Master Agreement and each other Operative Document to which the
Lessor is or will be a party, are not or will not be, and the performance by the
Lessor of its obligations under each will not be, inconsistent with its
Partnership Agreement, do not and will not contravene any Applicable Law and do
not and will not contravene any provision of, or constitute a default under, or,
except pursuant to the Operative Documents, result in the creation of any Lien
upon any of the properties of the Lessor under, any Contractual Obligation of
Lessor, and the Lessor possesses all requisite consents and regulatory authority
to undertake and perform its obligations under the Operative Documents.
(e) Litigation. There are no pending or, to the knowledge of the
----------
Lessor, threatened actions or proceedings against the Lessor before any court,
arbitrator or administrative agency that would have a Lessor Material Adverse
Effect.
(f) Lessor Liens. No Lessor Liens (other than those created by the
------------
Operative Documents) exist on the Closing Date on the Leased Property, or any
portion thereof, and the execution, delivery and performance by the Lessor of
this Master Agreement or any other Operative Document to which it is or will be
a party will not subject the Leased Property, or any portion thereof, to any
Lessor Liens (other than those created by the Operative Documents).
35
<PAGE>
(g) Employee Benefit Plans. The Lessor is not and will not be making
----------------------
its investment hereunder, and is not performing its obligations under the
Operative Documents, with the assets of an "employee benefit plan" (as defined
in Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as
defined in Section 4975(e)(1)) of the Code.
(h) General Partner. The sole general partner of the Lessor is
---------------
Atlantic Financial Managers, Inc.
(i) Financial Information. (i) The unaudited balance sheet of the
---------------------
Lessor as of December 31, 1996 and the related statements of income, partners'
capital and cash flows for the year then ended, copies of which have been
delivered to the Agent, fairly present, in conformity with sound accounting
principles consistently applied, the financial condition of the Lessor as of
such dates and the results of operations and cash flows for such periods.
(ii) Since December 31, 1996, there has been no event, act, condition
or occurrence having a material adverse effect upon the financial
condition, operations, performance or properties of the Lessor, or the
ability of the Lessor to perform in any material respect under the
Operative Documents.
SECTION 4.3 Representations of each Lender. Effective as of the date of
------------------------------
execution hereof, as of the Closing Date and as of each Funding Date, each
Lender represents and warrants to the Lessor and to the Lessee as follows:
(a) Securities Act. The interest being acquired or to be acquired by
--------------
such Lender in the Funded Amounts is being acquired for its own account, without
any view to the distribution thereof or any interest therein, provided that such
--------
Lender shall be entitled to assign, convey or transfer its interest in
accordance with Section 6.2. Such Lender is an accredited investor as that term
-----------
is defined in Rule 501(a) under the Securities Act.
(b) Employee Benefit Plans. Such Lender is not and will not be making
----------------------
its investment hereunder, and is not performing its obligations under the
Operative Documents, with the assets of an "employee benefit plan" (as defined
in
36
<PAGE>
Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as
defined in Section 4975(e)(1)) of the Code.
SECTION 5
COVENANTS
SECTION 5.1 Legal Existence, etc. Except for any Commerce Company which
--------------------
is then a Non-Guarantor Subsidiary, which has been merged into another
Subsidiary or the Lessee in compliance with Section 5.22, or which has been
------------
disposed of in compliance with the provisions of Section 5.24, the Lessee will,
------------
and will cause each of the other Commerce Companies to, maintain its legal
existence and good standing under the laws of its jurisdiction of incorporation,
maintain its qualification to do business in each state in which the failure to
do so would have a Material Adverse Effect and maintain all of its rights and
franchises reasonably necessary to the conduct of its business.
SECTION 5.2 Use of Loan Proceeds. The Lessee shall use the proceeds of the
--------------------
Loans solely to fund the acquisition and Construction of the Leased Property,
and to pay related development, transaction and closing costs incurred by the
Lessee, and not in violation of Regulations U or X of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Parts 221 and 224.
SECTION 5.3 Financial Statements. The Lessee will furnish financial
--------------------
statements and other reports to each of the Lenders as follows:
(a) promptly upon the filing of the Lessee's annual 10-K Report with
the Securities and Exchange Commission, the consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows (the "consolidated financial statements") of the Lessee and its
Subsidiaries, as at the end of such fiscal year, in reasonable detail, each
setting forth in comparative form the corresponding figures for the preceding
year, prepared in accordance with generally accepted accounting principles
consistently applied, and accompanied by a report and unqualified opinion of a
nationally recognized firm of independent certified public accountants selected
by the Lessee and reasonably satisfactory to the Agent (except that a
37
<PAGE>
qualification for a change in accounting principles with which such firm of
independent certified public accountants concurs shall be permitted);
(b) promptly upon the filing of the Lessee's quarterly 10-Q Report
with the Securities and Exchange Commission, unaudited consolidated financial
statements of the Lessee and its Subsidiaries for which a 10-Q Report is
required, prepared in accordance with generally accepted accounting principles,
together with a certification by an Authorized Officer of the Lessee that the
information contained in such financial statements fairly presents the financial
position of the Lessee and its Subsidiaries on the date thereof (subject only to
year-end adjustments);
(c) contemporaneously with the delivery of the financial statements
referred to in subparagraphs (a) and (b) above but in no event later than
----------------- ---
ninety-five (95) days after the close of the fiscal year of the Lessee and fifty
(50) days after the end of each fiscal quarter of the Lessee, a statement,
substantially in the form of Exhibit E hereto, showing compliance by the Lessee
---------
with the covenants set forth in Sections 5.31, 5.32, 5.33 and 5.34 and setting
-------- ---- ---- ---- ----
forth in reasonable detail computations evidencing such compliance and (if
applicable) reconciliations to reflect changes in generally accepted accounting
principles since the Balance Sheet Date, certified by a Responsible Officer of
the Lessee ("Compliance Certificate");
----------------------
(d) at the time of delivery of each quarterly and annual statement
referred to in clauses (a) and (b) above, a certificate, executed by a
----------- ---
Responsible Officer, (i) stating that such officer has caused the Operative
Documents to which the Lessee is a party to be reviewed and has no knowledge of
any Potential Event of Default or Event of Default by the Lessee in the
performance or observance of any of the provisions of any Operative Document to
which the Lessee is a party, during such quarter or at the end of such year, or,
if such officer has such knowledge, specifying each Potential Event of Default
or Event of Default and the nature thereof, and (ii) setting forth (A) each
pending or threatened action or suit of which the Lessee is aware affecting the
Lessee or any of its Subsidiaries or to which the Lessee or any of its
Subsidiaries is a party, involving an uninsured claim against any such Person
which could reasonably be expected to have a
38
<PAGE>
Material Adverse Effect and which was not previously reported pursuant to
Section 5.4, or the last quarterly certificate and (B) any Commerce Subsidiary
- -----------
deactivated in accordance with Section 5.16 since the date of the last
------------
certificate delivered pursuant to this clause (d);
----------
(e) as soon as practicable but, in any event, within twenty (20)
Business Days after the issuance thereof, copies of all other financial
statements and reports as the Lessee or the Lessee shall send to its
stockholders as such, and copies of all regular and periodic reports which any
of the Commerce Companies may be required to file pursuant to federal securities
laws or regulations with the Securities and Exchange Commission or any similar
or corresponding federal or state governmental commission, department or agency
substituted therefor; and
(f) with reasonable promptness, such other data as the Lessor, the
Agent or any of the Lenders may reasonably request.
SECTION 5.4 Notice of Litigation and Judgment and Environmental Events.
----------------------------------------------------------
(a) Litigation and Judgments. The Lessee will, for itself and on
------------------------
behalf of its Subsidiaries, give notice to the Agent in writing within thirty
(30) days of becoming aware of any pending or threatened action or suit
affecting the Lessee or any of its Subsidiaries or to which the Lessee or any of
its Subsidiaries is or becomes a party involving an uninsured claim against the
Lessee or any of its Subsidiaries which seeks or demands damages in an amount
which would reasonably be expected to have a Material Adverse Effect, and
stating the nature and status of such litigation or proceedings. The Lessee
will, for itself and on behalf of its Subsidiaries, give notice to the Agent on
behalf of the Lenders, in writing, in form and detail satisfactory to the Agent,
within ten (10) days of any judgment not covered by insurance, final or
otherwise, against the Lessee or any of its Subsidiaries in an amount in excess
of $1,000,000.
(b) Environmental Events. The Lessee will promptly give notice to the
--------------------
Agent upon becoming aware of (i) of any violation of any Environmental Law that
any of the Lessee or the Commerce Subsidiaries reports in writing or is
reportable
39
<PAGE>
by such Person in writing (or for which any written report supplemental to any
oral report is made) to any federal, state or local environmental agency and
(ii) upon becoming aware thereof, of any inquiry, proceeding, investigation, or
other action, including a notice from any agency of potential environmental
liability, or any federal, state or local environmental agency or board, that
has the potential to materially affect the assets, liabilities, financial
conditions or operations of the Lessee and the Commerce Subsidiaries taken as a
whole.
(c) Notice of Default. The Lessee, on behalf of itself and its
-----------------
Subsidiaries, will promptly notify the Agent in writing upon becoming aware of
the occurrence of any Potential Event of Default or Event of Default. If any
Person shall give any notice or take any other action in respect of a claimed
default (whether or not constituting a Potential Event of Default or Event of
Default) by the Lessee or any of its Subsidiaries under any Operative Documents
to which the Lessee is a party, or any note, evidence of indebtedness, indenture
or other obligation to which or with respect to which the Lessee or any of the
Commerce Subsidiaries is a party or obligor, whether as principal, guarantor,
surety or otherwise, such Lessee or the Commerce Subsidiary, as the case may be,
shall forthwith, upon becoming aware thereof, give written notice thereof to the
Agent, describing the notice or action and the nature of the claimed default.
SECTION 5.5 Books and Records. The Lessee will, and will cause each of the
-----------------
Commerce Subsidiaries to, (a) keep true and accurate records and books of
account in which full, true and correct entries, together with all financial
statements provided for herein, shall, to the extent generally accepted
accounting principles are applicable thereto, be made in accordance with
generally accepted accounting principles consistently applied, and (b) at all
times have engaged a firm of nationally recognized independent certified public
accountants as its accountants, with no more than thirty (30) days elapsing
between the termination of any such accountants as the Lessee's accountants and
the engagement of successor accountants (from a firm of nationally recognized
certified public accountants).
SECTION 5.6 Insurance. The Lessee will, for itself and on behalf of the
---------
Commerce Subsidiaries, maintain with
40
<PAGE>
financially sound and reputable insurers insurance with respect to its
properties and business against such casualties and contingencies as shall be in
accordance with the general practices of businesses engaged in similar
activities in similar geographic areas (which may include reasonable self
insurance) and in amounts, containing such terms, in such forms and for such
periods as may be reasonably satisfactory to the Agent. Without limiting the
foregoing, the Lessee will, for itself and on behalf of the Commerce
Subsidiaries, (i) keep all of its physical property insured against fire and
extended coverage risks in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, (ii) maintain all such workers' compensation or similar insurance as may
be required by law, except in instances involving immaterial operations of any
Commerce Subsidiary and where the failure to maintain such insurance would not
have a material adverse effect on the Lessee and its Subsidiaries taken as a
whole, and (iii) maintain, in amounts and with deductibles equal to those
generally maintained by businesses engaged in similar activities in similar
geographic areas, general public liability insurance against claims for bodily
injury, death or property damage occurring on, in or about the properties of the
Lessee and the Commerce Subsidiaries (other than Non-Guarantor Subsidiaries),
and business interruption insurance. All such policies of insurance shall
provide for ten days' prior written minimum cancellation notice to the Agent. In
the event of failure to provide and maintain insurance as herein provided, the
Agent may, at its option, after giving notice to the Lessee, provide such
insurance and charge the amount thereof to the Lessee. The Lessee shall furnish
to the Agent promptly following receipt of same certificates or other evidence
satisfactory to the Agent of compliance with the foregoing insurance provision,
and shall, upon the request of the Agent, provide copies of all policies
evidencing such insurance.
SECTION 5.7 Taxes. The Lessee, for itself and on behalf of its
-----
Subsidiaries, will pay or cause to be paid all taxes or other assessments or
governmental charges or levies imposed upon it or upon its income or profits or
upon property belonging to it prior to the time when any penalties or interest
(except interest during extensions of time for filing of returns not in excess
of seven (7) months for taxes owed to United States taxing authorities and
twelve (12) months for
41
<PAGE>
taxes owed to taxing authorities located outside of the United States) accrue
with respect thereto, unless (a) in any such case, the same is being contested
in good faith by appropriate proceedings and an appropriate reserve therefor has
been established and is maintained in accordance with generally accepted
accounting principles, (b) in any such case, the Lessee or any such Subsidiary,
as the case may be, is in good faith and using due diligence and all deliberate
speed, investigating or ascertaining the extent of the liability for such unpaid
taxes, if any, and (i) no lien or notice thereof has been filed in any public
recording office with respect to such unpaid taxes, and (ii) neither the Lessee
nor any such Subsidiary has received notice of a lien or the initiation of an
enforcement proceeding with respect to such unpaid taxes or has reason to
believe that such a lien or enforcement proceeding is likely to occur or is
specifically contemplated by appropriate authorities or (c) the failure to so
pay would not have a material adverse effect on any of the Commerce Companies
individually, or on the Lessee and its Subsidiaries taken as a whole.
SECTION 5.8 Conduct of Business. The Lessee will, and will cause each of
-------------------
the Commerce Subsidiaries to, continue to engage in the businesses engaged in by
the Lessee or, as the case may be, such Commerce Subsidiaries on the Closing
Date (except in the case of dispositions permitted under Section 5.24).
SECTION 5.9 Compliance with Law, Contracts, Licenses and Permits. The
----------------------------------------------------
Lessee will, and will cause each of the Commerce Companies to, (i) comply (A)
with all laws (including Environmental Laws), rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject,
noncompliance with which could reasonably be expected to have a Material Adverse
Effect; (B) the provisions of its charter documents and by-laws, (C) all
agreements and instruments by which it or any of its properties may be bound
(including, without limitation, any of the escrow arrangements set forth on
Schedule 5.11 hereto), non-compliance with which would reasonably be expected to
- -------------
have a Material Adverse Effect; and (D) all applicable decrees, orders and
judgments, non-compliance with which would reasonably be expected to have a
Material Adverse Effect; and (ii) promptly obtain, maintain, apply for renewal,
and not allow to lapse, any authorization, consent, approval, license or order,
and accomplish any filing
42
<PAGE>
or registration with any court or judicial, administrative or governmental
authority which may be or may become necessary in order that it perform in all
material respects all of its obligations under this Agreement or the other
Operative Documents to which the Lessee is a party and in order that the same
may be valid and binding and effective in accordance with their terms and in
order that the Lenders may be able freely to exercise and enforce any and all of
their rights under or the other Operative Documents.
SECTION 5.10 Access to Properties and Books; Commercial Finance
--------------------------------------------------
Examinations; Confidentiality.
- -----------------------------
(a) Subject to all applicable federal laws and regulations relating to
the need for appropriate security clearance, the Lessee will, and will cause
each of the other Commerce Companies to, permit the Lessor, the Agent and each
of the Lenders, by its representatives and agents, to inspect any of the
properties, including corporate books, computer files and tapes and financial
records of each Commerce Company, to examine and make copies of the books of
accounts and other financial records of each Commerce Company, and to discuss
the affairs, finances and accounts of each Commerce Company with, and to be
advised as to the same by, their respective officers and by the Lessee's
independent certified public accountants (provided that all such discussions
with the Lessee's independent certified public accountants shall be made upon
notice to and with the consent of the Lessee, which consent shall not be
unreasonably withheld), at such reasonable times and intervals as the Lessor,
the Agent or any Lender may designate. The Lessor, the Lenders and the Agent
agree that they will treat in confidence all financial and proprietary
information with respect to the Commerce Companies, including financial
projections delivered pursuant hereto, and all other information obtained during
such inspection which is designated by the Lessee, either in advance (which may
be in the form of a master list of confidential information provided to the
Agent) or at such inspection as confidential and will not, without the consent
of the Lessee, disclose such information to any third party other than its
attorneys and auditors (who agree to be bound by the provisions of this Section
-------
5.10) or at any judicial or administrative proceeding and, if any representative
- ----
or agent of the Lessor, the Lenders or the Agent shall not be an employee of the
Lessor, one of the Lenders or the Agent or any
43
<PAGE>
affiliate of the Lessor, the Lenders or the Agent, such designee shall be
reputable and of recognized standing and shall agree in writing to treat in
confidence the information obtained during any such inspection and, without the
prior written consent of the Lessee, not to disclose such information to any
third party or make use of such information for personal gain. For purposes of
this Section, the Lessor, the Agent and the Lenders agree that all software
licensed by the Lessee or its Subsidiaries shall be deemed to be proprietary
information. Notwithstanding the foregoing, the Lessee hereby authorizes each of
the Lessor, the Agent and Lenders to disclose information obtained pursuant to
this Master Agreement to banks or other financial institutions who are
participants or potential participants in the Loans made and who agree to be
bound by the provisions of this Section 5.10 together with their respective
------------
attorneys and auditors (who agree to be bound by the provisions of this Section
-------
5.10) and where required or requested by governmental or regulatory authorities
- ----
or in or as part of any judicial or administrative proceeding.
(b) Subject to the confidentiality and security clearance restrictions
set forth in paragraph (a) of this Section 5.10 the Lessee will, and will cause
------------- ------------
each of its Subsidiaries to, permit the Agent, the Banks or any of their
respective representatives, upon reasonable notice to the Lessee, to conduct
commercial finance examinations from time to time at the Lessee's expense.
SECTION 5.11 Allowances. The Lessee will maintain, for itself and on
----------
behalf of each of its Subsidiaries (other than Non-Guarantor Subsidiaries) (a)
appropriate allowances for depreciation, depletion, obsolescence, amortization
and bad debts and (b) adequate accrued liabilities for taxes on income and other
liabilities as required in accordance with generally accepted accounting
principles.
SECTION 5.12 Change of Corporate Name; Maintenance of Office. The Lessee
-----------------------------------------------
shall notify the Agent within thirty days of any change in its corporate name or
in the corporate names of any of the Commerce Companies. Until the Agent
receives notice of a change (i) the Lessee will maintain its chief executive
office and the offices where all of its material records and books of account
are kept, at 300 Crescent Court, Suite 1200, Dallas, Texas 75201-7832, and (ii)
each of the
44
<PAGE>
Commerce Subsidiaries shall maintain its chief executive office (which office
shall also be the office where all of its material records and books of account
are kept), at the offices set forth in Schedule 5.6 hereto.
-------- ---
SECTION 5.13 Employee Benefit Plan. The Lessee will (i) promptly upon
---------------------
filing the same with the Department of Labor or Internal Revenue Service,
furnish to the Agent a copy of the most recent actuarial statement required to
be submitted under (S)103(d) of ERISA and Annual Report, Form 5500, with all
required attachments, in respect of each Guaranteed Pension Plan and (ii)
promptly upon receipt or dispatch, furnish to the Agent any notice, report or
demand sent or received in respect of a Guaranteed Pension Plan under (S)(S)302,
4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a
Multiemployer Plan, under (S)(S)4041A, 4202, 4219, 4242, or 4245 of ERISA.
SECTION 5.14 Corporate Existence; Maintenance of Properties.
----------------------------------------------
(a) Corporate Existence. Except for any Commerce Subsidiary which is then a
-------------------
Non-Guarantor Subsidiary, which has been merged into the Lessee or a Commerce
Subsidiary in compliance with Section 5.23, or which has been disposed of in
------------
compliance with the provisions of Section 5.28, the Lessee will, and will cause
------------
each of the Commerce Subsidiaries to, maintain its legal existence and good
standing under the laws of its jurisdiction of incorporation, maintain its
qualification to do business in each state in which the failure to do so would
have a Material Adverse Effect.
(b) Maintenance of Properties. The Lessee will, and will cause each of the
-------------------------
Commerce Subsidiaries to, (i) cause all of its properties necessary or
appropriate in the conduct of its business to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment,
unless failure to do so would not have a Material Adverse Effect, (ii) cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Lessee or such Commerce
Subsidiary may be necessary so that the business carried on in connection
therewith may be advantageously conducted at all times, unless failure to do so
would not have a Material Adverse Effect, (iii) comply in all material respects
with all federal, state and local laws, regulations, rules and
45
<PAGE>
ordinances applicable to it or its properties, noncompliance with which would
reasonably be expected to materially adversely affect its financial condition,
assets or operations, provided that it shall not be a breach of this Section
-------- -------
5.14(b) if the Lessee or any Commerce Subsidiary fails to comply with such laws,
- -------
rules and regulations during any period in which the Lessee or such Commerce
Subsidiary is in good faith diligently contesting the validity thereof by
appropriate proceedings, and (iv) continue to engage primarily in the businesses
now conducted by it (except in the case of dispositions permitted under Section
-------
5.24) and in related businesses; provided that nothing in this Section 5.14(b)
- ---- ------------- ---------------
shall prevent any of the Lessee or the Commerce Subsidiaries from discontinuing
the operation and maintenance of any of its properties if such discontinuance
is, in the judgment of the Lessee or such Commerce Subsidiary, desirable in the
conduct of its business and that do not in the aggregate materially adversely
affect the business of the Lessee and the Commerce Subsidiaries on a
consolidated basis.
SECTION 5.15 Activation of Non-Guarantor Subsidiaries. On any date upon
----------------------------------------
which (a) any one or more of the Non-Guarantor Subsidiaries (i) commences to
engage in business of any kind or nature or (ii) acquires or otherwise receives
assets as a result of which such Non-Guarantor Subsidiary's net worth equals or
exceeds (A) $1,000,000, or (B) in the case of Sterling Commerce Leasing, Inc.,
in excess of $5,000,000 for any period of thirty-five (35) or more consecutive
days, or (b) the Non-Guarantor Subsidiaries, taken as a whole, have or receive
assets as a result of which such Non-Guarantor Subsidiaries' net worth, in the
aggregate, equals or exceeds $6,000,000, the Lessee shall provide written notice
thereof to the Agent, and such Subsidiary or Subsidiaries shall, in accordance
with the provisions of this Section 5.15, be activated and shall be required to
------------
become a Commerce Subsidiary and a guarantor under the Subsidiary Guaranty,
except that in the case of those Non-Guarantor Subsidiaries whose net worth is
less than $1,000,000 individually (or, in the case of Sterling Commerce Leasing,
Inc., less than $5,000,000 for any period of thirty-five (35) or less
consecutive days) but in the aggregate is greater than $6,000,000, only such of
the Non-Guarantor Subsidiaries as shall reduce the aggregate net worth of all
remaining Non-Guarantor Subsidiaries to an amount less than $6,000,000 shall be
required to become guarantors under the Subsidiary
46
<PAGE>
Guaranty. As soon as practicable following receipt of any such notice, the Agent
shall provide such activated Subsidiary or Subsidiaries with forms of the
Operative Documents (including the Subsidiary Guaranty) to which such activated
Subsidiary is or such activated Subsidiaries are to be a party, or appropriate
amendments thereto, as well as forms of acceptable legal opinions and other
documents necessary to demonstrate the due authorization, execution and delivery
by such activated Subsidiary or Subsidiaries of such Operative Documents or
amendments thereto and the enforceability thereof. The Lessee shall cause such
activated Non-Guarantor Subsidiary or Subsidiaries, as the case may be, to
deliver executed copies of such Operative Documents, amendments, legal opinions
and other documents to the Agent within fifteen (15) days following its or their
receipt of the forms thereof from the Agent. Upon the later to occur of (i) the
date of activation of such Non-Guarantor Subsidiary or (ii) the delivery of such
executed counterparts of such Operative Documents, amendments, legal opinions
and other documents to the Agent, (A) each such Subsidiary shall cease to be a
Non-Guarantor Subsidiary for purposes of this Master Agreement and shall become
a Commerce Subsidiary and a guarantor under the Subsidiary Guaranty hereunder
and shall comply with and be bound by all of the terms and conditions of the
Operative Documents (including the Subsidiary Guaranty) to which it becomes a
party, and (B) the Lessee shall cause such activated Subsidiary or Subsidiaries
to take all actions which it or they would have been required to make or take
had it not been a Non-Guarantor Subsidiary or Non-Guarantor Subsidiaries on the
Closing Date including, without limitation, making all representations and
warranties as a Commerce Subsidiary under each of the Operative Documents as of
the date such representations and warranties are made.
SECTION 5.16 Deactivation of Commerce Subsidiaries. Effective immediately
-------------------------------------
upon any Commerce Subsidiary ceasing to do business and ceasing to have a net
worth of $1,000,000 or more (or, in the case of Sterling Commerce Leasing, Inc.,
ceasing to have a net worth of $5,000,000 or more after any period of thirty-
five (35) or more consecutive days), such Commerce Subsidiary shall become a
Non-Guarantor Subsidiary for purposes of this Master Agreement, provided, that
--------
such Commerce Subsidiary may thereafter be activated again pursuant to Section
-------
5.15 hereto. The Lessee shall notify the Agent of
- ----
47
<PAGE>
the deactivation of any Commerce Subsidiary in accordance with Section 5.3(d).
--------------
SECTION 5.17 New Subsidiaries. Contemporaneously with the creation or
----------------
acquisition (in accordance with the provisions of Section 5.23) of any new
------------
domestic Subsidiary of the Lessee, other than a Non-Guarantor Subsidiary, the
Lessee will notify the Agent of such Subsidiary's name and the address of its
chief executive offices. No later than fifteen (15) Business Days following the
later to occur of (a) the creation of such new Subsidiary or (b) receipt by the
Lessee or such new Subsidiary from the Agent of forms of the Operative Documents
(including the Subsidiary Guaranty) to which such new domestic Subsidiary is to
be a party, or appropriate amendments thereto, as well as forms of acceptable
legal opinions and other documents necessary to demonstrate the due
authorization, execution and delivery by such new domestic Subsidiary of such
Operative Documents or amendments thereto, the Lessee shall cause such new
domestic Subsidiary to deliver executed counterparts of such Operative
Documents, amendments, legal opinions and other documents to the Agent. Upon
delivery of such executed counterparts of such Operative Documents, amendments,
legal opinions and other documents to the Agent, (y) such new domestic
Subsidiary shall become a Commerce Subsidiary and a party to the Subsidiary
Guaranty and shall comply with and be bound by all of the terms and conditions
of the Operative Documents as a Commerce Subsidiary thereunder, and (z) the
Lessee shall cause such new domestic Subsidiary to take all actions, which it
would have been required to make or take had it been a Commerce Subsidiary and a
party to the Subsidiary Guaranty on the Closing Date including, without
limitation, making all representations and warranties as a Commerce Subsidiary
under each of the Operative Documents to which it is a party as of the date such
representations and warranties are made.
SECTION 5.18 Further Assurances. The Lessee shall, and shall cause all
------------------
applicable Commerce Subsidiaries to, at any time or from time to time, execute
and deliver such further instruments and take such further action as may
reasonably be requested by the Agent, in each case further and more perfectly to
effect the purposes of this Master Agreement and the other Operative Documents.
48
<PAGE>
SECTION 5.19 Indebtedness. The Lessee will not, and will not permit any
------------
of its Subsidiaries to, incur or permit to exist or remain outstanding any
Indebtedness to any Person, provided, however, that the Lessee and its
-------- -------
Subsidiaries may incur or permit to exist or remain outstanding:
(a) Indebtedness of the Commerce Companies arising under the Operative
Documents or under the Credit Agreement and the other Loan Documents (as defined
in the Credit Agreement);
(b) Indebtedness in respect of capitalized leases and the Lease (but
not in respect of any other operating lease which is a synthetic lease referred
to in clause (c) of the definition of the term "Indebtedness") and the other
Operative Documents;
(c) Indebtedness in respect of taxes, assessments, governmental
charges, and claims for labor, materials, services or supplies and liabilities
under employee benefit plans, including pension plans, to the extent that
payment thereof is not yet due, or to the extent that the amount, applicability,
or validity thereof is actively contested by the Lessee or its Subsidiaries in
good faith by appropriate proceedings and with respect to which, to the extent
required by generally accepted accounting principles, reserves have been set
aside on the books of the Lessee or its Subsidiaries (segregated to the extent
required by generally accepted accounting principles and practices) reasonably
deemed by the Lessee or its Subsidiaries to be adequate with respect thereto;
(d) Indebtedness in respect of the Guaranty and the Subsidiary
Guaranty;
(e) Intercompany Indebtedness;
(f) Indebtedness of the Lessee and its Subsidiaries under (i) the Tax
Allocation Agreement with respect to obligations incurred by the Lessee or any
of its Subsidiaries while the Lessee was a Subsidiary of Sterling Software,
Inc.; (ii) the Indemnification Agreement and (iii) performance bonds and other
similar indebtedness incurred in the ordinary course of business;
49
<PAGE>
(g) Indebtedness up to $5,000,000 in the aggregate in respect of any
conditional sales agreements, security agreements, equipment leases intended as
security or otherwise in the nature of title retention agreements or security
agreements or other similar title retention agreements (not otherwise expressly
permitted by any of the other terms of this Section 5.19) entered into in the
------------
ordinary course of business on, prior to or after the date of this Agreement in
order to secure the payment of the purchase price of any equipment purchased,
leased or otherwise acquired by any Commerce Company for use in the ordinary
course of its business; provided, however, that (A) no such agreement or lease
-------- -------
shall extend to or cover any property other than the property, the payment of
the purchase price of which is secured by such agreement or lease and (B) the
aggregate principal amount of all of the Indebtedness secured by any such
agreement or lease shall not exceed one hundred percent (100%) of the purchase
price or fair market value at the time of purchase or lease, whichever shall be
lower, of the property covered by such agreement or lease;
(h) up to $10,000,000 in the aggregate of Foreign Obligations
(including the Indebtedness of Subsidiaries of the Lessee in respect of which
such Foreign Obligations have been incurred);
(i) Indebtedness and other liabilities incurred in the ordinary course
of business not incurred through the borrowing of money or the obtaining of
credit except for credit on an open account basis customarily extended to the
Lessee or its Subsidiaries in connection with normal purchases of goods and
services;
(j) Indebtedness consisting of contingent liabilities to which
reference is or should be made by a footnote to the consolidated balance sheets
of the Lessee and its Subsidiaries in accordance with generally accepted
accounting principles to the extent that such contingent liabilities are not
quantifiable and were not voluntarily incurred;
(k) Indebtedness not otherwise permitted by subparagraph (m) of this
----------------
Section 5.19 and not to exceed $2,000,000 in aggregate amount consisting of
- ------------
Investments in
50
<PAGE>
any Person which is in a line of business the same or similar to that of the
Lessee or its Subsidiaries;
(l) Indebtedness existing on the date hereof and set forth on
Schedule 9.1;
- ------------
(m) Indebtedness constituting the purchase price of acquisitions
permitted by Section 5.23(a)(i), to the extent that such Indebtedness is payable
------------------
to any Person to whom the purchase price or any portion thereof is, at the time
of reference thereto, scheduled to become due and owing at a future date;
(n) So long as no Potential Event of Default or Event of Default has
occurred and is continuing or would occur after giving effect thereto,
Indebtedness incurred by the Lessee or any of its Subsidiaries in connection
with the purchase by any of the Commerce Accounts Receivable Agreement Parties
of Commerce Accounts Receivable in an aggregate amount outstanding at any time
not to exceed, when combined with sales permitted by Sections 5.24(b) and
----------------
(d)(ii), twenty percent (20%) of Total Revenues for all Commerce Accounts
- -------
Receivable Agreements; and
(o) Indebtedness to one or more of the Banks (as defined in the Credit
Agreement) in an aggregate amount not to exceed $10,000,000 in respect of one or
more letters of credit issued for the account of the Lessee or any of the
Commerce Subsidiaries.
Guaranties by the Lessee of the obligations of its Subsidiaries shall not
constitute Indebtedness to the extent that such obligations do not constitute
Indebtedness or are permitted in accordance with the above limitations.
SECTION 5.20 Security Interests and Liens. The Lessee will not, and will
----------------------------
not permit any of its Subsidiaries to, (i) create or permit to exist any
mortgage, pledge, security interest or other lien or encumbrance on any of its
property or assets of any character whether now owned or hereafter acquired, or
upon the income or profits therefrom; (ii) transfer any of such property or
assets or the income or profits therefrom for the purpose of subjecting the same
to the payment of Indebtedness or performance of any other obligation in
priority to payment of its general creditors;
51
<PAGE>
(iii) acquire, or agree or have an option to acquire, any property or assets
upon conditional sale or other title retention or purchase money security
agreement, device or arrangement; (iv) suffer to exist for a period of more than
thirty (30) days after the same shall have been incurred any Indebtedness or
claim or demand against it that if unpaid might by law or upon bankruptcy or
insolvency, or otherwise, be given any priority whatsoever over its general
creditors; or (v) sell, assign, pledge or otherwise transfer any accounts,
contract rights, general intangibles or chattel paper with or without recourse,
except for the existence or creation of:
(a) liens under the Operative Documents and existing liens, but, with
respect to the Commerce Companies, only to the extent described on
Schedule 9.2(a) hereto;
- ---------------
(b) liens securing Indebtedness permitted by Section 5.19(n);
---------------
(c) liens arising from attachments or similar proceedings, pending
litigation, judgments or taxes or assessments in any such event whose validity
or amount is being contested in good faith by appropriate proceedings
satisfactory to the Agent and for which appropriate reserves have been
established and are maintained in accordance with generally accepted accounting
principles, or taxes and assessments which are not due and payable and which do
not have a material adverse effect on any of the Commerce Companies
individually, or against the Lessee and its Subsidiaries taken as a whole;
(d) liens of carriers, warehousemen, mechanics and materialmen and
other like liens;
(e) pledges or deposits made in connection with workmen's
compensation, unemployment or other insurance, old age pensions, or other Social
Security benefits, and good faith deposits in connection with tenders, contracts
or leases to which it is a party or deposits to secure, or in lieu of, surety,
penalty or appeal bonds, performance bonds and other similar obligations;
(f) such minor defects, irregularities, encumbrances, easements,
rights of way, and clouds on title as
52
<PAGE>
normally exist with respect to similar properties which do not materially impair
the property affected thereby for the purpose for which it was acquired;
(g) landlords' liens arising by statute or common law in respect of
real estate leases;
(h) liens in respect of Indebtedness described in Section 5.19(g),
---------------
provided, in the case of Indebtedness described in Section 5.19(g), that no such
- -------- ---------------
lien or security interest shall extend to or cover any property other than the
property the purchase of which is financed with such Indebtedness and the
aggregate principal amount of the Indebtedness secured by such liens, security
interests or mortgages shall not exceed the original fair market value of such
property;
(i) existing liens being assumed pursuant to or in connection with
acquisitions permitted pursuant to Section 5.23 and which do not extend to any
------------
assets other than those specifically acquired and which were not created in
anticipation of such acquisition;
(j) liens on the authorized shares of the capital stock of the Lessee
held by the Lessee as treasury stock; and
(k) (i) rights of lessors under capitalized leases and synthetic
leases permitted under Section 5.19(b), (ii) rights of the parties under the
---------------
Operative Documents and (iii) rights of first refusal of Lincoln Property
Company under the Development Agreement to (A) purchase the Leased Property in
the event that such Leased Property is sold prior to the construction of any
improvements thereon and (B) manage the construction of any improvements
thereon; and
(l) such other liens as are expressly permitted or otherwise consented
to by the Lenders in writing.
SECTION 5.21 Restrictions on Investments. The Lessee may make Investments
---------------------------
of any kind or nature, except as otherwise limited by this Agreement, and
provided that any Investment which is in the nature of a joint venture or
- --------
general partnership or similar investment vehicle shall be made with respect to
a Person in a similar line of business
53
<PAGE>
(or natural extensions thereof) as the Lessee and its Subsidiaries.
SECTION 5.22 Merger and Consolidation. The Lessee will not at any time,
------------------------
and will not cause or permit any of its Subsidiaries at any time to, become a
party to any merger or consolidation other than a disposition permitted pursuant
to Section 5.24, except that a Subsidiary (including a Subsidiary acquired or
------------
created pursuant to permitted acquisitions under Section 5.23) may be merged or
------------
consolidated with the Lessee if the Lessee shall be the continuing or surviving
corporation or with any one or more other Subsidiaries if the successor formed
or resulting from such consolidation or merger shall be a wholly-owned
Subsidiary (except, in the case of a Subsidiary not organized under the laws of
the District of Columbia or any state of the United States, for such third-party
ownership as may be permitted pursuant to Section 5.27) and, in each case, if no
------------
Potential Event of Default or Event of Default shall have occurred and be
continuing or would occur upon consummation of such merger or consolidation.
SECTION 5.23 Acquisitions.
------------
(a) The Lessee will not at any time, and will not cause or permit any
of its Subsidiaries at any time to, agree to affect any asset acquisition (other
than an acquisition of inventory in the ordinary course of business or which is
a capital expenditure) or stock acquisition representing a controlling interest
in the issuer thereof, without the prior consent of the Lenders, which consent,
so long as no Potential Event of Default or Event of Default has occurred and is
continuing or would occur after giving effect thereto, shall not be unreasonably
withheld, except that, if no Potential Event of Default or Event of Default has
occurred and is continuing, or would occur immediately after giving affect
thereto:
(i) subject to the requirements of clause (b) hereof, the Lessee
----------
may effect friendly acquisitions if the total consideration for all
such acquisitions, including the sum of the cash, stock (as valued for
the purposes of such acquisitions) and other consideration comprising
the deferred (whether represented by promissory notes or
54
<PAGE>
otherwise) portion of the purchase price, does not exceed, in the
aggregate for all such acquisitions made, (A) as long as the sum of
Cash and Cash Equivalents plus Marketable Securities held by the
Lessee equals or exceeds $150,000,000, an amount equal to fifty
percent (50%) of the sum of Cash and Cash Equivalents plus Marketable
Securities held by the Lessee, and (B) in the event that the sum of
Cash and Cash Equivalents plus Marketable Securities held by the
Lessee is less than $150,000,000, $75,000,000, in each case plus such
----
additional amounts to which the Agent and the Lenders may from time to
time agree, with such agreement not to be unreasonably withheld,
provided, however, that in the event that the sum of Cash and Cash
-------- -------
Equivalents plus Marketable Securities is less than $150,000,000, the
amount of cash or other deferred (whether represented by promissory
notes or otherwise) portion of the purchase price shall not exceed, in
the aggregate for all such acquisitions made, $25,000,000; and
(ii) the Lessee or any of its Subsidiaries may acquire Commerce
Accounts Receivable to the extent required or permitted by any of the
Commerce Accounts Receivable Agreements (to the extent Indebtedness in
respect thereof is permitted by Section 5.19).
------------
(b) All businesses acquired or commenced through any acquisition
referred to in paragraph (a) of this Section 5.23 shall be in the same or
------------- ------------
similar lines of business (or natural extensions thereof) as current lines of
business of the Lessee and its Subsidiaries (provided that such businesses may
--------
include Subsidiaries or divisions which are not in such same lines of business,
to the extent that the preponderance of the assets acquired in connection with
such acquired business relate to, and the preponderance of the revenues
historically generated by such acquired business relate to, the same or similar
lines of business as currently engaged in by the Lessee and its Subsidiaries or
natural extensions thereof). No later than fifteen (15) Business Days following
the later to occur of (a) any such Permitted Acquisition or (b) the receipt by
the Lessee or any newly acquired domestic Subsidiary from the Agent of forms of
the Operative Documents
55
<PAGE>
(including the Subsidiary Guaranty) to which such newly acquired domestic
Subsidiary is to be a party, or appropriate amendments thereto, together with
forms of acceptable legal opinions and other documents necessary to demonstrate
the due authorization, execution and delivery by such newly acquired domestic
Subsidiary of such Operative Documents or amendments thereto, such newly
acquired domestic Subsidiary shall deliver executed counterparts of such
Operative Documents, amendment, legal opinions and other documents to the Agent
in accordance with the requirements of Section 5.17. Upon such delivery of such
------------
executed counterparts of such Operative Documents, amendments, legal opinions
and other documents to the Agent, such newly acquired domestic Subsidiary shall
be a party to the Subsidiary Guaranty and a Commerce Subsidiary and shall comply
with and be bound by all of the terms and conditions of the Operative Documents
to which it is a party. To the extent that any such acquisition alters in any
material respect the accuracy or completeness of any of Schedules 5.2, 5.6, 5.11
------------- --- ----
(but only to the extent that the Lessee would not be required to report the
litigation to be included in Schedule 5.11 within 30 days pursuant to Section
------------- -------
5.4), 5.13 (but only to the extent that any alteration to Schedule 5.13 results
- -- ---- -------------
solely from the failure of the newly acquired domestic Subsidiary to file state
or local tax returns, or the failure to pay state or local taxes, and in no
event arises from any failure to file any federal tax returns or pay any federal
taxes, or from the existence of any tax lien on any assets of such newly
acquired domestic Subsidiary), or Schedule 5.20, the Lessee shall deliver to the
-------------
Agent within 30 days of such acquisition, revised schedules reflecting changes
resulting from such acquisition, and during the 30 day period immediately
following such acquisition, the inaccuracy or incompleteness of the
representations and warranties relating to such schedules resulting from such
acquisition shall not constitute a Potential Event of Default or Event of
Default, provided, that the Lessee shall, during such 30 day period, take any
--------
and all necessary action to bring such newly acquired domestic Subsidiary into
full compliance with each representation and warranty set forth in Section
-------
4.1(a), and provided, further, that no change resulting from any acquisition
- ------ -------- -------
would have a material adverse affect on the Commerce Companies taken as a whole.
SECTION 5.24 Asset Dispositions. The Lessee will not at any time, and will
------------------
not cause or permit any of its
56
<PAGE>
Subsidiaries at any time to, become a party to any disposition of assets without
the consent of the Lenders, which consent, so long as no Potential Event of
Default or Event of Default shall have occurred and is continuing or would occur
after giving effect thereto, shall not be unreasonably withheld, except for:
(a) Dispositions of inventory and obsolescent equipment and fixtures in the
ordinary course of business;
(b) Sales or other dispositions of Subsidiaries, divisions or product
lines, provided, that no Potential Event of Default or Event of Default shall
--------
have occurred and be continuing or would occur after giving effect thereto, and
provided, further that the aggregate annual revenues attributable to any such
- -------- -------
Subsidiary, division or line (measured by the twelve full consecutive calendar
months most recently past as of the date of any such disposition) disposed of
shall not, when combined with other dispositions pursuant to paragraph (d)
-------------
below, exceed twenty percent (20%) of Total Revenues for such immediately
preceding twelve (12) months;
(c) Sales or other dispositions of Investments which are Approved
Investments;
(d) (i) Sales of Commerce Accounts Receivable pursuant to the Commerce
Accounts Receivable Agreements and (ii) sales under these paragraphs (d)(i) and
-----------------
(ii), in the aggregate when combined with sales or other dispositions of
- ----
Subsidiaries, divisions or product lines permitted by paragraph (b) above, do
-------------
not exceed twenty percent (20%) of Total Revenues; and
(e) Sales or other dispositions of assets by the Lessee to any of the
Commerce Subsidiaries or by any of the Commerce Subsidiaries to the Lessee or
any other Commerce Subsidiary.
SECTION 5.25 Change of Location. The Lessee will not at any time, and will
------------------
not cause or permit any of the Commerce Subsidiaries at any time to, (a) change
the location of its chief executive offices, or (b) change the locations where
its records or books of account are kept without (in each case) giving at least
10 days' prior written notice to the Agent specifying the new location of such
office or location.
57
<PAGE>
SECTION 5.26 Employee Benefit Plans. Neither the Lessee nor any ERISA
----------------------
Affiliate will:
(a) engage in any "prohibited transaction" within the meaning of
(S)406 of ERISA or (S)4975 of the Code which could result in a material
liability for the Commerce Companies, which is not covered by a prohibited
transaction exemption granted by the Department of Labor; or
(b) (i) permit any Guaranteed Pension Plan to incur an "accumulated
funding deficiency" (as such term is defined in (S)302 of ERISA), in an amount
which would reasonably be expected to have a material adverse effect on the
Lessee and its Subsidiaries taken as a whole, whether or not such deficiency is
or may be waived; or (ii) in the case of any Person acquired pursuant to the
terms hereof, with a Guaranteed Pension Plan subject to an "accumulated funding
deficiency" in an amount which would reasonably be expected to have a material
adverse effect on the Lessee and its Subsidiaries taken as a whole, permit such
"accumulated funding deficiency" to exist for a period of more than twelve
months from the date of such acquisition, provided, that the Lessee shall, in
--------
any such case, deliver to the Agent (A) a certificate evidencing the amount of
such "accumulated funding deficiency", (B) evidence satisfactory to the Agent
that, on a pro-forma basis, the Lessee will continue to be in compliance with
each of the covenants set forth in Sections 5.31, 5.32, 5.33 and 5.34 hereof
------------- ---- ---- ----
after such acquisition and that no Potential Event of Default or Event of
Default shall occur after giving effect to such acquisition, and (C) evidence
satisfactory to the Agent that such "accumulated funding deficiency" could be
cured through merger with another Guaranteed Pension Plan or otherwise; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a manner which, could result
in the imposition, pursuant to (S)302(f) or (S)4068 of ERISA, of a lien or
encumbrance on the assets of the Lessee in an amount which would reasonably be
expected to have a material adverse effect on the Lessee and its Subsidiaries
taken as a whole;
(d) amend any Guaranteed Pension Plan in circumstances requiring the
posting of security pursuant to (S)307 of ERISA or (S)401(a)(29) of the Code in
an amount which
58
<PAGE>
would reasonably be expected to have a material adverse effect on the Lessee and
its Subsidiaries taken as a whole; or
(e) permit or take any action which would result in the aggregate
benefit liabilities (within the meaning of (S)4001 of ERISA) of all Guaranteed
Pension Plans exceeding the value of the aggregate assets of such Plans by a
material amount, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities, provided,
--------
that if merger of the affected Guaranteed Pension Plan would be permitted under
(S)414(l) of ERISA and would, if consummated, result in such Guaranteed Pension
Plan's aggregate assets equaling or exceeding in value such Guaranteed Pension
Plan's benefit liabilities, such Guaranteed Pension Plan's benefit liabilities
may exceed in value its aggregate assets for a period not to exceed twelve
months.
The Lessee will (i) promptly upon filing the same with the Department of
Labor or Internal Revenue Service and, upon request of the Agent, furnish to the
Agent a copy of the most recent actuarial statement required to be submitted
under (S)103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Guaranteed Pension Plan and (ii) promptly upon
receipt or dispatch, furnish to the Agent any notice, report or demand sent or
received in respect of a Guaranteed Pension Plan under (S)(S)302, 4041, 4042,
4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan,
under (S)(S)4041A, 4202, 4219, 4242, or 4245 of ERISA.
SECTION 5.27 Additional Shares. The Lessee will not at any time cause or
-----------------
permit any of its Subsidiaries at any time, to issue any shares of any class of
capital stock of any Subsidiary without the prior written consent of the
Required Lenders, other than shares issued in connection with acquisitions
permitted by Section 5.23 or issued to the Lessee or to any directly or
------------
indirectly wholly-owned Subsidiary of the Lessee; provided, however, that the
-------- -------
shares of any such Subsidiary not organized under the laws of the District of
Columbia or any of the states of the United States may be issued to third
parties (i) which, in the aggregate own not more than two percent of the shares
of the capital stock of such Subsidiary, or (ii) to the extent mandated by the
laws of the jurisdiction in which such Subsidiary is organized.
59
<PAGE>
SECTION 5.28 Negative Pledges. Except as provided for herein and in the
----------------
Credit Agreement, the Lessee will not at any time, and will not cause or permit
any of the Commerce Subsidiaries at any time to, enter into any agreement or
covenant with any Person prohibiting the Lessee or such Commerce Subsidiary from
mortgaging, pledging, or subjecting to, or suffering to arise, any lien, charge
or any other encumbrance of, or against, any of its assets, tangible or
intangible, real or personal.
SECTION 5.29 Compliance with Environmental Laws. The Lessee will not, and
----------------------------------
will not permit any of the Commerce Subsidiaries to, (i) use any of the Real
Estate or any portion thereof for the handling, processing, storage or disposal
of Hazardous Substances, (ii) cause to be located on any of the Real Estate any
underground tank or other underground storage receptacle for Hazardous
Substances, (iii) generate any Hazardous Substances on any of the Real Estate,
(iv) conduct any activity at any Real Estate or use any Real Estate in any
manner so as to cause a release (i.e. releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping) or threatened release of Hazardous Substances on, upon or
into the Real Estate or (v) otherwise conduct any activity at any Real Estate or
use any Real Estate in any manner that would violate any Environmental Law or
bring such Real Estate in violation of any Environmental Law.
SECTION 5.30 Distributions. The Lessee will not, and will not permit any
-------------
of its Subsidiaries to, make any Distributions, other than Distributions by any
Commerce Subsidiary to the Lessee or by any Subsidiary of a Commerce Subsidiary
to such Commerce Subsidiary; provided, however, that, so long as no Potential
-------- -------
Event of Default or Event of Default shall have occurred and be continuing, or
would occur as a result thereof (a) the Lessee may repurchase shares of its own
issued and outstanding capital stock; (b) the Lessee may redeem Rights in
accordance with the provisions of the Rights Agreement; and (c) the Lessee may
make Distributions in respect of its preferred stock in an aggregate amount not
to exceed $5,000,000 in any fiscal year of the Lessee.
SECTION 5.31 Profitability. The Lessee shall not cause or permit (a)
-------------
Consolidated Earnings Before Interest and Taxes for any fiscal quarter of the
Lessee to be less than
60
<PAGE>
$1.00 or (b) Consolidated Net Income for any two consecutive fiscal quarters of
the Lessee to be less than $1.00.
SECTION 5.32 EBIT to Interest Charges. The Lessee shall not cause or
------------------------
permit the ratio of Consolidated Earnings Before Interest and Taxes to Interest
Charges for any fiscal quarter of the Lessee to be less than 3.0:1.0.
SECTION 5.33 Current Ratio. The Lessee shall not cause or permit the
-------------
ratio of Consolidated Current Assets to the sum of Consolidated Current
Liabilities plus Revolving Loans outstanding at the end of any fiscal quarter of
the Lessee to be less than 1.5:1.0.
SECTION 5.34 Total Debt To Consolidated Earnings Before Interest, Taxes,
-----------------------------------------------------------
Depreciation and Amortization. The Lessee shall not permit the ratio of Total
- -----------------------------
Debt as of the end of any fiscal quarter to Consolidated Earnings Before
Interest, Taxes, Depreciation and Amortization for the four consecutive fiscal
quarter period ending on such fiscal quarter to be greater than 1.0:1.0.
SECTION 5.35 Further Assurances. Upon the written request of the Lessor
------------------
or the Agent, the Lessee, at its own cost and expense, will cause all financing
statements (including precautionary financing statements), fixture filings and
other similar documents, to be recorded or filed at such places and times in
such manner, as may be reasonably necessary to preserve, protect and perfect the
interest of the Lessor, the Agent and the Lenders in the related Leased Property
as contemplated by the Operative Documents.
SECTION 5.36 Additional Required Appraisals. If, as a result of any
------------------------------
change in Applicable Law after the date hereof, an appraisal of all or any of
the Leased Property is required during the Lease Term under Applicable Law with
respect to any Funding Party's interest therein, such Funding Party's Funded
Amount with respect thereto or the Operative Documents, then the Lessee shall
pay the reasonable cost of such appraisal.
SECTION 5.37 Lessor's Covenants. The Lessor covenants and agrees that,
------------------
unless the Lessee, the Agent and the Lenders shall have otherwise consented in
writing:
61
<PAGE>
(a) it shall not amend its Partnership Agreement, except to admit limited
partners in connection with transactions similar to the Transactions;
(b) it shall not incur any indebtedness or other monetary obligation or
liability, other than (i) non-recourse indebtedness incurred in connection
with the Transactions or similar transactions and (ii) operating expenses
incurred in the ordinary course of business that are not delinquent;
(c) the proceeds of the Loans received from the Lenders will be used by the
Lessor solely to acquire the Leased Property and to pay the Lessee for
certain closing and transaction costs associated therewith and for the
costs of Construction. No portion of the proceeds of the Loans will be
used by the Lessor (i) in connection with, whether directly or indirectly,
any tender offer for, or other acquisition of, stock of any corporation
with a view towards obtaining control of such other corporation, (ii)
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any Margin Stock, (iii) for any
purpose in violation of any Applicable Law or (iv) in violation of the
Operative Documents;
(d) it shall not engage in any business or activity, or invest in any Person,
except for activities similar to its activities conducted on the date
hereof, the Transactions and lease transactions similar to the
Transactions;
(e) it will maintain tangible net worth in an amount no less than the sum of
(i) $100,000 plus (ii) 3% of its total assets (calculated assuming no
----
reduction in the value of any leased property from its original cost to
the Lessor);
(f) the Lessor's Invested Amount will be at least 3.5% of the aggregate amount
funded by the Funding Parties pursuant hereto;
(g) it will deliver to the Agent, the Lessee and the Lenders, as soon as
available and in any event
62
<PAGE>
within 90 days after the end of each fiscal year, a balance sheet of the
Lessor as of the end of such fiscal year and the related statements of
income, partners' capital and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal
year, together with copies of its tax returns, all certified by an officer
of the general partner (and if the Lessor ever prepares audited financial
statements, it shall deliver copies thereof to the Agent, the Lessee and
the Lenders);
(h) it will permit the Agent, the Lenders and their respective representatives
to examine, and make copies form, the Lessor's books and records, and to
visit the offices and properties of the Lessor for the purpose of examining
such materials, and to discuss the Lessor's performance hereunder with any
of its, or its general partner's, officers and employees;
(i) it shall not consent to or suffer or permit any Lien against the Leased
Property or sell or otherwise dispose of the Leased Property, other than as
expressly contemplated pursuant to the Operative Documents;
(j) it shall not consent to or suffer or permit the creation of any easement or
other restriction against the Leased Property other than as permitted
pursuant to Article VI of the Lease.
(k) it shall maintain its legal existence and good standing under the laws of
Texas and each other state in which the failure to do so would have a
Lessor Material Adverse Effect;
(l) it shall comply with all Applicable Laws the non-compliance with which
would reasonably be expected to have a Lessor Material Adverse Effect;
63
<PAGE>
(m) it shall notify the Agent and the Lessee of the institution of any
litigation against it which would reasonably be expected to have a
Lessor Material Adverse Effect; and
(n) it shall pay any and all taxes owed by it prior to such taxes becoming
delinquent, unless it is contesting such taxes in good faith by
appropriate proceedings and maintaining reserves with respect thereto
in accordance with generally accepted accounting principles.
SECTION 6
TRANSFERS BY LESSOR AND LENDERS
SECTION 6.1 Lessor Transfers. The Lessor shall not assign, convey or
----------------
otherwise transfer all or any portion of its right, title or interest in, to or
under the Leased Property (except pursuant to Article V of the Lease) or any of
---------
the Operative Documents without the prior written consent of the Agent, the
Lenders and the Lessee.
SECTION 6.2 Lender Transfers. Each Lender may assign to one or more
----------------
Eligible Assignees all or a portion of its Commitment and Loans, provided that
--------
(i) the Lessee shall have given its prior written consent to such assignment,
which consent will not be unreasonably withheld, (ii) each such assignment shall
be of a constant, and not a varying, percentage of both the assigning Lender's A
Loans and B Loans and (iii) such assignment shall be in an amount of at least
$5,000,000. Assignments shall be evidenced by an assignment and assumption
agreement in substantially the form set forth as Exhibit I attached hereto.
---------
SECTION 7
INDEMNIFICATION; LESSOR DEFAULT
SECTION 7.1 General Indemnification. The Lessee agrees, whether or not
-----------------------
any of the transactions contemplated hereby shall be consummated, to indemnify,
protect, defend, save and hold harmless each Indemnitee, on an After-Tax Basis,
from and against, any and all Claims that may be imposed on, incurred by or
asserted, or threatened to be asserted, against such
64
<PAGE>
Indemnitee (whether because of action or omission by such Indemnitee or
otherwise), whether or not such Indemnitee shall also be indemnified as to any
such Claim by any other Person and whether or not such Claim arises or accrues
prior to the Closing Date or after the Lease Termination Date, in any way
relating to or arising out of:
(a) any of the Operative Documents or any of the transactions
contemplated thereby, and any amendment, modification or waiver in respect
thereof; or
(b) the Land, the Building or any part thereof or interest therein;
(c) the purchase, design, construction, preparation, installation,
inspection, delivery, non-delivery, acceptance, rejection, ownership,
management, possession, operation, rental, lease, sublease, repossession,
maintenance, repair, alteration, modification, addition, substitution,
storage, transfer of title, redelivery, use, financing, refinancing,
disposition, operation, condition, sale (including, without limitation, any
sale pursuant to the Lease), return or other disposition of all or any part
of any interest in the Leased Property or the imposition of any Lien (or
incurring of any liability to refund or pay over any amount as a result of
any Lien) thereon, including, without limitation: (1) Claims or penalties
arising from any violation or alleged violation of law or in tort (strict
liability or otherwise), (2) latent or other defects, whether or not
discoverable, (3) any Claim based upon a violation or alleged violation of
the terms of any restriction, easement, condition or covenant or other
matter affecting title to the Leased Property or any part thereof, (4) the
making of any Alterations in violation of any standards imposed by any
insurance policies required to be maintained by the Lessee pursuant to the
Lease which are in effect at any time with respect to the Leased Property
or any part thereof, (5) any Claim for patent, trademark or copyright
infringement, (6) Claims arising from any public improvements with respect
to the Leased Property resulting in any charge or special assessments being
levied against the Leased Property or any Claim for utility "tap-in" fees,
and (7) Claims for personal injury or real or personal property damage
occurring, or
65
<PAGE>
allegedly occurring, on the Land, Building or Leased Property;
(d) the offer, issuance, sale or delivery of the Notes by the Lessor;
(e) the breach or alleged breach by the Lessee of any representation
or warranty made by it or deemed made by it in any Operative Document or
any certificate required to be delivered by any Operative Document;
(f) the retaining or employment of any broker, finder or financial
advisor by the Lessee to act on its behalf in connection with this Master
Agreement;
(g) the existence of any Lien on or with respect to the Leased
Property, the Construction, any Basic Rent or Supplemental Rent, title
thereto, or any interest therein, including any Liens which arise out of
the possession, use, occupancy, construction, repair or rebuilding of the
Leased Property or by reason of labor or materials furnished or claimed to
have been furnished to the Lessee, or any of its contractors or agents or
by reason of the financing of any personalty or equipment purchased or
leased by the Lessee or Alterations constructed by the Lessee, except in
all cases the Liens listed as item (a) in the definition of Permitted
Liens;
(h) the transactions contemplated hereby or by any other Operative
Document, in respect of the application of Parts 4 and 5 of Subtitle B of
Title I of ERISA and any prohibited transaction described in Section
4975(c) of the Code; or
(i) any act or omission by the Lessee under any Operative Document,
and any breach of any requirement, condition, restriction or limitation in
the Deed;
provided, however, the Lessee shall not be required to indemnify any Indemnitee
- -------- -------
under this Section 7.1 for any of the following: (1) any Claim to the extent
-----------
that such Claim results from the willful misconduct or gross negligence of such
Indemnitee,(2) any Claim to the extent resulting from or arising out of any
representation or warranty by any Indemnitee in the Operative Documents being
incorrect, (3) any
66
<PAGE>
Claim to the extent resulting from or arising out of any fraud of such
Indemnitee, (4) any Claim to the extent resulting from or arising out of the
breach of any provision of the Operative Documents by such Indemnitee (other
than the failure of Lessor to make payments in respect of the Loans), (5)
subject to Sections 7.2 and 7.4, any Claim to the extent resulting from or
------------ ---
arising out of the violation by such Indemnitee of any law, rule or regulation
binding upon an Indemnitee, unless, in the case of clauses (2), (4) and (5),
----------- --- ---
such inaccuracy, breach or violation was caused by, or resulted from, an
inaccurate representation or warranty, action, failure to act or breach of the
Operative Documents on the part of the Lessee or its Subsidiaries (including,
without limitation, in the Lessee's capacity as agent for the Lessor), or (6)
any Claim resulting from Lessor Liens which such Indemnitee is responsible for
discharging under the Operative Documents. It is expressly understood and
agreed that the indemnity provided for herein shall survive the expiration or
termination of, and shall be separate and independent from any other remedy
under this Master Agreement, the Lease or any other Operative Document.
SECTION 7.2 Environmental Indemnity. In addition to and without limitation
-----------------------
of Section 7.1, the Lessee agrees to indemnify, hold harmless and defend each
-----------
Indemnitee from and against any and all claims (including without limitation
third party claims for personal injury or real or personal property damage),
losses (including but not limited to any loss of value of the Leased Property),
damages, liabilities, fines, penalties, charges, suits, settlements, demands,
administrative and judicial proceedings (including informal proceedings) and
orders, judgments, remedial action, requirements, enforcement actions of any
kind, and all reasonable costs and expenses actually incurred in connection
therewith (including, but not limited to, reasonable attorneys' and/or
paralegals' fees and expenses), including, but not limited to, all costs
incurred in connection with any investigation or monitoring of site conditions
or any cleanup, remedial, removal or restoration work by any federal, state or
local government agency, arising directly or indirectly, in whole or in part,
out of
(i) the presence on or under the Land of any Hazardous Materials, or
any releases or discharges of any Hazardous Materials on, under, from or
onto the Land,
67
<PAGE>
(ii) any activity, including, without limitation, construction,
carried on or undertaken on or off the Land, and whether by the Lessee or
any predecessor in title or any employees, agents, contractors or
subcontractors of the Lessee or any predecessor in title, or any other
Person, in connection with the handling, treatment, removal, storage,
decontamination, clean-up, transport or disposal of any Hazardous Materials
that at any time are located or present on or under or that at any time
migrate, flow, percolate, diffuse or in any way move onto or under the
Land,
(iii) loss of or damage to any property or the environment (including,
without limitation, clean-up costs, response costs, remediation and removal
costs, cost of corrective action, costs of financial assurance, fines and
penalties and natural resource damages), or death or injury to any Person,
and all expenses associated with the protection of wildlife, aquatic
species, vegetation, flora and fauna, and any mitigative action required by
or under Environmental Laws, in each case to the extent related to the
Leased Property,
(iv) any claim concerning the Leased Property's lack of compliance
with Environmental Laws, or any act or omission causing an environmental
condition on or with respect to the Leased Property that requires
remediation or would allow any governmental agency to record a lien or
encumbrance on the land records, or
(v) any residual contamination on or under the Land, or affecting any
natural resources on the Land, and to any contamination of any property or
natural resources arising in connection with the generation, use, handling,
storage, transport or disposal of any such Hazardous Materials on or from
the Leased Property; in each case irrespective of whether any of such
activities were or will be undertaken in accordance with applicable laws,
regulations, codes and ordinances;
in any case with respect to the matters described in the foregoing clauses (i)
-----------
through (v) that arise or occur
---
(w) prior to or during the Lease Term,
68
<PAGE>
(x) at any time during which the Lessee or any Affiliate thereof owns
any interest in or otherwise occupies or possesses the Leased Property or
any portion thereof,
(y) during any period after and during the continuance of any Event
of Default or
(z) during any period of one year following the date an Indemnitee
takes possession of the Leased Property;
provided, however, the Lessee shall not be required to indemnify any Indemnitee
- -------- -------
under this Section 7.2 for any Claim to the extent that such Claim results from
-----------
the willful misconduct or gross negligence of such Indemnitee. It is expressly
understood and agreed that the indemnity provided for herein shall survive the
expiration or termination of and shall be separate and independent from any
other remedy under this Master Agreement, the Lease or any other Operative
Document.
SECTION 7.3 Proceedings in Respect of Claims. With respect to any amount
--------------------------------
that the Lessee is requested by an Indemnitee to pay by reason of Section 7.1 or
-----------
7.2, such Indemnitee shall, if so requested by the Lessee and prior to any
- ---
payment, submit such additional information to the Lessee as the Lessee may
reasonably request and which is in the possession of such Indemnitee to
substantiate properly the requested payment. In case any action, suit or
proceeding shall be brought against any Indemnitee, such Indemnitee shall
promptly notify the Lessee in writing of the commencement thereof, and the
Lessee shall be entitled, at its expense, to participate in, and, to the extent
that the Lessee desires to, assume and control the defense thereof with counsel
reasonably satisfactory to such Indemnitee; provided, however, that such
-------- -------
Indemnitee may pursue a motion to dismiss such Indemnitee from such action, suit
or proceeding with counsel of such Indemnitee's choice at the Lessee's
reasonable expense; and provided further that the Lessee may assume and control
-------- -------
the defense of such proceeding only if the Lessee shall have acknowledged in
writing its obligations to fully indemnify such Indemnitee in respect of such
action, suit or proceeding, the Lessee shall pay all reasonable costs and
expenses related to such action, suit or proceeding as and when incurred and the
Lessee shall keep such Indemnitee fully apprised of the
69
<PAGE>
status of such action suit or proceeding and shall provide such Indemnitee with
all information with respect to such action, suit or proceeding as such
Indemnitee shall reasonably request; and, provided further, that the Lessee
-------- -------
shall not be entitled to assume and control the defense of any such action, suit
or proceeding (but may participate in a reasonable manner at its own expense and
with its own counsel) if and to the extent that, (A) in the reasonable opinion
of such Indemnitee, (x) such action, suit or proceeding involves any possibility
of imposition of criminal liability or any material risk of civil liability on
such Indemnitee in excess of $10,000,000 or (y) such action, suit or proceeding
will involve a material risk of the sale, forfeiture or loss of, or the creation
of any Lien (other than a Permitted Lien) on the Leased Property or any part
thereof unless the Lessee shall have posted a bond or other security reasonably
satisfactory to the relevant Indemnitees in respect to such risk or (z) the
control of such action, suit or proceeding would involve an actual or potential
conflict of interest, (B) such proceeding involves Claims not fully indemnified
by the Lessee which the Lessee and the Indemnitee have been unable to sever from
the indemnified claim(s), or (C) an Event of Default has occurred and is
continuing. The Indemnitee may participate in a reasonable manner at its own
expense and with its own counsel in any proceeding conducted by the Lessee in
accordance with the foregoing.
If the Lessee fails to fulfill the conditions to the Lessee's assuming the
defense of any claim on or prior to the date that is 15 days prior to the date
that an answer or response is required, the Indemnitee may undertake such
defense, at the Lessee's reasonable expense. The Lessee shall not enter into
any settlement or other compromise with respect to any Claim which is entitled
to be indemnified under Section 7.1 or 7.2 without the prior written consent of
----------- ---
the related Indemnitee, which consent shall not be unreasonably withheld. Unless
an Event of Default shall have occurred and be continuing, no Indemnitee shall
enter into any settlement or other compromise with respect to any claim which is
entitled to be indemnified under Section 7.1 or 7.2 without the prior written
----------- ---
consent of the Lessee, which consent shall not be unreasonably withheld, unless
such Indemnitee waives its right to be indemnified under Section 7.1 or 7.2 with
----------- ---
respect to such Claim.
70
<PAGE>
Upon payment in full of any Claim by the Lessee pursuant to Section 7.1 or
-----------
7.2 to or on behalf of an Indemnitee, the Lessee, without any further action,
- ---
shall be subrogated to any and all claims that such Indemnitee may have relating
thereto (other than claims in respect of insurance policies maintained by such
Indemnitee at its own expense and for which the Lessee is not obligated to
reimburse such Indemnitee), and such Indemnitee shall execute such instruments
of assignment and conveyance, evidence of claims and payment and such other
documents, instruments and agreements as may be reasonably necessary to preserve
any such claims and otherwise cooperate with the Lessee and give such further
assurances as are reasonably necessary or advisable to enable the Lessee
vigorously to pursue such claims.
Any amount payable to an Indemnitee pursuant to Section 7.1 or 7.2 shall be
----------- ---
paid to such Indemnitee promptly upon, but in no event later than 30 days after,
receipt of a written demand therefor from such Indemnitee, accompanied by a
written statement describing in reasonable detail the basis for such indemnity
and the computation of the amount so payable.
If for any reason the indemnification provided for in Section 7.1 or 7.2 is
----------- ---
unavailable to an Indemnitee or is insufficient to hold an Indemnitee harmless,
then the Lessee agrees to contribute to the amount paid or payable by such
Indemnitee as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative benefits received
by such Indemnitee on the one hand and by the Lessee on the other hand but also
the relative fault of such Indemnitee as well as any other relevant equitable
considerations. It is expressly understood and agreed that the right to
contribution provided for herein shall survive the expiration or termination of
and shall be separate and independent from any other remedy under this Master
Agreement, the Lease or any other Operative Document.
SECTION 7.4 General Tax Indemnity. (a) Tax Indemnity. Except as otherwise
--------------------- -------------
provided in this Section 7.4, the Lessee shall pay on an After-Tax Basis, and on
-----------
written demand shall indemnify and hold each Tax Indemnitee harmless from and
against, any and all fees (including, without limitation, documentation,
recording, license and registration fees), taxes (including, without limitation,
income, gross receipts, sales, rental, use, turnover, value-added, property,
excise
71
<PAGE>
and stamp taxes), levies, imposts, duties, charges, assessments or withholdings
of any nature whatsoever, together with any penalties, fines or interest thereon
or additions thereto (any of the foregoing being referred to herein as "Taxes"
-----
and individually as a "Tax" (for the purposes of this Section 7.4, the
--- -----------
definition of "Taxes" includes amounts imposed on, incurred by, or asserted
against each Tax Indemnitee as the result of any prohibited transaction, within
the meaning of Section 406 or 407 of ERISA or Section 4975(c) of the Code,
arising out of the transactions contemplated hereby or by any other Operative
Document)) imposed on or with respect to any Tax Indemnitee, the Lessee, the
Leased Property or any portion thereof or the Land, or any sublessee or user
thereof, by the United States or by any state or local government or other
taxing authority in the United States in connection with or in any way relating
to (i) the acquisition, financing, mortgaging, construction, preparation,
installation, inspection, delivery, non-delivery, acceptance, rejection,
purchase, ownership, possession, rental, lease, sublease, maintenance, repair,
storage, transfer of title, redelivery, use, operation, condition, sale, return
or other application or disposition of all or any part of the Leased Property or
the imposition of any Lien (or incurrence of any liability to refund or pay over
any amount as a result of any Lien) thereon, (ii) Basic Rent or Supplemental
Rent or the receipts or earnings arising from or received with respect to the
Leased Property or any part thereof, or any interest therein or any applications
or dispositions thereof, (iii) any other amount paid or payable pursuant to the
Notes, or any other Operative Documents, (iv) the Leased Property, the Land or
any part thereof or any interest therein (including, without limitation, all
assessments payable in respect thereof, including, without limitation, all
assessments noted on the related Title Policy), (v) all or any of the Operative
Documents, any other documents contemplated thereby, any amendments and
supplements thereto, and (vi) otherwise with respect to or in connection with
the transactions contemplated by the Operative Documents.
(b) Exclusions from General Tax Indemnity. Section 7.4(a) shall not
------------------------------------- --------------
apply to:
(i) Taxes on, based on, or measured by or with respect to net
income of the Lessor and the Lenders (including, without limitation,
minimum Taxes, capital
72
<PAGE>
gains Taxes, Taxes on or measured by items of tax preference or alternative
minimum Taxes) other than (A) any such Taxes that are, or are in the nature
of, sales, use, license, rental or property Taxes, and (B) withholding
Taxes imposed by the United States or any state in which the Leased
Property is located (i) on payments with respect to the Notes, to the
extent imposed by reason of a change in Applicable Law occurring after the
date on which the holder of such Note became the holder of such Note or
(ii) on Rent, to the extent the net payment of Rent after deduction of such
withholding Taxes would be less than amounts currently payable with respect
to the Funded Amounts;
(ii) Taxes on, based on, or in the nature of or measured by Taxes
on doing business, business privilege, franchise, capital, capital stock,
net worth, or mercantile license or similar taxes other than (A) any
increase in such Taxes imposed on such Tax Indemnitee by any state in which
the Leased Property is located, net of any decrease in such taxes realized
by such Tax Indemnitee, to the extent that such tax increase would not have
occurred if on each Funding Date the Lessor and the Lenders had advanced
funds to the Lessee in the form of loans secured by the Leased Property in
an amount equal to the Funded Amounts funded on such Funding Date, with
debt service for such loans equal to the Basic Rent payable on each Payment
Date and a principal balance at the maturity of such loans in a total
amount equal to the Funded Amounts at the end of the Lease Term, or (B) any
Taxes that are or are in the nature of sales, use, rental, license or
property Taxes;
(iii) Taxes that are based on, or measured by, the fees or other
compensation received by a Person acting as Agent (in its individual
capacities) or any Affiliate of any thereof for acting as trustee under the
Loan Agreement;
(iv) Taxes that result from any act, event or omission, or are
attributable to any period of time, that occurs after the earliest of (A)
the expiration of the Lease Term and, if the Leased Property is required to
be returned to the Lessor in accordance with the Lease, such return and (B)
the discharge in full of the Lessee's
73
<PAGE>
obligations to pay the Lease Balance, or any amount determined by reference
thereto, with respect to the Leased Property and all other amounts due
under the Lease, unless such Taxes relate to acts, events or matters
occurring prior to the earliest of such times or are imposed on or with
respect to any payments due under the Operative Documents after such
expiration or discharge;
(v) Taxes imposed on a Tax Indemnitee that result from any
voluntary sale, assignment, transfer or other disposition by such Tax
Indemnitee or any related Tax Indemnitee of any interest in the Leased
Property or any part thereof, or any interest therein or any interest or
obligation arising under the Operative Documents, including the Notes, or
from any sale, assignment, transfer or other disposition of any interest in
such Tax Indemnitee or any related Tax Indemnitee, it being understood that
each of the following shall not be considered a voluntary sale: (A) any
substitution, replacement or removal of any of the property by the Lessee,
(B) any sale or transfer resulting from the exercise by the Lessee of any
termination option, any purchase option or sale option, (C) any sale or
transfer while an Event of Default shall have occurred and be continuing
under the Lease, and (D) any sale or transfer resulting from the Lessor's
exercise of remedies under the Lease;
(vi) any Tax which is being contested in accordance with the
provisions of Section 7.4(c), during the pendency of such contest;
--------------
(vii) any Tax that is imposed on a Tax Indemnitee as a result of
such Tax Indemnitee's gross negligence or willful misconduct (other than
gross negligence or willful misconduct imputed to such Tax Indemnitee
solely by reason of its interest in any Leased Property);
(viii) any Tax that results from a Tax Indemnitee engaging, with
respect to the Leased Property, in transactions other than those permitted
by the Operative Documents;
74
<PAGE>
(ix) to the extent any interest, penalties or additions to tax result
in whole or in part from the failure of a Tax Indemnitee to file a return
that it is required to file in a proper and timely manner, unless such
failure (A) results from the transactions contemplated by the Operative
Documents in circumstances where the Lessee did not give timely notice to
such Tax Indemnitee (and such Tax Indemnitee otherwise had no actual
knowledge) of such filing requirement that would have permitted a proper
and timely filing of such return, or (B) results from the failure of the
Lessee to supply information necessary for the proper and timely filing of
such return that was not in the possession of such Tax Indemnitee; and
(x) any Tax that results from the breach by the Lessor of its
representation and warranty made in Section 4.2(b) or the breach of any
--------------
Lender of its representation and warranty made in Section 4.3(b).
--------------
(c) Contests. If any claim shall be made against any Tax Indemnitee or if
--------
any proceeding shall be commenced against any Tax Indemnitee (including a
written notice of such proceeding) for any Taxes as to which the Lessee may have
an indemnity obligation pursuant to Section 7.4, or if any Tax Indemnitee shall
-----------
determine that any Taxes as to which the Lessee may have an indemnity obligation
pursuant to Section 7.4 may be payable, such Tax Indemnitee shall promptly
-----------
notify the Lessee. The Lessee shall be entitled, at its expense, to participate
in, and, to the extent that the Lessee desire to, assume and control the defense
thereof; provided, however, that the Lessee shall have acknowledged in writing
-------- -------
its obligation to fully indemnify such Tax Indemnitee in respect of such action,
suit or proceeding if the contest is unsuccessful; and, provided further, that
-------- -------
the Lessee shall not be entitled to assume and control the defense of any such
action, suit or proceeding (but the Tax Indemnitee shall then contest, at the
sole reasonable cost and expense of the Lessee, on behalf of the Lessee with
representatives reasonably satisfactory to the Lessee) if and to the extent
that, (A) in the reasonable opinion of such Tax Indemnitee, such action, suit or
proceeding (x) involves any meaningful risk of imposition of criminal liability
or, except in the case of the Lessor, any material risk of civil liability on
such Tax Indemnitee in excess of $10,000,000 or (y) will
75
<PAGE>
involve a material risk of the sale, forfeiture or loss of, or the creation of
any Lien (other than a Permitted Lien) on the Leased Property or any part
thereof unless the Lessee shall have posted a bond or other security reasonably
satisfactory to the relevant Tax Indemnitees in respect to such risk, (B) such
proceeding involves Claims not fully indemnified by the Lessee which the Lessee
and the Tax Indemnitee have been unable to sever from the indemnified claim(s),
(C) an Event of Default has occurred and is continuing, (D) such action, suit or
proceeding involves matters which extend beyond or are unrelated to the
Transaction and if determined adversely could be materially detrimental to the
interests of such Tax Indemnitee notwithstanding indemnification by the Lessee
or (E) such action, suit or proceeding involves any federal or any state income
tax liability of the Tax Indemnitee not indemnified by the Lessee. With respect
to any contests controlled by a Tax Indemnitee, (i) if such contest relates to
the federal or any state income tax liability of such Tax Indemnitee, such Tax
Indemnitee shall be required to conduct such contest only if the Lessee shall
have provided to such Tax Indemnitee an opinion of independent tax counsel
selected by the Tax Indemnitee and reasonably satisfactory to the Lessee stating
that a reasonable basis exists to contest such claim or (ii) in the case of an
appeal of an adverse determination of any contest relating to any Taxes, an
opinion of such counsel to the effect that such appeal is more likely than not
to be successful, provided, however, such Tax Indemnitee shall in no event be
-------- -------
required to appeal an adverse determination to the United States Supreme Court.
The Tax Indemnitee may participate in a reasonable manner at its own expense and
with its own counsel in any proceeding conducted by the Lessee in accordance
with the foregoing.
Each Tax Indemnitee shall at the Lessee's reasonable expense supply the
Lessee with such information and documents in such Tax Indemnitee's possession
reasonably requested by the Lessee as are reasonably necessary or advisable for
the Lessee to participate in any action, suit or proceeding to the extent
permitted by this Section 7.4. Unless an Event of Default shall have occurred
-----------
and be continuing, no Tax Indemnitee shall enter into any settlement or other
compromise with respect to any Claim which is entitled to be indemnified under
this Section 7.4 without the prior written consent of the Lessee, which consent
-----------
shall not be unreasonably withheld,
76
<PAGE>
unless such Tax Indemnitee waives its right to be indemnified under this Section
-------
7.4 with respect to such Claim.
- ---
Notwithstanding anything contained herein to the contrary, (a) a Tax
Indemnitee will not be required to contest (and the Lessee shall not be
permitted to contest) a claim with respect to the imposition of any Tax if such
Tax Indemnitee shall waive its right to indemnification under this Section 7.4
-----------
with respect to such claim (and any related claim with respect to other taxable
years the contest of which is precluded as a result of such waiver) and (b) no
Tax Indemnitee shall be required to contest any claim if the subject matter
thereof shall be of a continuing nature and shall have previously been decided
adversely, unless the Lessee shall have provided to such Tax Indemnitee an
opinion of independent tax counsel selected by the Tax Indemnitee and reasonably
satisfactory to the Lessee stating that a reasonable basis exists to contest
such claim in light of such adverse decision. Each Tax Indemnitee and the Lessee
shall consult in good faith with each other regarding the conduct of such
contest controlled by either.
(d) Reimbursement for Tax Savings. If (x) a Tax Indemnitee shall
-----------------------------
obtain a credit or refund of any Taxes paid by the Lessee pursuant to this
Section 7.4 or (y) by reason of the incurrence or imposition of any Tax for
- -----------
which a Tax Indemnitee is indemnified hereunder or any payment made to or for
the account of such Tax Indemnitee by the Lessee pursuant to this Section 7.4,
-----------
such Tax Indemnitee at any time realizes a reduction in any Taxes for which the
Lessee is not required to indemnify such Tax Indemnitee pursuant to this Section
-------
7.4, which reduction in Taxes was not taken into account in computing such
- ---
payment by the Lessee to or for the account of such Tax Indemnitee, then such
Tax Indemnitee shall promptly pay to the Lessee (xx) the amount of such credit
or refund, together with the amount of any interest received by such Tax
Indemnitee on account of such credit or refund or (yy) an amount equal to such
reduction in Taxes, as the case may be; provided that so long as an Event of
--------
Default shall have occurred and be continuing, such payment shall be made to the
Agent and applied to the amounts owing by the Lessee under the Operative
Documents pursuant to Section 3.5 of the Loan Agreement, and, provided, further,
-------- -------
that the amount payable to the Lessee by any Tax Indemnitee pursuant to this
Section 7.4(d) shall not at any time exceed the aggregate amount of
- --------------
77
<PAGE>
all indemnity payments made by the Lessee under this Section 7.4 to such Tax
-----------
Indemnitee with respect to the Taxes which gave rise to the credit or refund or
with respect to the Tax which gave rise to the reduction in Taxes less the
amount of all prior payments made to the Lessee by such Tax Indemnitee under
this Section 7.4(d). Each Tax Indemnitee agrees to act in good faith to claim
--------------
such refunds and other available Tax benefits, and take such other actions as
may be reasonable to minimize any payment due from the Lessee pursuant to this
Section 7.4. The disallowance or reduction of any credit, refund or other tax
- -----------
savings with respect to which a Tax Indemnitee has made a payment to the Lessee
under this Section 7.4(d) shall be treated as a Tax for which the Lessee are
--------------
obligated to indemnify such Tax Indemnitee hereunder without regard to Section
-------
7.4(b) hereof.
- ------
(e) Payments. Any Tax indemnifiable under this Section 7.4 shall be paid
-------- -----------
directly when due to the applicable taxing authority if direct payment is
practicable and permitted. If direct payment to the applicable taxing authority
is not permitted or is otherwise not made, any amount payable to a Tax
Indemnitee pursuant to Section 7.4 shall be paid within thirty (30) days after
-----------
receipt of a written demand therefor from such Tax Indemnitee accompanied by a
written statement describing in reasonable detail the amount so payable, but not
before the date that the relevant Taxes are due. Any payments made pursuant to
Section 7.4 shall be made to the Tax Indemnitee entitled thereto or the Lessee,
- -----------
as the case may be, in immediately available funds at such bank or to such
account as specified by the payee in written directions to the payor, or, if no
such direction shall have been given, by check of the payor payable to the order
of the payee by certified mail, postage prepaid at its address as set forth in
this Master Agreement. Upon the request of any Tax Indemnitee with respect to a
Tax that the Lessee are required to pay, the Lessee shall furnish to such Tax
Indemnitee the original or a certified copy of a receipt for the Lessee's
payment of such Tax or such other evidence of payment as is reasonably
acceptable to such Tax Indemnitee.
(f) Reports. If the Lessee knows of any report, return or statement
-------
required to be filed with respect to any Taxes that are subject to
indemnification under this Section 7.4, the Lessee shall, if the Lessee is
-----------
permitted by Applicable Law, timely file such report, return or statement
78
<PAGE>
(and, to the extent permitted by law, show ownership of the Leased Property in
the Lessee); provided, however, that if the Lessee is not permitted by
-------- -------
Applicable Law or does not have access to the information required to file any
such report, return or statement, the Lessee will promptly so notify the
appropriate Tax Indemnitee, in which case Tax Indemnitee will file such report.
In any case in which the Tax Indemnitee will file any such report, return or
statement, the Lessee shall, upon written request of such Tax Indemnitee,
prepare such report, return or statement for filing by such Tax Indemnitee or,
if such Tax Indemnitee so requests, provide such Tax Indemnitee with such
information as is reasonably available to the Lessee.
(g) Verification. At the Lessee's request, the amount of any indemnity
------------
payment by the Lessee or any payment by a Tax Indemnitee to the Lessee pursuant
to this Section 7.4 shall be verified and certified by an independent public
-----------
accounting firm selected by the Lessee and reasonably acceptable to the Tax
Indemnitee. Unless such verification shall disclose an error in the Lessee's
favor of 5% or more, the costs of such verification shall be borne by the
Lessee. In no event shall the Lessee have the right to review the Tax
Indemnitee's tax returns or receive any other confidential information from the
Tax Indemnitee in connection with such verification. The Tax Indemnitee agrees
to cooperate with the independent public accounting firm performing the
verification and to supply such firm with all information reasonably necessary
to permit it to accomplish such verification, provided that the information
--------
provided to such firm by such Tax Indemnitee shall be for its confidential use.
The parties agree that the sole responsibility of the independent public
accounting firm shall be to verify the amount of a payment pursuant to this
Master Agreement and that matters of interpretation of this Master Agreement are
not within the scope of the independent accounting firm's responsibilities.
SECTION 7.5 Increased Costs, etc.
---------------------
(a) Additional Costs, Etc. If any present or future Applicable Law, which
---------------------
expression, as used herein, includes statutes, rules and regulations thereunder
and interpretations thereof by any competent court or by any governmental or
other regulatory body or official charged with the administration or the
interpretation thereof and requests, directives,
79
<PAGE>
instructions and notices at any time or from time to time hereafter made upon or
otherwise issued to the Lessor, any Lender or the Agent by any central bank or
other fiscal, monetary or other authority (whether or not having the force of
law), shall in the case of any Funded Amount or any Commitment:
(i) subject the Lessor, any Lender or the Agent to any tax, levy, impost,
duty, charge, fee, deduction or withholding of any nature with respect
to this Master Agreement, the other Operative Documents, such Funding
Party's Commitment or the Funded Amounts (other than taxes based upon
or measured by the income or profits of the Lessor, such Lender or the
Agent), or
(ii) materially change the basis of taxation (except for changes in taxes
on income or profits) of payments to the Lessor or any Lender of the
principal of or the interest on any Funded Amount or any other amounts
payable to the Lessor, any Lender or the Agent under this Master
Agreement or any of the other Operative Documents, or
(iii) impose or increase or render applicable (other than to the extent
specifically provided for elsewhere in this Master Agreement) any
special deposit, reserve, assessment, liquidity, capital adequacy or
other similar requirements (whether or not having the force of law)
against assets held by, or deposits in or for the account of, or loans
or letters of credit by, or commitments of, any office of the Lessor
or any Lender, or
(iv) impose on the Lessor, any Lender or the Agent any other conditions or
requirements with respect to this Master Agreement, the other
Operative Documents, the Funded Amounts, any such Funding Party's
Commitment, or any class of commitments,
80
<PAGE>
letters of credit or loans of which any of the Funded Amounts, or such
Funding Party's Commitment forms a part, and the result of any of the
foregoing is
(1) to increase the cost to the Lessor or any Lender of making,
funding, issuing, renewing, extending or maintaining any of the
Funded Amounts or such Funding Party's Commitment, or
(2) to reduce the amount of principal, interest, fees, or other
amount payable to the Lessor, such Lender or the Agent hereunder
on account of such Funding Party's Commitment or any of the
Funded Amounts, or
(3) to require the Lessor, such Lender or the Agent to make any
payment or to forego any interest, principal, Yield or other sum
payable hereunder, the amount of which payment or foregone
interest or Yield, principal or other sum is calculated by
reference to the gross amount of any sum receivable or deemed
received by the Lessor, such Lender or the Agent from the Lessee
hereunder,
then, and in each such case, the Lessee will, within five (5) days following
demand made by the Lessor, such Lender (through the Agent) or, as the case may
be, the Agent at any time and from time to time and as often as the occasion
therefor may arise, pay to the Lessor or the Agent for the respective accounts
of the Lenders or for the Agent's own account such additional amounts as will be
sufficient to compensate the Lessor, such Lender or the Agent for such
additional cost, reduction, payment or foregone interest, principal or other
sum. Each Funding Party or, as the case may be, the Agent shall give the Lessee
prompt notice of any event causing such additional cost, reduction, payment or
foregone interest, Yield or other sum; provided, however, that if such Funding
-------- -------
Party or, as the case may be, the Agent shall fail to notify
81
<PAGE>
the Lessee or make demand within one hundred twenty (120) days following the
occurrence of any such event, such Funding Party or, as the case may be, the
Agent shall not be entitled to claim any additional amounts pursuant to this
Section 7.5(a) for any period ending on a date which is prior to one hundred
- --------------
twenty (120) days before such notification or demand.
(b) Indemnification for Losses. Without prejudice to any of the foregoing
--------------------------
provisions of this Master Agreement, the Lessee will, on demand by any Lender
(through the Agent) or the Lessor, at any time and from time to time and as
often as the occasion therefor may arise, indemnify such Lender or the Lessor
against any losses, costs or expenses which such Lender or the Lessor may at any
time or from time to time sustain or incur with respect to any Funded Amount
bearing interest or Yield calculated by reference to the Eurodollar Rate as a
consequence of
(i) the failure by the Lessee to draw any Funded Amount on the date
of borrowing designated by the Lessee,
(ii) the failure by the Lessee to pay, punctually on the due date
thereof, any amount payable by the Lessee under the Operative
Documents,
(iii) the accelerated payment of any of the Lessee's obligations under
the Operative Documents as a result of an Event of Default, or
(iv) any voluntary or mandatory prepayment made with respect to any
Funded Amount other than on the last day of a Rent Period.
Such losses, costs or expenses, including interest or fees
payable by such Funding Party to lenders of funds obtained by it in order to
maintain any such Funded Amount, will be determined by such Funding Party on a
commercially reasonable basis and will include in the case of any such
accelerated payment, but not be limited to, the amount by which:
82
<PAGE>
(1) the total amount of interest which would have accrued on the
principal so repaid or prepaid during the period (in this Section
-------
7.5(b) called the "Reemployment Period") beginning on the date of
------ -------------------
such repayment or prepayment and ending on the last day of the
Rent Period relating to the principal so repaid or prepaid, such
total amount of interest to be calculated on the basis of the
Eurodollar Rate applicable to such Rent Period:
exceeds
(2) the total amount of interest which would accrue and become
payable to such Funding Party during the Reemployment Period on
the principal repaid or prepaid if such Funding Party, following
such repayment or prepayment, were to use its best efforts to
reemploy as soon as possible the principal so repaid or prepaid
by (A) placing with a prime lender in the Eurodollar Interbank
Market selected by such Funding Party deposits of dollars in
amounts equal (as nearly as may be) to the principal so repaid or
prepaid and for the number of days equal (as nearly as may be) to
the Reemployment Period, or (as such Funding Party may elect) (B)
buying at face value from a prime bank a negotiable certificate
of deposit issued by such prime bank in an amount equal (as
nearly as may be) to the principal so repaid or prepaid and
having a maturity comparable to the Reemployment Period.
83
<PAGE>
In the event that the Agent or any Funding Party shall fail to notify the Lessee
of any such losses, costs or expenses within one hundred twenty (120) days
following the incurrence of any thereof, the Agent, or as the case may be, such
Funding Party shall not be entitled to claim any additional amounts pursuant to
this Section 7.5(b) for any period ending on a date which is prior to one
--------------
hundred twenty (120) days before such notification.
(c) Capital Adequacy. If any present or future law, governmental
----------------
rule, regulation, policy, guideline or directive (whether or not having the
force of law) or the interpretation thereof by a court or governmental authority
with appropriate jurisdiction affects the amount of capital required or expected
to be maintained by any Funding Party or the Agent, or any corporation
controlling such Funding Party or the Agent and such Lender or the Agent
determines that the amount of capital required to be maintained by it is
increased by or based upon the existence of such Funding Party's or the Agent's
commitment with respect to the facility established hereunder or the Fundings
made, issued, maintained, extended or renewed pursuant hereto, then such Funding
Party or the Agent may notify the Lessee of such fact. To the extent that the
costs of such increased capital requirements are not reflected in the
Alternative Rate or Eurodollar Rate, or in amounts paid or payable by the Lessee
pursuant to Section 7.5(a) or (b) hereof, the Lessee and such Funding Party or
-------------- ---
(as the case may be) the Agent shall thereafter attempt to negotiate in good
faith, within thirty (30) days of the day on which the Lessee receives such
notice, an adjustment payable hereunder which will adequately compensate such
Funding Party or the Agent in light of these circumstances. If the Lessee and
such Funding Party or the Agent are unable to agree to such adjustment within
thirty (30) days of the date on which the Lessee receives such notice, then
commencing on the date of such notice (but not earlier than the effective date
of any such increased capital requirement), the fees payable hereunder shall
increase by an amount that will, in such Funding Party's or the Agent's
reasonable determination, provide adequate compensation. Each Funding Party and
the Agent shall allocate such cost increases among its customers in good faith
and on an equitable basis. For the purposes of Section 7.5, any costs reimbursed
-----------
to SunTrust Bank as a Lender shall not be reimbursable to SunTrust Bank as
Agent, and to the extent that costs
84
<PAGE>
attributable to the Lessor's or any Lender's Funded Amount are reimbursed by
such Lender to the Agent, such costs shall not be reimbursable by the Lessor or
the Lessee to the Agent and any costs reimbursed to the Agent which are
attributable to the Commitment or Funded Amounts of the Lessor or any Lender
shall not be reimbursed to the Lessor or such Lender. Notwithstanding anything
to the contrary contained in this Section 7.5(c), in the event that the Agent or
--------------
any Funding Party shall fail to notify the Lessee of any such costs of increased
capital requirements within one hundred twenty (120) days following the Agent's
or such Funding Party's determination thereof, the Agent or, as the case may be,
such Funding Party shall not be entitled to claim any additional amounts
pursuant to this Section 7.5(c) for any period ending on a date which is prior
--------------
to one hundred twenty (120) days before such notification.
(d) Lender Certificate. A certificate signed by an officer of any
------------------
Funding Party, setting forth any additional amount required to be paid by the
Funding Party to such Lender under this Section 7.5 and the computations made by
-----------
such Funding Party to determine such additional amount, shall be submitted by
such Funding Party to the Lessee in connection with each demand made at any time
by such Funding Party upon the Lessee under this Section 7.5. Without limiting
-----------
the negotiation requirements of Section 7.5 (with respect to certificates issued
-----------
on account of additional amounts required to be paid pursuant to Section 7.5),
-----------
such certificate shall constitute prima facie evidence as to the additional
----- -----
amount owed.
(e) Inability to Determine Eurodollar Rate. In the event that, prior
--------------------------------------
to the commencement of any Rent Period, the Agent shall determine that adequate
and reasonable methods do not exist for ascertaining the Eurodollar Rate that
would otherwise determine the rate of interest to be applicable to any Funded
Amount during any Rent Period, the Agent shall forthwith give notice of such
determination (which shall be conclusive and binding on the Lessee, the Lessor
and the Lenders) to the Lessee, the Lessor and the Lenders. In such event all
Funded Amounts will automatically, on the last day of the then current Rent
Period relating thereto, be deemed to accrue interest or Yield, as the case may
be, at the Alternative Rate until the Agent determines that the circumstances
giving rise to such suspension no longer exist,
85
<PAGE>
whereupon the Agent shall so notify the Lessee, the Lessor and the Lenders.
Neither the Agent nor any Funding Party shall in any event be responsible to the
Lessee in any way if it is not able for any reason beyond its control to quote a
Eurodollar Rate with respect to any Rent Period.
(f) Illegality. Notwithstanding any other provisions herein, if any
----------
present or future law, regulation, treaty or directive or in the interpretation
or application thereof shall make it unlawful for any Funding Party to make or
maintain its Funded Amount at the Eurodollar Rate, such Funding Party shall
forthwith give notice of such circumstances to the Lessee and the Agent and
thereupon (a) the commitment of such Funding Party to fund any Funded amount at
the Eurodollar Rate shall forthwith be suspended and (b) such Funding Party's
Funded Amount then outstanding shall be converted automatically to be deemed to
accrue interest or Yield, as the case may be, at the Alternative Rate on the
last day of each Rent Period or within such earlier period as may be required by
law. The Lessee hereby agrees promptly to pay the Agent for the account of such
Funding Party, upon demand by such Funding Party, any additional amounts
necessary to compensate such Funding Party for any costs incurred by such
Funding Party in making any conversion in accordance with this Section 7.5,
-----------
including any interest or fees payable by such Funding Party to lenders of funds
obtained by it in order to make or maintain its Fundings hereunder.
SECTION 7.6 End of Term Indemnity. In the event that at the end of the
---------------------
Lease Term: (i) the Lessee elects the option set forth in Section 14.6 of the
Lease, and (ii) after the Lessor receives the sales proceeds from the Leased
Property under Section 14.6 or 14.7 of the Lease, together with the Lessee's
payment of the Recourse Deficiency Amount, the Lessor shall not have received
the entire Lease Balance, then, within 90 days after the end of the Lease Term,
the Lessor or the Agent may obtain, at the Lessee's sole reasonable cost and
expense, a report from the Appraiser (or, if the Appraiser is not available,
another appraiser reasonably satisfactory to the Lessor or the Agent, as the
case may be, and approved by the Lessee, such approval not to be unreasonably
withheld) in form and substance reasonably satisfactory to the Lessor and the
Agent (the "Report") to establish the reason for any decline in value of the
------
Leased Property from the Lease Balance. The Lessee shall promptly
86
<PAGE>
reimburse the Lessor for the amount equal to such decline in value to the extent
that the Report indicates that such decline was due to
(v) extraordinary use, failure to maintain, to repair, to restore, to
rebuild or to replace, failure to comply with all Applicable Laws, failure
to use, workmanship, method of installation or removal or maintenance,
repair, rebuilding or replacement, or any other cause or condition within
the power of the Lessee to control or effect resulting in the Building
failing to be an office, store or warehouse of the type and quality
contemplated by the Appraisal (excepting in each case ordinary wear and
tear), or
(w) any Alteration made to, or any rebuilding of, the Leased Property
or any part thereof by the Lessee, or
(x) any restoration or rebuilding carried out by the Lessee or any
condemnation of any portion of the Leased Property pursuant to Article X of
the Lease, or
(y) any use of the Leased Property or any part thereof by the Lessee
other than as permitted by the Lease, or any act or omission constituting a
breach of any requirement, condition, restriction or limitation set forth
in the Deed, or
(z) any provision of, or restriction or right contained in, or
encumbrance created by, the Development Agreement; provided, however, that
-------- -------
the amount related to this clause (z) shall not exceed $400,000 if
----------
Construction is completed or $800,000 if Construction is not completed.
SECTION 8
MISCELLANEOUS
SECTION 8.1 Survival of Agreements. The representations, warranties,
----------------------
covenants, indemnities and agreements of the parties provided for in the
Operative Documents, and the parties' obligations under any and all thereof,
shall survive the execution and delivery and the termination or expiration of
this Master Agreement and any of
87
<PAGE>
the Operative Documents, the transfer of any Land to the Lessor as provided
herein (and shall not be merged into the Deed), any disposition of any interest
of the Lessor in the Leased Property, the purchase and sale of the Notes,
payment therefor and any disposition thereof and shall be and continue in effect
notwithstanding any investigation made by any party hereto or to any of the
other Operative Documents and the fact that any such party may waive compliance
with any of the other terms, provisions or conditions of any of the Operative
Documents.
SECTION 8.2 Notices. Unless otherwise specified herein, all notices,
-------
requests, demands or other communications to or upon the respective parties
hereto shall be addressed to such parties at the addresses therefor as set forth
in Schedule 8.2, as such other address as any such party shall specify to the
------------
other parties hereto, and shall be deemed to have been given (i) the Business
Day after being sent, if sent by overnight courier service; (ii) the Business
Day received, if sent by messenger; (iii) the day sent, if sent by facsimile and
confirmed electronically or otherwise during business hours of a Business Day
(or on the next Business Day if otherwise sent by facsimile and confirmed
electronically or otherwise); or (iv) three Business Days after being sent, if
sent by registered or certified mail, postage prepaid.
SECTION 8.3 Counterparts. This Master Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
SECTION 8.4 Amendments. No Operative Document nor any of the terms
----------
thereof may be terminated, amended, supplemented, waived or modified with
respect to the Lessee or any Funding Party, except (a) in the case of a
termination, amendment, supplement, waiver or modification to be binding on the
Lessee, with the written agreement or consent of the Lessee, and (b) in the case
of a termination, amendment, supplement, waiver or modification to be binding on
the Funding Parties, with the written agreement or consent of the Lessor and the
Required Lenders; provided, however, that
-------- -------
88
<PAGE>
(x) notwithstanding the foregoing provisions of this Section 8.4,
-----------
the consent of each Funding Party affected thereby shall be required for any
amendment, modification or waiver directly:
(i) modifying any of the provisions of this Section 8.4, changing
-----------
the definition of "Required Lenders", or increasing the Commitment of such
----------------
Funding Party;
(ii) amending, modifying, waiving or supplementing any of the
provisions of Section 3 of the Loan Agreement, Sections 14.6 through 14.9
------------- ----
of the Lease or the representations of such Funding Party in Section 4.2 or
-----------
4.3 or the covenants of such Funding Party in Section 6 of this Master
--- ---------
Agreement;
(iii) reducing any amount payable to such Funding Party under the
Operative Documents or extending the time for payment of any such amount,
including, without limitation, any Rent, any Funded Amount, any fees, any
indemnity, the Lease Balance, any Funding Party Balance, Recourse
Deficiency Amount, interest or Yield; or
(iv) consenting to any assignment of the Lease, releasing any of the
collateral assigned to the Agent and the Lenders pursuant to the Mortgage
and the Assignment of Lease and Rents (but excluding a release of any
rights that the Lenders may have in the Leased Property, or the proceeds
thereof as contemplated in the definition of "Release Date"), releasing the
Lessee from its obligations in respect of the payments of Rent and the
Lease Balance, releasing the Lessee from its obligations under the Guaranty
or the other Operative Documents or changing the absolute and unconditional
character of any such obligation; or
(v) renewing the Lease Term pursuant to Section 14.9 of the Lease;
------------
and
(y) subject to the foregoing clauses (x) and (y), so long as no
----------- ---
Event of Default has occurred and is continuing, the Lessor, the Agent and the
Lenders may not amend, supplement, waive or modify any terms of the Loan
Agreement, the Notes, the Mortgage and the Assignment of Lease and Rents
89
<PAGE>
without the consent of the Lessee (such consent not to be unreasonably withheld
or delayed); the Lessor and the Lessee may not amend, supplement, waive or
modify any terms of the Lease or any Security Agreement and Assignment without
the consent of the Agent and the Lenders.
SECTION 8.5 Headings, etc. The Table of Contents and headings of the
-------------
various Articles and Sections of this Master Agreement are for convenience of
reference only and shall not modify, define, expand or limit any of the terms or
provisions hereof.
SECTION 8.6 Parties in Interest. Except as expressly provided herein,
-------------------
none of the provisions of this Master Agreement is intended for the benefit of
any Person except the parties hereto and their respective successors and
permitted assigns.
SECTION 8.7 GOVERNING LAW. THIS MASTER AGREEMENT HAS BEEN DELIVERED IN,
-------------
AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF GEORGIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
SECTION 8.8 Expenses. Whether or not the transactions herein contemplated
--------
are consummated, the Lessee agrees to pay, as Supplemental Rent, all actual,
reasonable and documented out-of-pocket costs and expenses of the Lessor and the
Agent in connection with the preparation, execution and delivery of the
Operative Documents and the documents and instruments referred to therein and
any amendment, waiver or consent relating thereto (including, without
limitation, the fees and disbursements reasonably and actually incurred of
Mayer, Brown & Platt) ("Transaction Costs") and of the Lessor, the Agent and the
-----------------
Lenders in connection with the enforcement of the Operative Documents and the
documents and instruments referred to therein (including, without limitation,
the fees and disbursements reasonably and actually incurred by counsel for the
Lessor, the Agent and the Lenders).
SECTION 8.9 Severability. Any provision of this Master Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to
90
<PAGE>
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 8.10 Liabilities of the Funding Parties. No Funding Party shall
----------------------------------
have any obligation to any other Funding Party or to the Lessee with respect to
the transactions contemplated by the Operative Documents except those
obligations of such Funding Party expressly set forth in the Operative Documents
or except as set forth in the instruments delivered in connection therewith, and
no Funding Party shall be liable for performance by any other party hereto of
such other party's obligations under the Operative Documents except as otherwise
so set forth. No Lender shall have any obligation or duty to the Lessee, any
other Funding Parties or any other Person with respect to the transactions
contemplated hereby except to the extent expressly set forth in this Master
Agreement or the Loan Agreement.
SECTION 8.11 Submission to Jurisdiction; Waivers. Each party hereto
-----------------------------------
hereby irrevocably and unconditionally:
(i) submits for itself and its property in any legal action or
proceeding relating to this Master Agreement or any other Operative
Document, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the Courts of the
State of Georgia sitting in Georgia, the courts of the United States of
America for the Northern District, of Georgia, and appellate courts from
any thereof;
(ii) consents that any such action or proceedings may be brought to
such courts, and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any court or that such action
or proceeding was brought in an inconvenient court and agrees not to plead
or claim the same;
(iii) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to
91
<PAGE>
such party at its address set forth in Schedule 8.2 or at such other
------------
address of which the other parties hereto shall have been notified pursuant
to Section 8.2; and
-----------
(iv) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law.
SECTION 8.12 Liabilities of the Agent. The Agent shall have no duty,
------------------------
liability or obligation to any party to this Master Agreement with respect to
the transactions contemplated hereby except those duties, liabilities or
obligations expressly set forth in this Master Agreement or the Loan Agreement,
and any such duty, liability or obligations of the Agent shall be as expressly
limited by this Master Agreement or the Loan Agreement, as the case may be.
SECTION 8.13 Interest and Charges. It is not the intention of any parties
--------------------
to this Master Agreement to make an agreement in violation of the laws of any
applicable jurisdiction relating to usury. Regardless of any provision in any
Operative Document, none of the Lenders, Lessor or the Agent shall be entitled
to charge, receive, collect or apply, as interest on the Funded Amounts, any
amount in excess of the highest rate of interest permitted under Applicable Law.
If any Lender, Lessor, the Agent or any participant ever receives, collects or
applies, as interest, any such excess, such amount which would be excessive
interest shall be deemed a partial repayment of principal and treated hereunder
as such; and if principal is paid in full, any remaining excess shall be paid to
Lessee. In determining whether or not the interest paid or payable, under any
specific contingency, exceeds the highest rate of interest permitted under
Applicable Law, Lessee, Lessor, the Agent and Lenders shall, to the maximum
extent permitted under Applicable Law, (a) characterize any nonprincipal payment
as an expense, fee or premium rather than as interest, and (b) amortize,
prorate, allocate and spread in equal parts, the total amount of interest
throughout the entire contemplated term of the Funded Amounts so that the
interest rate is uniform through the entire term of the Funded Amounts;
provided, however, that if the Funded Amounts are paid and performed in full
- -------- -------
prior to the end of the full contemplated term thereof, and if the interest
received for the actual period of existence thereof exceeds the highest rate of
interest permitted under Applicable Law,
92
<PAGE>
the Lenders, Lessor and the Agent shall refund to Lessee the amount of such
excess or credit the amount of such excess against the total principal amount of
the Funded Amounts owing. This section shall control every other provision of
all agreements pertaining to the transactions contemplated by or contained in
the Operative Documents.
SECTION 8.14 Documentation Agent. BankBoston, N.A., in its capacity as
-------------------
Documentation Agent, shall not have any responsibilities or obligations, nor
shall it incur any liabilities to any Person as a result of acting as
Documentation Agent, provided that nothing contained in this Section 8.14 shall
-------- ------------
affect its obligations as a Lender.
93
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Master Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
STERLING COMMERCE, INC., as the
Lessee
By:
--------------------------------
Name Printed:
Title
MASTER
S-1 AGREEMENT
<PAGE>
ATLANTIC FINANCIAL GROUP, LTD., as
Lessor
By: Atlantic Financial Managers,
Inc., its General Partner
By:
---------------------------
Name Printed:
-----------------
Title:
------------------------
MASTER
S-2 AGREEMENT
<PAGE>
SUNTRUST BANK, ATLANTA, as a
Lender
By:
--------------------------------
Name Printed:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
as a Lender
By:
--------------------------------
Name Printed:
Title:
ABN AMRO BANK N.V., as a Lender
By:
--------------------------------
Name Printed:
Title:
By:
--------------------------------
Name Printed:
Title:
BANKBOSTON, N.A., as a Lender and
as Documentation Agent
By:
--------------------------------
Name Printed:
Title:
MASTER
S-3 AGREEMENT
<PAGE>
MASTER
S-4 AGREEMENT
<PAGE>
SUNTRUST BANK, ATLANTA, as Agent
By:
--------------------------------
Name Printed:
----------------------
Title:
-----------------------------
MASTER
S-5 AGREEMENT
<PAGE>
SCHEDULE 2.2
AMOUNT OF EACH FUNDING PARTY'S COMMITMENT
Lessor Commitment Percentage: 3.5%
Lender Commitment Percentage: 96.5%
Lessor Commitment: $2,275,000
Lender Commitments:
- --------------------------------------------------------------------------------
A Notes B Notes Total
------- ------- -----
- --------------------------------------------------------------------------------
SunTrust Bank, $15,612,694.30 $2,112,305.70 $17,725,000.00
Atlanta
- --------------------------------------------------------------------------------
BankBoston, N.A $17,616,580.31 $2,383,419.69 $20,000,000.00
- --------------------------------------------------------------------------------
ABN AMRO Bank, N.V $13,212,435.23 $1,787,564.77 $15,000,000.00
- --------------------------------------------------------------------------------
The First National
Bank of Chicago $ 8,808,290.16 $1,191,709.84 $10,000,000.00
- --------------------------------------------------------------------------------
MASTER
AGREEMENT
<PAGE>
SCHEDULE 8.2
ADDRESSES FOR NOTICES
Lessee: Sterling Commerce, Inc.
4600 Lakehurst Court
Dublin, Ohio 43017
Attention: Steven P. Shiflet,
Senior Vice President, CFO
and Treasurer
Telephone: (614) 793-7114
Facsimile: (614) 799-6310
Lessor: Atlantic Financial Group, Ltd.
1000 Ballpark Way, Suite 304
Arlington, Texas 76011
Attn: Stephan Brookshire
Telephone: (817) 265-1262
Facsimile: (817) 265-0537
Agent: SunTrust Bank, Atlanta
25 Park Place
MC 120
Atlanta, Georgia 30303
Attn:
Telephone: (404)
Facsimile: (404) 827-6270
with a copy to:
c/o SunTrust Equitable Securities
Corporation
303 Peachtree Street, 24th Floor
Mail Code 3943
Atlanta, Georgia 30308
Attn: R. Todd Shutley
Telephone: (404) 588-7464
Facsimile: (404) 827- 6514
Lenders: SunTrust Bank, Atlanta
<PAGE>
25 Park Place
MC 120
Atlanta, Georgia 30303
Attn: John Fields
Telephone: (404) 724-3667
Facsimile: (404) 827-6270
Eurodollar Lending Office: same as
above
ABN AMRO Bank, N.V.
135 South LaSalle Street, Suite 2805
Chicago, Illinois 60603
Attn: Credit Administration
Telephone: (312) 904-8835
Facsimile: (312) 904-8840
with a copy to:
ABN AMRO North America, Inc.
Three Riverway, Suite 1700
Houston, Texas 77056
Attn: Laurie Tuzo
Telephone: (713) 964-3360
Facsimile: (713) 434-0819
BankBoston, N.A.
Commercial Loan Services
100 Federal Street
Mail Stop: 01-08-04
Boston, Massachusetts 02110
Attn: Debra DelVecchio
Telephone: (617) 434-2815
Facsimile: (617) 434-0819
Eurodollar Lending Office: same as
above
The First National Bank of Chicago
One First National Plaza
10th Floor
<PAGE>
Mail Suite 0324
Chicago, Illinois 60670
Attn:
Telephone: (312)
Facsimile: (312)
Eurodollar Lending Office: same as
above
<PAGE>
After recordation,
this instrument
should be returned to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Rex Palmer
================================================================================
LEASE AGREEMENT
Dated as of February 26, 1998
between
ATLANTIC FINANCIAL GROUP, LTD., as Lessor,
and
STERLING COMMERCE, INC., as Lessee
------------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
(Lease Agreement)
Page
ARTICLE I.
DEFINITIONS ............................................................ 1
ARTICLE II.
LEASE OF LEASED PROPERTY ................................................. 1
Section 2.1 Acceptance and Lease of Property ............................ 1
Section 2.2 Acceptance Procedure ........................................ 2
ARTICLE III.
RENT ..................................................................... 2
Section 3.1 Basic Rent ................................................. 2
Section 3.2 Supplemental Rent .......................................... 2
Section 3.3 Method of Payment .......................................... 3
Section 3.4 Late Payment ............................................... 3
Section 3.5 Net Lease; No Setoff, Etc .................................. 3
Section 3.6 Certain Taxes .............................................. 5
Section 3.7 Utility Charges ............................................ 5
ARTICLE IV.
WAIVERS .................................................................. 6
ARTICLE V.
LIENS; EASEMENTS; PARTIAL CONVEYANCES .................................... 7
ARTICLE VI.
MAINTENANCE AND REPAIR;
ALTERATIONS, MODIFICATIONS AND ADDITIONS ................................. 8
Section 6.1 Maintenance and Repair; Compliance With Law ................ 8
Section 6.2 Alterations ................................................ 9
Section 6.3 Title to Alterations ....................................... 9
ARTICLE VII.
USE ...................................................................... 9
<PAGE>
Page
----
ARTICLE VIII.
INSURANCE................................................................ 9
ARTICLE IX.
ASSIGNMENT AND SUBLEASING................................................ 11
ARTICLE X.
LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE ............................... 12
Section 10.1 Event of Loss.............................................. 12
Section 10.2 Event of Taking............................................ 12
Section 10.3 Casualty................................................... 13
Section 10.4 Condemnation............................................... 13
Section 10.5 Verification of Restoration and
Rebuilding .......................................... 13
Section 10.6 Application of Payments ................................... 14
Section 10.7 Prosecution of Awards. .................................... 15
Section 10.8 Application of Certain Payments Not
Relating to an Event of Taking ...................... 16
Section 10.9 Other Dispositions ........................................ 16
Section 10.10 No Rent Abatement ......................................... 16
ARTICLE XI.
INTEREST CONVEYED TO LESSEE ............................................. 16
ARTICLE XII.
EVENTS OF DEFAULT ....................................................... 22
ARTICLE XIII.
ENFORCEMENT ............................................................. 27
Section 13.1 Remedies .................................................. 27
Section 13.2 Remedies Cumulative; No Waiver;
Consents ........................................... 29
ARTICLE XIV.
SALE, RETURN OR PURCHASE OF LEASED PROPERTY; RENEWAL .................... 30
Section 14.1 Lessee's Option to Purchase ............................... 30
Section 14.2 Conveyance to Lessee ...................................... 30
Section 14.3 Acceleration of Purchase Obligation ....................... 31
Section 14.4 Determination of Purchase Price ........................... 31
(ii)
<PAGE>
Page
----
Section 14.5 Purchase Procedure ....................................... 31
Section 14.6 Option to Remarket; Surrender Option ..................... 32
Section 14.7 Rejection of Sale......................................... 35
Section 14.8 Return of Leased Property ................................ 35
Section 14.9 Renewal .................................................. 36
ARTICLE XV.
LESSEE'S EQUIPMENT ..................................................... 36
ARTICLE XVI.
RIGHT TO PERFORM FOR LESSEE ............................................ 37
ARTICLE XVII.
MISCELLANEOUS .......................................................... 37
Section 17.1 Reports .................................................. 38
Section 17.2 Binding Effect; Successors and Assigns; Survival ......... 38
Section 17.3 Quiet Enjoyment .......................................... 38
Section 17.4 Notices .................................................. 38
Section 17.5 Severability ............................................. 38
Section 17.6 Amendment; Complete Agreements ........................... 39
Section 17.7 Construction ............................................. 39
Section 17.8 Headings ................................................. 39
Section 17.9 Counterparts ............................................. 39
Section 17.10 GOVERNING LAW ............................................ 40
Section 17.11 Discharge of Lessee's Obligations by its Affiliates ...... 40
Section 17.12 Liability of Lessor Limited .............................. 40
Section 17.13 Estoppel Certificates .................................... 40
Section 17.14 No Joint Venture ......................................... 41
Section 17.15 No Accord and Satisfaction ............................... 41
Section 17.16 No Merger ................................................ 41
Section 17.17 Survival ................................................. 41
Section 17.18 Chattel Paper ............................................ 42
Section 17.19 Time of Essence .......................................... 42
Section 17.20 Recordation of Lease ..................................... 42
Section 17.21 Investment of Security Funds ............................. 42
(iii)
<PAGE>
APPENDICES AND EXHIBITS
- -----------------------
APPENDIX A Defined Terms
EXHIBIT A Legal Description
(iv)
<PAGE>
THIS LEASE AGREEMENT (as from time to time amended or supplemented, this
"Lease"), dated as of February 26, 1998, is between ATLANTIC FINANCIAL GROUP,
-----
LTD., a Texas limited partnership (together with its successors and permitted
assigns hereunder, the "Lessor"), as Lessor, and STERLING COMMERCE, INC., a
------
Delaware corporation (together with its successors and permitted assigns
hereunder, the "Lessee"), as Lessee.
------
PRELIMINARY STATEMENT
A. Lessor will purchase from the Seller certain parcels of real property
to be specified by Lessee, together with any improvements thereon.
B. Lessor desires to lease to Lessee, and Lessee desires to lease from
Lessor, such property.
C. Lessee will construct, or cause to be constructed, certain improvements
on such parcels of real property which as constructed will be the property of
Lessor and will become part of such property subject to the terms of this Lease.
In consideration of the mutual agreements herein contained and other good
and valuable consideration, receipt of which is hereby acknowledged, Lessor and
Lessee hereby agree as follows:
ARTICLE I.
DEFINITIONS
-----------
Terms used herein and not otherwise defined shall have the meanings
assigned thereto in Appendix A hereto for all purposes hereof.
----------
ARTICLE II.
LEASE OF LEASED PROPERTY
------------------------
Section 2.1 Acceptance and Lease of Property. On the Closing Date,
--------------------------------
Lessor, subject to the satisfaction or waiver of the conditions set forth in
Section 3 of the Master Agreement, hereby agrees to accept delivery on the
Closing Date of the Land designated by Lessee to be delivered on the Closing
Date pursuant to the terms of the Master Agreement, together with any
improvements thereon and simultaneously to lease to Lessee hereunder for the
Lease Term, Lessor's interest in such Land and in such improvements, together
with any Building which thereafter may be constructed thereon pursuant to the
Construction Agency Agreement, and Lessee hereby agrees, expressly for the
direct benefit of
<PAGE>
Lessor, commencing on the Closing Date for the Lease Term, to lease from Lessor
Lessor's interest in the Land, together with Lessor's interest in any Building
and other improvements thereon or which thereafter may be constructed thereon
pursuant to the Construction Agency Agreement. The legal description of the Land
is set forth on Exhibit A hereto.
---------
Section 2.2 Acceptance Procedure. Lessor hereby authorizes one or more
--------------------
employees of Lessee, to be designated by Lessee, as the authorized
representative or representatives of Lessor to accept delivery on behalf of
Lessor of the Leased Property. Lessee hereby agrees that such acceptance of
delivery by such authorized representative or representatives and the execution
and delivery by Lessee on the Closing Date of this Lease shall, without further
act, constitute the irrevocable acceptance by Lessee of the Leased Property for
all purposes of this Lease and the other Operative Documents on the terms set
forth therein and herein, and that the Leased Property, together with any
improvements constructed thereon pursuant to the Construction Agency Agreement,
shall be deemed to be included in the leasehold estate of this Lease and shall
be subject to the terms and conditions of this Lease as of the Closing Date.
The demise and lease of the Building pursuant to this Section 2.2 shall include
-----------
any additional right, title or interest in such Building which may at any time
be acquired by Lessor, the intent being that all right, title and interest of
Lessor in and to such Building shall at all times be demised and leased to
Lessee hereunder.
ARTICLE III.
RENT
----
Section 3.1 Basic Rent. Beginning with and including the first Payment
----------
Date occurring after the Closing Date, Lessee shall pay to the Agent the Basic
Rent for the Leased Property, in installments, payable in arrears on each
Payment Date during the Lease Term, subject to Section 2.3(c) of the Master
Agreement.
Section 3.2 Supplemental Rent. Lessee shall pay to the Agent, or to
-----------------
whomever shall be entitled thereto as expressly provided herein or in any other
Operative Document, any and all Supplemental Rent within five (5) Business Days
of the date the same shall become due and payable and in the event of any
failure on the part of Lessee to pay any Supplemental Rent, the Agent shall have
all rights, powers and remedies provided for herein or by law or in equity or
otherwise in the case of nonpayment of Basic Rent. All Supplemental Rent to be
paid pursuant to this Section 3.2 shall be payable in the type of funds and in
-----------
the manner set forth in Section 3.3.
-----------
Section 3.3 Method of Payment. Basic Rent shall be paid to the Agent, and
-----------------
Supplemental Rent (including amounts due under Article XIV hereof) shall be paid
-----------
to the Agent (or to such Person as may be entitled thereto) or, in each case, to
such Person as the Agent (or such other Person) shall specify in writing to
Lessee, and at such place as the Agent (or such other Person) shall specify in
2
<PAGE>
writing to Lessee, which specifications by the Agent shall be given by the Agent
at least five (5) Business Days prior to the due date therefor. Each payment of
Rent (including payments under Article XIV hereof) shall be made by Lessee prior
-----------
to 12:00 p.m. (noon) Atlanta, Georgia time at the place of payment in funds
consisting of lawful currency of the United States of America which shall be
immediately available on the scheduled date when such payment shall be due,
unless such scheduled date shall not be a Business Day, in which case such
payment shall be made on the next succeeding Business Day.
Section 3.4 Late Payment. If any Rent shall not be paid on the date when
------------
due, Lessee shall pay to the Agent, as Supplemental Rent, interest (to the
maximum extent permitted by Applicable Law) on such overdue amount from and
including the due date thereof to but excluding the Business Day of payment
thereof at the Overdue Rate.
Section 3.5 Net Lease; No Setoff, Etc. This Lease is an absolute triple-
-------------------------
net lease and notwithstanding any other provision of this Lease, Lessee shall
pay all Basic Rent and Supplemental Rent, and all costs, charges, taxes (other
than taxes and other items covered by the exclusion described in Section 7.4(b)
of the Master Agreement), assessments and other operating and capital expenses
foreseen or unforeseen, for which Lessee or any Indemnitee is or shall become
liable by reason of Lessee's or such Indemnitee's estate, right, title or
interest in the Leased Property, or that are connected with or arise out of the
acquisition (except the initial costs of purchase by Lessor of its interest in
the Leased Property, which costs, subject to the terms of the Master Agreement,
shall be funded by the Funding Parties pursuant to the Master Agreement),
installation, possession, use, occupancy, maintenance, ownership, leasing,
repairs and rebuilding of, or addition to, the Leased Property or any portion
thereof, and any other amounts payable hereunder and under the other Operative
Documents without counterclaim, setoff, deduction or defense and without
abatement, suspension, deferment, diminution or reduction, and Lessee's
obligation to pay all such amounts throughout the Lease Term, including the
Construction Term, is absolute and unconditional. The obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason, including without limitation: (a) any defect
in the condition, merchantability, design, quality or fitness for use of the
Leased Property or any part thereof, or the failure of the Leased Property to
comply with all Applicable Law, including any inability to occupy or use the
Leased Property by reason of such non-compliance; (b) any damage to, removal,
abandonment, salvage, loss, contamination of or Release from, scrapping or
destruction of or any requisition or taking of the Leased Property or any part
thereof; (c) any restriction, prevention or curtailment of or interference with
any use of the Leased Property or any part thereof including eviction; (d) any
defect in title to or rights to the Leased Property or any Lien on such title or
rights or on the Leased Property; (e) any change, waiver, extension, indulgence
or other action or omission or breach in respect of any obligation or liability
of or by Lessor, the Agent or any Lender; (f) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceedings relating to Lessee, Lessor, any Lender, the Agent or any other
Person, or any action taken with respect to this Lease by any trustee or
receiver of Lessee,
3
<PAGE>
Lessor, any Lender, the Agent or any other Person, or by any court, in any such
proceeding; (g) any claim that Lessee has or might have against any Person,
including without limitation, Lessor, any vendor, manufacturer, contractor of or
for the Building or any part thereof, the Agent or any Lender; (h) any failure
on the part of Lessor to perform or comply with any of the terms of this Lease,
any other Operative Document or of any other agreement; (i) any invalidity or
unenforceability or illegality or disaffirmance of this Lease against or by
Lessee or any provision hereof or any of the other Operative Documents or any
provision of any thereof whether or not related to the Transaction; (j) the
impossibility or illegality of performance by Lessee, Lessor or both; (k) any
action by any court, administrative agency or other Governmental Authority; (l)
any restriction, prevention or curtailment of or interference with the
Construction or any use of the Leased Property or any part thereof; or (m) any
other occurrence whatsoever, whether similar or dissimilar to the foregoing,
whether or not Lessee shall have notice or knowledge of any of the foregoing,
provided that nothing set forth herein shall be deemed to be a waiver of any
- --------
other rights or causes of action that Lessee may have against Lessor as a result
of Lessor's willful misconduct, gross negligence or breach of any provision of
this Lease or any other Operative Document. Except as specifically set forth in
Article XIV or X of this Lease, this Lease shall be noncancellable by Lessee in
- ----------- -
any circumstance whatsoever and Lessee, to the extent permitted by Applicable
Law, waives all rights now or hereafter conferred by statute or otherwise to
quit, terminate or surrender this Lease, or to any diminution, abatement or
reduction of Rent payable by Lessee hereunder. Each payment of Rent made by
Lessee hereunder shall be final and Lessee shall not seek or have any right to
recover all or any part of such payment from Lessor, the Agent, any Lender or
any party to any agreements related thereto for any reason whatsoever. Lessee
assumes the sole responsibility for the condition, use, operation, maintenance,
and management of the Leased Property and Lessor shall have no responsibility in
respect thereof and shall have no liability for damage to the property of either
Lessee or any subtenant of Lessee on any account or for any reason whatsoever,
other than solely by reason of Lessor's willful misconduct or gross negligence.
Section 3.6 Certain Taxes. Without limiting the generality of Section
------------- -------
3.5, Lessee agrees to pay when due all real estate taxes, personal property
- ---
taxes, gross sales taxes, including any sales or lease tax imposed upon the
rental payments hereunder or under a sublease, occupational license taxes, water
charges, sewer charges, assessments of any nature and all other governmental
impositions and charges of every kind and nature whatsoever (the "tax(es)"),
-------
when the same shall be due and payable without penalty or interest; provided,
--------
however, that this Section shall not apply to any of the taxes and other items
- -------
covered by the exclusion described in Section 7.4(b) of the Master Agreement.
It is the intention of the parties hereto that, insofar as the same may lawfully
be done, Lessor shall be, except as specifically provided for herein, free from
all expenses in any way related to the Leased Property and the use and occupancy
thereof. Any tax relating to a fiscal period of any taxing authority falling
partially within and partially outside the Lease Term, shall be apportioned and
adjusted between Lessor and Lessee. Lessee covenants to furnish Lessor and the
Agent, upon the Agent's request, within forty-five (45) days after the last date
when any tax must be paid by Lessee as provided in this Section 3.6,
-----------
4
<PAGE>
official receipts of the appropriate taxing authority or other proof
satisfactory to Lessor, evidencing the payment thereof.
So long as no Event of Default has occurred and is continuing, Lessee may
defer payment of a tax so long as the validity or the amount thereof is
contested by Lessee with diligence and in good faith and for which adequate
reserves have been established and are being maintained in accordance with GAAP;
provided, however, that Lessee shall pay the tax in sufficient time to prevent
- -------- -------
delivery of a tax deed; and provided, further that, unless Lessee purchases the
-------- -------
Leased Property in accordance herewith, Lessee shall pay the tax on or before
the Lease Termination Date. Such contest shall be at Lessee's sole cost and
expense. Lessee covenants to indemnify and save harmless Lessor, the Agent and
each Lender from any actual and reasonable costs or expenses incurred by Lessor,
the Agent or any Lender as a result of such contest. Lessor agrees to promptly
forward to Lessee copies of any tax notices and correspondence from taxing
authorities relating to the Leased Property received by Lessor.
Section 3.7 Utility Charges. Lessee agrees to pay or cause to be paid as
---------------
and when the same are due and payable all charges for gas, water, sewer,
electricity, lights, heat, power, telephone or other communication service and
all other utility services used, rendered or supplied to, upon or in connection
with the Leased Property.
ARTICLE IV.
WAIVERS
-------
During the Lease Term, Lessor's interest in the Building(s) (whether or not
completed) and the Land is demised and let by Lessor "AS IS" subject to (a) the
rights of any parties in possession thereof, (b) the state of the title thereto
existing at the time Lessor acquired its interest in the Leased Property, (c)
any state of facts which an accurate survey or physical inspection might show
(including the survey delivered on the Closing Date), (d) all Applicable Law,
and (e) any violations of Applicable Law which may exist upon or subsequent to
the commencement of the Lease Term. LESSEE ACKNOWLEDGES THAT, ALTHOUGH LESSOR
WILL OWN AND HOLD TITLE TO THE LEASED PROPERTIES, LESSOR IS NOT RESPONSIBLE FOR
THE DESIGN, DEVELOPMENT, BUDGETING AND CONSTRUCTION OF THE BUILDING(S) OR ANY
ALTERATIONS. NEITHER LESSOR, THE AGENT NOR ANY LENDER HAS MADE OR SHALL BE
DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR SHALL
BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE VALUE, MERCHANTABILITY,
TITLE, HABITABILITY, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE
LEASED PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION OR WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASED PROPERTY (OR ANY PART
THEREOF), ALL SUCH WARRANTIES BEING HEREBY DISCLAIMED,
5
<PAGE>
AND NEITHER LESSOR, THE AGENT NOR ANY LENDER SHALL BE LIABLE FOR ANY LATENT,
HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE LEASED PROPERTY, OR ANY
PART THEREOF, TO COMPLY WITH ANY APPLICABLE LAW, except that Lessor hereby
represents and warrants that the Leased Property is and shall be free of Lessor
Liens. As between Lessor and Lessee, Lessee has been afforded full opportunity
to inspect the Leased Property, is satisfied with the results of its inspections
of the Leased Property and is entering into this Lease solely on the basis of
the results of its own inspections and all risks incident to the matters
discussed in the two preceding sentences, as between Lessor, the Agent or the
Lenders on the one hand, and Lessee, on the other, are to be borne by Lessee.
The provisions of this Article IV have been negotiated, and, except to the
----------
extent otherwise expressly stated, the foregoing provisions are intended to be a
complete exclusion and negation of any representations or warranties by Lessor,
the Agent or the Lenders, express or implied, with respect to the Leased
Property, that may arise pursuant to any law now or hereafter in effect, or
otherwise.
ARTICLE V.
LIENS; EASEMENTS; PARTIAL CONVEYANCES
-------------------------------------
Lessee shall not directly or indirectly create, incur or assume, any Lien
on or with respect to the Leased Property, the title thereto, or any interest
therein, including any Liens which arise out of the possession, use, occupancy,
construction, repair or rebuilding of the Leased Property or by reason of labor
or materials furnished or claimed to have been furnished to Lessee, or any of
its contractors or agents or by reason of the financing of any personalty or
equipment purchased or leased by Lessee from third parties and not financed by
Lessor or Alterations constructed by Lessee, except, in all cases, Permitted
Liens.
Notwithstanding the foregoing paragraph, at the request of Lessee, Lessor
shall, from time to time during the Lease Term and upon reasonable advance
written notice from Lessee, and receipt of the materials specified in the next
succeeding sentence, consent to and join in any (i) grant of easements,
licenses, rights of way and other rights in the nature of easements, including,
without limitation, utility easements to facilitate Lessee's use, development
and construction of the Leased Property, (ii) release or termination of
easements, licenses, rights of way or other rights in the nature of easements
which are for the benefit of the Land or the Building(s) or any portion thereof,
(iii) dedication or transfer of portions of the Land, not improved with a
building, for road, highway or other public purposes, (iv) execution of
agreements for ingress and egress and amendments to any covenants and
restrictions affecting the Land or the Building(s) or any portion thereof and
(v) request to any Governmental Authority for platting or subdivision or
replatting or resubdivision approval with respect to the Land or any portion
thereof or any parcel of land of which the Land or any portion thereof forms a
part or a request for any variance from zoning or other governmental
requirements. Lessor's obligations pursuant to the preceding sentence shall be
subject to the requirements that:
6
<PAGE>
(a) any such action shall be at the sole cost and expense of Lessee
and Lessee shall pay all actual and reasonable out-of-pocket costs of Lessor,
the Agent and any Lender in connection therewith (including, without limitation,
the reasonable fees of attorneys, architects, engineers, planners, appraisers
and other professionals reasonably retained by Lessor, the Agent or any Lender
in connection with any such action),
(b) Lessee shall have delivered to Lessor and Agent a certificate of a
Responsible Officer of Lessee stating that
(1) such action will not cause the Leased Property, the Land or
any Building or any portion thereof to fail to comply in any material
respect with the provisions of this Lease or any other Operative Documents,
or in any material respect with Applicable Law; and
(2) such action will not materially reduce the Fair Market Sales
Value, utility or useful life of the Leased Property, the Land or any
Building nor Lessor's interest therein; and
(c) in the case of any release or conveyance, if Lessor, the Agent or
any Lender so reasonably requests, Lessee will cause to be issued and delivered
to Lessor and the Agent by the Title Insurance Company an endorsement to the
Title Policy pursuant to which the Title Insurance Company agrees that its
liability for the payment of any loss or damage under the terms and provisions
of the Title Policy will not be affected by reason of the fact that a portion of
the real property referred to in Schedule A of the Title Policy has been
released or conveyed by Lessor.
ARTICLE VI.
MAINTENANCE AND REPAIR;
ALTERATIONS, MODIFICATIONS AND ADDITIONS
----------------------------------------
Section 6.1 Maintenance and Repair; Compliance With Law. Lessee, at its
-------------------------------------------
own expense, shall at all times (a) maintain the Leased Property in good repair
and condition (subject to ordinary wear and tear), in accordance with prudent
industry standards and, in any event, in no less a manner as other similar
office buildings owned or leased by Lessee or its Affiliates, (b) make all
Alterations in accordance with, and maintain (whether or not such maintenance
requires structural modifications or Alterations) and operate and otherwise keep
the Leased Property in compliance in all material respects with, all Applicable
Laws and insurance requirements, and (c) make all material repairs, replacements
and renewals of the Leased Property or any part thereof which may be required to
keep the Leased Property in the condition required by the preceding clauses (a)
-----------
and (b). Lessee shall perform the foregoing maintenance obligations regardless
---
of whether the Leased Property is occupied or unoccupied. Lessee waives any
right that it may now have or hereafter acquire to (i) require Lessor,
7
<PAGE>
the Agent or any Lender to maintain, repair, replace, alter, remove or rebuild
all or any part of the Leased Property or (ii) make repairs at the expense of
Lessor, the Agent or any Lender pursuant to any Applicable Law or other
agreements or otherwise. NEITHER LESSOR, THE AGENT NOR ANY LENDER SHALL BE
LIABLE TO LESSEE OR TO ANY CONTRACTORS, SUBCONTRACTORS, LABORERS, MATERIALMEN,
SUPPLIERS OR VENDORS FOR SERVICES PERFORMED OR MATERIAL PROVIDED ON OR IN
CONNECTION WITH ANY LEASED PROPERTY OR ANY PART THEREOF. Neither Lessor, the
Agent nor any Lender shall be required to maintain, alter, repair, rebuild or
replace the Leased Property in any way.
Section 6.2 Alterations. Lessee may, without the consent of Lessor, at
-----------
Lessee's own cost and expense, make Alterations which do not materially diminish
the value, utility or useful life of the Leased Property.
Section 6.3 Title to Alterations. Title to all Alterations shall without
--------------------
further act vest in Lessor (subject to Lessee's right to remove trade fixtures,
personal property and equipment which were not acquired with funds advanced by
Lessor or any Lender at a time when no Event of Default has occurred and is
continuing) and shall be deemed to constitute a part of the Leased Property and
be subject to this Lease.
ARTICLE VII.
USE
---
Lessee may use the Leased Property or any part thereof for any lawful
purpose, and in a manner consistent with the standards applicable to properties
of a similar nature in the geographic area in which the Leased Property is
located, provided that such use does not materially adversely affect the Fair
--------
Market Sales Value, utility, remaining useful life or residual value of the
Leased Property, and does not materially violate or conflict with, or constitute
or result in a material default under, any Applicable Law or any insurance
policy required hereunder. In the event Lessee's use substantially changes the
character of the Building in a manner or to an extent that, in Lessor's or the
Lenders' reasonable opinion, adversely affects the Fair Market Sales Value
and/or marketability of the Building, Lessee shall, upon the termination or
expiration of this Lease, at Lessor's request, restore the Leased Property to
its general character at the Completion Date (ordinary wear and tear excepted),
unless Lessee has purchased the Leased Property pursuant to the terms of this
Lease. Lessee shall not commit or permit any waste of the Leased Property or
the material part thereof.
8
<PAGE>
ARTICLE VIII.
INSURANCE
---------
(a) At any time during which any part of the Building or any
Alteration is under construction and as to any part of the Building or any
Alteration under construction, Lessee shall maintain, or cause to be maintained,
at its sole cost and expense, as a part of its blanket policies or otherwise,
"all risks" non-reporting completed value form of builder's risk insurance, it
being understood by Lessor that Lincoln Property Company, CSE, Inc. as developer
of the Leased Property is carrying builders risk insurance pursuant to the
Development Agreement, which insurance Lessor acknowledges satisfies the
requirements of this clause (a).
----------
(b) During the Lease Term, Lessee shall maintain, at its sole cost and
expense, as a part of its blanket policies or otherwise, insurance against loss
or damage to the Building by fire and other risks, including comprehensive
boiler and machinery coverage, on terms and in amounts no less favorable than
insurance covering other similar properties owned or leased by Lessee and its
Affiliates and that are in accordance with the general practices of businesses
engaged in similar activities in similar geographic areas (which may include
self-insurance in an amount not to exceed $1,000,000), but in no event less than
the replacement cost of such Building from time to time.
(c) During the Lease Term, Lessee shall maintain, at its sole cost and
expense, commercial general liability insurance with respect to the Leased
Property, as is ordinarily procured by Persons who own or operate similar
properties in the same geographic area. Such insurance shall be on terms and in
amounts that are no less favorable than insurance maintained by Lessee or its
Affiliates with respect to similar properties that it owns or leases and that
are in accordance with the general practices of businesses engaged in similar
activities in similar geographic areas, but in no event less than $1,000,000 per
occurrence, with an umbrella policy of $10,000,000. Such insurance policies
shall also provide that Lessee's insurance shall be considered primary
insurance. Nothing in this Article VIII shall prohibit Lessor, the Agent or any
------------
Lender from carrying at its own expense other insurance on or with respect to
the Leased Property, provided that any insurance carried by Lessor, the Agent or
--------
any Lender shall not prevent Lessee from carrying the insurance required hereby.
(d) Each policy of insurance maintained by Lessee pursuant to clauses
-------
(a) and (b) of this Article IX shall provide that all insurance proceeds in
- --- --- ----------
respect of any loss or occurrence with respect to the Leased Property shall be
adjusted by Lessee, except that with respect to any loss with respect to the
Leased Property, the insurance proceeds therefor shall be paid jointly to the
Agent (or to Lessor if the Funded Amounts have been fully paid) and the Lessee
for application in accordance with this Lease.
(e) On the Closing Date, on the Completion Date and on each
anniversary of the Closing Date, Lessee shall furnish Lessor with certificates
showing the insurance required under this
9
<PAGE>
Article VIII to be in effect and naming Lessor, the Agent and the Lenders as
- ------------
additional insureds. Such certificates shall include a provision for thirty
(30) days' advance written notice by the insurer to Lessor and the Agent in the
event of cancellation or expiration or nonpayment of premium with respect to
such insurance.
(f) Each policy of insurance maintained by Lessee pursuant to this
Article VIII shall (1) contain the waiver of any right of subrogation of the
- ------------
insurer against Lessor, the Agent and the Lenders, and (2) provide that in
respect of the interests of Lessor, the Agent and the Lenders, such policies
shall not be invalidated by any breach of warranty of Lessee or any other Person
acting on behalf of Lessee.
(g) All insurance policies carried in accordance with this Article
-------
VIII shall be maintained with insurers rated at least A by A.M. Best & Company,
- ----
and in all cases the insurer shall be qualified to insure risks in the State
where such Leased Property is located.
ARTICLE IX.
ASSIGNMENT AND SUBLEASING
-------------------------
Lessee may not assign any of its right, title or interest in, to or under
this Lease, except (i) to a wholly owned Subsidiary of Lessee so long as Lessee
has delivered to the Lessor and the Agent a reaffirmation of the Guaranty and
(ii) as set forth in the following sentence. Lessee may sublease all or any
portion of the Leased Property, provided that (a) all obligations of Lessee
--------
shall continue in full effect as obligations of a principal and not of a
guarantor or surety, as though no sublease had been made; (b) such sublease
shall be expressly subject and subordinate to this Lease, the Loan Agreement and
the other Operative Documents; and (c) each such sublease shall terminate on or
before the Lease Termination Date.
Except pursuant to an Operative Document, this Lease shall not be mortgaged
or pledged by Lessee, nor shall Lessee mortgage or pledge any interest in the
Leased Property or any portion thereof. Any such mortgage or pledge shall be
void.
ARTICLE X.
LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE
-----------------------------------------
Section 10.1 Event of Loss. Any event (i) which would otherwise constitute
-------------
a Casualty during the Base Term, and (ii) which, in the good-faith judgment of
Lessee, renders repair and restoration of the Leased Property impractical or
uneconomical, and (iii) as to which Lessee, within sixty (60) days after the
occurrence of such event, delivers to Lessor an Officer's Certificate notifying
10
<PAGE>
Lessor of such event and of such judgment, shall constitute an "Event of Loss".
-------------
In the case of any other event which constitutes a Casualty, Lessee shall
restore the Leased Property pursuant to Section 10.3. If an Event of Loss other
------------
than an Event of Taking shall occur, Lessee shall pay to Lessor on the next
Payment Date following delivery of the Officer's Certificate pursuant to clause
------
(iii) above an amount equal to the Lease Balance. Upon Lessor's receipt of such
- -----
Lease Balance on such date, Lessor shall cause Lessor's interest in the Leased
Property to be conveyed to Lessee in accordance with and subject to the
provisions of Section 14.5 hereof; upon completion of such purchase, but not
------------
prior thereto, this Lease and all obligations hereunder shall terminate, except
with respect to obligations and liabilities hereunder, actual or contingent,
that have arisen or relate to events occurring on or prior to such date of
purchase, or which are expressly stated herein to survive termination of this
Lease.
Upon the consummation of the purchase of the Leased Property pursuant to
this Section 10.1, any proceeds derived from insurance required to be maintained
------------
by Lessee pursuant to this Lease for the Leased Property remaining after payment
of such purchase price shall be paid over to, or retained by, Lessee or as it
may direct, and Lessor shall assign to Lessee, without warranty, all of Lessor's
rights to and interest in insurance required to be maintained by Lessee pursuant
to this Lease.
Section 10.2 Event of Taking. Any event (i) which constitutes a
---------------
Condemnation of all of, or substantially all of, the Leased Property, or (ii)
(A) which would otherwise constitute the Condemnation, (B) which, in the good-
faith judgment of Lessee, renders restoration and rebuilding of the Leased
Property impossible, impractical or uneconomical, and (C) as to which Lessee,
within sixty (60) days after the occurrence of such event, delivers to Lessor an
Officer's Certificate notifying Lessor of such event and of such judgment, shall
constitute an "Event of Taking". In the case of any other event which
---------------
constitutes a Condemnation, Lessee shall restore and rebuild the Leased Property
pursuant to Section 10.4. If an Event of Taking shall occur, Lessee shall pay
------------
to Lessor (1) on the next Payment Date occurring not less than ninety (90) days
after the occurrence of such Event of Taking, in the case of an Event of Taking
described in clause (i) above, or (2) on the next Payment Date occurring not
----------
less than ninety (90) days after delivery of the Officer's Certificate pursuant
to clause (ii) above, in the case of an Event of Taking described in clause (ii)
----------- -----------
above, an amount equal to the Lease Balance. Upon Lessor's receipt of such
Lease Balance on such date, Lessor shall cause Lessor's interest in the Leased
Property to be conveyed to Lessee in accordance with and subject to the
provisions of Section 14.5 hereof (provided that such conveyance shall be
------------
subject to all rights of the condemning authority); upon completion of such
purchase, but not prior thereto, this Lease and all obligations hereunder shall
terminate, except with respect to obligations and liabilities hereunder, actual
or contingent, that have arisen or relate to events occurring on or prior to
such date of purchase, or which are expressly stated herein to survive
termination of this Lease.
Upon the consummation of the purchase of the Leased Property pursuant to
this Section 10.2, all Awards received by Lessor, after deducting any reasonable
------------
costs incurred by Lessor in collecting such Awards, received or payable on
account of an Event of Taking with respect to the Leased
11
<PAGE>
Property during the related Lease Term shall be paid to Lessee, and all rights
of Lessor in Awards not then received shall be assigned to Lessee by Lessor.
Section 10.3 Casualty. If a Casualty shall occur, Lessee shall rebuild and
--------
restore the Leased Property, will complete the same prior to the Lease
Termination Date, and will cause the condition set forth in Section 3.4 (c) of
---------------
the Master Agreement to be fulfilled with respect to such restoration and
rebuilding prior to the Lease Termination Date, regardless of whether insurance
proceeds received as a result of such Casualty are sufficient for such purpose,
unless Lessee purchases the Leased Property in accordance with the terms of this
Lease.
Section 10.4 Condemnation. If a Condemnation shall occur, Lessee shall
------------
rebuild and restore the Leased Property, will complete the same prior to the
Lease Termination Date, and will cause the condition set forth in Section
-------
3.4(c) of the Master Agreement to be fulfilled with respect to such restoration
- ------
and rebuilding prior to the Lease Termination Date, unless Lessee purchases the
Leased Property in accordance with the terms of this Lease.
Section 10.5 Verification of Restoration and Rebuilding. In the event of
------------------------------------------
Casualty or Condemnation, to verify Lessee's compliance with the foregoing
Sections 10.3 and 10.4, Lessor, the Agent, the Lenders and their respective
- ------------- ----
authorized representatives may, upon five (5) Business Days' notice to Lessee,
make inspections of the Leased Property with respect to (i) the extent of the
Casualty or Condemnation and (ii) the restoration and rebuilding of the Building
and the Land. All actual and reasonable out-of-pocket costs of such inspections
incurred by Lessor, the Agent or any Lender will be paid by Lessee promptly
after written request therefor. No such inspection shall unreasonably interfere
with Lessee's operations or the operations of any other occupant of the Leased
Property. None of the inspecting parties shall have any duty to make any such
inspection or inquiry and none of the inspecting parties shall incur any
liability or obligation by reason of making or not making any such inspection or
inquiry.
Section 10.6 Application of Payments. All proceeds (except for payments
-----------------------
under insurance policies maintained other than pursuant to Article VIII of this
------------
Lease) received at any time by Lessor, Lessee or the Agent from any Governmental
Authority or other Person with respect to any Condemnation or Casualty to the
Leased Property or any part thereof or with respect to an Event of Loss or an
Event of Taking, plus the amount of any payment that would have been due from an
insurer but for Lessee's self-insurance or deductibles ("Loss Proceeds"), shall
-------------
(except to the extent Section 10.9 applies) be applied as follows:
------------
(a) In the event Lessee purchases the Leased Property pursuant to
Section 10.1 or Section 10.2, such Loss Proceeds shall be applied as set
------------ ------------
forth in Section 10.1 or Section 10.2, as the case may be;
------------ ------------
12
<PAGE>
(b) In the event of a Casualty at such time when no Event of Default
has occurred and is continuing and Lessee is obligated to repair and
rebuild the Leased Property pursuant to Section 10.3, Lessee may, in good
------------
faith and subsequent to the date of such Casualty, certify to Lessor and to
the applicable insurer that no Event of Default has occurred and is
continuing, in which event the applicable insurer shall pay the Loss
Proceeds to Lessee, unless the estimated cost of restoration exceeds
$10,000,000, in which case the Loss Proceeds shall be paid jointly to the
Agent (or Lessor if the Loans have been paid in full) and the Lessee, and
shall be promptly released to Lessee upon certification by Lessee to Lessor
and the Agent that Lessee has incurred, or will incur within 30 days
thereof, costs in the amount requested to be released for the repair and
rebuilding of the Leased Property;
(c) In the event of a Condemnation at such time when no Event of
Default has occurred and is continuing and Lessee is obligated to repair
and rebuild the Leased Property pursuant to Section 10.4, Lessor shall upon
------------
Lessee's request assign to Lessee Lessor's interest in any applicable
Awards; and
(d) As provided in Section 10.8, if such section is applicable.
------------
During any period of repair or rebuilding pursuant to this Article X, this
---------
Lease will remain in full force and effect and Basic Rent shall continue to
accrue and be payable without abatement or reduction. Lessee shall maintain
records setting forth information relating to the receipt and application of
payments in accordance with this Section 10.6. Such records shall be kept on
------------
file by Lessee at its offices and shall be made available to Lessor, the Lenders
and the Agent upon reasonable request.
Section 10.7 Prosecution of Awards. (a) If, during the continuance of any
---------------------
Event of Default, any Condemnation shall occur, Lessee shall give to Lessor and
the Agent promptly, but in any event within thirty (30) days after the
occurrence thereof, written notice of such occurrence and the date thereof,
generally describing the nature and extent of such Condemnation. With respect
to any Event of Taking or any Condemnation, Lessee shall control the
negotiations with the relevant Governmental Authority as to any proceeding in
respect of which Awards are required, under Section 10.6, to be assigned or
------------
released to Lessee, unless an Event of Default shall have occurred and be
continuing, in which case (1) the Agent (or Lessor if the Loans have been fully
paid) shall control such negotiations; and (2) subject to Section 10.9, Lessee
------------
hereby irrevocably assigns, transfers and sets over to Lessor all rights of
Lessee to any Award made during the continuance of an Event of Default on
account of any Event of Taking or any Condemnation and, if there will not be
separate Awards to Lessor and Lessee on account of such Event of Taking or
Condemnation, irrevocably authorizes and empowers the Agent (or Lessor if the
Loans have been fully paid) during the continuance of an Event of Default, with
full power of substitution, in the name of Lessee or otherwise (but without
limiting the obligations of Lessee under this Article X), to file and prosecute
---------
what would otherwise be Lessee's claim for any such Award and to collect,
receipt for and retain the same; provided, however, that in any event Lessor and
-------- -------
the
13
<PAGE>
Agent may participate in such negotiations, and no settlement will be made
without the prior consent of the Agent (or Lessor if the Loans have been fully
paid), not to be unreasonably withheld.
(b) Notwithstanding the foregoing, Lessee may prosecute, and Lessor shall
have no interest in, any claim with respect to Lessee's trade fixtures, personal
property and equipment not financed by Lessor and Lessee's relocation expenses.
Section 10.8 Application of Certain Payments Not Relating to an Event of
-----------------------------------------------------------
Taking. In case of a requisition for temporary use of all or a portion of the
- ------
Leased Property which is not an Event of Taking, this Lease shall remain in full
force and effect, without any abatement or reduction of Basic Rent, and the
Awards for the Leased Property shall, unless an Event of Default has occurred
and is continuing, be paid to Lessee.
Section 10.9 Other Dispositions. Notwithstanding the foregoing provisions
------------------
of this Article X, so long as an Event of Default shall have occurred and be
---------
continuing, any amount that would otherwise be payable to or for the account of,
or that would otherwise be retained by, Lessee pursuant to this Article X shall
---------
be paid to the Agent (or Lessor if the Loans have been fully paid) as security
for the obligations of Lessee under this Lease and, at such time thereafter as
no Event of Default shall be continuing, such amount shall be paid promptly to
Lessee to the extent not previously applied by Lessor or the Agent in accordance
with the terms of this Lease or the other Operative Documents.
Section 10.10 No Rent Abatement. Rent shall not abate hereunder by reason
-----------------
of any Casualty, any Event of Loss, any Event of Taking or any Condemnation of
the Leased Property, and Lessee shall continue to perform and fulfill all of
Lessee's obligations, covenants and agreements hereunder notwithstanding such
Casualty, Event of Loss, Event of Taking or Condemnation until the Lease
Termination Date.
ARTICLE XI.
INTEREST CONVEYED TO LESSEE
---------------------------
It is the intent of Lessee and Lessor that for federal, state and local tax
purposes Lessee owns the Leased Property and will be entitled to all tax
benefits ordinarily available to an owner of property similar to such Leased
Property, and that Lessor will be treated as a lender making loans to Lessee.
Lessor and Lessee intend that this Lease be treated, for accounting purposes, as
an operating lease. For all other purposes, Lessee and Lessor intend that the
transaction represented by this Lease be treated as a financing transaction; for
such purposes, it is the intention of the parties hereto that this Lease be
treated as a mortgage and deed of trust (and is referred to in this Article XI
----------
as "this deed of trust")under applicable Texas law and a security agreement,
encumbering the Leased Property, granted by Lessee, for the benefit of Lessor,
as security for the obligations of Lessee hereunder. To effect such
14
<PAGE>
intentions, and to cause this Lease to create the desired deed of trust lien in
the Leased Property, the parties agree as follows:
A. Lessee (Lessee in such capacity being herein referred to as "Grantor"),
-------
whose address is 300 Crescent Court, Suite 1200, Dallas, Texas 75201-7832 in
consideration of the sum of $10.00 and other valuable consideration paid to
Grantor, the receipt and sufficiency of which are hereby acknowledged by
Grantor, has GRANTED, ASSIGNED, TRANSFERRED and CONVEYED, and does hereby GRANT,
ASSIGN, TRANSFER and CONVEY the Leased Property (referred to in this Deed of
Trust as the "Mortgaged Property"), whether now owned by Grantor or hereafter
------------------
acquired unto Rex A. Palmer ("Trustee"), whose address is 190 South LaSalle
-------
Street, Chicago, Illinois 60603, for the benefit of Lessor (Lessor in its
capacity as secured creditor of Lessee and as the beneficiary of this deed of
trust being herein referred to as the "Beneficiary").
-----------
B. TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee, and also
unto the Substitute Trustee, and the assigns of the Trustee or Substitute
Trustee, and Grantor does hereby bind itself, its successors and assigns, to
warrant and forever defend all and singular the Mortgaged Property unto the
Trustee, and also unto the Substitute Trustee, and the assigns of the Trustee or
Substitute Trustee, against every person or party whomsoever claiming or to
claim the same, or any part thereof, subject, however, to the Permitted Liens
by, through or under Grantor, but not otherwise.
C. This conveyance is made in trust, however, to secure the payment and
performance by Grantor of all of its obligations and duties (whether of a
payment or performance nature, or both) as set out in this Lease and the other
Operative Documents, including, but specifically without limitation or
duplication, the obligation to make payments of the Funded Amounts, the Base
Rent, and the Supplemental Rent provided for herein (collectively, the
"Obligation").
----------
D. To the extent that any of the Obligation represents funds utilized to
satisfy any outstanding indebtedness or obligations secured by liens, rights or
claims against the Mortgaged Property or any part thereof, Beneficiary shall be
subrogated to any and all liens, rights, superior titles and equities owned or
claimed by the holder of any such outstanding indebtedness or obligation so
satisfied, however remote, regardless of whether said liens, rights, superior
titles and equities are by the holder(s) thereof assigned to Beneficiary or
released.
E. Upon payment in full of the Obligation, this deed of trust shall become
of no further force or effect and Beneficiary or other holder(s) of the
Obligation shall, at Grantor's expense and upon Grantor's written request,
execute in recordable form a release of this deed of trust.
F. If an Event of Default occurs: (i) the Beneficiary may exercise any
right, power or remedy permitted to it by law, and (ii) it shall thereupon, or
at any time thereafter, be the duty of the Trustee or the Substitute Trustee, at
the request of Beneficiary or the holder(s) of a majority of the Obligation, to
15
<PAGE>
enforce this deed of trust and to sell as an entirety or in parcels, by one sale
or by several sales, held at one time or at different times as the Trustee
acting may elect (all rights to a marshalling of Grantor's assets, including the
Mortgaged Property, or to a sale in inverse order of alienation, being hereby
expressly waived by Grantor), the Mortgaged Property at the door of the County
Courthouse in the County in which the Mortgaged Property, or a part of the
Mortgaged Property, to be sold is situated, each sale to be made on the first
Tuesday of a calendar month between the hours of ten o'clock a.m. and four
o'clock p.m. (which sale will begin not later than three hours after the
earliest time at which such sale may occur as designated in the notice of sale
hereinafter described) to the highest bidder for cash at public auction, after
posting or causing to be posted written or printed notice of the time, place and
terms of sale at the door of the Courthouse of said County or at such other
location as may be designated for the posting thereof under then applicable law
and procedure, for at least twenty-one (21) days successively next before the
day of sale (such 21-day period commencing on the date of posting), and to
execute and deliver to the purchaser(s) at such sale proper conveyance(s) of the
property sold, with special warranty of title binding upon Grantor and the
successors and assigns of Grantor, or the Beneficiary or other holder(s) of the
Obligation may foreclose or cause to be foreclosed the lien of this deed of
trust, in whole or in part, through judicial foreclosure or in any manner as may
at any time be authorized under the statutes of the State of Texas. The notice
of sale described above shall designate the earliest time (between ten o'clock
a.m. and four o'clock p.m.) on which the sale may occur, and if the applicable
commissioners court has not designated a portion of the courthouse at which such
public sales are to be held, the notice shall designate the portion of the
courthouse at which the sale will take place. In addition, the holder(s) of the
Obligation shall at least twenty-one (21) days preceding the date of sale (such
21-day period commencing on the date of filing and mailing of the notice) (i)
file a copy of such notice with the clerk of the county in which the Mortgaged
Property is situated, and (ii) serve written notice of the proposed sale by
certified mail on each debtor obligated to pay the Obligation according to the
records of such holder(s). Service of such notice shall be completed upon
deposit of the notice, enclosed in a postpaid wrapper, properly addressed to
each debtor at such debtor's most recent address as shown by Beneficiary's
records, in a post office or official depository under the care and custody of
the United States Postal Service. The affidavit of any person having knowledge
of the facts to the effect that such service was completed shall be prima facie
evidence of the fact of service. No notice of such sale or sales other than
that herein provided for need be given to Grantor or any other person or party.
The Trustee acting shall apply the proceeds arising from each such sale, first,
to pay all expenses of the sale, including the out-of-pocket expenses for the
Trustee acting, second, to reimburse Beneficiary for any reasonable expenses
incurred by Beneficiary in protecting, administering and operating the Mortgaged
Property prior to the foreclosure sale, and third, to the payment of the
Obligation. Grantor may apply the proceeds of each sale to the Obligation in
such order and manner as set forth herein. Any surplus funds from any sale or
sales hereunder shall be paid to Grantor, or as otherwise provided by law.
Beneficiary or other holder(s) of the Obligation shall have the right to become
the purchaser at any sale to the same extent as any other party, being the
highest bidder, and in lieu of paying cash may credit the amount of the bid upon
the Obligation held by Beneficiary or such other holder(s) up to the full amount
of the Obligation then unpaid. Beneficiary shall
16
<PAGE>
not be liable for any damages in connection with actions taken by Beneficiary
hereunder, except those occasioned by Beneficiary's gross negligence or willful
misconduct.
G. In any sale of the Mortgaged Property or any part thereof under any
provision of this deed of trust or pursuant to any judgment or decree of court
the purchaser at such sale shall take title to the Mortgaged Property or the
part thereof so sold free and discharged of the estates of the Grantor therein,
the purchaser being hereby discharged from all liability to see to the
application of the purchase money. Any person, including the Beneficiary, may
purchase at any sale.
H. The Beneficiary shall have the right from time to time to sue for any
sums required to be paid by the Grantor under the terms of this Lease and deed
of trust as the same become due, without regard to whether the principal sum
secured hereby or any other sums evidenced by this Lease and secured by this
deed of trust shall be due and without prejudice to the right of the Beneficiary
thereafter to bring any action or proceeding of foreclosure or any other action
upon the occurrence of any Event of Default hereunder existing at the time such
earlier action was commenced.
I. No failure to exercise, nor any delay in exercising, any power or right
hereunder by the Beneficiary shall operate as a waiver thereof, nor shall any
single or partial exercise by the Beneficiary of any right hereunder preclude
any other or further exercise thereof or the exercise of any other right.
J. If such a sale is made because of an occurrence of an Event of Default
relating to payment of any portion of the Obligation, it may be made subject to
the unmatured part of the Obligation, but as to the unmatured part of the
Obligation, this deed of trust shall remain in full force and effect just as
though no sale had been made under the provisions of this Section. Several
sales may be made hereunder without exhausting the power of foreclosure and the
power to sell the Mortgaged Property, in whole or in part, for any other part of
the Obligation whether then matured or subsequently maturing.
K. Grantor represents and covenants that the Mortgaged Property forms no
part of any property owned, used or claimed by Grantor as a business or
residential homestead, and, to the extent it may lawfully do so, waives any and
all rights of appraisement, marshaling, valuation, stay or extension law, sale
and redemption under the laws of Texas now or hereafter in force.
L. All rights and remedies of Beneficiary under this deed of trust, and
any and all other instruments evidencing or securing the Obligation, are
cumulative and concurrent and may be exercised singly, successively or
concurrently.
M. Except for gross negligence or willful misconduct, Trustee, and the
Substitute Trustee, shall not be liable for any act or omission of judgment.
Trustee, and the Substitute Trustee, may rely on any document believed by him in
good faith to be genuine. All money received by Trustee, or the Substitute
Trustee, shall, until used or applied as herein provided, be held in trust, but
need not be segregated
17
<PAGE>
(except to the extent required by law), and Trustee, or the Substitute Trustee,
shall not be liable for interest thereon. Grantor hereby indemnifies Trustee
and the Substitute Trustee against all liability and expenses that he may incur
in the performance of his duties hereunder except for acts or omissions
involving gross negligence or willful misconduct.
N. In case of the resignation of the Trustee, or the inability (through
death or otherwise), refusal or failure of the Trustee to act, or at the option
of Beneficiary for any other reason (which reason need not be stated), a
substitute trustee (herein, the "Substitute Trustee") may be named, constituted
------------------
and appointed by Beneficiary, without other formality than an appointment and
designation in writing; which appointment and designation shall be full evidence
of the right and authority to make the same and of all facts therein recited;
and this conveyance shall vest in the Substitute Trustee the title, powers and
duties herein conferred on the Trustee originally named herein, and the
conveyance of the Substitute Trustee to the purchaser(s) at any sale shall be
equally valid and effective. The right to appoint a Substitute Trustee shall
exist as often and whenever from any of said causes, the Trustee, original or
substitute, resigns, or cannot, will not or does not act, or Beneficiary desires
for any reason whatsoever to appoint a Substitute Trustee. No bond shall ever
be required of the Trustee, original or substitute. The recitals in any
conveyance made by the Trustee, original or substitute, shall be accepted and
construed in court and elsewhere as prima facie evidence and proof of the facts
recited, and no other proof shall be required as to the request of Beneficiary
to the Trustee to enforce this Deed of Trust, or as to the notice of or holding
of the sale, or as to any particulars thereof, or as to the resignation of the
Trustee, original or substitute, or as to the inability, refusal or failure of
the Trustee, original or substitute, to act, or as to the election of
Beneficiary to appoint a new Trustee, or as to appointment of a Substitute
Trustee, and all prerequisites of said sale shall be presumed to have been
performed; and each sale made under the powers herein granted shall be a
perpetual bar against Grantor and the heirs, personal representatives,
successors and assigns of Grantor.
O. This deed of trust (a) shall be construed as a deed of trust on real
property, and (b) shall also constitute and serve as a "Security Agreement" on
personal property within the meaning of, and shall constitute until the grant of
this deed of trust shall terminate as provided hereinabove, a first and prior
security interest under the applicable Uniform Commercial Code (being Chapter 9
of the Texas Business and Commerce Code, as to property within the scope thereof
and situated in the State of Texas) that may constitute a portion of the
Mortgaged Property (herein, if any, the "UCC Collateral"). To this end, Grantor
--------------
has GRANTED, BARGAINED, CONVEYED, ASSIGNED, TRANSFERRED and SET OVER, and by
these presents does GRANT, BARGAIN, CONVEY, ASSIGN, TRANSFER and SET OVER, unto
Trustee and Beneficiary, a first and prior security interest and all of
Grantor's right, title and interest in, to, under and with respect to the UCC
Collateral to secure the full and timely payment of and the full and timely
performance and discharge of the Obligation.
P. Grantor hereby agrees with Beneficiary to execute and deliver to
Beneficiary, in form and substance reasonably satisfactory to Beneficiary, such
financing statements and such further assurances
18
<PAGE>
as Beneficiary may, from time to time, reasonably consider necessary to create,
perfect and preserve Beneficiary's security interest herein granted, and
Beneficiary may cause such statements and assurances to be recorded and filed,
at such times and places as may be required or permitted by law to so create,
perfect and preserve such security interest.
Q. Beneficiary and/or Trustee shall have all the rights, remedies and
recourses with respect to the UCC Collateral afforded to it by the aforesaid
Uniform Commercial Code (being Chapter 9 of the Texas Business and Commerce
Code, as to property within the scope thereof and situated in the State of
Texas) in addition to, and not in limitation of, the other rights, remedies and
recourses afforded by this Lease and deed of trust.
R. The granting to Grantor or to any other person or party of any
extension(s) of time for the payment of the Obligation or the performance of any
covenant or agreement contained herein, or the taking of other or additional
security for the payment of the Obligation, or any part thereof, or the
releasing of any part of the security for the Obligation, shall not release
Grantor or any other person or party obligated for the payment of the
Obligation, or release or impair this deed of trust or any other security held
in connection with the Obligation, except to the extent Beneficiary releases a
person, party or property in writing. Moreover, the taking of additional
security, or the renewal, extension, modification or rearrangement of the
Obligation or any part thereof, shall at no time release or impair the liens and
rights granted hereby; and this deed of trust, as well as any instrument given
to secure any renewal, extension, modification or rearrangement of the
Obligation, or any part thereof, shall be and remain a first and prior lien
subject only to the encumbrances set forth herein, on all of the Mortgaged
Property not released, until the Obligation is completely paid.
S. If any provision in this deed of trust is invalid or unenforceable in
whole or in part, this instrument shall in all other respects remain in full
force and effect.
T. All of the provisions hereof shall apply to and be binding upon Grantor
and its successors and assigns, and shall apply to and inure to the benefit of
Beneficiary and its successors and assigns, including all future holders of the
Obligation.
U. THIS ARTICLE XI SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF
LAWS.
19
<PAGE>
ARTICLE XII.
EVENTS OF DEFAULT
-----------------
The following events shall constitute Events of Default (whether any such
event shall be voluntary or involuntary or come about or be effected by
operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any Governmental
Authority):
(a) Lessee shall fail to make any payment of Rent when due, and such
failure shall continue for three (3) or more days after written notice thereof
to Lessee from Lessor or the Agent;
(b) Lessee shall fail to make any payment of any other amount payable
hereunder or under any of the other Operative Documents (other than Rent and
other than as set forth in clause (c)), and such failure shall continue for a
----------
period of five or more Business Days after written notice thereof to Lessee from
Lessor or the Agent;
(c) Lessee shall fail to pay the Funded Amount or Lease Balance when due
pursuant to Section 10.1, 10.2, 14.1 or 14.2, or Lessee shall fail to pay the
------------ ---- ---- ----
Recourse Deficiency Amount when required pursuant to Article XIV or any
-----------
Construction Agency Event of Default shall occur;
(d) Lessee shall fail to maintain insurance as required by Article VIII
------------
hereof, and such failure shall continue until the earlier of (i) 15 days after
written notice thereof from Lessor and (ii) the day immediately preceding the
date on which any applicable insurance coverage would otherwise lapse or
terminate;
(e) if any of the Commerce Companies shall fail to pay when due and
payable, or within any applicable period of grace, any obligations for borrowed
money or in respect of capitalized leases or in respect of synthetic leases
referred to in clause (c) of the definition of "Indebtedness", which obligations
exceed $5,000,000 in the aggregate, or fail to observe or perform in any
material respect any term, covenant or agreement contained in any material
agreement by which it is bound, evidencing or securing obligations for borrowed
money or in respect of capitalized leases or in respect of capitalized leases or
in respect of synthetic leases referred to in clause (c) of the definition of
"Indebtedness", which obligations exceed $5,000,000 in the aggregate, for such
period of time as would permit (assuming the giving of appropriate notice if
required) the holder or holders thereof or of any obligations issued thereunder
to accelerate the maturity thereof;
(f) Lessee, any Commerce Subsidiary or any Material Foreign Subsidiary
shall (i) apply for or consent to the appointment of a receiver, trustee or
liquidator of itself or of its property, (ii) be unable, or admit in writing
inability, to pay its debts as they mature, (iii) make a general assignment for
the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent, (v) file
a voluntary petition in
20
<PAGE>
bankruptcy, or a petition or answer seeking reorganization or an arrangement
with creditors to take advantage of any insolvency law or an answer admitting
the material allegations of a bankruptcy, reorganization or insolvency petition
filed against it, (vi) take corporate action for the purpose of effecting any of
the foregoing, or (vii) have an order for relief entered against it in any
proceeding under any bankruptcy law;
(g) An order, judgment or decree shall be entered, without the application,
approval or consent of Lessee, any Commerce Subsidiary or any Material Foreign
Subsidiary, by any court of competent jurisdiction, approving a petition seeking
reorganization of such entity or appointing a receiver, trustee or liquidator of
such entity or of all or a substantial part of its assets;
(h) any representation or warranty by Lessee in any Operative Document or
in any certificate or document delivered to Lessor, the Agent or any Lender
pursuant to any Operative Document shall have been incorrect in any material
respect when made;
(i) Lessee shall repudiate or terminate the Guaranty, or the Guaranty shall
at any time cease to be in full force and effect or cease to be the legal, valid
and binding obligation of Lessee;
(j) Lessee shall fail in any material respect to timely, perform or observe
any covenant, condition or agreement (not included in clause (a), (b), (c), (d),
---------- --- --- ---
(e), (f), (g), (h) or (i) of this Article XII) to be performed or observed by it
- --- --- --- --- --- -----------
hereunder or under any other Operative Document and such failure shall continue
for a period of 30 days after Lessee's receipt of written notice thereof from
Lessor, the Agent or any Lender;
(k) if there shall remain in force, undischarged, unsatisfied and unstayed
for more than thirty (30) days, whether or not consecutive, any final judgment
against any of the Commerce Companies which, alone or with any outstanding final
judgments undischarged against the Commerce Companies equal or exceeds in the
aggregate an amount which could reasonably be expected to have a Material
Adverse Effect;
(l) any of the Lessee or the Commerce Subsidiaries shall fail to comply
with the covenant contained in Section 5.10 of the Master Agreement for one (1)
Business Day (in the case of Lessee) on for two (2) Business Days (in the case
of any of the Commerce Subsidiaries), after written notice of such failure has
been given to Lessee by the Agent or Lessor;
(m) with respect to any Guaranteed Pension Plan, an ERISA Reportable Event
shall have occurred (or in the event that a Subsidiary shall have been acquired
with an Employee Benefit Plan subject to an "accumulated funding deficiency" and
such "accumulated funding deficiency" shall not have been cured within any grace
period specified therefore in Section 5.26(b) of the Master Agreement and the
Lessor or the Agent shall have determined in its reasonable discretion that such
event reasonably
21
<PAGE>
could be expected to result in liability of Lessee or any ERISA Affiliate to the
PBGC or such Guaranteed Pension Plan in an aggregate amount exceeding the amount
provided in Section 5.26(b)(i) or (ii) of the Master Agreement, as applicable,
and such event in the circumstances occurring reasonably could constitute
grounds for the termination of such Guaranteed Pension Plan by the PBGC or for
the appointment by the appropriate United States District Court of a trustee to
administer such Guaranteed Pension Plan; or a trustee shall have been appointed
by the United States District Court to administer such Guaranteed Pension Plan;
or the PBGC shall have instituted proceedings to terminate such Guaranteed
Pension Plan;
(n) if any of the Operative Documents to which Lessee or any of the
Commerce Subsidiaries is a party shall be canceled, terminated, revoked or
rescinded by the Lessee or such Commerce Subsidiary otherwise than in accordance
with the terms thereof or with the express prior written agreement, consent or
approval of the Lenders and Lessor or any action at law, suit or in equity or
other legal proceeding to cancel, revoke or rescind any of the Operative
Documents shall be commenced by or on behalf of any of the Lessee or the
Commerce Subsidiaries party thereto or any of their respective stockholders, or
any court or any other governmental or regulatory authority or agency of
competent jurisdiction shall make a determination that, or issue a judgment,
order, decree or ruling to the effect that, any one or more of the Operative
Documents is illegal, invalid or unenforceable in accordance with the terms
thereof;
(o) (i) any of the Lessee or the Commerce Subsidiaries shall be enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting any material part of its
business and such order shall continue in effect for more than thirty (30) days
and such inability to conduct its business shall have a material adverse effect
on the business or financial condition of the Lessee and the Commerce
Subsidiaries taken as a whole, or (ii) there shall occur any strike, lockout,
labor dispute, embargo, condemnation, act of God or public enemy or other
casualty, which, in any such case, causes, for more than fifteen (15)
consecutive days, the cessation or substantial curtailment of revenue producing
activities at any facility of any of Lessee or the Commerce Subsidiaries and
which has a Material Adverse Effect;
(p) there shall occur the loss, suspension or revocation of, or failure to
renew, any license or permit now held or hereafter acquired by any of the Lessee
or the Commerce Subsidiaries if such loss, suspension, revocation or failure to
renew would have a Material Adverse Effect;
(q) any of the Lessee or the Commerce Subsidiaries shall be indicted for a
state or federal crime, or any civil or criminal action shall otherwise have
been brought or threatened in writing with the basis for such threatened action
specified therein against any of the Lessee or the Commerce Subsidiaries, a
punishment for which in any such case could include the forfeiture of any assets
of the Lessee or such Commerce Subsidiary having a fair market value in excess
of an amount which could reasonably be expected to have a Material Adverse
Effect;
22
<PAGE>
(r) any person or group of persons (within the meaning of Section 13 or 14
of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or more of the
outstanding shares of common stock of Lessee; or, during any period of twelve
consecutive calendar months, individuals who were directors of Lessee on the
first day of such period shall cease to constitute a majority of the board of
directors of the Lessee; or Lessee or one of the Commerce Subsidiaries shall,
except as a result of dispositions permitted by Section 5.24 of the Master
Agreement, cease to own 100% of the capital stock of each of the Commerce
Subsidiaries; or
(s) (i) Lessee or any of its Subsidiaries is obligated to repurchase
Commerce Accounts Receivable arising under the Commerce Accounts Receivable
Agreement with Sanwa Business Credit Corporation in an aggregate amount equal to
or greater than fifty percent (50%) of the amount of Commerce Accounts
Receivable outstanding under such agreement at any time, or (ii) a Total
Repurchase Event with respect to Commerce Accounts Receivable other than those
specified in clause (i) hereof in an aggregate amount equal to or greater than
----------
$5,000,000 shall have occurred under one or more of the Commerce Accounts
Receivable Agreements.
ARTICLE XIII.
ENFORCEMENT
-----------
Section 13.1 Remedies. Upon the occurrence and during the continuance of
--------
any Event of Default, Lessor may do one or more of the following as Lessor in
its sole discretion shall determine, without limiting any other right or remedy
Lessor may have on account of such Event of Default (including, without
limitation, the obligation of Lessee to purchase the Leased Property as set
forth in Section 14.3):
------------
(a) Lessor may, by notice to Lessee, rescind or terminate this Lease as of
the date specified in such notice; however, (A) no reletting, reentry or taking
of possession of the Leased Property by Lessor will be construed as an election
on Lessor's part to terminate this Lease unless a written notice of such
intention is given to Lessee, (B) notwithstanding any reletting, reentry or
taking of possession, Lessor may at any time thereafter elect to terminate this
Lease for a continuing Event of Default, and (C) no act or thing done by Lessor
or any of its agents, representatives or employees and no agreement accepting a
surrender of the Leased Property shall be valid unless the same be made in
writing and executed by Lessor;
(b) Lessor may (i) demand that Lessee, and Lessee shall upon the written
demand of Lessor, return the Leased Property promptly to Lessor in the manner
and condition required by, and otherwise in accordance with all of the
provisions of, Articles VI and XIV hereof as if the Leased Property were being
----------- ---
returned at the end of the Lease Term, and Lessor shall not be liable for the
23
<PAGE>
reimbursement of Lessee for any costs and expenses incurred by Lessee in
connection therewith and (ii) without prejudice to any other remedy which Lessor
may have for possession of the Leased Property, and to the extent and in the
manner permitted by Applicable Law, enter upon the Leased Property and take
immediate possession of (to the exclusion of Lessee) the Leased Property or any
part thereof and expel or remove Lessee and any other person who may be
occupying the Leased Property, by summary proceedings or otherwise, all without
liability to Lessee for or by reason of such entry or taking of possession,
whether for the restoration of damage to property caused by such taking or
otherwise and, in addition to Lessor's other damages, Lessee shall be
responsible for the actual and reasonable costs and expenses of reletting,
including brokers' fees and the reasonable costs of any alterations or repairs
made by Lessor;
(c) Lessor may (i) sell all or any part of the Leased Property at public or
private sale, as Lessor may determine, free and clear of any rights of Lessee
and without any duty to account to Lessee with respect to such action or
inaction or any proceeds with respect thereto (except to the extent required by
clause (ii) below if Lessor shall elect to exercise its rights thereunder) in
- -----------
which event Lessee's obligation to pay Basic Rent hereunder for periods
commencing after the date of such sale shall be terminated or proportionately
reduced, as the case may be; and (ii) if Lessor shall so elect, demand that
Lessee pay to Lessor, and Lessee shall pay to Lessor, on the date of such sale,
as liquidated damages for loss of a bargain and not as a penalty (the parties
agreeing that Lessor's actual damages would be difficult to predict, but the
aforementioned liquidated damages represent a reasonable approximation of such
amount) (in lieu of Basic Rent due for periods commencing on or after the
Payment Date coinciding with such date of sale (or, if the sale date is not a
Payment Date, the Payment Date next preceding the date of such sale)), an amount
equal to (a) the excess, if any, of (1) the sum of (A) all Rent due and unpaid
to and including such Payment Date and (B) the Funded Amounts, computed as of
such date, over (2) the net proceeds of such sale (that is, after deducting all
costs and expenses incurred by Lessor, the Agent or any Lender incident to such
conveyance (including, without limitation, all costs, expenses, fees, premiums
and taxes described in Section 14.5(b))); plus (b) interest at the Overdue Rate
---------------- ----
on the foregoing amount from such Payment Date until the date of payment;
(d) Lessor may, at its option, not terminate this Lease, and continue to
collect all Basic Rent, Supplemental Rent, and all other amounts (including,
without limitation, the Funded Amount) due Lessor (together with all costs of
collection) and enforce Lessee's obligations under this Lease as and when the
same become due, or are to be performed, and at the option of Lessor, upon any
abandonment of the Leased Property by Lessee or re-entry of same by Lessor,
Lessor may, in its sole and absolute discretion, elect not to terminate this
Lease with respect thereto and may make such reasonable alterations and
necessary repairs in order to relet the Leased Property, and relet the Leased
Property or any part thereof for such term or terms (which may be for a term
extending beyond the term of this Lease) and at such rental or rentals and upon
such other terms and conditions as Lessor in its reasonable discretion may deem
advisable; and upon each such reletting all rentals actually received
24
<PAGE>
by Lessor from such reletting shall be applied to Lessee's obligations hereunder
in such order, proportion and priority as Lessor may elect in Lessor's sole and
absolute discretion; it being agreed that under no circumstances shall Lessee
benefit from its default from any increase in market rents. If such rentals
received from such reletting during any Rent Period are less than the Rent to be
paid during that Rent Period by Lessee hereunder, Lessee shall pay any
deficiency, as calculated by Lessor, to Lessor on the Payment Date for such Rent
Period;
(e) If the Leased Property has not been sold, Lessor may, whether or not
Lessor shall have exercised or shall thereafter at any time exercise any of its
rights under paragraph (b), (c) or (d) of this Article XIII with respect to the
------------- --- --- ------------
Leased Property, demand, by written notice to Lessee specifying a date (the
"Final Rent Payment Date") not earlier than 30 days after the date of such
-----------------------
notice, that Lessee purchase, on the Final Rent Payment Date, the Leased
Property in accordance with the provisions of Sections 14.2, 14.4 and 14.5;
------------- ---- ----
provided, however, that (1) such purchase shall occur on the date set forth in
- -------- -------
such notice, notwithstanding the provision in Section 14.2 calling for such
------------
purchase to occur on the Lease Termination Date; and (2) Lessor's obligations
under Section 14.5(a) shall be limited to delivery of a special warranty deed
---------------
and quit claim bill of sale of the Leased Property, without recourse or
warranty, but free and clear of Lessor Liens and the Liens of the Operative
Documents;
(f) Lessor may exercise any other right or remedy that may be available to
it under Applicable Law, or proceed by appropriate court action (legal or
equitable) to enforce the terms hereof or to recover damages for the breach
hereof. Separate suits may be brought to collect any such damages for any Rent
Period(s), and such suits shall not in any manner prejudice Lessor's right to
collect any such damages for any subsequent Rent Period(s), or Lessor may defer
any such suit until after the expiration of the Lease Term, in which event such
suit shall be deemed not to have accrued until the expiration of the Lease Term;
or
(g) Lessor may retain and apply against Lessor's damages all sums which
Lessor would, absent such Event of Default, be required to pay to, or turn over
to, Lessee pursuant to the terms of this Lease.
Section 13.2 Remedies Cumulative; No Waiver; Consents. To the extent
----------------------------------------
permitted by, and subject to the mandatory requirements of, Applicable Law, each
and every right, power and remedy herein specifically given to Lessor or
otherwise in this Lease shall be cumulative and shall be in addition to every
other right, power and remedy herein specifically given or now or hereafter
existing at law, in equity or by statute, and each and every right, power and
remedy whether specifically herein given or otherwise existing may be exercised
from time to time and as often and in such order as may be deemed expedient by
Lessor, and the exercise or the beginning of the exercise of any power or remedy
shall not be construed to be a waiver of the right to exercise at the same time
or thereafter any right, power or remedy. Notwithstanding the foregoing, so
long as Lessee purchases the Leased Property in accordance with Sections 14.2,
-------------
14.4 and 14.5 (including the payment of the Lease Balance in cash)
- ---- ----
25
<PAGE>
prior to the sale of the Leased Property to another Person, Lessor shall not
have the right to exercise any other remedy set forth in Section 13.1. No delay
------------
or omission by Lessor in the exercise of any right, power or remedy or in the
pursuit of any remedy shall impair any such right, power or remedy or be
construed to be a waiver of any default on the part of Lessee or to be an
acquiescence therein. Lessor's consent to any request made by Lessee shall not
be deemed to constitute or preclude the necessity for obtaining Lessor's
consent, in the future, to all similar requests. No express or implied waiver by
Lessor of any Event of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Potential Event of Default or Event of
Default. To the extent permitted by Applicable Law, Lessee hereby waives any
rights now or hereafter conferred by statute or otherwise that may require
Lessor to sell, lease or otherwise use the Leased Property or part thereof in
mitigation of Lessor's damages upon the occurrence of an Event of Default or
that may otherwise limit or modify any of Lessor's rights or remedies under this
Article XIII.
- ------------
ARTICLE XIV.
SALE, RETURN OR PURCHASE OF LEASED PROPERTY; RENEWAL
----------------------------------------------------
Section 14.1 Lessee's Option to Purchase. Subject to the terms, conditions
---------------------------
and provisions set forth in this Article XIV, Lessee shall have the option (the
-----------
"Purchase Option"), to be exercised as set forth below, to purchase from Lessor,
---------------
Lessor's interest in the Leased Property. Such option must be exercised by
written notice to Lessor not later than 270 days prior to the Lease Termination
Date which notice shall be irrevocable; such notice shall specify the date that
such purchase shall take place, which date shall be a date occurring not less
than thirty (30) days after such notice or the Lease Termination Date (whichever
is earlier). If the Purchase Option is exercised pursuant to the foregoing,
then, subject to the provisions set forth in this Article XIV, on the applicable
-----------
purchase date or the Lease Termination Date, as the case may be, Lessor shall
convey to Lessee, or a transferee designated by Lessee in a written notice given
to Lessor not less than ten (10) Business Days prior to the purchase date or
Lease Termination Date, as the case may be, by special warranty deed (which
shall include a warranty to the absence of Lessor Liens, but shall exclude any
warranty with respect to Liens created by Lessee as Lessor's agent) and Lessee,
or such transferee, shall purchase from Lessor, Lessor's interest in the Leased
Property.
Section 14.2 Conveyance to Lessee. Unless (a) Lessee shall have properly
--------------------
exercised the Purchase Option and purchased the Leased Property pursuant to
Section 14.1 hereof, or (b) Lessee shall have properly exercised the Remarketing
- ------------
Option or the Surrender Option and shall have fulfilled all of the conditions of
Section 14.6 hereof, then, subject to the terms, conditions and provisions set
- ------------
forth in this Article XIV, Lessee shall purchase from Lessor, and Lessor shall
-----------
convey to Lessee, on the Lease Termination Date all of Lessor's interest in the
Leased Property. Lessee may designate, in a notice given to Lessor not less
than ten (10) Business Days prior to the closing of such purchase (time being of
the essence), the transferee to whom the conveyance shall be made (if other than
to Lessee), in
26
<PAGE>
which case such conveyance shall (subject to the terms and conditions set forth
herein) be made to such designee; provided, however, that such designation of a
-------- -------
transferee shall not cause Lessee to be released, fully or partially, from any
of its obligations under this Lease.
Section 14.3 Acceleration of Purchase Obligation. Lessee shall be
-----------------------------------
obligated to purchase Lessor's interest in the Leased Property immediately,
automatically and without notice upon the occurrence of any Event of Default
specified in clause (g) of Article XII, for the purchase price set forth in
---------- -----------
Section 14.4. Upon the occurrence and during the continuance of any other Event
- ------------
of Default, Lessee shall be obligated to purchase Lessor's interest in the
Leased Property for the purchase price set forth in Section 14.4 upon notice of
------------
such obligation from Lessor.
Section 14.4 Determination of Purchase Price. Upon the purchase by Lessee
-------------------------------
of Lessor's interest in the Leased Property upon the exercise of the Purchase
Option or pursuant to Section 14.2 or 14.3, the purchase price for the Leased
------------ ----
Property shall be an amount equal to the Lease Balance as of the closing date
for such purchase, plus any amount due pursuant to Section 7.5(b) of the Master
----
Agreement as a result of such purchase.
Section 14.5 Purchase Procedure. (a) If Lessee shall purchase Lessor's
------------------
interest in the Leased Property pursuant to any provision of this Lease, (i)
Lessee shall accept from Lessor and Lessor shall convey the Leased Property by a
duly executed and acknowledged special warranty deed and quit claim bill of sale
of the Leased Property in recordable form, (ii) upon the date fixed for any
purchase of Lessor's interest in the Leased Property hereunder, Lessee shall pay
to the order of the Agent (or Lessor if the Loans have been paid in full) the
Lease Balance, plus any amount due pursuant to Section 7.5(b) of the Master
----
Agreement as a result of such purchase by wire transfer of immediately available
funds, and (iii) Lessor will execute and deliver to Lessee such other documents,
including releases, termination agreements and termination statements, as may be
legally required or as may be reasonably requested by Lessee in order to effect
such conveyance, free and clear of Lessor Liens and the Liens of the Operative
Documents.
(b) Lessee shall, at Lessee's sole cost and expense, obtain all required
governmental and regulatory approval and consents and shall make such filings as
required by Applicable Law; in the event that Lessor is required by Applicable
Law to take any action in connection with such purchase and sale, Lessee shall
pay all costs incurred by Lessor in connection therewith. In addition, all
charges incident to such conveyance, including, without limitation, Lessee's
attorneys' fees, Lessor's attorneys' fees reasonably and actually incurred,
commissions, Lessee's and Lessor's escrow fees, recording fees, title insurance
premiums and all applicable documentary transfer or other transfer taxes and
other taxes required to be paid in order to record the transfer documents that
might be imposed by reason of such conveyance and the delivery of such deed
shall be borne entirely and paid by Lessee.
27
<PAGE>
(c) Upon expiration or termination of this Lease resulting in conveyance
of Lessor's interest in the title to the Leased Property to Lessee, there shall
be no apportionment of rents (including, without limitation, water rents and
sewer rents), taxes, insurance, utility charges or other charges payable with
respect to the Leased Property, all of such rents, taxes, insurance, utility or
other charges due and payable with respect to the Leased Property prior to
termination being payable by Lessee hereunder and all due after such time being
payable by Lessee as the then owner of the Leased Property.
Section 14.6 Option to Remarket; Surrender Option. Subject to the
------------------------------------
fulfillment of each of the conditions set forth in this Section 14.6, Lessee
------------
shall have the option to either (i) market the Leased Property for Lessor (the
"Remarketing Option") or (ii) surrender the Leased Property to Lessor (the
------------------
"Surrender Option").
----------------
Lessee's effective exercise and consummation of the Remarketing Option or
the Surrender Option, as the case may be, shall be subject to the due and timely
fulfillment of each of the following provisions, the failure of any of which
shall render the Remarketing Option or the Surrender Option, as the case may be,
and Lessee's exercise thereof null and void, in which event, Lessee shall be
obligated to perform its obligations under Section 14.2.
------------
(a) Not later than 270 days prior to the Lease Termination Date,
Lessee shall give to Lessor and the Agent written notice of Lessee's
exercise of the Remarketing Option or the Surrender Option, as the case may
be, which exercise shall be irrevocable and shall state whether Lessee has
exercised the Remarketing Option or the Surrender Option.
(b) Not later than ten (10) Business Days prior to the Lease
Termination Date, Lessee shall deliver to Lessor and the Agent an
environmental assessment of the Leased Property dated not later than forty-
five (45) days prior to the Lease Termination Date. Such environmental
assessment shall be prepared by an environmental consultant approved by the
Required Funding Parties in their reasonable discretion, shall be in form,
detail and substance reasonably satisfactory to the Required Funding
Parties, and shall otherwise indicate the environmental condition of the
Leased Property to be the same as described in the Environmental Audit.
(c) On the date of Lessee's notice to Lessor and the Agent of
Lessee's exercise of the Remarketing Option or the Surrender Option, as the
case may be, each of the Construction Conditions shall have been timely
satisfied and no Event of Default or Potential Event of Default shall
exist, and thereafter, no Event of Default or Potential Event of Default
shall exist under this Lease.
(d) Lessee shall have completed all Alterations, restoration and
rebuilding of the Leased Property pursuant to Sections 6.1, 6.2, 10.3 and
------------ --- ----
10.4 (as the case may be) and shall
----
28
<PAGE>
have fulfilled all of the conditions and requirements in connection
therewith pursuant to said Sections, in each case by the date on which
--------
Lessor and the Agent receive Lessee's notice of Lessee's exercise of the
Remarketing Option or the Surrender Option, as the case may be (time being
of the essence), regardless of whether the same shall be within Lessee's
control.
(e) Lessee shall promptly provide any maintenance records relating to
the Leased Property to Lessor, the Agent and any potential purchaser upon
request, and shall otherwise do all things necessary to deliver possession
of the Leased Property to the purchaser. Lessee shall allow Lessor, the
Agent and any potential purchaser access to the Leased Property for the
purpose of inspecting the same during regular business hours (or as
otherwise agreed by Lessee).
(f) On the Lease Termination Date, Lessee shall surrender the Leased
Property in accordance with Section 14.8 hereof.
------------
(g) In connection with any such sale of the Leased Property, Lessee
will provide to the purchaser all customary "seller's" indemnities,
representations and warranties regarding title, absence of Liens (except
Lessor Liens and the Liens of the Operative Documents) and the condition of
the Leased Property, including, without limitation, an environmental
indemnity. Lessee shall fulfill all of the requirements set forth in clause
------
(b) of Section 14.5, and such requirements are incorporated herein by
--- ------------
reference. As to Lessor, any such sale shall be made on an "as is, with
all faults" basis by special warranty deed by Lessor, which shall include a
warranty as to the absence of Lessor Liens and the Liens of the Operative
Documents, but shall exclude any warranty with respect to Liens created by
Lessee as Lessor's agent.
(h) In connection with any such sale of Leased Property, Lessee shall
pay directly, and not from the sale proceeds, all prorations, credits,
costs and expenses of the sale of the Leased Property, whether incurred by
Lessor, any Lender, the Agent or Lessee, including without limitation, the
cost of all title insurance, surveys, environmental reports, appraisals,
transfer taxes, Lessor's and the Agent's attorneys' fees, Lessee's
attorneys' fees, commissions, escrow fees, recording fees, and all
applicable documentary and other transfer taxes.
(i) In addition to the gross proceeds of the sale of the Leased
Property (but subject to the penultimate sentence of this Section 14.6),
------------
Lessee shall pay to the Agent on the Lease Termination Date (or to such
other Person as Agent shall notify Lessee in writing, or in the case of
Supplemental Rent, to the Person entitled thereto) an amount equal to the
Recourse Deficiency Amount, plus all Basic Rent and Supplemental Rent, and
----
all other amounts hereunder which have accrued prior to or as of such date,
in the type of funds specified in Section 3.3 hereof.
-----------
29
<PAGE>
If Lessee has exercised the Remarketing Option, the following additional
provisions shall apply: During the period commencing on the date of Lessee's
notice pursuant to Section 14.6(a), Lessee shall, as nonexclusive agent for
---------------
Lessor, use commercially reasonable efforts to sell Lessor's interest in the
Leased Property and will attempt to obtain the highest purchase price therefor.
All such marketing of the Leased Property shall be at Lessee's sole expense.
Lessee shall submit all bids to Lessor and the Agent and Lessor and the Agent
will have the right to review the same and the right to submit any one or more
bids. All bids shall be on an all-cash basis. In no event shall such bidder be
Lessee or any Subsidiary or Affiliate of Lessee. The written offer must specify
the Lease Termination Date as the closing date. If, and only if, the selling
price (net of closing costs and prorations, as reasonably estimated by the
Agent) is less than the difference between the Lease Balance at such time minus
the Recourse Deficiency Amount, then the Agent (as directed by the Required
Lenders) may, in its sole and absolute discretion, by notice to Lessee, reject
such offer to purchase, in which event the parties will proceed according to the
provisions of Section 14.7 [Rejection of Sale] hereof. If the Agent does not
------------
reject such purchase offer as provided above, the closing of such purchase of
the Leased Property by such purchaser shall occur on the Lease Termination Date,
contemporaneously with Lessee's surrender of the Leased Property in accordance
with Section 14.8 hereof, and the gross proceeds of the sale (i.e., without
------------
deduction for any marketing, closing or other costs, prorations or commissions)
shall be paid directly to the Agent (or Lessor if the Loans have been fully
paid); provided, however, that if the sum of the gross proceeds from such sale
-------- -------
plus the Recourse Deficiency Amount paid by Lessee on the Lease Termination Date
pursuant to Section 14.6(i), minus any and all costs and expenses (including
---------------
broker fees, appraisal costs, legal fees and transfer taxes) incurred by the
Agent or Lessor in connection with the marketing of the Leased Property or the
sale thereof exceeds the Lease Balance as of such date, then the excess shall be
paid to Lessee on the Lease Termination Date. Lessee shall have no right, power
or authority to bind Lessor in connection with any proposed sale of the Leased
Property.
Section 14.7 Rejection of Sale. Notwithstanding anything contained herein
-----------------
to the contrary, if Lessor or the Agent rejects the purchase offer for the
Leased Property as provided in Section 14.6, then (a) Lessee shall pay to the
------------
Agent the Recourse Deficiency Amount pursuant to Section 14.6(i), (b) Lessor
---------------
shall retain title to the Leased Property, and (c) in addition to Lessee's other
obligations hereunder, Lessee will reimburse Lessor and the Agent, within ten
(10) Business Days after written request, for all reasonable costs and expenses
incurred by Lessor or Agent during the period ending on the first anniversary of
the Lease Termination Date in connection with the marketing, sale, closing or
transfer of the Leased Property, which obligation shall survive the Lease
Termination Date and the termination or expiration of this Lease.
Section 14.8 Return of Leased Property. If Lessor retains title to the
-------------------------
Leased Property pursuant to Section 14.7 hereof or Lessee has properly exercised
------------
the Surrender Option, then Lessee shall, on the Lease Termination Date, and at
its own expense, return possession of the Leased Property to Lessor for
retention by Lessor or, if Lessee properly exercises the Remarketing Option and
fulfills all
30
<PAGE>
of the conditions of Section 14.6 hereof and neither Lessor nor the Agent
------------
rejects such purchase offer pursuant to Section 14.6, then Lessee shall, on such
------------
Lease Termination Date, and at its own cost, transfer possession of the Leased
Property to the independent purchaser thereof, in each case by surrendering the
same into the possession of Lessor or such purchaser, as the case may be, free
and clear of all Liens other than Lessor Liens and the Liens of the Operative
Documents, in as good condition as it was on the Completion Date (as modified by
Alterations permitted by this Lease), ordinary wear and tear excepted, and in
compliance in all material respects with Applicable Law. Lessee shall, on and
within a reasonable time before and after the Lease Termination Date, cooperate
with Lessor and the independent purchaser of the Leased Property in order to
facilitate the ownership and operation by such purchaser of the Leased Property
after the Lease Termination Date, which cooperation shall include the following,
all of which Lessee shall do on or before the Lease Termination Date or as soon
thereafter as is reasonably practicable: providing all books and records
regarding the maintenance and ownership of the Leased Property and all know-how,
data and technical information relating thereto, providing a copy of the Plans
and Specifications, granting or assigning all licenses (to the extent
assignable) necessary for the operation and maintenance of the Leased Property,
and cooperating in seeking and obtaining all necessary Governmental Action.
Lessee shall have also paid the cost of all Alterations commenced prior to the
Lease Termination Date. The obligations of Lessee under this Article XIV shall
-----------
survive the expiration or termination of this Lease.
Section 14.9 Renewal. Lessee may, by the written notice to Lessor and the
-------
Agent given on or prior to the Completion Date request an extension of the Lease
Term such that the Lease Term shall expire on the fifth anniversary of the
Completion Date; such extension, if granted, shall be on the same terms and
conditions as this Lease. Subject to the conditions set forth herein, Lessee
may, by written notice to Lessor and the Agent given not later than 270 days and
not earlier than sixteen months, prior to the Lease Termination Date then in
effect, request an extension of this Lease, for up to five years commencing on
the date following the Lease Termination Date then in effect, provided that in
--------
no event shall the Lease Term exceed fifteen (15) years. No later than the date
that is 45 days after the date any request to renew has been delivered to each
of Lessor and the Agent, the Agent will notify Lessee whether or not Lessor and
the Lenders consent to such renewal request (which consent, in the case of
Lessor and the Lenders, may be granted or denied in their sole discretion, and
may be conditioned on such conditions precedent as may be specified by Lessor
and the Lenders). If the Agent fails to respond within such time frame, such
failure shall be deemed to be a rejection of such request. If the Agent
notifies Lessee of Lessor's and the Lenders' consent to such renewal, such
renewal shall be effective.
ARTICLE XV.
LESSEE'S EQUIPMENT
------------------
After any repossession of the Leased Property (whether or not this Lease
has been terminated), as a result of the exercise of the Surrender Option or
otherwise, Lessee, at its expense and so long as
31
<PAGE>
such removal of such Alteration shall not result in a violation of Applicable
Law, shall, within a reasonable time after such repossession or within sixty
(60) days after Lessee's receipt of Lessor's written request (whichever shall
first occur), remove all of Lessee's trade fixtures, personal property and
equipment from the Leased Property (to the extent that the same can be readily
removed from the Leased Property without causing material damage to the Leased
Property); provided, however, that Lessee shall not remove any such trade
-------- -------
fixtures, personal property or equipment that have been financed by Lessor under
the Operative Documents or otherwise constituting Leased Property (or that
constitutes a replacement of such property). Any of Lessee's trade fixtures,
personal property and equipment not so removed by Lessee within such period
shall be considered abandoned by Lessee, and title thereto shall without further
act vest in Lessor, and may be appropriated, sold, destroyed or otherwise
disposed of by Lessor without notice to Lessee and without obligation to account
therefor and Lessee will pay Lessor, upon written demand, all reasonable costs
and expenses incurred by Lessor in removing, storing or disposing of the same
and all reasonable costs and expenses incurred by Lessor to repair any damage to
the Leased Property caused by such removal. Lessee will immediately repair at
its expense all damage to the Leased Property caused by any such removal (unless
such removal is effected by Lessor, in which event Lessee shall pay all
reasonable costs and expenses incurred by Lessor for such repairs). Lessor shall
have no liability in exercising Lessor's rights under this Article XV except as
----------
set forth in clause (ii) of the first sentence hereof, nor shall Lessor be
-----------
responsible for any loss of or damage to Lessee's personal property and
equipment.
ARTICLE XVI.
RIGHT TO PERFORM FOR LESSEE
---------------------------
If Lessee shall fail to perform or comply with any of its agreements
contained herein, Lessor may perform or comply with such agreement, and Lessor
shall not thereby be deemed to have waived any Potential Event of Default or
Event of Default caused by such failure, and the amount of such payment and the
amount of the reasonable expenses of Lessor (including actual and reasonable
attorneys' fees and expenses) incurred in connection with such payment or the
performance of or compliance with such agreement, as the case may be, shall be
deemed Supplemental Rent, payable by Lessee to Lessor within thirty (30) days
after written demand therefor.
ARTICLE XVII.
MISCELLANEOUS
-------------
Section 17.1 Reports. To the extent required under Applicable Law and to
-------
the extent it is reasonably practical for Lessee to do so, Lessee shall prepare
and file in timely fashion, or, where such filing is required to be made by
Lessor or it is otherwise not reasonably practical for Lessee to make such
filing, Lessee shall prepare and deliver to Lessor (with a copy to the Agent)
within a reasonable
32
<PAGE>
time prior to the date for filing and Lessor shall file, any material reports
with respect to the condition or operation of the Leased Property that shall be
required to be filed with any Governmental Authority.
Section 17.2 Binding Effect; Successors and Assigns; Survival. The terms
------------------------------------------------
and provisions of this Lease, and the respective rights and obligations
hereunder of Lessor and Lessee, shall be binding upon their respective
successors, legal representatives and assigns (including, in the case of Lessor,
any Person to whom Lessor may transfer any Leased Property or any interest
therein in accordance with the provisions of the Operative Documents), and inure
to the benefit of their respective permitted successors and assigns, and the
rights hereunder of the Agent and the Lenders shall inure (subject to such
conditions as are contained herein) to the benefit of their respective permitted
successors and assigns. Lessee hereby acknowledges that Lessor has assigned all
of its right, title and interest to, in and under this Lease to the Agent and
the Lenders, and that all of Lessor's rights hereunder may be exercised by the
Agent.
Section 17.3 Quiet Enjoyment. Lessor covenants that it will not interfere
---------------
in Lessee's or any of its permitted sublessees' quiet enjoyment of the Leased
Property in accordance with this Lease during the Lease Term, so long as no
Event of Default has occurred and is continuing. Such right of quiet enjoyment
is independent of, and shall not affect, Lessor's rights otherwise to initiate
legal action to enforce the obligations of Lessee under this Lease.
Section 17.4 Notices. Unless otherwise specified herein, all notices,
-------
offers, acceptances, rejections, consents, requests, demands or other
communications to or upon the respective parties hereto shall be in writing and
shall be deemed to have been given as set forth in Section 8.2 of the Master
Agreement. All such notices, offers, acceptances, rejections, consents,
requests, demands or other communications shall be addressed as set forth in
Schedule 8.2 of the Master Agreement or to such other address as any of the
parties hereto may designate by written notice.
Section 17.5 Severability. Any provision of this Lease that shall be
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction, and Lessee shall remain
liable to perform its obligations hereunder except to the extent of such
unenforceability. To the extent permitted by Applicable Law, Lessee hereby
waives any provision of law that renders any provision hereof prohibited or
unenforceable in any respect.
Section 17.6 Amendment; Complete Agreements. Neither this Lease nor any of
------------------------------
the terms hereof may be terminated, amended, supplemented, waived or modified
orally, except by an instrument in writing signed by Lessor and Lessee in
accordance with the provisions of Section 8.4 of the Master Agreement. This
Lease, together with the other Operative Documents, is intended by the parties
as a
33
<PAGE>
final expression of their lease agreement and as a complete and exclusive
statement of the terms thereof, all negotiations, considerations and
representations between the parties having been incorporated herein and therein.
No course of prior dealings between the parties or their officers, employees,
agents or Affiliates shall be relevant or admissible to supplement, explain, or
vary any of the terms of this Lease or any other Operative Document. Acceptance
of, or acquiescence in, a course of performance rendered under this or any prior
agreement between the parties or their Affiliates shall not be relevant or
admissible to determine the meaning of any of the terms of this Lease or any
other Operative Document. No representations, undertakings, or agreements have
been made or relied upon in the making of this Lease other than those
specifically set forth in the Operative Documents.
Section 17.7 Construction. This Lease shall not be construed more strictly
------------
against any one party, it being recognized that both of the parties hereto have
contributed substantially and materially to the preparation and negotiation of
this Lease.
Section 17.8 Headings. The Table of Contents and headings of the various
--------
Articles and Sections of this Lease are for convenience of reference only and
shall not modify, define or limit any of the terms or provisions hereof.
Section 17.9 Counterparts. This Lease may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
Section 17.10 GOVERNING LAW. EXCEPT AS SET FORTH IN ARTICLE XI, THIS LEASE
------------- ----------
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF GEORGIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE.
Section 17.11 Discharge of Lessee's Obligations by its Affiliates. Lessor
---------------------------------------------------
agrees that performance of any of Lessee's obligations hereunder by one or more
of Lessee's Affiliates or one or more of Lessee's sublessees of the Leased
Property or any part thereof shall constitute performance by Lessee of such
obligations to the same extent and with the same effect hereunder as if such
obligations were performed by Lessee, but no such performance shall excuse
Lessee from any obligation not performed by it or on its behalf under the
Operative Documents.
Section 17.12 Liability of Lessor Limited. Except as otherwise expressly
---------------------------
provided below in this Section 17.12, it is expressly understood and agreed by
-------------
and between Lessee, Lessor and their respective successors and assigns that
nothing herein contained shall be construed as creating any liability of Lessor
or any of its Affiliates or any of their respective officers, directors,
employees or agents, individually or personally, to perform any covenant, either
express or implied, contained herein, all such liability, if any, being
expressly waived by Lessee and by each and every Person now or
34
<PAGE>
hereafter claiming by, through or under Lessee, and that, so far as Lessor or
any of its Affiliates or any of their respective officers, directors, employees
or agents, individually or personally, is concerned, other than in connection
with the willful misconduct, gross negligence, misrepresentation or fraud on the
part of the Lessor or any of its Affiliates or any of their respective officers,
directors, employees or agents, Lessee and any Person claiming by, through or
under Lessee shall look solely to the right, title and interest of Lessor in the
Leased Property and any proceeds from Lessor's sale or encumbrance thereof
(provided, however, that Lessee shall not be entitled to any double recovery)
-------- -------
for the performance of any obligation under this Lease and under the Operative
Documents and the satisfaction of any liability arising therefrom.
Section 17.13 Estoppel Certificates. Each party hereto agrees that at any
---------------------
time and from time to time during the Lease Term, it will promptly, but in no
event later than thirty (30) days after request by the other party hereto,
execute, acknowledge and deliver to such other party or to any prospective
purchaser (if such prospective purchaser has signed a commitment or letter of
intent to purchase the Leased Property or any part thereof or any Note),
assignee or mortgagee or third party designated by such other party, a
certificate stating (a) that this Lease is unmodified and in force and effect
(or if there have been modifications, that this Lease is in force and effect as
modified, and identifying the modification agreements); (b) the date to which
Basic Rent has been paid; (c) whether or not there is any existing default by
Lessee in the payment of Basic Rent or any other sum of money hereunder, and
whether or not there is any other existing default by either party with respect
to which a notice of default has been served, and, if there is any such default,
specifying the nature and extent thereof; (d) whether or not, to the knowledge
of the signer after due inquiry and investigation, there are any setoffs,
defenses or counterclaims against enforcement of the obligations to be performed
hereunder existing in favor of the party executing such certificate and (e)
other items that may be reasonably requested; provided that no such certificate
--------
may be requested unless the requesting party has a good faith reason for such
request.
Section 17.14 No Joint Venture. Any intention to create a joint venture or
----------------
partnership relation between Lessor and Lessee is hereby expressly disclaimed.
Section 17.15 No Accord and Satisfaction. The acceptance by Lessor of any
--------------------------
sums from Lessee (whether as Basic Rent or otherwise) in amounts which are less
than the amounts due and payable by Lessee hereunder is not intended, nor shall
be construed, to constitute an accord and satisfaction of any dispute between
Lessor and Lessee regarding sums due and payable by Lessee hereunder, unless
Lessor specifically deems it as such in writing.
Section 17.16 No Merger. In no event shall the leasehold interests,
---------
estates or rights of Lessee hereunder, or of the holder of any Notes secured by
a security interest in this Lease, merge with any interests, estates or rights
of Lessor in or to the Leased Properties, it being understood that such
leasehold interests, estates and rights of Lessee hereunder, and of the holder
of any Notes secured by a
35
<PAGE>
security interest in this Lease, shall be deemed to be separate and distinct
from Lessor's interests, estates and rights in or to the Leased Property,
notwithstanding that any such interests, estates or rights shall at any time or
times be held by or vested in the same person, corporation or other entity.
Section 17.17 Survival. The obligations of Lessee to be performed under
--------
this Lease prior to the Lease Termination Date and the obligations of Lessee
pursuant to Article III, Articles X, XI, XIII, Sections 14.2, 14.3, 14.4, 14.5,
----------- ---------- -- ---- ------------- ---- ---- ----
14.8, Articles XIV, XV, and XVI, and Sections 17.10 and 17.12 shall survive the
- ---- ------------ -- --- -------------- -----
expiration or termination of this Lease. The extension of any applicable
statute of limitations by Lessor, Lessee, the Agent or any Indemnitee shall not
affect such survival.
Section 17.18 Chattel Paper. To the extent that this Lease constitutes
-------------
chattel paper (as such term is defined in the Uniform Commercial Code in any
applicable jurisdiction), no security interest in this Lease may be created
through the transfer or possession of any counterpart other than the original
counterpart, which shall be identified as the original counterpart by the
receipt of the Agent.
Section 17.19 Time of Essence. Time is of the essence of this Lease.
---------------
Section 17.20 Recordation of Lease. Lessee will, at its expense, cause
--------------------
this Lease or memorandum of lease (if permitted by Applicable Law) to be
recorded in the proper office or offices in the States and the municipalities in
which the Land is located.
Section 17.21 Investment of Security Funds. Any amounts not payable to
----------------------------
Lessee pursuant to any provision of Article VIII, X or XIV or this Section 17.21
------------ - --- -------------
solely because an Event of Default shall have occurred and be continuing shall
be held by the Agent (or Lessor if the Loans have been fully paid) as security
for the obligations of Lessee under this Lease and the Master Agreement. At
such time as no Event of Default shall be continuing, such amounts, net of any
amounts previously applied to Lessee's obligations hereunder or under the Master
Agreement, shall be paid to Lessee. Any such amounts which are held by the
Agent (or Lessor if the Loans have been fully paid) pending payment to Lessee
shall until paid to Lessee, as provided hereunder or, as long as the Loan
Agreement is in effect, until applied against Lessee's obligations herein and
under the Master Agreement and distributed as provided in the Loan Agreement or
herein (after the Loan Agreement is no longer in effect) in connection with any
exercise of remedies hereunder, be invested by the Agent or Lessor, as the case
may be as directed from time to time in writing by Lessee (provided, however, if
-------- -------
an Event of Default has occurred and is continuing it will be directed by the
Agent or, if the Funded Amounts have been fully paid, Lessor) and at the expense
and risk of Lessee, in Permitted Investments specified by the Agent. Any gain
(including interest received) realized as the result of any such investment (net
of any fees, commissions and other expenses, if any, incurred in connection with
such investment) shall be applied in the same manner as the principal invested.
36
<PAGE>
[Signature page follows]
37
<PAGE>
IN WITNESS WHEREOF, the undersigned have each caused this Lease Agreement
to be duly executed and delivered and attested by their respective officers
thereunto duly authorized as of the day and year first above written.
STERLING COMMERCE, INC.
as Lessee
By
-------------------------------
Name:
Title:
LEASE
S-1 AGREEMENT
<PAGE>
ATLANTIC FINANCIAL GROUP, LTD., as
Lessor
By: Atlantic Financial Managers,
Inc., its General Partner
By
---------------------------------
Name:
Title:
LEASE
S-2 AGREEMENT
<PAGE>
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged as of the date hereof.
SUNTRUST BANK, ATLANTA , as the
Agent
By
---------------------------------
Name:
Title:
LEASE
S-3 AGREEMENT
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on February __, 1998, by ______
of STERLING COMMERCE, INC., a Delaware corporation, on behalf of said
corporation.
-----------------------
Notary Public, State of Texas
Printed name:
----------------------
My commission expires:
-------------
[SEAL]
LEASE
N-1 AGREEMENT
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on February __, 1998, by
________________, __________ of Atlantic Financial Managers, Inc., a
corporation, general partner of ATLANTIC FINANCIAL GROUP, LTD., a Texas limited
partnership, on behalf of said limited partnership.
-----------------------
Notary Public, State of Texas
Printed name:
----------------------
My commission expires:
-------------
[SEAL]
LEASE
N-2 AGREEMENT
<PAGE>
EXHIBIT A
---------
Tract 1: (Fee Simple)
BEING a 16.286 acre tract of land situated in the Anton Kuhn Survey, Abstract
No. 729, Dallas County, Texas, and being all of Lot 1, Las Colinas Sector X,
First Installment, Revised, of the Final Plat Lot 1, 4, 5 & 6, Las Colinas,
Sector X, First Installment, Revised, as recorded in Volume 98018, Page 00005,
Dallas County Map Records, said 16.286 acre tract of land being more
particularly described by metes and bounds as follows:
BEGINNING at an "X" cut found in concrete, in the North right-of-way line at
Walnut Hill Lane, a 110 foot wide public right-of-way, said "X" being the
Southeast corner of Lot 2, of said Las Colinas Sector X;
THENCE along the East line of said Log 2 the following seven (7) calls:
North 00 degrees 12 minutes 11 seconds West a distance of 255.72 feet to 5/8
inch iron rod set;
Northwesterly along a curve to the left with a radius of 55.79 feet, with a
central angle of 30 degrees 03 minutes 23 seconds, a chord which bears North 15
degrees 13 minutes 53 seconds West, and a distance of 28.93 feet, and arc length
of 29.27 feet to a "X" cut found in concrete;
North 00 degrees 03 minutes 41 seconds East a distance of 85.82 feet to 5/8 inch
iron rod set;
North 89 degrees 56 minutes 19 seconds West a distance of 10.37 feet to 5/8 inch
iron rod set;
North 00 degrees 03 minutes 41 seconds East a distance of 381.26 feet to 5/8
inch iron rod set;
Northeasterly along a curve to the left with a radius of 60.17 feet, with a
central angle of 57 degrees 40 minutes 20 seconds, a chord which bears North 29
degrees 00 minutes 55 seconds East, and a distance of 58.04 feet, and arc length
of 60.57 feet to 5/8 inch iron rod set;
North 00 degrees 10 minutes 45 seconds East a distance of 150.97 feet to 5/8
inch iron rod set on the South right-of-way line of a variable width private
access and utility easement, as recorded in Volume 85068, Page 2623 D.R.D.C.T.;
THENCE along the said South right-of-way line the following two (2) calls:
<PAGE>
Southeasterly along a curve to the left with a radius of 262.00 feet, with a
central angle of 1 degrees 27 minutes 43 seconds, a chord which bears South 79
degrees 20 minutes 11 seconds East, and a distance of 6.68 feet, and arc length
of 6.69 feet to 5/8 inch iron rod found;
South 80 degrees 04 minutes 02 seconds East a distance of 420.64 feet to 5/8
inch iron rod found on the Southerly right-of-way line of State Highway No. 114
a variable width right-of-way;
THENCE along the said Southerly right-of-way of State Highway No. 114 the
following three (3) calls:
South 57 degrees 00 minutes 13 seconds East a distance of 103.21 feet to 5/8
inch iron rod found;
Southeasterly along a curve to the right with a radius of 1387.30 feet, with a
central angle of 13 degrees 01 minutes 26 seconds, a chord which bears South 50
degrees 29 minutes 30 seconds East, and a distance of 314.67 feet, and arc
length of 315.35 feet, where a 1/2 inch iron rod bears North 72 degrees 42
minutes 44 seconds East, a distance of 0.66 feet;
South 28 degrees 56 minutes 12 seconds East a distance of 368.28 feet to 5/8
inch iron rod set in the Northerly right-of-way line of said Walnut Hill Lane,
from which Texas Highway Department Monument bears South 43 degrees 53 minutes
32 seconds East, a distance of 5.19 feet;
THENCE along the said Northerly right-of-way line the following five (5) calls:
South 25 degrees 04 minutes 31 seconds West a distance of 195.57 feet to 5/8
inch iron rod set, from which a 1/2 inch rod bears South 42 degrees 11 minutes
02 seconds East a distance of 5.17 feet;
Southwesterly along a curve to the right with a radius of 548.11 feet, with a
central angle of 41 degrees 04 minutes 40 seconds, a chord which bears South 69
degrees 32 minutes 07 seconds West, and a distance of 384.60 feet, and arc
length of 392.96 feet, to 5/8 inch iron rod set, from which 1/2 inch iron rod
bears South 62 degrees 29 minutes 36 seconds West, a distance of 1.52;
North 89 degrees 55 minutes 33 seconds West a distance of 295.28 feet to 5/8
inch iron rod set;
North 00 degrees 04 minutes 27 seconds East a distance of 11.00 feet a 5/8 inch
iron rod found bears;
South 00 degrees 47 minutes 09 seconds East a distance of 0.70 feet;
North 89 degrees 55 minutes 33 seconds West a distance of 200.20 feet; to the
POINT OF BEGINNING, and containing a computed area of 709,417 square feet or
16.286 acres of land more or less.
2
<PAGE>
Tract 2: (Easement Estate)
BEING a 0.653 acre tract of land situated in the Anton Kuhn Survey, Abstract No.
729, Dallas County, Texas, and being a portion of Lot 1, Las Colinas Sector X,
First Installment, Revised, as recorded in Volume 85068, Page 2623, Dallas
County Deed Records and being a portion of a private access and utility
easement, as recorded in Volume 85068, Page 2623, Deed Records of Dallas County,
Texas. Said 0.653 acre tract of land being more particularly described by metes
and bounds as follows:
BEGINNING at 5/8 inch iron rod capped "Carter & Burgess" found for the most
Southeasterly corner of the said access and utility easement;
THENCE along the South line of the said access and utility easement the
following calls:
North 80 degrees 04 minutes 02 seconds West a distance of 420.64 feet to a
point;
Northwesterly along a curve to the right having a radius of 262.00 feet,
with a delta angle of 1 degrees 27 minutes 43 seconds, a chord which bears
North 79 degrees 20 minutes 11 seconds West and a distance of 6.68 feet,
and arc length of 6.69 feet to a point on the East line of Lot 2, Las
Colinas Sector X, First Installment, Revised;
THENCE North 00 degrees 10 minutes 45 seconds East across the said access and
utility easement, a distance of 86.16 feet to a point on the North line of the
said access and utility easement;
THENCE South 80 degrees 04 minutes 02 seconds East along the North line of the
said access and utility easement a distance of 242.29 feet to a point on the
West right-of-way of State Highway No. 114;
THENCE South 57 degrees 00 minutes 13 seconds East along the said West right-of-
way a distance of 216.97 feet to the POINT OF BEGINNING and containing 0.653
acres of land more or less.
3
<PAGE>
================================================================================
LOAN AGREEMENT
Dated as of February 26, 1998
among
ATLANTIC FINANCIAL GROUP, LTD.,
as Lessor and Borrower,
the financial institutions party hereto,
as Lenders
and
SUNTRUST BANK, ATLANTA,
as Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1 DEFINITIONS; INTERPRETATION ................................ 1
SECTION 2 AMOUNT AND TERMS OF COMMITMENTS; REPAYMENT AND PREPAYMENT
OF LOANS ................................................... 1
SECTION 2.1 Commitment ............................................ 1
SECTION 2.2 Notes ................................................. 2
SECTION 2.3 Scheduled Principal Repayment ......................... 2
SECTION 2.4 Interest .............................................. 2
SECTION 2.5 Prepayment ............................................ 3
SECTION 3 RECEIPT, DISTRIBUTION AND APPLICATION OF CERTAIN PAYMENTS
IN RESPECT OF LEASE AND LEASED PROPERTY .................... 3
SECTION 3.1 Distribution and Application of Rent Payments ......... 3
SECTION 3.2 Distribution and Application of Purchase Payment ...... 3
SECTION 3.3 Distribution and Application to Funding Party Balances
of Lessee Payment of Recourse Deficiency Amount Upon
Exercise of Remarketing Option or Surrender Option .... 4
SECTION 3.4 Distribution and Application to Funding Part Balance
of Remarketing Proceeds of Leased Property ............ 4
SECTION 3.5 Distribution and Application of Payments Received When
an Event of Default Exists or Has Ceased to Exist
Following Rejection of a Lease ........................ 4
SECTION 3.6 Distribution of Other Payments ........................ 6
SECTION 3.7 Timing of Agent Distributions ......................... 6
SECTION 4 THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE AND GUARANTY .. 6
SECTION 4.1 Covenant of Lessor .................................... 6
SECTION 4.2 Lessor Obligations Nonrecourse; Payment from Certain
Lease and Guaranty Obligations and Certain Proceeds of
Leased Property Only .................................. 7
SECTION 4.3 Exercise of Remedies Under Lease
-i-
<PAGE>
and Guaranty .......................................... 7
SECTION 5 LOAN EVENTS OF DEFAULT; REMEDIES ........................... 8
SECTION 5.1 Loan Events of Default ................................ 8
SECTION 5.2 Loan Event of Default; Remedies ....................... 9
SECTION 6 THE AGENT .................................................. 10
SECTION 6.1 Appointment ........................................... 10
SECTION 6.2 Delegation of Duties .................................. 11
SECTION 6.3 Exculpatory Provisions ................................ 11
SECTION 6.4 Reliance by Agent ..................................... 11
SECTION 6.5 Notice of Default ..................................... 12
SECTION 6.6 Non-Reliance on Agent and Other Lenders ............... 12
SECTION 6.7 Indemnification ....................................... 13
SECTION 6.8 Agent in Its Individual Capacity ...................... 14
SECTION 6.9 Successor Agent ....................................... 14
SECTION 7 MISCELLANEOUS ............................................... 14
SECTION 7.1 Amendments and Waivers ................................ 14
SECTION 7.2 Notices ............................................... 15
SECTION 7.3 No Waiver; Cumulative Remedies ........................ 15
SECTION 7.4 Successors and Assigns ................................ 15
SECTION 7.5 Counterparts .......................................... 15
SECTION 7.6 GOVERNING LAW ......................................... 15
SECTION 7.7 Survival and Termination of Agreement ................. 15
SECTION 7.8 Entire Agreement ...................................... 15
SECTION 7.9 Severability .......................................... 16
APPENDIX A Definitions and Interpretation
EXHIBITS
EXHIBIT A-1 Form of A Note
EXHIBIT A-2 Form of B Note
-ii-
<PAGE>
THIS LOAN AGREEMENT (as it may be amended or modified from time to time in
accordance with the provisions hereof, this "Loan Agreement") dated as of
--------------
February 26, 1998 is among ATLANTIC FINANCIAL GROUP, LTD., a Texas limited
partnership, as Lessor and Borrower (the "Lessor"), SUNTRUST BANK, ATLANTA, and
------
the other financial institutions which may from time to time become party hereto
as lenders (the "Lenders"), and SUNTRUST BANK, ATLANTA, a Georgia banking
-------
corporation, as agent for the Lenders (the "Agent").
-----
PRELIMINARY STATEMENT
In accordance with the terms and provisions of the Master Agreement, the
Lease, this Loan Agreement and the other Operative Documents, (i) the Lessor
contemplates acquiring and leasing the Land to the Lessee, (ii) the Lessee
wishes to construct a Building on the Land for the Lessor and, when completed,
to lease the Building from the Lessor as part of the Leased Property under the
Lease, (iii) the Lessee wishes to obtain, and the Lessor is willing to provide,
funding for the acquisition of the Land and the construction of the Building,
(iv) the Lessor wishes to obtain, and the Lenders are willing to provide,
financing of a portion of the funding of the acquisition of the Land and the
construction of the Building, and (v) the Lessee is willing to provide its
Guaranty to the Agent and the Funding Parties.
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1 DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and not
defined herein shall have the meanings assigned thereto in Appendix A hereto for
----------
all purposes hereof; and the rules of interpretation set forth in Appendix A
----------
hereto shall apply to this Loan Agreement.
SECTION 2 AMOUNT AND TERMS OF COMMITMENTS; REPAYMENT AND PREPAYMENT OF
LOANS
SECTION 2.1 Commitment. (a) Subject to the terms and conditions hereof and
----------
of the Master Agreement, each Lender agrees to make term loans to the Lessor
("Loans") from time to
-----
<PAGE>
time during the period from and including the Closing Date through the Funding
Termination Date, on the Closing Date and on each subsequent Funding Date, in
the amounts required under Section 2.2 of the Master Agreement. Each such Loan
shall consist of an A Loan in the amount of the A Percentage of such Lender's
Commitment Percentage of the aggregate amount to be funded by the Funding
Parties on such date and a B Loan in the amount of the B Percentage of such
Lender's Commitment Percentage of the aggregate amount to be funded by the
Funding Parties on such date.
SECTION 2.2 Notes. The A Loans made by each Lender to the Lessor shall be
-----
evidenced by a note of the Lessor (an "A Note"), substantially in the form of
------
Exhibit A-1 with appropriate insertions, and the B Loans made by each Lender to
- -----------
the Lessor shall be evidenced by a note of the Lessor (a "B Note") substantially
------
in the form of Exhibit A-2 with appropriate insertions, each duly executed by
-----------
the Lessor and payable to the order of such Lender and in a principal amount
equal to the A Percentage of such Lender's Commitment Percentage of the
aggregate Commitments and the B Percentage of such Lender's Commitment
Percentage of the aggregate Commitments, respectively (or, if less, the
aggregate unpaid principal amount of all A Loans or B Loans, as the case may be,
made by such Lender to the Lessor). The Notes shall be dated the Closing Date
and delivered to the Agent in accordance with Section 3.1 of the Master
Agreement. Each Lender is hereby authorized to record the date and amount of
each Loan made by such Lender to the Lessor on the Notes, but the failure by
such Lender to so record such Loan shall not affect or impair any obligations
with respect thereto. Each Note shall (i) be stated to mature no later than the
Lease Termination Date and (ii) bear interest on the unpaid principal amount
thereof from time to time outstanding at the applicable interest rate per annum
determined as provided in, and payable as specified in, Section 2.4. Upon the
-----------
occurrence of an Event of Default under clause (f) or (g) of Article XII of the
---------- --- -----------
Lease, or upon Acceleration as described in Section 4.3(b) hereof, each Note
--------------
shall automatically become due and payable in full.
SECTION 2.3 Scheduled Principal Repayment. On the Lease Termination Date,
-----------------------------
the Lessor shall pay the aggregate unpaid principal amount of all Loans as of
such date.
2
<PAGE>
SECTION 2.4 Interest. (a) The Loans shall be allocated to Eurodollar
--------
Advances and/or Alternative Rate Advances as set forth in the applicable Funding
Notice or Payment Date Notice delivered pursuant to the Master Agreement. Each
Eurodollar Advance shall bear interest during each Rent Period at a rate equal
to the sum of (i) the Eurodollar Rate for such Rent Period, plus (ii) the
Applicable Margin per annum, computed using the actual number of days elapsed
and a 360 day year. Each Alternative Rate Advance shall bear interest at a rate
equal to the Alternative Rate in effect from time to time, computed using the
actual number of days elapsed and a 360 day year.
(b) If all or a portion of the principal amount of or interest on the Loans
shall not be paid when due (whether at the stated maturity, by acceleration or
otherwise), such overdue amount shall, without limiting the rights of the
Lenders under Section 5, to the maximum extent permitted by Applicable Law, bear
---------
interest at the Overdue Rate, in each case from the date of nonpayment until
paid in full (as well after as before judgment).
(c) Interest accruing on each Loan during the Construction Term may be
added to the principal amount of such Loan (or paid) from time to time pursuant
to Section 2.3 of the Master Agreement. Following the date each Loan is made,
but subject to the foregoing sentence, interest on such Loan shall be payable in
arrears on each Payment Date with respect thereto.
(d) Any change in the interest rate on the Loans resulting from a change in
the Alternative Rate shall become effective as of the opening of business on the
day on which such Alternative Rate changes as provided in the definition
thereof.
SECTION 2.5 Prepayment. Except in conjunction with a payment by the Lessee
----------
of the Lease Balance pursuant to the terms of the Lease, the Lessor shall have
no right to prepay the Loans.
SECTION 3 RECEIPT, DISTRIBUTION AND APPLICATION OF CERTAIN PAYMENTS IN
RESPECT OF LEASE AND LEASED PROPERTY
3
<PAGE>
SECTION 3.1 Distribution and Application of Rent Payments.
---------------------------------------------
(a) Basic Rent. Each payment of Basic Rent (and any payment of interest on
----------
overdue installments of Basic Rent) received by the Agent shall be distributed
first, pro rata to the Lenders to be applied to the amounts of accrued and
- -----
unpaid interest (including overdue interest) on the Loans and second, to the
------
Lessor to be applied to accrued and unpaid Yield (including overdue Yield) on
the Lessor's Invested Amounts.
(b) Supplemental Rent. Each payment of Supplemental Rent received by the
-----------------
Agent shall be paid to or upon the order of the Person owed the same.
SECTION 3.2 Distribution and Application of Purchase Payment. The payment
------------------------------------------------
by the Lessee of:
(a) the purchase price for a consummated sale of the Leased Property
received by the Agent in connection with the Lessee's exercise of the
Purchase Option under Section 14.1 of the Lease, or
(b) the Lessee's compliance with its obligation to purchase the Leased
Property in accordance with Section 14.2 or 14.3 of the Lease, or
(c) the payment by the Lessee to Agent of the Lease Balance in
accordance with Section 10.1 or Section 10.2 of the Lease,
shall be distributed by Agent as promptly as possible first, to the Lenders, pro
----- ---
rata in accordance with, and for application to, their respective Funding Party
- ----
Balances and second, to the Lessor for application to its Funding Party Balance.
------
SECTION 3.3 Distribution and Application to Funding Party Balances of
---------------------------------------------------------
Lessee Payment of Recourse Deficiency Amount Upon Exercise of Remarketing Option
- --------------------------------------------------------------------------------
or Surrender Option. The payment by the Lessee of the Recourse Deficiency Amount
- -------------------
to the Agent on the Lease Termination Date in accordance with Section 14.6 or
14.7 of the Lease upon the Lessee's exercise of the Remarketing Option or
Surrender Option, shall be applied by the Agent to the accrued and unpaid
interest on, and the outstanding principal of, the A Loans.
4
<PAGE>
SECTION 3.4 Distribution and Application to Funding Party Balance of
--------------------------------------------------------
Remarketing Proceeds of Leased Property. Any payments received by the Lessor as
- ---------------------------------------
proceeds from the sale of the Leased Property sold pursuant to the Lessee's
exercise of the Remarketing Option or the Surrender Option pursuant to Section
14.6 or 14.7 of the Lease, shall be distributed by the Lessor as promptly as
possible in the following order of priority:
first, to the Lenders pro rata for application to their remaining
----- --- ----
Funding Party Balances, an amount equal to their Funding Party Balances;
and
second, to the Lessor for application to its Funding Party Balance;
------
and
third, (i) if sold by the Lessee pursuant to Section 14.6 of the
-----
Lease, to the Lessee, the excess, if any, and (ii) otherwise, to the
Lessor.
SECTION 3.5 Distribution and Application of Payments Received When an Event
---------------------------------------------------------------
of Default Exists or Has Ceased to Exist Following Rejection of a Lease.
- -----------------------------------------------------------------------
(a) Proceeds of Leased Property. Any payments received by the Lessor or the
---------------------------
Agent when an Event of Default exists (or has ceased to exist by reason of a
rejection of the Lease in a proceeding with respect to the Lessee described in
Article XII(f) or (g) of the Lease), as
(i) proceeds from the sale of the Leased Property sold pursuant to the
exercise of the Lessor's remedies pursuant to Article XIII of the Lease, or
(ii) proceeds of any amounts from any insurer or any Governmental
Authority in connection with an Event of Loss or an Event of Taking
shall if received by the Lessor be paid to the Agent as promptly as possible,
and shall be distributed or applied in the following order of priority prior to
the Release Date:
first, to the Agent for any reasonable amounts expended by it in
-----
connection with the Leased Property or
5
<PAGE>
the Operative Documents and not previously reimbursed to it;
second, to the Lenders pro rata for application to their Funding Party
------ --- ----
Balances, an amount equal to such Funding Party Balances;
third, to the Lessor for application to its Funding Party Balance; and
-----
fourth, to the Lessee or the Person or Persons otherwise legally
------
entitled thereto, the excess, if any; and
on and after such Release Date such amounts shall be paid over to the Lessor and
shall be distributed by the Lessor, first to the Lessor for application to any
-----
amounts owed to it, and second to the Lessee or the Person or Persons otherwise
------
legally entitled thereto, the excess, if any.
(b) Proceeds of Recoveries from Lessee and Guarantor. Any payments received
------------------------------------------------
by any Funding Party when an Event of Default exists (or has ceased to exist by
reason of a rejection of the Lease in a proceeding with respect to the Lessee
described in Article XII(f) or (g) of the Lease), from
(i) the Lessee as a payment in accordance with such Lease, or
(ii) the Guarantor as a payment in accordance with the Guaranty,
including, without limitation, any payment made by the Guarantor in
satisfaction of the guaranty of payment of the Notes pursuant to the
Guaranty,
shall be paid to the Agent as promptly as possible, and shall then be
distributed as applied by the Agent as promptly as possible in the order of
priority set forth in paragraph (a) above.
-------------
(c) Proceeds from Cash Collateral Account. Any payments received by any
-------------------------------------
Funding Party when an Event of Default exists (or has ceased to exist by reason
of a rejection of the Lease in a proceeding with respect to the Lessee described
in Article XII(f) or (g) of the Lease) from funds in the Cash Collateral Account
shall be paid to the Agent as promptly as
6
<PAGE>
possible, and shall be distributed to the Lenders for application to the accrued
interest on the A Loans until paid in full and then to the principal of the A
Loans until paid in full.
SECTION 3.6 Distribution of Other Payments. All payments under Section 7.6
------------------------------
of the Master Agreement shall be made first, to the Lenders, pro rata, until
--- ----
their Funding Party Balances have been paid in full, and second, to the Lessor
------
who shall be entitled to retain all such remaining amounts. Except as otherwise
provided in this Section 3, any payment received by the Lessor which is to be
---------
paid to Agent pursuant hereto or for which provision as to the application
thereof is made in an Operative Document but not elsewhere in this Section 3
---------
shall, if received by the Lessor, be paid forthwith to the Agent and when
received shall be distributed forthwith by the Agent to the Person and for the
purpose for which such payment was made in accordance with the terms of such
Operative Document.
SECTION 3.7 Timing of Agent Distributions. Payments received by the Agent
-----------------------------
in immediately available funds before 12:00 p.m. (noon), Atlanta Georgia time,
on any Business Day shall be distributed to the Funding Parties in accordance
with and to the extent provided in this Section 3 on such Business Day. Payments
---------
received by the Agent in immediately available funds after 12:00 p.m. (noon),
Atlanta, Georgia time shall be distributed to the Funding Parties in accordance
with and to the extent provided in this Section 3 prior to 12:00 p.m.
---------
(noon), Atlanta, Georgia time on the next Business Day.
SECTION 4 THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE AND GUARANTY
SECTION 4.1 Covenant of Lessor. So long as any Lender's Commitment remains
------------------
in effect, any Loan remains outstanding and unpaid or any other amount is owing
to any Lender with respect to its Funding Party Balances, subject to Section
-------
4.2, the Lessor will promptly pay all amounts payable by it under this Loan
- ---
Agreement and the Notes issued by it in accordance with the terms hereof and
thereof and shall duly perform each of its obligations under this Loan Agreement
and the Notes. The Lessor agrees to provide to the Agent a copy of each estoppel
certificate that the Lessor proposes to deliver pursuant to Section 17.13 of the
Lease at least five
7
<PAGE>
(5) days prior to such delivery and to make any corrections thereto reasonably
requested by the Agent prior to such delivery. The Lessor shall keep the Leased
Property free and clear of all Lessor Liens. The Lessor shall not reject any
sale of the Leased Property pursuant to Section 14.6 of the Lease unless all of
the Loans have been paid in full or the Lenders consent to such rejection. In
the event that the Lenders reject any sale of the Leased Property pursuant to
Section 14.6 of the Lease, the Lessor agrees to take such action as the Lenders
reasonably request to effect a sale or other disposition of the Leased Property,
provided that the Lessor shall not be required to expend its own funds in
- --------
connection with such sale or disposition.
SECTION 4.2 Lessor Obligations Nonrecourse; Payment from Certain Lease and
--------------------------------------------------------------
Guaranty Obligations and Certain Proceeds of Leased Property Only. All payments
- -----------------------------------------------------------------
to be made by the Lessor in respect of the Loans, the Notes and this Loan
Agreement shall be made only from certain payments received under the Lease and
the Guaranty and proceeds of the Leased Property and only to the extent that the
Lessor or the Agent shall have received sufficient payments from such sources to
make payments in respect of the Loans in accordance with Section 3. Each Lender
---------
agrees that it will look solely to such sources of payments to the extent
available for distribution to such Lender as herein provided and that neither
the Lessor nor the Agent is or shall be personally liable to any Lender for any
amount payable hereunder or under any Note. Nothing in this Loan Agreement, the
Notes or any other Operative Document shall be construed as creating any
liability (other than for willful misconduct, gross negligence,
misrepresentation or fraud) of the Lessor individually to pay any sum or to
perform any covenant, either express or implied, in this Loan Agreement, the
Notes or any other Operative Documents (all such liability, if any, being
expressly waived by each Lender) and that each Lender, on behalf of itself and
its successors and assigns, agrees in the case of any liability of the Lessor
hereunder or thereunder (except for such liability attributable to its willful
misconduct, gross negligence, misrepresentation or fraud) that it will look
solely to those certain payments received under the Lease and the Guaranty and
those proceeds of the Leased Property, provided, however, that the Lessor in its
-------- -------
individual capacity shall in any event be liable with respect to (i) the removal
of Lessor's Liens or involving its gross negligence,
8
<PAGE>
willful misconduct, misrepresentation, fraud or breach of contract (other than
the failure to make payments in respect of the Loans) or (ii) failure to turn
over payments the Lessor has received in accordance with Section 3; and provided
--------- --------
further that the foregoing exculpation of the Lessor shall not be deemed to be
- -------
exculpations of the Lessee, the Guarantor or any other Person.
SECTION 4.3 Exercise of Remedies Under Lease and Guaranty.
---------------------------------------------
(a) Event of Default. With respect to any Potential Event of Default as to
----------------
which notice thereof by the Lessor to the Lessee is a requirement to cause such
Potential Event of Default to become an Event of Default, the Lessor may at any
time in its discretion give such notice, provided that the Lessor agrees to give
--------
such notice to such Lessee promptly upon receipt of a written request to do so
by the Required Lenders or the Agent.
(b) Acceleration of Lease Balance. When an Event of Default exists, the
-----------------------------
Lessor, upon the direction of the Required Lenders, shall exercise remedies
under Article XIII of the Lease and the Guaranty to demand payment in full of
the Lease Balance by the Lessee or the Guarantor (the "Acceleration"). Following
------------
the Acceleration, the Lessor shall consult with the Lenders regarding actions to
be taken in response to such Event of Default. The Lessor (1) shall not, without
the prior written consent of the Required Lenders and (2) shall (subject to the
provisions of this Section), if so directed by the Required Lenders, do any of
-------
the following: commence eviction or foreclosure proceedings, or make a demand
under the Guaranty, or file a lawsuit against the Lessee under the Lease, or
file a lawsuit against the Guarantor under the Guaranty, or sell the Leased
Property, or exercise other remedies against the Lessee or the Guarantor under
the Operative Documents in respect of such Event of Default; provided, however,
-------- -------
that any payments received by the Lessor shall be distributed in accordance with
Section 3. Notwithstanding any such consent, direction or approval by the
- ---------
Required Lenders of any such action or omission, the Lessor shall not have any
obligation to follow such direction if the same would, in the Lessor's
reasonable judgment, require the Lessor to expend its own funds or expose the
Lessor to liability, expense, loss or damages unless and until the
9
<PAGE>
Lenders advance to the Lessor an amount which is sufficient, in the Lessor's
reasonable judgment, to cover such liability, expense, loss or damage (excluding
the Lessor's pro rata share thereof, if any). Notwithstanding the foregoing, on
and after the Release Date, the Lenders shall have no rights to the Leased
Property or any proceeds thereof, the Lenders shall have no rights to direct or
give consent to any actions with respect to the Leased Property and the proceeds
thereof, the Lessor shall have absolute discretion with respect to such exercise
of remedies with respect to the Leased Property, and the proceeds thereof,
including, without limitation, any foreclosure or sale of the Leased Property,
and the Lessor shall have no liability to the Lenders with respect to the
Lessor's actions or failure to take any action with respect to the Leased
Property.
SECTION 5 LOAN EVENTS OF DEFAULT; REMEDIES
SECTION 5.1 Loan Events of Default. Each of the following events shall
----------------------
constitute a Loan Event of Default (whether any such event shall be voluntary or
involuntary or come about or be effected by operation of law or pursuant to or
in compliance with any judgment, decree or order of any court or any order, rule
or regulation of any Governmental Authority) and each such Loan Event of Default
shall continue so long as, but only as long as, it shall not have been remedied:
(a) Lessor shall fail to distribute in accordance with the provisions
of Section 3 any amount received by the Lessor pursuant to the Lease or the
---------
Master Agreement within five (5) Business Days of receipt thereof if and to
the extent that the Agent or the Lenders are entitled to such amount or a
portion thereof; or
(b) the Lessor shall fail to pay to the Agent, within five (5)
Business Days of the Lessor's receipt thereof, any amount which the Lessee
or the Guarantor is required, pursuant to the Operative Documents, to pay
to the Agent but erroneously pays to the Lessor; or
(c) failure by the Lessor to perform in any material respect any other
covenant or condition herein or in any other Operative Document to which
the Lessor is a party, which failure shall continue unremedied for thirty
(30)
10
<PAGE>
days after receipt by the Lessor of written notice thereof from the Agent
or any Lender; or
(d) any representation or warranty of the Lessor contained in any
Operative Document or in any certificate required to be delivered
thereunder shall prove to have been incorrect in a material respect when
made and shall not have been cured within thirty (30) days of receipt by
the Lessor of written notice thereof from the Agent or any Lender; or
(e) the Lessor or the General Partner shall become bankrupt or make an
assignment for the benefit of creditors or consent to the appointment of a
trustee or receiver; or a trustee or a receiver shall be appointed for the
Lessor or the General Partner or for substantially all of its property
without its consent and shall not be dismissed or stayed within a period of
sixty (60) days; or bankruptcy, reorganization or insolvency proceedings
shall be instituted by or against the Lessor or the General Partner and, if
instituted against the Lessor or the General Partner, shall not be
dismissed or stayed for a period of sixty (60) days; or
(f) any Event of Default shall occur and be continuing.
SECTION 5.2 Loan Event of Default; Remedies.
-------------------------------
(a) Upon the occurrence of a Loan Event of Default hereunder, (i) if such
event is a Loan Event of Default specified in clause (e) of Section 5.1 with
---------- -----------
respect to the Lessor, automatically the Lenders' Commitments shall terminate
and the outstanding principal of, and accrued interest on, the Loans shall be
immediately due and payable, and (ii) if such event is any other Loan Event of
Default, upon written request of the Required Lenders, the Agent shall, by
notice of default to the Lessors, declare the Commitments of the Lenders to be
terminated forthwith and the outstanding principal of, and accrued interest on,
the Loans to be immediately due and payable, whereupon the Commitments of the
Lenders shall immediately terminate and the outstanding principal of, and
accrued interest on, the Loans shall become immediately due and payable.
11
<PAGE>
(b) When a Loan Event of Default exists, the Agent may, and upon the
written instructions of the Required Lenders shall, exercise any or all of the
rights and powers and pursue any and all of the remedies available to it
hereunder, under the Notes, the Mortgage, and the Assignment of Lease and Rents
and shall have and may exercise any and all rights and remedies available under
the Uniform Commercial Code or any provision of law. When a Loan Event of
Default exists, the Agent may, and upon the written instructions of the Required
Lenders shall, have the right to exercise all rights of the Lessor under the
Lease pursuant to the terms and in the manner provided for in the Mortgage and
the Assignment of Lease and Rents.
(c) Except as expressly provided above, no remedy under this Section 5.2 is
-----------
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy provided under this Section 5.2 or under the other Operative
-----------
Documents or otherwise available at law or in equity. The exercise by the Agent
or any Lender of any one or more of such remedies shall not preclude the
simultaneous or later exercise of any other remedy or remedies. No express or
implied waiver by the Agent or any Lender of any Loan Event of Default shall in
any way be, or be construed to be, a waiver of any future or subsequent Loan
Event of Default. The failure or delay of the Agent or any Lender in exercising
any rights granted it hereunder upon any occurrence of any of the contingencies
set forth herein shall not constitute a waiver of any such right upon the
continuation or recurrence of any such contingencies or similar contingencies
and any single or partial exercise of any particular right by the Agent or any
Lender shall not exhaust the same or constitute a waiver of any other right
provided herein.
SECTION 6 THE AGENT
SECTION 6.1 Appointment. Each Lender hereby irrevocably designates and
-----------
appoints the Agent as the agent of such Lender under this Loan Agreement and the
other Operative Documents, and each such Lender irrevocably authorizes the
Agent, in such capacity, to take such action on its behalf under the provisions
of this Loan Agreement and the other Operative Documents and to exercise such
powers and perform such duties as are expressly delegated to the Agent by the
terms of this Loan Agreement and the other Operative
12
<PAGE>
Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Loan Agreement,
the Agent shall not have any duties or responsibilities, except those expressly
set forth herein, or any fiduciary relationship with any Lender, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Loan Agreement or any other Operative Document or otherwise
exist against the Agent.
SECTION 6.2 Delegation of Duties. The Agent may execute any of its duties
--------------------
under this Loan Agreement and the other Operative Documents by or through agents
or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys-in-fact selected by it with
reasonable care.
SECTION 6.3 Exculpatory Provisions. Neither the Agent nor any of its
----------------------
officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be
(a) liable for any action lawfully taken or omitted to be taken by it or such
Person under or in connection with this Loan Agreement or any other Operative
Document (except for its or such Person's own gross negligence or willful
misconduct) or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Lessor, the
Guarantor or the Lessee or any officer thereof contained in this Loan Agreement
or any other Operative Document or in any certificate, report, statement or
other document referred to or provided for in, or received by the Agent under or
in connection with, this Loan Agreement or any other Operative Document or for
the value, validity, effectiveness, genuineness, enforceability or sufficiency
of this Loan Agreement or any other Operative Document or for any failure of the
Lessor, the Guarantor or the Lessee to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Loan Agreement or any other
Operative Document, or to inspect the properties, books or records of the
Lessor, the Guarantor or the Lessee.
SECTION 6.4 Reliance by Agent. The Agent shall be entitled to rely, and
-----------------
shall be fully protected in relying,
13
<PAGE>
upon any Note, writing, resolution, notice, consent, certificate, affidavit,
letter, telecopy, telex or teletype message, statement, order or other document
or conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Lessor, the Guarantor or the Lessee), independent accountants and other experts
selected by the Agent. The Agent may deem and treat the payee of any Note as the
owner thereof for all purposes unless a written notice of assignment,
negotiation or transfer thereof shall have been filed with the Agent. The Agent
shall be fully justified in failing or refusing to take any action under this
Loan Agreement or any other Operative Document unless it shall first receive
such advice or concurrence of the Required Lenders as it deems appropriate or it
shall first be indemnified to its satisfaction by the Funding Parties against
any and all liability and expense which may be incurred by it by reason of
taking or continuing to take any such action. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Loan
Agreement and the other Operative Documents in accordance with a request of the
Required Lenders, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders and all future holders of
the Notes. Subject to the foregoing, and to Section 8.4 of the Master Agreement,
the Agent shall take such action with respect to the Operative Documents and the
Leased Property as is directed in writing by the Required Lenders, unless the
Agent shall reasonably determine that such requested action is contrary to
Applicable Law or in violation of the Operative Documents.
SECTION 6.5 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Loan Potential Event of Default or
Loan Event of Default hereunder unless the Agent has received notice from a
Lender referring to this Loan Agreement, describing such Loan Potential Event of
Default or Loan Event of Default and stating that such notice is a "notice of
default". In the event that the Agent receives such a notice, the Agent shall
give notice thereof to the other Lenders. The Agent shall take such action with
respect to such Loan Potential Event of Default or Loan Event of Default as
shall be reasonably directed by the Required Lenders; provided that unless and
--------
until the Agent shall have received such directions, the Agent
14
<PAGE>
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to such Loan Potential Event of Default or Loan Event
of Default as it shall deem advisable in the best interests of the Lenders.
SECTION 6.6 Non-Reliance on Agent and Other Lenders. Each Lender expressly
---------------------------------------
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by the Agent hereinafter taken, including
any review of the affairs of the Lessor, the Guarantor or the Lessee, shall be
deemed to constitute any representation or warranty by the Agent to any Lender.
Each Lender represents to the Agent that it has, independently and without
reliance upon the Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of the Lessor, the Guarantor and the Lessee and
made its own decision to make its Loans hereunder and enter into this Loan
Agreement. Each Lender also represents that it will, independently and without
reliance upon the Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Loan Agreement and the other Operative Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Lessor, the Guarantor and the Lessee. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, operations,
property, condition (financial or otherwise), prospects or creditworthiness of
the Lessor, the Guarantor or the Lessee which may come into the possession of
the Agent or any of its officers, directors, employees, agents, attorneys-in-
fact or Affiliates.
SECTION 6.7 Indemnification. The Lenders agree to indemnify the Agent in
---------------
its capacity as such (to the extent not reimbursed by the Lessee or Guarantor
and without limiting the obligation of the Lessee or Guarantor to do so),
ratably according to the percentage each Lender's Commitment bears
15
<PAGE>
to the total commitments of all of the Lenders on the date on which
indemnification is sought under this Section 6.7 (or, if indemnification is
-----------
sought after the date upon which the Lenders' Commitments shall have terminated
and the Loans shall have been paid in full, ratably in accordance with the
percentage that each Lender's Commitment bears to the Commitments of all of the
Lenders immediately prior to such date), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of, the Commitments, this Loan Agreement, any of the other
Operative Documents or any documents contemplated by or referred to herein or
therein or the transactions contemplated hereby or thereby or any action taken
or omitted by the Agent under or in connection with any of the foregoing;
provided that no Lender shall be liable for the payment of any portion of such
- --------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Agent's gross
negligence or willful misconduct. The agreements in this Section 6.7 shall
-----------
survive the payment of the Notes and all other amounts payable hereunder.
SECTION 6.8 Agent in Its Individual Capacity. The Agent and its
--------------------------------
Affiliates may make loans to, accept deposits from and generally engage in any
kind of business with the Lessor, the Guarantor or the Lessee as though the
Agent were not the Agent hereunder and under the other Operative Documents.
With respect to Loans made or renewed by it and any Note issued to it, the Agent
shall have the same rights and powers under this Loan Agreement and the other
Operative Documents as any Lender and may exercise the same as though it were
not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in
its individual capacity. Each Lender acknowledges that the Agent in its
individual capacity has had and continues to have other business relations and
transactions with the Lessee.
SECTION 6.9 Successor Agent. The Agent may resign as Agent upon 20 days'
---------------
notice to the Lenders, the Lessor and the Lessee. If the Agent shall resign as
Agent under this Loan Agreement and the other Operative Documents, then the
Required
16
<PAGE>
Lenders shall appoint a successor agent for the Lenders, which successor agent
shall be a commercial bank organized under the laws of the United States of
America or any State thereof or under the laws of another country which is doing
business in the United States of America and having a combined capital, surplus
and undivided profits of at least $100,000,000, whereupon such successor agent
shall succeed to the rights, powers and duties of the Agent, and the term
"Agent" shall mean such successor agent effective upon such appointment and
approval, and the former Agent's rights, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such former
Agent or any of the parties to this Loan Agreement or any holders of the Notes.
After any retiring Agent's resignation as Agent, all of the provisions of this
Section 6 shall inure to its benefit as to any actions taken or omitted to be
- ---------
taken by it while it was Agent under this Loan Agreement and the other Operative
Documents.
SECTION 7 MISCELLANEOUS
SECTION 7.1 Amendments and Waivers. Neither this Loan Agreement, any Note,
----------------------
nor any terms hereof or thereof may be amended, supplemented or modified except
in accordance with the provisions of Section 8.4 of the Master Agreement.
SECTION 7.2 Notices. Unless otherwise specified herein, all notices,
-------
requests, demands or other communications to or upon the respective parties
hereto shall be given in accordance with Section 8.2 of the Master Agreement.
SECTION 7.3 No Waiver; Cumulative Remedies. No failure to exercise and no
------------------------------
delay in exercising, on the part of the Agent or any Lender, any right, remedy,
power or privilege hereunder, shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and privileges
herein provided are cumulative and not exclusive of any rights, remedies, powers
and privileges provided by law.
SECTION 7.4 Successors and Assigns. This Loan Agreement shall be binding
----------------------
upon and inure to the benefit of the Lessor, the Agent, the Lenders, all future
holders of the Notes and their respective successors and permitted assigns.
17
<PAGE>
SECTION 7.5 Counterparts. This Loan Agreement may be executed by one or
------------
more of the parties to this Loan Agreement on any number of separate
counterparts and all of said counterparts taken together shall be deemed to
constitute one and the same agreement. A set of the counterparts of this Loan
Agreement signed by all the parties hereto shall be lodged with the Lessor and
the Agent.
SECTION 7.6 GOVERNING LAW. THIS LOAN AGREEMENT AND THE NOTES AND THE
-------------
RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS LOAN AGREEMENT AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW
OF THE STATE OF GEORGIA.
SECTION 7.7 Survival and Termination of Agreement. All covenants,
-------------------------------------
agreements, representations and warranties made herein and in any certificate,
document or statement delivered pursuant hereto or in connection herewith shall
survive the execution and delivery of this Loan Agreement, and the Notes and
shall continue in full force and effect so long as any Note or any amount
payable to any Lender under or in connection with this Loan Agreement or the
Notes is unpaid, at which time this Loan Agreement shall terminate.
SECTION 7.8 Entire Agreement. This Loan Agreement and the other Operative
----------------
Documents sets forth the entire agreement of the parties hereto with respect to
its subject matter, and supersedes all previous understandings, written or oral,
with respect thereto.
SECTION 7.9 Severability. Any provision of this Loan Agreement or of the
------------
Notes which is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition, unenforceability or non-authorization without invalidating the
remaining provisions hereof or thereof or affecting the validity, enforceability
or legality of any such provision in any other jurisdiction.
18
<PAGE>
IN WITNESS THEREOF, the parties hereto have caused this Loan Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
SUNTRUST BANK, ATLANTA, as Agent
By: ____________________________
Name Printed: ___________________
Title: __________________________
S-1 LOAN AGREEMENT
<PAGE>
ATLANTIC FINANCIAL GROUP, LTD., as
Lessor and Borrower
By: Atlantic Financial Managers,
Inc., its General Partner
By: _________________________
Name Printed: ________________
Title: _______________________
S-2 LOAN AGREEMENT
<PAGE>
SUNTRUST BANK, ATLANTA,
as a Lender
By: ____________________________
Name Printed: ___________________
Title: __________________________
THE FIRST NATIONAL BANK OF CHICAGO,
as a Lender
By: ____________________________
Name Printed: ___________________
Title: __________________________
ABN AMRO BANK, N.V., as a Lender
By: ____________________________
Name Printed: ___________________
Title: __________________________
By: ____________________________
Name Printed: ___________________
Title: __________________________
BANKBOSTON, N.A., as a Lender
By: ____________________________
Name Printed: ___________________
Title: __________________________
S-3 LOAN AGREEMENT
<PAGE>
================================================================================
CONSTRUCTION AGENCY AGREEMENT
dated as of February 26, 1998
among
ATLANTIC FINANCIAL GROUP, LTD.
and
STERLING COMMERCE, INC.
as Construction Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS .................................................... 2
1.1. Defined Terms .................................................. 2
ARTICLE II APPOINTMENT OF CONSTRUCTION AGENT .............................. 2
2.1. Appointment .................................................... 2
2.2. Acceptance; Construction ....................................... 2
2.3. Commencement of Construction ................................... 2
2.4. Term ........................................................... 2
2.5. Construction Documents ......................................... 3
2.6. Scope of Authority ............................................. 3
2.7. Covenants of the Construction Agent ............................ 4
ARTICLE III THE BUILDING ................................................... 5
3.1. Construction ................................................... 5
3.2. Amendments; Modifications ...................................... 5
3.3. Casualty, Condemnation and Construction Force
Majeure Events ................................................. 5
ARTICLE IV PAYMENT OF FUNDS ............................................... 6
4.1. Funding of Property Acquisition Costs and Property
Buildings Costs ................................................ 6
ARTICLE V CONSTRUCTION AGENCY EVENTS OF DEFAULT .......................... 6
5.1. Construction Agency Events of Default .......................... 6
5.2. Damages ........................................................ 7
5.3. Remedies; Remedies Cumulative .................................. 7
ARTICLE VI NO CONSTRUCTION AGENCY FEE ..................................... 8
6.1. Lease as Fulfillment of Lessor's Obligations ................... 8
ARTICLE VII LESSOR'S RIGHTS; CONSTRUCTION AGENT'S RIGHTS ................... 8
7.1. Exercise of the Lessor's Rights ................................ 8
7.2. Lessor's Right to Cure Construction Agent's
Defaults ....................................................... 8
ARTICLE VIII MISCELLANEOUS ................................................. 8
8.1. Notices ........................................................ 8
<PAGE>
8.2. Successors and Assigns ......................................... 9
8.3. GOVERNING LAW .................................................. 9
8.4. Amendments and Waivers ......................................... 9
8.5. Counterparts ................................................... 9
8.6. Severability ................................................... 9
8.7. Headings and Table of Contents ................................. 9
ii
<PAGE>
CONSTRUCTION AGENCY AGREEMENT
-----------------------------
CONSTRUCTION AGENCY AGREEMENT, dated as of February 26, 1998 (as
amended, supplemented or otherwise modified from time to time, this
"Agreement"), between ATLANTIC FINANCIAL GROUP, LTD., a Texas limited
---------
partnership, (the "Lessor"), and STERLING COMMERCE, INC., a Delaware corporation
------
(in its capacity as construction agent, the "Construction Agent").
------------------
PRELIMINARY STATEMENT
A. Sterling Commerce, Inc., as lessee (the "Lessee"), and Lessor, as
------
lessor, are parties to that certain Lease Agreement, dated as of February 26,
1998 (as amended, supplemented or otherwise modified from time to time pursuant
thereto, the "Lease"), pursuant to which the Lessee has agreed to lease from
-----
Lessor, and Lessor have agreed to lease to Lessee, Lessor's interests in the
Leased Property.
B. Lessor, the Lessee, the Lenders signatory thereto and SunTrust Bank,
Atlanta, as agent for such Lenders (in such capacity, the "Agent") are parties
-----
to that certain Master Agreement, dated as of the date hereof (as amended,
supplemented or otherwise modified from time to time pursuant thereto, the
"Master Agreement").
----------------
C. Subject to the terms and conditions hereof, (i) the Lessor desires
to appoint the Construction Agent as its sole and exclusive agent for the
identification and acquisition of the Land pursuant to the Master Agreement and
to cause the construction of the Building in accordance with the Plans and
Specifications and pursuant to the Master Agreement and this Agreement, and (ii)
the Construction Agent desires, for the benefit of the Lessor, to cause the
Building to be constructed in accordance with the Plans and Specifications and
pursuant to the Master Agreement and this Agreement, in each case in accordance
with the terms herein set forth.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and
<PAGE>
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
ARTICLE I
DEFINITIONS
1.1. Defined Terms. Capitalized terms used but not otherwise defined in
-------------
this Agreement shall have the meanings set forth in the Master Agreement.
ARTICLE II
APPOINTMENT OF CONSTRUCTION AGENT
2.1. Appointment. Pursuant to and subject to the terms and conditions
-----------
set forth herein and in the Master Agreement and the other Operative Documents,
the Lessor hereby irrevocably designates and appoints the Construction Agent as
its exclusive agent for the identification and acquisition of the Land to be
acquired by the Lessor and to cause the construction of the Building on such
Land in substantial accordance with the Plans and Specifications and in
substantial compliance in all material respects with all Requirements of Law and
insurance requirements.
2.2. Acceptance; Construction. The Construction Agent hereby
------------------------
unconditionally accepts the designation and appointment as Construction Agent.
The Construction Agent will cause the Building to be constructed on the Land in
substantial accordance with the Plans and Specifications and in substantial
compliance in all material respects with all Requirements of Law and insurance
requirements.
2.3. Commencement of Construction. Subject to Construction Force
----------------------------
Majeure Events, the Construction Agent hereby agrees, unconditionally and for
the benefit of the Lessor, to cause the commencement of construction of the
Building on the Land as soon as is practicable after the Closing Date. For
purposes hereof, construction of a Building shall be deemed to commence on the
date (the "Construction
------------
2
<PAGE>
Commencement Date") on which excavation for the foundation for the Building
- -----------------
commences. Without limiting the foregoing, no phase of such construction shall
be undertaken until all permits required for such phase have been issued
therefor.
2.4. Term. This Agreement shall commence on the date hereof and shall
----
terminate upon the first to occur of:
(a) payment by the Lessee of the Lease Balance and termination of
the Lease in accordance therewith;
(b) the expiration or earlier termination of the Lease; and
(c) termination of this Agreement pursuant to Article V hereof.
---------
2.5. Construction Documents. The Construction Agent may execute any of
----------------------
its duties and obligations under this Agreement by or through agents,
contractors, employees or attorneys-in-fact, and the Construction Agent shall
enter into such agreements with architects and contractors as the Construction
Agent deems necessary or desirable for the construction of the Building pursuant
hereto (the "Construction Documents"); provided, however, that no such
---------------------- -------- -------
delegation shall limit or reduce in any way the Construction Agent's duties and
obligations under this Agreement; provided, further, that contemporaneously with
-------- -------
the execution and delivery of a Construction Document, the Construction Agent
will execute and deliver to the Lessor the Security Agreement and Assignment,
pursuant to which the Construction Agent assigns to the Lessor (who in turn will
assign to the Agent), among other things, all of the Construction Agent's rights
under and interests in such Construction Documents.
2.6. Scope of Authority. (a) Subject to the terms, conditions,
------------------
restrictions and limitations set forth in the Operative Documents, the Lessor
hereby expressly authorizes the Construction Agent, or any agent or contractor
of the Construction Agent, and the Construction Agent unconditionally agrees,
for the benefit of the Lessor, to take all action necessary or desirable for the
performance and satisfaction of all of the Construction Agent's obligations
hereunder with
3
<PAGE>
respect to the Leased Property acquired by the Lessor. The parties hereto
acknowledge that the Construction Agent is not a general contractor, and that
the Construction Agent intends to cause the construction of the Building by
entering into and enforcing one or more construction contracts with one or more
general contractors.
(b) Neither the Construction Agent nor any of its Affiliates or agents
shall enter into any contract which would, directly or indirectly, impose any
liability or obligation on the Lessor unless such contract expressly contains an
acknowledgment by the other party or parties thereto that the obligations of the
Lessor are non-recourse, and that the Lessor shall have no personal liability
with respect to such obligations. Subject to the foregoing, the Lessor shall
execute such documents and take such other actions as the Construction Agent
shall reasonably request, at the Construction Agent's expense, to permit the
Construction Agent to perform its duties hereunder.
(c) Subject to the terms and conditions of this Agreement and the
other Operative Documents, the Construction Agent shall have sole management and
control over the construction means, methods, sequences and procedures with
respect to the construction of the Building.
2.7. Covenants of the Construction Agent. The Construction Agent hereby
-----------------------------------
covenants and agrees that it will:
(a) following the Construction Commencement Date, cause
construction of the Building on the Land to be prosecuted diligently and
without undue interruption substantially in accordance with the Plans
and Specifications and in substantial compliance in all material
respects with all Requirements of Law and insurance requirements;
(b) notify the Lessor and the Agent in writing not less than five
(5) Business Days after the occurrence of each Construction Force
Majeure Event;
4
<PAGE>
(c) take all reasonable and practical steps to minimize the
disruption of the construction process arising from Construction Force
Majeure Events;
(d) take all reasonable and practical steps to cause the
Completion Date to occur on or prior to the Scheduled Construction
Termination Date, and cause all Liens (including, without limitation,
Liens or claims for materials supplied or labor or services performed in
connection with the construction of the Building), other than Permitted
Liens and Lessor Liens, to be discharged;
(e) following the Completion Date, cause all outstanding punch
list items with respect to the Building to be completed within sixty
(60) days after said Completion Date; and
(f) at all times during construction of the Building, cause all
title to all personalty financed by the Lessor on or within the Leased
Property to be and remain vested in the Lessor and cause to be on file
with the applicable filing office all necessary documents under Article
9 of the Uniform Commercial Code to perfect such title free of all Liens
other than Permitted Liens and Lessor Liens, it being understood and
acknowledged that such Lessor's rights, title and interest in and to
said personalty have been assigned to the Agent pursuant to the
Operative Documents.
ARTICLE III
THE BUILDING
3.1. Construction. The Construction Agent shall cause the Building to
------------
be constructed, equipped, maintained and used in substantial compliance in all
material respects with all Requirements of Law and insurance requirements.
3.2. Amendments; Modifications. The Construction Agent may, subject to
-------------------------
the conditions, restrictions and limitations set forth herein and in the
Operative Documents (but not otherwise), at any time during the term hereof
revise, amend
5
<PAGE>
or modify the Plans and Specifications without the consent of the Lessor;
provided, however, that the Lessor's prior written consent will be required in
- -------- -------
the following instances: (x) such revision, amendment or modification would
result in the Completion Date of the Building occurring after the Scheduled
Construction Termination Date, or (y) such revision, amendment or modification
would result in the cost for the Leased Property exceeding the then remaining
Commitments, or (z) the aggregate effect of such revision, amendment or
modification, when taken together with any previous or contemporaneous revision,
amendment or modification to the Plans and Specifications, would be to reduce
the Fair Market Sales Value of the Leased Property in a material respect when
completed.
3.3. Casualty, Condemnation and Construction Force Majeure Events. If
------------------------------------------------------------
at any time prior to the Completion Date with respect to the Building there
occurs a Casualty or a Construction Force Majeure Event or the Lessor or the
Construction Agent receives notice of a Condemnation, then, except as otherwise
provided in the Lease, in each case the Construction Agent shall promptly and
diligently take all reasonable and practical steps to complete the construction
of the Building substantially in accordance with the Plans and Specifications
and with the terms hereof, and cause the Completion Date to occur on or prior to
the Scheduled Construction Termination Date.
ARTICLE IV
PAYMENT OF FUNDS
4.1. Funding of Property Acquisition Costs and Property Buildings
------------------------------------------------------------
Costs. (a) In connection with the acquisition of the Land and during the course
- -----
of the construction of the Building, the Construction Agent may request that the
Lessor advance funds for the payment of acquisition, transaction and closing
costs or property improvements costs, and the Lessor will comply with such
request to the extent provided for under, and subject to the conditions,
restrictions and limitations contained in, the Master Agreement and the other
Operative Documents.
6
<PAGE>
(b) The proceeds of any funds made available to the Lessor to pay
acquisition, transaction and closing costs or improvements costs shall be made
available to the Construction Agent in accordance with the Funding Request
relating thereto and the terms of the Master Agreement. The Construction Agent
will use such proceeds only to pay the acquisition, transaction and closing
costs or improvements costs for Leased Property.
ARTICLE V
CONSTRUCTION AGENCY EVENTS OF DEFAULT
5.1. Construction Agency Events of Default. If any one or more of the
-------------------------------------
following events (each a "Construction Agency Event of Default") shall occur and
------------------------------------
be continuing:
(a) the Construction Agent fails to apply any funds paid by, or on
behalf of, the Lessor to the Construction Agent for the acquisition of
the Land and the construction of the Building to the payment of
acquisition, transaction and closing costs or improvements costs for the
Leased Property;
(b) subject to Construction Force Majeure Events, the Construction
Commencement Date shall fail to occur for any reason on or prior to the
date that is 6 months after the Closing Date;
(c) the Completion Date shall fail to occur for any reason on or
prior to the Funding Termination Date;
(d) any Lease Event of Default shall have occurred and be
continuing; or
(e) the Construction Agent shall fail to observe or perform any
term, covenant or condition of this Agreement (except those specified in
clauses (a) through (d) above), and such failure shall remain uncured
----------- ---
for a period of thirty (30) days after notice thereof to the
Construction Agent; provided, however, no Construction Agency Event of
-------- -------
Default shall be deemed to occur if such failure or breach cannot
reasonably be cured within such
7
<PAGE>
period, so long as the Construction Agent shall have promptly commenced
the cure thereof and continues to act with diligence to cure such
failure or breach and such failure or breach is cured within 120 days
after notice thereof to the Construction Agent;
then, in any such event, the Lessor may, in addition to the other rights and
remedies provided for in this Article, immediately terminate this Agreement by
giving the Construction Agent written notice of such termination, and upon the
giving of such notice, this Agreement shall terminate and all rights of the
Construction Agent and all obligations of the Lessor under this Agreement shall
cease. The Construction Agent shall pay upon demand all reasonable costs,
expenses, losses, expenditures and damages (including, without limitation,
reasonable attorneys' fees and disbursements) actually incurred by or on behalf
of the Lessor in connection with any Construction Agency Event of Default.
5.2. Damages. The termination of this Agreement pursuant to Section 5.1
------- -----------
shall in no event relieve the Construction Agent of its liability and
obligations hereunder, all of which shall survive any such termination.
5.3. Remedies; Remedies Cumulative. (a) If a Construction Agency
-----------------------------
Event of Default shall have occurred and be continuing, the Lessor shall have
all rights and remedies available under the Operative Documents or available at
law, equity or otherwise.
(b) No failure to exercise and no delay in exercising, on the part of
the Lessor, any right, remedy, power or privilege under this Agreement or under
the other Operative Documents shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege under this
Agreement preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege. The rights, remedies, powers and
privileges provided in this Agreement are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
8
<PAGE>
ARTICLE VI
NO CONSTRUCTION AGENCY FEE
6.1. Lease as Fulfillment of Lessor's Obligations. All obligations,
--------------------------------------------
duties and requirements imposed upon or allocated to the Construction Agent
shall be performed by the Construction Agent at the Construction's Agent's sole
cost and expense, and the Construction Agent will not be entitled to, and the
Lessor shall not have any obligation to pay, any agency fee or other fee or
compensation, and the Construction Agent shall not be entitled to, and the
Lessor shall not have any obligation to make or pay, any reimbursement therefor,
it being understood that this Agreement is being entered into as consideration
for and as an inducement to the Lessor entering into the Lease and the other
Operative Documents.
ARTICLE VII
LESSOR'S RIGHTS; CONSTRUCTION AGENT'S RIGHTS
7.1. Exercise of the Lessor's Rights. The Construction Agent hereby
-------------------------------
acknowledges and agrees that the rights and powers of the Lessor under this
Agreement have been assigned to and may be exercised by the Agent so long as the
Loan Agreement is outstanding.
7.2. Lessor's Right to Cure Construction Agent's Defaults. The Lessor,
----------------------------------------------------
without waiving or releasing any obligation or Construction Agency Event of
Default, may (but shall be under no obligation to) remedy any Construction
Agency Event of Default for the account of and at the sole cost and expense of
the Construction Agent. All reasonable out of pocket costs and expenses so
incurred (including actual and reasonable fees and expenses of counsel),
together with interest thereon at the Overdue Rate from the date on which such
sums or expenses are paid by the Lessor, shall be paid by the Construction Agent
to the Lessor on demand.
ARTICLE VIII
MISCELLANEOUS
9
<PAGE>
8.1. Notices. All notices, consents, directions, approvals,
-------
instructions, requests, demands and other communications required or permitted
by the terms hereof to be given to any Person shall be given in writing in the
manner provided in, shall be sent to the respective addresses set forth in, and
the effectiveness thereof shall be governed by the provisions of, Section 8.2 of
the Master Agreement.
8.2. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the Lessor, the Construction Agent and their respective
legal representatives, successors and permitted assigns. The Construction Agent
shall not assign its rights or obligations hereunder without the prior written
consent of the Lessor and the Agent.
8.3. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
-------------
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
8.4. Amendments and Waivers. The Lessor and the Construction Agent may
----------------------
from time to time, enter into written amendments, supplements or modifications
hereto.
8.5. Counterparts. This Agreement may be executed on any number of
------------
separate counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same agreement.
8.6. Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8.7. Headings and Table of Contents. The headings and table of contents
------------------------------
contained in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.
10
<PAGE>
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
STERLING COMMERCE, INC.
By____________________________________
Name:_______________________________
Title:______________________________
ATLANTIC FINANCIAL GROUP, LTD.
By: Atlantic Financial Managers,
Inc., its General Partner
By____________________________________
Name:_______________________________
Title:______________________________
CONSTRUCTION
AGENCY AGREEMENT
<PAGE>
APPENDIX A
to
Master Agreement, Lease,
Loan Agreement and Construction Agency Agreement
DEFINITIONS AND INTERPRETATION
A. Interpretation. In each Operative Document, unless a clear contrary
--------------
intention appears:
(i) the singular number includes the plural number and vice versa;
---- -----
(ii) reference to any Person includes such Person's successors and
assigns but, if applicable, only if such successors and assigns are
permitted by the Operative Documents;
(iii) reference to any gender includes each other gender;
(iv) reference to any agreement (including any Operative Document),
document or instrument means such agreement, document or instrument as
amended, supplemented or modified and in effect from time to time in
accordance with the terms thereof and, if applicable, the terms of the other
Operative Documents and reference to any promissory note includes any
promissory note which is an extension or renewal thereof or a substitute or
replacement therefor;
(v) reference to any Applicable Law means such Applicable Law as
amended, modified, codified, replaced or reenacted, in whole or in part, and
in effect from time to time, including rules and regulations promulgated
thereunder and reference to any section or other provision of any Applicable
Law means that provision of such Applicable Law from time to time in effect
and constituting the substantive amendment, modification, codification,
replacement or reenactment of such section or other provision;
(vi) reference in any Operative Document to any Article, Section,
------- -------
Appendix, Schedule or Exhibit means
-------- -------- -------
<PAGE>
such Article or Section thereof or Appendix, Schedule or Exhibit thereto;
------- ------- -------- -------- -------
(vii) "hereunder", "hereof", "hereto" and words of similar import shall
be deemed references to an Operative Document as a whole and not to any
particular Article, Section or other provision hereof;
------- -------
(viii) "including" (and with correlative meaning "include") means
including without limiting the generality of any description preceding such
term;
(ix) "or" is not exclusive; and
(x) relative to the determination of any period of time, "from" means
"from and including" and "to" means "to but excluding".
B. Accounting Terms. In each Operative Document, unless expressly otherwise
----------------
provided, accounting terms shall be construed and interpreted, and accounting
determinations and computations shall be made, in accordance with GAAP as in
effect from time to time, applied on a basis consistent (except for changes
agreed to by the Lessee's independent public accountants) with the most recent
audited consolidated financial statements of the Lessee and its Subsidiaries;
provided, however, that if any change in generally accepted accounting
- -------- -------
principles occurring after the Balance Sheet Date in itself materially affects
the calculation or definition of Capitalized Computer Software Costs,
Consolidated Current Assets, Consolidated Current Liabilities, Consolidated
Earnings Before Interest and Taxes, Consolidated Earnings Before Interest,
Taxes, Depreciation and Amortization, Consolidated Net Income, Consolidated
Total Assets, Consolidated Total Liabilities, Interest Charges or Total
Revenues, the Lessee may, by notice to the Agent, or the Agent (on its own or at
the request of the Required Lenders) may by notice to the Lessee, require that
Capitalized Computer Software Costs, Consolidated Current Assets, Consolidated
Current Liabilities, Consolidated Earnings Before Interest and Taxes,
Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization,
Consolidated Net Income, Consolidated Total Assets, Consolidated Total
Liabilities, Interests Charges and Total Revenue, as the case may be, thereafter
be calculated in accordance with generally accepted
-2-
<PAGE>
accounting principles as in effect and applied by the Lessee immediately before
such change in generally accepted accounting principles occurs. If such notice
is given the Compliance Certificate delivered pursuant to the Master Agreement
after such change occurs shall be accompanied by reconciliations of the
difference between the calculation set forth herein and a calculation made in
accordance with generally accepted accounting principles as in effect from time
to time after such change occurs.
C. Conflict in Operative Documents. If there is any conflict between any
-------------------------------
Operative Documents, such Operative Document shall be interpreted and construed,
if possible, so as to avoid or minimize such conflict but, to the extent (and
only to the extent) of such conflict, the Master Agreement shall prevail and
control.
D. Legal Representation of the Parties. The Operative Documents were
-----------------------------------
negotiated by the parties with the benefit of legal representation and any rule
of construction or interpretation otherwise requiring the Operative Document to
be construed or interpreted against any party shall not apply to any
construction or interpretation hereof or thereof.
E. Defined Terms. Unless a clear contrary intention appears, terms defined
-------------
herein have the respective indicated meanings when used in each Operative
Document.
"A Loan" means the A Percentage of the aggregate Fundings made pursuant to
------
the Loan Agreement and the Master Agreement.
"A Note" is defined in Section 2.2 of the Loan Agreement.
------
"A Percentage" means 85%.
------------
"Address" means with respect to any Person, its address set forth in
-------
Schedule 8.2 to the Master Agreement or such other address as it shall have
identified to the parties to the Master Agreement in writing.
"Affiliate" of the Lessee or its Subsidiaries shall mean any Person that
---------
would be considered to be an affiliate company under Rule 144(a) of the Rules
and Regulations of the SEC, as in effect on the date hereof, if the Lessee were
issuing securities, and of any other Person shall mean any other
-3-
<PAGE>
Person directly or indirectly controlling, controlled by or under common control
with, such Person. For purposes of this definition, the term "control"
-------
(including the correlative meanings of the terms "controlling," "controlled by"
----------- -------------
and "under common control with"), as used with respect to any Person, shall mean
-------------------------
the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of such Person, whether through the
ownership of voting securities or by contract or otherwise, provided (but
without limiting the foregoing) that no pledge of voting securities of any
Person without the current right to exercise voting rights with respect thereto
shall by itself be deemed to constitute control over such Person.
"After-Tax Basis" means (a) with respect to any payment to be received by an
---------------
Indemnitee (which, for purposes of this definition, shall include any Tax
Indemnitee), the amount of such payment supplemented by a further payment or
payments so that, after deducting from such payments the amount of all Taxes
(net of any current credits, deductions or other Tax benefits arising from the
payment by the Indemnitee of any amount, including Taxes, for which the payment
to be received is made) imposed currently on the Indemnitee by any Governmental
Authority or taxing authority with respect to such payments, the balance of such
payments shall be equal to the original payment to be received and (b) with
respect to any payment to be made by any Indemnitee, the amount of such payment
supplemented by a further payment or payments so that, after increasing such
payment by the amount of any current credits, deductions or other Tax benefits
realized by the Indemnitee under the laws of any Governmental Authority or
taxing authority resulting from the making of such payments, the sum of such
payments (net of such credits, deductions or benefits) shall be equal to the
original payment to be made; provided, however, for the purposes of this
-------- -------
definition, and for purposes of any payment to be made to either the Lessee or
an Indemnitee on an after-tax basis, it shall be assumed that (i) federal, state
and local taxes are payable at the highest combined marginal federal and state
statutory income tax rate (taking into account the deductibility of state income
taxes for federal income tax purposes) applicable to corporations from time to
time and (ii) such Indemnitee or the Lessee has sufficient income to utilize any
deductions, credits (other than foreign tax credits, the use of which shall be
determined
-4-
<PAGE>
on an actual basis) and other Tax benefits arising from any payments described
in clause (b) of this definition.
----------
"Agent" means SunTrust Bank, Atlanta, a Georgia banking corporation, in its
-----
capacity as agent under the Master Agreement and the Loan Agreement, or such
successor agent appointed pursuant to the Master Agreement and the Loan
Agreement.
"Alterations" means fixtures, alterations, improvements, modifications and
-----------
additions to the Leased Property.
"Alternative Rate" means, for any period, an interest rate per annum equal
----------------
to the rate of interest most recently announced by the Agent from time to time
as its "prime rate" (or other comparable reference rate) for calculating
interest on certain loans of varying maturities in United States dollars to
United States residents of various degrees of creditworthiness, which need not
be the lowest interest rate charged by the Agent. If such prime rate or
equivalent of the Agent changes from time to time after the date hereof, the
Alternative Rate shall be automatically increased or decreased, as the case may
be, without notice to the Lessee as of the effective time of each change in such
prime lending rate or equivalent.
"Alternative Rate Advance" means that portion of the Funded Amounts bearing
------------------------
interest at the Alternative Rate.
"Applicable Law" means all existing and future applicable laws (including
--------------
Environmental Laws), rules, regulations (including temporary and final income
tax regulations), statutes, treaties, codes, ordinances, permits, certificates,
orders and licenses of and interpretations by, any Governmental Authority, and
applicable judgments, decrees, injunctions, writs, orders or like action of any
court, arbitrator or other administrative, judicial or quasi-judicial tribunal
or agency of competent jurisdiction (including those pertaining to health,
safety or the environment (including, without limitation, wetlands) and those
pertaining to the construction, use or occupancy of any Leased Property) and any
restrictive covenant or deed restriction or easement of record affecting any
Leased Property.
-5-
<PAGE>
"Applicable Margin" means (i) 0.25% if, and for the period that, the Cash
-----------------
Collateral Account is fully funded in an amount at least equal to the
outstanding principal of the A Loans and (ii) 0.625% in all other cases.
"Appraisal" is defined in Section 3.1(a)(xii) of the Master Agreement.
---------
"Appraiser" means an MAI appraiser reasonably satisfactory to the Agent and
---------
the Lessor.
"Approved Investments" means Investments permitted pursuant to Section 5.21
--------------------
of the Master Agreement.
"Architect" means the architect engaged in connection with the construction
---------
of the Building, who may be an employee of the General Contractor.
"Architect's Agreement" means the architectural services agreement, if any,
---------------------
between the Lessee and the Architect.
"Assignment of Lease and Rents" means the Assignment of Lease and Rents,
-----------------------------
dated as of the Closing Date, from the Lessor to the Agent, substantially in the
form of Exhibit B to the Master Agreement.
"Awards" means any award or payment received by or payable to the Lessor or
------
the Lessee on account of any Condemnation or Event of Taking (less the actual
costs, fees and expenses incurred in the collection thereof, for which the
Person incurring the same shall be reimbursed from such award or payment).
"B Loan" means the B Percentage of the aggregate Fundings made pursuant to
------
the Loan Agreement and the Master Agreement.
"B Note" is defined in Section 2.2 of the Loan Agreement.
------
"B Percentage" means 11.5%.
------------
"Balance Sheet Date" means September 30, 1997.
------------------
"Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended from
---------------
time to time, or any similar federal or state law for the relief of debtors.
-6-
<PAGE>
"Banks" means the banks from time to time party to the Credit Agreement.
-----
"Base Term" means (a) the period commencing on the Closing Date and ending
---------
on the fifth (5th) anniversary of the Closing Date (or the fifth anniversary of
the Completion Date, if Lessee has extended the Lease Term pursuant to the first
sentence of Section 14.9 of the Lease) or (b) such shorter period as may result
from earlier termination of the Lease as provided therein.
"Basic Rent" means the rent payable pursuant to Section 3.1 of the Lease,
----------
determined in accordance with the following: each installment of Basic Rent
payable on any Payment Date shall be in an amount equal to the sum of (i) the
interest accrued on the Loans during the Rent Period ending on such Payment Date
pursuant to the Loan Agreement, plus (ii) the Yield accrued during the Rent
----
Period ending on such Payment Date.
"Board of Directors", with respect to a corporation, means either the Board
------------------
of Directors or any duly authorized committee of that Board which pursuant to
the by-laws or resolutions of such corporation has the same authority as that
Board as to the matter at issue.
"Building" means the buildings, structures and improvements located or to be
--------
located on the Land, along with all fixtures used or useful in connection with
the operation of the Leased Property, including, without limitation, all
furnaces, boilers, compressors, elevators, fittings, pipings, connectives,
conduits, ducts, partitions, equipment and apparatus of every kind and
description now or hereafter affixed or attached or used or useful in connection
with the Building, all equipment financed by the Lessor and/or the Lenders and
all Alterations (including all restorations, repairs, replacements and
rebuilding of such buildings, improvements and structures) thereto (but in each
case excluding trade fixtures and equipment financed other than by the Lessor or
the Lenders).
"Business Day" means any day other than a Saturday, Sunday or other day on
------------
which banks are required or authorized to be closed for business in Atlanta,
Georgia and Dallas, Texas and, when dealing in the Eurodollar Interbank Market
as
-7-
<PAGE>
contemplated by the Operative Documents, also a day which is a Eurodollar
Business Day.
"Capitalized Computer Software Costs" means, for any fiscal period of the
-----------------------------------
Lessee, the production costs for the development of computer software to be
sold, leased or otherwise marketed which have been capitalized in accordance
with generally accepted accounting principles and which otherwise would have
been an expense in determining Consolidated Earnings Before Interest and Taxes.
"Cash and Cash Equivalents" means cash and cash equivalents as defined by,
-------------------------
and determined in accordance with, GAAP.
"Cash Collateral Account" is defined in Section 2.3(d) of the Master
-----------------------
Agreement.
"Casualty" means an event of damage or casualty relating to all or part of
--------
the Leased Property that does not constitute an Event of Loss.
"Claims" means liabilities, obligations, damages, losses, demands,
------
penalties, fines, claims, actions, suits, judgments, proceedings, settlements,
utility charges, reasonable costs, reasonable expenses and reasonable
disbursements (including, without limitation, reasonable legal fees and
expenses) of any kind and nature whatsoever.
"Closing Date" means the date on which the initial Funding occurs under the
------------
Master Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, and in effect
----
from time to time.
"Commerce Accounts Receivable" means amounts receivable for products
----------------------------
licensed or leased, or for product support and services provided, by any of the
Commerce Companies.
"Commerce Accounts Receivable Agreement Party(ies)" means those entities
------------------------------------------------
(other than any of the Commerce Companies) which are party to the Commerce
Accounts Receivable Agreements.
-8-
<PAGE>
"Commerce Accounts Receivable Agreements" means those agreements set forth
---------------------------------------
on Schedule 1.2 to the Master Agreement, together with any agreement between any
------------
Commerce Subsidiary and another entity pursuant to which such entity agrees to
purchase Commerce Accounts Receivable of such Commerce Subsidiary.
"Commerce Accounts Receivable Guaranties" means the guaranty agreements
---------------------------------------
issued in connection with the Commerce Accounts Receivable Agreements and set
forth on Schedule 1.3 to the Master Agreement, together with any guaranty issued
------------
by the Lessee in favor of a Commerce Accounts Receivable Agreement Party
pursuant to which the Lessee guaranties the obligations of any of the Commerce
Subsidiaries under any of the Commerce Receivable Agreements.
"Commerce Companies" means collectively, the Lessee, the Commerce
------------------
Subsidiaries and the Non-Guarantor Subsidiaries.
"Commerce Subsidiaries" means collectively, those Subsidiaries of the Lessee
---------------------
or any of the Lessee's Subsidiaries listed on Schedule 1.4 to the Master
------------
Agreement, and any other Subsidiary of the Lessee or any of its Subsidiaries
which (i) is acquired or created subsequent to the date hereof, (ii) is
organized under the laws of the District of Columbia or of any state of the
United States, (iii) has its principal place of business in the United States,
(iv) does not do business exclusively outside the United States; and (v) is a
party to and guarantor under the Subsidiary Guaranty.
"Commitment" means as to each Funding Party, its obligation to make Fundings
----------
as investments in the Leased Property, or to make Loans to the Lessor, as the
case may be, in an aggregate amount not to exceed at any one time outstanding
the amount set forth for such Funding Party on Schedule 2.2 to the Master
------------
Agreement (as it may be adjusted from time to time pursuant to Section 6 of the
Master Agreement).
"Commitment Percentage" means as to any Funding Party, at a particular time,
---------------------
the percentage of the aggregate Commitments in effect at such time constituted
by such Funding Party's Commitment, as such percentage is shown for such Funding
Party on Schedule 2.2 to the Master Agreement (as it may be adjusted
------------
-9-
<PAGE>
from time to time pursuant to Section 6 of the Master Agreement).
"Completion Date" means the Business Day on which the conditions specified
---------------
in Section 3.4 of the Master Agreement have been satisfied with respect to the
Leased Property.
"Compliance Certificate" is defined in Section 5.3(c) of the Master
----------------------
Agreement.
"Condemnation" means any condemnation, requisition, confiscation, seizure or
------------
other taking or sale of the use, occupancy or title to the Leased Property or
any part thereof in, by or on account of any actual eminent domain proceeding or
other action by any Governmental Authority or other Person under the power of
eminent domain, which in any case does not constitute an Event of Taking. A
Condemnation shall be deemed to have "occurred" on the earliest of the dates
that use, occupancy or title is taken.
"Consolidated or consolidated" means, with reference to any term defined
------------ -- ------------
herein, shall mean that term as applied to the financial statements of the
Lessee and all of its Subsidiaries, consolidated in accordance with generally
accepted accounting principles.
"Consolidated Current Assets" means all assets of the Lessee and its
---------------------------
Subsidiaries on a consolidated basis that, in accordance with generally accepted
accounting principles, are properly classified as current assets.
"Consolidated Current Liabilities" means all liabilities of the Lessee and
--------------------------------
its Subsidiaries on a consolidated basis which may properly be classified as
current liabilities in accordance with generally accepted accounting principles.
"Consolidated Earnings Before Interest and Taxes" means for any particular
-----------------------------------------------
fiscal period, the consolidated income (or loss) of the Lessee and its
Subsidiaries before restructuring charges, extraordinary items and other
non-operating acquisition-related charges, non-cash research and development
write-offs, interest expense and income taxes, determined in accordance with
generally accepted accounting principles.
-10-
<PAGE>
"Consolidated Earnings Before Interest, Taxes, Depreciation and
--------------------------------------------------------------
Amortization" means, for any fiscal period, the consolidated income (or loss) of
- ------------
the Lessee and its Subsidiaries before restructuring charges, extraordinary
items and other non-operating acquisition-related charges, interest expenses,
income taxes, non-cash research and development write-offs, depreciation and
amortization, determined in accordance with generally accepted accounting
principles.
"Consolidated Net Income" means, with respect to any particular fiscal
-----------------------
period, the consolidated net income (or net loss) of the Lessee and its
Subsidiaries for such period, determined in accordance with generally accepted
accounting principles.
"Consolidated Total Assets" means the sum of (a) the consolidated assets of
-------------------------
the Lessee and its Subsidiaries, as determined in accordance with generally
accepted accounting principles with generally accepted accounting principles,
plus (b) without duplication, all assets leased by the Lessee or any Subsidiary
- ----
as lessee under any synthetic lease (including the Lease) referred to in clause
(c) of the definition of the term "Indebtedness", to the extent that such assets
would have been consolidated balance sheet assets had such synthetic lease been
treated for accounting purposes as a capitalized lease.
"Consolidated Total Liabilities" means the consolidated liabilities of the
------------------------------
Lessee and its Subsidiaries, determined in accordance with generally accepted
accounting principles.
"Construction" means the construction of the Building pursuant to the Plans
------------
and Specifications.
"Construction Agency Agreement" means the Construction Agency Agreement,
-----------------------------
dated as of February 26, 1998, between the Lessee and the Lessor.
"Construction Agency Agreement Event of Default" is defined in Section 5.1
---------------------------------------------- -----------
of the Construction Agency Agreement.
"Construction Agent" means the Lessee in its capacity as construction agent
------------------
pursuant to the Construction Agency Agreement.
-11-
<PAGE>
"Construction Conditions" means the conditions set forth in Section 3.4 of
-----------------------
the Master Agreement.
"Construction Contract" means that certain construction contract, if any,
---------------------
between the Lessee and a General Contractor for the construction of the
Building, provided that such contract shall be assigned by the Lessee to the
Lessor, and such assignment shall be consented to by such General Contractor,
pursuant to an assignment of such construction contract substantially in the
form of the Security Agreement and Assignment set forth as Exhibit D to the
Master Agreement.
"Construction Force Majeure Event" means:
--------------------------------
(a) an act of God arising after the Closing Date, or
(b) any change in any state or local law, regulation or other legal
requirement arising after the Closing Date and relating to the use of
the Land or the construction of a building on the Land, or
(c) strikes, lockouts, labor troubles, unavailability of materials, riots,
insurrections or other causes beyond the Lessee's control
which prevents the Lessee from completing the Construction prior to the
Scheduled Construction Termination Date and which could not have been avoided or
which cannot be remedied by the Lessee through the exercise of all commercially
reasonable efforts or the reasonable expenditure of funds and, in the case of
(b) above, the existence or potentiality of which was not known to, and could
not have been discovered prior to the Closing Date through the exercise of due
diligence by, the Lessee.
"Construction Term" means the period commencing on the Closing Date and
-----------------
ending on the Construction Term Expiration Date, or such shorter period as may
result from earlier termination of the Lease as provided therein.
"Construction Term Expiration Date" means the earliest of the following:
---------------------------------
(a) the Completion Date,
-12-
<PAGE>
(b) the date on which the aggregate Funded Amounts with respect to the
Leased Property equal (or exceed) the aggregate Commitments, and
(c) the Scheduled Construction Termination Date.
"Contractual Obligation", as applied to any Person, means any provision of
----------------------
any Securities issued by that Person or any indenture, mortgage, deed of trust,
contract, undertaking, agreement, instrument or other document to which that
Person is a party or by which it or any of its properties is bound or to which
it or any of its properties is subject (including, without limitation, any
restrictive covenant affecting any of the properties of such Person).
"Credit Agreement" means the Revolving Credit and Term Loan Agreement, dated
----------------
as of October 1, 1996, among the Lessee, BankBoston, N.A., formerly known as The
First National Bank of Boston, as agent, and the banks named therein, and any
replacement thereof.
"Deed" means, with respect to the Land, a General Warranty Deed, dated the
----
Closing Date, from the Seller to the Lessor, conveying such Land.
"Development Agreement" means the Development Agreement, dated January 5,
---------------------
1998, between Lincoln Property Company, CSE, Inc., as developer, and the Lessee.
"Distribution" means the declaration or payment of any dividend on or in
------------
respect of any shares of any class of capital stock of any Person, other than
dividends payable solely in shares of common stock of such Person; or the
repurchase, redemption, or other retirement of any class of capital stock, or of
any rights or options to acquire any class of capital stock, of any Person,
directly or indirectly through a Subsidiary or otherwise; the return of capital
by any Person to its shareholders as such; or any other distribution on or in
respect of any shares of any class of capital stock of any Person.
"Eligible Assignee" means any of (a) a commercial bank or finance company
-----------------
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (b) a
savings and
-13-
<PAGE>
loan association or savings bank organized under the laws of the United States,
or any State thereof or the District of Columbia, and having a net worth of at
least $100,000,000, determined in accordance with generally accepted accounting
principles; (c) a commercial bank organized under the laws of any other country
which is a member of the Organization for Economic Cooperation and Development
(the "OECD"), or a political subdivision of any such country, and having total
----
assets in excess of $1,000,000,000, provided that such bank is acting through a
--------
branch or agency located in the country in which it is organized, the United
States of America or another country which is also a member of the OECD; (d) the
central bank of any country which is a member of the OECD; and (e) if, but only
if, any Event of Default has occurred and is continuing, any other bank,
insurance company, commercial finance company or other financial institution or
other Person approved by the Agent, such approval not to be unreasonably
withheld.
"Employee Benefit Plan" means any employee benefit plan within the meaning
---------------------
of (S)3(3) of ERISA maintained or contributed to by the Lessee or any ERISA
Affiliate, other than a Multiemployer Plan.
"Environmental Audit" means a Phase I environmental assessment titled
-------------------
Environmental Site Assessment, dated December 2, 1997, by HBC Engineering, Inc.
for Lincoln Property Company.
"Environmental Governmental Rule" means any judgment, decree, order, law,
-------------------------------
license, rule or regulation pertaining to environmental matters, including those
arising under any Environmental Law.
"Environmental Laws" means and includes the Resource Conservation and
------------------
Recovery Act of 1976, (RCRA) 42 U.S.C. (S)(S) 6901-6987, as amended by the
Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C. (S)(S) (CERCLA), the
Hazardous Materials Transportation Act of 1975, 49 U.S.C. (S)(S) 1801-1812, the
Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601-2671, the Clean Air Act, 42
U.S.C. (S)(S) 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. (S)(S) 136 et seq., and all similar
-14-
<PAGE>
federal, state and local environmental laws, ordinances, rules, orders,
statutes, decrees, judgments, injunctions, codes and regulations, and any other
federal, state or local laws, ordinances, rules, codes and regulations, and any
other federal, state or local laws, ordinances, rules, codes and regulations
relating to the environment, human health or natural resources or the regulation
or control of or imposing liability or standards of conduct concerning human
health, the environment, Hazardous Materials or the clean-up or other
remediation of the Leased Property, or any part thereof, as any of the foregoing
may have been from time to time amended, supplemented or supplanted.
"Environmental Permits" means all permits, licenses, authorizations,
---------------------
certificates and approvals of Governmental Authorities required by Environmental
Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time or any successor federal statute.
"ERISA Affiliate" means any Person which is treated as a single employer
---------------
with the Lessee under (S)414 of the Code.
"ERISA Reportable Event" means a reportable event with respect to a
----------------------
Guaranteed Pension Plan within the meaning of (S)4043 of ERISA and the
regulations promulgated thereunder as to which the requirement of notice has not
been waived.
"Eurocurrency Reserve Rate" means, for any day with respect to a Eurodollar
-------------------------
Rate Advance, the maximum rate (expressed as a decimal) at which any lender
subject thereto would be required to maintain reserves under Regulation D of the
Board of Governors of the Federal Reserve System (or any successor or similar
regulations relating to such reserve requirements) against "Eurocurrency
Liabilities" (as that term is used in Regulation D), if such liabilities were
outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on
and as of the effective date of any change in the Eurocurrency Reserve Rate.
"Eurodollar Advance" means that portion of the Funded Amounts bearing
------------------
interest determined by reference to the Eurodollar Rate.
-15-
<PAGE>
"Eurodollar Business Day" means any Business Day on which commercial banks
-----------------------
are open for international business (including dealings in dollar deposits) in
London or such other Eurodollar Interbank Market as may be selected by the Agent
in its sole discretion acting in good faith.
"Eurodollar Interbank Market" means any lawful recognized market in which
---------------------------
deposits of United States dollars are offered by international banking units of
United States banking institutions and by foreign banking institutions to each
other, and where the eurodollar and foreign currency and exchange operations of
the Agent are customarily conducted.
"Eurodollar Lending Office" means, initially, the office of each Lender
-------------------------
designated as such in Schedule 8.2 to the Master Agreement; thereafter, such
------------
other office of such Lender, if any, that shall be making or maintaining Loans.
"Eurodollar Rate" means, for any Rent Period, the rate of interest equal to
---------------
(i) the rate per annum (rounded upwards to the nearest 1/100 of one percent) at
which the Agent's Eurodollar Lending Office is offered Dollar deposits two (2)
Eurodollar Business Days prior to the beginning of such Rent Period in the
Eurodollar Interbank Market, for delivery on the first day of such Rent Period
for the number of days comprised therein and in an amount comparable to the
amount of the Loans to which such Rent Period applies, divided by (ii) a number
equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.
"Event of Default" means any event or condition designated as an "Event of
----------------
Default" in Article XII of the Lease.
"Event of Loss" is defined in Section 10.1 of the Lease.
-------------
"Event of Taking" is defined in Section 10.2 of the Lease.
---------------
"Fair Market Rental Value" means the fair market rental value as determined
------------------------
by an independent appraiser chosen by the Lessor that would be obtained in an
arm's-length lease between an informed and willing lessee and an informed and
willing lessor, in either case under no compulsion to lease, and neither of
which is related to the Lessor or Lessee for the
-16-
<PAGE>
lease of the Leased Property on the terms set forth, or referred to, in the
Lease. Such fair market rental value shall be calculated as the value for the
use of the Leased Property to be leased in place at the Land, assuming, in the
determination of such fair market rental value, that the Leased Property is in
the condition and repair required to be maintained by the terms of the Lease
(unless such fair market rental value is being determined for the purposes of
Section 13.1 of the Lease and except as otherwise specifically provided in the
Lease, in which case this assumption shall not be made).
"Fair Market Sales Value" means, with respect to the Leased Property or any
-----------------------
portion thereof, the fair market sales value as determined by an independent
appraiser chosen by the Lessor or, so long as the Funded Amounts are
outstanding, the Agent and, so long as no Event of Default has occurred and is
continuing, approved by the Lessee (such approval not to be unreasonably
withheld) that would be obtained in an arm'slength transaction between an
informed and willing buyer (other than a lessee currently in possession) and an
informed and willing seller, under no compulsion, respectively, to buy or sell
and neither of which is related to the Lessor or Lessee, for the purchase of the
Leased Property. Such fair market sales value shall be calculated as the value
for the use of the Leased Property, assuming, in the determination of such fair
market sales value, that the Leased Property is in the condition and repair
required to be maintained by the terms of the Lease (unless such fair market
sales value is being determined for purposes of Section 13.1 of the Lease and
except as otherwise specifically provided in the Lease or the Master Agreement,
in which case this assumption shall not be made).
"Final Rent Payment Date" is defined in Section 13.1(e) of the Lease.
-----------------------
"Fiscal Quarter" means each of the quarters of the Fiscal Year ending on
--------------
December 31, March 31, June 30 and September 30.
"Fiscal Year" means the fiscal year of the Lessee and its Subsidiaries,
-----------
which shall be the twelve (12) months ending on September 30.
-17-
<PAGE>
"Foreign Obligations" means all Indebtedness, obligations and liabilities of
-------------------
the Lessee to any of the Lenders or the Banks or any affiliate of any of the
Lenders or the Banks in respect of guaranties by, and other contingent
obligations of, the Lessee, existing on the Closing Date or arising thereafter,
direct or indirect, joint or several, absolute or contingent, matured or
unmatured, liquidated or unliquidated, secured or unsecured, in respect of
Indebtedness of any Subsidiary of the Lessee or of its Subsidiaries which is not
organized under the laws of any jurisdiction of the United States of America and
which does not have its principal place of business in the United States of
America.
"Funded Amount" means, as to the Lessor, the Lessor's Invested Amounts, and,
-------------
as to each Lender, the outstanding principal of such Lender's Loans.
"Funding" means any funding by the Funding Parties pursuant to Section 2.2
-------
of the Master Agreement.
"Funding Date" means collectively, the Closing Date and each other date
------------
during the Construction Term on which a Funding occurs under Section 2 of the
Master Agreement.
"Funding Parties" means the Lessor and the Lenders, collectively.
---------------
"Funding Party Balance" means, without duplication, (i) for the Lessor as of
---------------------
any date of determination, an amount equal to the sum of the outstanding
Lessor's Invested Amount, all accrued and unpaid Yield on such outstanding
Lessor's Invested Amount, all unpaid related fees owing to the Lessor under the
Operative Documents, and all other related amounts owing to the Lessor by the
Lessee under the Operative Documents, and (ii) for any Lender as of any date of
determination, an amount equal to the sum of the outstanding related Loans of
such Lender, all accrued and unpaid interest thereon, all unpaid related fees
owing to such Lender under the Operative Documents, and all other related
amounts owing to such Lender by the Lessee under the Operative Documents.
"Funding Request" is defined in Section 2.2(d) of the Master Agreement.
---------------
-18-
<PAGE>
"Funding Termination Date" means the Scheduled Construction Termination
------------------------
Date.
"General Contractor" means the general contractor under the Construction
------------------
Contract as may be selected by the Lessee.
"General Partner" means Atlantic Financial Managers, Inc., a Texas
---------------
corporation.
"GAAP or Generally Accepted Accounting Principles or generally accepted
---- --------------------------------------------------------------
accounting principles" means, except as provided in Section B above, principles
- --------------------- ---------
which are (A) consistent with the principles promulgated or adopted by the
Financial Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission and their predecessors
(or successor organizations), as in effect from time to time and (B)
consistently applied with past financial statements of the Lessee and its
Subsidiaries adopting the same principles where required by generally accepted
accounting principles, provided that in each case referred to in this definition
--------
of "generally accepted accounting principles", a certified public accountant
would, insofar as the use of such accounting principles is pertinent, be in a
position to deliver an unqualified opinion (other than a qualification regarding
changes in generally accepted accounting principles) as to financial statements
in which such principles have been properly applied for any fiscal period end
being reported.
"Governmental Action" means all permits, authorizations, registrations,
-------------------
consents, approvals, waivers, exceptions, variances, orders, judgments, decrees,
licenses, exemptions, publications, filings, notices to and declarations of or
with, or required by, any Governmental Authority, or required by any Applicable
Law and shall include, without limitation, all citings, environmental and
operating permits and licenses that are required for the use, occupancy, zoning
and operation of the Leased Property.
"Governmental Authority" means any federal, state, county, municipal or
----------------------
other governmental or regulatory authority, agency, board, body, commission,
instrumentality, court or any political subdivision thereof.
-19-
<PAGE>
"Guaranteed Pension Plan" means any employee pension benefit plan within the
-----------------------
meaning of (S)3.2(a) of ERISA maintained by the Lessee or any ERISA Affiliate,
or to which the Lessee or any ERISA Affiliate contributes, the benefits of which
are guaranteed on termination in full or in part by the PBGC pursuant to Title
IV of ERISA, other than a Multiemployer Plan required to pay plan termination
insurance premiums to the PBGC.
"Guarantor" means the Lessee, in its capacity as guarantor under the
---------
Guaranty.
"Guaranty" means the Guaranty, dated as of February 26, 1998 by the
--------
Guarantor in favor of the Funding Parties.
"Hazardous Material" means any hazardous waste, as defined by 42 U.S.C. (S)
------------------
6903(5), any hazardous substances as defined by 42 U.S.C. (S) 6901(14), any
pollutant or contaminant as defined by 42 U.S.C. (S) 9601(33) and any other
toxic substances, oil or hazardous materials or other chemicals or substances
regulated by any Environmental Laws.
"Indebtedness" means, all obligations, contingent and otherwise, which in
------------
accordance with generally accepted accounting principles should be and are
classified upon the obligor's balance sheet as liabilities, or to which
reference should be and is made by footnotes thereto, including, in any event
and whether or not so classified: (a) all debt and similar monetary obligations,
whether direct or indirect; (b) all liabilities secured by any mortgage, pledge,
security interest, lien, charge, or other encumbrance existing on property owned
or acquired subject thereto, whether or not the liability secured thereby shall
have been assumed; (c) all rental and other obligations under capitalized leases
and under any lease (a "synthetic lease") treated as an operating lease under
generally accepted accounting principles and as a loan or financing for U.S.
income tax purposes (including, without limitation, the Lease), with the
"amount" or "principal amount" of any such obligations under a synthetic lease
at any time of determination represented by the stipulated loss value,
termination value, or other equivalent amount thereof or, in the case of the
Lease, the sum of (i) the sum of all unused Commitments of all Funding Parties
plus (ii) the Lease Balance, and (d) all guaranties, endorsements and other
- ----
contingent obligations which are probable and
-20-
<PAGE>
estimable, whether direct or indirect, in respect of Indebtedness of others, and
any obligation to supply funds to or in any manner to invest in, directly or
indirectly, the debtor, to purchase Indebtedness, or to assure the owner of
Indebtedness against loss, through an agreement to purchase goods, supplies, or
services for the purpose of enabling the debtor to make payment of the
Indebtedness held by such owner or otherwise, and the obligations to reimburse
the issuer of any letters of credit.
"Indemnification Agreement" means the Indemnification Agreement dated as of
-------------------------
March 4, 1996 among Sterling Software, Inc., the Lessee and one or more of their
Subsidiaries, as in effect on the Closing Date.
"Indemnitee" means the Agent (in its individual capacity and in its capacity
----------
as Agent), each Lender, and the Lessor, and their respective Affiliates,
successors, permitted assigns, permitted transferees, employees, officers,
directors and agents; provided, however, that in no event shall the Lessee be an
-------- -------
Indemnitee.
"Intercompany Indebtedness" means the aggregate amount of all Indebtedness
-------------------------
of any Commerce Subsidiary to any other Commerce Subsidiary or to the Lessee,
and of the Lessee to any Subsidiary.
"Interest Charges" means, for any period, the expenses of the Lessee and its
----------------
Subsidiaries for such period for interest on Indebtedness (including all finance
charges and accrued interest expense, in the case of any Indebtedness on which
interest is payable less frequently than quarterly, payments consisting of
interest in respect of any capitalized lease or any synthetic lease referred to
in clause (c) of the definition of "Indebtedness" (including Basic Rent under
the Lease), but excluding the interest portion of operating lease payments and
Intercompany Indebtedness), to the extent paid in cash or due and payable in
cash in such period (whether or not such payment is due but is prohibited from
being made pursuant to the terms of such Indebtedness).
"Investments" means all expenditures made and all liabilities incurred
-----------
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to,
-21-
<PAGE>
or in respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person, which expenditures, liabilities,
loans, advances, capital contributions, transfers of property, guaranties or
obligations, in accordance with generally accepted accounting principles, should
be and are classified upon such Person's balance sheet as an asset. In
determining the aggregate amount of Investments outstanding at any particular
time: (i) the amount of any Investment represented by a guaranty shall be taken
at not less than the principal amount of the obligations guaranteed and still
outstanding; (ii) there shall be included as an Investment all interest accrued
with respect to Indebtedness constituting an Investment unless and until such
interest is paid; and (iii) there shall be deducted in respect of each such
Investment any amount received as a return of capital (but only by repurchase,
redemption, retirement, repayment, liquidating dividend or liquidating
distribution).
"Land" means the land described in Exhibit A to the Lease.
----
"Laws" means all ordinances, statutes, rules, regulations, orders,
----
injunctions, writs, treaties or decrees of any governmental or political
subdivision or agency thereof, or of any court or similar entity established by
any thereof.
"Lease" means the Lease Agreement, dated as of February 26, 1998, between
-----
the Lessee and the Lessor.
"Lease Balance" means as of any date of determination, without duplication,
-------------
an amount equal to the aggregate sum of the outstanding Funded Amounts of all
Funding Parties, all accrued and unpaid interest on the Loans, all accrued and
unpaid Yield on the Lessor's Invested Amounts, all unpaid fees owing to the
Funding Parties under the Operative Documents, and all other amounts owing to
the Funding Parties by the Lessee under the Operative Documents.
"Lease Term" with respect to the Lease means (a) the Base Term, as it may be
----------
renewed or extended pursuant to Section 14.9 of the Lease or (b) such shorter
period as may result from earlier termination of the Lease as provided therein.
-22-
<PAGE>
"Lease Termination Date" means the last day of the Lease Term, as the same
----------------------
may be accelerated pursuant to the Lease.
"Leased Property" means the Land and the Building(s).
---------------
"Lender Basic Rent" means, for any Rent Period under the Lease, the
-----------------
aggregate amount of interest accrued on the Loans allocated to such Rent Period
pursuant to Section 2.4 of the Loan Agreement during such Rent Period.
"Lenders" means such financial institutions as are, or who may hereafter
-------
become, parties to the Loan Agreement as Lenders to the Lessor.
"Lessee" is defined in the preamble to the Master Agreement.
------
"Lessor" is defined in the preamble to the Master Agreement.
------
"Lessor Basic Rent" means, for any Rent Period, the Yield accrued on the
-----------------
Lessor's Invested Amount during such Rent Period.
"Lessor Liens" means Liens on or against the Leased Property, the Lease, any
------------
other Operative Document or any payment of Rent (a) which result from any act or
omission of, or any Claim against, the Lessor unrelated to the transactions
contemplated by the Operative Documents or (b) which result from any Tax owed by
the Lessor, except any Tax for which the Lessee is obligated to indemnify
(including, without limitation, in the foregoing exception any assessments with
respect to the Leased Property noted on the related Title Policy or assessed in
connection with any construction or development by the Lessee).
"Lessor Material Adverse Effect" means a material adverse effect upon the
------------------------------
financial condition, operations or properties of the Lessor, the ability of the
Lessor to perform its obligations under the Operative Documents to which it is
party or the validity or enforceability against the Lessor of any of the
Operative Documents to which it is a party.
"Lessor's Invested Amount" means the amounts funded by the Lessor pursuant
------------------------
to Section 2 of the Master Agreement that
-23-
<PAGE>
are not proceeds of Loans by a Lender, as increased during the related
Construction Term pursuant to Section 2.3(c) of the Master Agreement.
"Lien" means any mortgage, deed of trust, security deed, pledge, security
----
interest, encumbrance, lien, easement, servitude or charge of any kind,
including, without limitation, any irrevocable license, conditional sale or
other title retention agreement, any lease in the nature thereof, or any other
right of or arrangement with any creditor to have its claim satisfied out of any
specified property or asset with the proceeds therefrom prior to the
satisfaction of the claims of the general creditors of the owner thereof,
whether or not filed or recorded, or the filing of, or agreement to execute as
"debtor", any financing or continuation statement under the Uniform Commercial
Code of any jurisdiction or any federal, state or local lien imposed pursuant to
any Environmental Law.
"Loan" shall have the meaning specified in Section 2.1 of the Loan
----
Agreement.
"Loan Agreement" means the Loan Agreement, dated as of February 26, 1998,
--------------
among the Lessor, the Agent and the Lenders.
"Loan Documents" means the Loan Agreement, the Notes, the Assignment of
--------------
Lease and Rents, the Mortgage and all documents and instruments executed and
delivered in connection with each of the foregoing.
"Loan Event of Default" means any of the events specified in Section 5.1 of
---------------------
the Loan Agreement, provided that any requirement for the giving of notice, the
--------
lapse of time, or both, or any other condition, event or act has been satisfied.
"Loan Potential Event of Default" means any event, condition or failure
-------------------------------
which, with notice or lapse of time or both, would become a Loan Event of
Default.
"Loss Proceeds" is defined in Section 10.6 of the Lease.
-------------
"Marketable Securities" means marketable securities, as defined by and
---------------------
determined in accordance with GAAP.
-24-
<PAGE>
"Master Agreement" means the Master Agreement, dated as of February 26,
----------------
1998, among the Lessee, the Lessor, the Agent and the Lenders.
"Material Adverse Effect" means a material adverse effect upon (a) the
-----------------------
financial condition, operations or properties of the Lessee or any other
Commerce Company, taken as a whole, or (b) the ability of the Lessee or any
other Commerce Company to perform in any material respect under the Operative
Documents or (c) the value, utility or useful life of the Leased Property, or
(d) the validity or enforceability against Lessee of any of the Operative
Documents to which Lessee is a party, or (e) the priority or perfection of any
Funding Party's interest in the Leased Property.
"Material Foreign Subsidiary" means any Subsidiary of the Lessee or any of
---------------------------
its Subsidiaries which (a)(i) is organized under the laws of a jurisdiction
located outside of the United States or (ii) has its principal place of business
outside of the United States and (b)(i) is engaged in business of any kind or
nature, (ii) has net worth in excess of $5,000,000 or (iii) has issued any
capital stock to any Person other than (A) the Lessee or a Subsidiary of the
Lessee, (B) de minimis directors' qualifying shares, (C) as required by law or
(D) employees of such Subsidiary in connection with stock option plans of such
Subsidiary.
"Moody's" means Moody's Investor Services, Inc.
-------
"Monthly Payment Date" means the first Business Day of each month.
--------------------
"Mortgage" means that certain Deed of Trust and Security Agreement, dated as
--------
of the Closing Date, by the Lessor to Rex A. Palmer, as trustee, for the benefit
of the Agent, in substantially the form of Exhibit D attached to the Master
Agreement, with such modifications as are reasonably satisfactory to the Lessor
and the Agent in conformity with Applicable Law to assure customary remedies in
favor of the Agent in the jurisdiction where the Leased Property is located.
"Multiemployer Plan" means any multiemployer plan within the meaning of
------------------
(S)3(37) of ERISA maintained or contributed to by the Lessee or any ERISA
Affiliate.
-25-
<PAGE>
"Non-Guarantor Subsidiaries" means as of the Closing Date, the Commerce
--------------------------
Companies listed on Schedule 1.5 to the Master Agreement and identified as
------------
Non-Guarantor Subsidiaries, as such schedule may be modified from time to time
pursuant to the provisions of Sections 5.16 and 5.17 of the Master Agreement.
"Notes" means the A Note and the B Note issued by the Lessor to each Lender
-----
under the Loan Agreement, and any and all notes issued in replacement or
exchange therefor in accordance with the provisions thereof.
"Obligations" means all amounts owed by, and obligations of, the Lessor to
-----------
the Lenders or the Agent under the Loan Agreement, Notes and other Operative
Documents.
"Officer's Certificate" of a Person means a certificate signed by a
---------------------
Responsible Officer of such Person.
"Operative Documents" means the Master Agreement, the Guaranty, the Deed,
-------------------
the Lease, the Security Agreement and Assignment, the Notes, the Loan Agreement,
the Assignment of Lease and Rents, the Mortgage, the Subsidiary Guaranty and the
other documents delivered in connection with the transactions contemplated by
the Master Agreement.
"Overdue Rate" means the lesser of (a) the highest interest rate permitted
------------
by Applicable Law and (b) an interest rate per annum (calculated on the basis of
a 365-day (or 366-day, if appropriate) year equal to 2.0% above the Alternative
Rate in effect from time to time.
"Partnership Agreement" means the Agreement of Limited Partnership of AFG,
---------------------
dated as of February 28, 1996, among Atlantic Financial Managers, Inc., as
general partner, and the persons listed on Schedule A thereto as limited
partners.
"Payment Date" means the last day of each Rent Period (and, if such Rent
------------
Period exceeds 3 months, the day that is 3 months after the first day of such
Rent Period).
"Payment Date Notice" is defined in Section 2.3(f) of the Master Agreement.
-------------------
-26-
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation, and any successor
----
thereto having similar responsibilities.
"Permitted Investments" means those investments permitted by the Lessee's
---------------------
Investment Policy dated October 1, 1997, attached hereto as Exhibit A.
---------
"Permitted Liens" means the following: (a) the respective rights and
---------------
interests of the Lessee, the Lessor, the Agent, and any Lender, as provided in
the Operative Documents, (b) Liens for Taxes either not yet due or being
contested in good faith and by appropriate proceedings, so long as enforcement
thereof is stayed pending such proceedings, (c) materialmen's, mechanics',
workers', repairmen's, employees' or other like Liens arising after the Closing
Date in the ordinary course of business for amounts either not yet due or being
contested in good faith and by appropriate proceedings, so long as enforcement
thereof is stayed pending such proceedings, (d) Liens arising after the Closing
Date out of judgments or awards with respect to which at the time an appeal or
proceeding for review is being prosecuted in good faith, so long as the
enforcement thereof has been stayed pending such appeal or review, (e)
easements, rights of way, reservations, servitudes and rights of others against
the Land which do not materially and adversely affect the value or the utility
of the Leased Property, (f) other Liens incidental to the conduct of Lessee's
business which were not incurred in connection with the borrowing of money or
the obtaining of advances or credit and which do not in the aggregate materially
detract from the value of the Leased Property or materially impair the use
thereof, (g) assignments, leases and subleases expressly permitted by the
Operative Documents, and (h) Liens created pursuant to the Development
Agreement.
"Person" means an individual, corporation, partnership, limited liability
------
company, joint venture, association, joint-stock company, trust, nonincorporated
organization or government or any agency or political subdivision thereof.
"Plans and Specification" means with respect to the Building the final plans
-----------------------
and specifications for such Building prepared by the Architect, and referred to
by the Appraiser in the Appraisal, as such Plans and Specifications may be
-27-
<PAGE>
hereafter amended, supplemented or otherwise modified from time to time.
"Potential Event of Default" means any event, condition or failure which,
--------------------------
with notice or lapse of time or both, would become an Event of Default.
"Potentially Responsible Party" means a potentially responsible party under
-----------------------------
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, with respect to a site listed on the National Priorities List,
40 C.F.R. Part 300, Appendix B.
"Proceeding" means a claim, action, cause of action, complaint or legal or
----------
administrative proceeding, in each case, contingent or otherwise.
"Property" or "Properties" means any interest in any kind of property or
-------- ----------
asset, whether real, personal, or mixed, or tangible or intangible.
"Purchase Option" is defined in Section 14.1 of the Lease.
---------------
"Real Estate" means all real property (1) owned or leased (as lessee or
-----------
sublessee) by the Lessee or any of its Subsidiaries and (2) located within the
United States of America.
"Recourse Deficiency Amount" means, as of any date of determination thereof,
--------------------------
the sum of (i) the aggregate principal amount of the A Loans then outstanding,
plus (ii) all accrued and unpaid interest on the A Loans.
"Regulations" means the income tax regulations promulgated from time to time
-----------
under and pursuant to the Code.
"Release" means the release, deposit, disposal or leak of any Hazardous
-------
Material into or upon or under any land or water or air, or otherwise into the
environment, including, without limitation, by means of burial, disposal,
discharge, emission, injection, spillage, leakage, seepage, leaching, dumping,
pumping, pouring, escaping, emptying, placement and the like.
-28-
<PAGE>
"Release Date" means the earlier of (i) the date that the Lease Balance has
------------
been paid in full, and (ii) the date on which the Agent gives notice to the
Lessor that the Lenders release any and all interest they may have in the Leased
Property, and all proceeds thereof, and any rights to direct, consent or deny
consent to any action by the Lessor with respect to the Leased Property.
"Remarketing Option" is defined in Section 14.6 of the Lease.
------------------
"Rent" means Basic Rent and Supplemental Rent, collectively.
----
"Rent Period" means (x) in the case of Alternative Rate Advances, means the
-----------
period from, and including, a Monthly Payment Date to, but excluding, the next
succeeding Monthly Payment Date (or, if earlier, the date of the conversion of
such Alternative Rate Advance to a Eurodollar Advance pursuant to Section 2.3(f)
of the Master Agreement) and (y) in the case of Eurodollar Advances, either a 1,
2, 3 or 6 month period; provided that:
-------- ----
(a) The initial Rent Period for any Funding shall commence on the
Funding Date of such Funding, and each Rent Period occurring thereafter in
respect of such Funding shall commence on the day on which the immediately
preceding Rent Period expires;
(b) If any Rent Period would otherwise expire on a day which is not a
Business Day, such Rent Period shall expire on the next succeeding Business
Day, provided that if any Rent Period in respect of Eurodollar Advances
--------
would otherwise expire on a day that is not a Business Day but is a day of
the month after which no further Business Day occurs in such month, such
Rent Period shall expire on the immediately preceding Business Day;
(c) Any Rent Period in respect of Eurodollar Advances which begins on a
day for which there is no numerically corresponding day in the calendar
month at the end of such Rent Period shall, subject to paragraph (d) below,
-------------
expire on the last Business Day of such calendar month;
-29-
<PAGE>
(d) No Rent Period shall extend beyond the Lease Termination Date; and
(e) There shall be no more than seven (7) Rent Periods outstanding at
any one time.
"Report" is defined in Section 7.6 of the Master Agreement.
------
"Required Lenders" means, at any time, Lenders holding an aggregate
----------------
outstanding principal amount of Loans equal to at least a majority of the
aggregate outstanding principal amount of all Loans.
"Required Funding Parties" means, at any time, Funding Parties holding an
------------------------
aggregate outstanding principal amount of Funded Amounts equal to at least a
majority of the aggregate outstanding principal amount of all Funded Amounts.
"Requirements of Law" means, as to any Person, the charter and by-laws or
-------------------
other organizational or governing documents of such Person, and any law, rule or
regulation, permit, approval, authorization, license or variance, order or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject, including, without
limitation, the Securities Act, the Securities Exchange Act, Regulations G, T, U
and X of the Board of Governors of the Federal Reserve System, and any building,
environmental or land use requirement or permit or occupational safety or health
law, rule or regulation.
"Responsible Officer" means the Chairman or Vice Chairman of the Board of
-------------------
Directors, the Chairman or Vice Chairman of the Executive Committee of the Board
of Directors, the President, any Senior Vice President or Executive Vice
President, any Vice President, the Secretary, any Assistant Secretary, the
Treasurer, any Assistant Treasurer, the Comptroller or any Assistant
Comptroller.
"Revolving Loans" means the loans made to the Lessee pursuant to the Credit
---------------
Agreement.
-30-
<PAGE>
"Rights" means rights issued in respect of each share of the Lessee's common
------
stock, par value $0.10 per share, by the Lessee pursuant to the Rights
Agreement.
"Rights Agreement" means the Rights Agreement dated as of December 13, 1996
----------------
between the Lessee and The First National Bank of Boston (now BankBoston, N.A.),
as Rights Agent, as in effect on December 13, 1996.
"Scheduled Construction Termination Date" means December 31, 1999.
---------------------------------------
"SEC" means the United States Securities and Exchange Commission.
---
"Securities" means any stock, shares, voting trust certificates, bonds,
----------
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or in general any instruments commonly
known as "securities", or any certificates of interest, shares, or
participations in temporary or interim certificates for the purchase or
acquisition of, or any right to subscribe to, purchase or acquire any of the
foregoing.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
-----------------------
amended.
"Security Agreement and Assignment" means the Security Agreement and
---------------------------------
Assignment (Development Agreement, Permits, Licenses and Governmental Approvals,
and Plans, Specifications and Drawings) from the Lessee to the Lessor,
substantially in the form of Exhibit C to the Master Agreement.
"Seller" means Zale Delaware, Inc., a Delaware corporation.
------
"S&P" means Standard & Poor's.
---
"Subsidiary" means any corporation, association, trust, or other business
----------
entity, of which the designated parent shall at any time own directly or
indirectly through a Subsidiary or
-31-
<PAGE>
Subsidiaries at least a majority (by number of votes) of the outstanding Voting
Stock.
"Subsidiary Guaranty" means the unlimited joint and several guaranty of
-------------------
certain Subsidiaries of Lessee, substantially in the form of Exhibit F to the
Master Agreement.
"Supplemental Rent" means any and all amounts, liabilities and obligations
-----------------
other than Basic Rent which the Lessee assumes or agrees or is otherwise
obligated to pay under the Lease or any other Operative Document (whether or not
designated as Supplemental Rent) to the Lessor, the Agent, any Lender or any
other party, including, without limitation, amounts under Article XVI of the
Lease, and indemnities and damages for breach of any covenants, representations,
warranties or agreements, and all overdue or late payment charges in respect of
any Funded Amount.
"Surrender Option" is defined in Section 14.6 of the Lease.
----------------
"Tax" or "Taxes" is defined in Section 7.4(a) of the Master Agreement.
--- -----
"Tax Allocation Agreement" means the Tax Allocation Agreement dated as of
------------------------
March 4, 1996 among Sterling Software, Inc., the Lessee and one or more of their
Subsidiaries, as in effect on the Closing Date.
"Tax Indemnitee" means the Lessor, the Agent, any Lender and their
--------------
respective Affiliates, successors, permitted assigns, permitted transferees,
employees, officers, directors and agents thereof, provided, however, that in no
-------- -------
event shall the Lessee be a Tax Indemnitee.
"Title Insurance Company" means the company that has or will issue the title
-----------------------
policies with respect to the Leased Property, which company shall be reasonably
acceptable to the Funding Parties.
"Title Policy" is defined in Section 3.1(a)(xi) of the Master Agreement.
------------
-32-
<PAGE>
"Total Debt" means at any time of determination, the sum of (a) the sum of
----------
(i) the aggregate unpaid principal of the loans outstanding under the Credit
Agreement (after giving effect to all amounts requested) plus (ii) the maximum
----
aggregate amount from time to time that the beneficiaries may draw under letters
of credit outstanding pursuant to the Credit Agreement, as such aggregate amount
may be reduced from time to time pursuant to the terms of such letters of credit
plus (iii) all unpaid reimbursement obligations under the Credit Agreement, plus
- ---- ----
(b) the amount of any Foreign Obligations then outstanding, plus (c) any
----
Indebtedness of the Lessee or any of its Subsidiaries under any of the Commerce
Accounts Receivable Agreements or the Commerce Accounts Receivable Guaranties,
which Indebtedness is on a full or partial recourse basis, plus (d) all
----
Indebtedness in respect of any capitalized lease or of any synthetic lease
(including the Lease) referred to in clause (c) of the definition of the term
"Indebtedness".
"Total Repurchase Event" means the occurrence of any event or circumstance
----------------------
which would permit any Commerce Accounts Receivable Agreement Party to require
the Commerce Subsidiary party to the applicable Commerce Accounts Receivable
Agreement to repurchase all Commerce Accounts Receivable previously purchased by
such Commerce Accounts Receivable Agreement Party under the applicable Commerce
Accounts Receivable Agreement.
"Total Revenues" means, for any fiscal period, the total gross revenues of
--------------
the Lessee and its Subsidiaries, determined in accordance with generally
accepted accounting principles.
"Transaction" means all the transactions and activities referred to in or
-----------
contemplated by the Operative Documents.
"Transaction Costs" is defined in Section 8.8 of the Master Agreement.
-----------------
"UCC" means the Uniform Commercial Code of Georgia, as in effect from time
---
to time.
"Unfunded Benefit Liabilities" means with respect to any Plan or
----------------------------
Multiemployer Plan at any time, the amount of unfunded benefit liabilities of
such Plan or Multiemployer Plan at such time as determined under ERISA Section
4001(a)(18) which shall not be less than the accumulated benefit obligation, as
-33-
<PAGE>
disclosed in accordance with FAS 87, over the fair market value of Plan or
Multiemployer Plan assets.
"Voting Stock" means stock or similar interests, of any class or classes
------------
(however designated), the holders of which are at the time entitled, as such
holders, to vote for the election of a majority of the directors (or persons
performing similar functions) of the corporation, association, trust or other
business entity involved, whether or not the right so to vote exists by reason
of the happening of a contingency.
"Yield" is defined in Section 2.3(a) of the Master Agreement.
-----
"10-K Report" means the report of the Lessee and its Subsidiaries filed
-----------
annually on Form 10-K with the SEC.
"10-Q Report" means the report of the Lessee and its Subsidiaries filed
-----------
quarterly on Form 10-Q with the SEC.
-34-
<PAGE>
================================================================================
GUARANTY
from
STERLING COMMERCE, INC.
Dated as of February 26, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Guaranty .................................................... 1
SECTION 2. Bankruptcy .................................................. 2
SECTION 3. Right of Set-Off ............................................ 3
SECTION 4. Continuing Guaranty ......................................... 3
SECTION 5. Reinstatement ............................................... 3
SECTION 6. Certain Actions ............................................. 3
SECTION 7. Application ................................................. 4
SECTION 8. Waiver ...................................................... 4
SECTION 9. Assignment .................................................. 4
SECTION 10. Miscellaneous ............................................... 5
<PAGE>
GUARANTY
--------
THIS GUARANTY, dated as of February 26, 1998, is made by Sterling Commerce,
Inc., a Delaware corporation ("SCI" or the "Guarantor"), in favor of the Funding
--- ---------
Parties (as defined in the Master Agreement referred to below).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, SCI, Atlantic Financial Group, Ltd., as Lessor, the financial
institutions party thereto, as Lenders, BankBoston, N.A., as Documentation
Agent, and SunTrust Bank, Atlanta, as Agent, have entered into that certain
Master Agreement, dated as of February 26, 1998 (as it may be modified, amended
or restated from time to time as and to the extent permitted thereby, the
"Master Agreement"; and, unless otherwise defined herein, terms which are
----------------
defined or defined by reference in the Master Agreement (including Appendix A
thereto) shall have the same meanings when used herein as such terms have
therein); and
WHEREAS, SCI expects to receive substantial direct and indirect benefits
from the transactions contemplated by the Master Agreement; and
WHEREAS, it is a condition precedent to the Funding Parties consummating
the transactions to be consummated on the Closing Date that the Guarantor
execute and deliver this Guaranty; and
WHEREAS, it is in the best interests of the Guarantor that the transactions
contemplated by the Master Agreement be consummated on the Closing Date; and
WHEREAS, this Guaranty, and the execution, delivery and performance hereof,
have been duly authorized by all necessary corporate action of the Guarantor;
and
WHEREAS, this Guaranty is offered by the Guarantor as an inducement to the
Funding Parties to consummate the transactions contemplated in the Master
Agreement, which transactions, if consummated, will be of benefit to the
Guarantor;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Guarantor, the Guarantor hereby agrees as follows:
SECTION 1. Guaranty. The Guarantor hereby unconditionally guarantees to
--------
the Funding Parties the full and prompt payment when due, whether by
acceleration or otherwise, and at all times thereafter, and the full and prompt
performance, of all of the Liabilities (as hereinafter defined), including
interest and earnings on any such Liabilities whether accruing before or after
any bankruptcy or insolvency case or proceeding involving Guarantor, or any
other Person and, if interest or earnings on any portion of such obligations
ceases to accrue by operation of law by reason of the commencement of such case
or proceeding, including such interest and yield as would have accrued on any
such portion of such obligations if such case or proceeding had not commenced,
and further agrees to pay all reasonable expenses (including reasonable
attorneys' fees and legal expenses) actually paid or incurred by each of the
Funding Parties in endeavoring to collect the Liabilities, or any part thereof,
and in enforcing this Guaranty. The term "Liabilities", as used herein, shall
-----------
mean all of the following, in each case howsoever created, arising or evidenced,
whether direct or indirect, joint or several, absolute or contingent, or now or
hereafter existing, or due or to become due: (i) all amounts payable by the
Lessee under the Lease (including, without limitation, Basic Rent, Supplemental
Rent and the Recourse Deficiency Amount), the Master Agreement or any other
Operative Document, and (ii) all principal of the Notes and interest accrued
thereon, and all additional amounts and other sums at any time due and owing,
and required to be paid by Lessee, to the Funding Parties under the terms of the
Master Agreement, the Loan Agreement, the Assignment of Lease and Rent, the
Mortgage, the Notes or any other Operative Document, in each case irrespective
of the unenforceability of any of the foregoing agreements, or the obligations
of the Lessee or the Lessor thereunder; provided, however, that the Guarantor
-------- -------
will not be obligated to pay under this Guaranty any amounts greater than the
Lessee would have had to pay, under the Lease, the Master Agreement and the
other Operative Documents assuming that such documents were enforced in
accordance with their terms (and without giving
2
<PAGE>
effect to any discharge or limitation thereon resulting or arising by reason of
the bankruptcy or insolvency of the Lessee), plus all actual and reasonable
costs of enforcing this Guaranty.
By way of extension but not in limitation of any of its other obligations
hereunder, the Guarantor stipulates and agrees that in the event any foreclosure
proceedings are commenced and result in the entering of a foreclosure judgment,
any such foreclosure judgment, to the extent related to the Liabilities, shall
be treated as part of the Liabilities, and the Guarantor unconditionally
guarantees the full and prompt payment of such judgment.
SECTION 2. Bankruptcy. The Guarantor agrees that, in the event of the
----------
dissolution, bankruptcy or insolvency of the Guarantor, or the inability or
failure of the Guarantor generally to pay debts as they become due, or an
assignment by the Guarantor for the benefit of creditors, or the commencement of
any case or proceeding in respect of the Guarantor under any bankruptcy,
insolvency or similar laws, and if such event shall occur at a time when any of
the Liabilities may not then be due and payable, the Guarantor will pay to the
Funding Parties forthwith the full amount which would be payable hereunder by
the Guarantor if all Liabilities were then due and payable.
SECTION 3. Right of Set-Off. To secure all obligations of the Guarantor
----------------
hereunder, each Funding Party, during the continuance of an Event of Default,
shall have a right to set-off, without demand or notice of any kind, at any time
and from time to time when any amount shall be due and payable by the Guarantor
hereunder against any and all balances, credits, deposits, accounts or moneys
(other than trust accounts, accounts held by the investment group of any Funding
Party or Affiliate thereof for investment services provided to the Guarantor,
other than with respect to the Cash Collateral Account, but only to the extent
of the outstanding principal of the A Notes) of or in the Guarantor's name now
or hereafter, for any reason or purpose whatsoever, in the possession or control
of, or in transit to, any Funding Party or any agent or bailee for any Funding
Party, and apply any such amounts toward the payment of the Liabilities then due
in such order as the Agent may elect in accordance with the Operative Documents.
3
<PAGE>
SECTION 4. Continuing Guaranty. THIS GUARANTY SHALL IN ALL RESPECTS BE A
-------------------
CONTINUING, ABSOLUTE AND UNCONDITIONAL GUARANTY OF PROMPT AND COMPLETE PAYMENT
AND PERFORMANCE (AND NOT MERELY OF COLLECTION), AND SHALL REMAIN IN FULL FORCE
AND EFFECT (NOTWITH-STANDING, WITHOUT LIMITATION, THE DISSOLUTION OF THE
GUARANTOR) UNTIL THE TERMINATION OF THE COMMITMENTS AND THE FULL AND FINAL
PAYMENT OF ALL OF THE LIABILITIES.
SECTION 5. Reinstatement. The Guarantor further agrees that, if at any
-------------
time all or any part of any payment theretofore applied to any of the
Liabilities is or must be rescinded or returned for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Guarantor), such Liabilities shall, for the purposes of this Guaranty, to
the extent that such payment is or must be rescinded or returned, be deemed to
have continued in existence, notwithstanding such application, and this Guaranty
shall continue to be effective or be reinstated, as the case may be, as to such
Liabilities, all as though such application had not been made.
SECTION 6. Certain Actions. The Funding Parties may, from time to time at
---------------
their discretion and without notice to the Guarantor, take any or all of the
following actions: (a) retain or obtain (i) a security interest in the Lessee's
interests in the Lease and (ii) a lien or a security interest hereafter granted
by any Person upon or in any property, in each case to secure any of the
Liabilities or any obligation hereunder; (b) retain or obtain the primary or
secondary obligation of any obligor or obligors, in addition to the Guarantor,
with respect to any of the Liabilities; (c) extend or renew for one or more
periods (regardless of whether longer than the original period), or release or
compromise any obligation of the Guarantor hereunder or any obligation of any
nature of any other obligor (including, without limitation, the Lessor) with
respect to any of the Liabilities; (d) release or fail to perfect its Lien upon
or security interest in, or impair, surrender, release or permit any
substitution or exchange for, all or any part of any property securing any of
the Liabilities or any obligation hereunder, or extend or renew for one or more
periods (regardless of whether longer than the original period) or release or
compromise any obligations of any nature of any obligor with respect to any such
property; and (e) resort to the Guarantor for payment of any of the Liabilities,
regardless of whether the Agent or any
4
<PAGE>
other Person shall have resorted to any property securing any of the Liabilities
or any obligation hereunder or shall have proceeded against any other obligor
primarily or secondarily obligated with respect to any of the Liabilities (all
of the actions referred to in this clause (e) being hereby expressly waived by
----------
the Guarantor).
SECTION 7. Application. Any amounts received by any Funding Party from
-----------
whatever source on account of the Liabilities shall be applied by it toward the
payment of such of the Liabilities, and in such order of application, as is set
forth in the Operative Documents.
SECTION 8. Waiver. The Guarantor hereby expressly waives: (a) notice of
------
the acceptance of this Guaranty; (b) notice of the existence or creation or non-
payment of all or any of the Liabilities; (c) presentment, demand, notice of
dishonor, protest, and all other notices whatsoever; (d) all suretyship defenses
and (e)all diligence in collection or protection of or realization upon the
Liabilities or any thereof, any obligation hereunder, or any security for or
guaranty of any of the foregoing.
SECTION 9. Assignment. Subject to Section 6 of the Master Agreement, each
----------
Funding Party may, from time to time, whether before or after any discontinuance
of this Guaranty, at its sole discretion and without notice to the Guarantor,
assign or transfer any or all of its portion of the Liabilities or any interest
therein; and, notwithstanding any such assignment or transfer or any subsequent
assignment or transfer thereof, such Liabilities shall be and remain Liabilities
for the purposes of this Guaranty, and each and every such immediate and
successive assignee or transferee of any of the Liabilities or of any interest
therein shall, to the extent of such assignee's or transferee's interest in the
Liabilities, be entitled to the benefits of this Guaranty to the same extent as
if such assignee or transferee were such Funding Party.
SECTION 10. Miscellaneous. No delay in the exercise of any right or
-------------
remedy shall operate as a waiver thereof, and no single or partial exercise of
any right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy; nor shall any modification or waiver of
any of the provisions of this Guaranty be binding
5
<PAGE>
upon any Funding Party except as expressly set forth in a writing duly signed
and delivered on its behalf. No action permitted hereunder shall in any way
affect or impair any Funding Party's rights or the Guarantor's obligations under
this Guaranty. For the purposes of this Guaranty, Liabilities shall include all
of the obligations described in the definition thereof, notwithstanding any
right or power of the Lessee or the Lessor or anyone else to assert any claim or
defense (other than final payment) as to the invalidity or unenforceability of
any such obligation, and no such claim or defense shall affect or impair the
obligations of the Guarantor hereunder. The Guarantor hereby acknowledges that
there are no conditions to the effectiveness of this Guaranty.
This Guaranty shall be binding upon the Guarantor and upon the Guarantor's
successors and permitted assigns; and all references herein to the Guarantor
shall be deemed to include any successor or successors, whether immediate or
remote, to such Person; provided that the Guarantor shall not assign its
obligations hereunder without the prior written consent of the Funding Parties.
Wherever possible each provision of this Guaranty shall be interpreted in
such manner as to be effective and valid under Applicable Law, but if any
provision of this Guaranty shall be prohibited by or invalid thereunder, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
The Guarantor: (a) submits for itself and its property in any legal action
or proceeding relating to this Guaranty, or for recognition and enforcement of
any judgment in respect thereof, to the non-exclusive general jurisdiction of
the Courts of the State of Georgia sitting in Fulton County, Georgia, the courts
of the United States of America for the Northern District of Georgia, and
appellate courts from any thereof; (b) consents that any such action or
proceedings may be brought to such courts, and waives any objection that it may
now or hereafter have to the venue of any such action or proceeding in any such
court or that such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same; (c) agrees that service of process in any
such action or proceeding may be effected by delivering a copy thereof to it at
its address set forth below or at such other
6
<PAGE>
address of which the other parties to the Master Agreement shall have been
notified pursuant to Section 8.2 of the Master Agreement; and (d) agrees that
nothing herein shall affect the right to effect service of process in any other
manner permitted by law or shall limit the right of the Funding Parties to sue
in any other jurisdiction.
All notices, demands, declarations, consents, directions, approvals,
instructions, requests and other communications required or permitted by this
Guaranty shall be in writing and shall be deemed to have been duly given when
addressed to the appropriate Person and delivered in the manner specified in
Section 8.2 of the Master Agreement. The initial address for notices to each
Guarantor is set forth below.
THIS GUARANTY SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.
7
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed
and delivered as of the date first above written.
IMPORTANT: READ BEFORE SIGNING: THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
STERLING COMMERCE, INC.
By: ___________________________________
Name Printed:
Title:
GUARANTY
<PAGE>
SUBSIDIARY GUARANTY
SUBSIDIARY GUARANTY (as amended from time to time, this "Subsidiary
----------
Guaranty"), dated as of February 26, 1998, by each of the undersigned
- --------
subsidiaries of Sterling Commerce, Inc. (each a "Guarantor" and collectively the
---------
"Guarantors") in favor of SunTrust Bank, Atlanta, as agent (in such capacity,
----------
the "Agent") for itself and for the other Funding Parties (as defined in the
-----
Master Agreement referred to below).
WHEREAS, Sterling Commerce, Inc., as Lessee, Atlantic Financial Group,
Ltd., as Lessor, the financial institutions party thereto, as Lenders, Bank
Boston, N.A., as Documentation Agent, and the Agent have entered into that
certain Master Agreement, dated as of February 26, 1998 (as it may be amended or
otherwise modified from time to time, the "Master Agreement"; and, unless
----------------
otherwise defined herein, terms which are defined or defined by reference in the
Master Agreement (including Appendix A thereto) shall have the same meanings
when used herein as such terms have therein);
WHEREAS, the Lessee and the Guarantors are members of a group of related
corporations, the success of any one of which is dependent in part on the
success of the other members of such group;
WHEREAS, the Guarantors expect to receive substantial direct and indirect
benefits from the extensions of credit to the Lessee by the Funding Parties
pursuant to the Operative Documents (which benefits are hereby acknowledged);
WHEREAS, it is a condition precedent to the Funding Parties' making any
loans or otherwise extending credit to the Lessee under the Operative Documents
that the Guarantors execute and deliver to the Agent, for the benefit of the
Funding Parties and the Agent, a guaranty in the form hereof; and
NOW, THEREFORE, the Guarantors hereby agree with the Funding Parties and
the Agent as follows:
1. Obligations. The term "Obligations", as used herein, shall mean all of
----------- -----------
the following, in each case howsoever created, arising or evidenced, whether
direct or indirect, joint or several, absolute or contingent, or now or
hereafter existing, or due or to become due: (i) all amounts payable by the
Lessee under the Lease (including, without limitation, Basic Rent, Supplemental
Rent and the Recourse Deficiency Amount), the Master Agreement or any other
Operative Document, and (ii) all principal of the Notes and interest accrued
thereon, and all additional amounts and other sums at any time due and owing,
and required to be paid by Lessee, to the Funding Parties under the terms of the
Master Agreement, the Loan Agreement, the Assignment of Lease and Rent, the
Mortgage, the Notes or any other Operative Document, in each case irrespective
of the unenforceability of any of the foregoing agreements, or the obligations
of the Lessee or the Lessor thereunder; provided, however, that the Guarantors
-------- -------
will not be obligated to pay under this Subsidiary Guaranty any amounts greater
than the Lessee would have had to pay under the Lease, the Master Agreement and
the other Operative
<PAGE>
Documents assuming that such documents were enforced in accordance with their
terms (and without giving effect to any discharge or limitation thereon
resulting or arising by reason of the bankruptcy or insolvency of the Lessee),
plus all actual and reasonable costs of enforcing this Subsidiary Guaranty. In
any action or proceeding involving any state corporate Applicable Law, or any
state or federal bankruptcy, insolvency, reorganization or other Applicable Law
affecting the rights of creditors generally (collectively, the "Fraudulent
----------
Transfer Laws") if the obligations of any Guarantor hereunder would otherwise,
- -------------
in each case after giving effect to all other liabilities of such Guarantor,
contingent or otherwise, that are relevant under the Fraudulent Transfer Laws
(specifically excluding, however, any liabilities of such Guarantor in respect
of intercompany indebtedness to the Lessee, other Affiliates of the Lessee or
other obligors to the extent that such indebtedness would be discharged in any
amount equal to the amount paid by such Guarantor hereunder) and after giving
effect as assets to the value (as determined under the applicable provisions of
Fraudulent Transfer Laws) of any agreement providing for an equitable allocation
among such Guarantor and other obligors of obligations arising under guaranties
by such parties, to be held or determined to be void, invalid or unenforceable
or subordinated to the claims of any other creditors, on account of the amount
of its liability under this Subsidiary Guaranty, then, notwithstanding any other
provision hereof to the contrary, the amount of such liability shall, without
any further action by such Guarantor, any Funding Party, the Agent or any other
Person, be automatically limited and reduced to the highest amount that is valid
and enforceable and not subordinated to the claims of other creditors as
determined in such action or proceeding.
2. Guaranty of Payment and Performance. The Guarantors hereby jointly and
-----------------------------------
severally guaranty to the Funding Parties and the Agent the full and punctual
payment when due (whether at stated maturity, by required pre-payment, by
acceleration or otherwise), as well as the performance, of all of the
Obligations including all such which would become due but for the operation of
the automatic stay pursuant to (S)362(a) of the Federal Bankruptcy Code and the
operation of (S)(S)502(b) and 506(b) of the Federal Bankruptcy Code. This
Subsidiary Guaranty is an absolute, unconditional and continuing guaranty of the
full and punctual payment and performance of all of the Obligations and not of
their collectibility only and is in no way conditioned upon any requirement that
the Agent or any Funding Party first attempt to collect any of the Obligations
from the Lessee or resort to any collateral security or other means of obtaining
payment. Should the Lessee default in the payment or performance of any of the
Obligations, the obligations of the Guarantors hereunder with respect to such
Obligations in default shall, upon demand by the Agent, become immediately due
and payable to the Agent, for the benefit of the Funding Parties and the Agent,
without demand or notice of any nature, all of which are expressly waived by the
Guarantors. Payments by the Guarantors hereunder may be required by the Agent
on any number of occasions. All payments by the Guarantors hereunder shall be
made to the Agent, in the manner and at the place of payment specified therefor
in the Lease for the account of the Funding Parties and the Agent.
3. Guarantors' Agreement to Pay Enforcement Costs, etc. The Guarantors
---------------------------------------------------
further jointly and severally agree, as the principal obligors and not as
guarantors only, to pay to the Agent, on demand, all costs and expenses
(including court costs and legal expenses) reasonably and actually
2
<PAGE>
incurred or expended by the Agent or any Funding Party in connection with the
Obligations, this Subsidiary Guaranty and the enforcement thereof, together with
interest on amounts recoverable under this Section 3 from the time when such
---------
amounts become due until payment, whether before or after judgment, at the
Overdue Rate, provided that if such interest exceeds the maximum amount
--------
permitted to be paid under Applicable Law, then such interest shall be reduced
to such maximum permitted amount.
4. Extent of Guarantors' Liabilities. The joint and several liability of
---------------------------------
the Guarantors hereunder shall be unlimited.
5. Waivers by Guarantors: Funding Parties' and Agent's Freedom to Act.
-------------------------------------------------------------------
The Guarantors agree that the Obligations will be paid and performed strictly in
accordance with their respective terms, regardless of any law, regulation or
order now or hereafter in effect in any jurisdiction affecting any of such terms
or the rights of the Agent or any Funding Party with respect thereto. The
Guarantors waive promptness, diligences, presentment, demand, protest, notice of
acceptance, notice of any Obligations incurred and all other notices of any
kind, all defenses which may be available by virtue of any valuation, stay,
moratorium law or other similar law now or hereafter in effect, any right to
require the marshalling of assets of the Lessee or any other entity or other
person primarily or secondarily liable with respect to any of the Obligations,
and all suretyship defenses generally. Without limiting the generality of the
foregoing, the Guarantors agree to the provisions of any instrument evidencing,
securing or otherwise executed in connection with any Obligation and agrees that
the obligations of the Guarantors hereunder shall not be released or discharged,
in whole or in part, or otherwise affected by (i) the failure of the Agent or
any Funding Party to assert any claim or demand or to enforce any right or
remedy against the Lessee or any other entity or other person primarily or
secondarily liable with respect to any of the Obligations; (ii) any extensions,
compromise, refinancing, consolidation or renewals of any Obligations; (iii) any
change in the time, place or manner of payment of any of the Obligations or any
rescissions, waivers, compromise, refinancing, consolidation or other amendments
or modifications of any of the terms or provisions of the Lease, any Note, the
other Operative Documents or any other agreement evidencing, securing or
otherwise executed in connection with any of the Obligations, (iv) the addition,
substitution or release of any entity or other person primarily or secondarily
liable for any Obligations; (v) the adequacy of any rights which the Agent or
any Funding Party may have of obtaining repayment of any of the Obligations; or
(vi) any other act or omission which might in any manner or to any extent vary
the risk of the Guarantors or otherwise operate as a release or discharge of the
Guarantors, all of which may be done without notice to the Guarantors. To the
fullest extent permitted by law, the Guarantors hereby expressly waive any and
all rights or defenses arising by reason of (A) any "one action" or "anti-
deficiency" law which would otherwise prevent the Agent or any Funding Party
from bringing any action, including any claim for a deficiency, or exercising
any other right or remedy (including any right of set-off), against the
Guarantors before or after the Agent's or such Funding Party's commencement or
completion of any foreclosure action, whether judicially, by exercise of power
of sale or otherwise, or (B) any other law
3
<PAGE>
which in any other way would otherwise require any election of remedies by the
Agent or any Funding Party.
6. Unenforceability of Obligations Against Lessee. If for any reason the
----------------------------------------------
Lessee has no legal existence or is under no legal obligation to discharge any
of the Obligations, or if any of the Obligations have become irrecoverable from
the Lessee by reason of the Lessee's insolvency, bankruptcy or reorganization or
by other operation of law or for any other reason, this Subsidiary Guaranty
shall nevertheless be binding on the Guarantors to the same extent as if the
Guarantors at all times had been the principal obligor on all such Obligations.
In the event that acceleration of the time for payment of any of the Obligations
is stayed upon the insolvency, bankruptcy or reorganization of the Lessee, or
for any other reason, all such amounts otherwise subject to acceleration under
the terms of the Lease, the Notes, the other Operative Documents or any other
agreement evidencing, securing or otherwise executed in connection with any
Obligation shall be immediately due and payable by the Guarantors.
7. Subrogation; Subordination.
--------------------------
7.1 Waiver of Rights Against Lessee. Until the final payment and
-------------------------------
performance in full of all of the Obligations, the Guarantors shall not exercise
and hereby waive (until such final payment and performance in full of all of the
Obligations) any rights against the Lessee arising as a result of payment by the
Guarantors hereunder, by way of subrogation, reimbursement, restitution,
contribution or otherwise, and will not prove any claim in competition with the
Agent or any Funding Party in respect of any payment hereunder in any
bankruptcy, insolvency or reorganization case or proceedings of any nature; and
the Guarantors will not claim any set off, recoupment or counterclaim against
the Lessee in respect of any liability of the Guarantors to the Lessee.
7.2 Subordination. The payment of any amounts due with respect to any
-------------
indebtedness of the Lessee for money borrowed or credit received now or
hereafter owed to the Guarantors is hereby subordinated to the prior payment in
full of all of the Obligations. The Guarantors agree that, after the occurrence
of any default in the payment or performance of any of the Obligations, the
Guarantors will not demand, sue for or otherwise attempt to collect any such
indebtedness of the Lessee to the Guarantors until all of the Obligations shall
have been paid in full. If notwithstanding the foregoing sentence, the
Guarantors shall collect, enforce or receive any amounts in respect of such
indebtedness while any Obligations are still outstanding, such amounts shall be
collected, enforced and received by the Guarantors as trustees for the Funding
Parties and the Agent and be paid over to the Agent, for the benefit of the
Funding Parties and Agent, on account of the Obligations without affecting in
any manner the liability of the Guarantors under the other provisions of this
Subsidiary Guaranty.
7.3. Provisions Supplemental. The provisions of this Section 7 shall be
----------------------- ---------
supplemental to and not in derogation of any rights and remedies of the Funding
Parties and the Agent under any separate
4
<PAGE>
subordination agreement which the Agent may at any time and from time to time
enter into with the Guarantors for the benefit of the Funding Parties and the
Agent.
8. Set off. Regardless of the adequacy of any other means of obtaining
-------
payment of any of the Obligations, each of the Agent and the Funding Parties is
hereby authorized at any time and from time to time, without notice to the
Guarantors (any such notice being expressly waived by the Guarantors) and to the
fullest extent permitted by law, to set off and apply such deposits and other
sums credited by or due from any of the Funding Parties or the Agent to any of
the Guarantors or subject to withdrawal by any of the Guarantors (but excluding
accounts held by the investment group of any Funding Party or the Agent or any
affiliate thereof for investment services provided to the Guarantors) against
the obligations of the Guarantors under this Subsidiary Guaranty, whether or not
the Agent or such Funding Parties shall have made any demand under this
Subsidiary Guaranty and although such obligations may be contingent or
unmatured.
9. Further Assurances. The Guarantors agree that they will from time to
------------------
time, at the request of the Agent, do all such things and execute all such
documents as the Agent may consider necessary or desirable to give full effect
to this Subsidiary Guaranty and to preserve the rights and powers of the Funding
Parties and the Agent hereunder. The Guarantors acknowledge and confirm that
they have established their own adequate means of obtaining from the Lessee on a
continuing basis all information desired by the Guarantors concerning the
financial condition of the Lessee and that the Guarantors will look to the
Lessee and not to the Agent or any Funding Party in order for the Guarantors to
keep adequately informed of changes in the Lessee's financial condition.
10. Termination: Reinstatement. The obligations of the Guarantors under
---------------------------
this Subsidiary Guaranty shall continue in full force and effect until 120 days
after the Obligations have been paid or satisfied in full; provided, however,
-------- -------
that this Subsidiary Guaranty shall continue to be effective or be reinstated,
notwithstanding any such notice, if at any time any payment made or value
received with respect to any Obligation is rescinded or must otherwise be
returned by the Agent or any Funding Party upon the insolvency, bankruptcy or
reorganization of the Lessee, or otherwise, all as though such payment had not
been made or value received. No invalidity , irregularity or unenforceability
by reason of the Bankruptcy Code or any insolvency or other similar law, or any
law or order of any government or agency thereof purporting to reduce, amend or
otherwise affect, the Obligations, shall impair, affect, be a defense to or
claim against the obligations of the Guarantors hereunder.
11. Successors and Assigns. This Subsidiary Guaranty shall be binding upon
----------------------
the Guarantors, their successors and assigns, and shall inure to the benefit of
the Agent and the Funding Parties and their respective successors, transferees
and assigns. Without limiting the generality of the foregoing sentence, each
Funding Party may assign or otherwise transfer its Notes, the other Operative
Documents or any other agreement or note held by it evidencing or otherwise
executed in connection with the Obligations, or sell participations in any
interest therein, to any other entity or other person, and such other entity or
other person shall thereupon become vested, to the extent set forth in the
agreement
5
<PAGE>
evidencing such assignment, transfer or participation, with all the rights in
respect thereof granted to such Funding Party herein, all in accordance with
Sections 6.1 and 6.2 of the Master Agreement. None of the Guarantors may assign
any of its obligations hereunder; provided, however, that a Guarantor (the
-------- -------
"Assigning Guarantor") may assign its obligations hereunder to another guarantor
-------------------
which is the surviving entity of a merger or consolidation of the Assigning
Guarantor into such Guarantor, to the extent such merger or consolidation is
permitted by Section 5.22 of the Master Agreement.
12. Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Subsidiary Guaranty nor consent to any departure by the Guarantors
therefrom shall be effective unless the same shall be in writing and signed by
the Agent with the consent of the Required Lenders; provided, however, that,
-------- -------
except for deactivation of Sterling Subsidiaries pursuant to Section 5.16 of the
Master Agreement and the sale of Subsidiaries permitted by Section 5.24 of the
Master Agreement, no Guarantor shall be released from its obligations hereunder
without the consent of each of the Funding Parties. No failure on the part of
the Agent or any Funding Party to exercise, an no delay in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right.
13. Interest Limitation. Notwithstanding any other term of this
-------------------
Subsidiary Guaranty, the Master Agreement or any other Operative Document, the
maximum amount of interest which may be charged to or collected from any
Guarantor by any of the Funding Parties or the Agent under this Subsidiary
Guaranty shall be absolutely limited to, and shall in no event exceed the
maximum amount of interest which could lawfully be charged or collected under
Applicable Law, so that the maximum of all amounts constituting interest under
Applicable Law, however computed, shall never exceed as to any Guarantor such
lawful maximum, and any term of this Subsidiary Guaranty, the Master Agreement,
or any other Operative Document which could be construed as providing for
interest in excess of such lawful maximum shall be, and hereby is, made
expressly subject to and modified by the provisions of this paragraph. Any part
of the Obligations consisting of sums paid or agreed to be paid to any of the
Funding Parties or Agent for the use, forbearance or detention of the
Obligations shall, to the extent permitted by Applicable Law, be amortized,
prorated, allocated and spread throughout the full term of such indebtedness
until payment in full of the principal (including the period of any renewal or
extension thereof) so that interest on account of the Obligations shall not
exceed the maximum amount permitted by Applicable Law.
14. Joint and Several Liabilities. (a) Each of the Guarantors is
-----------------------------
accepting joint and several liability hereunder and in consideration of the
financial accommodations to be provided by the Agent and the Funding Parties
under the Operative Documents, for the mutual benefit, directly and indirectly
of each of the Guarantors and in consideration of the undertakings of each other
Guarantor to accept joint and several liability for the Obligations.
(b) Each of the Guarantors, jointly and severally, hereby irrevocably and
unconditionally accepts, not merely as a surety but also as a co-debtor, joint
and several liability with the other
6
<PAGE>
Guarantors, with respect to the payment and performance of all of the
Obligations arising under this Subsidiary Guaranty (including, without
limitation, any Obligations arising under this Section 14), it being the
----------
intention of the parties hereto that all such Obligations shall be joint and
several Obligations of each of the Guarantors without preferences or distinction
among them.
(c) If and to the extent that any of the Guarantors shall fail to make any
payment with respect to such Guarantor's Obligations as and when due or to
perform such Guarantor's Obligations in accordance with the terms thereof, then
in each such event the other Guarantors will make such payment with respect to,
or perform, such Obligation.
(d) The Obligations of each of the Guarantors under the provisions of this
Section 14 constitute full recourse Obligations of each of the Guarantors,
- ----------
enforceable against each such Guarantor to the full extent of its properties and
assets, irrespective of the validity, regularity or enforceability of this
Subsidiary Guaranty or any other circumstance whatsoever.
(e) Except as otherwise expressly provided in this Subsidiary Guaranty,
each of the Guarantors hereby waives notice of acceptance of its joint and
several liability, notice of any Loans or any other Funding made under the
Operative Documents, notice of the occurrence of any default, notice of any
action at any time taken or omitted by the Agent or the Funding Parties under or
in respect of any of the Obligations, any requirement of diligence or mitigation
of damages and, generally, to the extent permitted by Applicable Law, all
demands, notices and other formalities of every kind in connection with this
Subsidiary Guaranty. Each of the Guarantors hereby assents to, and waives notice
of, any extension or postponement of the time for the payment of any of the
Obligations, the acceptance of any partial payment thereon, any waiver, consent
or other action or acquiescence by the Agent or any Funding Party at any time or
times in respect of any default by any of the Guarantors in the performance or
satisfaction of any term, covenant, condition or provision of this Subsidiary
Guaranty, any and all other indulgences whatsoever by the Agent or any Funding
Party in respect of any of the Obligations, and the taking, addition,
substitution or release, in whole or in part, at any time or times, of any
security for any of the Obligations or the addition, substitution or release, in
whole or in part, of any of the Guarantors. Without limiting the generality of
the foregoing, each of the Guarantors assents to any other action or delay in
acting or failing to act on the part of the Agent or any Funding Party with
respect to the failure by any of the Guarantors to comply with any of its
respective Obligations, including, without limitation, any failure strictly or
diligently to assert any right or to pursue any remedy or to comply fully with
Applicable Laws thereunder, which might, but for the provisions of this Section
-------
14, afford grounds for terminating, discharging or relieving any of the
- --
Guarantors, in whole or in part, from any of its Obligations under this Section
-------
14, it being the intention of each of the Guarantors that, so long as any of the
- --
Obligations hereunder remain unsatisfied, the Obligations of the Guarantors
under this Section 14 shall not be discharged except by performance and then
----------
only to the extent of such performance. The Obligations of each of the
Guarantors under this Section 14 shall not be diminished or rendered
unenforceable by any winding up, reorganization, arrangement, liquidation,
reconstruction or similar proceeding with respect to any of the Guarantors or
the Agent or any Funding Party. The
7
<PAGE>
joint and several liability of each Guarantor hereunder shall continue in full
force and effect notwithstanding any absorption, merger, amalgamation or any
other change whatsoever in the name, membership, constitution or place of
formation of any Guarantor or the Agent or any Funding Party.
(f) The provisions of this Section 14 are made for the benefit of the
----------
Agent, the Funding Parties and their respective successors and assigns, and may
be enforced by any of them from time to time against any or all of the
Guarantors as often as occasion therefor may arise and without requirement on
the part of the Agent or any Funding Party first to marshall any of its claims
or to exercise any of its rights against any other Guarantor or to resort to any
other source or means of obtaining payment of any of the Obligations hereunder
or to elect any other remedy. The provisions of this Section 14 shall remain in
----------
effect until all of the Lessee's obligations under the Operative Documents shall
have been finally paid in full or otherwise fully satisfied. If at any time,
any payment, or any part thereof, made in respect of any of the Obligations, is
rescinded or must otherwise be restored or returned by the Agent or any Funding
Party upon the insolvency, bankruptcy or reorganization of any of the
Guarantors, or otherwise, the provisions of this Section 14 will forthwith be
----------
reinstated and in effect, as though such payment has not been made.
(g) Each Guarantor hereby agrees that it will not enforce any of its rights
of contribution or subrogation against any other Guarantor with respect to any
liability incurred by it hereunder or under any of the other Operative
Documents, any payments made by it to the Agent or any Funding Party with
respect to any of the Obligations or any collateral security therefor until such
time as all Obligations have been paid in full. If any payment shall be made to
a Guarantor on account of its rights under this Section 14 at any time when the
----------
Obligations shall not have been paid in full, each and every amount so paid will
forthwith be paid over to the Agent for the ratable benefit of the Funding
Parties to be credited and applied to the Obligations.
15. Notices. All notices and other communications called for hereunder
-------
shall be made in writing and, unless otherwise specifically provided herein,
shall be deemed to have been duly made or given when delivered by hand or mailed
first class, postage prepaid, or, in the case of telegraphic or telexed notice,
when transmitted, answer back received, addressed as follows: if to the
Guarantors, at the addresses set forth beneath their signatures hereto, and if
to the Agent, at the address for notices to the Agent set forth in Section 8.2
of the Master Agreement, or at such address as either party may designate in
writing to the other.
16. Governing Law; Consent to Jurisdiction. THIS SUBSIDIARY GUARANTY IS
--------------------------------------
INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. The Guarantors
agree that any suit for the enforcement of this Subsidiary Guaranty may be
brought in the courts of the State of Georgia or any federal court sitting
therein and consents to the nonexclusive jurisdiction of such court and to
service of process in any such suit being made upon the Guarantors by mail at
the addresses specified by reference in Section 15. The
----------
8
<PAGE>
Guarantors hereby waive any objection that it may now or hereafter have to the
venue of any such suit or any such court or that such suit was brought in an
inconvenient court.
17. Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, THE
--------------------
GUARANTORS HEREBY WAIVE THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION
OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS SUBSIDIARY GUARANTY,
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY OF SUCH RIGHTS OR
OBLIGATIONS. The Guarantors (i) certify that neither the Agent or any Funding
Party nor any representative, agent or attorney of the Agent or any Funding
Party has represented, expressly or otherwise, that the Agent or any Funding
Party would not, in the event of litigation, seek to enforce the foregoing
waivers and (ii) acknowledges that, in entering into the Operative Documents to
which the Agent or any Funding Party is a party, the Agent and the Funding
Parties are relying upon, among other things, the waivers and certifications
contained in this Section 17.
----------
18. Miscellaneous. This Subsidiary Guaranty constitutes the entire
-------------
agreement of the Guarantors with respect to the matters set forth herein. The
rights and remedies herein provided are cumulative and not exclusive of any
remedies provided by law or any other agreement, and this Subsidiary Guaranty
shall be in addition to any other guaranty of or collateral security for any of
the Obligations. The invalidity or unenforceability of any one or more sections
of the Subsidiary Guaranty shall not affect the validity or enforceability of
its remaining provisions. Captions are for the ease of reference only and shall
not affect the meaning of the relevant provisions. The meanings of all defined
terms used in this Subsidiary Guaranty shall be equally applicable to the
singular and plural forms of the terms defined.
9
<PAGE>
IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be executed
and delivered as of the date first above written.
GUARANTORS:
STERLING COMMERCE INTERNATIONAL, INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
STERLING COMMERCE (NORTHERN AMERICA), INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
SUBSIDIARY
S-1 GUARANTY
<PAGE>
STERLING COMMERCE (AMERICA), INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
STERLING COMMERCE (MID AMERICA), INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
SUBSIDIARY
S-2 GUARANTY
<PAGE>
STERLING COMMERCE (U.S.), INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
300 Crescent Court
Suite 1200
Dallas, Texas 75201-7832
Telecopier: _____________________________
Attention: Steven P. Shiflet
STERLING COMMERCE (EASTERN), INC.
By: ________________________________________
Name Printed:___________________________
Title:__________________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
300 Crescent Court
Suite 1200
Dallas, Texas 75201-7832
Telecopier:_____________________________
Attention: Steven P. Shiflet
SUBSIDIARY
S-3 GUARANTY
<PAGE>
STERLING COMMERCE (U.S.), L.P.
By: Sterling Commerce (U.S.), Inc.,
its General Partner
By: ____________________________________
Name Printed:_______________________
Title:______________________________
Address:
4600 Lakehurst Court
Dublin, Ohio 43016-2000
Telecopier: 614/799-6310
Attention: David A. Myers
300 Crescent Court
Suite 1200
Dallas, Texas 75201-7832
Telecopier:_________________________
Attention: Steven P. Shiflet
SUBSIDIARY
S-4 GUARANTY
<PAGE>
EXHIBIT 21.1
STERLING COMMERCE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
OF INCORPORATION
NAME ----------------
<S> <C>
Sterling Commerce, Inc., a Wyoming corporation................ Wyoming
Sterling Commerce (America), Inc. ............................ Delaware
Sterling Commerce (U.S.), LP.(partnership-owned 97% by
America; 3% by Eastern)....................................
Sterling Commerce (Mid America), Inc. ...................... Michigan
Sterling Commerce (South West), Inc. ..................... Delaware
Sterling Commerce (U.S.A.), Inc. ......................... Delaware
Sterling Commerce (U.S.), Inc. ............................... Delaware
Sterling Commerce (Eastern), Inc. ............................ Delaware
Sterling Commerce (Northern America), Inc. ................... Delaware
Sterling Commerce (North West), Inc. ....................... Delaware
Sterling Commerce Leasing, Inc. .............................. Delaware
Sterling Commerce International, Inc. ........................ Delaware
Sterling Commerce EU, Inc. ................................... Delaware
Sterling Commerce (Mid West), Inc. ........................... Delaware
Sterling Commerce (Southern), Inc. ........................... Delaware
Remoteware, Inc. ........................................... Georgia
Xventures, Inc. ............................................ Georgia
XcelleNet Integration Services, Inc. ....................... North Carolina
Sterling Electronic Commerce (Barbados), Inc. .............. Barbados
XcelleNet Australia Pty Ltd. ............................... Australia
XcelleNet SARL.............................................. France
Sterling Commerce B.V. ....................................... Netherlands
Sterling Commerce International SARL.......................... France
Sterling Electronic Commerce (Canada), Inc. .................. Canada
Sterling Commerce (France), SARL.............................. France
Sterling Commerce GmbH........................................ Germany
Sterling Commerce International Sales Corporation............. Barbados
Sterling Commerce K.K. ....................................... Japan
Sterling Commerce (Singapore) Pte. Ltd. ...................... Singapore
Sterling Commerce (UK) Limited................................ United Kingdom
Sterling Electronic Commerce (U.K.) Limited................. United Kingdom
The Electronic Data Exchange Service Limited................ United Kingdom
Electronic Commerce Group Limited........................... United Kingdom
Sterling Commerce (Australia) Pty Limited..................... Australia
Sterling Commerce (Sweden) AB................................. Sweden
Sterling Commerce (Switzerland) AG............................ Switzerland
Sterling Commerce (Belgium) BVBA.............................. Belgium
Sterling Commerce do Brasil Ltda.............................. Brazil
Sterling Commerce (Hong Kong) Limited......................... Hong Kong
Sterling Commerce (Mexico) S.A. de C.V........................ Mexico
Sterling Commerce (Italy) S.r.l............................... Italy
</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 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
Statements on Form S-8 (File No. 333-37523, File No. 333-40827 and File No.
333-74345) of Sterling Commerce, Inc., and in the related Prospectuses of our
report dated November 17, 1999, 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, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
December 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
COMMERCE, INC. FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 61,689
<SECURITIES> 200,444
<RECEIVABLES> 189,703
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 491,905
<PP&E> 0
<DEPRECIATION> 80,103
<TOTAL-ASSETS> 780,731
<CURRENT-LIABILITIES> 197,905
<BONDS> 0
0
0
<COMMON> 961
<OTHER-SE> 516,944
<TOTAL-LIABILITY-AND-EQUITY> 517,905
<SALES> 623,072
<TOTAL-REVENUES> 623,072
<CGS> 129,295
<TOTAL-COSTS> 448,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 197,675
<INCOME-TAX> 73,786
<INCOME-CONTINUING> 123,889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,889
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.31
</TABLE>
