<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 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)
Delaware 75-2623341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Crescent Court, Suite 1200
Dallas, Texas 75201
(Address of principal executive offices, including zip code)
(214) 981-1100
(Registrant's telephone number, including area code)
www.sterlingcommerce.com
Registrant's web page
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
--- ---
As of February 7, 2000, the number of shares outstanding of the Registrant's
Common Stock was 80,040,782.
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STERLING COMMERCE, INC.
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page
----
<S> <C>
Sterling Commerce, Inc. Consolidated Balance Sheets at December 31, 1999 and
September 30, 1999.................................................................. 1
Sterling Commerce, Inc. Consolidated Statements of Operations for the Three Months
Ended December 31, 1999 and 1998.................................................... 2
Sterling Commerce, Inc. Consolidated Statement of Stockholders' Equity for the Three
Months Ended December 31, 1999...................................................... 3
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998.................................................... 4
Sterling Commerce, Inc. Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 9
</TABLE>
Part II - Other Information
<TABLE>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K............................................. 15
</TABLE>
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STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share information)
<TABLE>
<CAPTION>
A S S E T S
December 31, September 30,
1999 1999
------------ -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 83,701 $ 61,574
Marketable securities........................................................ 196,916 200,444
Accounts receivable, net..................................................... 156,286 171,485
Deferred income taxes........................................................ 8,740 9,748
Prepaid expenses and other current assets.................................... 27,682 28,605
Net assets held for sale..................................................... 41,371 94,557
------------ -----------
Total current assets..................................................... 514,696 566,413
Property and equipment, net of accumulated depreciation of $75,872 at
December 31, 1999 and $67,523 at September 30, 1999.......................... 98,975 97,091
Computer software, net of accumulated amortization of $61,126 at
December 31, 1999 and $58,268 at September 30, 1999.......................... 46,567 45,668
Excess cost over net assets acquired, net of accumulated amortization of
$5,028 at December 31, 1999 and $4,809 at September 30, 1999................. 18,725 16,086
Other assets................................................................... 47,027 40,516
------------ -----------
$ 725,990 $ 765,774
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L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 70,549 $ 81,690
Income taxes payable......................................................... 15,890 20,512
Deferred revenue............................................................. 77,685 81,026
------------ -----------
Total current liabilities................................................ 164,124 183,228
------------ -----------
Deferred income taxes.......................................................... 40,111 38,481
Other noncurrent liabilities................................................... 25,571 26,160
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 50,000 shares authorized; no shares issued
and outstanding...........................................................
Common stock, $.01 par value; 300,000 shares authorized; 96,124 shares
issued at December 31, 1999 and September 30, 1999........................ 961 961
Additional paid-in capital.................................................. 763,681 763,639
Retained earnings........................................................... 131,060 153,030
Accumulated other comprehensive loss........................................ (2,370) (2,010)
Treasury stock, at cost; 16,140 shares at December 31, 1999
and 16,160 shares at September 30, 1999................................... (397,148) (397,715)
------------ -----------
Total stockholders' equity.............................................. 496,184 517,905
------------ -----------
$ 725,990 $ 765,774
============ ===========
</TABLE>
See accompanying notes.
1
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
Three Months
Ended December 31,
------------------------
1999 1998
----------- -----------
Revenues:
Products........................................... $ 46,417 $ 49,650
Product support.................................... 39,256 33,732
Services........................................... 65,765 57,396
----------- ----------
151,438 140,778
Costs and expenses:
Costs of sales:
Products and product support..................... 16,311 14,340
Services......................................... 18,175 14,952
----------- ----------
34,486 29,292
Product development and enhancement expenses....... 12,032 9,220
Selling, general and administrative expenses....... 67,999 58,204
----------- ----------
114,517 96,716
----------- ----------
Income before other income (expense) and income
taxes.............................................. 36,921 44,062
Other income (expense):
Asset impairment charge - XcelleNet................ (50,000)
Other income....................................... 3,150 6,250
----------- ----------
(46,850) 6,250
----------- ----------
Income (loss) before income taxes.................... (9,929) 50,312
Provision for income taxes........................... 11,916 18,379
----------- -----------
Net income (loss).................................... $ (21,845) $ 31,933
=========== ===========
Income (loss) per common share:
Basic.............................................. $ (0.27) $ 0.34
=========== ===========
Diluted............................................ $ (0.27) $ 0.33
=========== ===========
See accompanying notes.
2
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended December 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive Treasury Stock Total
---------------- ---------------- Stockholders'
Shares Amount Capital Earnings Loss Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999............ 96,124 $961 $763,639 $153,030 $(2,010) 16,160 $(397,715) $517,905
Net loss................................. (21,845) (21,845)
Foreign currency translation adjustment.. (110) (110)
Unrealized loss on marketable
securities, net of tax................. (250) (250)
--------
Total comprehensive loss................. (22,205)
--------
Issuance of common stock pursuant to
employee stock plans, including tax
benefit................................ 42 (125) (20) 567 484
------ ---- -------- -------- -------- ------ ---------- ---------
Balance at December 31, 1999............. 96,124 $961 $763,681 $131,060 $(2,370) 16,140 $(397,148) $496,184
====== ==== ======== ======== ======== ====== ========== =========
</TABLE>
3
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STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss).......................................................... $ (21,845) $ 31,933
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization......................................... 16,092 16,183
Provision for losses on accounts receivable........................... 1,932 573
Provision for deferred income taxes................................... 20 1,297
Asset impairment charge - XcelleNet................................... 50,000
Changes in operating assets and liabilities:
Accounts receivable................................................. 13,267 3,513
Prepaid expenses, other assets and net assets held for sale......... (2,891) (6,488)
Accounts payable, accrued liabilities and income taxes payable...... (15,763) 4,334
Deferred revenue.................................................... (3,341) 616
Other............................................................... (3,801) 2,950
------------ ------------
Net cash provided by operating activities......................... 33,670 54,911
------------ ------------
Investing activities:
Purchases of property and equipment........................................ (10,067) (12,300)
Purchases and capitalized cost of development of computer software......... (5,238) (6,905)
Purchases of investments................................................... (10,127) (61,177)
Sales of investments....................................................... 13,405 44,683
------------ ------------
Net cash used in investing activities............................. (12,027) (35,699)
------------ ------------
Financing activities:
Issuance of common stock................................................... 484 19,894
------------ ------------
Net cash provided by financing activities......................... 484 19,894
------------ ------------
Increase in cash and cash equivalents........................................ 22,127 39,106
Cash and cash equivalents at beginning of period............................. 61,574 354,948
------------ ------------
Cash and cash equivalents at end of period................................... $ 83,701 $ 394,054
============ ============
</TABLE>
See accompanying notes.
4
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STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
The Company
Sterling Commerce, Inc. (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.
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 period
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles for interim financial statements, which require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies and the results of operations.
While management has based its assumptions and estimates on facts and
circumstances currently known, final amounts may differ from such estimates.
The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Sterling Commerce, Inc. 1999 Annual Report on Form 10-K.
Revenue
The Company recognizes revenue in accordance with Statement of Position 97-
2, "Software Revenue Recognition." The Company adopted the provisions of
Statement of Position 98-9, "Modification of Statement of Position 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" effective
with its fiscal year beginning October 1, 1999. The adoption of Statement of
Position 98-9 did not significantly impact the Company.
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 license transactions include the right to receive future products, a
portion of the software license 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 when vendor-specific objective
evidence ("VSOE") exists for all elements. In the absence of VSOE for one or
more of the delivered elements, revenue is recognized by means of the residual
method. Revenue is 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.
5
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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.
Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
Three Months
Ended December 31,
---------------------
1999 1998
---------- ---------
Basic:
Net income (loss).................................. $ (21,845) $ 31,933
========== =========
Weighted average common shares outstanding......... 79,970 94,680
========== =========
Income (loss) per common share..................... $ (0.27) $ 0.34
========== =========
Diluted:
Net income (loss).................................. $ (21,845) $ 31,933
========== =========
Weighted average common shares outstanding......... 79,970 94,680
Net effect of dilutive stock options (1)........... 2,796
---------- ---------
Diluted weighted average common shares outstanding. 79,970 97,476
========== =========
Income (loss) per common share..................... $ (0.27) $ 0.33
========== =========
__________
1. Due to the net loss reported for the three months ended December 31,
1999, 1.0 million antidilutive stock options have been excluded from
diluted loss per common share since these would reduce the net loss per
common share. Additionally, for the three months ended December 31,
1999 and 1998, 4.1 million and 1.8 million, respectively, antidilutive
stock options were excluded from the computation of diluted income
(loss) per common share due to the option exercise prices being greater
than the average market price.
Comprehensive Income
The Company's comprehensive income consists of net income, foreign currency
translation adjustments and unrealized gains or losses on marketable securities.
Comprehensive income (loss) was $(22.2) million and $32.3 million during first
quarter 2000 and first quarter 1999, respectively.
2. Income Taxes
The effective income tax rate for first quarter 2000 differed from the
statutory rate primarily due to the asset impairment charge of $50.0 million
which includes $40.9 million for the write-off of non-deductible goodwill.
3. Unaudited Interim Financial Statements
The interim consolidated financial information contained herein is unaudited
but, in the opinion of management, includes all adjustments (consisting of
normal recurring entries) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year.
6
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4. Reorganization and Unusual Costs
The unpaid balances of reorganization and unusual costs are classified as
accounts payable and accrued liabilities in the Company's consolidated balance
sheets.
1999 Reorganization and Unusual Costs
At September 30, 1999 the unpaid balance of 1999 reorganization and unusual
costs was $14.2 million and was comprised of $10.2 million of excess facilities
costs, $3.0 million of employee termination costs and $1.0 million related to
other items. During the quarter ended December 31, 1999 the Company paid $2.2
million of excess facilities costs, $1.8 million of employee termination costs
and $0.2 million related to other items. At December 31, 1999 the unpaid
balance of 1999 reorganization and unusual costs was $10.0 million and was
comprised of $8.0 million of excess facilities costs, $1.2 million of employee
termination costs and $0.8 million related to other items.
1998 Reorganization and Unusual Costs
The unpaid balance remaining for 1998 reorganization and unusual costs at
September 30, 1999 and December 31, 1999, was $3.6 million and $2.8 million,
respectively.
5. Sale of XcelleNet
During the fourth quarter of fiscal 1999, the Company determined that the
product lines acquired in its 1998 acquisition of XcelleNet, Inc. ("XcelleNet")
were not sufficiently strategic to its future growth plans. The Company found
that the XcelleNet products were still primarily utilized for information
technology systems management, and the customers and sales processes utilized
were different than those for the Company's other infrastructure products.
Therefore, the Company decided to sell the XcelleNet business.
On January 26, 2000, the Company entered into a definitive Asset Purchase
Agreement (the "Asset Purchase Agreement") to sell to an affiliate of Francisco
Partners, L.P., the net operating assets of XcelleNet. The sale price for the
net operating assets of XcelleNet is $50.0 million, subject to adjustment,
consisting of $40.0 million in cash and a $10.0 million unsecured subordinated
promissory note. The sale is expected to be consummated during the second
quarter of fiscal 2000. During the three months ended December 31, 1999, the
Company recorded an impairment charge of $50.0 million to adjust the carrying
value of the XcelleNet net assets to their estimated net realizable value. The
impairment charge related primarily to excess costs over net assets acquired and
to a lesser extent computer software.
Revenues and expenses for XcelleNet for the three months ended December 31,
1999 were $13.3 million and $66.2 million (which includes the $50.0 million
charge), respectively. During the three months ended December 31, 1998, revenues
were $12.7 million and expenses were $12.9 million. The net assets of XcelleNet
were used in the Company's operations during the first quarter of fiscal 2000;
therefore, depreciation and amortization related to these assets was not
suspended. The net assets of XcelleNet at December 31, 1999 and September 30,
1999 are presented in the consolidated balance sheets as net assets held for
sale.
7
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6. Business Segments
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 and are individually managed. Each business
segment offers a distinct family of products and/or services to E-Business
communities worldwide. However, a business segment may sell another business
segment's products and services.
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
offerings are 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
generally in support of the Company's other business segments.
<TABLE>
<CAPTION>
Managed
1999 COMMERCE GENTRAN CONNECT Services Other (1) Consolidated
------------------------------------- -------- ------- ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers...... $55,424 $18,777 $46,981 $12,327 $ 17,929 $151,438
Revenues from intersegment
transactions.......................... 1,624 (1,624)
Income (loss) before income taxes(2).. 23,398 3,783 14,258 2,456 (53,824) (9,929)
1998
-------------------------------------
Revenues from external customers.... $48,508 $18,279 $45,139 $11,931 $ 16,921 $140,778
Revenues from intersegment
transactions........................ 1,230 (1,230)
Income before income taxes.......... 21,856 3,423 17,863 3,336 3,834 50,312
</TABLE>
___________
1. Primarily comprised of corporate items which are not allocated to business
segments (see 2 below), elimination of intersegment transactions and
business segments which are not separately reported.
2. Income (loss) before income taxes in the other column includes an asset
impairment charge of $50.0 million in 1999 (see Note 5).
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and notes
thereto 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 6--Notes to Consolidated Financial
Statements). Each business segment offers a distinct family of products and/or
services to E-Business communities worldwide. However, a business segment may
sell another business segment's products and services. During the fourth
quarter of 1999, the Company determined that the product lines acquired in the
1998 acquisition of XcelleNet, Inc. ("XcelleNet") were not sufficiently
strategic to its future growth plans. On January 26, 2000, the Company entered
into a definitive agreement to sell the net operating assets of XcelleNet.
The Company's recurring revenues include 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 E-business
message management software, software for the movement and management of
information over extranets and intranets, management of E-business communities
over extranets and related consulting services.
Three Months Ended December 31, 1999 (first quarter 2000) and 1998 (first
quarter 1999)
Total revenues increased $10.7 million or 8% in first quarter 2000 compared
to first quarter 1999. The revenues increase was due to a $5.5 million or 16%
increase in product support revenue and a $8.4 million or 15% increase in
services revenue, offset by a $3.2 million or 7% decrease in products revenue.
The decrease in products revenue was due primarily to a decrease in licensing of
CONNECT and XcelleNet software products and the increase in product support
revenue was due primarily to an increase product support services provided for
CONNECT and GENTRAN software products. The increase in services revenue was
primarily due to COMMERCE services customer volume growth and the addition of
new customers. Products revenue, product support revenue and services revenue
represented 31%, 26% and 43%, respectively, of total 2000 first quarter revenues
compared to 35%, 24% and 41%, respectively, of total 1999 first quarter
revenues. The Company's recurring revenues increased $13.1 million or 17% in
first quarter 2000 compared to the same period of 1999 and represented 59% and
54%, respectively, of total revenues during first quarter 2000 and 1999. The
Company's Internet-related revenues increased 72% to $68.1 million for first
quarter 2000 from $39.6 million for the comparative period. Approximately $15.2
million of the first quarter 2000 amount is attributable to newly identified
Internet usage not included in the prior year involving the Company's
communication infrastructure products.
The Company's revenue growth rate is lower as compared to prior periods
primarily due to (i) a slowdown in product licensing and related product support
and services as a result of customers delaying new licensing decisions and
software implementation and integration services as a result of year 2000
issues ("Y2K") and (ii) 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 believes some dampening effects of Y2K may continue
into its second fiscal quarter of 2000 for products and product support revenues
and, particularly because of the inherent ramp-up time for IT project
implementations, for managed services revenue. The Company has provided 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 revenues due to the effects of Y2K as described above.
9
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Revenues from the COMMERCE business segment increased $6.9 million or 14% in
first quarter 2000 compared to first quarter 1999, primarily due to a 16%
increase in services revenue, offset by a slight decrease in products support
revenue. The increase in products revenue is primarily due to increased
international software licensing. The increase in services revenue was primarily
due to an increase in customer transaction volume and the addition of new
customers. Approximately 16% of the Company's total international revenues were
generated by the COMMERCE business segment during first quarter 2000, compared
to 14% in first quarter 1999.
Revenues from the GENTRAN business segment increased $0.9 million or 5% in
first quarter 2000 compared to first quarter 1999, primarily due to a 15%
increase in product support revenue and to a lesser extent, an increase in
services revenue offset by a 5% decrease in products revenue. The increase in
product support revenue was primarily due to an expansion of the installed
customer base and international growth. The increase in services revenue was
primarily due to an increase in services provided to international customers.
Approximately 20% of the Company's total international revenues was generated by
the GENTRAN business segment during first quarter 2000, compared to 19% in first
quarter 1999.
Revenues from the CONNECT business segment increased $1.8 million or 4% in
first quarter 2000 compared to first quarter 1999, primarily due to a 15%
increase in product support revenue primarily due to an increase in the
installed customer base and international product support revenue offset by a 2%
decrease in products revenue. Approximately 50% of the Company's total
international revenues was generated by the CONNECT business segment during
first quarter 2000, compared to 51% in first quarter 1999.
Revenue from the Managed Services business segment increased $0.4 million or
3% in first quarter 2000 compared to the first quarter 1999. The revenue
increase was due primarily to an increase in international services and to a
lesser extent continued Y2K services. Managed Services revenue was overall
negatively impacted by customer decisions to stop or not implement projects in
connection with Y2K. Approximately 6% of the Company's total international
revenues was generated by the Managed Services business segment during first
quarter 2000, compared to 7% in first quarter 1999.
Total revenues generated from the Company's international operations were
$36.7 million and $30.9 million during first quarter 2000 and first quarter
1999, respectively, representing an increase of $5.8 million or 19%. This was
due primarily to an increase of 36% in international revenues by the COMMERCE
business segment, a 26% increase by the GENTRAN business segment, a 16% increase
by the CONNECT business segment and a 10% increase by the Managed Services
business segment. Revenues from the Company's international operations
represented 24% of total revenues in first quarter 2000 compared to 22% in first
quarter 1999.
Total costs and expenses increased $17.8 million or 18% during first quarter
2000 as compared to the same period of 1999. The increase in total costs and
expenses is primarily due to a 30% increase in product development and
enhancement expenses, an 18% increase in cost of sales and a 17% increase in
selling, general and administrative expenses. The increase in total costs and
expenses of the COMMERCE, GENTRAN, CONNECT and Managed Services business
segments are 21%, 6%, 17% and 15%, respectively. The increase in total costs and
expenses of the COMMERCE, CONNECT and GENTRAN business segments relate to
increases in revenues, revenue support activities and international expansion.
The increase in total costs and expenses of the Managed Services business
segment resulted primarily from an increased number of personnel needed to
support anticipated revenue growth in the current and future quarters and
increased revenue support activities.
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 $5.2 million or 18%, in first quarter 2000 as compared to the
comparative period of fiscal 1999. As a percentage of total revenues, total
costs of sales increased to 23% for first quarter 2000 from 21% for first
quarter 1999. Costs of sales for products and product support increased $2.0
million or 14%, primarily due to increased costs associated with a larger
installed customer base and to a lesser extent increased costs related to
software licensing. Costs of sales for products and product support as a
percentage of revenues increased to 11% in first quarter 2000 from 10% in the
first quarter 1999. Costs of sales for services increased $3.2 million or 22%,
primarily due to higher costs associated with providing Managed Services
education and consulting, as described above, and the growth in COMMERCE
services revenue. As a percentage of total revenues, costs of sales for services
increased to 12% for first quarter 2000 from 11% for first
10
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quarter 1999. Cost of sales includes $11.4 million and $9.0 million of
depreciation and amortization for first quarter 2000 and 1999, respectively.
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 related facilities and equipment. Product
development and enhancement expenses for first quarter 2000 were $12.0 million,
net of $4.0 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 $2.8 million or 30%
compared to first quarter 1999 product development and enhancement expenses of
$9.2 million, net of $5.7 million capitalized pursuant to FAS 86. The increase
was primarily due to higher gross product development expense relating to
products under development during the current quarter, including those under the
Company's new growth initiatives. As a percentage of total revenues, product
development and enhancement expenses increased to 8% for first quarter 2000 from
7% for first quarter 1999. As a percentage of total development and enhancement
expenses, total capitalized costs decreased to 25% in the current quarter from
38% in the comparative quarter. 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 consist 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
$9.8 million or 17% during first quarter 2000 compared to first quarter 1999,
primarily due to an increase in sales, marketing and administrative support
activities needed to support revenue generating activities. As a percentage of
total revenues, selling, general and administrative expenses increased to 45%
for the current quarter from 41% for the comparative quarter.
Income before other income and income taxes was $36.9 million for first
quarter 2000 as compared to $44.1 million for first quarter 1999 due to a $10.7
million increase in revenues offset by a $17.8 million increase in total costs.
Other income (expense) decreased $53.1 million primarily due to a $50.0 million
asset impairment charge (see sale of XcelleNet below) and a $3.1 million
decrease in other income due to lower investment income as a result of lower
invested balances resulting from the Company's repurchases of its stock.
Provision for income taxes decreased $6.5 million for first quarter 2000
compared to first quarter 1999, primarily due to the decrease in income before
income taxes associated with the XcelleNet asset impairment charge, a
substantial portion of which is nondeductible for tax purposes.
Reorganization and Unusual Costs
The unpaid balances of reorganization and unusual costs are classified as
accounts payable and accrued liabilities in the Company's consolidated balance
sheets.
1999 Reorganization and Unusual Costs
At September 30, 1999 the unpaid balance of 1999 reorganization and unusual
costs was $14.2 million and was comprised of $10.2 million of excess facilities
costs, $3.0 million of employee termination costs and $1.0 million related to
other items. During first the first quarter of fiscal 2000 the Company paid
$2.2 million of excess facilities costs, $1.8 million of employee termination
costs and $0.2 million related to other items. At December 31, 1999 the unpaid
balance of 1999 reorganization and unusual costs was $10.0 million and was
comprised of $8.0 million of excess facilities costs, $1.2 million of employee
termination costs and $0.8 million related to other items.
1998 Reorganization and Unusual Costs
The unpaid balance remaining for 1998 reorganization and unusual costs at
September 30, 1999 and December 31, 1999 was $3.6 million and $2.8 million,
respectively.
11
<PAGE>
Sale of XcelleNet
During the fourth quarter of fiscal 1999, the Company determined that the
product lines acquired in the 1998 XcelleNet acquisition were not sufficiently
strategic to its future growth plans. The Company found that the XcelleNet
products were still primarily utilized for information technology systems
management, and the customers and sales processes utilized were different than
those for the Company's other infrastructure products. Therefore, the Company
decided to sell the XcelleNet business (see Note 5-Notes to the Consolidated
Financial Statements).
On January 26, 2000, the Company entered into a definitive Asset Purchase
Agreement (the "Asset Purchase Agreement") to sell to an affiliate of Francisco
Partners, L.P., the net operating assets of XcelleNet. The purchase price for
the assets of XcelleNet is $50.0 million, subject to adjustment, consisting of
$40.0 million in cash and a $10.0 million unsecured subordinated promissory
note. The sale is expected to be consummated during the second quarter of fiscal
2000. During the three months ended December 31, 1999, the Company recorded an
impairment charge of $50.0 million to adjust the carrying value of the XcelleNet
net assets to their estimated net realizable value. The impairment charge
related primarily to excess costs over net assets acquired and to a lesser
extent computer software.
The results of operations of the Company without the XcelleNet business and
the asset impairment charge are supplementally presented below in order to
provide meaningful information which will represent the continuing operations of
the Company after the sale (in thousands, except per share information).
<TABLE>
<CAPTION>
Three Months Comparative Percent of
Ended December 31, Change Total Revenue
------------------ ----------------- ---------------
1999 1998 $$$ % 1999 1998
---- ---- --- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products.......................................... $ 41,435 $ 42,818 $(1,383) (3)% 30% 33%
Product support................................... 32,456 28,768 3,688 13% 23% 23%
Services.......................................... 64,241 56,463 7,778 14% 47% 44%
--------- --------- --------- ------ ------
138,132 128,049 10,083 8% 100% 100%
Costs and expenses:
Cost of sales:
Products and product
support......................................... 10,496 10,104 392 4% 8% 8%
Services.......................................... 17,066 13,981 3,085 22% 12% 11%
--------- --------- --------- ------ ------
27,562 24,085 3,477 14% 20% 19%
Product development
and enhancement expenses........................ 9,611 7,455 2,156 29% 7% 6%
Selling, general and
administrative expenses......................... 61,165 52,259 8,906 17% 44% 40%
--------- --------- --------- ------ ------
98,338 83,799 14,539 17% 71% 65%
--------- --------- --------- ------ ------
Income before other income
and income taxes................................ 39,794 44,250 (4,456) (10)% 29% 35%
Other income...................................... 3,155 6,227 (3,072) (49%) 2% 4%
--------- --------- --------- ------ ------
Income before income taxes........................ 42,949 50,477 (7,528) (15)% 31% 39%
Provision for income taxes........................ 15,610 18,048 (2,438) (14)% 11% 14%
--------- --------- --------- ------ ------
Net income........................................ $ 27,339 $ 32,429 $(5,090) (16)% 20% 25%
========= ========= ========= ====== ======
Income per common share:
Basic........................................... $0.34 $0.34
========= =========
Diluted......................................... $0.34 $0.33
========= =========
</TABLE>
12
<PAGE>
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 Before
Other Income
(Expense) and
Income Taxes Net Income (Loss)
----------------------- ----------------------------
Three Months Ended December31,
------------------------------------------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
As reported.......................... $36,921 $44,062 $(21,845) $31,933
XcelleNet business................... 2,873 188 2,691 496
Asset impairment charge, net of tax
benefit.......................... 46,493
-------- -------- --------- --------
$39,794 $44,250 $ 27,339 $32,429
======== ======== ========= ========
</TABLE>
Liquidity and Capital Resources
Excluding net assets held for sale, the Company had $309.2 million of
working capital at December 31, 1999, including $83.7 million of cash and cash
equivalents and $196.9 million of marketable securities. At September 30, 1999,
the Company had $288.6 million of working capital.
Net cash flows from operations decreased $21.2 million to $33.7 million in
first quarter 2000 as compared to first quarter 1999. Cash provided from
operations during first quarter 2000 was primarily due to profitable results of
operations (exclusive of a non-cash asset impairment charge) and decreases in
accounts receivable offset by decreases in accounts payable, accrued
liabilities, income taxes payable and deferred revenue. A portion of the
Company's cash flow from operations during first quarter 2000 and 1999 was used
to fund software additions and capital expenditures. Software expenditures
during first quarter 2000 were $5.2 million as compared to $6.9 million in first
quarter 1999. Capitalization related to XcelleNet was $1.7 million for first
quarter 1999; however, no amounts were capitalized for XcelleNet in first
quarter 2000 due to the pending sale of that business. Additionally, there were
a greater number of projects in the research and development phase during first
quarter 2000 compared to first quarter 1999. The software expenditures during
the current quarter were primarily for new products and enhancements of
products. Property and equipment purchases of $10.1 million for first quarter
2000 were primarily for purchases of equipment for processing systems and
computer equipment purchases.
Terms of the sale of the XcelleNet business provide for the Company to
receive $40.0 million in cash and a $10.0 million unsecured subordinated
promissory note upon closing. The sale is expected to be consummated during
second quarter of fiscal 2000. The sales price is subject to adjustment per the
agreement.
At December 31, 1999, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and equipment
activities. 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.
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 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.
13
<PAGE>
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.
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. 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.
14
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
On January 28, 2000 the Company filed a Current Report on Form 8-K
dated January 27, 2000 which included information under Item 5 (Other
Events).
On November 15, 1999 the Company filed a Current Report on Form 8-K
dated November 15, 1999 which included information under Item 5 (Other
Events).
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING COMMERCE, INC.
Date: February 9, 2000 By: /s/ Steven P. Shiflet
--------------------------------------------
Steven P. Shiflet
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
INDEX TO EXHIBITS
27.1 - Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STERLING
COMMERCE, INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 83,701
<SECURITIES> 196,916
<RECEIVABLES> 156,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 514,696
<PP&E> 174,847
<DEPRECIATION> 75,872
<TOTAL-ASSETS> 725,990
<CURRENT-LIABILITIES> 164,124
<BONDS> 0
0
0
<COMMON> 961
<OTHER-SE> 495,223
<TOTAL-LIABILITY-AND-EQUITY> 725,990
<SALES> 151,438
<TOTAL-REVENUES> 151,438
<CGS> 34,486
<TOTAL-COSTS> 114,517
<OTHER-EXPENSES> 50,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,929)
<INCOME-TAX> 11,916
<INCOME-CONTINUING> (21,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,845)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
