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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A AMENDMENT NO. 1
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1994
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. 1-8465
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 891-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of April 30, 1994
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Common Stock, $.10 par value 20,160,902
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MERGER WITH SYSTEMS CENTER, INC.
On July 1, 1993, Sterling Software, Inc. ("Sterling Software") acquired
Systems Center, Inc. ("Systems Center"), a Delaware corporation based in Reston,
Virginia which developed, marketed and supported systems software products, in a
merger (the "Merger") accounted for as a pooling of interests, resulting in the
combined company, hereafter defined as the "Company" or "Sterling." The merger
of the equity interests has been given retroactive effect and the Company's
financial statements for periods prior to the Merger represent the combined
financial statements of the previously separate entities adjusted to conform
Systems Center's fiscal years and accounting policies to those used by Sterling
Software.
In connection with the Merger, the Company eliminated duplicate facilities
and equipment, reduced its workforce and wrote off certain software products
which would not be actively marketed by the Company. There were no
restructuring charges incurred in the first six months of 1994 in excess of the
restructuring charges accrued in the fourth quarter of 1993. Since September
30, 1993, there has been no significant increase in operating expenses as a
result of the restructuring of the Company and the Company does not expect there
to be any material increase in costs and expenses in the second half of 1994 as
a result of the Merger. In addition, future operating results are expected to
continue to benefit from the reduction in workforce and elimination of duplicate
facilities and equipment. Approximately $19,200,000 of cash was expended in the
first six months of 1994 relating to restructuring charges accrued in the fourth
quarter of 1993. Future cash expenditures related to the restructuring are
anticipated to be made from cash generated from operations.
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Effective with the Merger, Sterling Software changed Systems Center's
fiscal year-end from December 31 to September 30, affecting the timing of sales
incentives and changing the revenue pattern for products previously marketed by
Systems Center. Accordingly, the Company believes that the revenue for the
three months ended March 31, 1994, which is the Company's second quarter of its
fiscal year, is not directly comparable to revenue for the three months ended
March 31, 1993. While the change in revenue patterns did not materially impact
revenues for Electronic Commerce Group ("ECG") or the Federal Systems Group
("FSG"), this change was relevant with respect to Enterprise Software Group
("ESG") revenues because the majority of the products previously marketed by
Systems Center are now marketed by ESG.
Revenue increased $16,062,000, or 16%, in the second quarter of 1994 over
the same period of 1993 due to increases in all three of the Company's markets.
Foreign revenue, which represented approximately 23% and 26% of the Company's
total revenue in the second quarter of 1994 and 1993, respectively, was
negatively impacted approximately $535,000 by changes in exchange rates during
the second quarter of 1994, as compared to the same period of 1993.
ESG revenue increased $2,118,000, or 5%, due to increased product revenue.
ECG revenue increased $10,365,000, or 39%, on the strength of a $3,501,000, or
40%, increase in
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network services revenue, a $4,307,000, or 44%, increase in product revenue and
a $2,557,000, or 32%, increase in product support revenue. The increased
network services revenue was due to an increase in the network services customer
base, primarily in the hardlines, retail and grocery vertical markets, and
increases in the network processing volume for existing customers. ECG product
revenue increased primarily as a result of increased software sales of
communications software and interchange software products. ECG product support
revenue increased primarily as a result of an increase in the installed customer
base and price increases for some products. FSG revenue increased $2,140,000 or
9%, due to higher contract billings in the Information Technology, Scientific
Systems and NASA Ames divisions.
Total costs and expenses increased $3,636,000, or 4%. Total cost of sales
increased $2,009,000, or 5%, primarily due to a $1,202,000, or 5%, increase in
federal contract costs, commensurate with the increase in FSG revenue; a
$1,951,000, or 29%, increase in ECG's cost of sales due to increased
amortization of capitalized software and due to increased costs, commensurate
with the increase in ECG revenue; offset by a $1,907,000, or 18%, decrease in
ESG's cost of sales, the majority of which is due to decreased amortization of
capitalized software as a result of write-off in the fourth quarter of 1993 of
certain software products which will not be actively marketed by the Company as
a result of the Merger. Product development expense for the second quarter of
1994 of $7,588,000, net of $4,916,000 of costs 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 No. 86"), increased
$941,000, or 14%, compared to the second quarter of 1993 product development
expense of $6,647,000, net of $6,061,000 of costs capitalized pursuant to FAS
No. 86. The increase is due to the decrease in capitalization of software
development costs. Product development expense may fluctuate from period to
period depending in part upon the number and status of software development
projects. Selling, general and administrative expense increased $686,000, or
2%.
Income before extraordinary item and cumulative effect of an accounting
change increased $8,453,000, or 172%, primarily due to higher operating profits
in ECG, up 142%, and ESG, up 45%, over the same period of 1993, partially offset
by an increase in federal income tax expense due to higher pretax profit. Also
contributing to this increase was a decrease of $431,000 in interest expense
primarily for interest accrued in the second quarter of 1993 on the unpaid and
previously outstanding Systems Center Series A 9% Convertible Redeemable
Preferred Stock ("Systems Center Preferred Stock") dividends. Other income and
expense includes foreign currency exchange gains of approximately $700,000 in
the second quarter of 1994 versus foreign currency exchange losses of
approximately $115,000 in the second quarter of 1993.
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
Effective with the Merger, Sterling Software changed Systems Center's
fiscal year-end from December 31 to September 30, affecting the timing of sales
incentives and changing the revenue pattern for products previously marketed by
Systems Center. Accordingly, the Company believes that the revenue for the six
months ended March 31, 1994 is not directly comparable to revenue for the six
months ended March 31, 1993. While the change in revenue patterns did not
materially impact revenues for ECG or FSG, this change was relevant with respect
to ESG revenues because the majority of the products previously marketed by
Systems Center are now marketed by ESG.
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Revenue increased $26,174,000, or 13%, in the first six months of 1994 over
the same period of 1993 due to increases in all three of the Company's markets.
Foreign revenue, which represented approximately 25% and 28% of the Company's
total revenue in the first six months of 1994 and 1993, respectively, was
negatively impacted approximately $3,000,000 by changes in exchange rates during
the first six months of 1994, as compared to the same period of 1993.
ESG revenue increased $2,544,000, or 3%, due to increases in product and
product support revenue. ECG revenue increased $19,301,000, or 37%, on the
strength of a $7,196,000, or 42%, increase in network services revenue, a
$6,937,000, or 36%, increase in product revenue and a $5,168,000, or 34%,
increase in product support revenue. The increase in network services revenue
was due to an increase in the network services customer base, primarily in the
hardlines, retail and grocery vertical markets, and increases in the network
processing volume for existing customers. ECG product revenue increased
primarily as a result of increased software sales of communications software,
interchange software and banking systems products. ECG product support revenue
increased primarily as a result of an increase in the installed customer base
and price increases for some products. FSG revenue increased $3,111,000, or 6%,
primarily due to higher contract billings in the Information Technology and NASA
Ames divisions.
Total costs and expenses increased $3,275,000, or 2%. Total cost of sales
increased $2,756,000, or 3%, primarily due to a $1,925,000, or 4%, increase in
federal contract costs, commensurate with the increase in FSG revenue; a
$4,228,000, or 63%, increase in ECG's cost of sales due to increased
amortization of capitalized software and due to increased costs, commensurate
with the increase in ECG revenue; offset by a $3,715,000, or 36%, decrease in
ESG's cost of sales, the majority of which is due to decreased amortization of
capitalized software as a result of the write-off in the fourth quarter of 1993
of certain software products which will not be actively marketed by the Company
as a result of the Merger. Product development expense for the first six months
of 1994 of $14,608,000, net of $9,316,000 of costs capitalized pursuant to FAS
No. 86, increased $2,044,000, or 16%, compared to the first six months of 1993
product development expense of $12,564,000, net of $12,275,000 of costs
capitalized pursuant to FAS No. 86. The increase is due to the decrease in
capitalization of software development costs. Product development expense may
fluctuate from period to period depending in part upon the number and status of
software development projects. Selling, general and administrative expense
decreased $1,525,000, or 2%, reflecting reduced costs after the Company's fourth
quarter 1993 restructuring due to the Merger, which eliminated duplicate
corporate overhead functions and streamlined the sales and marketing functions,
resulting in a reduced workforce, and eliminated duplicate facilities.
Income before extraordinary item and cumulative effect of an accounting
change increased $14,447,000, or 145%, primarily due to higher operating profits
in ECG, up 142%, and ESG, up 50%, over the same period of 1993, partially offset
by an increase in federal income tax expense due to higher pretax profit. Also
contributing to this increase was a decrease in interest expense of $722,000
primarily for interest accrued in the first six months of 1993 on the unpaid and
previously outstanding Systems Center Preferred Stock dividends. Other income
and expense includes foreign currency exchange gains of approximately $345,000
in the first six months of 1994 versus foreign currency exchange losses of
approximately $83,000 in the first six months of 1993. Other income and expense
includes approximately $127,000 of loss on assets in the first
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six months of 1994 compared to approximately $71,000 of loss on assets in the
first six months of 1993.
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS
No. 106") as of October 1, 1992 and recorded a charge of $2,774,000, net of
related income tax benefit of $1,813,000. This charge is shown as the
cumulative effect of a change in accounting principle. See Note 5 to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$80,903,000 of working capital at March 31, 1994, which includes $62,601,000 of
cash and equivalents and $29,148,000 of marketable securities. Net cash flows
from operations increased $2,316,000, or 9%, in the first six months of 1994 as
compared to the first six months of 1993 primarily due to higher operating
profits before noncash charges. Cash flows from operations and available cash
balances were used to fund operations, investment purchases and capital
expenditures, including software additions.
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. The Company invests excess cash in a diversified
portfolio consisting of a variety of securities of both domestic and foreign
issuers including medium term notes, U.S. government obligations, investment
fund partnerships and certificates of deposit, which may include both investment
grade and non-investment grade securities. Certain of these investments are
managed by Maverick Capital, Ltd. ("Maverick"), including a $15 million
investment in an investment fund partnership managed by Maverick. Maverick is
owned and managed by a group of individuals, five of whom are directors of the
Company. Subsequent to March 31, 1994, Sterling withdrew as a limited partner
of Maverick and pursuant to the terms of the withdrawal agreement, funds will
be distributed on or before July 1, 1994. All marketable securities and
long-term investments are classified as available-for-sale securities.
Securities totaling $35,496,000 that the Company intends to hold for more than
one year are included in "Other Assets."
During the first six months of 1994, software expenditures, the majority of
which were costs capitalized pursuant to FAS No. 86, were $10,119,000 compared
to $12,325,000 in the first six months of 1993. ECG represented $6,055,000 of
the total software expenditures during the first six months of 1994, primarily
for enhancements of communications software products, interchange software
products and costs to add new network services features. ESG represented
$4,064,000 of the total software expenditures during the first six months of
1994, primarily for the development of systems management, storage management
and applications management products and product enhancements. Property and
equipment purchases of $8,709,000 in the first six months of 1994 include
purchases made in ECG for equipment upgrades for network processing systems and
computer equipment purchases to support the continuing growth in ECG. ESG's and
FSG's property and equipment additions were primarily computer equipment
purchases. Property and equipment purchases were $4,884,000 in the first six
months of 1993. Net purchases of $5,974,000 in marketable securities and long-
term investments in the first six months of 1994 were generally from the net
cash provided by operating activities and proceeds from issuances of common
stock pursuant to the exercise of stock options and warrants.
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At March 31, 1994, after the utilization of $2 million for letters of
credit, $33 million was available for borrowing on the Company's $35 million
revolving credit and term loan agreement ("Loan Agreement.") Borrowings, if
any, outstanding on December 31, 1994 will be payable in eight equal quarterly
payments. There were no amounts borrowed or outstanding on the Loan Agreement
during the six months ended March 31, 1994, however, the Company's international
operations borrowed $10,485,000 during the first six months of 1994 on separate
lines of credit, primarily for foreign exchange exposure management and working
capital requirements. Payments of $6,417,000 were made during the first six
months of 1994 on these lines of credit. Other debt payments related to capital
leases.
Proceeds from the exercise of stock options and warrants were $19,264,000
during the first six months of 1994, compared to $2,805,000 during the first six
months of 1993.
At March 31, 1994, the Company's capital resource commitments consisted of
commitments under lease arrangements for office space and equipment. The
Company intends to meet such obligations primarily from internally generated
funds. No significant commitments exist for future capital expenditures. The
Company believes available balances of cash, cash equivalents and marketable
securities combined with cash flows from operations and amounts available under
credit and term loan agreements are sufficient to meet the Company's cash
requirements for the foreseeable future.
OTHER MATTERS
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("FAS No. 112"), which requires employers to recognize
the cost of postemployment benefits on an accrual basis, if certain defined
conditions are met. Postemployment benefits are all types of benefits provided
to former or inactive employees, their beneficiaries, and covered dependents.
The Company will be subject to the provisions of FAS No. 112 beginning in the
fiscal year ending September 30, 1995. However, the Company does not believe
the provisions of FAS No. 112 will have a significant impact on the Company's
financial position and results of operations in the year of adoption, as the
majority of the postemployment benefits are a result of certain employment
contracts. Payments under these contracts are contingent upon future events,
the occurrence of which is not presently contemplated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
STERLING SOFTWARE, INC.
Date: May 16, 1994 By /s/ George H. Ellis
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George H. Ellis
Executive Vice President Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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