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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1994
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee Required)
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 No.)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (214) 891-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $0.10 Par Value New York Stock Exchange
5 3/4% Convertible Subordinated
Debentures Due February 1, 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 30, 1994, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $650,531,195 based on the closing sales
price of $30 3/4 on the New York Stock Exchange.
As of November 30, 1994, 23,094,091 shares of the Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the Registrant to
be held during 1995 are incorporated by reference in Part III. The Registrant
will file an amendment on Form 10-K/A to this Form 10-K to include Financial
Statement Schedules II, VIII and X required by Part IV.
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STERLING SOFTWARE, INC.
TABLE OF CONTENTS
Form 10-K Item Page
- - -------------- ----
Part I.
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 10
Item 3. Legal Proceedings.............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 14
Item 6. Selected Financial Data........................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
Item 8. Financial Statements and Supplementary Data.................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 47
Part III.
Item 10. Directors and Executive Officers of the Registrant............. 47
Item 11. Executive Compensation......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management. 47
Item 13. Certain Relationships and Related Transactions................. 47
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 48
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Sterling Software, Inc. ("Sterling," "Sterling Software," or the
"Company") was founded in 198l and became a publicly owned corporation in l983.
Sterling is a recognized worldwide supplier of software products and services
within the electronic commerce and enterprise systems software markets and also
provides technical professional services to certain sectors of the federal
government. Consistent with Sterling's decentralized operating style, each major
market is served by independently operated business groups which consist of
divisions that focus on specific business niches within those markets. Sterling
has steadily expanded its operations through internal growth and by business and
product acquisitions. In July 1993, Sterling completed the acquisition of
Systems Center, Inc. ("Systems Center"), a recognized leader in data
communications and systems management software for approximately $156 million in
a stock-for-stock acquisition.
On November 30, 1994, Sterling completed the acquisition of KnowledgeWare,
Inc. ("KnowledgeWare") for approximately $100 million in a stock-for-stock
acquisition. KnowledgeWare, a leading provider of applications development
software and services, is based in Atlanta, Georgia, and had revenue of
$132.5 million for its fiscal year ended June 30, 1994. Following the completion
of the KnowledgeWare acquisition, Sterling reorganized into five groups and
eighteen divisions (see further discussion on page 7 presented under "Recent
Developments").
As of September 30, 1994, the Company was organized into the following
four business groups:
. The Electronic Commerce Group, headquartered in Columbus, Ohio,
provides software and services to facilitate electronic commerce,
defined by Sterling as the worldwide electronic interchange of business
information. Product offerings include electronic data interchange
("EDI") software and services, data communications software and
electronic payments software for financial institutions. Since 1975,
Sterling has been a major provider of EDI network services, the
cornerstone of electronic commerce, and Sterling is the leading EDI
translation software vendor in North America.
. The Enterprise Software Group, headquartered in Los Angeles,
California, provides applications development and systems management
software products for customers typically utilizing large IBM mainframe
computers in conjunction with midrange computers and networks of
personal computers. Sterling addresses the needs of corporations as
they move to client/server computing environments through its expanded
market focus, including products that operate on a variety of computer
platforms and operating systems.
. The Federal Systems Group, headquartered in San Francisco, California,
provides technical professional services to the federal government
under several multi-year contracts primarily in support of the National
Aeronautics and Space Administration ("NASA") aerospace research
projects and secure communications systems for the U.S. Department of
Defense ("DoD"). Sterling Software has provided professional services
to both the NASA Ames Research Center and to the DoD for over 25 years.
. The International Group, headquartered in London, England, is the
exclusive channel to international markets for all of Sterling's
products. The group operates through regional divisions representing
Europe, Asia/Pacific, the Americas (except the United States) and other
countries throughout the world. The products are sold and supported
through 25 offices in 15 countries and through trained agents and
distributors.
A large percentage of Sterling's business is recurring through annual and
multi-year product support agreements generally having terms ranging from one to
three years, fixed term product lease and rental agreements generally having
terms ranging from month-to-month to year-to-year, short-term electronic
commerce services agreements cancelable upon 30 days notice and multi-year
federal contracts generally having terms ranging from one to five years but,
like most federal contracts, with provisions for termination by the government
for convenience or for failure to obtain funding. Recurring revenue represented
63% of the Company's total revenue in both 1994 and 1993. Sterling's customer
base includes 95 of the 100 largest U.S. industrial corporations, as ranked by
1993 sales reported in Fortune Magazine, and 98 of the top l00 U.S. commercial
banks, as ranked by deposits as of
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December 31, 1993, in the American Banker magazine. At September 30, 1994, the
Company employed approximately 3,000 persons.
The product names used herein are registered or unregistered trademarks
owned by the Company.
ELECTRONIC COMMERCE GROUP
The Electronic Commerce Group is comprised of four divisions and provides
software and services offerings to facilitate electronic commerce. Sterling is
one of the leading providers of EDI network services, the cornerstone of
electronic commerce, and is the leading EDI translation software provider in
North America. As of September 30, 1994, the group employed approximately 800
persons.
Sterling's Network Services Division provides over 85 software products
and services under the COMMERCE family name. COMMERCE:Network combines the power
of EDI, E-mail, library services and file transfer into a full-service network
to handle store-and-forward data transfer. The network supports all major
communications, messaging and data standards including BSC, SNA, X.25, X.400,
ANSI X.12 and EDIFACT. Sterling also offers COMMERCE:Connection, a Windows-based
suite of products that provides integrated access to a full range of data
networking services including EDI, E-mail, file transfer and electronic
libraries. During the year, Sterling released COMMERCE:Catalog, an electronic
database for buyers and sellers, and COMMERCE:Interactive, a COMMERCE:Network
capability that accelerates the speed of transmission for time-critical business
documents. Sterling's electronic commerce training and education are provided
through its COMMERCE:Institute and COMMERCE:Resource offerings. Sterling's
network services are marketed into targeted vertical industries. Sterling's
primary vertical industry markets include healthcare, insurance, groceries,
hardlines, retail, train-truck-ship transportation, automotive, chemical and
petroleum, paper and packaging, banking and government.
Sterling's Interchange Software Division markets the group's EDI
management products under the GENTRAN family name. GENTRAN:Basic, the base EDI
translation product for a wide range of platforms including mainframe, midrange,
UNIX and desktop platforms, translates data from internal formats into standard
formats for EDI transmission and interprets incoming EDI communications back
into internal formats for processing. GENTRAN:Plus adds Sterling's
communications products to the GENTRAN:Basic offering. GENTRAN:Control
prioritizes batch processing by trading partner and/or document and
GENTRAN:Realtime provides a full set of powerful on-line translation and EDI
management capabilities for critical documents requiring immediate response.
Other GENTRAN products provide additional EDI management functions.
GENTRAN:Dataguard provides data security through encryption/decryption and
GENTRAN:Viewpoint provides increased efficiencies through exception management
processing. GENTRAN:Structure incorporates application integration and audit
trail functions within the EDI environment for proprietary data exchange. In
August 1994, the division acquired American Business Computer Company ("ABC")
which added the following new products to the GENTRAN family: GENTRAN:Excel,
which provides high performance EDI processing in UNIX environments; and
GENTRAN:Server, which provides sophisticated electronic commerce gateway
functionality including advanced data routing, restart/recovery and exception
condition monitoring.
Sterling's Communications Software Division provides a range of data
communications products under the CONNECT family name. The CONNECT family is a
complete suite of integrated file transfer and communications management
solutions that support a wide variety of protocols, including BSC, SNA, X.25 and
TCP/IP, on a variety of operating systems and hardware platforms, including MVS,
VSE, VM, TANDEM, VMS, AS/400, UNIX, MS-DOS and OS/2. The CONNECT products
provide full-function automated file transfer for clients of all industry
classifications. CONNECT:Direct is primarily used to move large volumes of data
with a focus on high performance that normally addresses intracompany
requirements. Sterling recently launched CONNECT:Direct for NetWare which
similarly addresses the rapidly growing local area network market.
CONNECT:Mailbox is used primarily to move information between corporations with
a focus on wide connectivity. The software works independently of applications,
platforms and protocols, and provides open connections throughout the network to
any host, value-added network, midrange or remote workstation. CONNECT:Queue is
a scheduling and workload balancing system for heterogeneous UNIX networks.
Sterling's Banking Systems Division provides the VECTOR family of products
that automate several key functions associated with check processing in major
banks. The Banking Systems Division has the leadership position in the emerging
market for financial EDI software for banks. The VECTOR:Connexion product allows
banks to expand their cash management services to include the handling of
financial EDI for corporate customers. Over 1500 VECTOR systems have been
installed by approximately 500 financial institutions worldwide, including
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98 of the top 100 largest U.S. banks as ranked by deposits as of December 31,
1993 in the American Banker magazine.
Worldwide revenue from the Company's Electronic Commerce market
represented 35%, 29% and 25% of the Company's revenue during 1994, 1993 and
1992, respectively.
ENTERPRISE SOFTWARE GROUP
The Enterprise Software Group is comprised of four divisions that focus on
four enterprise software niche markets: applications management, storage
management, VM operations management and systems management for non-VM
platforms. As of September 30, 1994, the group employed approximately 600
persons.
The Applications Management Division markets products under the ANSWER
family name that address a wide range of applications development and
information management needs. ANSWER:Architect is a workstation-based tool for
the planning, analysis and design of applications. ANSWER:Builder and
ANSWER:Transact are applications development tools for batch and on-line
environments, respectively, that operate on major IBM mainframe platforms.
ANSWER:Zim is an open systems applications development tool based on the Entity-
Relationship model, which includes a fully integrated 4GL-RDBMS (fourth
generation language relational database management system) and a series of
application development tools for multiple users and platforms. The
ANSWER:Testpro product suite includes workstation-based tools that automate the
testing stage of applications development for mainframe, midrange and desktop
platforms. ANSWER:Journey is a tool that runs on desktop computers and
interfaces with ANSWER:Results, an information management and report generation
system for IBM mainframes, and other ANSWER products to create queries and
reports from a variety of mainframe resident data sources.
The Storage Management Division markets its products under the SAMS family
name. The SAMS family of products gives customers the ability to manage and
automate data storage across the enterprise in distributed or centralized
environments. SAMS:Disk automates data management and optimizes data
availability; SAMS:Allocate automates allocation control; and SAMS:Compress
provides data set compression. SAMS:Vantage, SAMS:Expert and SAMS:Control are
three new products that operate with Sterling's other storage management
products to provide complete client/server storage management systems for the
enterprise; SAMS:Vantage for IBM mainframe MVS platforms, SAMS:Expert for local
area networks and SAMS:Control for centralized management of multi-platform
storage management. Finally, SAMS:Save is an automated backup/restore product
for desktop platforms.
Sterling also provides a complete line of systems management tools for the
VM operating system through its VM Software Division. IBM is positioning VM as a
major client/server platform, and Sterling's VM software product family includes
16 systems management products to provide full-function systems management for
this platform. VM:Manager is a complete package of eleven individual and closely
integrated Sterling products that provides automated operations, service level
management, security, recovery and storage management for the VM operating
system.
The Company's remaining systems management products are marketed by the
Systems Management Division under the SOLVE family name. These products provide
systems and network management functions integrating a wide range of hardware
platforms. SOLVE:Netmaster automates SNA and other network management operations
across a variety of enterprise platforms. SOLVE:Stat reports on the status of
critical SNA network resources. SOLVE:Monitor provides a graphical user
interface to SOLVE:Netmaster. SOLVE:Attach integrates network management across
a number of environments including IBM, Tandem, TCP/IP and NetWare. A new
release of SOLVE:Attach for NetWare was introduced this year. Also during the
year, Sterling launched a new line of products for managing enterprise-wide
service desk operations. SOLVE:Central is the name for the complete suite of
these products comprising SOLVE:Problem for problem tracking and resolution,
SOLVE:Change for managing the systems change process, SOLVE:Configuration for
tracking software and hardware configuration changes and SOLVE:Asset for
business management of computer assets and the services they deliver.
Worldwide revenue from the Company's Enterprise Software market
represented 41%, 45% and 48% of the Company's revenue during 1994, 1993 and
1992, respectively.
FEDERAL SYSTEMS GROUP
The Federal Systems Group is comprised of three divisions that provide
highly specialized technical professional services to sectors of the federal
government, generally under multi-year contracts. Its major customers
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are NASA and the DoD. In 1994, Sterling began its 28th year of service to both
NASA and the DoD and secured new contracts and contract renewals with estimated
total revenue of approximately $43,000,000 over the next five years. Most of the
contracts represent an expansion or extension of ongoing services to NASA and
the DoD. Altogether, in 1994 the Federal Systems Group was working under 71
contracts, many of which are for multi-year terms.
As of September 30, 1994, the group employed approximately 1,100 persons.
Sterling's NASA Ames Division is an exclusive provider of scientific
software support and supercomputer facilities management at the NASA Ames
Research Center. The division's work includes software and support services on
such research projects as airborne and space flight systems, experimental and
theoretical aerodynamics, atmospheric sciences and astronomy, and data
acquisition and control systems. The division also manages the Advanced
Computational Facility (the supercomputer center) at NASA Ames, serving about
700 NASA scientists. Sterling is a consistent high performer at NASA Ames and,
in 1994, received "excellent" award fee scores on its most significant NASA Ames
contract.
Sterling's Information Technology Division provides highly technical
professional services to military and intelligence agencies, specializing in
data handling, secure communications, networking and systems integration. The
division supports such varied technical projects as satellite data collection
and counter-terrorism, generally requiring top secret security clearances. Its
computing resources include data processing facilities approved for classified
operations, and substantial hardware and software configurations to support
software development activities in a distributed processing environment. In
1994, the division obtained 31 new or renewed contracts, representing revenue of
approximately $28,000,000 over the next five years.
Sterling's Scientific Systems Division provides highly technical
professional services to civil sectors of the federal government, particularly
in scientific and engineering areas and specialty software products in advanced
graphics, visualization and virtual reality. The division's contracts include
project applications such as spacecraft imagery and scientific data systems to
aviation research and transportation safety. Customers include the Jet
Propulsion Laboratory, the NASA Lewis Research Center and the MIT Lincoln
Laboratory. In 1994, the division obtained 8 new or renewed contracts,
representing revenue of approximately $13,200,000 over the next five years.
Revenue from the Federal Systems Group represented 23%, 24% and 25% of the
Company's revenue during 1994, 1993 and 1992, respectively.
INTERNATIONAL GROUP
The International Group is the exclusive channel to international markets
for all Sterling products. Prior to 1993, all international sales were conducted
through separate divisions within the Electronic Commerce Group (then the EDI
Group) and the Enterprise Software Group (then the Systems Software Group).
Sterling organized a separate group during 1993 to focus on its international
expansion. The group operates through three regional divisions representing
Europe, Asia/Pacific and the Americas (except the United States) and a division
representing the distributors located throughout the world.
Each division is responsible for sales, marketing and first level support
of all Sterling products and services in their respective regions. The Europe
Division, headquartered in London, is responsible for direct sales in the United
Kingdom, France, Belgium, The Netherlands, Italy, Norway, Sweden, Germany,
Switzerland and Austria and has offices in 16 European cities. The Pacific
Division, headquartered in Tokyo with an office in Sydney, is responsible for
direct sales in the Asia/Pacific countries. Canada is the responsibility of the
Americas Division, which is headquartered in Toronto. Sterling has a separate
division to manage approximately 50 agents and distributors, the Distributor
Division, headquartered in London. Major distributors are located in Brazil,
Japan, Italy, Korea, Spain, Taiwan and Venezuela.
As of September 30, 1994, the group employed approximately 400 persons.
In 1994, approximately 25% of Sterling's revenue came from the International
Group.
PRODUCT LICENSES
Sterling's software products are generally licensed for perpetual use or
for a fixed term. Sterling typically does not sell or otherwise transfer title
to its software products. The license agreements generally restrict the use of
the product to designated sites or central processing units and prohibit
reproduction, transfer or disclosure of the
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product. However, some license agreements may cover multiple sites or multiple
central processing units at one site.
PRODUCT SUPPORT
Product support is available to Sterling customers, typically in the form
of annual contracts generally priced from 15% to 21% of the then current license
fee. Sterling's product support contracts allow customers to receive updated or
enhanced versions of Sterling's software products as they become available, as
well as telephone access to Sterling's technical personnel.
SERVICES
Sterling's services primarily include technical professional services in
support of federal government contracts provided through Sterling's federal
systems business and EDI network services provided through Sterling's electronic
commerce business. Sterling also provides training and education in support of
its products generally in the form of customer training seminars, videos and
instruction materials. Sterling also has an applications management consulting
department that provides applications development services to its customers.
PRODUCT DEVELOPMENT
Sterling's product development programs in each of its businesses include
the enhancement of existing products and introduction of new products based upon
current and anticipated customer needs. Each division within Sterling's
Electronic Commerce Group and Enterprise Software Group has its own development
function. Each development lab operates as a profit center with revenues derived
from intercompany royalties earned on products sold in the domestic and
international markets. This management organization facilitates development cost
control and focuses the development function on the customer's needs.
Approximately 440 Sterling employees were engaged in product development at
September 30, 1994. Gross product development costs in 1994, 1993 and 1992 were
$52,392,000, $51,127,000 and $49,778,000, respectively, of which the Company
capitalized $19,390,000, $23,730,000 and $24,617,000, respectively, as the cost
of developing and testing new or significantly enhanced software products.
SALES AND MARKETING
Consistent with its decentralized operating style, Sterling conducts its
sales and marketing activities in multiple software divisions focused on
specific product markets. Sterling sells its products and services through a
combination of direct sales and telesales organizations, and in certain
countries, independent agents and distributors. The use of telesales has proven
effective in reaching customers at a minimal cost. Each division within the
Electronic Commerce Group and Enterprise Software Group has its own U.S. sales
and marketing organizations. In addition, the Company's International Group has
its own sales and marketing functions to focus specifically on the international
marketplace for each of Sterling's product lines. At September 30, 1994,
Sterling employed approximately 430 sales representatives.
CUSTOMERS
Sterling's customers include 95 of the 100 largest U.S. industrial
corporations, as ranked by 1993 sales in Fortune magazine and 98 of the top 100
U.S. commercial banks, as ranked by deposits as of December 31, 1993, in the
American Banker magazine. In the year ended September 30, 1994, agencies,
branches and departments of the federal government accounted for approximately
23% of the Company's consolidated revenue. At September 30, 1994, Sterling had
approximately 140 separate product license contracts and approximately 125
separate services contracts with the federal government. The acquisition of
Systems Center in 1993 and the completion of the KnowledgeWare acquisition on
November 30, 1994, reduce the Company's financial risk associated with a loss of
the federal government as a customer such that any such loss would no longer
have a material effect on the Company's results of operation and financial
position.
COMPETITION
The computer software industry is highly competitive. Sterling competes
with both large companies with substantially greater resources and small
specialized companies that compete in a particular geographic region or market
niche. Sterling also competes with internal programming staffs of corporations
and, increasingly, with hardware manufacturers.
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Some internal programming staffs of corporations are capable of developing
products similar to those offered by the Company. In general, however, the
Company believes that the time and costs associated with custom software
development significantly exceed the time and costs required to license and
install the comparable product from Sterling. Also, competition within the
Company's federal business is increasing because of continued federal budget
constraints and cutbacks.
The Company anticipates that hardware manufacturers will increasingly
provide operating systems that incorporate certain systems management and other
enterprise software functions into the hardware. Management believes, however,
that these technological advances will not have a significant impact on the
Company. Sterling believes that its products will continue to be chosen by
customers due to superior product functionality, reliability and technical
support, ease of product installation and use, close integration between the
products and customer business applications and, finally, the Company's history
of success and reputation for providing quality products.
EMPLOYEES
Sterling's business is dependent upon its ability to attract and retain
qualified personnel who are in limited supply. The Company's operations could be
adversely affected if it were to lose the services of a significant number of
qualified employees or if it were unable to obtain additional qualified
employees when needed. To attract and retain qualified personnel, the Company
strives to maintain excellent employee relations, attractive office facilities
and challenging working environments, and offers competitive compensation and
benefits packages.
At September 30, 1994, the Company employed approximately 3,000 persons.
TRADEMARKS AND COPYRIGHTS
The Company has certain trademarks that are registered in the United
States and various foreign countries and certain copyrights that are registered
with the United States Copyright Office. In general, however, management
believes that the competitive position of the Company depends primarily on the
skill, knowledge and experience of Sterling's personnel and their ability to
develop, market and support software products, and that its business is not
materially dependent on copyright protection or trademarks. The Company believes
that all of its products are of a proprietary nature and its licensing
agreements generally prohibit program disclosure. It is possible, however, for
product users or competitors to copy portions of the Company's products without
its consent.
Licenses for a number of software products have been granted to the
Company for its own use or for remarketing to its customers. In the aggregate,
these licenses are material to the business of the Company, but the loss of any
one of these licenses would not materially affect the Company's results of
operations or financial position.
BACKLOG
Sterling's backlog relates principally to the uncompleted portion of
multi-year professional services contracts with the federal government,
including renewal options with government agencies, a portion of which is
restricted by law to a term ending on the last day of the government agencies'
then current fiscal year.
Determination of the Company's backlog involves estimation, particularly
with respect to customer requirements contracts and multi-year contracts of a
cost-reimbursement or incentive nature. A large portion of the Company's federal
government contracts is funded for one year or less and is subject to contract
award, extension or expiration at different times during the year, and all of
the Company's federal government contracts are subject to termination by the
government. Based upon past practices, the Company believes that the contract
renewal options included in existing contracts will be exercised for the full
period designated in such contracts, but no assurances can be given.
Total backlog, including contract renewal options not yet exercised, at
September 30, 1994 and 1993, was $228,345,000 and $297,751,000, respectively,
99% of which related to federal government sources, primarily in the Company's
Federal Systems Group. Renewal options not yet exercised included in backlog at
September 30, 1994 and 1993, were $52,163,000 and $126,896,000, respectively.
Approximately $101,039,000 of the 1994 backlog is expected to be realized in the
year ending September 30, 1995.
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RECENT DEVELOPMENTS
On November 30, 1994, Sterling consummated the acquisition of
KnowledgeWare pursuant to the terms of an Amended and Restated Agreement and
Plan of Merger dated as of August 31, 1994 (as amended, the "Merger Agreement")
with SSI Corporation, a Georgia corporation and a recently organized wholly
owned subsidiary of Sterling ("Merger Sub"), and KnowledgeWare. In connection
with the acquisition, which was accounted for as a purchase, Sterling issued
approximately 2,421,000 shares of the Company's $0.10 par value Common Stock
(the "Common Stock") and reserved approximately 257,700 shares of Common Stock
for issuance upon exercise of KnowledgeWare's options and warrants. Of the
2,421,000 shares of Common Stock issued by Sterling, approximately 484,200
shares were placed in escrow (the "Escrowed Shares") to cover certain losses
that may result in connection with any pending or threatened litigation, action,
claim, proceeding, dispute or investigation ("Actions") (including amounts paid
in settlement) for which Sterling is entitled to indemnification pursuant to the
terms of the Merger Agreement. See further discussion on page 21 presented under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In connection with its KnowledgeWare acquisition, Sterling reorganized
into five groups and 18 divisions. A new group, Applications Management,
consisting of three divisions, was established to focus exclusively on the
applications management market. The two product divisions, Applications
Development and Applications Engineering, address two key needs in applications
management--the need to develop new applications and the need to revitalize
existing applications. Consulting services are provided through the third
division to ensure that customers are successful using Sterling's applications
management products.
Additionally, Sterling's $100 million international business was combined
with KnowledgeWare's, which was almost half that size, resulting in a much
larger international business. To accommodate this growth, the group was
reorganized into five divisions.
Finally, Sterling created a new Systems Management Group, consisting of
three former Enterprise Software Group divisions. The Electronic Commerce
Group and the Federal Systems Group remained essentially unchanged.
The five groups and 18 divisions are:
<TABLE>
<CAPTION>
Electronic Commerce Group Applications Management Group Systems Management Group
------------------------- ----------------------------- ------------------------
<S> <C> <C>
Network Services Division Applications Development Division Operations Management Division
Interchange Software Division Applications Engineering Division Storage Management Division
Communications Software Division Consulting Services Division VM Software Division
Banking Systems Division
Federal Systems Group International Group
--------------------- -------------------
NASA Ames Division Northern Europe Division
Information Technology Division Central Europe Division
Scientific Systems Division Southern Europe Division
Pacific Division
Distributor Division
</TABLE>
The following table reflects the changes to certain of Sterling's product
names and the new products added as a result of the KnowledgeWare acquisition.
The changes are effective as of December 1, 1994:
<TABLE>
<CAPTION>
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New Product Name Former Product Name
------------------------------------------------------------------------------
Sterling KnowledgeWare
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACHIEVE:Advise
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Analyze
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Client
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Construct
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Coordinate
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Deliver
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Design
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Document
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Guide
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Insight
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Model
-------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
New Product Name Former Product Name
------------------------------------------------------------------------------
Sterling KnowledgeWare
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACHIEVE:Objectview
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Plan
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Rapid
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Rochade
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Team
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Utilities
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Workgroup
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Builder
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Comparex
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Data
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Flashpoint
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Improve
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Inform
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Inquiry
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Integrate
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Journey
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Legacy
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Results
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Testpro
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Transfer
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Ability
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Assess
-------------------------------------------------------------------------------------------------------------
ACHIEVE:Rekey
-------------------------------------------------------------------------------------------------------------
KEY:Advise ForeSight Hypermedia
-------------------------------------------------------------------------------------------------------------
KEY:Analyze ADW Analysis Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Client ObjectView Enterprise Model Connection
-------------------------------------------------------------------------------------------------------------
KEY:Construct ADW Construction Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Coordinate ADW Workgroup Manager
-------------------------------------------------------------------------------------------------------------
KEY:Deliver ObjectView Enterprise Model Connection plus ADW
Construction Workstation plus ADW Design Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Design ADW Design Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Document ADW Document Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Guide Foresight
-------------------------------------------------------------------------------------------------------------
KEY:Insight ANSWER:Cabe
-------------------------------------------------------------------------------------------------------------
KEY:Model ForeSight Hypermedia plus ADW Analysis Workstation
plus ADW Planning Workstation plus ADW Workgroup
Coordinator
-------------------------------------------------------------------------------------------------------------
KEY:Objectview ObjectView
-------------------------------------------------------------------------------------------------------------
KEY:Plan ADW Planning Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Rapid ADW RAD Workstation
-------------------------------------------------------------------------------------------------------------
KEY:Rochade ROCHADE
-------------------------------------------------------------------------------------------------------------
KEY:Team ADW Workgroup Coordinator
-------------------------------------------------------------------------------------------------------------
KEY:Utilities ADW Toolset Utilities
-------------------------------------------------------------------------------------------------------------
KEY:Workgroup ForeSight Hypermedia plus ADW Analysis Workstation
plus ObjectView Enterprise Model Connection plus ADW
Planning Workstation
-------------------------------------------------------------------------------------------------------------
VISION:Builder ANSWER:Builder
-------------------------------------------------------------------------------------------------------------
VISION:Comparex ANSWER:Comparex
-------------------------------------------------------------------------------------------------------------
VISION:Data ClearAccess
-------------------------------------------------------------------------------------------------------------
VISION:Flashpoint Flashpoint
-------------------------------------------------------------------------------------------------------------
VISION:Improve Legacy Workbench plus NorthStar
-------------------------------------------------------------------------------------------------------------
VISION:Inform ANSWER:Inform
-------------------------------------------------------------------------------------------------------------
VISION:Inquiry ANSWER:Inquiry
-------------------------------------------------------------------------------------------------------------
VISION:Integrate ClearAccess plus Flashpoint
-------------------------------------------------------------------------------------------------------------
VISION:Journey ANSWER:Journey
-------------------------------------------------------------------------------------------------------------
VISION:Legacy Legacy Workbench
-------------------------------------------------------------------------------------------------------------
VISION:Results ANSWER:Results
-------------------------------------------------------------------------------------------------------------
VISION:Testpro ANSWER:Testpro
-------------------------------------------------------------------------------------------------------------
VISION:Transfer NorthStar
-------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Since August 30, 1994, a number of Actions have been filed against
KnowledgeWare and certain of its former officers and directors alleging
violations of securities laws. On December 18, 1991, a complaint (the "1991
Class Action") was filed in the United States District Court for the Northern
District of Georgia, Atlanta Division which consolidated and amended several
class action lawsuits previously filed against KnowledgeWare in October 1991.
The 1991 Class Action was a class action lawsuit alleging violations of Sections
20 and 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 10b-5 under the Exchange Act. In summary, the complaint alleged
KnowledgeWare misrepresented or failed to disclose material facts which would
have a material adverse impact on KnowledgeWare or approved such
misrepresentations and omissions. The complaint sought compensatory damages and
reimbursements for the plaintiffs' fees and expenses. On January 26, 1994,
KnowledgeWare entered into and the District Court preliminarily approved a
stipulation of settlement of the 1991 Class Action (the "Settlement Agreement").
By entering into the settlement, KnowledgeWare did not admit the allegations in
the suit and, to the contrary, denied any wrongdoing. The Settlement Agreement,
which received final court approval in April 1994, required a cash payment of
$1,750,000, all of which was paid by KnowledgeWare's insurance carrier, and the
issuance by KnowledgeWare of warrants (the "Warrants") to purchase an aggregate
of 500,000 shares of KnowledgeWare Common Stock at a price of $17.50 per share.
The Warrants are exercisable for a period of three years from June 9, 1994 (the
date of issuance). On August 30, 1994, the plaintiffs in the 1991 Class Action
filed a "Motion to Enforce Stipulation of Settlement for Temporary Injunction of
Merger and for Damages Resulting from Fraud" (the "Motion"). In the Motion, the
plaintiffs allege that the proposed business combination between KnowledgeWare
and Sterling and an announcement by KnowledgeWare that it modified its
accounting policy for revenue recognition and restated financial results for the
first three quarters of fiscal year 1994 resulted in a substantially reduced
value of the Warrants available to the plaintiffs under the Settlement
Agreement. Accordingly, the plaintiffs moved the District Court for a decree of
specific performance of the terms of the Settlement Agreement entailing the
delivery of new warrants of equivalent value to the original value of the
Warrants, and for a preliminary injunction of the consummation of any business
combination between KnowledgeWare and Sterling, pending compliance by
KnowledgeWare with the terms of the Settlement Agreement. Alternatively, the
plaintiffs moved for a declaration that the Warrant Agreement set forth in the
Settlement Agreement was the product of fraud and for an award to the plaintiffs
of the appropriate measure of damages. The plaintiffs have subsequently filed a
motion requesting the withdrawal of their request for the preliminary
injunction.
On August 30 and 31, 1994, and September 12, 22 and 23, 1994, eight
lawsuits were filed against KnowledgeWare and certain of its officers in the
United States District Court for the Northern District of Georgia, Atlanta
Division (the "1994 Class Action Suits"). Each of the 1994 Class Action Suits is
purportedly a class action lawsuit on behalf of KnowledgeWare stockholders
alleging violations of Sections 20 and 10(b) of the Exchange Act, and Rule 10b-5
under the Exchange Act. The alleged factual basis underlying the 1994 Class
Action Suits and the relief sought therein is the plaintiffs' allegations that
KnowledgeWare and the individual defendants actively misrepresented or failed to
disclose the actual financial condition of KnowledgeWare throughout fiscal year
1994 and that the value of KnowledgeWare Common Stock was artificially inflated
as a result of such misrepresentations or failures to disclose. Each of the 1994
Class Action Suits seeks compensatory damages and reimbursement for the
plaintiffs' fees and expenses.
On September 9, 1994, a lawsuit was filed against KnowledgeWare and
certain of its officers in the Southern District of Iowa, Central Division (the
"Ecta Suit"). The Ecta Suit is a lawsuit alleging violations of Section 10(b) of
the Exchange Act, Rule 10b-5 under the Exchange Act, Section 12(2) of the
Securities Act of 1933, as amended, violation of the Iowa Blue Sky Laws (Iowa
Stat. Ann (S)502.502), fraud and breach of contract. The alleged factual basis
underlying the Ecta Suit arises in connection with the purchase by KnowledgeWare
of substantially all of the assets of ClearAccess Corporation (now known as Ecta
Corporation) and Fairfield Software, Inc. (now known as Fairfield Development,
Inc.) pursuant to an Asset Purchase Agreement dated May 26, 1994 (the
"Acquisition Agreement"). The plaintiffs allege that KnowledgeWare and the
individual defendants misrepresented or failed to disclose the actual financial
condition of KnowledgeWare, that the value of KnowledgeWare Common Stock was
artificially inflated as a result of such misrepresentations or failures to
disclose and that KnowledgeWare has breached certain warranties, representations
and covenants made in the Acquisition Agreement. The Ecta Suit seeks
compensatory damages, rescission of the Acquisition Agreement and/or the sale of
KnowledgeWare's securities issued pursuant thereto, punitive damages,
prejudgment interest, and reimbursement of attorneys' fees and costs.
KnowledgeWare has received informal requests for information from the Staff
of the Securities and Exchange Commission as to which persons and entities had
knowledge of the negotiations between KnowledgeWare and Sterling prior to the
initial public announcement of the proposed merger on August 1, 1994, and as to
the circumstances with respect to the restatement by KnowledgeWare of financial
results for the first three quarters of fiscal 1994.
9
<PAGE>
On October 27, 1994, KnowledgeWare received a letter on behalf of certain
persons (the "Investors") who purchased shares of KnowledgeWare Common Stock
pursuant to a stock purchase agreement between the Investors and KnowledgeWare
dated January 26, 1994. The Investors assert that in light of, among other
things, KnowledgeWare's announcement on September 1, 1994 and KnowledgeWare's
other public statements disclosing its restatement of its financial statements
for the first, second and third quarters of fiscal 1994, it is the position of
the Investors that KnowledgeWare is in breach of the representations and
warranties it made to the Investors in the stock purchase agreement and seek to
recover damages in the amount of approximately $9.5 million, representing the
difference between the aggregate purchase price the Investors paid for their
KnowledgeWare Common Stock and the aggregate price for which they sold those
shares.
A shareholder derivative action was filed in the United States District
Court for the Northern District of Georgia, Atlanta Division on November 14,
1994 against the directors and certain officers of KnowledgeWare and against
KnowledgeWare as a nominal defendant (the "Suit"). The case is styled as
follows: Howard Lasker v. Francis A. Tarkenton, Donald L. Addington, Richard M.
Haddrill, Sam A. Brooks, P.E. Sadler, J. Williams Scruggs, Rick W. Gossett,
(Defendants) and KnowledgeWare, Inc., Nominal Defendant. The complaint alleges
that plaintiff Lasker is, and at all relevant times was, a KnowledgeWare
stockholder and that he has brought the Suit derivatively in the right and for
the benefit of KnowledgeWare. The complaint alleges that the individual
defendants failed to exercise reasonable diligence and due care and acted in a
deliberate, reckless, or grossly negligent fashion in performing their
responsibilities, in failing properly to monitor the accuracy of KnowledgeWare's
disclosures, and in failing to have proper internal controls to monitor
collectibility of receivables and to reserve properly for doubtful accounts. The
Suit seeks an award of damages from the individual defendants in favor of
KnowledgeWare in an amount in excess of at least $50,000 in addition to
reimbursement of the plaintiff's costs and disbursements of pursuing the
complaint. The complaint also alleges that KnowledgeWare would not pursue this
action directly because it would lose the benefit of its insurance coverage, if
any; that recovery under such an insurance policy would be more beneficial to
KnowledgeWare than pursuit of personal assets, if any, of the KnowledgeWare
directors; and that the individual defendants who authorized the purchase of
such insurance coverage have created an asset (potential recovery under the
insurance policy) which cannot be realized for the benefit of KnowledgeWare
except by a derivative action pursued by a KnowledgeWare stockholder such as
plaintiff.
Sterling is entitled to indemnification, to be satisfied exclusively from
the Escrowed Shares, concerning certain Actions pending as of the date of the
Merger Agreement or thereafter arising, including Actions arising out of
violations or alleged violations of securities laws, but excluding any Actions
arising out of the ordinary course of business transactions, Actions brought by
current or former employees with respect to their employment or termination
thereof and certain other Actions. If any of the Actions described above result
in losses (including amounts paid in settlement) to KnowledgeWare, Merger Sub or
Sterling, such losses will result in a claim for indemnification to be satisfied
from the Escrowed Shares.
ITEM 2. PROPERTIES.
The Company leases offices and facilities in or near approximately 50
cities in the United States, Canada and other countries. Major U.S. facilities
are located in the following metropolitan areas: Los Angeles, Palo Alto, San
Francisco, Sacramento and San Bernardino, California; Cleveland and Columbus,
Ohio; Omaha, Nebraska; New York City and Rome, New York; Washington, D.C.;
Detroit, Michigan; and Dallas, Texas. The Company's major international
facilities are located in London and Reading, England; Paris, France; Montreal,
Toronto and Ottawa, Canada; Duesseldorf, Germany; Brussels, Belgium; Nieuwegein,
The Netherlands; Stavanger and Oslo, Norway; Kista, Sweden; Tokyo, Japan; Sydney
and Melbourne, Australia; Turin, Italy; and Tefen, Israel. The Company believes
that its facilities are adequate for its immediate needs and that additional or
substitute space is available if needed to accommodate expansion.
In connection with the acquisition of KnowledgeWare, Inc., effective
December 1, 1994, the Company also leases a major facility in Atlanta, Georgia
and leases 22 international sales offices in Australia, Austria, Belgium,
France, Germany, Hong Kong, Italy, The Netherlands, Portugal, Sweden, Denmark,
Norway, Finland, Spain, Switzerland and the United Kingdom.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to certain legal proceedings and claims that arise
in the conduct of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions, net of applicable
reserves, will not materially affect the financial condition or results of
operations of the Company.
In addition, KnowledgeWare is subject to certain legal proceedings and
claims, as described under "Business-Recent Developments." Sterling cannot
presently estimate the amount of losses that will result in connection with such
Actions because such Actions have only recently been filed and discovery has
just commenced in some matters and has not commenced in others.
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.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- ------- ------------------------------------------------------
<S> <C> <C>
Sam Wyly 60 Chairman of the Board and Director
Charles J. Wyly, Jr. 61 Vice Chairman of the Board and Director
Sterling L. Williams 51 President, Chief Executive Officer and Director
Warner C. Blow 57 Executive Vice President
George H. Ellis 45 Executive Vice President and Chief Financial Officer
Werner L. Frank 65 Executive Vice President, Business Development
M. Gene Konopik 51 Executive Vice President
Edward J. Lott 65 Executive Vice President
Jeannette P. Meier 47 Executive Vice President, Secretary and General Counsel
Phillip A. Moore 52 Executive Vice President, Technology and Director
William D. Plumb 56 Executive Vice President
A. Maria Smith 52 Executive Vice President
Clive A. Smith 40 Executive Vice President
Geno P. Tolari 51 Executive Vice President
Richard Connelly 43 Vice President, Controller
Vicki L. Hill 43 Vice President, Treasurer
Albert K. Hoover 34 Vice President, Assistant General Counsel
Jim Jenkins 41 Vice President, Tax
Anne Vahala 34 Vice President, Investor Relations
</TABLE>
Sam Wyly co-founded Sterling Software in 1981 and has served as Chairman
of the Board and a director since its formation. In 1963, Mr. Wyly founded
University Computing Company, a computer software and services company, and
served as President or Chairman from 1963 until 1979. Mr. Wyly co-founded Earth
Resources Company, an oil refining and silver and gold mining company, and
served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and his
brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse chain
in 1967. It grew to approximately 600 restaurants by 1989, during which time he
served as Chairman. Mr. Wyly currently serves as Chairman of Michaels Stores,
Inc., a specialty retail chain, and as President of Maverick Capital, Ltd., an
investment fund management company. Sam Wyly is the father of Evan A. Wyly, a
director of Sterling.
Charles J. Wyly, Jr. co-founded Sterling Software in 1981 and has served
as a director since its formation. Effective November 1984, Mr. Wyly was elected
Vice Chairman of the Board. Mr. Wyly served as an officer and director of
University Computing Company from 1964 to 1975, including President from 1969 to
1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company and
Charles J. Wyly, Jr. served as Chairman of the Board from 1968 to 1980. Mr. Wyly
served as Vice Chairman of the Bonanza Steakhouse chain from 1967 to 1989. Mr.
Wyly currently serves as Vice Chairman of the Board of Michaels Stores, Inc. and
as Chairman of Maverick Capital, Ltd. Charles J. Wyly, Jr. is the father-in-law
of Donald R. Miller, Jr., a director of Sterling.
11
<PAGE>
Sterling L. Williams co-founded Sterling Software in 1981 and has served
as President, Chief Executive Officer and a director of Sterling Software since
its formation. Mr. Williams also currently serves as a director of Cimage
Corporation, a privately held provider of document management systems, and
INPUT, an information technology market research company.
Warner C. Blow has served as Executive Vice President of Sterling Software
since October 1989, prior to which he served as Senior Vice President since
November 1986. Since July 1993, Mr. Blow has served as President of the
Electronic Commerce Group. From October 1990 until July 1993, Mr. Blow served as
President of Sterling Software's former EDI Group and prior to October 1990 he
served as President of Sterling Software's former Applications Software Group.
George H. Ellis has served as Executive Vice President of Sterling
Software since July 1993, Chief Financial Officer since February 1986 and
Treasurer since December 1, 1994. Prior to July 1993, Mr. Ellis also served as
Senior Vice President of Sterling Software.
Werner L. Frank has served as Executive Vice President, Business
Development of Sterling Software since December 1, 1994. From July 1993 until
December 1, 1994, Mr. Frank served as Executive Vice President of Sterling
Software and President of Sterling Software's former Enterprise Software Group.
From 1985 until July 1993, Mr. Frank served as President of Sterling Software's
former Systems Software Group.
M. Gene Konopik has served as Executive Vice President of Sterling
Software and President of Sterling Software's Federal Systems Group since
December 1994. From July 1993 until December 1994, Mr. Konopik served as the
President of Sterling Software's Information Technology Division and prior to
July 1993 he served as the President of the former Intelligence and Military
Division of Sterling Software.
Edward J. Lott served as Executive Vice President of Sterling Software
from October 1984 until November 30, 1994. From November 1988 until
November 30, 1994, Mr. Lott was Executive Vice President in charge of mergers
and acquisitions. From 1985 until November 1988, Mr. Lott served as President of
Sterling Software's former Financial Software Group. Effective December 1, 1994,
Mr. Lott became a Special Assistant to the President of Sterling Software and is
no longer deemed an executive officer of Sterling Software.
Jeannette P. Meier has served as Executive Vice President of Sterling
Software since July 1993 and has served as General Counsel and Secretary since
1985. Prior to July 1993, Ms. Meier also served as Senior Vice President of
Sterling Software.
Phillip A. Moore co-founded Sterling Software in 1981 and has served as a
director since such time and as Executive Vice President, Technology since July
1993. Prior to July 1993, Mr. Moore served as Senior Vice President, Technology
of Sterling Software.
William D. Plumb has served as Executive Vice President of Sterling
Software since July 1993 and served as President of the International Group of
Sterling Software from July 1993 until October 1994. From July 1992 until July
1993, Mr. Plumb served as President of Sterling Software's former Ordernet
Services International Division and from 1985 until July 1992 he served as
President of Sterling Software's former Ordernet Services Division.
A. Maria Smith has served as Executive Vice President of Sterling Software
and President of Sterling Software's new Applications Management Group since
December 1994. From July 1993 until December 1994, Ms. Smith served as President
of Sterling Software's former Systems Management Division and prior to July 1993
she served as President of the former Systems Software Marketing Division of
Sterling Software.
Clive A. Smith has served as Executive Vice President of Sterling Software
since December 1994 and President of Sterling Software's International Group
since October 1994. From July 1993 until October 1994, Mr. Smith served as the
President of Sterling Software's former Europe Division and from September 1990
until July 1993 he served as the President of the former International Division
of Sterling Software. Prior to September 1990, Mr. Smith served as European
Director for Execucom Systems Corporation.
Geno P. Tolari has served as Executive Vice President of Sterling Software
since March 1990, prior to which he served as Senior Vice President since
November 1986. Mr. Tolari has also served as President of Sterling Software's
Systems Management Group since December 1, 1994 and he served as the President
of the Federal Systems Group of Sterling Software from October 1985 until
December 1994.
12
<PAGE>
Richard Connelly has served as Vice President, Controller of Sterling
Software since July 1993. From October 1992 until July 1993 Mr. Connelly served
as Corporate Controller and from June 1987 until October 1992 he served as
Director of Accounting of Sterling Software.
Vicki L. Hill served as Vice President, Treasurer of Sterling Software
from July 1993 until November 30, 1994. From 1986 until July 1993, Ms. Hill
served as Treasurer of Sterling Software. Effective December 1, 1994, Ms. Hill
became Vice President, Finance and Administration for the Central Europe
Division of Sterling Software and is no longer deemed an executive officer of
Sterling Software.
Albert K. Hoover has served as Vice President of Sterling Software since
May 1994 and Assistant General Counsel of Sterling Software since June 1990.
From October 1988 until June 1990 he was associated with the law firm Gibson,
Dunn & Crutcher.
Jim Jenkins has served as Vice President, Tax of Sterling Software since
May 1994. From May 1986 until May 1994 he served as Director of Tax.
Anne Vahala has served as Vice President, Investor Relations of Sterling
Software since July 1993. From August 1992 until July 1993, Ms. Vahala served as
Director, Investor Relations and prior to August 1992 she served as Senior
Financial Analyst of Sterling Software.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's $0.10 par value Common Stock (the "Common Stock") has been
traded on the New York Stock Exchange since March 28, 1990, under the symbol
SSW. Prior to that time, the Common Stock was traded on the American Stock
Exchange since May 4, 1983. The high and low closing prices for the Common Stock
for the periods indicated are set forth below.
<TABLE>
<CAPTION>
PRICE RANGE
----------------------
HIGH LOW
---------- ----------
<S> <C> <C>
Year Ended September 30, 1994:
Quarter Ended:
December 31, 1993.............. $33 1/2 $ 24
March 31, 1994................. $34 1/2 $ 28
June 30, 1994.................. $34 1/4 $27 1/8
September 30, 1994............. $31 5/8 $25 3/8
Year Ended September 30, 1993:
Quarter Ended:
December 31, 1992.............. $22 3/8 $15 1/2
March 31, 1993................. $24 3/8 $19 3/8
June 30, 1993.................. $23 3/8 $17 5/8
September 30, 1993............. $ 24 $ 19
</TABLE>
At November 30, 1994, the Company had approximately 1,500 common
stockholders of record.
The Company did not pay dividends on its Common Stock during the three
fiscal years ended September 30, 1994. The terms of the Company's Series B
Junior Preferred Stock ("Junior Preferred Stock") prohibit the payment of
dividends on the Common Stock whenever quarterly dividends on the Junior
Preferred Stock are in arrears.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the consolidated financial statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data (1):
Revenue................................. $473,393 $416,114 $378,396 $333,381 $278,301
Cost of sales........................... 171,745 172,105 162,592 141,436 132,680
Product development and enhancement..... 33,002 27,397 25,161 24,545 18,493
Selling, general and administrative..... 173,112 170,180 167,590 149,728 116,217
Restructuring charges (2)............... - 91,260 11,515 23,085 -
Income (loss) before extraordinary
item and cumulative effect of a change
in accounting principle................ 58,339 (32,847) (5,182) (2,407) 2,051
Income (loss) applicable to common
stockholders........................... 58,143 (38,106) (6,656) (5,700) -
Average common shares outstanding....... 19,812 17,507 15,496 11,763 11,606
Per common share data:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle:
Primary.............................. $ 2.54 $ (1.93) $ (.43) $ (.52) $ (.09)
Fully diluted........................ $ 2.31 (1.93) (.43) (.52) (.09)
Income (loss) before cumulative effect
of a change in accounting principle:
Primary.............................. $ 2.54 (2.02) (.43) (.48) -
Fully diluted........................ $ 2.31 (2.02) (.43) (.48) -
Net income (loss):
Primary.............................. $ 2.54 (2.18) (.43) (.48) -
Fully diluted........................ $ 2.31 (2.18) (.43) (.48) -
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance sheet data (1):
Working capital......................... $125,159 $ 53,668 $ 37,793 $ 32,402 $ 28,885
Total assets............................ 488,773 402,266 347,484 330,499 319,944
Long-term debt.......................... 115,932 117,532 80,743 84,833 95,990
Other noncurrent liabilities............ 25,018 22,351 13,420 16,085 8,549
Stockholders' equity.................... 175,804 97,697 117,565 108,468 102,093
</TABLE>
15
<PAGE>
________________
(1) In August 1994, Sterling Software, Inc. ("Sterling") acquired American
Business Computer Company ("ABC") in a merger accounted for as a pooling
of interests. Sterling's consolidated financial statements have been
retroactively adjusted to include the results of ABC for all periods
presented. See Note 2 of Notes to Consolidated Financial Statements.
(2) The 1993 restructuring charges reflect the cost of combination of Sterling
and Systems Center, Inc. ("Systems Center") including transaction costs
and charges relating to the elimination of duplicate facilities and
equipment, severance costs and the write-off of costs related to certain
software products not actively marketed by the Company. The 1992
restructuring charges include severance and other costs related to System
Center's reduction in workforce, elimination of duplicate facilities and
the sale of certain AS/400 and UNIX utility products. The 1991
restructuring charges reflect a write-down by Systems Center of certain
purchased computer software costs based on a revaluation of the products
in light of changes in market conditions and increased competition, as
well as severance costs and costs associated with elimination of certain
management positions and duplicate functions resulting from previous
business acquisitions. See Note 3 of Notes to Consolidated Financial
Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MERGER WITH AMERICAN BUSINESS COMPUTER COMPANY
On August 1, 1994, Sterling Software Inc. ("Sterling" or the "Company")
acquired all the outstanding common stock of American Business Computer Company
("ABC"), a Michigan corporation based near Detroit, Michigan, which developed,
marketed and supported UNIX-based electronic data interchange products,
including products that provide sophisticated electronic commerce gateway
functionality. The merger has been accounted for as a pooling of interests and,
accordingly, Sterling's financial statements have been retroactively adjusted to
include the results of ABC for all periods presented.
MERGER WITH SYSTEMS CENTER, INC.
In July 1993, Sterling acquired all of the outstanding common stock and
preferred stock of Systems Center, Inc. ("Systems Center"), a recognized leader
in data communications and systems management software which developed,
marketed and supported systems software products, for approximately $156 million
in a merger (the "SCI Merger") accounted for as a pooling of interests and,
accordingly, Sterling's financial statements were retroactively adjusted to
include the results of Systems Center for all periods presented, including
adjustments for the conforming of accounting policies.
In connection with the SCI Merger, on July 1, 1993, approximately
$2,177,000 of preferred dividends and $699,000 of interest was paid on the
Systems Center Series A 9% Convertible Redeemable Preferred Stock ("Systems
Center Preferred Stock"), which dividends were in arrears. Additionally,
subsequent to the closing of the SCI Merger, Systems Center repaid the amounts
outstanding under its revolving line of credit of approximately $30,337,000. The
Company incurred a non-recurring charge to operations in the fourth quarter of
1993 of $91,260,000 to reflect the combination of Sterling and Systems Center,
including charges related to the elimination of duplicate facilities, severance
costs, the write-off of certain intangibles, property and equipment and certain
transaction costs. Since September 30, 1993, there has been no significant
increase in operating expenses as a result of the SCI Merger. Of the total
restructuring charge of $91,260,000, approximately $21,348,000 was non-cash and
the remaining $69,912,000 required cash outlays. Cash of approximately
$30,700,000 was expended prior to September 30, 1993 and approximately
$26,600,000 was expended in 1994. Future cash expenditures related to the
restructuring, the majority of which relate to the elimination of duplicate
facilities, are accrued and are anticipated to be made from cash generated from
operations.
RESULTS OF OPERATIONS
The results of the International Group are included in the Enterprise
Software Group ("ESG") and Electronic Commerce Group ("ECG") for management's
discussion and analysis of financial condition and results of operations.
1994 Compared to 1993
Total revenue increased $57,279,000, or 14%, in 1994 over 1993 due to
sales increases in all three of the Company's markets. The Company's recurring
revenue includes revenue recurring through annual and multi-year product support
agreements generally having terms ranging from one to three years, fixed term
product lease and rental agreements generally having terms ranging from
month-to-month to year-to-year, short-term electronic commerce services
agreements cancelable upon 30 days notice and multi-year federal contracts
generally having terms ranging from one to five years but, like most federal
contracts, with provisions for termination by the government for convenience or
for failure to obtain funding. Recurring revenue increased $36,521,000, or 14%,
in 1994 over 1993 and represented 63% of total revenue in both 1994 and 1993.
ESG revenue increased $8,370,000, or 5%, on the strength of a $3,705,000, or 4%,
increase in product revenue and a $4,945,000, or 6%, increase in product support
revenue. All four ESG product lines, storage management, applications
management, systems management and VM software, increased revenue in 1994 over
1993. The introduction of a new storage management product, price increases for
certain products and an increase in the installed customer base were the primary
reasons for the ESG revenue growth. ECG revenue increased $42,765,000, or 35%,
on the strength of a $15,223,000, or 40%, increase in network services revenue,
a $20,863,000, or 43%, increase in product revenue and a $6,679,000, or 20%,
increase in product support revenue. The increase in network services revenue
was primarily due to an increase in the customer base primarily in the
hardlines, grocery, retail, manufacturing and healthcare industries, increases
in the network processing volume for existing customers and increases in network
processing fees. The number of network customers grew by approximately 2,075,
placing the total network customers at September 30, 1994, at approximately
9,475. The three ECG product lines, communications software, banking systems and
interchange software, each had revenue growth in product and product support
revenue due to new
17
<PAGE>
customers, certain product price increases and a continuing expansion of the
installed customer base for product support revenue. Federal Systems Group
("FSG") revenue increased $6,177,000, or 6%, in 1994 over 1993, due to higher
contract billings in the NASA Ames, Information Technology and Scientific
Systems divisions.
Revenue in the United States was $350,587,000 in 1994, representing an
increase of $45,589,000, or 15%, over 1993 and revenue from outside of the
United States was $122,806,000 in 1994, representing a $11,690,000, or 11%,
increase over 1993. The Company expects revenue from outside of the United
States to continue to constitute a significant percentage of its revenue. The
net impact of changes in foreign currency rates on revenue from outside of the
United States was not significant.
Total costs and expenses decreased $83,083,000, or 18%, in 1994 over 1993.
In 1993, total costs and expenses included restructuring charges of $91,260,000
for Sterling's restructuring resulting from the acquisition of Systems Center.
The components of the 1993 restructuring charges were the following:
<TABLE>
<CAPTION>
1993
-------------
<S> <C>
Severance and transition costs $26,296,000
Elimination of duplicate facilities and equipment 32,175,000
Write-offs of software products not actively marketed 13,462,000
Transaction costs related to the SCI Merger 15,864,000
Other 3,463,000
-------------
$91,260,000
=============
</TABLE>
Total cost of sales decreased $360,000; cost of sales services increased
commensurate with the increase in services revenue, but the increase was offset
primarily by decreased cost of sales products and product support as a
percentage of the related revenue. The decrease relates to lower costs
associated with technical support personnel as a result of the 1993
restructuring and, to a lesser extent, to decreased depreciation and
amortization in cost of sales products and product support. Cost of sales
includes $25,936,000 and $26,626,000 of depreciation and amortization in 1994
and 1993, respectively. Amortization of capitalized software development costs
increased $5,138,000, or 42%, and amortization of intangible assets and
depreciation of property and equipment increased $46,000, or 1%. These increases
were offset by a decline of $5,561,000, or 68%, in the amortization of purchased
software due to the full amortization of purchased software and the write-off of
certain software in the fourth quarter of 1993 as a result of the SCI Merger,
coupled with a decline of $313,000, or 11%, in the amortization of the excess
costs over net assets of businesses acquired. Product development expense for
1994 of $33,002,000, net of $19,390,000 of amounts 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 $5,605,000, or 20%, compared to 1993 product development expense of
$27,397,000, net of $23,730,000 of amounts capitalized pursuant to FAS No. 86.
The increase is primarily due to the decrease in the capitalization of software
development costs and, to a lesser extent, to increased gross product
development expense. 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 which are in process. Selling, general and
administrative expenses increased $2,932,000, or 2%, which is significantly less
than the 14% increase in revenue, primarily due to decreased headcount as a
result of the reduction in workforce in the fourth quarter of 1993.
Income before income taxes, extraordinary item and cumulative effect of a
change in an accounting principle was $92,601,000 in 1994 as compared to a loss
of $47,830,000 in 1993. Excluding the restructuring charges of $91,260,000 in
1993, income before income taxes, extraordinary item and cumulative effect of a
change in an accounting principle increased $49,171,000 primarily due to higher
operating profits in ESG, up 60%, ECG, up 96%, and FSG, up 15%, in 1994 over
1993, respectively. Also contributing to this increase was a decrease of
$1,091,000, or 14%, in interest expense primarily for interest accrued in 1993
on the unpaid dividends on previously outstanding Systems Center Preferred
Stock.
Pursuant to the SCI Merger, Systems Center Preferred Stock was converted
into the right to receive Common Stock. As a result, preferred stock dividends
declined $808,000 in 1994 over 1993.
1993 Compared to 1992
Total revenue increased $37,718,000, or 10%, in 1993 over 1992 due to
sales increases in all three of the Company's markets. Recurring revenue
increased $25,267,000, or 11%, in 1993 over 1992 and represented 63% of total
revenue in both 1993 and 1992. ESG revenue increased $5,738,000, or 3%, on the
strength of a $2,851,000, or 3%,
18
<PAGE>
increase in product revenue and a $2,308,000, or 3%, increase in product support
revenue. All four ESG product lines, storage management, applications
management, systems management and VM software, increased revenue in 1993 over
1992. Increases in new customers, some product price increases and an increase
in the installed customer base were the primary reasons for the ESG revenue
growth, offset by the impact of generally weaker foreign currency versus the
United States dollar. ECG revenue increased $27,696,000, or 30%, on the strength
of a 41% increase in network services revenue, a 24% increase in product revenue
and a 27% increase in product support revenue. The increase in network services
revenue was due to increases in certain targeted industries, including
healthcare, grocery, hardlines, retail, transportation and manufacturing. The
number of network customers grew by approximately 1,900 placing total network
customers at approximately 7,400. All four ECG divisions, network services,
interchange software, communications software and banking systems, increased
total revenue in 1993 over 1992. The increases were primarily due to new
customers, some product price increases and a continuing expansion of the
installed customer base for product support revenue. FSG revenue increased
$5,650,000, or 6%, in 1993 over 1992. This growth was primarily due to higher
contract billings in the Information Technology Division, offset by lower
contract revenue from the Scientific Systems Division.
Revenue in the United States was $304,998,000 in 1993, representing an
increase of $37,446,000, or 14%, over 1992 and revenue from outside of the
United States was $111,116,000 in 1993, representing only a $272,000, or 1%,
increase over 1992, primarily due to a negative foreign currency impact of
approximately $9,000,000. Revenue from outside of the United States represented
27% of the Company's 1993 revenue.
Total costs and expenses increased $94,084,000, or 26%, primarily due to a
$91,260,000 charge for restructuring of the Company resulting from the SCI
Merger. The non-recurring charge to operations in the fourth quarter of 1993
reflects the combination of Sterling and Systems Center, including charges
related to the elimination of duplicate facilities, severance costs, the write-
off of certain intangibles, property and equipment and certain transaction
costs. Total cost of sales increased $9,513,000, or 6%. Cost of sales includes
$26,626,000 and $25,657,000 of depreciation and amortization in 1993 and 1992,
respectively. Amortization of capitalized software development costs increased
$1,061,000, or 10%; amortization of the excess costs over net asset of
businesses acquired increased $231,000, or 9%; and amortization of intangible
assets and depreciation of property and equipment increased $179,000, or 6%.
These increases were offset by a decline of $502,000, or 6%, in the amortization
of purchased software due to the full amortization of certain purchased software
and the write-off of certain software products which will not be actively
marketed by the Company as a result of the SCI Merger. Product development
expense for 1993 was $27,397,000, net of $23,730,000 of amounts capitalized
pursuant to FAS No. 86. Product development expense for 1992 was $25,161,000,
net of $24,617,000 of amounts capitalized pursuant to FAS No. 86. Gross product
development costs continued to grow reflecting the Company's development
activities in ESG and ECG. Selling, general and administrative expenses
increased nominally in 1993 over 1992 reflecting reduced costs after the
Company's restructuring due to the SCI Merger which eliminated duplicate
corporate overhead functions, duplicate facilities and streamlined the sales and
marketing functions in the fourth quarter of 1993 and Systems Center's 1992
restructuring which resulted in a reduced workforce, the elimination of
duplicate facilities and the sale of certain assets associated with two product
lines.
Total costs and expenses include restructuring charges of $91,260,000 for
Sterling's restructuring in 1993, as previously discussed, and $11,515,000 for
Systems Center's restructuring in 1992. The components of the restructuring
charges for 1993 and 1992 were the following:
<TABLE>
<CAPTION>
1993 1992
------------- -------------
<S> <C> <C>
Severance and transition costs $26,296,000 $ 3,500,000
Elimination of duplicate facilities and equipment 32,175,000 2,827,000
Write-offs of software products not actively marketed 13,462,000
Transaction costs related to the SCI Merger 15,864,000
Costs associated with the sale of two product lines 5,188,000
Other 3,463,000
------------- -------------
$91,260,000 $11,515,000
============= =============
</TABLE>
Restructuring charges in 1992 included severance and other costs
associated with Systems Center's reduction in workforce, elimination of
duplicate facilities and the sale of certain assets related to its AS/400 and
UNIX utility products. The Company did not incur any additional material
restructuring charges in 1993 relating to the 1992 restructuring of Systems
Center.
19
<PAGE>
The loss before income taxes, extraordinary item and cumulative effect of a
change in an accounting principle was $47,830,000 in 1993 as compared to income
of $5,385,000 in 1992. Excluding the restructuring charges of $91,260,000 in
1993 and $11,515,000 in 1992, income before income taxes, extraordinary item and
cumulative effect of a change in an accounting principle increased $26,530,000
primarily due to higher operating profits in ESG, up 22%, ECG, up 129%, and FSG,
up 7%, in 1993 over 1992, respectively. The 129% increase in ECG operating
profit was due primarily to increases in the network services division, as a
result of better margins and higher processing volume as compared to the prior
year, and increases in the communications software division's revenue, without
commensurate cost increases due to cost reductions implemented in the 1992 and
1993 restructurings. Also contributing to this increase was an increase of
$2,656,000 in investment income earned on higher average cash balances available
for investment resulting from the net cash generated from issuance of 5 3/4%
Convertible Subordinated Debentures ("5 3/4% Debentures"). See "Liquidity and
Capital Resources" below.
During 1993, the Company called for redemption its 8% Convertible Senior
Subordinated Debentures ("8% Debentures") at a price equal to 103.2% of the
principal amount. Holders of $13,739,000 principal amount of 8% Debentures
elected to convert their 8% Debentures into 636,054 shares of Common Stock. The
redemption of the remaining 8% Debentures resulted in an extraordinary loss of
$1,481,000, net of applicable income taxes of $987,000. During 1992, the
Company purchased $4,523,000 principal amount of 8% Debentures in open market
transactions resulting in no significant gain or loss.
During 1993, the Company adopted Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS No.
106"), which requires that the expected cost of postretirement benefits be
charged to expense during the years the employee renders service. The effect of
adopting the new standard as of October 1, 1992, was a charge of $2,774,000,
representing the accumulated benefit obligation existing at that date, net of
related income tax benefit of $1,813,000. This charge is shown as the
cumulative effect of a change in accounting principle. In addition,
postretirement benefit costs for 1993 increased by $1,211,000 as a result of the
adoption of FAS No. 106.
Pursuant to the SCI Merger, Systems Center Preferred Stock was converted into
the right to receive Common Stock. As a result, preferred stock dividends
declined $470,000 in 1993 over 1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$125,159,000 of working capital at September 30, 1994, which includes
$101,893,000 of cash and equivalents and $41,847,000 of marketable securities.
Net cash flows from operations increased $58,638,000 primarily due to higher
operating profits. The increase in accounts and notes receivable is due to
record fourth quarter sales. The decrease in accounts payable and accrued
liabilities is primarily due to the payment of approximately $26,600,000 during
1994 of restructuring charges related to the SCI Merger accrued in the fourth
quarter of 1993. The increase in current and long-term deferred revenue is due
to increased sales volume and higher levels of fixed term licenses sold with
product support terms of one to five years. Cash flows from operations and from
the proceeds of stock options and warrants exercised during 1994 were used to
fund operations and capital expenditures, including software additions.
Software expenditures of $21,392,000, the majority of which were costs
capitalized pursuant to FAS No. 86, were made during 1994, compared to
$24,685,000 during 1993. ECG incurred $12,384,000 of the total software
expenditures during 1994, primarily for enhancements of communications software
products, interchange software products and costs to add new network services
features. ESG incurred $9,008,000 of the total software expenditures during
1994, primarily for the development of systems management, applications
development and storage management products and enhancements. Property and
equipment purchases of $16,444,000 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 $13,103,000 in 1993.
Proceeds from the exercise of the Company's stock options and warrants were
$21,906,000 in 1994 and $6,490,000 in 1993.
In February 1993, the Company issued $115,000,000 principal amount of 5 3/4%
Debentures. The 5 3/4% Debentures are convertible into Common Stock at any time
prior to maturity at a conversion price of $28.35. This transaction resulted in
$111,450,000 of net proceeds after transaction costs.
20
<PAGE>
Also, in February 1993, the Company called for redemption its 8%
Debentures at a price equal to 103.2% of the principal amount. At that time,
holders of the 8% Debentures had the option to convert their holdings into
shares of Common Stock or redeem the debentures for cash. Holders of $13,739,000
principal amount of 8% Debentures elected to convert their 8% Debentures into
636,054 shares of Common Stock. The remaining $38,894,000 principal amount of 8%
Debentures was redeemed on March 4, 1993, for $40,165,000, including interest of
$26,000. The redemption of the 8% Debentures resulted in an extraordinary loss
of $1,481,000, net of applicable income tax benefit of $987,000. The Company has
used the remaining proceeds from the issuance of the 5 3/4% Debentures for
working capital and other general corporate purposes.
At September 30, 1994, after the utilization of $4.6 million for standby
letters of credit, $30.4 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 convert to a term
loan with eight equal quarterly payments. The Company is currently negotiating
an extension of the conversion date of the Loan Agreement to March 31, 1995. The
Company is also obtaining proposals for a replacement credit line from its lead
lending bank as well as other lenders which will meet its capital requirements
of the future.
Certain of the Company's foreign subsidiaries have separate lines of
credit available for foreign exchange exposure management and working capital
requirements. These lines of credit are guaranteed by the U.S. parent company.
At September 30, 1994, $6.7 million was outstanding pursuant to foreign lines of
credit.
In July 1993, Systems Center repaid approximately $30,337,000 outstanding
under its revolving line of credit. Additionally, in connection with the SCI
Merger, approximately $2,177,000 of preferred dividends and approximately
$699,000 of interest was paid on the Systems Center Preferred Stock, which
dividends were in arrears.
At September 30, 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 short-term investments 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.
MERGER WITH KNOWLEDGEWARE, INC.
On November 30, 1994, the Company consummated the acquisition of
KnowledgeWare, Inc. ("KnowledgeWare"), for approximately $100 million, in a
stock-for-stock acquisition. KnowledgeWare, a leading provider of applications
development software and services, is based in Atlanta, Georgia and had revenue
of $132.5 million for its fiscal year ended June 30, 1994. The acquisition (the
"KWI Merger") was completed pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger dated as of August 31, 1994 (as amended, the
"Merger Agreement"). In connection with the KWI Merger, which was accounted for
as a purchase, the Company issued approximately 2,421,000 shares of Common Stock
and reserved approximately 257,700 shares of the Company's Common Stock for
issuance upon exercise of KnowledgeWare's options and warrants. Of the 2,421,000
shares of Common Stock issued, approximately 484,200 shares were placed in
escrow (the "Escrowed Shares") to cover certain losses that may result in
connection with any pending or threatened litigation, action, claim, proceeding,
dispute or investigation (including amounts paid in settlement) to which
Sterling is entitled to indemnification pursuant to the terms of the Merger
Agreement.
In a separate agreement, effective August 31, 1994, the Company acquired
all of the interest of IBM Credit Corporation ("IBM Credit") under the Revolving
Loan and Security Agreement with KnowledgeWare (the "KWI Loan Agreement") by
paying to IBM Credit $15.1 million, which was equal to all amounts owed
thereunder by KnowledgeWare. Concurrently, the Company and KnowledgeWare
modified the terms of the KWI Loan Agreement and an additional $3 million was
advanced to KnowledgeWare, resulting in total borrowings pursuant to the KWI
Loan Agreement of $18,266,000 at September 30, 1994, including accrued interest.
Since August 30, 1994, a number of lawsuits have been filed against
KnowledgeWare and certain of its officers alleging violations of securities
laws. Sterling cannot presently estimate the amount of losses that will result
in connection with such actions because such actions have only recently been
filed and discovery has just commenced in some matters and has not commenced in
others. If these actions result in losses, claims, liabilities, judgments, costs
or expenses (including amounts
21
<PAGE>
paid in settlement) to KnowledgeWare or Sterling, such losses, claims,
liabilities, judgments, costs or expenses will result in a claim for
indemnification to be satisfied from the Escrowed Shares. In the event that all
of the Escrowed Shares are used to cover losses, claims, liabilities, judgments,
costs or expenses incurred by KnowledgeWare or Sterling, no Escrowed Shares will
be distributed to the former KnowledgeWare common stockholders. If the ultimate
loss from such actions exceeds the proceeds from applicable insurance and the
value of the Escrowed Shares, such excess will be included in Sterling's cost of
acquiring KnowledgeWare to the extent such excess can be reasonably estimated
within one year of the date of acquisition.
The Company believes that the KWI Merger represents an opportunity to
create one of the leading software and services companies in the world, which
will be able to provide its customers with a broad range of products and
excellent customer support and to assist their movement toward enterprise-wide
computing. Specifically, the Company believes that the combined company will
have a greatly expanded presence in the visual application software and services
market, including integrated computer-aided software engineering and application
development tools and products for client/server, midrange and mainframe
computing environments. Additionally, Sterling will continue to be a leading
provider of electronic commerce software and services in North America, to
provide a broad offering of enterprise-wide systems management software tools
and to have a strong presence in the complex federal systems market. The
combined company is expected to be a leading vendor of application development
tools and will have a substantial worldwide customer base, a broader global
distribution network, a workforce of approximately 3,500 skilled employees and
an expected high level of recurring revenue, all of which Sterling believes will
position the combined company for significant future growth.
Substantial costs are expected to occur as a result of the combination of
the two companies, including costs with respect to the elimination of duplicate
facilities, severance costs related to the termination of certain employees,
transaction costs, and write-off of costs related to certain software products
which will not be actively marketed by the combined company. Such costs
directly related to the acquisition of KnowledgeWare are expected to be
approximately $25 to $30 million and are included in the aggregate cost of the
KWI Merger. Such costs related to Sterling are expected to be approximately $12
to $18 million and are expected to be charged to the results of operations of
the combined company in the first quarter of 1995. In addition, the results of
operations for the first quarter of 1995 will include approximately $46 to $55
million of purchased research and development costs, which will be charged to
expense in accordance with purchase accounting.
Because the enterprise software industry is highly competitive and because
of the inherent uncertainties associated with merging two large companies, there
can be no assurance that the combined entity will be able to realize the
economics of scale and operating efficiencies that Sterling currently expects to
realize as a result of the consolidation of its operations with KnowledgeWare's.
Furthermore, any difficulties encountered in the transition process could have
an adverse impact on the revenues and operating results of the combined company.
OTHER MATTERS
Demand for many of the Company's products tends to improve with increased
inflation as customers strive to increase employee productivity and reduce
costs. However, the effect of inflation on the Company's relatively labor
intensive cost structure could adversely affect its results of operations to the
extent the Company might not be able to recover increased operating costs
through increased product licensing and prices.
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occur. Unrealized translation
gains and losses are included as an adjustment to retained earnings. The
Company has mitigated a portion of its currency exposure through decentralized
sales, marketing and support operations and through remote development
facilities, in which all costs are local currency based. When necessary, the
Company may also hedge to prevent material exposure.
The Company maintains a strategy of acquiring businesses and products that
fill strategic market niches within the business groups. This acquisition
strategy contributes in part to the Company's growth in revenue and operating
profit before restructuring charges. The impact of future acquisitions on
continued growth in revenue and operating profit cannot presently be determined.
In November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 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
22
<PAGE>
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 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.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors............................................. 25
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1994 and 1993................ 27
Consolidated Statements of Operations for the Years Ended
September 30, 1994, 1993 and 1992...................................... 28
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1994, 1993 and 1992...................................... 29
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1994, 1993 and 1992...................................... 30
Notes to Consolidated Financial Statements................................ 31
</TABLE>
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling Software, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Software, Inc. (the "Company") as of September 30, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Systems Center, Inc.,
for the year ended September 30, 1992. As discussed in Note 2, Systems Center,
Inc. was acquired by the Company in 1993 in a merger accounted for as a pooling
of interests. The financial statements of Systems Center, Inc. reflect total
revenues of $112,643,121 for the year ended September 30, 1992. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Systems Center,
Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sterling Software, Inc. at September 30,
1994 and 1993, and the consolidated results of its operations and its cash flows
for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
December 1, 1994
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Systems Center, Inc.:
We have audited the consolidated balance sheet of Systems Center, Inc. (a
Delaware corporation), and subsidiaries ("Systems Center") as of September 30,
1992, and the related statements of operations, cash flows and changes in
shareholders' equity for the year then ended (which are not presented separately
herein). These financial statements are the responsibility of Systems Center's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 Systems Center's previously issued financial statements, the effect of
adopting FAS 109 "Accounting for Income Taxes," was reflected by recording the
cumulative effect of the change as of January 1, 1992. As discussed in Note 19
of Notes to Consolidated Financial Statements, on July 1, 1993, Systems Center
consummated a merger with a wholly owned subsidiary of Sterling Software, Inc.
("Sterling"), in a transaction accounted for as a pooling of interests. In
order to conform to the accounting policies of the combined entity, the method
of reflecting the adoption of FAS 109 has been changed. The financial
statements have been restated and the adoption of FAS 109 has now been presented
on a retroactive basis to give effect to the change in each year presented.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Systems Center, Inc., and
subsidiaries as of September 30, 1992, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As explained in Notes 1 and 12 of Notes to Consolidated Financial Statements,
the Company has given retroactive effect to the change in accounting for income
taxes.
As explained in Note 1 of Notes to Consolidated Financial Statements, the
Company has given retroactive effect to the change in accounting for revenue.
As explained in Note 1 of Notes to Consolidated Financial Statements, the
Company has given retroactive effect to the change from the direct method of
reporting cash flows from operating activities to the indirect method of
reporting cash flows from operating activities.
Arthur Andersen LLP
Washington, D.C.,
June 18, 1993 (except with
respect to the matter
discussed in Note 19 as to
which the date is July 1, 1993)
26
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1994 1993
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $101,893 $ 30,199
Marketable securities (Note 7)................................................... 41,847 51,354
Accounts and notes receivable, net (Note 8)...................................... 132,166 112,955
Deferred income taxes (Note 12).................................................. 11,294 11,045
Prepaid expenses and other current assets........................................ 9,978 12,801
----------- ------------
Total current assets........................................................... 297,178 218,354
Property and equipment, net (Note 9)............................................... 33,526 27,248
Computer software, net of accumulated amortization of $93,356 in 1994 and
$75,089 in 1993 (Note 1).......................................................... 61,304 60,494
Excess cost over net assets acquired, net of accumulated amortization of
$18,753 in 1994 and $16,188 in 1993............................................... 54,504 54,273
Noncurrent deferred income taxes (Note 12)......................................... 2,216 19,958
Note and accrued interest receivable from KnowledgeWare, Inc. (Note 2)............. 18,266
Other assets (Notes 1 and 7)....................................................... 21,779 21,939
----------- ------------
$488,773 $402,266
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 10)...................................... $ 7,257 $ 4,065
Income taxes payable............................................................. 10,945
Accounts payable and accrued liabilities (Note 11)............................... 76,219 89,209
Deferred revenue................................................................. 77,598 71,412
----------- ------------
Total current liabilities...................................................... 172,019 164,686
Long-term debt (Note 10)........................................................... 115,932 117,532
Other noncurrent liabilities....................................................... 25,018 22,351
Contingencies and commitments (Notes 4, 13 and 17).................................
Stockholders' equity (Notes 14 through 16):
Preferred stock, $.10 par value; 10,000,000 shares authorized; 200,000 shares
issued and outstanding in 1994 and 1993, respectively; aggregate liquidation
preference of $1,786 in 1994 and 1993.......................................... 20 20
Common stock, $.10 par value; 50,000,000 shares authorized; 22,378,000 and
19,917,000 shares issued in 1994 and 1993, respectively........................ 2,238 1,992
Additional paid-in capital....................................................... 192,064 169,825
Retained earnings (deficit)...................................................... 572 (54,582)
Less treasury stock, at cost; 1,793,000 and 1,837,000 shares in 1994 and 1993,
respectively................................................................... (19,090) (19,558)
----------- ------------
Total stockholders' equity..................................................... 175,804 97,697
----------- ------------
$488,773 $402,266
=========== ============
</TABLE>
See accompanying notes.
27
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1994, 1993 and 1992
(in thousands, except per share information)
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Products.................................................. $178,233 $153,776 $142,245
Product support........................................... 133,752 122,284 113,032
Services.................................................. 161,408 140,054 123,119
------------ ----------- ------------
473,393 416,114 378,396
Costs and expenses:
Cost of sales:
Products and product support............................ 64,123 66,972 67,348
Services................................................ 107,622 105,133 95,244
------------ ----------- ------------
171,745 172,105 162,592
Product development and enhancement....................... 33,002 27,397 25,161
Selling, general and administrative....................... 173,112 170,180 167,590
Restructuring charges (Note 3)............................ 91,260 11,515
------------ ------------ ------------
377,859 460,942 366,858
------------ ------------ ------------
Income (loss) before other income (expense), income taxes,
extraordinary item and cumulative effect of a change in
accounting principle..................................... 95,534 (44,828) 11,538
Other income (expense):
Interest expense.......................................... (6,658) (7,749) (7,643)
Investment income......................................... 1,519 4,442 1,786
Other..................................................... 2,206 305 (296)
------------ ------------ -----------
(2,933) (3,002) (6,153)
------------ ------------ -------------
Income (loss) before income taxes, extraordinary item and
cumulative effect of a change in accounting principle..... 92,601 (47,830) 5,385
Provision (benefit) for income taxes (Note 12).............. 34,262 (14,983) 10,567
------------ ------------ -------------
Income (loss) before extraordinary item and cumulative 58,339 (32,847) (5,182)
effect of a change in accounting principle
Extraordinary item - loss on early extinguishment of debt,
net of applicable income taxes (Note 10).................. (1,481)
Cumulative effect of a change in accounting principle, net
of applicable income tax benefit (Note 16)................ (2,774)
------------ ------------ -------------
Net income (loss)........................................... 58,339 (37,102) (5,182)
Preferred stock dividends................................... 196 1,004 1,474
------------ ------------ -------------
Income (loss) applicable to common stockholders............. $ 58,143 $(38,106) $ (6,656)
============ ============ =============
Income (loss) per common share:
Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle
Primary................................................. $ 2.54 $ (1.93) $ (.43)
============ ============ =============
Fully diluted........................................... $ 2.31 $ (1.93) $ (.43)
============ ============ =============
Income (loss) before cumulative effect of a change in
accounting principle
Primary................................................. $ 2.54 $ (2.02) $ (.43)
============ ============ =============
Fully diluted........................................... $ 2.31 $ (2.02) $ (.43)
============ ============ =============
Net income (loss)
Primary................................................. $ 2.54 $ (2.18) $ (.43)
============ ============ =============
Fully diluted........................................... $ 2.31 $ (2.18) $ (.43)
============ ============ =============
</TABLE>
See accompanying notes.
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
----------------- ----------------- -----------------
Number Number Additional Retained Number Total
of Par of Par Paid-in Earnings of Stockholders'
Shares Value Shares Value Capital (Deficit) Shares Cost Equity
-------- ------- --------- -------- ------------ ---------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1991... 651 $ 65 16,348 $1,635 $151,412 $ (6,458) 3,586 $(38,186) $108,468
Adjustment for pooling of
interests with American
Business Computer Company
(Note 2)..................... 307 31 (31)
Net loss..................... (5,182) (5,182)
Preferred stock dividends.... (1,474) (1,474)
Exchange of common stock for
exchangeable preferred
stock...................... (414) (41) (16,137) (1,553) 16,540 362
Redemption of exchangeable
preferred stock............. (37) (4) (1,836) (1,840)
Issuance of common stock
pursuant to option, warrant
and employee benefit plans.. 1,982 198 13,295 13,493
Issuance of common stock to
retirement plan (Note 16)... 192 (36) 380 572
Income tax benefit from
exercise of stock options
and warrants................ 1,872 1,872
Issuance of common stock for
business acquisition........ 531 (113) 1,206 1,737
Other........................ 120 (563) (443)
-------- ------- --------- -------- ------------ ---------- -------- --------- --------------
Balance at September 30, 1992... 200 20 18,637 1,864 149,418 (13,677) 1,884 (20,060) 117,565
Net loss..................... (37,102) (37,102)
Preferred stock dividends.... (1,004) (1,004)
Issuance of common stock
pursuant to stock option,
warrant and employee
benefit plans............... 644 64 6,426 6,490
Issuance of common stock
pursuant to conversion of
8% debentures (Note 10)..... 636 64 13,675 13,739
Issuance of common stock to
retirement plan (Note 16)... 290 (44) 464 754
Other........................ 16 (2,799) (3) 38 (2,745)
-------- ------- --------- -------- ------------ ---------- -------- --------- --------------
Balance at September 30, 1993... 200 20 19,917 1,992 169,825 (54,582) 1,837 (19,558) 97,697
Net income................... 58,339 58,339
Preferred stock dividends.... (196) (196)
Issuance of common stock
pursuant to stock options
and warrants................. 2,461 246 21,660 21,906
Issuance of common stock to
retirement plan (Note 16).... 544 (41) 434 978
Other......................... 35 (2,989) (3) 34 (2,920)
-------- ------- --------- -------- ------------ ---------- -------- --------- --------------
Balance at September 30, 1994... 200 $ 20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804
======== ======= ========= ======== ============ ========== ======== ========= ==============
</TABLE>
See accompanying notes.
29
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Operating activities:
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle....................................... $ 58,339 $(32,847) $(5,182)
Adjustments to reconcile income (loss) before extraordinary item and
cumulative effect of a change in accounting principle to net cash
provided by operating activities:
Depreciation and amortization.................................... 34,302 32,204 31,285
Provision for losses on accounts receivable...................... 5,442 6,200 5,757
Provision (benefit) for deferred income taxes.................... 17,493 (15,514) 8,101
Write-down of property and equipment and other assets............ 7,886
Write-down of purchased and capitalized computer software costs.. 13,462 4,580
Changes in operating assets and liabilities, net of effects of
business acquisitions:
Increase in accounts and notes receivable.................... (34,279) (13,204) (20,566)
Increase in prepaid expenses and other assets................ (3,143) (5,080) (5,238)
Increase (decrease) in accounts payable, accrued liabilities
and income taxes payable................................... (1,157) 34,846 11,252
Increase in deferred revenue................................. 11,841 2,006 11,201
Other........................................................ (142) 99 864
--------- --------- --------
Net cash provided by operating activities.................. 88,696 30,058 42,054
Investing activities:
Purchases of property and equipment.................................... (16,444) (13,103) (9,812)
Purchases and capitalized cost of development of computer software..... (21,392) (24,685) (26,835)
Business acquisitions.................................................. (425) (700) (3,054)
Purchases of investments............................................... (95,940) (70,017)
Proceeds from sales of investments..................................... 102,518 15,139
Other.................................................................. 2,235 2,925 905
--------- --------- --------
Net cash used in investing activities...................... (29,448) (90,441) (38,796)
Financing activities:
Preferred stock dividends.............................................. (196) (2,374) (263)
Exchange and redemption of exchangeable preferred stock................ (1,989)
Retirement and redemption of debt and capital lease obligations........ (24,535) (81,752) (19,046)
Proceeds from issuance of debt, net of issuance costs.................. 26,172 122,930 15,726
Acquisition of KnowledgeWare, Inc. loan from IBM Credit Corporation
and advances to KnowledgeWare, Inc. (Note 2)......................... (18,133)
Proceeds from sales of installment and lease contracts receivable...... 10,061 2,985 1,187
Proceeds from issuance of common stock pursuant to stock option,
warrant and employee benefit plans................................... 21,906 6,490 13,493
Other.................................................................. (3,264) 1,170 1,306
--------- --------- --------
Net cash provided by financing activities.................. 12,011 49,449 10,414
Effect of foreign currency exchange rate changes on cash................. 435 (907) 326
--------- --------- --------
Increase (decrease) in cash and equivalents.............................. 71,694 (11,841) 13,998
Cash and cash equivalents at beginning of year........................... 30,199 42,040 28,042
--------- --------- --------
Cash and cash equivalents at end of year................................. $101,893 $ 30,199 $ 42,040
========= ========= ========
Supplemental cash flow information:
Interest paid.......................................................... $ 7,339 $ 8,132 $ 7,047
========= ========= ========
Income taxes paid...................................................... $ 4,259 $ 3,023 $ 6,081
========= ========= ========
Income tax refunds..................................................... $ 1,285 $ 547 $ 1,980
========= ========= ========
</TABLE>
See accompanying notes.
30
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994, 1993 and 1992
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software, Inc. and its wholly owned subsidiaries ("Sterling" or the "Company")
(See Note 2) after elimination of all significant intercompany balances and
transactions. Certain amounts for periods ended prior to September 30, 1994,
have been reclassified to conform to the current year presentation.
Revenue
Revenue from license fees, including leasing transactions, for standard
software products is recognized when the software is delivered, provided no
significant future vendor obligations exist and collection is probable. Service
revenue and revenue from products involving installation or other services are
recognized as the services are performed.
Product support contracts entitle the customer to telephone support, bug
fixing and the right to receive software updates as they are released. Revenue
from product support contracts, including product support included in initial
license fees, is recognized ratably over the contract period. All significant
costs and expenses associated with product support contracts are expensed
ratably over the contract period.
If software product transactions include the right to receive future
products, a portion of the software product revenue is deferred and recognized
as products are delivered. Contract accounting is applied for sales of software
products requiring significant modification or customization, such that revenue
is recognized only when the modification or customization is complete.
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.
Revenue from professional services provided to the federal government
under multi-year contracts is recognized as the services are performed. Revenue
for services under long-term contracts is recognized using the percentage-of-
completion method of accounting. Losses on long-term contracts are recognized
when the current estimate of total contract costs indicates a loss on a contract
is probable.
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." Unamortized
software development costs of $56,713,000 and $53,829,000 are included in
"Computer software, net" at September 30, 1994 and 1993, respectively.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to twenty years.
Computer software costs are amortized on a product-by-product basis using the
greater of the amount computed by taking the ratio of current year net revenue
to estimated future net revenue or the amount computed by the straight-line
method over periods ranging from three to seven years. 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 five to ten years.
31
<PAGE>
Depreciation and amortization consists of the following for the years
ended September 30, 1994, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Property and equipment.................. $10,850 $ 8,080 $ 8,140
Purchased computer software............. 2,579 8,140 8,642
Capitalized computer software
development costs...................... 17,365 12,227 11,166
Excess costs over net assets of
businesses acquired.................... 2,531 2,844 2,613
Intangible assets....................... 977 913 724
------- ------- -------
$34,302 $32,204 $31,285
======= ======= =======
</TABLE>
Income Taxes
In the fourth quarter of 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("FAS No. 109"),
which requires the use of the asset and liability method of accounting for
income taxes, and restated prior years' financial statements. Under the asset
and liability method, a deferred tax asset or liability is recognized for
estimated future tax effects attributable to temporary differences and
carryforwards. The measurement of deferred income tax assets is adjusted by a
valuation allowance, if necessary, to recognize future tax benefit only to the
extent, based on available evidence, it is more likely than not it will be
realized. The effect on deferred taxes of a change in income tax rates is
recognized in the period that includes the enactment date.
Earnings Per Common Share
Primary earnings per common share data is computed using the weighted
average number of common shares and common share equivalents represented by
stock options and warrants, if such stock options and warrants have a dilutive
effect in the aggregate. For purposes of this computation, income applicable to
common stockholders is adjusted to reflect use of net cash proceeds on the
assumed exercise of stock options and warrants to purchase outstanding long-term
debt or government securities, if such stock options and warrants have a
dilutive effect.
Fully diluted earnings per common share computations assume, in addition,
the conversion of the Company's 5 3/4% Convertible Subordinated Debentures
("5 3/4% Debentures") in 1994 computations, the Company's 8% Convertible Senior
Subordinated Debentures ("8% Debentures") and 5 3/4% Debentures in 1993
computations and the 8% Debentures in 1992 computations, if such conversions
have a dilutive effect. Upon assumed conversion of the convertible debentures,
income applicable to common stockholders is adjusted to reflect the elimination
of after tax interest expense related to such debentures. For purposes of this
computation, income applicable to common stockholders is also adjusted to
reflect use of net cash proceeds on the assumed exercise of stock options and
warrants to purchase outstanding long-term debt or government securities, if
such stock options and warrants have a dilutive effect.
For the years ended September 30, 1993 and 1992, neither the common share
equivalents nor the assumed conversion of the debentures had a dilutive effect
on the loss per share calculations. Accordingly, the loss per common share
calculations for such periods are based on the weighted average number of common
shares outstanding during each year. The number of shares used in the
computations of loss per common share for the years ended September 30, 1993 and
1992, was 17,506,593 and 15,496,438, respectively. The numbers of shares used in
the computations of primary and fully diluted income per common share for the
year ended September 30, 1994, were 22,922,584 and 26,979,021, respectively.
Foreign Currency Translation
The assets and liabilities of consolidated wholly owned 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 these
operations are translated at average exchange rates prevailing during the month
the transactions occur. Unrealized translation gains and losses are included as
an adjustment to retained earnings.
32
<PAGE>
Cash and Equivalents
Cash equivalents consist primarily of highly liquid investments in
repurchase agreements backed by U.S. Treasury securities and investment-grade
commercial paper of various issuers, with maturities of three months or less
when purchased. The carrying amount reported in the consolidated balance sheet
for cash and cash equivalents approximates its fair value.
Marketable Securities and Other Investments
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, 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. The fair values for marketable securities are based on quoted market
prices. Effective September 30, 1993, the Company adopted Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS No. 115"). Adoption of FAS No. 115 did not have a
significant effect on the Company's financial position at September 30, 1993.
All marketable securities and long-term investments are classified as
available-for-sale securities under FAS No. 115. Unrealized holding gains and
losses on securities available-for-sale are recorded as a component of
stockholders' equity, net of tax effect. The amortized cost of debt securities
in this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in values judged to be other-than-
temporary on available-for-sale securities are included in investment income.
Other Assets
Included in "other assets" in the consolidated balance sheet are
noncurrent marketable securities (see Note 7) debt issuance costs related to the
issuance of the 5 3/4% debentures (see Note 10), long-term deposits, certain
intangibles (see Note 1) and other noncurrent assets. Other assets also includes
$430,000 and $597,000 at September 30, 1994 and 1993, respectively, of
noncurrent notes receivable from officers.
2. BUSINESS COMBINATIONS
In August 1994, the Company acquired all of the outstanding common stock
of American Business Computer Company ("ABC"), a Michigan corporation based near
Detroit, Michigan, which developed, marketed and supported UNIX-based electronic
data interchange products, including products that provide sophisticated
electronic commerce gateway functionality, in a merger (the "ABC Merger")
accounted for as a pooling of interests. The Company issued approximately
306,500 shares of the Company's $0.10 par value Common Stock (the "Common
Stock") as a result of the transaction.
The ABC Merger was accounted for as a pooling of interests. Accordingly,
the merger of the equity interests has been given retroactive effect and the
Company's financial statements for periods prior to the ABC Merger represent the
combined financial statements of the previously separate entities adjusted to
conform ABC's fiscal years to those used by the Company.
Separate and combined results of Sterling and ABC are as follows (in
thousands):
<TABLE>
<CAPTION>
Sterling ABC Combined
----------- ------- ----------
<S> <C> <C> <C>
Nine months ended June 30, 1994
(unaudited)
Revenue................................. $338,126 $3,915 $342,041
Net income (loss)....................... 39,526 (173) 39,353
Income (loss) applicable to common
stockholders........................... 39,379 (173) 39,206
Year ended September 30, 1993
Revenue................................. 411,795 4,319 416,114
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle................... (33,350) 503 (32,847)
Net income (loss)....................... (37,605) 503 (37,102)
Income (loss) applicable to common
stockholders........................... (38,609) 503 (38,106)
Year ended September 30, 1992
Revenue................................. 378,056 340 378,396
Net loss................................ (5,162) (20) (5,182)
Loss applicable to common stockholders.. (6,636) (20) (6,656)
</TABLE>
33
<PAGE>
In September 1994, the Company acquired the division of its Italian
distributor, Gruppo Formula S.P.A., that had the marketing rights to certain
Sterling's products. The total cost of the acquisition was approximately $2.7
million and was accounted for as a purchase.
In July 1993, the Company acquired all of the outstanding common stock and
preferred stock of Systems Center, Inc. ("Systems Center"), a recognized leader
in data communications and systems management software for approximately $156
million in a merger (the "SCI Merger") accounted for as a pooling of interests
and, accordingly, the merger of the equity interests was given retroactive
effect. The Company's financial statements for periods prior to the SCI 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 the Company.
On November 30, 1994, the Company consummated the acquisition of
KnowledgeWare, Inc. ("KnowledgeWare") for approximately $100 million, in a
stock-for-stock acquisition. KnowledgeWare, a leading provider of applications
development software and services, is based in Atlanta, Georgia and had revenue
of $132.5 million for its fiscal year ended June 30, 1994. The acquisition (the
"KWI Merger") was completed pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger dated as of August 31, 1994 (as amended, the
"Merger Agreement"). In connection with the acquisition, which was accounted for
as a purchase, the Company issued approximately 2,421,000 shares of Common Stock
and reserved approximately 257,700 shares of the Company's Common Stock for
issuance upon exercise of KnowledgeWare's options and warrants. Of the 2,421,000
shares of Common Stock issued, approximately 484,200 shares were placed in
escrow (the "Escrowed Shares") to cover certain losses that may result in
connection with any pending or threatened litigation, action, claim, proceeding,
dispute or investigation (including amounts paid in settlement) to which
Sterling is entitled to indemnification pursuant to the terms of the Merger
Agreement.
In a separate agreement, effective August 31, 1994, the Company acquired
all of the interest of IBM Credit Corporation ("IBM Credit") under the Revolving
Loan and Security Agreement with KnowledgeWare (the "KWI Loan Agreement") by
paying to IBM Credit $15.1 million, which was equal to all amounts owed
thereunder by KnowledgeWare. Concurrently, the Company and KnowledgeWare
modified the terms of the KWI Loan Agreement and an additional $3 million was
advanced to KnowledgeWare, resulting in total borrowings pursuant to the KWI
Loan Agreement of $18,266,000 at September 30, 1994, including accrued interest.
Substantial costs are expected to occur as a result of the combination of
the two companies, including costs with respect to the elimination of duplicate
facilities, severance costs related to the termination of certain employees,
transaction costs, and write-off of costs related to certain software products
which will not be actively marketed by the combined company. Such costs directly
related to the acquisition of KnowledgeWare are expected to be approximately $25
to $30 million and are included in the aggregate cost of the KWI Merger. Such
costs related to Sterling are expected to be approximately $12 to $18 million
and are expected to be charged to the results of operations of the combined
company in the first quarter of 1995. In addition, the results of operations for
the first quarter of 1995 will include approximately $46 to $55 million of
purchased research and development costs, which will be charged to expense in
accordance with purchase accounting.
34
<PAGE>
Since August 30, 1994, a number of lawsuits have been filed against
KnowledgeWare and certain of its officers alleging violations of securities
laws. Sterling cannot presently estimate the amount of losses that will result
in connection with such actions because such actions have only recently been
filed and discovery has just commenced in some matters and has not commenced in
others. If these actions result in losses, claims, liabilities, judgments, costs
or expenses (including amounts paid in settlement) to KnowledgeWare or Sterling,
such losses, claims, liabilities, judgments, costs or expenses will result in a
claim for indemnification to be satisfied from the Escrowed Shares. In the event
that all of the Escrowed Shares are used to cover losses, claims, liabilities,
judgments, costs or expenses incurred by KnowledgeWare or Sterling, no Escrowed
Shares will be distributed to the former KnowledgeWare common stockholders. If
the ultimate loss from such actions exceeds the proceeds from applicable
insurance and the value of the Escrowed Shares, such excess will be included in
Sterling's cost of acquiring KnowledgeWare to the extent such excess can be
reasonably estimated within one year of the date of acquisition.
3. RESTRUCTURING CHARGES
The Company recorded restructuring charges of approximately $91,260,000
and $11,515,000 during fiscal years 1993 and 1992, respectively.
The 1993 restructuring charges reflect the cost of combination of the
Company and Systems Center, including transaction costs and charges relating to
the elimination of duplicate facilities and equipment, severance costs and the
write-off of costs related to certain software products not actively marketed by
the Company. Of the total restructuring charge of $91,260,000, approximately
$21,348,000 was non-cash and the remaining $69,912,000 required cash outlays.
Cash of approximately $30,700,000 was expended prior to September 30, 1993 and
approximately $26,600,000 was expended in 1994. Future cash expenditures
related to the restructuring, the majority of which relate to the elimination of
duplicate facilities, are accrued and are anticipated to be made from cash
generated from operations. See Note 11.
The 1992 restructuring charges included severance and other costs related
to Systems Center's reduction in workforce, elimination of duplicate facilities,
and the sale of certain AS/400 and UNIX utility products. At September 30, 1994
all charges related to the 1992 Systems Center restructuring have been incurred.
4. LEGAL PROCEEDINGS AND CLAIMS
The Company is subject to certain legal proceedings and claims that arise
in the conduct of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions, net of applicable reserves,
will not materially affect the financial condition or results of operation of
the Company.
In addition, KnowledgeWare, which was acquired on November 30, 1994, is
subject to certain legal proceedings and claims, as described in Note 2.
5. SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in three major markets classified as
Enterprise Software, Electronic Commerce and Federal Systems. Each major market
is represented through independently operated business groups. The Enterprise
Software Group provides enterprise-wide systems management and applications
development software for large computing environments. The Electronic Commerce
Group provides software and services to facilitate electronic commerce, defined
by the Company as the worldwide electronic interchange of business information,
including EDI software and services, data communications software and electronic
payments software for financial institutions. The Federal Systems Group
provides highly technical services to the federal government under several
multi-year contracts primarily in support of the National Aeronautics and Space
Administration aerospace research projects and secure communications systems for
the Department of Defense. A fourth business group, International, is
responsible for sales and first level support of the Company's products outside
the United States. International Group operating results and assets are
included, as applicable, in the Company's Enterprise Software and Electronic
Commerce segments in the business segment tables contained herein.
35
<PAGE>
Financial information concerning the Company's operations by business
segment at September 30, 1994, 1993 and 1992 and for the years then ended is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS 1994 1993 1992
- - ----------------- ------ ------ ------
<S> <C> <C> <C>
Revenue:
Enterprise Software.......... $194,194 $185,824 $180,086
Electronic Commerce.......... 163,600 120,835 93,139
Federal Systems.............. 106,973 100,796 95,146
Corporate and other.......... 8,626 8,659 10,025
-------- -------- --------
Consolidated totals......... $473,393 $416,114 $378,396
======== ======== ========
Operating Profit (Loss):
Enterprise Software.......... $ 61,218 $ 38,339 $ 31,487
Electronic Commerce.......... 48,114 24,491 10,696
Federal Systems.............. 7,260 6,295 5,897
Restructuring charges........ - (91,260) (11,515)
Corporate and other.......... (21,058) (22,693) (25,027)
-------- --------- ---------
Consolidated totals......... $ 95,534 $(44,828) $ 11,538
======== ======== ========
Identifiable Assets:
Enterprise Software.......... $130,471 $122,818 $152,347
Electronic Commerce.......... 109,986 87,493 76,337
Federal Systems.............. 56,476 54,835 55,141
Corporate and other.......... 191,840 137,120 63,659
-------- -------- --------
Consolidated totals......... $488,773 $402,266 $347,484
======== ======== ========
Capital Expenditures (including
additions to computer software):
Enterprise Software.......... $ 14,855 $ 17,708 $ 16,156
Electronic Commerce.......... 20,469 16,483 15,789
Federal Systems.............. 1,225 1,483 1,325
Corporate and other.......... 1,287 2,114 3,377
-------- -------- --------
Consolidated totals......... $ 37,836 $ 37,788 $ 36,647
======== ======== ========
Depreciation and Amortization:
Enterprise Software.......... $ 14,538 $ 17,269 $ 17,757
Electronic Commerce.......... 14,757 10,426 7,693
Federal Systems.............. 2,099 2,132 2,584
Corporate and other.......... 2,908 2,377 3,251
-------- -------- --------
Consolidated totals......... $ 34,302 $ 32,204 $ 31,285
======== ======== ========
Revenue from the U.S. Government:
Enterprise Software.......... $ 5,643 $ 2,976 $ 5,314
Electronic Commerce.......... 1,132 1,395 125
Federal Systems.............. 103,580 99,903 94,280
Corporate and other.......... 700
-------- -------- --------
Consolidated totals......... $110,355 $104,274 $100,419
======== ======== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
intersegment eliminations, cash balances, marketable securities, long-term
investments, deferred income tax benefits, other assets and the results of
operations and assets of the Company's retail software division.
36
<PAGE>
6. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations in the United States and international markets at
September 30, 1994, 1993 and 1992 and for the years then ended are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
GEOGRAPHICAL SEGMENT INFORMATION 1994 1993 1992
- - -------------------------------- ------- -------- --------
<S> <C> <C> <C>
Revenue:
United States............................ $341,961 $296,339 $257,527
Europe................................... 77,574 76,864 76,560
Canada and Latin America................. 18,772 15,582 15,645
Pacific.................................. 26,460 18,670 18,639
Corporate and other...................... 8,626 8,659 10,025
--------- --------- ---------
$473,393 $416,114 $378,396
========= ========= =========
Operating Profit (Loss):
United States............................ $ 97,734 $ 62,747 $ 48,312
Europe................................... 11,022 2,077 (3,757)
Canada and Latin America................. 4,823 2,922 3,130
Pacific.................................. 3,013 1,379 395
Restructuring charges.................... (91,260) (11,515)
Corporate and other...................... (21,058) (22,693) (25,027)
---------- ---------- ---------
$ 95,534 $(44,828) $ 11,538
========== ========== =========
Identifiable Assets:
United States............................ $221,167 $205,639 $204,499
Europe................................... 52,751 47,350 56,849
Canada and Latin America................. 9,184 4,113 9,878
Pacific.................................. 13,831 8,044 12,599
Corporate and other...................... 191,840 137,120 63,659
--------- --------- ---------
$488,773 $402,266 $347,484
========= ========= =========
</TABLE>
7. MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS
At September 30, 1994 and 1993, all of the Company's marketable securities
and other long-term investments are classified as available-for-sale and 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, 1994
Current:
Commercial paper.................... $15,761 $15,761
U.S. corporate notes................ 23,122 23,377 255
U.S. government obligations......... 1,679 1,718 39
Other............................... 1,285 1,285
-------- -------- -------
$41,847 $42,141 $ 294
======== ======== =======
Noncurrent........................... $ 4,770 $ 5,938 $ 52 $1,220
======== ======== ===== =======
SEPTEMBER 30, 1993
Current:
Commercial paper.................... $ 1,989 $ 1,989
U.S. corporate notes................ 29,084 28,933 $154 $ 3
U.S. government obligations......... 2,018 2,008 10
Bond mutual funds................... 10,375 10,361 29 15
Adjustable rate preferred stock..... 4,963 5,019 4 60
Other............................... 2,925 2,929 11 15
-------- -------- ----- -------
$51,354 $51,239 $208 $ 93
======== ======== ===== =======
Noncurrent........................... $ 3,540 $ 3,511 $ 29
======== ======== =====
</TABLE>
37
<PAGE>
At September 30, 1994, scheduled maturities of investments in debt
securities are: $11,582,000 within one year and $15,948,000 between one and five
years.
8. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Trade................................. $109,821 $ 93,054
Unbilled.............................. 31,604 28,152
Other................................. 103 110
-------- -------
141,528 121,316
Less allowance for doubtful accounts.. 9,362 8,361
-------- --------
$132,166 $112,955
======== ========
</TABLE>
At September 30, 1994 and 1993, accounts receivable include $30,728,000
and $28,561,000, respectively, due under contracts with the federal government
and related agencies. The remainder of the Company's receivables are due
principally from corporations in diverse industries located in North America and
Europe.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 (in
thousands) :
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Computer and peripheral equipment....... $46,309 $35,557
Furniture, fixtures and other equipment. 22,325 21,246
Building and improvements............... 9,036 8,430
------- -------
77,670 65,233
Less accumulated depreciation........... 44,144 37,985
------- -------
$33,526 $27,248
======= =======
10. LONG-TERM DEBT
Long-term debt consists of the following at September 30 (in thousands):
1994 1993
------- -------
5 3/4% Debentures....................... $115,000 $115,000
Capital leases and other debt........... 8,189 6,597
-------- --------
123,189 121,597
Less amounts due within one year........ 7,257 4,065
-------- --------
$115,932 $117,532
======== ========
</TABLE>
The 5 3/4% Debentures are unsecured general obligations of the Company and
mature on February 1, 2003. Interest is payable semi-annually. The 5 3/4%
Debentures are convertible into Common Stock at a conversion price of $28.35.
The 5 3/4% Debentures are redeemable at a premium after February 12, 1996, at
the option of the Company, in whole or in part. Upon a Change of Control (as
defined), holders of the 5 3/4% Debentures will have the right, subject to
certain restrictions and conditions, to require the Company to purchase all or
in part any of the 5 3/4% Debentures at the principal amount, plus accrued
interest. The 5 3/4% Debentures are subordinated to all existing and future
Senior Indebtedness (as defined) of the Company. Based on quoted market prices,
the aggregate fair value of the 5 3/4% Debentures was approximately $134,550,000
at September 30, 1994.
In February 1993, the Company called for redemption its 8% Debentures at a
price equal to 103.2% of the principal amount. Holders of $13,739,000 principal
amount of 8% Debentures elected to convert their 8% Debentures into 636,054
shares of Common Stock. The remaining $38,894,000 principal amount of 8%
Debentures was redeemed on March 4, 1993, for $40,139,000. The conversion and
redemption of the 8% Debentures resulted in an extraordinary loss of $1,481,000,
net of applicable income taxes of $987,000. If the
38
<PAGE>
conversion of $13,739,000 principal amount of 8% Debentures was assumed to have
been consummated on October 1, 1992, the pro forma net loss per common share
amount for the year ended September 30, 1993 would have been $2.13 per share.
During 1992, the Company purchased $4,523,000 principal amount of 8%
Debentures in open market transactions. No significant gain or loss resulted
from the 8% Debentures purchased in 1992.
Amounts outstanding under the Company's $35,000,000 revolving credit and
term loan agreement ("Loan Agreement") bear interest at an annual rate, ranging
from the bank's prime rate to prime plus 1/2%. Borrowings are secured by the
stock and assets of certain subsidiaries of the Company. Borrowings, if any,
outstanding on December 31, 1994, will convert to a term loan with eight equal
quarterly payments. The terms of the Loan Agreement contain various restrictions
on the Company, including limitations on additional borrowings, acquisitions and
capital expenditures. The Loan Agreement also requires that certain financial
ratios be maintained. The Company is currently negotiating an extension of the
conversion date of the Loan Agreement to March 31, 1995. The Company is also
obtaining proposals for a replacement credit line from its lead lending bank as
well as other lenders which will meet its capital requirements of the future.
There were no amounts outstanding under the Loan Agreement at September 30, 1994
and 1993. At September 30, 1994, after the utilization of $4.6 million for
standby letters of credit, $30.4 million was available for borrowing on the Loan
Agreement.
Certain of the Company's foreign subsidiaries have separate lines of
credit available for foreign exchange exposure management and working capital
requirements. These lines of credit are guaranteed by the U.S. parent company.
At September 30, 1994, $6.7 million was outstanding pursuant to foreign lines of
credit.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Trade accounts payable.................... $15,810 $13,649
Accrued compensation...................... 34,450 27,388
Accrued restructuring costs............... 11,670 34,228
Other accrued liabilities................. 14,289 13,944
-------- --------
$76,219 $89,209
-------- --------
</TABLE>
Accrued restructuring costs included in accounts payable and accrued
liabilities are due to the Companys 1993 restructuring as a result of the
acquisition of Systems Center (see Notes 2 and 3) and are primarily for the
remaining commitments pursuant to operating leases of duplicate facilities.
12. INCOME TAXES
The provision (benefit) for income taxes on income (loss) before
extraordinary item and cumulative effect of a change in accounting principle is
composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-----------------------------------------
Current: 1994 1993 1992
------ ------- ------
<S> <C> <C> <C>
Federal.................................. $12,955 $ 3,271
State.................................... 1,229 $ 156 1,202
Foreign.................................. 2,585 375 1,810
Deferred:
Federal.................................. 13,228 (8,436) 3,216
State.................................... 2,086 (480) 790
Foreign.................................. 2,179 (6,598) 278
-------- ---------- --------
$34,262 $(14,983) $10,567
======== ========== ========
</TABLE>
39
<PAGE>
The effective income tax (benefit) rate on income (loss) before
extraordinary item and cumulative effect of a change in accounting principle
differed from the federal income tax statutory rate for the following reasons
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal
statutory rate................................ $32,410 $(16,621) $ 1,830
Increases (reductions) in tax expense
(benefit) resulting from:
Net operating loss for which no federal
income tax benefit recognized............... 2,228 6,300
Recognition of previously unrecognized
deferred income tax asset................... (728)
Amortization of excess cost over net assets.. 885 425 423
Difference between U.S. federal
statutory rate and foreign effective
income tax rates............................ 451
Effect of increase in U.S. federal
statutory rate.............................. (547)
State income taxes, net of federal benefit... 2,155 (324) 1,315
Other........................................ (460) (144) 248
-------- ---------- --------
$34,262 $(14,983) $10,567
======== ========== ========
</TABLE>
Income (loss) before extraordinary item and cumulative effect of a change
in accounting principle includes foreign pretax earnings (losses) of
$12,104,000, $(17,780,000) and $3,721,000 for the years ended September 30,
1994, 1993 and 1992, respectively.
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 asset as of September 30 are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards........................................ $ 22,758 $ 59,150
Research and development credit carryforwards........................... 2,500 2,500
Foreign tax credit carryforwards........................................ 5,247 3,755
Foreign taxes creditable on undistributed foreign source income......... 5,397 4,870
Alternative minimum tax credit carryforwards............................ 1,425 938
Deferred revenue........................................................ 5,247
Accrued postretirement benefits......................................... 2,393 2,267
Reserves and restructuring accruals..................................... 19,024 7,336
--------- ---------
Deferred income tax assets............................................. 63,991 80,816
--------- ---------
Deferred income tax liabilities:
Capitalized software costs............................................... 20,438 18,811
Depreciation and amortization............................................ 8,541 8,772
Other future income tax liabilities...................................... 4,001 4,001
--------- ---------
Deferred income tax liabilities......................................... 32,980 31,584
--------- ---------
Deferred income tax asset net of deferred income tax liability........... 31,011 49,232
Less valuation allowance................................................. (17,501) (18,229)
--------- ---------
Net deferred income tax asset $ 13,510 $ 31,003
========= =========
</TABLE>
The valuation allowance relates principally to certain foreign net
operating loss carryforwards and to certain federal net operating loss and
credit carryforwards which are subject to limitation as to utilization.
Management believes that future taxable income based on expected future earnings
of the Company will more likely than not utilize a substantial portion of the
net operating loss carryforwards, tax credit carryforwards and other future tax
deductions in existence at September 30, 1994, to realize the net deferred
income tax asset. However, as there can be no assurances that such future
earnings will be achieved, the aforementioned valuation allowance has been
recorded.
40
<PAGE>
At September 30, 1994, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $44,000,000 and
$7,747,000, respectively. These carryforwards will expire at various times
between 1998 and 2008, with approximately $30,000,000 of the carryforwards
expiring between 2006 and 2008. The usage of a portion of these carryforwards is
restricted to future taxable income of certain of the Company's wholly owned
subsidiaries and limited by Section 382 of the Internal Revenue Code.
13. COMMITMENTS
The Company leases certain facilities and equipment under operating
leases. Total rent expense for the years ended September 30, 1994, 1993 and 1992
was $27,306,000, $27,827,000 and $35,559,000, respectively. At September 30,
1994, minimum future rental payments due under all operating leases, net of
future sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1995....................................................... $ 26,501
1996....................................................... 24,451
1997....................................................... 20,262
1998....................................................... 18,288
1999....................................................... 15,602
Thereafter................................................. 35,801
--------
$140,905
========
</TABLE>
14. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock,
par value $0.10 per share ("Preferred Stock"), of which 200,000 shares
designated as Series B Junior Preferred Stock ("Junior Preferred Stock") were
issued and outstanding at September 30, 1994 and 1993. The Board of Directors of
the Company is 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.
The outstanding shares of the Junior Preferred Stock are controlled by the
Chairman, the Vice Chairman and a director of the Company. The holders of the
Junior Preferred Stock are entitled to a liquidation preference of $8.93 per
share and cumulative dividends of $0.98 per share payable quarterly. The Junior
Preferred Stock has voting rights of ten votes per share with respect to certain
business combinations. The terms of the Junior Preferred Stock prohibit the
payment of dividends on the Common Stock whenever dividends on the Junior
Preferred Stock are in arrears.
15. STOCK OPTIONS AND WARRANTS
The Company has ten stock option plans that provide for the granting of
options to officers, directors, key employees and advisors, including six stock
plans assumed by the Company in the SCI Merger (the "Systems Center Plans"),
under which no further options or other rights may be granted. All options have
been granted at or above the fair market value of the stock at the time of the
grant.
Options granted pursuant to the plans (other than options pursuant to the
Systems Center Plans) become exercisable generally at a rate of 25% per year and
expire within five years from the date of grant. All of the outstanding stock
options granted under the Systems Center Plans were fully vested as of September
30, 1994.
41
<PAGE>
Stock option transactions are summarized below for the three years ended
September 30, 1994:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER EXERCISE EXERCISE
OF SHARES PRICE PRICE
--------- ----------- -----------
<S> <C> <C> <C>
Outstanding at September 30, 1991
(1,945,134 shares exercisable)......... 2,885,819 $1.92 - $39.23 $28,250,890
Granted during the year................ 3,301,392 9.62 - 28.38 58,561,166
Terminated and cancelled during the
year.................................. (166,715) 2.12 - 33.80 (2,710,204)
Exercised during the year.............. (1,375,455) 2.12 - 23.42 (9,360,196)
----------- ------------
Outstanding at September 30, 1992
(2,078,510 shares exercisable)......... 4,645,041 1.92 - 39.23 74,741,656
Granted during the year................ 3,093,008 8.00 - 24.00 57,654,288
Terminated and cancelled during the
year.................................. (109,730) 6.75 - 33.80 (1,583,867)
Exercised during the year.............. (438,993) 1.92 - 22.15 (4,634,580)
---------- ------------
Outstanding at September 30, 1993
(3,797,865 shares exercisable)......... 7,189,326 2.10 - 39.23 126,177,497
Granted during the year................ 520,800 24.00 - 34.50 15,901,475
Terminated and cancelled during the
year.................................. (117,804) 2.12 - 39.23 (2,110,416)
Exercised during the year.............. (1,131,559) 2.10 - 26.10 (15,034,772)
------------ -------------
Outstanding at September 30, 1994
(3,893,745 shares exercisable)......... 6,460,763 2.12 - 36.92 $124,933,784
============ ============
</TABLE>
At September 30, 1994 and 1993, a maximum of 3,096,711 and 546,637 shares,
respectively, were reserved for future grants of options under the plans.
The following table summarizes the number of warrants exercised during
1994 and information with respect to warrants outstanding at September 30, 1994:
<TABLE>
<CAPTION>
WARRANTS EXERCISED WARRANTS OUTSTANDING
-------------------------- -------------------------
NUMBER AGGREGATE NUMBER AGGREGATE
EXPIRATION EXERCISE OF EXERCISE OF EXERCISE
DATE PRICE WARRANTS PRICE WARRANTS PRICE
------------ --------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series B Warrants........ May 1, 1994 $ 6.25 750,000 $4,687,500
Series E Warrants........ May 1, 1994 $ 6.25 416,000 2,600,000
Series F Warrants........ May 1, 1994 $ 6.25 149,700 935,625
Series G Warrants........ March 5, 1995 $ 8.50 13,335 113,348 13,337 $ 113,364
Systems Center
Warrants................ June 25, 1996 $22.16 216,680 4,801,629
--------- ---------- -------- -----------
1,329,035 $8,336,473 230,017 $4,914,993
========= ========== ======== ===========
</TABLE>
Officers and directors hold none of the remaining outstanding warrants.
During 1993 and 1992, 158,465 and 562,499 warrants with an aggregate exercise
price of $1,027,903 and $3,538,117, respectively, were exercised for shares of
Common Stock.
All of the outstanding stock options and warrants are subject to anti-
dilution adjustments.
Subsequent to September 30, 1994, 1,100,000 additional shares became
available for grant under the Company's stock option plans. In the latter part
of November 1994, Sterling granted to certain officers, directors and other key
employees of the Company, including employees added as a result of the
acquisition of KnowledgeWare, options to purchase approximately 3,500,000 shares
of the Company's common stock at exercise prices ranging from $29.00 to $30.75
per share.
16. POSTRETIREMENT BENEFITS
The Company has a plan to provide retirement benefits under the provisions
of Section 401(k) of the Internal Revenue Code for all domestic employees who
have completed a specified term of service. Pursuant to this plan, eligible
participants may elect to contribute a percentage of their annual gross
compensation and the Company will contribute additional amounts, as provided by
the plan. Benefits under the plan are limited to the assets of the plan. Company
contributions charged to expense during 1994, 1993 and 1992 were $2,895,000,
$2,517,000 and $2,013,000, respectively. A portion of the Company contributions
are invested in Common Stock of the Company. During 1994, 1993 and 1992, the
investment of the Company's contributions included 40,700, 43,600 and 35,718
shares of Common Stock, respectively.
42
<PAGE>
Certain of the Company's subsidiaries also provide medical benefits to
eligible retired employees. Certain eligible employees retiring on or after
attaining age 55 who have rendered specific years of service as outlined in the
plan are entitled to postretirement healthcare coverage. These benefits are
subject to deductibles, copayment provisions and other limitations including
employee premium contributions. The Company's policy is to fund the cost of the
postretirement healthcare coverage in amounts determined at the discretion of
management. The Company and its subsidiaries may amend or change the plan
periodically, or may terminate the plan.
A plan amendment was adopted in October 1994 that will reduce the number
of employees participating in the postretirement benefit plan. The estimated
impact of the amendment of a curtailment gain of approximately $1.9 million and
a decrease in net periodic pension cost of $1.4 million will be recognized in
1995.
In 1993, the Company adopted Financial Accounting Standards No. 106,
"Accounting for Postretirement Benefits other than Pensions" ("FAS No. 106").
This new standard requires that the expected costs of retiree healthcare
benefits be charged to expense during the years the employee renders service.
The effect of adopting the new standard as of October 1, 1992, was a charge of
$2,774,000, representing the accumulated benefit obligation existing at that
date, net of related income tax benefit of $1,813,000. In addition,
postretirement benefit costs for the year ended September 30, 1993, increased by
$1,211,000 as a result of the adoption of the new standard. Postretirement
benefit costs for the year ended September 30, 1992, which were recorded on a
cash basis, were not material and were not restated.
The following table sets forth the computation of accrued postretirement
healthcare benefit costs at September 30 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees................................ $ 766 $ 871
Fully eligible active plan participants. 916 926
Other active plan participants.......... 5,208 4,773
------ ------
6,890 6,570
Assets at fair market value............. 786
------ ------
Projected benefit obligation in excess
of assets at fair market value......... 6,104 6,570
Unrecognized net gain (loss)............ 364 (757)
------ ------
Accrued postretirement benefit cost..... $6,468 $5,813
====== ======
</TABLE>
The following table presents net periodic postretirement healthcare
benefit costs for the years ended September 30, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------
1994 1993
------- -------
<S> <C> <C>
Service cost.................................. $ 857 $ 838
Interest cost................................. 459 389
Actual asset return........................... (8)
Net amortization and deferral................. 59
------ ------
Net periodic postretirement benefit cost.... $1,367 $1,227
====== ======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8% at September 30, 1994. The weighted-
average annual assumed rate of increase in the per capita cost of covered
benefits (healthcare cost trend rate) is 11 1/2% for 1994 and is assumed to
decrease gradually to 5% after 13 years and remain at that level thereafter.
At September 30, 1993, the weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7%. The weighted average
healthcare cost trend rate was 12% for 1993 and is assumed to decrease gradually
to 4 1/2% after 15 years and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed healthcare cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1994 by $1,641,000 and the
aggregate of the service costs and interest cost components of net periodic
postretirement benefit cost for 1994 by $323,000.
The Company does not provide other significant postemployment benefits.
43
<PAGE>
17. CHANGE-IN-CONTROL AND EMPLOYMENT AGREEMENTS
The Company has change-in-control agreements with eleven officers that
grant the right to receive payments based on the individual's respective salary,
bonus and benefits if there has been a change in control (as defined) in the
Company and termination of employment has occurred. At September 30, 1994, the
maximum liability for salary, bonus and benefits under these agreements would be
approximately $30,000,000.
The Company has entered into employment agreements with eight officers of
the Company. Seven of the agreements provide for severance payments based on the
individual officer's salary and bonus and continuation of certain benefits for a
period of three years if the Company terminates the officer's employment. The
other employment agreement provides for an annual base salary plus agreed-upon
bonuses or benefits and converts to a five year consulting agreement upon the
occurrence of certain events. The aggregate commitment for future salaries,
excluding bonuses, under these employment agreements would be approximately
$10,438,000.
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1994 and
1993 are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- --------- -------- -------------
<S> <C> <C> <C> <C>
Year ended September 30, 1994 (1):
Revenue................................. $110,032 $115,466 $116,543 $131,352
Cost of sales........................... 41,672 44,342 41,542 44,189
Product development and enhancement..... 7,476 8,178 8,852 8,496
Selling, general and administrative..... 41,460 41,256 42,390 48,006
Income before other income (expense)
and income taxes....................... 19,424 21,690 23,759 30,661
Income applicable to common stockholders 10,774 13,506 14,926 18,937
Average common shares outstanding....... 18,399 19,857 20,433 20,562
Income per common share:
Net income:
Primary................................ $.48 $.59 $.65 $.82
Fully diluted.......................... $.44 $.54 $.59 $.74
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------ --------- ---------- --------------
<S> <C> <C> <C> <C>
Year ended September 30, 1993 (1):
Revenue................................. $100,063 $98,666 $105,456 $111,929
Cost of sales........................... 40,850 42,393 44,277 44,585
Product development and enhancement..... 6,057 6,839 7,128 7,373
Selling, general and administrative..... 43,542 40,547 44,735 41,356
Restructuring charges (2)............... 91,260
Income (loss) before other income
(expense), income taxes, extraordinary
item and cumulative effect of a
change in accounting principle......... 9,614 8,887 9,316 (72,645)
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle......... 5,519 4,719 5,212 (48,297)
Income (loss) before cumulative effect
of a change in accounting principle.... 5,519 3,238 5,212 (48,297)
Income (loss) applicable to common
stockholders........................... 2,424 2,923(3) 4,894 (48,347)
Average common shares outstanding....... 16,866 17,336 17,817 18,007
Income (loss) per common share:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle........ $ .27 $ .22 $ .25 $ (2.68)
Income (loss) before cumulative effect
of a change in accounting principle... .27 .15 .25 (2.68)
Net income (loss)...................... .14 .15 .25 (2.68)
_______________
</TABLE>
(1) In August 1994, Sterling acquired ABC in a merger accounted for as a
pooling of interests. Sterling's consolidated financial statements have
been retroactively adjusted to include the results of ABC for all periods
presented. See Note 2.
(2) The 1993 restructuring charges reflect the cost of combination of Sterling
and Systems Center, including transaction costs and charges relating to the
elimination of duplicate facilities and equipment, severance costs and the
write-off of costs related to certain software products not actively
marketed by the Company. See Note 3.
(3) Income applicable to common stockholders in the second quarter of 1993
includes an extraordinary loss (net of applicable income taxes) of
$1,481,000. See Note 10.
45
<PAGE>
Information concerning the Company's operations by business segment for each
quarter of 1994, 1993 and 1992 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- --------- --------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1994:
Revenue:
Enterprise Software............. $ 47,885 $ 46,378 $ 45,110 $ 54,821
Electronic Commerce............. 35,316 38,356 42,087 47,841
Federal Systems................. 24,718 26,945 27,296 28,014
Corporate and other............. 2,113 3,787 2,050 676
---------- --------- --------- ----------
Consolidated totals............ $110,032 $115,466 $116,543 $131,352
========== ========= ========= ==========
Operating Profit (Loss):
Enterprise Software............. $ 15,727 $ 13,563 $ 13,907 $ 18,021
Electronic Commerce............. 6,798 10,827 12,783 17,706
Federal Systems................. 1,614 1,694 2,391 1,561
Restructuring charge............
Corporate and other............. (4,715) (4,394) (5,322) (6,627)
---------- --------- --------- ----------
Consolidated totals............ $ 19,424 $ 21,690 $ 23,759 $ 30,661
========== ========= ========= ==========
Year ended September 30, 1993:
Revenue:
Enterprise Software............. $ 47,459 $ 44,260 $ 44,979 $ 49,126
Electronic Commerce............. 26,523 27,253 32,662 34,397
Federal Systems................. 23,747 24,805 25,700 26,544
Corporate and other............. 2,334 2,348 2,115 1,862
---------- --------- --------- ----------
Consolidated totals............ $100,063 $ 98,666 $105,456 $111,929
========== ========= ========= ==========
Operating Profit (Loss):
Enterprise Software............. $ 10,152 $ 9,365 $ 6,006 $ 12,816
Electronic Commerce............. 3,372 4,225 8,116 8,778
Federal Systems................. 1,580 1,657 1,370 1,688
Restructuring charge............ (91,260)
Corporate and other............. (5,490) (6,360) (6,176) (4,667)
---------- --------- --------- ----------
Consolidated totals............ $ 9,614 $ 8,887 $ 9,316 $(72,645)
========== ========= ========= ==========
Year ended September 30, 1992:
Revenue:
Enterprise Software............. $ 43,247 $ 42,993 $ 43,970 $ 49,876
Electronic Commerce............. 20,726 21,971 22,336 28,106
Federal Systems................. 22,108 23,688 24,013 25,337
Corporate and other............. 3,303 1,828 2,716 2,178
---------- --------- --------- ----------
Consolidated totals............ $ 89,384 $ 90,480 $ 93,035 $105,497
========== ========= ========= ==========
Operating Profit (Loss):
Enterprise Software............. $ 8,635 $ 6,601 $ 5,365 $ 10,886
Electronic Commerce............. 3,334 2,316 1,213 3,833
Federal Systems................. 1,719 1,424 1,359 1,395
Restructuring charge............ (11,515)
Corporate and other............. (6,959) (4,640) (7,267) (6,161)
---------- --------- --------- ----------
Consolidated totals............ $ 6,729 $ 5,701 $(10,845) $ 9,953
========== ========= ========= ==========
</TABLE>
46
<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.
The information concerning the directors of the Company is set forth in
the Proxy Statement to be delivered to stockholders in connection with the
Company's 1995 Annual Meeting of Stockholders under the heading "Election of
Directors," 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.
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Management Compensation," which information
is incorporated herein by reference. Information contained in the Proxy
Statement under the caption "Management Compensation - Report of the Executive
and Stock Option Committees of the Board of Directors on Executive Compensation
and -Stock Performance Chart" is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Stockholders and Management Ownership," which information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the headings "Management Compensation
- - -- Executive and Stock Option Committee Interlocks and Insider Participation"
and "Certain Transactions," which information is incorporated herein by
reference.
47
<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:
The Registrant will file an amendment on Form 10-K/A to include Financial
Statement Schedules II, VIII and X required by Part IV. Schedules other than
Schedules II, VIII and X are omitted for the reason that they are either not
required or not applicable or the required information is included in the
consolidated financial statements or notes thereto.
<TABLE>
<CAPTION>
3. Exhibits:
<C> <S>
2(a) - Agreement and Plan of Merger dated as
of March 31, 1993 among the Company,
Systems Center, Inc. and SSI
Acquisition Corporation ("SCI
Agreement and Plan of Merger") (1)
2(b) - First Amendment to SCI Agreement and
Plan of Merger (11)
2(c) - Amended and Restated Agreement and
Plan of Merger dated as of August 31,
1994, among the Company,
KnowledgeWare, Inc. and SSI
Corporation ("KWI Agreement and Plan
of Merger") (2)
2(d) - Agreement dated October 11, 1994
among the Company, KnowledgeWare,
Inc. and SSI Corporation (2)
2(e) - First Amendment to KWI Agreement and
Plan of Merger (2)
3(a) - Certificate of Incorporation of the
Company (3)
3(b) - Certificate of Amendment of
Certificate of Incorporation of the
Company (11)
3(c) - Certificate of Amendment of
Certificate of Incorporation of the
Company (4)
3(d) - Restated Bylaws of the Company (5)
4(a) - Form of Common Stock Certificate (6)
4(b) - Form of Certificate of Designation,
Preferences, Rights and Limitations
with respect to Series B Junior
Preferred Stock (11)
4(c) - Form of Indenture between the Company
and Bank of America Texas, National
Association, as Trustee, including
the form of 5 3/4% Convertible
Subordinated Debenture attached as
Exhibit A thereto (7)
4(d) - Preferred Stock and Warrant Purchase
Agreement dated June 25, 1991 among
Systems Center, Inc. and the
Investors named therein (8)
4(e) - Warrant Agreement dated June 9, 1994
between KnowledgeWare, Inc. and Trust
Company Bank (14)
4(f) - Supplemental Warrant Agreement dated as of
November 30, 1994 between Knowledgeware,
Inc. and Trust Company Bank (14)
9 - None
10(a) - Amended and Restated Stock Option
Agreement dated as of August 31, 1994
between the Company and
KnowledgeWare, Inc. (2)
10(b) - Form of Amended and Restated
Stockholder Agreement dated as of
August 31, 1994 between the Company
and certain stockholders of
KnowledgeWare, Inc. (2)
10(c) - Form of Registration Rights Agreement
dated as of November 30, 1994
among the Company and the Selling
Stockholders named therein (2)
10(d) - Form of Escrow Agreement dated as of
November 30, 1994 among the Company,
KnowledgeWare, Inc., The First
National Bank of Boston, N.A. and
Stuart Finestone (2)
10(e) - Amended Incentive Stock Option Plan
of the Company (16), (19)
10(f) - Amended Non-Statutory Stock Option
Plan of the Company (16), (19)
10(g) - Supplemental Executive Retirement
Plan II of Informatics General
Corporation (11)
10(h) - Form of Supplemental Executive
Retirement Plan II Agreement (the
"SERP II Agreement") (11)
10(i) - Amendment to SERP II Agreement (11)
10(j) - Form of Employment Agreement with
Jeannette P. Meier, George H. Ellis
and Phillip A. Moore (11), (19)
</TABLE>
48
<PAGE>
<TABLE>
<C> <S>
10(k) - Form of Amendment No. 1 to Employment
Agreement with Jeannette P. Meier,
George H. Ellis and Phillip A. Moore
(11), (19)
10(l) - Employment Agreement with Sam Wyly
(11), (19)
10(m) - Employment Agreement with Charles J.
Wyly, Jr. (11), (19)
10(n) - Employment Agreement with Sterling L.
Williams (11), (19)
10(o) - Form of Amendment No. 1 to Employment
Agreement with Charles J. Wyly, Jr.
and Sterling L. Williams (11), (19)
10(p) - Amendment No. 1 to Employment
Agreement with Sam Wyly (11), (19)
10(q) - Amendment No. 2 to Employment
Agreement with Sam Wyly (11), (19)
10(r) - Consultation Agreement with REC
Enterprises, Inc. (11), (19)
10(s) - Employment Agreement with William D.
Plumb (11), (19)
10(t) - Employment Agreement with William D.
Plumb (11), (19)
10(u) - Form of Employment Agreement with
Edward J. Lott, Warner C. Blow,
Werner L. Frank and Geno P. Tolari
(11), (19)
10(v) - Employment Agreement with Sterling L.
Williams (1), (19)
10(w) - Form of Employment Agreement with
Jeannette P. Meier, George H. Ellis,
Phillip A. Moore, Warner C. Blow and
Geno P. Tolari (1), (19)
10(x) - Employment Agreement with Werner L.
Frank (19), (20)
10(y) - Form of Series B Warrant Agreement
(11)
10(z) - Form of Amendment to Series B Warrant
Agreement (January 1988) (11)
10(aa) - Form of Amendment to Series B Warrant
Agreement (May 1989) (11)
10(bb) - Form of Series E Warrant Agreement
(11)
10(cc) - Form of Amendment to Series E Warrant
Agreement (May 1989) (11)
10(dd) - Form of Series F Warrant Agreement
(11)
10(ee) - Form of Amendment to Series F Warrant
Agreement (May 1989) (11)
10(ff) - Amended and Restated Revolving Credit
and Term Loan Agreement dated June 8,
1990 between the Company and The
First National Bank of Boston and
BankOne Texas N.A. ("Loan Agreement")
(11)
10(gg) - First Amendment to Loan Agreement
dated as of October 16, 1990 (11)
10(hh) - Second Amendment to Loan Agreement
dated as of September 19, 1991 (11)
10(ii) - Third Amendment to Loan Agreement
dated as of December 31, 1991 (11)
10(jj) - Fourth Amendment to Loan Agreement
dated as of June 15, 1992 (11)
10(kk) - Fifth Amendment to Loan Agreement
dated as of July 31, 1992 (11)
10(ll) - Sixth Amendment to Loan Agreement
dated as of August 31, 1992 (11)
10(mm) - Seventh Amendment to Loan Agreement
dated as of September 9, 1992 (11)
10(nn) - Eighth Amendment to Loan Agreement
dated as of September 30, 1992 (11)
10(oo) - Ninth Amendment to Loan Agreement
dated as of October 13, 1992 (11)
10(pp) - Tenth Amendment to Loan Agreement
dated as of December 17, 1992 (1)
10(qq) - Form of Eleventh Amendment to Loan
Agreement dated as of March 29, 1993
(11)
10(rr) - Twelfth Amendment to Loan Agreement
dated as of June 30, 1993 (11)
10(ss) - Form of Thirteenth Amendment to Loan
Agreement dated as of November 10,
1993 (11)
10(tt) - Form of Fourteenth Amendment to Loan
Agreement dated as of November 22,
1993 (11)
10(uu) - Fifteenth Amendment to Loan Agreement
dated as of December 21, 1993 (12)
10(vv) - Sixteenth Amendment to Loan Agreement
dated as of December 30, 1993 (12)
10(ww) - Seventeenth Amendment to Loan
Agreement dated as of January 31,
1994 (12)
10(xx) - Eighteenth Amendment to Loan
Agreement dated as of March 15, 1994
(13)
10(yy) - Nineteenth Amendment to Loan
Agreement dated as of May 17, 1994
(16)
10(zz) - Form of Twentieth Amendment to Loan
Agreement dated as of November 30, 1994
(20)
10(aaa) - 1993 Executive Compensation Plan for
Group Presidents (1), (19)
10(bbb) - 1994 Executive Compensation Plan for
Group Presidents (11), (19)
10(ccc) - 1995 Executive Compensation Plan for
Group Presidents (19), (20)
10(ddd) - Form of Series G Warrant Agreement
(11)
10(eee) - Amended 1992 Non-Statutory Stock
Option Plan (17), (19)
10(fff) - 1994 Non-Statutory Stock Option Plan
(15), (19)
10(ggg) - Form of Indemnity Agreement between
the Company and each of its directors
and officers (11)
10(hhh) - Systems Center, Inc. Restated and
Amended Restricted Stock Plan (9)
</TABLE>
49
<PAGE>
<TABLE>
<C> <S>
10(iii) - Systems Center, Inc. Amended and
Restated Nondiscretionary Restricted
Stock Plan (9)
10(jjj) - Systems Center, Inc. 1982 Stock
Option Plan (9)
10(kkk) - Systems Center, Inc. 1992 Stock
Incentive Plan (9)
10(lll) - Systems Center, Inc. 1983 Stock Plan
(9)
10(mmm) - Systems Center, Inc. Share Option
Scheme (9)
10(nnn) - Registration Rights Agreement dated
as of July 1, 1993 among the Company
and the Selling Stockholders named
therein (10)
10(ooo) - KnowledgeWare, Inc. Incentive Stock
Option Plan of 1984 (18)
10(ppp) - KnowledgeWare, Inc. Second Incentive
Stock Option Plan of 1984 (18)
10(qqq) - KnowledgeWare, Inc. 1988 Stock
Incentive Plan (18)
10(rrr) - Consultation Agreement dated December
1, 1994 between the Company and
Francis A. Tarkenton (20)
11 - Computation of Earnings Per Share,
Year Ended September 30, 1994 (20)
12 - None
13 - None
16 - None
18 - None
21 - Subsidiaries (20)
22 - None
23.1 - Consent of Ernst & Young LLP,
Independent Auditors (20)
23.2 - Consent of Arthur Andersen LLP,
Independent Accountants (20)
24 - None
27 - Financial Data Schedule (20)
28 - None
99 - None
</TABLE>
(b) Reports on Form 8-K.
On August 2, 1994, the Company filed a Current Report on Form 8-K dated
July 31, 1994, with respect to Item 5 and Item 7 of said form, which report
related to a definitive Agreement and Plan of Merger with KnowledgeWare,
Inc., pursuant to which the Company will acquire KnowledgeWare, Inc.
On August 2, 1994, the Company filed a Current Report on Form 8-K dated
August 1, 1994, with respect to Item 5 and Item 7 of said form, which report
related to the Company's acquisition of American Business Computer Company.
On September 2, 1994, the Company filed a Current Report on Form 8-K
dated August 31, 1994, with respect to Item 5 and Item 7 of said form, which
report related to an Amended and Restated Agreement and Plan of Merger with
KnowledgeWare, Inc., pursuant to which the Company will acquire
KnowledgeWare, Inc.
On November 3, 1994, the Company filed a Current Report on Form 8-K
dated November 3, 1994, with respect to Item 5 and Item 7 of said form, which
report related to the Companys proposed acquisition of KnowledgeWare. The
Company included in such report the following financial statements of
KnowledgeWare: (i) Consolidated Balance Sheets as of June 30, 1994 and 1993;
(ii) Consolidated Statements of Operations for the years ended June 30, 1994,
1993 and 1992; (iii) Consolidated Statements of Shareholders Equity for the
years ended June 30, 1994, 1993 and 1992; (iv) Consolidated Statements of
Cash Flows for the years ended
50
<PAGE>
June 30, 1994, 1993 and 1992 and (v) the related notes thereto. The Company
also included in such report the following pro forma combined condensed
financial statements assuming a business combination between the Company and
KnowledgeWare accounted for as a purchase of KnowledgeWare by Sterling: (i)
the unaudited Pro Forma Combined Condensed Balance Sheet of Sterling and
KnowledgeWare as of June 30, 1994; (ii) the unaudited Pro Forma Combined
Condensed Statements of Operations of Sterling and KnowledgeWare for the nine
months ended June 30, 1994; (iii) the unaudited Pro Forma Combined Condensed
Statements of Operations of Sterling and KnowledgeWare for the year ended
September 30, 1993; and (iv) the related notes thereto.
On November 14, 1994, the Company filed a Current Report on Form 8-K
dated November 14, 1994, with respect to Item 5 and Item 7 of said form,
which report related to the Companys proposed acquisition of KnowledgeWare.
The Company included in such report the following Financial Statements of
KnowledgeWare: (i) the unaudited Condensed Consolidated Statements of
Operations for the three months ended September 30, 1994 and 1993; (ii) the
unaudited Condensed Consolidated Balance Sheets as of September 30, 1994
(unaudited) and June 30, 1994 (audited); (iii) the unaudited Condensed
Consolidated Statements of Cash Flows for the three months ended September
30, 1994 and 1993 and (iv) the related notes thereto.
On November 25, 1994, the Company filed a Current Report on Form 8-K
dated November 14, 1994, with respect to Item 5 of said form, which report
related to the Companys proposed acquisition of KnowledgeWare.
________________
(1) Previously filed as an exhibit to the Company's Registration Statement
No. 33-62028 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56185 on Form S-4 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement
No. 2-82506 on Form S-1 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement
No. 33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement
No. 33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement
No. 33-57428 on Form S-3 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of
Systems Center, Inc. for the quarter ended June 30, 1991 and incorporated
herein by reference.
(9) Previously filed as an exhibit to the Company's Registration Statement
No. 33-65402 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement
No. 33-71706 on Form S-3 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1993 and incorporated herein by
reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56679 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Registration Statement
No. 33-53837 on Form S-3 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Companys Registration Statement No.
33-56683 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Companys Registration Statement No.
33-56681 on Form S-8 and incorporated herein by reference.
(19) 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.
(20) Filed herewith.
51
<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 SOFTWARE, INC.
Date: December 5, 1994 By /s/ Sterling L. Williams
---------------------------------------
Sterling L. Williams
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: December 5, 1994 By /s/ George H. Ellis
---------------------------------------
George H. Ellis
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
52
<PAGE>
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.
Date: December 5, 1994 By /s/ Robert J. Donachie
-------------------------------------
Robert J. Donachie
Chairman of the Audit Committee and
Director
Date: December 5, 1994 By /s/ Michael C. French
-------------------------------------
Michael C. French
Director
Date: December 5, 1994 By /s/ Phillip A. Moore
------------------------------------
Phillip A. Moore
Executive Vice President,
Technology and Director
Date: December 5, 1994 By /s/ Charles J. Wyly, Jr.
------------------------------------
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
Date: December 5, 1994 By /s/ Evan A. Wyly
------------------------------------
Evan A. Wyly
Director
Date: December 5, 1994 By /s/ Robert E. Cook
------------------------------------
Robert E. Cook
Director
Date: December 5, 1994 By /s/ Donald R. Miller, Jr.
------------------------------------
Donald R. Miller, Jr.
Director
Date: December 5, 1994 By /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
Date: December 5, 1994 By /s/ Sam Wyly
--------------------------------------
Sam Wyly
Chairman of the Board and Director
53
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
-----------------
<C> <S>
2(a) - Agreement and Plan of Merger dated
as of March 31, 1993 among the
Company, Systems Center, Inc. and
SSI Acquisition Corporation ("SCI
Agreement and Plan of Merger") (1)
2(b) - First Amendment to SCI Agreement
and Plan of Merger (11)
2(c) - Amended and Restated Agreement and
Plan of Merger dated as of August
31, 1994, among the Company,
KnowledgeWare, Inc. and SSI
Corporation ("KWI Agreement and
Plan of Merger") (2)
2(d) - Agreement dated October 11, 1994
among the Company,
KnowledgeWare, Inc. and SSI
Corporation (2)
2(e) - First Amendment to KWI Agreement
and Plan of Merger (2)
3(a) - Certificate of Incorporation of the
Company (3)
3(b) - Certificate of Amendment of
Certificate of Incorporation of the
Company (11)
3(c) - Certificate of Amendment of
Certificate of Incorporation of the
Company (4)
3(d) - Restated Bylaws of the Company (5)
4(a) - Form of Common Stock Certificate (6)
4(b) - Form of Certificate of Designation,
Preferences, Rights and Limitations
with respect to Series B Junior
Preferred Stock (11)
4(c) - Form of Indenture between the
Company and Bank of America Texas,
National Association, as Trustee,
including the form of 5 3/4%
Convertible Subordinated Debenture
attached as Exhibit A thereto (7)
4(d) - Preferred Stock and Warrant
Purchase Agreement dated June 25,
1991 among Systems Center, Inc. and
the Investors named therein (8)
4(e) - Warrant Agreement dated June 9, 1994
between KnowledgeWare, Inc. and Trust
Company Bank (14)
4(f) - Supplemental Warrant Agreement dated as
of November 30, 1994 between KnowledgeWare,
Inc. and Trust Company Bank (14)
9 - None
10(a) - Amended and Restated Stock Option
Agreement dated as of August 31,
1994 between the Company and
KnowledgeWare, Inc. (2)
10(b) - Form of Amended and Restated
Stockholder Agreement dated as of
August 31, 1994 between the Company
and certain stockholders of
KnowledgeWare, Inc. (2)
10(c) - Form of Registration Rights
Agreement dated as of November 30, 1994
among the Company and the Selling
Stockholders named therein (2)
10(d) - Form of Escrow Agreement dated as of
November 30, 1994 among the
Company, KnowledgeWare, Inc., The
First National Bank of Boston, N.A.
and Stuart Finestone (2)
10(e) - Amended Incentive Stock Option Plan
of the Company (16), (19)
10(f) - Amended Non-Statutory Stock Option
Plan of the Company (16), (19)
10(g) - Supplemental Executive Retirement
Plan II of Informatics General
Corporation (11)
10(h) - Form of Supplemental Executive
Retirement Plan II Agreement (the
"SERP II Agreement") (11)
10(i) - Amendment to SERP II Agreement (11)
10(j) - Form of Employment Agreement with
Jeannette P. Meier, George H. Ellis
and Phillip A. Moore (11), (19)
10(k) - Form of Amendment No. 1 to
Employment Agreement with Jeannette
P. Meier, George H. Ellis and
Phillip A. Moore (11), (19)
10(l) - Employment Agreement with Sam Wyly
(11), (19)
10(m) - Employment Agreement with Charles
J. Wyly, Jr. (11), (19)
10(n) - Employment Agreement with Sterling
L. Williams (11), (19)
10(o) - Form of Amendment No. 1 to
Employment Agreement with Charles
J. Wyly, Jr. and Sterling L.
Williams (11), (19)
10(p) - Amendment No. 1 to Employment
Agreement with Sam Wyly (11), (19)
10(q) - Amendment No. 2 to Employment
Agreement with Sam Wyly (11), (19)
10(r) - Consultation Agreement with REC
Enterprises, Inc. (11), (19)
10(s) - Employment Agreement with William
D. Plumb (11), (19)
10(t) - Employment Agreement with William
D. Plumb (11), (19)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10(u) - Form of Employment Agreement with
Edward J. Lott, Warner C. Blow,
Werner L. Frank and Geno P. Tolari
(11), (19)
10(v) - Employment Agreement with Sterling
L. Williams (1), (19)
10(w) - Form of Employment Agreement with
Jeannette P. Meier, George H.
Ellis, Phillip A. Moore, Warner C.
Blow and Geno P. Tolari (1), (19)
10(x) - Employment Agreement with Werner L.
Frank (19), (20)
10(y) - Form of Series B Warrant Agreement
(11)
10(z) - Form of Amendment to Series B
Warrant Agreement (January 1988)
(11)
10(aa) - Form of Amendment to Series B
Warrant Agreement (May 1989) (11)
10(bb) - Form of Series E Warrant Agreement
(11)
10(cc) - Form of Amendment to Series E
Warrant Agreement (May 1989) (11)
10(dd) - Form of Series F Warrant Agreement
(11)
10(ee) - Form of Amendment to Series F
Warrant Agreement (May 1989) (11)
10(ff) - Amended and Restated Revolving
Credit and Term Loan Agreement
dated June 8, 1990 between the
Company and The First National Bank
of Boston and BankOne Texas N.A.
("Loan Agreement") (11)
10(gg) - First Amendment to Loan Agreement
dated as of October 16, 1990 (11)
10(hh) - Second Amendment to Loan Agreement
dated as of September 19, 1991 (11)
10(ii) - Third Amendment to Loan Agreement
dated as of December 31, 1991 (11)
10(jj) - Fourth Amendment to Loan Agreement
dated as of June 15, 1992 (11)
10(kk) - Fifth Amendment to Loan Agreement
dated as of July 31, 1992 (11)
10(ll) - Sixth Amendment to Loan Agreement
dated as of August 31, 1992 (11)
10(mm) - Seventh Amendment to Loan Agreement
dated as of September 9, 1992 (11)
10(nn) - Eighth Amendment to Loan Agreement
dated as of September 30, 1992 (11)
10(oo) - Ninth Amendment to Loan Agreement
dated as of October 13, 1992 (11)
10(pp) - Tenth Amendment to Loan Agreement
dated as of December 17, 1992 (1)
10(qq) - Form of Eleventh Amendment to Loan
Agreement dated as of March 29,
1993 (11)
10(rr) - Twelfth Amendment to Loan Agreement
dated as of June 30, 1993 (11)
10(ss) - Form of Thirteenth Amendment to
Loan Agreement dated as of November
10, 1993 (11)
10(tt) - Form of Fourteenth Amendment to
Loan Agreement dated as of November
22, 1993 (11)
10(uu) - Fifteenth Amendment to Loan
Agreement dated as of December 21,
1993 (12)
10(vv) - Sixteenth Amendment to Loan
Agreement dated as of December 30,
1993 (12)
10(ww) - Seventeenth Amendment to Loan
Agreement dated as of January 31,
1994 (12)
10(xx) - Eighteenth Amendment to Loan
Agreement dated as of March 15,
1994 (13)
10(yy) - Nineteenth Amendment to Loan
Agreement dated as of May 17, 1994
(16)
10(zz) - Form of Twentieth Amendment to Loan
Agreement dated as of November 30,
1994 (20)
10(aaa) - 1993 Executive Compensation Plan
for Group Presidents (1), (19)
10(bbb) - 1994 Executive Compensation Plan
for Group Presidents (11), (19)
10(ccc) - 1995 Executive Compensation Plan
for Group Presidents (19), (20)
10(ddd) - Form of Series G Warrant Agreement
(11)
10(eee) - Amended 1992 Non-Statutory Stock
Option Plan (17), (19)
10(fff) - 1994 Non-Statutory Stock Option
Plan (15), (19)
10(ggg) - Form of Indemnity Agreement between
the Company and each of its
directors and officers (11)
10(hhh) - Systems Center, Inc. Restated and
Amended Restricted Stock Plan (9)
10(iii) - Systems Center, Inc. Amended and
Restated Nondiscretionary
Restricted Stock Plan (9)
10(jjj) - Systems Center, Inc. 1982 Stock
Option Plan (9)
10(kkk) - Systems Center, Inc. 1992 Stock
Incentive Plan (9)
10(lll) - Systems Center, Inc. 1983 Stock
Plan (9)
10(mmm) - Systems Center, Inc. Share Option Scheme (9)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10(nnn) - Registration Rights Agreement dated as of
July 1, 1993 among the
Company and the Selling
Stockholders named therein (10)
10(ooo) - KnowledgeWare, Inc. Incentive Stock
Option Plan of 1984 (18)
10(ppp) - KnowledgeWare, Inc. Second
Incentive Stock Option Plan of 1984 (18)
10(qqq) - KnowledgeWare, Inc. 1988 Stock
Incentive Plan (18)
10(rrr) - Consultation Agreement dated
December 1, 1994 between the
Company and Francis A. Tarkenton (20)
11 - Computation of Earnings Per Share,
Year Ended September 30, 1994 (20)
12 - None
13 - None
16 - None
18 - None
21 - Subsidiaries (20)
22 - None
23.1 - Consent of Ernst & Young LLP,
Independent Auditors (20)
23.2 - Consent of Arthur Andersen LLP,
Independent Accountants (20)
24 - None
27 - Financial Data Schedule (20)
28 - None
99 - None
</TABLE>
__________
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-62028 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
33-56185 on form S-4 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 on Form S-1 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-57428 on Form S-3 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of
Systems Center, Inc. for the quarter ended June 30, 1991 and incorporated
herein by reference.
(9) Previously filed as an exhibit to the Company's Registration Statement No.
33-65402 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-71706 on Form S-3 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1993 and incorporated herein by
reference.
<PAGE>
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Registration Statement No.
33-53837 on Form S-3 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Companys Registration Statement No.
33-56683 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Companys Registration Statement No.
33-56681 on Form S-8 and incorporated herein by reference.
(19) 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.
(20) Filed herewith.
<PAGE>
Exhibit 10(x)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 1st day of December, 1994 by and between Sterling Software, Inc., a Delaware
corporation ("Sterling"), and Werner L. Frank, an individual ("Employee").
RECITALS:
WHEREAS, Sterling, through its wholly owned subsidiaries, acquires,
develops, markets and supports a broad range of products and services; and
WHEREAS, Sterling desires to retain Employee as Executive Vice President;
and
WHEREAS, Employee is willing to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Employee agrees to render such managerial services as
----------
are customarily required of an Executive Vice President, and Sterling
agrees to utilize such services on the terms and conditions contained
herein.
2. Term. This Agreement shall commence on December 1, 1994 and shall
----
continue in effect so long as Employee shall live or until terminated
by Employee in writing.
3. Duties. Employee shall consult with and advise the President of
------
Sterling, or such person as the President of Sterling shall
designate, with respect to strategic mergers, acquisitions,
technologies and other business matters at the request of the
President of Sterling, upon reasonable notice, at such times and for
such duration as may be mutually agreed upon.
4. Compensation. Employee shall be entitled to receive the compensation
------------
provided for herein without regard to whether the President of
Sterling (or his designee) avails himself of Employee's services at
any time during the term hereof. During the term hereof, Employee
shall be entitled to a base salary of $250,000 per year payable twice
monthly in accordance with Sterling's standard payroll practices,
plus all perquisites to which he was entitled as of November 30,
1994, including but not limited to life, medical, dental, health,
accident, and disability insurance benefits, a company car, financial
and tax
-1-
<PAGE>
planning assistance, and participation in Sterling's 401(K) plan;
provided however that if Sterling modifies such perquisites with
respect to all executive officers of Sterling, Employee's perquisites
shall be similarly modified. Employee shall not be entitled to any
bonus for the period October 1, 1994 through the termination of this
Agreement. In addition, Employee will be provided use of office
facilities, secretarial services, and telephone and will be
reimbursed for all authorized travel (first class), food and lodging
incurred at the direction of Sterling.
5. Continuation of Stock Options. During the term hereof, the Employee
-----------------------------
shall continue to participate in Sterling's Incentive and Non-
Statutory Stock Option Plans, 1992 Non-Statutory Stock Option Plan,
1994 Non-Statutory Stock Option Plan and any other such plans as may
be adopted in the future for the benefit and retention of Sterling's
executive officers; provided that Sterling may, but is not required,
to make any new grants of options to such Employee after the date
hereof.
6. Miscellaneous.
-------------
(i) Except for the Employee's Supplemental Executive Retirement
Plan with a subsidiary of the Company, which shall survive
in accordance with it's terms, this Agreement shall
supercede all other employee agreements between Employee and
the Company, including but not limited to the Employment
Agreement dated the 1st of January 1993.
(ii) Notices, demands, payments, reports and correspondence shall
be addressed to the parties hereto at the address for such
party set forth below or such other places as may from time
to time be designated in writing to the other party. Notices
hereunder shall be deemed to be given on the date such
notices are actually received.
If to Sterling, to: 8080 N. Central Expressway
Suite 1100
Dallas, TX 75206
If to Employee, to: Sterling Software, Inc.
5900 Canoga
Woodland Hills, CA 91367
-2-
<PAGE>
(iii) This Agreement shall be binding upon Sterling and Employee
and their respective successors, assigns, heirs and personal
representatives.
(iv) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of
the provisions of this Employment Agreement.
Executed by the parties hereto on the 1st day of December, 1994.
EMPLOYEE
/s/ Werner L. Frank
----------------------------------------------
Werner L. Frank
STERLING SOFTWARE, INC.
By: /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President and Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10(ZZ)
TWENTIETH AMENDMENT AND
MODIFICATION AGREEMENT
TWENTIETH AMENDMENT AND MODIFICATION AGREEMENT dated as of November 30,
1994 (this "Amendment") by and among STERLING SOFTWARE, INC., a Delaware
corporation (the "Company"), the direct and indirect subsidiaries of the Company
listed on the signature pages hereto (collectively, the "Sterling
Subsidiaries"), THE FIRST NATIONAL BANK OF BOSTON AND BANK ONE, TEXAS, NATIONAL
ASSOCIATION (collectively, the "Banks") and THE FIRST NATIONAL BANK OF BOSTON,
as agent (the "Agent") for the Banks, amending certain provisions of an Amended
and Restated Revolving Credit and Term Loan Agreement dated as of June 8, 1990
(as heretofore amended, the "Loan Agreement") by and among the Company, the
Banks and the Agent. Terms not otherwise defined herein which are defined in
the Loan Agreement shall have the respective meanings herein assigned to such
terms in the Loan Agreement.
WHEREAS, the Company has created a new, wholly owned Subsidiary, SSI
Corporation, a Georgia corporation (the "Acquisition Subsidiary");
WHEREAS, the Company desires to merge the Acquisition Subsidiary with
KnowledgeWare, Inc., a Georgia corporation ("KnowledgeWare"), with KnowledgeWare
being the surviving entity as a wholly owned Subsidiary of the Company;
WHEREAS, the Company has requested that the Banks agree to amend the terms
of the Loan Agreement to, among other things, reflect the foregoing transaction
and, in connection therewith, to grant certain limited waivers of certain of the
provisions of the Loan Agreement;
WHEREAS, upon the terms and subject to the conditions contained herein,
the Agent and the Banks are willing to amend certain provisions of the Loan
Agreement and to grant the foregoing waivers;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Loan Agreement, the other Loan Documents and herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged the parties hereto hereby agree as follows:
(S)1. AMENDMENT OF (S)1.1 OF THE LOAN AGREEMENT. Section 1.1 of the Loan
-----------------------------------------
Agreement is hereby amended by:
(a) inserting after the words "consisting of" and before the words "Net
Master" in the definition of "Dormant Subsidiaries", the words "the
KnowledgeWare Subsidiaries other than
<PAGE>
-2-
KnowledgeWare Worldwide, Inc., a Georgia corporation, to be known, following the
consummation of the transactions contemplated by the KnowledgeWare Merger
Agreement, as Sterling Software Worldwide, Inc.,".
(b) inserting in the definition of Sterling Subsidiaries, after the
words "Data Management" and before the words "and any other Subsidiary of the
Company," the words "KnowledgeWare, the KnowledgeWare Subsidiaries,".
(c) inserting the following new definitions in the order required by
alphabetical order:
"KnowledgeWare. KnowledgeWare, Inc., a Georgia corporation to be
-------------
known, following the consummation of the transactions contemplated
by the KnowledgeWare Merger Agreement, as Sterling Software
(Southern), Inc., and the surviving corporation in the merger of
KnowledgeWare, Inc. and SSI Corporation, a Georgia corporation and a
wholly owned Subsidiary of the Company.
KnowledgeWare Loan Agreements. (a) The Second Amended and Restated
------------- ---- ----------
Revolving Loan and Security Agreement dated as of November 30, 1994,
between the Company and KnowledgeWare, evidencing a $22,000,000
revolving credit facility and a $6,000,000 term loan from the
Company to KnowledgeWare, (b) the Revolving Credit Agreement dated
as of November 30, 1994 between the Company and KnowledgeWare and
evidencing a revolving credit facility of approximately $5,000,000,
and (c) the Term Loan Agreement dated as of November 30, 1994
between the Company and KnowledgeWare, evidencing a term loan of
approximately $10,000,000 from the Company to KnowledgeWare.
KnowledgeWare Merger Agreement. The Amended and Restated Agreement
------------- ------ ---------
and Plan of Merger dated as of August 31, 1994 among KnowledgeWare,
the Company and SSI Corporation, a Georgia corporation and a wholly
owned Subsidiary of the Company.
KnowledgeWare Notes. (a) The Amended and Restated Term Note dated
-------------------
as of November 30, 1994 executed by KnowledgeWare in favor of the
Company in the original principal amount of $6,000,000, (b) the
Amended and Restated Revolving Note dated as of November 30, 1994
executed by KnowledgeWare in favor of the Company in the original
principal amount of $22,000,000, (c) the Term Note dated as of
November 30, 1994 executed by KnowledgeWare in favor of the Company
in the original principal amount of approximately $10,000,000, and
(d) the Revolving Credit Note dated as of November 30, 1994 executed
by KnowledgeWare in favor of the Company in the original principal
amount of approximately $5,000,000.
KnowledgeWare Security Agreements. The Security Agreement dated as
------------- -------- ----------
of November 30, 1994 between the Company and KnowledgeWare and the
Second Amended and Restated Loan and Security Agreement dated as of
November 30, 1994, between KnowledgeWare and the Company, pursuant
to which
<PAGE>
-3-
KnowledgeWare has granted, ratified and continued liens and security
interests on certain of its assets in order to secure its
obligations under the KnowledgeWare Loan Agreements and the
KnowledgeWare Notes.
KnowledgeWare Subsidiaries. IWK Corporation, a Delaware
------------- ------------
corporation; KnowledgeWare Worldwide, Inc., a Georgia corporation to
be known, following the consummation of the transactions
contemplated by the Knowledge Ware Merger Agreement, as Sterling
Software Worldwide, Inc.; Matesys Corp., a California
corporation; and KnowledgeWare International, Inc., a Georgia
corporation."
(S)2. SUBSTITUTION OF NEW SCHEDULES 5.2(A) AND 5.6 TO THE LOAN AGREEMENT.
-------------------------------------------------------------------
Schedules 5.2(a) and 5.6 to the Loan Agreement are hereby deleted in their
- - ---------------- ---
entirety, and Schedules 5.2(a) and 5.6 attached hereto are respectively
--------- ------ ---
substituted in lieu thereof.
(S)3. AMENDMENT OF (S)9.1 OF THE LOAN AGREEMENT. Section 9.1 of the Loan
------------------------------------------
Agreement is hereby amended by:
(a) deleting the word "and" at the end of subsection (r) thereof;
(b) deleting the period (".") at the end of subsection (s) thereof
and substituting in lieu thereof the text "; and"; and
(c) inserting, immediately after subsection (s) thereof, a new
subsection (t) with the following text:
"(t) Indebtedness of KnowledgeWare or any of its Subsidiaries
existing on the date hereof and listed on Schedule 9.1(t)(2)."
------------------
(S)4. ADDITION OF SCHEDULE 9.1(T)(2). The Loan Agreement is hereby
------------------------------
amended by adding a new Schedule 9.1(t)(2) in the form attached hereto as
Schedule 9.1(t)(2).
- - ------------------
(S)5. AMENDMENT OF (S)9.2 OF THE LOAN AGREEMENT. Section 9.2 of the Loan
----------------------------------------- -----------
Agreement is hereby amended by:
(a) deleting the word "and" at the end of subsection (n) thereof;
(b) deleting the period (".") at the end of subsection (o) thereof
and substituting in lieu thereof the text "; and"; and
(c) inserting, immediately after subsection (o) thereof, a new
subsection (p) with the following text:
"(p) liens granted by KnowledgeWare on those assets
constituting collateral under the KnowledgeWare Security
Agreements (but specifically
<PAGE>
-4-
excluding any assets which were owned by a Subsidiary of the
Company prior to the merger of KnowledgeWare and SSI
Corporation) in favor of the Company, securing Indebtedness
from KnowledgeWare to the Company pursuant to the KnowledgeWare
Loan Agreements, as evidenced by the KnowledgeWare Notes.
(S)6. AMENDMENT OF (S)9.5 OF THE LOAN AGREEMENT. Section 9.5 of the Loan
-----------------------------------------
Agreement is hereby amended by:
(a) deleting the word "and" at the end of subsection (a)(iii)
thereof;
(b) deleting the period (".") at the end of subsection (a)(iv)
thereof and substituting in lieu thereof the text "; and"; and
(c) inserting, immediately after subsection (a)(iv) thereof, a new
subsection (v) with the following text;
"(v) the Company may acquire KnowledgeWare pursuant to the
terms of the KnowledgeWare Merger Agreement."
(S)7. AMENDMENTS OF (S)9.9 OF THE LOAN AGREEMENT. Section 9.9 of the
------------------------------------------
Loan Agreement is hereby amended by:
(a) inserting in subsection (c)(i)(B) thereof, immediately after
the text "if the Subsidiary being disposed of is" and immediately
before the text "Sterling Software (US), Sterling ZeroOne", the text
"KnowledgeWare, KnowledgeWare Subsidiaries,";
(b) deleting the word "and" at the end of subsection (g) thereof;
(c) deleting the period (".") at the end of subsection (h) thereof
and substituting in lieu thereof the text "; and"; and
(d) adding at the end thereof a new subsection (i) with the
following text:
"(i) Transfers of assets by Sterling Software (United States)
to KnowledgeWare contemporaneously with the consummation of the
transactions contemplated by the KnowledgeWare Merger
Agreement; provided, however, that such assets shall remain
-------- -------
subject to the Agent's lien for the benefit of the Banks."
(S)8. LIMITED WAIVER OF (S)(S)8.20 AND 9.4 OF THE LOAN AGREEMENT. In
----------------------------------------------------------
connection with the merger of KnowledgeWare and the Acquisition Subsidiary, the
Company has requested that the Agent and the Banks waive the covenants set forth
in (S)(S)8.20 and 9.4 of the Loan Agreement, solely
<PAGE>
-5-
to the limited extent necessary to permit the consummation of the merger of the
Acquisition Subsidiary and KnowledgeWare pursuant to the KnowledgeWare Merger
Agreement. Subject to all conditions of the Loan Agreement and this Amendment
and solely to the limited extent necessary to permit the consummation of the
merger of the Acquisition Subsidiary and KnowledgeWare pursuant to the
KnowledgeWare Merger Agreement, each of the Agent and the Banks hereby waives
the provisions of (S)(S)8.20 and 9.4 of the Loan Agreement which (a) require
that the Company pledge to the Agent for the benefit of the Banks the issued and
outstanding capital stock of KnowledgeWare, and of KnowledgeWare's wholly owned
Subsidiaries, (b) require KnowledgeWare and any of its wholly owned Subsidiaries
to grant to the Agent for the benefit of the Banks a first perfected priority
security interest in the items or types of collateral described in the Security
Agreement, (c) require that KnowledgeWare and any of its wholly owned
Subsidiaries become a party to and guarantor obligated under the Guaranty, and
(d) prohibit certain mergers; provided, however, that the waivers contained in
-------- -------
clauses (a), (b) and (c) above shall only be effective until December 31, 1994
and that the security interest granted in the items or types of collateral
described in the Security Agreement following December 31, 1994 shall be subject
only to the liens and security interests in favor of the Company and described
in (S)9.2(p) of the Loan Agreement.
(S)9. LIMITED WAIVER OF (S)2(A) OF THE ASSIGNMENT AGREEMENT. In
-----------------------------------------------------
connection with the merger of KnowledgeWare and the Acquisition Subsidiary, the
Company has requested that the Agent and the Banks waive the requirements of
(S)2(a) of the Assignment Agreement with respect to the assignment of (a) the
Amended and Restated Term Note dated as of November 30, 1994 executed by
KnowledgeWare in favor of the Company in the original principal amount of
$6,000,000, (b) the Amended and Restated Revolving Note dated as of November 30,
1994 executed by KnowledgeWare in favor of the Company in the original principal
amount of $22,000,000, (c) the Term Note dated as of November 30, 1994 executed
by KnowledgeWare in favor of the Company in the original principal amount of
$10,000,000 and (d) the Revolving Credit Note dated as of November 30, 1994
executed by KnowledgeWare in favor of the Company in the original principal
amount of $5,000,000 (collectively, the "KnowledgeWare Notes"), collectively
evidencing up to $43,000,000 of Intercompany Indebtedness of KnowledgeWare to
the Company under the KnowledgeWare Loan Agreements. Subject to all conditions
of the Loan Documents and this Amendment and solely to the limited extent
provided herein, each of the Agent and the Banks hereby waives, until December
31, 1994, the requirement of (S)2(a) of the Assignment Agreement that the
Company pledge, endorse and deliver to the Agent the KnowledgeWare Notes.
(S)10. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to be
---------------------------
effective as of November 30, 1994 (the "Effective Date") upon the satisfaction
of the conditions precedent that, on or before November 30, 1994, the Agent
shall have received (1) facsimile copies of original counterparts (to be
followed promptly by original counterparts) of this Amendment, executed by each
of the Company, the Sterling Subsidiaries, the Banks and the Agent; and (2) (a)
a fully executed copy of the Merger Agreement, and (b) copies of the approvals
of the shareholders of the Company and of KnowledgeWare of the merger of
KnowledgeWare and the Acquisition Subsidiary, with KnowledgeWare as the
surviving entity.
<PAGE>
-6-
(S)11. REPRESENTATION AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each of
-------------- --- ---------- -- ------- -------------
the Company and the Sterling Subsidiaries hereby represents and warrants to each
of the Agent and the Banks as follows:
(a) Each of the representations and warranties of the Company and the
Sterling Subsidiaries contained in the Loan Agreement, the other Loan Documents
or in any document or instrument delivered pursuant to or in connection with the
Loan Agreement, the other Loan Documents or this Amendment was true as of the
date as of which it was made and is true as and at the date of this Amendment,
and no Default or Event of Default has occurred and is continuing as of the date
of this Amendment; and
(b) This Amendment has been duly authorized, executed and delivered by
the Company and each of the Sterling Subsidiaries and shall be in full force and
effect upon the satisfaction of the conditions set forth in (S)10 hereof, and
the agreements of the Company and each of the Sterling Subsidiaries party hereto
contained herein, in the Loan Agreement, as amended, and the other Loan
Documents, as amended, respectively constitute the legal, valid and binding
obligations of the Company and each of the Sterling Subsidiaries party hereto,
enforceable against the Company or such Sterling Subsidiary in accordance with
their respective terms.
(S)12. RATIFICATION ETC. Except as expressly amended hereby, the Loan
------------ ---
Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. All references in the Loan Agreement
or such other Loan Documents or in any related agreement or instrument to the
Loan Agreement or such other Loan Documents shall hereafter refer to such
agreements as amended hereby and as previously amended, if previously amended,
pursuant to the provisions of the Loan Agreement.
(S)13. IMPLIED WAIVER. Except as expressly provided herein,
------- ------
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, any other obligations of the Company or any right of the
Agent or the Banks consequent thereon. The waivers provided herein are limited
strictly to their terms. Neither the Agent nor any of the Banks shall have any
obligation to issue any further waiver with respect to the subject matter hereof
or any other matter.
(S)14. COUNTERPARTS. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)15. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED
--------- ---
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
<PAGE>
-7-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
THE FIRST NATIONAL BANK OF BOSTON,
Individually and as Agent
By:____________________________________
Title:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:____________________________________
Title:
STERLING SOFTWARE, INC.
By:_____________________________________
Title:
Each of the undersigned hereby acknowledges the foregoing Amendment as of the
Effective Date and agrees that its obligations under the Guaranty will extend to
the Loan Agreement, as so amended, and the other Loan Documents, as so amended.
STERLING SOFTWARE (MIDWEST), INC.
(formerly Creative Data Systems, Inc.)
By:____________________________________
Title:
<PAGE>
-8-
STERLING SOFTWARE
(NORTHERN AMERICA), INC.
(formerly Directions, Inc.)
By:_________________________________
Title:
STERLING SOFTWARE
(UNITED STATES), INC.
(formerly Zanthe, Inc. Dylakor, Inc.
and Answer Systems, Inc.
By:_________________________________
Title:
STERLING SOFTWARE (AMERICA), INC.
(formerly Ordernet Services, Inc.)
By:_________________________________
Title:
STERLING CHECK LIQUIDATION, INC.
By:_________________________________
Title:
STERLING SOFTWARE (U.S.A.), INC.
(formerly Systems Software Marketing,
Inc. and Software Laboratories, Inc.)
By:_________________________________
Title:
<PAGE>
-9-
STERLING DISTRIBUTION SERVICES, INC.
By:_________________________________
Title:
STERLING SOFTWARE (US), INC.
(formerly known as Sterling
Federal Systems, Inc.
and Sterling IMD, lnc.)
By:_________________________________
Title:
SYSTEMS CENTER, INC.
(formerly Sterling Software, Inc.
a Wyoming corporation)
By:________________________________
Title:
STERLING SOFTWARE LEASING COMPANY
By:___________________________________
Title:
STERLING SOFTWARE
INTERNATIONAL, INC.
By:___________________________________
Title:
<PAGE>
-10-
STERLING ZEROONE, INC.
By:___________________________________
Title:
ZEROONE SYSTEMS, INC.
By:________________________________
Title:
STERLING SOFTWARE (UNITED STATES
OF AMERICA), INC.
By:_________________________________
Title:
STERLING SOFTWARE
(NORTH AMERICA), INC.
By:________________________________
Title:
STERLING SOFTWARE
(U.S. OF AMERICA), INC.
By: ________________________________
Title:
<PAGE>
-11-
SCHEDULE 5.2(a)
--------------
STERLING SUBSIDIARIES
---------------------
<TABLE>
<CAPTION>
Authorized Sterling Software
Capital Ownership Sterling Software (United States of
-----------------------------------------------------------------------------------------------------
Subsidiary Class (Par Value) No. Shares Issued Sterling (U.S.A.) America)
- - ---------------------------------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sterling Software Common ($.10) 50,000 1,000 1,000 -
(Midwest), Inc.
Sterling Software Common ($.10) 50,000 10,000 10,000 -
(Northern America), Inc.
Sterling Software Common ($.10) 50,000 1,000 1,000 -
(United States), Inc.
Sterling Software, Common ($.10) 50,000 1,000 1,000 -
(America), Inc.
Sterling Distri- Common ($.10) 50,000 1,000 1,000 -
bution Services, Inc.
Sterling Check Common (none) 2,000 1,000 1,000 -
Liquidation, Inc.
Sterling Software Common ($.10) 1,000 1,000 1,000 -
(US), Inc.
Systems Center, Inc. Common ($1.00) 1,000 1,000 1,000 -
Sterling Software Common ($.10) 50,000 1,000 1,000 -
International, Inc.
Sterling Software
Leasing Company Common ($.10) 10,000 1,000 1,000 -
Sterling ZeroOne, Inc. Common ($.10) 50,000 1,000 1,000 -
Sterling Software Common ($1.00) 25,000 995 995 -
(U.S.A.), Inc.
ZeroOne Systems, Inc. Common ($.10) 50,000 1,000 1,000 -
Sterling Software Common($.01) 10,000 1,000 1,000
(United States Preferred($.01) 1,000 500 478 22
of America), Inc.
Sterling Software Common($.10) 5,000 1,000 - 1,000
(U.S. of America), Inc.
Sterling Software Common($.10) 5,000 1,000 - 1,000
(North America), Inc.
Net/Master, Inc. Common($.01) 10,000 10,000 - 10,000
Data Management Common($.01) 3,000 3,000 - 3,000
Information, Inc.
</TABLE>
<PAGE>
-12-
<TABLE>
<CAPTION>
Authorized KnowledgeWare,
Capital Ownership Matesys Mathematics Inc.f
------------------------------------------------------------------------------------------------
Subsidiary Class (Par Value) No. Shares Issued Sterling Systems, Inc.
- - ---------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KnowledgeWare, Inc., to Common ($.10) 10,000 1,000 1,000
be known as Sterling
Software (Southern), Inc.
IWK Corporation Common ($.10) 1,000 1,000 1,000
KnowledgeWare Common (no par) 100,000 10,000 10,000
Worldwide, Inc., to
be known as Sterling
Software Worldwide, Inc.
Matesys Corp. Common (no par) 1,000,000 65,000 65,000
KnowledgeWare Common ($ ) 1,000 500 500
International, Inc.
</TABLE>
<PAGE>
-13-
SCHEDULE 5.6
------------
Sterling Subsidiaries
---------------------
and Chief Executive Offices
---------------------------
Sterling Software (Midwest), Inc.
(formerly Creative Data Systems, Inc.)
3659 South Green Road
Beachwood, OH 44122
Sterling Software (Northern
America), Inc.
(formerly Directions, Inc.)
15301 Dallas Parkway
Suite 400, LB 23
Dallas, TX 75248
Sterling Software (United
States), Inc.
(formerly Zanthe, Inc., Dylakor, Inc. and Answer Systems, Inc.)
5900 Canoga Avenue
Woodland Hills, CA 91367-4237
Sterling Software (America), Inc.
(formerly Ordernet Services, Inc.)
4600 Lakehurst Court
Dublin, OH 43220
Sterling Distribution Services, Inc.
4600 Lakehurst Court
Dublin, OH 43220
Sterling Check Liquidation, Inc.
15301 Dallas Parkway
Suite 400, LB 23
Dallas, TX 75248
Sterling Software (US), Inc.
(formerly Sterling Federal Systems, Inc.
and Sterling IMD, Inc.)
950 Tower Lane
Suite 870
Foster City, CA 94404
<PAGE>
-14-
Systems Center, Inc.
(formerly Sterling Software, Inc.,
a Wyoming corporation)
8080 N. Central Expy
Suite 1100
Dallas, TX 75206
Sterling Software International, Inc.
8080 N. Central Expressway
Suite 1100
Dallas, TX 75206
Sterling Software Leasing Company
8080 N. Central Expressway
Suite 1100
Dallas, TX 75206
Sterling ZeroOne, Inc.
950 Tower Lane
Suite 870
Foster City, CA 94404
Sterling Software (U.S.A.), Inc. (California)
(formerly Systems Software Marketing,
Inc. and Software Laboratories, Inc.)
11050 White Rock Road
Suite 100
Rancho Cordova, CA 95670
ZeroOne Systems, Inc.
8080 N. Central Expy
Suite 1100
Dallas, TX 75206
Sterling Software (United States
of America), Inc.
1800 Alexander Bell Drive
Reston, Virginia 22091
Sterling Software (U.S. of America), Inc.
1800 Alexander Bell Drive
Reston, Virginia 22091
<PAGE>
-15-
Sterling Software (North America), Inc.
2477 Gateway
Irving, Texas 75063
Net/Master, Inc.
1800 Alexander Bell Drive
Reston, Virginia 22091
Data Management Information, Inc.
1800 Alexander Bell Drive
Reston, Virginia 22091
KnowledgeWare, Inc., to be
known as Sterling Software
(Southern), Inc.
3340 Peachtree Road, N.E.
Suite No. 1100
Atlanta, Georgia 30326
IWK Corporation
c/o Corporation Trust Company
Corporate Trust Center
1209 Orange Street
Wilmington, Delaware 19801
KnowledgeWare Worldwide, Inc.,
to be known as Sterling Software
Worldwide, Inc.
3340 Peachtree Road, NE
Suite 1100
Atlanta, Georgia 30326
Matesys Corp.
3340 Peachtree Road, NE
Suite 1100
Atlanta, Georgia 30326
KnowledgeWare International, Inc.
3340 Peachtree Road, NE
Suite 1100
Atlanta, Georgia 30326
<PAGE>
-16-
SCHEDULE 9.1(T)(2)
------------------
(Existing Indebtedness of
KnowledgeWare and Its Subsidiaries)
1. Indebtedness of KnowledgeWare to the Company pursuant to the KnowledgeWare
Loan Agreements, as evidenced by the KnowledgeWare Notes
2. Indebtedness in the aggregate amount of $1,000,000 owed to Ernst & Young UK,
due September, 1995.
3. Indebtedness in the approximate aggregate amount of $800,000 (Australian
Dollars $1,125,000) owed to Ernst & Young, Australia, due in December, 1994.
<PAGE>
Exhibit 10(ccc)
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY95
PURPOSE
- - -------
The purpose of the Executive Compensation Plan ("Plan") is to provide rewards
for Group Presidents based on their ability to achieve and exceed specific Group
objectives.
ELIGIBILITY
- - -----------
All Group Presidents ("Participants") are eligible to participate in the Plan.
Eligibility of certain persons to participate in the Plan may be changed at any
time at the sole discretion of the Chief Executive Officer of Sterling Software,
Inc. ("CEO").
EFFECTIVE PERIOD
- - ----------------
The Plan is in effect beginning October 1, 1994 through September 30, 1995,
subject to change at any time at the sole discretion of the CEO. The Plan does
not constitute an employment agreement and the CEO reserves the right to
terminate the employment of the Participants without cause at any time.
GROUP OBJECTIVES
- - ----------------
Certain Plan compensation will be based on the achievement of specific Group
Operating Profit Objectives. Each Participant in the Plan agrees to provide a
detailed action plan to achieve his assigned Group Objectives against which his
performance will subsequently be measured. Group Objectives, their achievement
and the methods of measuring achievement will be determined by the CEO for the
purposes of this Plan. Objectives are subject to change at any time at the sole
discretion of the CEO in the exercise of his reasonable business judgment.
COMPENSATION TERMS
- - ------------------
The amounts and types of compensation to be received under the Plan will be
determined by each Participant's Executive Compensation Agreement ("Agreement").
PAYMENTS
- - --------
Salaries provided for under the Agreement are payable bi-weekly from the
effective date of the Agreement. Contingent compensation provided for under the
Agreement is payable (i) no later than sixty days after the applicable quarter
end with respect to compensation based upon quarterly objectives and (ii) no
later than ninety-five days after the fiscal year
<PAGE>
EXECUTIVE COMPENSATION PLAN
Page Two
end with respect to compensation based upon annual objectives. No payment of
contingent compensation will be made unless a Participant is a full-time
employee of Sterling Software, Inc. acting in the capacity of a Group President
at quarter end, with respect to any quarterly objective, or at September 30,
1995, with respect to an annual objective; provided however that in the event of
termination of a Participant's employment as a result of the death or disability
of a Participant while acting in the capacity of a Group President, Sterling
Software, Inc. shall pay to such Participant a prorated portion of the
contingent compensation provided for herein provided that at least 90% of the
Group Operating Profit had been attained on a prorata basis as of the
Participant's termination of employment.
<PAGE>
Exhibit 10(rrr)
CONSULTATION AGREEMENT
----------------------
THIS AGREEMENT, made and entered into this 1st day of December, 1994, by
and between STERLING SOFTWARE, INC., a Delaware corporation, with its principal
office and place of business at 8080 North Central Expressway, Suite 1100,
Dallas, Texas (hereinafter referred to as "Sterling") and FRANCIS A. TARKENTON,
1431 Garmon Ferry Road, Atlanta, Georgia 30327 (hereinafter referred to as
"Consultant").
W I T N E S S E T H:
WHEREAS, Consultant is familiar with and has the knowledge, expertise and
background as to the analysis of financial matters concerning Sterling with
specific background in the business of KnowledgeWare, Inc.; and
WHEREAS, Sterling is desirous of engaging the services of Consultant, and
Consultant is desirous of serving Sterling in an advisory capacity;
NOW THEREFORE, for and in consideration of the promises, covenants and
conditions contained herein, the parties hereto agree as follows:
1. Consultant shall serve in an advisory capacity to the President of
Sterling for the purpose of making financial and strategic recommendations
regarding Sterling's applications development business and, at the request of
the President of Sterling, shall engage in strategic planning and represent
Sterling in certain mergers and acquisitions and at trade shows, user group
meetings, quota clubs, professional association meetings and meetings with
prospective and current clients. Consultant shall make himself available for
such advisory and consultation purposes as may be desired by Sterling, upon
reasonable notice, at such times and for such duration as may be mutually agreed
upon.
2. As compensation for and in consideration of the services to be
performed hereunder, Sterling shall pay Consultant an annual fee of $300,000.00
per year. The term of this Agreement shall be from December 1, 1994, through
November 30, 1997. Commencing December 1, 1994, Sterling shall pay to Consultant
the $900,000.00 fee in thirty-six (36) equal monthly payments of $25,000.00,
with the first payment to be due on December 1, 1994, and a like payment to be
due on the first day of each month thereafter during the remaining term of the
Agreement. The fee shall be paid without regard to whether Sterling avails
itself of Consultant's services at any time during the term of this Agreement.
The Consultant shall be reimbursed for all authorized expenses such as travel
(first-class airfare), food and lodging which are incurred at the direction of
Sterling consistent with this Agreement. In addition, Consultant shall receive
an allowance of $3,000.00 per month for office and secretarial assistance
relating to the performance of his duties hereunder. Until such time as
Consultant secures his own office space and secretarial assistance, Sterling
shall make available at its Atlanta offices, for the benefit and use by
Consultant, use of office facilities such as secretarial services, telephone and
office space.
<PAGE>
3. Consultant shall not use, for his personal gain or benefit or the
personal gain or benefit of any members of his family, any confidential or
proprietary information of Sterling which is obtained by or delivered to
Consultant consistent with the purposes and intent of this Agreement. During the
term of this Agreement, Consultant shall not act as a financial consultant,
spokesperson or advisor to any other person, partnership, corporation or other
business association in the computer software, hardware or services industry
without the prior written consent of the President of Sterling. It is expressly
understood that the speaking engagements traditionally made by Consultant shall
not be deemed a violation of this provision, even though such engagements may be
for the purpose of speaking to businesses engaged in the computer software,
hardware or services industry. Consultant shall not be required to obtain prior
consent for such engagements. During the term of this Agreement, Consultant will
not, on his own behalf or on behalf of others, solicit, divert or hire away, or
attempt to solicit, divert or hire away any person employed by Sterling or its
subsidiaries.
4. This Agreement shall terminate on November 30, 1997 unless extended
by mutual agreement of the parties evidenced in a writing signed by both
parties. This Agreement may be terminated by Consultant at any time during the
term of this Agreement, but any compensation which has been paid as of the date
of termination shall be deemed to have been earned and there shall be no
repayment of any sums previously paid.
EXECUTED as of the date and year first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President and Chief Executive Officer
FRANCIS A. TARKENTON
By: /s/ Francis A. Tarkenton
-------------------------------------
Francis A. Tarkenton
2
<PAGE>
STERLING SOFTWARE, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED SEPTEMBER 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
--------- ---------
<S> <C> <C>
Earnings:
Earnings applicable to common stockholders......................................... $58,143 $58,143
Add: Interest expense on amounts outstanding for the 5 3/4% Convertible 133 4,224
Subordinated Debentures (net of applicable income taxes)..................
Interest income on investment of proceeds from assumed conversion 70
of options and warrants (net of applicable income taxes)..................
--------- ---------
$58,276 $62,437
========= =========
Shares:
Weighted average of shares outstanding............................................. 19,812 19,812
Add common shares issued on assumed exercise of options and warrants............... 7,228 7,228
Less common shares assumed repurchased............................................. (4,117) (4,117)
--------- ---------
22,923 22,923
=========
Common shares issued on assumed conversion of 5 3/4% Convertible
Subordinated Debentures............................................................ 4,056
---------
26,979
=========
Earnings per common share:
Primary............................................................................ $2.54
=========
Fully diluted...................................................................... $2.31
=========
</TABLE>
<PAGE>
EXHIBIT 21
STERLING SOFTWARE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- - --------------------------- -------------------------------
<S> <C>
Sterling Check Liquidation, Inc. Tennessee
Sterling Consulting S.A. France
Sterling Distribution Services, Inc. Delaware
Sterling International Finance, Inc. Cayman Islands
Sterling Software (America), Inc. Delaware
Sterling Software (Midwest), Inc. Delaware
Sterling Software (Northern America), Inc. Delaware
Sterling Software (U.S.), Inc. Delaware
Sterling Software (U.S.A.), Inc. California
Sterling Software (United States), Inc. Delaware
Sterling Software (United States of America), Inc. Delaware
Condessa Gestao E Investimentos Lda Portugal
Net/Master, Inc. U.S. Virgin Islands
Sterling Software A.B. Sweden
Sterling Software GmbH Germany
Sterling Software International (U.K) Limited United Kingdom
Sterling Software (Australia) Pty. Limited Australia
Sterling Software (Benelux) NV Belgium
Sterling Software (France) S.A. France
Sterling Software (Japan) Ltd. Japan
Sterling Software (North America), Inc. Delaware
Sterling Software (Singapore) Pte Ltd. Singapore
Sterling Software (U.S. of America), Inc. Delaware
Sterling Software (U.K.) Holdings Limited United Kingdom
Sterling Software (U.K.) Limited United Kingdom
Sterling Software (Switzerland) A.G. Switzerland
Systems Center AS Norway
Systems Center do Brasil Software Ltda. Brazil
Systems Center Distribuidora de Software Ltda. (49% subsidiary) Brazil
Systems Center Handelsgesellschaft m.b.H. Austria
Systems Center Limited United Kingdom
Systems Center Pty. Limited Australia
Systems Center Software Ltd. Hong Kong
VM Software, Inc. U.S. Virgin Islands
VM Software Sarl France
Sterling Software (Canada), Inc. Canada
Sterling Software International (France) Sarl France
Sterling Software International, Inc. Delaware
Sterling Software International (Australia) Limited Delaware
Sterling Software (Israel), Ltd. Israel
Sterling Software (Italia) S.R.L. Italy
Sterling Software Leasing Company Delaware
Sterling Software (Scandinavia) AS Norway
Sterling ZeroOne, Inc Delaware
Systems Center, Inc. Wyoming
VM Software U.K. Ltd. United Kingdom
ZeroOne Systems, Inc. Delaware
Sterling Software (Southern), Inc. Georgia
KnowledgeWare Worldwide, Inc. Georgia
KnowledgeWare International, Inc. Delaware
KnowledgeWare Export, Inc. Virgin Islands
KnowledgeWare Pacific Pty. Limited Australia
KnowledgeWare Vertrihs GmbH Austria
KnowledgeWare BVBA Belgium
KnowledgeWare SARL France
KnowledgeWare Denmark A/S Denmark
KnowledgeWare GmbH Germany
KnowledgeWare (Far East) Ltd. Hong Kong
KnowledgeWare SRL Italy
KnowledgeWare BV Netherlands
KnowledgeWare Pacific NZ Limited New Zealand
KnowledgeWare Portugal Informatica LDA Portugal
KnowledgeWare SA Spain
KnowledgeWare AB Sweden
KnowledgeWare AG Switzerland
KnowledgeWare UK Ltd. United Kingdom
IWK Corporation Delaware
Matesys Mathematic Systems, S.A. France
Matesys Corp. California
</TABLE>
Notes:
- - ------
1. Indented names are subsidiaries of subsidiaries.
2. Inclusion in the list is not a representation that the subsidiary is a
significant subsidiary.
3. Except as noted, the voting shares of all subsidiaries are 100% owned by
Sterling Software, Inc., its subsidiaries or employee nominees.
4. Sterling Software (Southern) Inc. (f/w/a KnowledgeWare, Inc.), together
with its subsidiaries (listed below it), was acquired as of November 30,
1994.
<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. 33-2644, No. 33-13490, No. 33-32699,
No. 33-35433, No. 33-48553, No. 33-55954, No. 33-57428, No. 33-71706,
No. 33-53831,No.33-53837, No. 33-54961, No. 33-56685, No. 33-56683,
No. 33-56677 and No. 33-56679), and in the Registration Statements on Form S-8
(File No. 33-65402, No. 33-69926, No. 33-47131, No. 33-13532, No. 33-8828, No.
2-95215, No. 2-95216, No. 33-53833 and No. 33-56681) of Sterling Software, Inc.,
and in the related Prospectuses of our report dated December 1, 1994, with
respect to the consolidated financial statements of Sterling Software, Inc.
included in this Annual Report on Form 10-K for the year ended September 30,
1994.
Ernst & Young LLP
Dallas, Texas
December 1, 1994
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 18, 1993 (except with respect to the matter discussed in Note
19 as to which the date is July 1, 1993) included in this Annual Report on Form
10-K for the year ended September 30, 1994 into Sterling Software, Inc.'s
previously filed Registration Statements on Form S-3 (File No. 33-2644, No.
33-13490, No. 33-32699, No. 33-35433, No. 33-48553, No. 33-55954, No. 33-57428,
No. 33-71706, No. 33-53831, No. 33-53837, No. 33-54961, No. 33-56685, No.
33-56683, No. 33-56677 and No. 33-56679) and on Form S-8 (File No. 33-65402, No.
33-69926, No. 33-47131, No. 33-13532, No. 33-8828, No. 2-95215, No. 2-95216, No.
33-53833 and No. 33-56681).
Arthur Andersen LLP
Washington, D.C.,
December 1, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
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-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 101,893
<SECURITIES> 41,847
<RECEIVABLES> 141,528
<ALLOWANCES> 9,362
<INVENTORY> 0
<CURRENT-ASSETS> 297,178
<PP&E> 77,670
<DEPRECIATION> 44,144
<TOTAL-ASSETS> 488,773
<CURRENT-LIABILITIES> 172,019
<BONDS> 115,932
<COMMON> 2,238
0
20
<OTHER-SE> 173,546
<TOTAL-LIABILITY-AND-EQUITY> 488,773
<SALES> 473,393
<TOTAL-REVENUES> 473,393
<CGS> 171,745
<TOTAL-COSTS> 377,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,658
<INCOME-PRETAX> 92,601
<INCOME-TAX> 34,262
<INCOME-CONTINUING> 58,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,339
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.31
</TABLE>
