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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1995
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
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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
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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 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Due February 1, 2003
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 October 31, 1995, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $1,204,419,900 based on the closing
sales price of $46 1/8 on the New York Stock Exchange.
As of October 31, 1995, 26,675,045 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 1996 are incorporated by reference in Part III.
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STERLING SOFTWARE, INC.
TABLE OF CONTENTS
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FORM 10-K ITEM PAGE
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PART I.
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 8
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 10
Item 6. Selected Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
Item 8. Financial Statements and Supplementary Data..................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 42
PART III.
Item 10. Directors and Executive Officers of the Registrant............. 42
Item 11. Executive Compensation......................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................................. 42
Item 13. Certain Relationships and Related Transactions................. 42
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K...................................................................... 42
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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, systems management and applications management
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 November 1994, Sterling completed the acquisition of KnowledgeWare, Inc.
("KnowledgeWare"), a leading provider of applications development software and
services, based in Atlanta, Georgia, for approximately $106 million in a
stock-for-stock acquisition plus cash costs accounted for as a purchase.
Following the completion of the KnowledgeWare acquisition, Sterling
reorganized into five groups which currently consist of twenty divisions. See
Notes 5 and 6 of Notes to Consolidated Financial Statements--Segment
Information and Operations by Geographic Area.
As of September 30, 1995, the Company was organized into the following five
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 network 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 worldwide.
. The Systems Management Group, headquartered in Washington, D.C., provides
systems management software products for computing environments across
the enterprise. The group provides software products that specialize in
storage management, VM systems management and operations management.
Sterling addresses the needs of corporations as they move to
client/server computing environments, offering products that operate on a
variety of computer platforms and operating systems.
. The Applications Management Group, headquartered in Atlanta, Georgia,
provides products for developing new applications and revitalizing
existing applications and services to ensure that customers are
successful using the applications management products. These software
tools allow customers to quickly develop and implement new software
applications and to integrate and improve existing applications at the
desktop.
. The Federal Systems Group, headquartered in Washington, D.C., provides
technical professional services to the federal government under several
multi-year contracts primarily in support of secure communications
systems for the U.S. Department of Defense ("DoD") and National
Aeronautics and Space Administration ("NASA") aerospace research
projects. The group also markets the products and services of the
Electronic Commerce Group to federal departments and agencies, and the
group's personnel serve as a source of technical expertise for commercial
customers and other divisions of Sterling.
. The International Group, headquartered in Paris, France, is the exclusive
channel to international markets for all of Sterling's products. The
group operates through six regional divisions representing four regions
of Europe, Asia/Pacific and other countries throughout the world. The
products are sold and supported through 30 offices in 17 countries and
through trained agents and distributors in 36 additional countries.
A large percentage of Sterling's business is recurring business 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. Recurring revenue represented
58% and 63% of the Company's total revenue in 1995 and 1994, respectively.
Sterling's customer base includes 96 of the 100 largest U.S. industrial
corporations, as ranked by 1994 sales reported in Fortune Magazine, and 99 of
the top l00 U.S. commercial banks, as ranked by deposits as of December 31,
1994, in the American Banker magazine. At September 30, 1995, the Company
employed approximately 3,700 people.
The product names used herein are registered or unregistered trademarks
owned by the Company.
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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 business-to-business EDI network services, the
cornerstone of electronic commerce, and is the leading EDI translation
software provider worldwide. As of September 30, 1995, the group employed
approximately 1,000 people.
Sterling's Network Services Division, a value-added electronic service
provider, offers over a dozen services and software solutions under the
COMMERCE family name. COMMERCE:Network combines the power of EDI, E-mail,
library services and file transfer into a full-service network offering. The
network supports all major communications, messaging and data standards
including BSC, SNA, X.25, X.400, ANSI X.12 and EDIFACT. In addition, the
network is accessible through a full range of connectivity options, including
toll-free dial-up, internationally available packet-switched networks and the
Internet. COMMERCE:Network can connect to over 20 other networks, facilitating
even broader relationships. Value-added services include trading partner and
vendor implementation programs, extended customer support, product training,
education, consulting and other professional services. Other network services
include COMMERCE:Catalog, an electronic database of product information that
permits manufacturers to list products and related universal product code
information in a central repository in order to place current product and
ordering information quickly and easily in the hands of buyers. COMMERCE:
Interactive, another network service, accelerates the speed of transmission
for time-critical business documents. Software products include
COMMERCE:Connection, a Windows-based suite of products that provides
integrated access to a full range of electronic commerce services including
EDI, E-mail, file transfer and electronic libraries. During the year, Sterling
released COMMERCE:Forms, a PC-based software product that converts electronic
forms into an EDI format and is targeted to the growing small- to medium-sized
enterprise market. Sterling's electronic commerce training and education are
provided through COMMERCE:Institute and supplemented with on-line information
offered through COMMERCE:Resource. Sterling's network services are marketed
into targeted vertical industry groups. Sterling is the electronic commerce
market share leader within North America in the pharmaceutical and hardlines
industries. Sterling's other primary vertical industry markets include
grocery, healthcare, insurance, retail, train-truck-ship transportation,
automotive, chemical and petroleum, paper and packaging, banking and
government. During the year, Sterling launched its network services in Europe.
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 the mainframe, AS/400 and HP 3000 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 for MVS or VSE mainframes. GENTRAN:Realtime for
MVS mainframes provides a full set of powerful on-line translation and EDI
management capabilities for critical documents requiring immediate response.
GENTRAN:Director provides Windows-based EDI processing and GENTRAN:Integrator
is a software developer's toolkit for GENTRAN:Director, providing tools to
implement and EDI-enable PC applications for mass distribution or to build
templates and forms for distribution with multiple copies of
GENTRAN:Director's user interface. GENTRAN:Mentor, the first system to use
expert systems technology and graphical navigation to fully automate EDI
mapping, is available for PC and UNIX platforms. GENTRAN:Excel provides high
performance EDI processing in PC-DOS and leading UNIX environments.
GENTRAN:Server is a sophisticated electronic commerce gateway that recognizes,
manages and routes all types of business messages, providing seamless
integration of all the components required to support electronic commerce at
the enterprise level. Other GENTRAN products provide additional EDI management
functions: GENTRAN:Dataguard provides data security through
encryption/decryption; GENTRAN:Viewpoint enhances document tracking and
exception handling; GENTRAN:Examiner provides user-defined tracking of
healthcare claims documents; GENTRAN:Client permits trading partner and map
development independent of connection to the hosts and GENTRAN:Structure
allows the definition and support of fixed-format standards.
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, OS/2, NetWare,
Windows and Windows NT. 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 addresses intracompany and intercompany requirements. CONNECT:Direct
addresses the rapidly growing local area network market with releases for
NetWare and Windows NT. CONNECT:Mailbox is used primarily to move information
between corporations with a focus on wide connectivity.
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The software works independently of applications, platforms and protocols, and
provides open connections throughout the network to any host, midrange or
remote workstation or value-added network. During the year, Sterling released
CONNECT:Firewall, an application-layer security software and enterprise
gateway management system that secures networks from intrusions via the
Internet and provides E-mail and nameserver administration. 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 in banks. The Banking Systems Division has
been a leading provider of banking software and services since 1976. VECTOR
products are used by major banks for item processing applications such as
statement sorting, research and adjustments, check fraud control, electronic
check presentment, return item processing, and signature verification. The
products also enable banks to provide integrated corporate trade payment
processing services for both paper-based check payments and electronic
payments. The Banking Systems Division is the market leader in Financial EDI
software for banks. VECTOR:Connexion provides Financial EDI payment services
for banks' key corporate customers and is used by 41 of the top 100 largest
U.S. bank holding companies as ranked by assets as of June 30, 1995 in the
American Banker magazine. In 1995, the division acquired MAXXUS, Inc., a
leading provider of PC-based cash management software, expanding the
division's traditional market of serving large banks by adding over 200 new
banking clients to the existing customer base and by providing complimentary
electronic payment products to the division's Financial EDI offerings.
Approximately 2,000 VECTOR systems have been installed by approximately 750
financial institutions worldwide, including 99 of the top 100 largest U.S.
banks as ranked by deposits as of December 31, 1994 in the American Banker
magazine.
Worldwide revenue from the Company's Electronic Commerce market represented
37%, 35% and 29% of the Company's revenue during 1995, 1994 and 1993,
respectively.
SYSTEMS MANAGEMENT GROUP
The Systems Management Group is comprised of three divisions that provide
systems management software for computing environments across the enterprise.
These divisions specialize in storage management, VM systems management and
operations management software. As of September 30, 1995, the group employed
approximately 400 people.
Under the SAMS family name, the Storage Management Division provides
software that manages, monitors, and automates data storage in both
distributed and centralized environments. These products provide enterprise-
wide storage management capabilities and include solutions for a variety of
platforms. The division's enterprise products, SAMS:Vantage, SAMS:Expert,
SAMS:Protect and SAMS:Control, automate the management of enterprise data
storage. SAMS:Vantage delivers automation, interactive reporting, analysis and
predictive modeling capabilities and centralized allocation control for MVS
environments. SAMS:Expert provides policy-based automation, interactive
viewing and fault-tolerant data protection for NetWare networks. SAMS:Protect
provides high-performance data protection for OS/2 LAN Server and
workstations. SAMS:Control integrates these three products to provide high-
performance LAN-to-mainframe backup, restore and remote vaulting.
SAMS:Allocate is a centralized allocation control system to make volume
pooling easier and SAMS:Disk is a complete DASD/tape management solution.
SAMS:Select is a high-performance backup accelerator for MVS data and
SAMS:Compress is a data compression tool available for MVS, IMS and DB2 data.
SAMS:Defrag is a defragmentation tool that reorganizes data on-line and in-
place.
Sterling's VM Software Division provides comprehensive integrated systems
management software for the VM operating system. VM:Manager, the division's
flagship product, allows VM sites to control costs, improve performance and
increase user productivity. VM:Manager provides solutions for automated
operations, storage management, service-level management, security and
recovery. In 1995, the VM Software Division introduced VM:Migrate, a storage
management package that enables sites to better exploit the advantages and
cost-savings potential of IBM's Shared File System ("SFS"). VM:Migrate
automatically migrates unused and infrequently used SFS files from expensive
primary storage to less expensive media.
The Company's remaining systems management products are marketed by the
Operations Management Division under the SOLVE family name. The division is a
pioneer in service-driven operations, providing software for managing systems
and network operations from a service perspective. SOLVE:Netmaster automates
SNA and other network management operations across a variety of enterprise
platforms. SOLVE:Attach integrates network management across a number of
environments including IBM, Tandem, TCP/IP and NetWare. SOLVE:Monitor provides
a graphical user interface to SOLVE:Netmaster. SOLVE:Central is a suite of
products for managing
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enterprise-wide service desk operations and is comprised of: 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. During the year, Sterling released the following
products: SOLVE:Viewpoint, a Windows-based interface to the SOLVE:Central
suite that brings complete administrative control to the desktop;
SOLVE:Commander, a UNIX-based product that provides users with single-console
visibility of both MVS/SNA and UNIX/SNMP environments from a service
perspective; and SOLVE:Operations, a package that automates systems and
network operations driven by enterprise policies, service-level agreements and
business priorities.
Worldwide revenue from the Company's Systems Management market represented
26%, 30% and 33% of the Company's revenue during 1995, 1994 and 1993
respectively.
APPLICATIONS MANAGEMENT GROUP
Effective November 1, 1995, Sterling reorganized the Applications Management
Group, establishing four divisions focused on the specific target markets the
group serves, offering both products and services. As of September 30, 1995,
the group employed approximately 500 people. As a part of the November 1, 1995
reorganization, approximately 150 positions were eliminated from the group's
workforce.
The Applications Development Division markets scaleable PC-based products
and services under the KEY family name for predictably developing new
applications systems. The products combine business and applications modeling
with state-of-the-art rapid prototyping and visual client/server development
to produce applications for Windows, UNIX, OS/2, OS/400 and MVS environments.
A systematic approach to modeling, delivering and managing applications
throughout the development process is provided. KEY:Enterprise is an OS/2-
based suite of second generation client/server development and support
products for the enterprise class business application. The toolset
facilitates the development of multi-tier, client/server applications,
assisting users in all development phases: planning, analysis, prototyping,
design, code generation, system documentation and maintenance. The
KEY:Enterprise components are: KEY:Advise, KEY:Analyze, KEY:Client,
KEY:Coordinate, KEY:Construct, KEY:Design, KEY:Document, KEY:Guide,
KEY:Insight, KEY:Plan, KEY:Rapid, KEY:Rochade and KEY:Team. In September 1995,
Sterling released KEY:Workgroup, a Windows-based application development
environment based on an underlying object oriented architecture that combines
the strengths of business modeling with the capabilities of visual
development. The toolset is a complete environment consisting of integrated
components based on the Object Linking and Embedding 2.0 interoperability
framework. The Key:Workgroup components are: KEY:Advise, KEY:Model,
KEY:Assemble and KEY:Empower.
The Information Management Division markets products and services under the
VISION family name that enable customers to extract value from their existing
corporate data and maximize the return on their information technology
investment by extending the life and usefulness of their legacy applications.
By improving existing applications, customers can reconcile their legacy and
new development strategies, ensuring they have the resources to implement
required new systems. VISION:Results is a comprehensive information management
and report generation system for IBM mainframes and a dynamic complement to
COBOL. VISION:Builder and VISION:Transact are applications development tools
for batch and on-line environments, respectively, that operate on major IBM
mainframe platforms. The VISION:Legacy suite of tools addresses the functions
required to assess the quality and maintainability of applications,
restructure old COBOL programs, redocument the flow of control through legacy
systems and graphically represent the architecture and flow of existing
systems. VISION:Inform facilitates data extraction from the mainframe database
to the PC.
The Data Access Division markets products and services under the CLEAR
family name that enable business users to access corporate data in an
organized, efficient manner. CLEAR:Access and CLEAR:Manage are the
cornerstones of the product line and run on Windows, Windows NT, Windows 95
and Macintosh platforms. CLEAR:Access facilitates end-user access as a query
and reporting tool. CLEAR:Manage allows database managers to monitor and
control database access in a client/server environment.
The Frontware Division provides software products and services under the
STAR family name that assist organizations in their delivery of client/server
applications which integrate desktop systems with an operational host. The
division's flagship product, STAR:Flashpoint, is a Windows-based tool that,
using visual development techniques, allows users to incorporate and integrate
information at the desktop as well as to create graphical user interfaces for
legacy applications.
Worldwide revenue from the Company's Applications Management market
represented 18% of the Company's revenue during 1995 and 11% of the Company's
revenue during both 1994 and 1993.
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FEDERAL SYSTEMS GROUP
The Federal Systems Group formed a new division during the year and combined
two formerly independent divisions. The group is now composed of two divisions
that provide highly specialized technical professional services to sectors of
the federal government, generally under multi-year contracts, and a third
division that markets the products and services of the Electronic Commerce
Group to federal departments and agencies.
The group's major customers are NASA and the DoD. In 1995, Sterling began
its 29th year of service to both NASA and the DoD. Altogether, in 1995 the
Federal Systems Group was working under 106 contracts, many of which are for
multi-year terms.
As of September 30, 1995, the group employed approximately 1,100 people.
Sterling's Information Technology Division provides highly technical
professional services, generally requiring Top Secret security clearances, to
military command and control, intelligence and weather agencies. The division
specializes in data handling, secure communications, networking, systems
integration and application development in support of varied technical
projects ranging from satellite data collection to counter-terrorism. Division
computing resources include data processing facilities approved for classified
operations, and substantial hardware and software configurations to support
software life cycle activities in a distributed processing environment.
Effective September 30, 1995, Sterling combined the Scientific Systems
Division and NASA Ames Division, both located in Redwood City, California and
suppliers to NASA, into the new Scientific Systems Division. Sterling's
Scientific Systems Division is a provider of scientific software support and
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 projects such as spacecraft imagery and
scientific data systems and applications such as aero-dynamics, aviation
research and transportation safety. Under contract to NASA, the division's
engineers designed and now operate the NASA Science Internet and designed and
installed the Worldwide Web server home page for the White House. Customers
include the Jet Propulsion Laboratory, the NASA Ames Research Center, the NASA
Lewis Research Center and the MIT Lincoln Laboratory. In 1995, the division
received "excellent" award fee scores on its three most significant NASA
contracts.
In July 1995, Sterling formed the new Federal Electronic Commerce Division,
combining the expertise of doing business with the government with proven
electronic commerce solutions to address the growing federal government needs
for cost-effective electronic commerce solutions. The Federal Electronic
Commerce Division markets Sterling's electronic commerce and EDI software
products, network services and professional services to federal departments
and agencies. The Presidential Memorandum of October 1993 and the Federal
Acquisition Streamlining Act of 1994 made electronic commerce the preferred
way of doing business with the federal government and set milestone dates by
which all federal departments and agencies must transact business
electronically.
Revenue from the Federal Systems Group represented 17%, 23% and 24% of the
Company's revenue during 1995, 1994 and 1993, respectively.
INTERNATIONAL GROUP
The International Group is the exclusive channel to international markets
for all Sterling products. The group operates through six regional divisions
representing four regions of Europe, Asia/Pacific and a division representing
the smaller, emerging growth markets 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 Northern
Europe Division, headquartered in London, England has responsibility for
direct sales in the United Kingdom, Belgium, The Netherlands, Norway and
Sweden and has offices in eight European cities. The Central Europe Division,
headquartered in Dusseldorf, Germany, has responsibility for direct sales in
Germany, Switzerland and Austria and has offices in five European cities. The
Southern Europe Division, headquartered in Rome, Italy, has responsibility for
direct sales in Italy, Spain and Portugal, has responsibility for indirect
sales in Italy and has offices in four European cities. The France Division,
with an office in Paris, France, has responsibility for direct sales in
France. The Pacific Division, headquartered in Tokyo, Japan with an office in
Sydney, has responsibility for direct sales in Japan, Australia and New
Zealand and indirect sales in Japan. Sterling's Distributor Division,
headquartered in London, England was renamed the Emerging Markets Division
effective
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October 1, 1995. The division continues to manage approximately 74 agents and
distributors and also has responsibility for direct sales in Singapore. Agents
and distributors are responsible for territories that include: Asia (except
Japan), the Middle East, South Africa, Eastern Europe, Mexico, and Central and
South America.
As of September 30, 1995, the group employed approximately 500 people. In
1995, 1994 and 1993, approximately 27%, 22% and 23%, respectively, 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 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 13% 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 provides training and education in
support of its products generally in the form of customer training seminars,
videos and instruction materials. Sterling also offers product-specific
consulting and education services within the Applications Management Group to
ensure customers are successful using the group's products.
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, Systems Management Group and Applications
Management 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 500 Sterling
employees were engaged in product development at September 30, 1995. Gross
product development costs in 1995, 1994 and 1993 were $64,217,000, $52,392,000
and $51,127,000, respectively, of which the Company capitalized $21,708,000,
$19,390,000 and $23,730,000, 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, Systems Management Group and Applications
Management Group has its own U.S. sales and marketing organizations and the
Federal Systems Group's Federal Electronic Commerce Division has its own sales
and marketing organization. In addition, the Company's International Group has
its own sales function to focus specifically on the international marketplace
for each of Sterling's product lines. At September 30, 1995, Sterling employed
approximately 600 sales representatives.
CUSTOMERS
Sterling's customers include 96 of the 100 largest U.S. industrial
corporations, as ranked by 1994 sales in Fortune magazine and 99 of the top
100 U.S. commercial banks, as ranked by deposits as of December 31, 1994, in
the American Banker magazine. In the year ended September 30, 1995, agencies,
branches and departments of the federal government accounted for approximately
19% of the Company's consolidated revenue.
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COMPETITION
The computer software and services 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. 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.
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, 1995, the Company employed approximately 3,700 people.
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 that such contracts will be renewed.
Total backlog, including federal government contract renewal options not yet
exercised and multi-year product support contracts at September 30, 1995 and
1994, was $224,611,000 and $228,345,000, respectively, 97% and 99% of which
related to federal government sources, primarily in the Company's Federal
Systems Group. Federal government renewal options not yet exercised or funded
included in backlog at September 30, 1995 and 1994, were $57,846,000 and
$52,163,000, respectively. Approximately $85,581,000 of the 1995 backlog is
expected to be realized in the year ending September 30, 1996.
7
<PAGE>
ITEM 2. PROPERTIES.
The Company leases offices and facilities in or near approximately 64 cities
in the United States, Canada and worldwide. Major U.S. facilities are located
in the following metropolitan areas: Los Angeles, Palo Alto, San Francisco,
Sacramento and San Bernardino, California; Atlanta, Georgia; Chicago, Illinois;
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, Stuttgart and
Frankfurt, Germany; Zurich, Switzerland; Brussels, Belgium; Nieuwegein, The
Netherlands; Stavanger and Oslo, Norway; Kista, Sweden; Tokyo, Japan; Sydney
and Melbourne, Australia; Rome, Milan and 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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to certain legal proceedings and claims that arise in
the ordinary 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 in the last twelve paragraphs under "Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Merger with KnowledgeWare, Inc.," which paragraphs are incorporated by
reference in this Item 3.
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 61 Chairman of the Board and Director
Charles J. Wyly, Jr. 62 Vice Chairman of the Board and Director
Sterling L. Williams 52 President, Chief Executive Officer and Director
Warner C. Blow 58 Executive Vice President
George H. Ellis 46 Executive Vice President, Chief Financial Officer and Treasurer
Werner L. Frank 66 Executive Vice President, Business Development
M. Gene Konopik 52 Executive Vice President
Jeannette P. Meier 48 Executive Vice President, Secretary and General Counsel
Phillip A. Moore 53 Executive Vice President, Chief Technology Officer and Director
A. Maria Smith 53 Executive Vice President
Clive A. Smith 41 Executive Vice President
Geno P. Tolari 52 Executive Vice President
Evan A. Wyly 34 Vice President and Director
Richard Connelly 44 Vice President, Controller
Albert K. Hoover 35 Vice President and Assistant General Counsel
James E. Jenkins, Jr. 42 Vice President, Tax
Anne Vahala 35 Vice President, Acquisitions
</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 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 (which has grown from 70 to 450 stores in 10
years of Wyly control), 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 Software.
Charles J. Wyly, Jr. co-founded Sterling Software in 1981 and has served as a
director since its formation and Vice Chairman since 1984. Mr. Wyly served as
an officer and director of University Computing Company from 1964
8
<PAGE>
to 1975, including President from 1969 to 1973. Mr. Wyly and his brother, Sam
Wyly, founded Earth Resources Company and Charles Wyly served as Chairman 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 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 Software.
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 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 October 1984 until December
1, 1994, Mr. Frank served as Executive Vice President of Sterling Software.
From July 1993 until December 1, 1994, Mr. Frank served as 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.
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, as Executive Vice President, Technology from July
1993 until December 1994 and as Executive Vice President, Chief Technology
Officer since December 1994. Prior to July 1993, Mr. Moore served as Senior
Vice President, Technology of Sterling Software.
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.
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.
Evan A. Wyly has served as a director of Sterling Software since July 1992
and as a Vice President of Sterling Software since December 1994. Mr. Wyly is
a Managing Director of Maverick Capital, Ltd. Prior to joining Maverick
Capital, Ltd., Mr. Wyly served as a Vice President of Michaels Stores, Inc.
from December 1991 to October 1993. In June 1988, Mr. Wyly founded Premier
Partners Incorporated, a private investment firm, and served as President
prior to joining Michaels Stores, Inc. Mr. Wyly also serves as a director of
Michaels Stores, Inc. and Xscribe Corp., a high-technology information
management company.
9
<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.
Albert K. Hoover has served as Vice President of Sterling Software since May
1994 and Assistant General Counsel of Sterling Software since June 1990.
James E. Jenkins, Jr. 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, Acquisitions of Sterling Software
since October 1995 and served as Vice President, Investor Relations of Sterling
Software from July 1993 until October 1995. 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.
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, 1995:
Quarter Ended:
December 31, 1994.................................... $36 3/4 $28 3/4
March 31, 1995....................................... $37 7/8 $34 1/4
June 30, 1995........................................ $39 1/4 $33 1/8
September 30, 1995................................... $47 $38 3/8
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
</TABLE>
At October 31, 1995, the Company had approximately 1,300 common stockholders
of record.
The Company did not pay dividends on its Common Stock during the three years
ended September 30, 1995. Under the terms of the Company's Second Amended and
Restated Revolving Credit and Term Loan Agreement, the Company is prohibited
from making distributions in the form of dividends on its Common Stock and is
limited to $500,000 of dividends with respect to any outstanding shares of the
Company's Series B Junior Preferred Stock ("Junior Preferred Stock"). At
September 30, 1995 there were no shares outstanding of the Junior Preferred
Stock.
10
<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
----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data (1) (2):
Revenue....................... $588,167 $473,393 $416,114 $378,396 $333,381
Cost of sales................. 190,563 171,745 172,105 162,592 141,436
Product development and
enhancement.................. 42,509 33,002 27,397 25,161 24,545
Selling, general and
administrative............... 222,745 173,112 170,180 167,590 149,728
Income before restructuring
charge, purchased research
and development, other income
(expense), income taxes,
extraordinary item and
cumulative effect of a change
in accounting principle...... 132,350 95,534 46,432 23,053 17,672
Restructuring charge (3)...... 19,512 91,260 11,515 23,085
Purchased research and
development.................. 62,000
Income (loss) before
extraordinary item and
cumulative effect of a change
in accounting principle...... 9,274 58,339 (32,847) (5,182) (2,407)
Income (loss) applicable to
common stockholders.......... 9,129 58,143 (38,106) (6,656) (5,700)
Average common shares
outstanding.................. 23,649 19,812 17,507 15,496 11,763
Per common share data:
Income (loss) before
extraordinary item and
cumulative effect of a change
in accounting principle:
Primary.................... $ .39 $ 2.54 $ (1.93) $ (.43) $ (.52)
Fully diluted.............. .39 2.31 (1.93) (.43) (.52)
Income (loss) before
cumulative effect of a change
in accounting principle:
Primary.................... .39 2.54 (2.02) (.43) (.48)
Fully diluted.............. .39 2.31 (2.02) (.43) (.48)
Net income (loss):
Primary.................... .39 2.54 (2.18) (.43) (.48)
Fully diluted.............. .39 2.31 (2.18) (.43) (.48)
Balance sheet data (1):
Working capital............... $222,405 $125,159 $ 53,668 $ 37,793 $ 32,402
Total assets.................. 714,180 488,773 402,266 347,484 330,499
Long-term debt................ 116,668 115,932 117,532 80,743 84,833
Other noncurrent liabilities.. 27,525 25,018 22,351 13,420 16,085
Stockholders' equity.......... 348,338 175,804 97,697 117,565 108,468
</TABLE>
- -------------------
(1) On November 30, 1994, Sterling Software, Inc. ("Sterling" or the
"Company") acquired KnowledgeWare, Inc. ("KnowledgeWare") in a stock-for-
stock acquisition accounted for as a purchase. Accordingly, the operating
results of KnowledgeWare are included in the Company's results of
operations from the date of the acquisition. The results of operations
include $62,000,000 of purchased research and development costs, which is
the portion of the purchase price attributable to in-process research and
development and which was charged to expense in accordance with purchase
accounting guidelines. The 1995 results of operations also include a
charge for restructure costs of $19,512,000 to integrate KnowledgeWare's
business into the Company's operations. The restructure charge includes
employee termination costs, costs related to the elimination of duplicate
facilities, the write-off of costs related to certain software products
which were not actively marketed and other out of pocket costs related to
the reorganization. Cash costs and expenses directly related to the
acquisition of
11
<PAGE>
KnowledgeWare and unrelated to the restructuring of the Company are
accounted for as a cost of the acquisition. See Note 2 of Notes to
Consolidated Financial Statements.
(2) In August 1994, Sterling acquired American Business Computer Company
("ABC") in a stock-for-stock acquisition accounted for as a pooling of
interests. In July 1993, the Company acquired Systems Center, Inc.
("Systems Center") in a stock-for-stock acquisition accounted for as a
pooling of interests. Sterling's consolidated financial statements have
been retroactively adjusted to include the results of ABC and Systems
Center for all periods presented. See Note 2 of Notes to Consolidated
Financial Statements.
(3) 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. 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MERGER WITH KNOWLEDGEWARE, INC.
On November 30, 1994, Sterling Software, Inc. (together with its wholly owned
subsidiaries, "Sterling" or the "Company") acquired KnowledgeWare, Inc.
("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a
leading provider of applications development software and services, for
approximately $106 million, in a stock-for-stock acquisition (the "Merger"). In
connection with the Merger, the Company issued approximately 2,421,000 shares
of the Company's $0.10 par value Common Stock (the "Common Stock") valued at
approximately $74,443,000 and reserved approximately 340,000 shares of Common
Stock for issuance upon exercise of KnowledgeWare's options and warrants. In
addition, the Company incurred cash costs directly related to the Merger of
approximately $31,672,000. The Merger, which was accounted for as a purchase,
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"), among the Company, SSI Corporation, a Georgia corporation and a
recently organized wholly owned subsidiary of the Company ("Merger Sub"), and
KnowledgeWare. Of the 2,421,000 shares of Common Stock issued, approximately
484,800 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) to which the Company is entitled to indemnification
pursuant to the terms of the Merger Agreement. Approximately 207,000 of the
Escrowed Shares remain to cover potential losses associated with remaining
Actions at October 31, 1995. (See Note 2 of Notes to Consolidated Financial
Statements.)
The cash costs directly related to the Merger of approximately $31,672,000
are included in the aggregate cost of the Merger and consist of employee
termination costs, transaction costs, costs associated with the elimination of
duplicate facilities and other direct costs of the acquisition. Approximately
$20,768,000 was paid in 1995.
The Company's restructuring charge related to the combining of KnowledgeWare
and the Company ("KnowledgeWare restructuring") is $19,512,000, which is
included in the results of operations for 1995. Approximately $7,000,000 of the
KnowledgeWare restructuring charge has not been tax benefited. The components
of the restructuring charge are the following:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 7,668,000
Write-offs of software products which will not be actively
marketed................................................... 6,446,000
Elimination of duplicate facilities and equipment........... 2,073,000
Out of pocket costs related to the reorganization........... 1,911,000
Other....................................................... 1,414,000
-----------
$19,512,000
===========
</TABLE>
12
<PAGE>
As a result of the KnowledgeWare restructuring charge, future operating
results are expected to benefit from the reduction in workforce and
elimination of duplicate facilities. Estimated annual cost reductions of
approximately $12,000,000 in salaries and benefits from the reduction in
workforce and estimated total future cost reductions of approximately
$8,200,000 in depreciation, amortization and rent expense are anticipated from
the write-offs of software products which will not be actively marketed by the
Company and the elimination of duplicate facilities and equipment. Of the
total restructuring charge of $19,512,000, approximately $8,377,000 is a non-
cash charge and the remaining $11,135,000 requires cash outlays, of which
approximately $10,941,000 was expended prior to September 30, 1995. Future
cash expenditures related to the KnowledgeWare restructuring are anticipated
to be made from cash generated from operations. The Company does not expect to
incur significant costs related to the KnowledgeWare restructuring in excess
of the amount charged to operations in 1995.
Pursuant to purchase accounting guidelines, the deferred revenue balance
associated with product support contracts and consulting services contracts
acquired in a business combination may not be recognized as revenue ratably
over the remaining terms of such contracts. However, the net present value of
the costs associated with the Company's obligation to provide product support
services under those contracts may be accrued at the date of acquisition.
Accordingly, deferred revenue of approximately $14,208,000 related to product
support contracts acquired in the acquisition of KnowledgeWare will not be
recognized as revenue in periods subsequent to November 30, 1994 and costs of
approximately $13,679,000 have been accrued representing the net present value
of the Company's obligation to provide product support services under these
contracts. As the product support services are performed the costs of
performing such services will be offset against this accrued liability.
Approximately $13,493,000 of costs incurred through September 30, 1995 have
been offset against this accrued liability.
Since August 30, 1994, a number of lawsuits 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 and certain of
its former officers and directors 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 (the "Exchange Act") and Rule 10b-5 under the
Exchange Act. 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. In April 1994, the District Court approved a settlement of the 1991
Class Action. On August 30, 1994, the plaintiffs in the 1991 Class Action
filed motions alleging 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 had substantially
reduced the value of warrants available to the plaintiffs under the settlement
agreement in the 1991 Class Action. On April 27, 1995, the District Court
issued an order denying most of plaintiffs' motions.
In August and September, 1994, eight lawsuits were filed against
KnowledgeWare and certain of its former directors and officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
Subsequently, these lawsuits were consolidated (the "1994 Class Action"). The
1994 Class Action is a class action 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 is the plaintiffs' allegation 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. The plaintiffs in the 1994
Class Action sought compensatory damages and reimbursement for the plaintiffs'
fees and expenses.
On October 25, 1995, Sterling and the defendants in the 1991 and 1994 Class
Actions entered into settlement agreements, subject to certain conditions and
court approval, to resolve the 1991 and 1994 Class Actions for an aggregate of
approximately $3.75 million in cash plus approximately 278,000 shares of
Sterling Common Stock. The cash portion of the settlement is being paid by
KnowledgeWare's insurance carrier. The stock portion will come out of the
Escrowed Shares. Pursuant to the terms of the settlement agreements, the
plaintiffs in the 1991 Class Action will receive $2.0 million of proceeds from
the sale of Escrowed Shares in lieu of the Warrants. The plaintiffs in the
1994 Class Action will receive the remainder of the proceeds from the sales of
Escrowed Shares included in the settlement and $3.75 million in cash, net of
plaintiffs' attorneys fees and certain costs. Consummation of the settlements
is contingent upon the fulfillment of customary conditions, including approval
of the Court. In the event those settlements are not approved by the Court or
do not become final for any reason, the 1991 and 1994 Class Actions may
continue to be litigated.
13
<PAGE>
After giving effect to the class action settlements, there will remain
approximately 207,000 shares of Sterling Common Stock in the Escrowed Shares,
with a market value at October 31, 1995, of approximately $9.5 million.
On September 9, 1994, a lawsuit was filed against KnowledgeWare and certain
of its former officers and directors in the Southern District of Iowa, Central
Division (the "Ecta Suit"). The Ecta Suit alleges 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, violation of the Iowa Blue Sky Laws, fraud and breach
of contract. The alleged factual basis underlying the Ecta Suit raised 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 unspecified 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. This suit is currently in discovery.
There are also presently pending three lawsuits against KnowledgeWare and
certain of its former officers and directors in the United States District
Court, District of Minnesota, Fourth Division. The first such suit, filed on
January 19, 1995, was brought against KnowledgeWare by seven named plaintiffs,
including Irwin L. Jacobs, who purchased 666,700 shares of KnowledgeWare's
common stock in a private placement (the "Jacobs Suit"). The second suit,
filed on January 20, 1995, was brought against KnowledgeWare and its former
directors and certain of its former officers by over twenty named plaintiffs
who purchased shares of KnowledgeWare Common Stock from and after November
1993 (the "Second Jacobs Suit"). The third suit, filed on June 27, 1995, was
brought by certain investment clients of Mitchell Hutchins Asset Management,
Inc., who had purchased 177,000 shares of KnowledgeWare common stock in a
private placement in January of 1994, against KnowledgeWare and certain of its
former directors and officers (the "Compass Investors Suit"). These three
suits were consolidated by court order on September 11, 1995. Discovery is
ongoing in all three cases.
In the Jacobs Suit, the plaintiffs allege that representations and
warranties in the private placement agreement relating to the financial
condition of KnowledgeWare were false and misleading in that they contained
untrue statements or omitted to state material facts necessary to make the
statements not misleading. The claims include breach of contract, violation of
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, controlling
person liability of the individual defendants under Section 20 of the Exchange
Act and the Georgia and Minnesota Securities Acts, claims for violation of
Section 18 of the Exchange Act, violations of the Minnesota Consumer Fraud
Act, breaches of fiduciary duty by the individual defendants, common law fraud
and claims for treble and punitive damages and attorneys' fees under Federal
and Georgia RICO statutes. Actual damages claimed are in the approximate
amount of $8.1 million, plus interest.
In the Second Jacobs Suit, the plaintiffs allege they purchased shares of
KnowledgeWare common stock based on defendants' representations which
allegedly contained untrue statements of material fact or omitted to state
material facts necessary to make the statements not misleading. The claims in
the Second Jacobs Suit for violation of law are substantially the same as
those in the Jacobs Suit, except in the Second Jacobs Suit there is no claim
for breach of contract, and include claims for treble and punitive damages and
attorneys' fees under Federal and Georgia RICO Statutes. Plaintiffs seek to
rescind the stock purchases, in the case of stock still held, or to recover
rescissory damages in the aggregate amount of $5.8 million, plus interest and
other relief.
The plaintiffs in the Compass Investors Suit allege claims substantially
identical to those alleged in the Jacobs Suit, except in the Compass Investors
suit there is no claim for breach of fiduciary duty. Plaintiffs in the Compass
Investors Suit seek compensatory damages of more than $2.0 million, treble and
punitive damages, interest, attorneys' fees and expenses.
On April 27, 1995, Gerald Caussade, a former employee of KnowledgeWare and a
principal of Ecta Corporation and Fairfield Development, Inc. (plaintiffs in
the Ecta Suit referred to above), filed suit in the United States District
Court, Southern District of Iowa, Central Division, against KnowledgeWare,
Donald Addington, Francis Tarkenton, Sterling Software, Inc., Werner Frank and
Sterling Williams. The plaintiff is claiming (a) breach of contract as a third
party beneficiary under the Asset Purchase Agreement dated May 26, 1994 among
KnowledgeWare, Ecta Corporation and Fairfield Development Inc., (b) as to the
individual defendants, tortious interference with plaintiff's business
relations with KnowledgeWare, (c) fraudulent misrepresentation and negligent
misrepresentation in
14
<PAGE>
connection with his accepting employment with KnowledgeWare, (d) wrongful
termination in violation of public policy in connection with his termination
from employment and (e) breach of contract under his employment contract.
Plaintiff is seeking unspecified compensatory damages, damages for emotional
distress, punitive damages and interest and other costs. Discovery is ongoing
in this suit.
On March 14, 1995, the Securities and Exchange Commission entered an Order
Directing Private Investigation and Designating Officers to take Testimony
titled "In the Matter of KnowledgeWare, Inc. (NY-6231)." The investigation
generally relates to trading in KnowledgeWare securities from July 1, 1992
through the time of the stock-for-stock transaction by which Sterling acquired
KnowledgeWare, KnowledgeWare's compliance with SEC filing and reporting
obligations and the adequacy and/or accuracy of its public disclosures,
recordkeeping and accounting controls.
There can be no assurance of the final resolution of any of the lawsuits,
claims or inquires described above as to the amount of losses that will result
in connection with such actions, nor as to the resulting impact on the
Company. As of October 31, 1995, the Company estimates that approximately
$1,340,000 of costs and expenses have been incurred with respect to such
actions. The Company believes the above claims are subject to the
indemnification arrangements described above related to the Company's
acquisition of KnowledgeWare. Assuming the consummation of the settlements of
the 1991 and 1994 Class Actions on the terms described above, however,
Sterling's management believes that after giving effect to the value of the
remaining Escrowed Shares and applicable reserves, the ultimate resolution of
such actions will not materially affect the financial condition or results of
operations of the Company.
MERGER WITH AMERICAN BUSINESS COMPUTER COMPANY
On August 1, 1994, Sterling 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 stock-for-stock
acquisition 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, including adjustments for the
conforming of accounting policies.
MERGER WITH SYSTEMS CENTER, INC.
In July 1993, Sterling acquired all of the outstanding common stock and
preferred stock of 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 stock-for-stock
acquisition (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. Of the amount
requiring cash outlays, approximately $63,047,000 has been expended through
September 30, 1995. 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 Systems
Management Group ("SMG"), Applications Management Group ("AMG") and Electronic
Commerce Group ("ECG") for management's discussion and analysis of financial
condition and results of operations.
1995 Compared to 1994
Total revenue increased $114,774,000, or 24%, in 1995 over 1994. Revenue
from the International Group ("IG") was $158,374,000 in 1995 and $103,824,000
in 1994, representing a $54,550,000, or 53% increase over
15
<PAGE>
1994. Revenue from IG represents 27% and 22% of total revenue in 1995 and
1994, respectively and the Company expects revenue from IG to continue to
constitute a significant percentage of its revenue. The net impact of changes
in foreign currency on revenue from a weaker U.S. dollar was approximately
$11,000,000.
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 service 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 $40,182,000, or 13%, in 1995 over 1994 and represented 58%
of total revenue in 1995 compared to 63% of total revenue in 1994. This
decrease in the percentage of recurring revenue to total revenue is primarily
due to a lower relative percentage of revenue from annual product support
contracts acquired in the acquisition of KnowledgeWare and the impact of
purchase accounting guidelines on the revenue recognized from such contracts
acquired. See "Merger with KnowledgeWare, Inc." For the year ended September
30, 1995, 37% of the Company's product revenue was for products that run on
hardware platforms other than mainframe hardware. This compares to 18% for the
previous year.
ECG revenue increased 31% over 1994 contributing $51,597,000 to the
Company's total revenue growth in 1995. Service revenue primarily from network
processing of EDI documents, increased 39% over 1994 primarily due to the
growth in existing network customer volume and the addition of new customers
to the network primarily in the healthcare, grocery, retail and hardlines
vertical markets. The number of network customers grew by approximately 3,000,
placing the total network customers at approximately 12,000 at September 30,
1995. Product revenue increased 30% and product support revenue increased 24%
over 1994. The three ECG product lines, communications software, banking
systems and interchange software each had revenue growth in product and
product support revenue due to sales of new products from businesses acquired
in 1994, new product releases, the addition of new customers, some product
price increases and a continuing expansion of the installed customer base for
product support revenue. Approximately 12% of ECG's 1995 revenue is derived
from the International Group as compared to 11% in 1994.
SMG revenue in 1995 increased $13,004,000, or 9%, over 1994 primarily due to
an increase of 18% in product revenue. Revenue from software products and
product support contracts increased in storage management and operations
management product lines and was partially offset by a decrease in VM software
product support revenue. The VM software product support revenue decrease is
primarily due to a consolidation and downsizing by customers using the VM
operating system. Approximately 54% of SMG's 1995 revenue is derived from the
International Group. This compares to 53% in 1994.
AMG revenue increased $57,275,000, or 115%, in 1995 over 1994 primarily due
to the businesses acquired from KnowledgeWare in November 1994. As a direct
result of this acquisition all the components of revenue increased in 1995
over 1994. Product revenue increased 117%, product support revenue increased
73%, and services revenue, primarily consulting services, increased
significantly. Product support revenue in 1995 was negatively impacted by
approximately $13,655,000 due to the application of purchase price accounting
guidelines which prohibit the post acquisition recognition of the deferred
revenue acquired in an acquisition. Consulting and training services revenue,
previously an immaterial component of AMG's product revenue, represented 12%
of total AMG revenue. Approximately 39% of AMG's revenue is derived from the
International Group. This compares to 22% in 1994. The increase is attributed
to the KnowledgeWare acquisition.
Federal Systems Group ("FSG") revenue decreased $5,271,000, or 5% in 1995
versus 1994 primarily due to lower contract billings at NASA Ames resulting
from lower billable costs and fewer federal contracts than in 1994. In 1995 a
division was formed to sell electronic commerce software and services to the
federal government. Revenue from this division is included in the ECG business
segment revenue.
Total costs and expenses increased $159,470,000, or 42%, in 1995 over 1994.
In 1995, total costs and expenses included restructuring expenses of
$19,512,000 for Sterling's restructuring resulting from the acquisition of
KnowledgeWare and the write-off of $62,000,000 of purchased research and
development costs resulting from the application of purchase accounting
guidelines in recording the Merger. The components of the 1995 restructuring
charges were as follows:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 7,668,000
Write-offs of software products which will not be actively
marketed................................................... 6,446,000
Elimination of duplicate facilities and equipment........... 2,073,000
Out of pocket costs related to the reorganization........... 1,911,000
Other....................................................... 1,414,000
-----------
$19,512,000
===========
</TABLE>
16
<PAGE>
Total cost of sales increased $18,818,000, or 11%, primarily due to
increased consulting services and product support costs of businesses acquired
in the stock-for-stock transaction and higher network services costs to
support the increase in network services volume partially offset by lower
contract costs associated with lower billings in FSG. In addition,
approximately $13,493,000 of product support costs related to customer support
contracts acquired in the stock-for-stock transaction were offset against a
liability for product support costs accrued at the Merger date in accordance
with purchase accounting guidelines. Cost of sales includes $33,572,000 and
$25,914,000 of depreciation and amortization in 1995 and 1994, respectively.
Product development expense for 1995 of $42,509,000, net of $21,708,000 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 $9,507,000, or 29%, compared to
1994 product development expense of $33,002,000, net of $19,390,000 of amounts
capitalized pursuant to FAS No. 86. The increase is primarily due to the
increased gross product development expense relating to products acquired in
the Merger as well as the decrease in the capitalization of software
development costs. Total capitalized costs represented 34% and 37% of total
development expense for 1995 and 1994, respectively. Product development
expense and the capitalization rate may fluctuate from period to period
depending in part upon the number and status of software development projects
which are in process.
Selling, general and administrative expense increased $49,633,000, or 29%,
primarily due to increased sales, marketing and administrative support
personnel in AMG and IG due to businesses acquired in the Merger and increased
sales personnel in ECG and IG to support the continuing revenue growth.
Interest expense increased due to higher average borrowings in IG to manage
foreign currency risk and to maintain increased working capital requirements
after the Merger. Investment income was also higher due to the higher average
cash balances available for investment, as well as higher interest rates in
1995 versus 1994. The impact on operating profit from the foreign currency
effect of the weaker U.S. Dollar was approximately $4,000,000. Income before
income taxes was $52,894,000 in 1995 as compared to income before income taxes
of $92,601,000 in 1994. The decrease in income before income taxes in 1995 can
be attributed to the Merger restructure costs of $19,512,000 and the write-off
of $62,000,000 of purchased research and development costs pursuant to the
application of purchase accounting guidelines in recording the Merger.
Excluding the restructure charges and write-off of purchased research and
development costs, income before income taxes was $134,406,000, an increase of
$41,805,000, or 45%, over 1994, primarily due to higher profits in ECG, up
45%, SMG, up 13% and in AMG, up 88%.
1994 Compared to 1993
Total revenue increased $57,279,000, or 14%, in 1994 over 1993 due to sales
increases in all four of the Company's markets. Recurring revenue increased
$36,521,000, or 14%, in 1994 over 1993 and represented 63% of total revenue in
both 1994 and 1993. Revenue from IG, primarily Europe, was $103,824,000 in
1994, representing an increase of $7,532,000, or 8%, over 1993. Revenue from
IG represented 22% and 23% of total Company revenue in 1994 and 1993,
respectively. The net impact of changes in foreign currency rates on revenue
from outside of the United States was not significant.
ECG revenue increased $43,639,000, or 36%, on the strength of a 40% increase
in network services revenue, a 43% increase in product revenue and a 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 and
increases in the network processing volume for existing customers. The number
of network customers grew by approximately 2,000, placing the total network
customers at September 30, 1994, at approximately 9,000. 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
customers, certain product price increases and a continuing expansion of the
installed customer base for product support revenue. SMG revenue increased
$5,403,000, or 4%, on a 4% increase in product revenue and a 4% increase in
product support revenue. All three SMG product lines, storage management,
operations 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 SMG revenue growth. AMG revenue increased $2,093,000,
or 4%, in 1994 over 1993, due to a 2% increase in product revenue and a 9%
increase in product support revenue. Price increases for certain products and
an increase in the installed customer base were the primary reasons for the
AMG revenue growth. 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.
17
<PAGE>
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 $25,914,000 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 SMG, up 74%%, ECG, up 98%, AMG,
up 13% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$222,405,000 of working capital at September 30, 1995, which includes
$179,305,000 of cash and equivalents and $61,341,000 of marketable securities.
Net cash flows from operations was $97,425,000. The increase in accounts and
notes receivable is due to 1995 fourth quarter sales of $172,594,000 versus
$131,352,000 for the fourth quarter of 1994. Days sales outstanding at
September 30, 1995, measured on a quarterly basis was 96 days versus 91 days,
an increase of 5%, on a 31% increase in revenue in the fourth quarter of 1995
versus the fourth quarter of 1994. 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 the proceeds from the exercise of stock options and
warrants during 1995 were used to fund capital expenditures and software
additions.
Software expenditures were $22,531,000, the majority of which were costs
capitalized pursuant to FAS No. 86, were made during 1995, compared to
$21,392,000 during 1994. ECG expended $10,331,000 for software during
18
<PAGE>
1995, primarily for enhancements of communications software products and
interchange software products. SMG expended $7,848,000 of the total software
expenditures during 1995, primarily for the development of systems management
and storage management products and enhancements. Software expenditures in AMG
were $4,352,000 for software enhancements of applications management and
development products. Property and equipment purchases of $38,100,000 include
purchases made for equipment upgrades for network processing systems, costs to
add new network service features and computer and other equipment purchases to
support the continuing growth of the Company.
On October 2, 1995, the Company renewed a share repurchase program pursuant
to which it may repurchase shares of its common stock from time to time
through open market transactions. The primary purpose of the program is to
provide shares to fund the Company's 401(k) and stock option plans. As of
November 10, 1995 699,500 shares of common stock were repurchased at an
aggregate amount of approximately $30,931,000. Although no finite number of
shares will be repurchased, depending on stock market conditions and plan
needs the Company could repurchase up to one million shares and perhaps more.
The 200,000 shares of the Company's Junior Preferred Stock outstanding at
September 30, 1994 were exchanged on June 27, 1995 for warrants to purchase
269,380 shares of the Company's Common Stock. The warrants became fully
exercisable on September 25, 1995 at an exercise price of $36.50 per share and
expire on June 26, 1997, pursuant to their terms.
Proceeds from the exercise of the Company's stock options and warrants were
$63,597,000 in 1995 and $21,906,000 in 1994. The tax benefit of $25,251,000
associated with the exercise of stock options and warrants was credited to
paid in capital. Subsequent to September 30, 1995 and through November 10,
1995, proceeds from the exercise of stock options and warrants were
approximately $16,865,000.
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.
On August 24, 1995, the Company entered into a Second Amended and Restated
Revolving Credit and Term Loan Agreement ("Loan Agreement") with a borrowing
capacity of $35,000,000. The Loan Agreement is unsecured and contains various
restrictions on the Company, including limitations on additional borrowings,
repurchase of subordinated debt, payment of dividends, acquisitions and
capital expenditures. The Loan Agreement also requires that certain financial
ratios be maintained. Borrowings under the Loan Agreement bear interest at the
higher of the bank's prime rate or the Federal Funds Effective Rate plus one-
half percent ( 1/2%). Borrowings, if any, outstanding on August 24, 1998 will
convert to four payments in equal installments due at the end of each
subsequent quarter. There were no amounts borrowed during 1995 and 1994 or
outstanding under the Company's loan facilities at September 30, 1995. At
September 30, 1995, after the utilization of approximately $3,524,000 for
standby letters of credit, approximately $31,476,000 was available for
borrowing on the Loan Agreement. Certain of the Company's foreign subsidiaries
have separate lines of credit totaling $24,328,000 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, 1995,
$4,170,000 was outstanding pursuant to foreign lines of credit.
At September 30, 1995, 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. Based
on the Company's current tax attributes, future cash tax payments are expected
to be substantially greater than cash tax payments made in 1995. See Note 12
of Notes to Consolidated Financial Statements--Income Taxes. 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.
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
19
<PAGE>
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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ 22
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1995 and 1994.............. 23
Consolidated Statements of Operations for the Years Ended September 30,
1995, 1994 and 1993.................................................... 24
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1995,
1994 and 1993.......................................................... 25
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995, 1994 and 1993.................................................... 26
Notes to Consolidated Financial Statements.............................. 27
</TABLE>
21
<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, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1995. Our
audit also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company'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 the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Software, Inc. at September 30, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Dallas, Texas
November 16, 1995
22
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1995 1994
ASSETS -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $179,305 $101,893
Marketable securities (Note 7)............................ 61,341 41,847
Accounts and notes receivable, net (Note 8)............... 183,734 132,166
Deferred income taxes (Note 12)........................... 1,890 11,294
Prepaid expenses and other current assets................. 17,784 9,978
-------- --------
Total current assets..................................... 444,054 297,178
Property and equipment, net (Note 9)....................... 68,412 36,699
Computer software, net of accumulated amortization of
$104,813 in 1995 and $90,259 in 1994 (Note 1)............. 80,966 58,131
Excess cost over net assets acquired, net of accumulated
amortization of $23,362 in 1995 and $18,753 in 1994....... 85,903 54,504
Noncurrent deferred income taxes (Note 12)................. 17,960 2,216
Note and accrued interest receivable from KnowledgeWare,
Inc. (Note 2)............................................. 18,266
Other assets (Notes 1 and 7)............................... 16,885 21,779
-------- --------
$714,180 $488,773
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 10)............... $ 5,871 $ 7,257
Income taxes payable...................................... 4,679 10,945
Accounts payable and accrued liabilities (Note 11)........ 114,391 76,219
Deferred revenue.......................................... 96,708 77,598
-------- --------
Total current liabilities................................ 221,649 172,019
Long-term debt (Note 10)................................... 116,668 115,932
Other noncurrent liabilities............................... 27,525 25,018
Contingencies and commitments (Notes 4, 13 and 17).........
Stockholders' equity (Notes 14 and 15):
Preferred stock, $.10 par value; 10,000,000 shares
authorized; 200,000 shares issued and outstanding in
1994; aggregate liquidation preference of $1,786 in
1994..................................................... 20
Common stock, $.10 par value; 75,000,000 shares
authorized; 26,529,000 and 22,378,000 shares issued in
1995 and 1994, respectively.............................. 2,653 2,238
Additional paid-in capital................................ 336,752 192,064
Retained earnings......................................... 9,515 572
Less treasury stock, at cost; 56,000 and 1,793,000 shares
in 1995 and 1994, respectively........................... (582) (19,090)
-------- --------
Total stockholders' equity............................... 348,338 175,804
-------- --------
$714,180 $488,773
======== ========
</TABLE>
See accompanying notes.
23
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Products...................................... $239,903 $178,233 $153,776
Product support............................... 159,942 133,752 122,284
Services...................................... 188,322 161,408 140,054
-------- -------- --------
588,167 473,393 416,114
Costs and expenses:
Cost of sales:
Products and product support................ 71,883 64,123 66,972
Services.................................... 118,680 107,622 105,133
-------- -------- --------
190,563 171,745 172,105
Product development and enhancement........... 42,509 33,002 27,397
Selling, general and administrative........... 222,745 173,112 170,180
Restructuring charges (Note 3)................ 19,512 91,260
Purchased research and development............ 62,000
-------- -------- --------
537,329 377,859 460,942
-------- -------- --------
Income (loss) before other income (expense),
income taxes, extraordinary item and cumulative
effect of a change in accounting principle..... 50,838 95,534 (44,828)
Other income (expense):
Interest expense.............................. (8,625) (6,658) (7,749)
Investment income............................. 9,044 1,519 4,442
Other......................................... 1,637 2,206 305
-------- -------- --------
2,056 (2,933) (3,002)
-------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of a change in
accounting principle........................... 52,894 92,601 (47,830)
Provision (benefit) for income taxes (Note 12).. 43,620 34,262 (14,983)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle...................................... 9,274 58,339 (32,847)
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)............................... 9,274 58,339 (37,102)
Preferred stock dividends....................... 145 196 1,004
-------- -------- --------
Income (loss) applicable to common
stockholders................................... $ 9,129 $ 58,143 $(38,106)
======== ======== ========
Income (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle
Primary..................................... $ .39 $ 2.54 $ (1.93)
-------- -------- --------
Fully diluted............................... $ .39 $ 2.31 $ (1.93)
======== ======== ========
Income (loss) before cumulative effect of a
change in accounting principle
Primary..................................... $ .39 $ 2.54 $ (2.02)
======== ======== ========
Fully diluted............................... $ .39 $ 2.31 $ (2.02)
======== ======== ========
Net income (loss)
Primary..................................... $ .39 $ 2.54 $ (2.18)
======== ======== ========
Fully diluted............................... $ .39 $ 2.31 $ (2.18)
======== ======== ========
</TABLE>
See accompanying notes.
24
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(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,
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
Net income............. 9,274 9,274
Preferred stock
dividends............. (145) (145)
Issuance of common
stock and treasury
stock for acquisition
net of issuance
costs................. 720 72 55,515 (1,701) 18,111 73,698
Issuance of common
stock pursuant to
stock options and
warrants including tax
benefit of $25,251
(Note 15)............. 3,431 343 88,505 88,848
Issuance of common
stock to retirement
plan (Note 16)........ 607 (28) 304 911
Other.................. (200) (20) 61 (186) (8) 93 (52)
---- ---- ------ ------ -------- -------- ------ -------- --------
Balance at September 30,
1995................... $ 26,529 $2,653 $336,752 $ 9,515 56 $ (582) $348,338
==== ==== ====== ====== ======== ======== ====== ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle..................................... $ 9,274 $ 58,339 $ (32,847)
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................ 45,433 34,302 32,204
Provision for losses on accounts receivable.. 3,885 5,442 6,200
Provision (benefit) for deferred income
taxes....................................... 15,661 17,493 (15,514)
Purchased research and development........... 62,000
Write-down of property and equipment and
other assets................................ 2,479 7,886
Write-down of purchased and capitalized
computer software costs..................... 6,446 13,462
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Increase in accounts and notes receivable... (57,143) (34,279) (13,204)
Increase in prepaid expenses and other
assets..................................... (5,962) (3,143) (5,080)
Increase (decrease) in accounts payable,
accrued liabilities and income taxes
payable.................................... 302 (1,157) 34,846
Increase in deferred revenue................ 16,765 11,841 2,006
Other....................................... (1,715) (142) 99
-------- -------- ---------
Net cash provided by operating activities... 97,425 88,696 30,058
Investing activities:
Purchases of property and equipment............ (38,100) (16,444) (13,103)
Purchases and capitalized cost of development
of computer software.......................... (22,531) (21,392) (24,685)
Business acquisitions net of cash acquired..... (17,913) (425) (700)
Purchases of investments....................... (143,827) (95,940) (70,017)
Proceeds from sales of investments............. 129,749 102,518 15,139
Other.......................................... 104 2,235 2,925
-------- -------- ---------
Net cash used in investing activities....... (92,518) (29,448) (90,441)
Financing activities:
Preferred stock dividends...................... (145) (196) (2,374)
Retirement and redemption of debt and capital
lease obligations............................. (73,128) (24,535) (81,752)
Proceeds from issuance of debt, net of issuance
costs......................................... 68,832 26,172 122,930
Acquisition of KnowledgeWare, Inc. loan from
IBM Credit Corporation and advances to
KnowledgeWare, Inc. (Note 2).................. (4,435) (18,133)
Proceeds from sales of installment and lease
contracts receivable.......................... 17,078 10,061 2,985
Proceeds from issuance of common stock pursuant
to the exercise of stock options and
warrants...................................... 63,597 21,906 6,490
Other.......................................... 579 (3,264) 1,170
-------- -------- ---------
Net cash provided by financing activities... 72,378 12,011 49,449
Effect of foreign currency exchange rate changes
on cash........................................ 127 435 (907)
-------- -------- ---------
Increase (decrease) in cash and equivalents..... 77,412 71,694 (11,841)
Cash and cash equivalents at beginning of year.. 101,893 30,199 42,040
-------- -------- ---------
Cash and cash equivalents at end of year........ $179,305 $101,893 $ 30,199
======== ======== =========
Supplemental cash flow information:
Interest paid.................................. $ 8,011 $ 7,339 $ 8,132
======== ======== =========
Income taxes paid.............................. $ 11,668 $ 4,259 $ 3,023
======== ======== =========
Income tax refunds............................. $ 1,425 $ 1,285 $ 547
======== ======== =========
</TABLE>
See accompanying notes.
26
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994 AND 1993
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, 1995,
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and the
disclosure of contingencies at September 30, 1995 and 1994 and the results of
operations for the years ended September 30, 1995, 1994 and 1993. While
management has based their assumptions and estimates on the facts and
circumstances known at September 30, 1995, final amounts may differ from such
estimates.
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 $56,117,000 and $56,713,000 are included in
"Computer software, net" at September 30, 1995 and 1994, 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 three to ten years.
27
<PAGE>
Depreciation and amortization consists of the following for the years ended
September 30, 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $17,006 $10,850 $ 8,080
Purchased computer software........................ 5,608 2,579 8,140
Capitalized computer software development costs.... 16,277 17,365 12,227
Excess costs over net assets of businesses
acquired.......................................... 5,320 2,531 2,844
Intangible assets.................................. 1,222 977 913
------- ------- -------
$45,433 $34,302 $32,204
======= ======= =======
</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 1995 and 1994 computations, the Company's 8% Convertible Senior
Subordinated Debentures ("8% Debentures") and 5 3/4% Debentures in 1993
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 year ended September 30, 1995 and 1993, neither the common share
equivalents nor the assumed conversion of the debentures had a dilutive effect
on the loss per share calculations. Accordingly, the net income (loss) per
common share calculations for such periods is based on the weighted average
number of common shares outstanding during the year. The number of shares used
in the computations of net income (loss) per common share for the year ended
September 30, 1995 was 23,649,000 and 1993 was 17,507,000. The number of shares
used in the computations of primary and fully diluted income per common share
for the year ended September 30, 1994, were 22,923,000 and 26,979,000,
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
period the transactions occur. Unrealized translation gains and losses are
included as an adjustment to retained earnings.
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.
28
<PAGE>
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").
All marketable securities and long-term investments are classified as
available-for-sale securities. Unrealized holding gains and losses on
securities available-for-sale are recorded as a component of stockholders'
equity, net of any related tax effect. The amortized cost of debt securities
in this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in values judged to be other-than-
temporary 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 and other noncurrent assets.
2. BUSINESS COMBINATIONS
On November 30, 1994, Sterling Software, Inc. acquired KnowledgeWare, Inc.
("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a
leading provider of applications development software and services, for
approximately $106 million, in a stock-for-stock acquisition (the "Merger").
In connection with the Merger, the Company issued approximately 2,421,000
shares of the Company's $0.10 par value Common Stock (the "Common Stock")
valued at approximately $74,443,000 and reserved approximately 340,000 shares
of Common Stock for issuance upon exercise of KnowledgeWare's options and
warrants. In addition, the Company incurred cash costs directly related to the
Merger of approximately $31,672,000. The Merger, which was accounted for as a
purchase, 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"), among the Company, SSI Corporation, a Georgia corporation
and a wholly owned subsidiary of the Company ("Merger Sub"), and
KnowledgeWare. Of the 2,421,000 shares of Common Stock issued, approximately
484,800 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) to which the Company is entitled to
indemnification pursuant to the terms of the Merger Agreement. Approximately
207,000 of the Escrowed Shares remain to cover potential losses associated
with remaining Actions. See Note 4.
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.
The operating results of KnowledgeWare are included in the Company's results
of operations from the date of the Merger. In addition, the results of
operations for the first quarter of 1995 include $62,000,000 of purchased
research and development costs, which is the portion of the purchase price
attributed to in-process research and development, and which is charged to
expense in accordance with purchase accounting guidelines. The $62,000,000
charge has no related tax benefit. The results of operations also include a
charge for restructure costs of $19,512,000 to integrate KnowledgeWare's
business into the Company's operations. See Note 3.
29
<PAGE>
The following unaudited supplemental information presents the results of
operations as if the Merger had occurred at October 1, 1993. This summary does
not purport to be indicative of what would have occurred had the Merger
occurred as of that date or of results which may occur in the future. This
method of combining the companies is for the presentation of unaudited pro
forma summary results of operations. The actual statements of operations of
Sterling Software, Inc. and of KnowledgeWare have been combined from November
30, 1994 forward, with no retroactive restatement.
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30
-----------------
1995 1994
(Dollars in thousands, except per share data) -------- --------
<S> <C> <C>
Revenue............................................... $596,502 $594,451
======== ========
Income before other income (expense) and income
taxes................................................ 116,435 60,535
======== ========
Income applicable to common stockholders.............. 69,558 23,440
======== ========
Net income per common share........................... $ 2.34 $ .94
======== ========
</TABLE>
The unaudited supplemental information presented above does not include a
$62,000,000 charge for purchased research and development costs and a
$19,512,000 restructuring charge directly related to the acquisition.
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 stock-for-stock
acquisition (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
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 and accounting policies to those used by the
Company.
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 stock-for-stock acquisition (the "SCI Merger")
accounted for as a pooling of interests and, accordingly, the combination 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.
3. RESTRUCTURING CHARGES
The Company recorded restructuring charges of approximately $19,512,000 and
$91,260,000 during 1995 and 1993, respectively.
The components of the Company's restructuring charge related to the
combining of KnowledgeWare and the Company ("KnowledgeWare restructuring") are
the following:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 7,668,000
Write-offs of software products which will not be actively
marketed................................................... 6,446,000
Elimination of duplicate facilities and equipment........... 2,073,000
Out of pocket costs related to the reorganization........... 1,911,000
Other....................................................... 1,414,000
-----------
$19,512,000
===========
</TABLE>
As a result of the KnowledgeWare restructuring, future operating results are
expected to benefit from the reduction in workforce and elimination of
duplicate facilities. Estimated annual cost reductions of approximately
$12,000,000 in salaries and benefits from the reduction in workforce and
estimated total future cost reductions of approximately $8,200,000 in
depreciation, amortization and rent expense are anticipated from the write-
offs of software products which will not be actively marketed by the Company
and the elimination of duplicate facilities and equipment. Of the total
restructuring charge of $19,512,000, approximately $8,377,000 is a non-cash
charge and the
30
<PAGE>
remaining $11,135,000 requires cash outlays, of which approximately
$10,941,000 was expended in 1995. Future cash expenditures related to the
KnowledgeWare restructuring are anticipated to be made from cash generated
from operations. The Company does not expect to incur significant costs
related to the KnowledgeWare restructuring in excess of the amount charged to
operations in 1995. Approximately $7,000,000 of the restructuring charge has
not been tax benefited.
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, approximately $26,600,000 was expended in 1994 and
$5,747,000 was expended in 1995. 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.
4. LEGAL PROCEEDINGS AND CLAIMS
The Company is subject to certain legal proceedings and claims that arise in
the ordinary 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
operations of the Company.
In addition, KnowledgeWare, which was acquired on November 30, 1994, is
subject to certain legal proceedings and claims, involving, among other
claims, allegations of federal and state securities fraud, breach of contract,
breach of fiduciary duty by former officers and directors of KnowledgeWare,
common law fraud, RICO violations under Federal and State law and, in certain
cases, trebled and punitive damages. The Company believes those claims are
subject to the indemnification arrangements described in Note 2, above. Two of
the proceedings have been settled, subject to court approval and other
customary conditions, for cash to be paid by KnowledgeWare's insurance carrier
and for the proceeds from the sale of approximately 278,000 of the 484,800
shares held in the escrow described in Note 2, above. In addition, the
Securities and Exchange Commission has entered an Order directing Private
Investigation and Directing Officers to take Testimony related to trading in
KnowledgeWare securities from July 1, 1992 through the time of the stock-for-
stock acquisition by which the Company acquired KnowledgeWare, KnowledgeWare's
compliance with filing and reporting procedures and/or accuracy of its public
disclosures, and KnowledgeWare's recordkeeping and accounting controls.
Assuming the consummation of the pending settlements referred to above on
the terms described, the Company's management believes that, after giving
effect to the value of the remaining Escrowed Shares and applicable reserves,
the ultimate resolution of such actions will not materially affect the
financial condition or results of operations of the Company.
5. SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in four major markets classified as
Systems Management, Electronic Commerce, Applications Management and Federal
Systems. Each major market is represented through independently operated
business groups. The Systems Management Group provides enterprise-wide systems
management 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 electronic data interchange software and services, data
communications software and electronic payments software for financial
institutions. The Applications Management Group focuses exclusively on the
applications management market. The group provides products for developing new
applications and revitalizing existing applications and consulting services to
ensure that customers are successful using the applications management
products. The Federal Systems Group provides highly technical services to the
federal government under several multi-year contracts primarily in support of
National Aeronautics and Space Administration aerospace research projects and
secure communications systems for the Department of Defense. In addition, the
Federal Systems Group sells the Company's electronic commerce products to the
federal government under a newly formed Federal Electronic Commerce Division.
The fifth business group, International, is responsible for sales and first
level support of the Company's products outside of the United States and
Canada. International Group operating results are included, as applicable, in
the Company's Systems Management, Electronic Commerce and Applications
Management segments in the business segment tables contained herein.
International Group revenue of $158,374,000, $103,824,000 and $96,292,000 and
operating profit (loss) of $26,355,000, $14,325,000 and $(1,203,000) for 1995,
1994 and 1993, respectively, have been allocated to the business segments.
31
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the years ended September 30, 1995, 1994 and 1993, restated to
conform to the current year presentation, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS 1995 1994 1993
----------------- -------- -------- --------
<S> <C> <C> <C>
Revenue:
Electronic Commerce......................... $217,804 $166,207 $122,568
Systems Management.......................... 154,657 141,653 136,250
Federal Systems............................. 101,702 106,973 100,796
Applications Management..................... 107,209 49,934 47,841
Corporate and other......................... 6,795 8,626 8,659
-------- -------- --------
Consolidated totals........................ $588,167 $473,393 $416,114
======== ======== ========
Operating Profit (Loss):
Electronic Commerce......................... $ 71,038 $ 49,003 $ 24,749
Systems Management.......................... 55,471 49,015 28,100
Federal Systems............................. 6,648 7,260 6,295
Applications Management..................... 21,320 11,314 9,981
Restructuring charge........................ (19,512) (91,260)
Purchased research and development.......... (62,000)
Corporate and other......................... (22,127) (21,058) (22,693)
-------- -------- --------
Consolidated totals........................ $ 50,838 $ 95,534 $(44,828)
======== ======== ========
Identifiable Assets:
Electronic Commerce......................... $142,426 $109,986 $ 87,493
Systems Management.......................... 115,729 95,318 88,970
Federal Systems............................. 57,354 56,476 54,835
Applications Management..................... 125,410 35,153 33,848
Corporate and other......................... 273,261 191,840 137,120
-------- -------- --------
Consolidated totals........................ $714,180 $488,773 $402,266
======== ======== ========
Capital Expenditures (including additions to
computer software):
Electronic Commerce......................... $ 26,172 $ 20,469 $ 16,483
Systems Management.......................... 11,808 10,699 14,158
Federal Systems............................. 1,518 1,225 1,483
Applications Management..................... 7,753 4,156 3,550
Corporate and other......................... 13,380 1,287 2,114
-------- -------- --------
Consolidated totals........................ $ 60,631 $ 37,836 $ 37,788
======== ======== ========
Depreciation and Amortization:
Electronic Commerce......................... $ 18,140 $ 14,757 $ 10,426
Systems Management.......................... 10,612 9,456 12,277
Federal Systems............................. 2,196 2,099 2,132
Applications Management..................... 11,390 5,082 4,992
Corporate and other......................... 3,095 2,908 2,377
-------- -------- --------
Consolidated totals........................ $ 45,433 $ 34,302 $ 32,204
======== ======== ========
Revenue from the U.S. Government:
Electronic Commerce......................... $ 5,404 $ 3,739 $ 1,395
Systems Management.......................... 3,250 2,460 2,498
Federal Systems............................. 97,650 103,580 99,903
Applications Management..................... 2,930 576 478
-------- -------- --------
Consolidated totals........................ $109,234 $110,355 $104,274
======== ======== ========
</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.
32
<PAGE>
6. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations in the United States and international markets at
September 30, 1995, 1994 and 1993 and for the years then ended are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
GEOGRAPHICAL SEGMENT INFORMATION 1995 1994 1993
-------------------------------- -------- -------- --------
<S> <C> <C> <C>
Revenue:
United States................................ $416,677 $350,587 $304,998
Europe....................................... 114,982 77,574 76,864
Canada and Latin America..................... 18,834 18,772 15,582
Pacific...................................... 37,674 26,460 18,670
-------- -------- --------
$588,167 $473,393 $416,114
======== ======== ========
Operating Profit (Loss):
United States................................ $124,807 $ 97,734 $ 62,747
Europe....................................... 17,683 11,022 2,077
Canada and Latin America..................... 5,977 4,823 2,922
Pacific...................................... 6,010 3,013 1,379
Restructuring charges........................ (19,512) (91,260)
Purchased research and development........... (62,000)
Corporate and other.......................... (22,127) (21,058) (22,693)
-------- -------- --------
$ 50,838 $ 95,534 $(44,828)
======== ======== ========
Identifiable Assets:
United States................................ $322,678 $221,167 $205,639
Europe....................................... 93,244 52,751 47,350
Canada and Latin America..................... 8,125 9,184 4,113
Pacific...................................... 18,206 13,831 8,044
Corporate and other.......................... 271,927 191,840 137,120
-------- -------- --------
$714,180 $488,773 $402,266
======== ======== ========
</TABLE>
7. MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS
At September 30, 1995 and 1994, 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
AMORTIZED ---------------
AGGREGATE COST HOLDING HOLDING
FAIR VALUE BASIS GAINS LOSSES
---------- --------- ------- -------
<S> <C> <C> <C> <C>
September 30, 1995
Current:
Commercial paper....................... $ 3,978 $ 3,978
U.S. corporate notes................... 46,746 46,741 $42 $ 37
U.S. government obligations............ 1,195 1,203 8
Municipal obligations.................. 7,500 7,500
Other.................................. 1,922 1,922
------- ------- --- ------
$61,341 $61,344 $42 $ 45
======= ======= === ======
Noncurrent.............................. $ 1,000 $ 1,000
======= =======
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.............................. $ 4,743 $ 5,938 $1,195
======= ======= ======
</TABLE>
33
<PAGE>
At September 30, 1995, scheduled maturities of investments in debt
securities are: $21,717,000 within one year and $22,737,000 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>
1995 1994
-------- --------
<S> <C> <C>
Trade..................................................... $159,110 $109,821
Unbilled.................................................. 33,800 31,604
Other..................................................... 103
-------- --------
192,910 141,528
Less: Allowance for doubtful accounts..................... 9,176 9,362
-------- --------
$183,734 $132,166
======== ========
</TABLE>
At September 30, 1995 and 1994, accounts receivable include $34,310,000 and
$30,728,000, 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>
1995 1994
------- -------
<S> <C> <C>
Computer and peripheral equipment........................... $76,478 $52,579
Furniture, fixtures and other equipment..................... 40,530 22,325
Building and improvements................................... 11,120 9,036
------- -------
128,128 83,940
Less accumulated depreciation............................... 59,716 47,241
------- -------
$68,412 $36,699
======= =======
</TABLE>
10. LONG-TERM DEBT
Long-term debt consists of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
5 3/4% Debentures......................................... $114,987 $115,000
Capital leases and other debt............................. 7,552 8,189
-------- --------
122,539 123,189
Less amounts due within one year.......................... 5,871 7,257
-------- --------
$116,668 $115,932
======== ========
</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
$181,679,000 at September 30, 1995.
In February 1993, the Company called for redemption of 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.
34
<PAGE>
On August 24, 1995, the Company entered into a Second Amended and Restated
Revolving Credit and Term Loan Agreement ("Loan Agreement") with a borrowing
capacity of $35,000,000. The Loan Agreement is unsecured and contains various
restrictions on the Company, including limitations on additional borrowings,
repurchase of subordinated debt, payment of dividends, acquisitions and capital
expenditures. The Loan Agreement also requires that certain financial ratios be
maintained. Borrowings under the Loan Agreement bear interest at the higher of
the bank's prime rate or the Federal Funds Effective Rate plus one-half percent
( 1/2%). Borrowings, if any, outstanding on August 24, 1998 will convert to
four payments in equal installments due at the end of each subsequent quarter.
There were no amounts borrowed during 1995 and 1994 or outstanding under the
Loan Agreement at September 30, 1995. At September 30, 1995, after the
utilization of approximately $3,524,000 for standby letters of credit,
approximately $31,476,000 was available for borrowing on the Loan Agreement.
Certain of the Company's foreign subsidiaries have $24,328,000 available
under separate lines of credit for foreign exchange exposure management and
working capital requirements. These lines of credit are guaranteed by the U.S.
parent company. At September 30, 1995, $4,170,000 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>
1995 1994
-------- -------
<S> <C> <C>
Trade accounts payable..................................... $ 29,245 $15,810
Accrued compensation....................................... 41,499 34,450
Accrued restructuring and acquisition costs................ 18,624 11,670
Other accrued liabilities.................................. 25,023 14,289
-------- -------
$114,391 $76,219
======== =======
</TABLE>
Accrued restructuring and acquisition costs included in accounts payable and
accrued liabilities are due to the Company's restructurings as a result of the
acquisitions of Systems Center and KnowledgeWare (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
------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $25,522 $12,955
State............................................. 1,737 1,229 $ 156
Foreign........................................... 700 2,585 375
Deferred:
Federal........................................... 13,057 13,228 (8,436)
State............................................. 2,604 2,086 (480)
Foreign........................................... 2,179 (6,598)
------- ------- --------
$43,620 $34,262 $(14,983)
======= ======= ========
</TABLE>
35
<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
--------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal statutory
rate.......................................... $18,513 $32,410 $(16,621)
Increases (reductions) in tax expense (benefit)
resulting from:
Purchased research and development for which
no federal income tax benefit recognized..... 21,700
Net operating loss for which no federal income
tax benefit recognized....................... 2,228
Recognition of previously unrecognized
deferred income tax asset.................... (1,197) (728)
Amortization of excess cost over net assets... 1,761 885 425
Foreign sales corporation..................... (2,163)
Effect of increase in U.S. federal statutory
rate......................................... (547)
State income taxes, net of federal benefit.... 4,341 2,155 (324)
Other......................................... 665 (460) (144)
------- ------- --------
$43,620 $34,262 $(14,983)
======= ======= ========
</TABLE>
Income (loss) before extraordinary item and cumulative effect of a change in
accounting principle includes foreign pretax earnings (losses) of
$(4,300,000), $12,104,000 and $(17,780,000) for the years ended September 30,
1995, 1994 and 1993, respectively.
The Company's income tax payments have been reduced by approximately
$25,251,000 due to income tax deductions associated with the exercise of stock
options and warrants. This reduction in tax payments has been credited to paid
in capital in 1995.
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>
1995 1994
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards........................ $66,812 $22,758
Research and development credit carryforwards........... 6,076 2,500
Foreign tax credit carryforwards........................ 8,188 5,247
Foreign taxes creditable on undistributed foreign source
income................................................. 5,397 5,397
Alternative minimum tax credit carryforwards............ 1,228 1,425
Deferred revenue........................................ 4,833 5,247
Accrued postretirement benefits......................... 3,821 2,393
Reserves and restructuring accruals..................... 5,140 19,024
------- -------
Deferred income tax assets............................. 101,495 63,991
------- -------
Deferred income tax liabilities:
Capitalized software costs.............................. 30,015 20,438
Depreciation and amortization........................... 3,139 8,541
Other future income tax liabilities..................... 6,571 4,001
------- -------
Deferred income tax liabilities......................... 39,725 32,980
------- -------
Deferred income tax asset net of deferred income tax
liability.............................................. 61,770 31,011
Less valuation allowance................................ (41,920) (17,501)
------- -------
Net deferred income tax asset.......................... $19,850 $13,510
======= =======
</TABLE>
36
<PAGE>
The valuation allowance relates principally to certain net operating loss
and credit carryforwards. Although realization is not assured, management
believes that future taxable income based on expected future earnings of the
Company will more likely than not utilize a portion of the net operating loss
carryforwards, tax credit carryforwards and other future tax deductions in
existence at September 30, 1995, equivalent to the net deferred income tax
asset. As there can be no assurances on amounts in excess of the net deferred
income tax asset, the aforementioned valuation allowance has been recorded and
may change as estimates during the carryforward periods change.
At September 30, 1995, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $125,000,000
and $15,491,000, respectively. These carryforwards will expire at various
times between 1996 and 2009, with approximately $120,000,000 of the
carryforwards expiring between 2006 and 2009. The usage of substantially all
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 which cannot be assured.
13. COMMITMENTS
The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1995, 1994 and 1993 was
$33,896,000, $27,306,000 and $27,827,000, respectively. At September 30, 1995,
minimum future rental payments due under all operating leases, net of future
sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................................ $ 30,293
1997................................................................ 27,494
1998................................................................ 24,717
1999................................................................ 19,874
2000................................................................ 11,652
Thereafter.......................................................... 24,827
--------
$138,857
========
</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. The 200,000 shares of the Company's Junior
Preferred Stock outstanding at September 30, 1994 were exchanged on June 27,
1995 for warrants to purchase 269,380 shares of the Company's Common Stock.
The warrants became fully exercisable on September 25, 1995 at an exercise
price of $36.50 per share and expire on June 26, 1997, pursuant to their
terms. 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.
15. STOCK OPTIONS AND WARRANTS
The Company has thirteen stock option plans that provide for the granting of
options to officers, directors, key employees and advisors, including two
stock plans assumed by the Company in the KnowledgeWare Merger (the
"KnowledgeWare Plans") and 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 and KnowledgeWare 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 and
KnowledgeWare Plans were fully vested as of September 30, 1995.
37
<PAGE>
Stock option transactions are summarized below for the three years ended
September 30, 1995:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF EXERCISE EXERCISE
SHARES PRICE PRICE
---------- -------------- ------------
<S> <C> <C> <C>
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
Options associated with KWI
acquisition......................... 166,173 13.80 - 149.73 8,314,254
Granted during the year.............. 4,886,547 29.00 - 45.88 161,278,929
Terminated and cancelled during the
year................................ (184,972) 7.63 - 101.34 (5,601,581)
Exercised during the year............ (3,242,780) 2.12 - 36.92 (59,610,840)
---------- ------------
Outstanding at September 30, 1995
(3,781,222 shares exercisable)....... 8,085,731 $229,314,546
========== ============
</TABLE>
At September 30, 1995 and 1994, a maximum of 1,293,704 and 3,096,711 shares,
respectively, were reserved for future grants of options under the plans.
Subsequent to September 30, 1995, 967,775 additional shares were granted under
the Company's stock option plans. The tax benefit associated with the exercise
of options and warrants is credited to paid in capital. This tax benefit
recognized in 1995 was $25,251,000.
The following table summarizes the number of warrants exercised during 1995
and information with respect to warrants outstanding at September 30, 1995:
<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 G Warrants....... March 5, 1995 $ 8.50 13,337 $ 113,364
Systems Center
Warrants............... June 25, 1996 $ 22.16 175,963 3,899,340 40,717 $ 902,289
KnowledgeWare Warrants.. June 9, 1997 $105.87 82,650 8,750,155
1995 Warrants........... June 26, 1997 $ 36.50 269,380 9,832,370
------- ---------- ------- -----------
189,300 $4,012,704 392,747 $19,484,814
======= ========== ======= ===========
</TABLE>
During 1993, 158,465 warrants with an aggregate exercise price of $1,027,903
were exercised for shares of Common Stock.
All of the outstanding stock options and warrants are subject to anti-
dilution adjustments.
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 1995, 1994 and 1993 were
$3,404,000, $2,895,000 and $2,517,000, respectively. A portion of the Company
contributions are invested in Common Stock of the Company. During 1995, 1994
and 1993, the investment of the Company's contributions included 28,597,
40,700 and 43,600 shares of Common Stock, respectively. Of the 1995
contribution 10,215 shares of Common Stock were transferred to the plan in
October 1995.
38
<PAGE>
Certain of the Company's subsidiaries also provide healthcare benefits to
eligible retired employees. These benefits are subject to deductibles,
copayment provisions and other limitations including retiree 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 reduced the number of
employees eligible for participation in the postretirement benefit plan and
reduced the Company's future costs for certain eligible participants. The
impact of the amendment in 1995 is a curtailment gain of approximately
$1,400,000.
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.
The following table sets forth the computation of accrued postretirement
healthcare benefit costs at September 30 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $ 947 $ 766
Fully eligible active plan participants.................... 1,386 916
Other active plan participants............................. 1,507 5,208
------ ------
3,840 6,890
Assets at fair market value................................ 1,648 786
------ ------
Projected benefit obligation in excess of assets at fair
market value................................................ 2,192 6,104
Unrecognized net gain (loss)................................. 2,074 364
------ ------
Accrued postretirement benefit cost.......................... $4,266 $6,468
====== ======
</TABLE>
The following table presents net periodic postretirement healthcare benefit
costs for the years ended September 30, 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
--------------------
1995 1994 1993
---- ------ ------
<S> <C> <C> <C>
Service cost............................................ $142 $ 857 $ 838
Interest cost........................................... 302 459 389
Actual asset return..................................... (90) (8)
Net amortization and deferral........................... (236) 59
---- ------ ------
Net periodic postretirement benefit cost.............. $118 $1,367 $1,227
==== ====== ======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at September 30, 1995. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (healthcare cost trend rate) is 10% for 1995 and is assumed
to decrease gradually to 5% after 10 years and remain at that level
thereafter. At September 30, 1994, the weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8%. The
weighted average healthcare cost trend rate was 11 1/2% for 1994 and is
assumed to decrease gradually to 5% after 13 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, 1995 by $233,700 and the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for 1995 by $18,900.
The Company does not provide other significant postemployment benefits.
17. CHANGE-IN-CONTROL AND EMPLOYMENT AGREEMENTS
The Company has change-in-control agreements with seventeen 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,
1995, the maximum liability for salary, bonus and benefits under these
agreements would be approximately $35,000,000.
39
<PAGE>
The Company has entered into employment agreements with fifteen officers of
the Company. Five of the agreements provide for severance payments based on
the individual officer's salary and bonus and continuation of benefits for a
period of one year if the Company terminates the officer's employment. Nine 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
$13,400,000.
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1995 and
1994 are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
DECEMBER SEPTEMBER
31 MARCH 31 JUNE 30 30
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ended September 30, 1995 (1):
Revenue................................. $126,418 $138,207 $150,948 $172,594
Cost of sales........................... 42,510 43,809 48,924 55,320
Product development and enhancement..... 9,446 11,356 11,661 10,046
Selling, general and administrative..... 49,015 51,916 56,452 65,362
Restructuring charges................... 19,512
Purchased research and development...... 62,000
Income (loss) before other income
(expense) and income taxes............. (56,065) 31,126 33,911 41,866
Income (loss) applicable to common
stockholders (61,704) 20,110 22,240 28,483
Average common shares outstanding....... 21,476 23,526 24,118 25,469
Income (loss) per common share:
Net income (loss):
Primary............................... $ (2.87) $ .72 $ .79 $ 1.00
Fully diluted......................... (2.87) .67 .73 .90
Year ended September 30, 1994 (2):
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>
- --------
(1) On November 30, 1994, Sterling acquired KnowledgeWare in a stock-for-stock
acquisition accounted for as a purchase. Accordingly, the operating
results of KnowledgeWare are included in the Company's results of
operations from the date of the acquisition. The results of operations
include $62,000,000 of purchased research and development costs, which is
the portion of the purchase price attributable to in-process research and
development and which was charged to expense in accordance with purchase
accounting guidelines. The 1995 results of operations also include a
charge for restructure costs of $19,512,000 to integrate KnowledgeWare's
business into the Company's operations. The restructure charge includes
employee termination costs, costs related to the elimination of duplicate
facilities, the write-off of costs related to certain software products
which were not actively marketed and other out of pocket costs related to
the reorganization. Legal costs and expenses directly related to the
acquisition of KnowledgeWare and unrelated to the restructuring of the
Company are accounted for as a cost of the acquisition.
(2) In August 1994, Sterling acquired ABC in a stock-for-stock acquisition
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.
40
<PAGE>
Information concerning the Company's operations by business segment for each
quarter of 1995, 1994 and 1993 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, 1995:
Revenue:
Electronic Commerce............. $ 47,905 $ 48,810 $ 55,836 $ 65,253
Systems Management.............. 33,374 37,287 37,821 46,175
Federal Systems................. 23,665 24,590 25,372 28,075
Applications Management......... 20,010 25,347 29,548 32,304
Corporate and other............. 1,464 2,173 2,371 787
-------- -------- -------- --------
Consolidated totals............ $126,418 $138,207 $150,948 $172,594
======== ======== ======== ========
Operating Profit (Loss):
Electronic Commerce............. $ 12,752 $ 16,452 $ 18,548 $ 23,286
Systems Management.............. 11,136 13,460 14,154 16,721
Federal Systems................. 1,526 1,867 1,953 1,302
Applications Management......... 4,491 5,125 5,284 6,420
Restructuring charge............ (19,512)
Purchased research and
development.................... (62,000)
Corporate and other............. (4,458) (5,778) (6,028) (5,863)
-------- -------- -------- --------
Consolidated totals............ $(56,065) $ 31,126 $ 33,911 $ 41,866
======== ======== ======== ========
Year ended September 30, 1994:
Revenue:
Electronic Commerce............. $ 35,866 $ 38,716 $ 42,446 $ 49,179
Systems Management.............. 35,442 34,046 32,539 39,626
Federal Systems................. 24,718 26,945 27,296 28,014
Applications Management......... 11,893 11,972 12,212 13,857
Corporate and other............. 2,113 3,787 2,050 676
-------- -------- -------- --------
Consolidated totals............ $110,032 $115,466 $116,543 $131,352
======== ======== ======== ========
Operating Profit (Loss):
Electronic Commerce............. $ 6,985 $ 10,894 $ 12,786 $ 18,338
Systems Management.............. 12,936 12,129 10,723 13,227
Federal Systems................. 1,614 1,694 2,391 1,561
Applications Management......... 2,604 1,367 3,181 4,162
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:
Electronic Commerce............. $ 26,826 $ 27,624 $ 33,055 $ 35,063
Systems Management.............. 35,599 32,780 32,892 34,979
Federal Systems................. 23,747 24,805 25,700 26,544
Applications Management......... 11,557 11,109 11,694 13,481
Corporate and other............. 2,334 2,348 2,115 1,862
-------- -------- -------- --------
Consolidated totals............ $100,063 $ 98,666 $105,456 $111,929
======== ======== ======== ========
Operating Profit (Loss):
Electronic Commerce............. $ 3,326 $ 4,240 $ 8,149 $ 9,034
Systems Management.............. 7,415 7,019 3,974 9,692
Federal Systems................. 1,580 1,657 1,370 1,688
Applications Management......... 2,783 2,331 1,999 2,868
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)
======== ======== ======== ========
</TABLE>
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 1996 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1995, 1994 and 1993
3. Exhibits:
<TABLE>
<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 (10)
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)
2(f) --Agreement of Merger dated as of August 1, 1994, among the
Registrant, Sterling Acquisition, Inc., American Business Computer
Company ("ABCC") and the Shareholders of ABCC (3)
3(a) --Certificate of Incorporation of the Company (4)
3(b) --Certificate of Amendment of Certificate of Incorporation of the
Company (10)
</TABLE>
42
<PAGE>
<TABLE>
<C> <S>
3(c) --Certificate of Amendment of Certificate of Incorporation of the
Company (5)
3(d) --Certificate of Amendment of Certificate of Incorporation of the
Company (6)
3(e) --Restated Bylaws of the Company (7)
4(a) --Form of Common Stock Certificate (8)
4(b) --Indenture dated as of February 2, 1993 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 (21)
4(c) --Preferred Stock and Warrant Purchase Agreement dated June 25,
1991 among Systems Center, Inc. and the Investors named therein
(9)
4(d) --Warrant Agreement dated June 9, 1994 between KnowledgeWare, Inc.
and Trust Company Bank (13)
4(e) --Supplemental Warrant Agreement dated as of November 30, 1994
between KnowledgeWare, Inc. and Trust Company Bank (13)
4(f) --Form of Common Stock Purchase Warrant dated June 27, 1995 (15)
10(a) --Amended and Restated Stock Option Agreement dated as of August
31, 1994 between the Company and KnowledgeWare, Inc. (2)
10(b) --Amended and Restated Stockholder Agreement dated as of August 31,
1994 between the Company and certain stockholders of
KnowledgeWare, Inc. (21)
10(c) --Registration Rights Agreement dated as of November 30, 1994 among
the Company and the Selling Stockholders named therein (21)
10(d) --Escrow Agreement dated as of November 30, 1994 among the Company,
KnowledgeWare, Inc., The First National Bank of Boston, N.A. and
Stuart Finestone (21)
10(e) --Incentive Stock Option Plan of the Company as amended through
April 26, 1995 (6), (20)
10(f) --Non-Statutory Stock Option Plan of the Company as amended through
June 15, 1995 (15), (20)
10(g) --Supplemental Executive Retirement Plan II of Informatics General
Corporation (10)
10(h) --Form of Supplemental Executive Retirement Plan II Agreement (the
"SERP II Agreement") (10)
10(i) --Amendment to SERP II Agreement (10)
10(j) --Form of Employment Agreement dated as of October 1, 1986 with
Jeannette P. Meier, George H. Ellis and Phillip A. Moore (10),
(20)
10(k) --Form of Amendment No. 1 to Employment Agreement dated February
14, 1989 with Jeannette P. Meier, George H. Ellis and Phillip A.
Moore (10), (20)
10(l) --Employment Agreement dated July 7, 1987 with Sam Wyly (10), (20)
10(m) --Employment Agreement dated July 7, 1987 with Charles J. Wyly, Jr.
(10), (20)
10(n) --Employment Agreement dated July 7, 1987 with Sterling L. Williams
(10), (20)
10(o) --Form of Amendment No. 1 to Employment Agreement dated February
14, 1989 with Charles J. Wyly, Jr. and Sterling L. Williams (10),
(20)
10(p) --Amendment No. 1 to Employment Agreement dated February 14, 1989
with Sam Wyly (10), (20)
10(q) --Amendment No. 2 to Employment Agreement dated March 15, 1989 with
Sam Wyly (10), (20)
10(r) --Consultation Agreement dated July 2, 1994 with REC Enterprises,
Inc. (20), (21)
10(s) --Form of Employment Agreement dated October 1, 1989 with Warner C.
Blow, Werner L. Frank and Geno P. Tolari (10), (20)
10(t) --Employment Agreement with Sterling L. Williams (1), (20)
10(u) --Form of Employment Agreement dated January 1, 1993 with Jeannette
P. Meier, George H. Ellis, Phillip A. Moore, Warner C. Blow and
Geno P. Tolari (1), (20)
10(v) --Employment Agreement with Werner L. Frank (17), (20)
10(w) --Second Amended and Restated Revolving Credit and Term Loan
Agreement dated August 24, 1995 by and among the Company and The
First National Bank of Boston as Agent and the Banks listed on
Schedule 1.1 thereto (12)
10(x) --1995 Executive Compensation Plan for Group Presidents (19), (20)
10(y) --1996 Executive Compensation Plan for Group Presidents (20), (21)
10(z) --1992 Non-Statutory Stock Option Plan as amended through September
11, 1995 (16), (20)
10(aa) --1994 Non-Statutory Stock Option Plan (17), (20)
10(bb) --Form of Indemnity Agreement between the Company and each of its
directors and officers (10), (20)
</TABLE>
43
<PAGE>
<TABLE>
<C> <S>
10(cc) --Systems Center, Inc. Restated and Amended Restricted Stock Plan
(11)
10(dd) --Systems Center, Inc. Amended and Restated Nondiscretionary
Restricted Stock Plan (11)
10(ee) --Systems Center, Inc. 1982 Stock Option Plan (11)
10(ff) --Systems Center, Inc. 1992 Stock Incentive Plan (11)
10(gg) --Systems Center, Inc. 1983 Stock Plan (11)
10(hh) --Systems Center, Inc. Share Option Scheme (11)
10(ii) --Registration Rights Agreement dated as of July 1, 1993 among the
Company and the Selling Stockholders named therein (14)
10(jj) --KnowledgeWare, Inc. Incentive Stock Option Plan of 1984 (18)
10(kk) --KnowledgeWare, Inc. Second Incentive Stock Option Plan of 1984
(18)
10(ll) --KnowledgeWare, Inc. 1988 Stock Incentive Plan (18)
10(mm) --Consultation Agreement dated December 1, 1994 between the Company
and Francis A. Tarkenton (19), (20)
10(nn) --Form of Employment Agreement with Richard Connelly, Albert
Hoover, James Jenkins, Anne Vahala and Evan Wyly (15), (20)
10(oo) --Form of Employment Agreement with Richard Connelly, Albert
Hoover, James Jenkins, Anne Vahala and Evan Wyly (15), (20)
10(pp) --Form of Employment Agreement dated as of July 7, 1995 with Warner
C. Blow, George H. Ellis, Werner L. Frank, M. Gene Konopik,
Jeannette P. Meier, Phillip A. Moore, Clive A. Smith, A. Maria
Smith, Geno P. Tolari, Sterling L. Williams, Charles J. Wyly, Jr.
and Sam Wyly (15), (20)
10(qq) --Exchange Agreement among the Company and the Preferred
Stockholders named therein (15)
11 --Computation of Earnings Per Share, Year Ended September 30, 1994
(21)
21 --Subsidiaries (21)
23.1 --Consent of Ernst & Young LLP, Independent Auditors (21)
27 --Financial Data Schedule (21)
</TABLE>
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter of its
fiscal year.
- --------
(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.
33-54961 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 on Form S-1 and incorporated herein by reference.
(9) 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.
(10) 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.
(11) Previously filed as an exhibit to the Company's Registration Statement No.
33-65402 on Form S-8 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Registration Statement No.
33-62401 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
44
<PAGE>
(14) Previously filed as an exhibit to the Company's Registration Statement No.
33-71706 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995 and incorporated herein by
reference.
(16) Previously filed as an exhibit to the Company's Registration Statement No.
33-64073 on Form S-3 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Company's Registration Statement No.
33-53837 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Company's Registration Statement No.
33-56681 on Form S-8 and incorporated herein by reference.
(19) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated herein by
reference.
(20) 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.
(21) Filed herewith.
45
<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.
/s/ Sterling L. Williams
Date: November 16, 1995 By ____________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ George H. Ellis
Date: November 16, 1995 By ____________________________________
George H. Ellis
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
46
<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.
/s/ Robert J. Donachie
Date: November 16, 1995 By ____________________________________
Robert J. Donachie
Chairman of the Audit Committee and
Director
/s/ Michael C. French
Date: November 16, 1995 By ____________________________________
Michael C. French
Director
/s/ Phillip A. Moore
Date: November 16, 1995 By ____________________________________
Phillip A. Moore
Executive Vice President,
Technology and Director
/s/ Charles J. Wyly, Jr.
Date: November 16, 1995 By ____________________________________
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
/s/ Evan A. Wyly
Date: November 16, 1995 By ____________________________________
Evan A. Wyly
Director
/s/ Robert E. Cook
Date: November 16, 1995 By ____________________________________
Robert E. Cook
Director
/s/ Donald R. Miller, Jr.
Date: November 16, 1995 By ____________________________________
Donald R. Miller, Jr.
Director
/s/ Francis A. Tarkenton
Date: November 16, 1995 By ____________________________________
Francis A. Tarkenton
Director
/s/ Sterling L. Williams
Date: November 16, 1995 By ____________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director
/s/ Sam Wyly
Date: November 16, 1995 By ____________________________________
Sam Wyly
Chairman of the Board and Director
47
<PAGE>
SCHEDULE II
STERLING SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS - DEDUCTIONS - END OF
PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful
accounts at
September 30,
1993................. $4,892,000 $6,200,000 $ 517,000 (1) $(3,248,000)(2) $8,361,000
========== ========== =========== =========== ==========
Allowance for
doubtful
accounts at
September 30,
1994................. $8,361,000 $5,442,000 $ (257,000)(1) $(4,184,000)(2) $9,362,000
========== ========== =========== =========== ==========
Allowance for
doubtful
accounts at
September 30,
1995................. $9,362,000 $3,885,000 $(1,563,000)(1) $(2,508,000)(2) $9,176,000
========== ========== =========== =========== ==========
</TABLE>
(1) Offsets to deferred revenue.
(2) Accounts written off.
<PAGE>
INDEX TO EXHIBITS
------------------
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 (10)
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)
2(f) - Agreement of Merger dated as of August 1, 1994, among the
Registrant, Sterling Acquisition, Inc., American Business Computer
Company ("ABCC") and the Shareholders of ABCC (3)
3(a) - Certificate of Incorporation of the Company (4)
3(b) - Certificate of Amendment of Certificate of Incorporation of the
Company (10)
3(c) - Certificate of Amendment of Certificate of Incorporation of the
Company (5)
3(d) - Certificate of Amendment of Certificate of Incorporation of the
Company (6)
3(e) - Restated Bylaws of the Company (7)
4(a) - Form of Common Stock Certificate (8)
4(b) - Indenture dated as of February 2, 1993 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 (21)
4(c) - Preferred Stock and Warrant Purchase Agreement dated June 25, 1991
among Systems Center, Inc. and the Investors named therein (9)
4(d) - Warrant Agreement dated June 9, 1994 between KnowledgeWare, Inc.
and Trust Company Bank (13)
4(e) - Supplemental Warrant Agreement dated as of November 30, 1994
between KnowledgeWare, Inc. and Trust Company Bank (13)
4(f) - Form of Common Stock Purchase Warrant dated June 27, 1995 (15)
10(a) - Amended and Restated Stock Option Agreement dated as of August 31,
1994 between the Company and KnowledgeWare, Inc. (2)
10(b) - Amended and Restated Stockholder Agreement dated as of August 31,
1994 between the Company and certain stockholders of
KnowledgeWare, Inc. (21)
10(c) - Registration Rights Agreement dated as of November 30, 1994 among
the Company and the Selling Stockholders named therein (21)
10(d) - Escrow Agreement dated as of November 30, 1994 among the
Company, KnowledgeWare, Inc., The First National Bank of Boston,
N.A. and Stuart Finestone (21)
10(e) - Incentive Stock Option Plan of the Company as amended through
April 26, 1995 (6), (20)
10(f) - Non-Statutory Stock Option Plan of the Company as amended through
June 15, 1995 (15), (20)
10(g) - Supplemental Executive Retirement Plan II of Informatics General
Corporation (10)
10(h) - Form of Supplemental Executive Retirement Plan II Agreement (the
"SERP II Agreement") (10)
10(i) - Amendment to SERP II Agreement (10)
10(j) - Form of Employment Agreement dated as of October 1, 1986 with
Jeannette P. Meier, George H. Ellis and Phillip A. Moore (10),
(20)
10(k) - Form of Amendment No. 1 to Employment Agreement dated February 14,
1989 with Jeannette P. Meier, George H. Ellis and Phillip A. Moore
(10), (20)
<PAGE>
10(l) - Employment Agreement dated July 7, 1987 with Sam Wyly (10), (20)
10(m) - Employment Agreement dated July 7, 1987 with Charles J. Wyly, Jr.
(10), (20)
10(n) - Employment Agreement dated July 7, 1987 with Sterling L. Williams
(10), (20)
10(o) - Form of Amendment No. 1 to Employment Agreement dated February 14,
1989 with Charles J. Wyly, Jr. and Sterling L. Williams (10), (20)
10(p) - Amendment No. 1 to Employment Agreement dated February 14, 1989
with Sam Wyly (10), (20)
10(q) - Amendment No. 2 to Employment Agreement dated March 15, 1989 with
Sam Wyly (10), (20)
10(r) - Consultation Agreement dated July 2, 1994 with REC Enterprises,
Inc. (20), (21)
10(s) - Form of Employment Agreement dated October 1, 1989 with Warner C.
Blow, Werner L. Frank and Geno P. Tolari (10), (20)
10(t) - Employment Agreement with Sterling L. Williams (1), (20)
10(u) - Form of Employment Agreement dated January 1, 1993 with Jeannette
P. Meier, George H. Ellis, Phillip A. Moore, Warner C. Blow and
Geno P. Tolari (1), (20)
10(v) - Employment Agreement with Werner L. Frank (17), (20)
10(w) - Second Amended and Restated Revolving Credit and Term Loan
Agreement dated August 24, 1995 by and among the Company and The
First National Bank of Boston as Agent and the Banks listed on
Schedule 1.1 thereto (12)
10(x) - 1995 Executive Compensation Plan for Group
Presidents (19), (20)
10(y) - 1996 Executive Compensation Plan for Group Presidents (20), (21)
10(z) - 1992 Non-Statutory Stock Option Plan as amended through September
11, 1995 (16), (20)
10(aa) - 1994 Non-Statutory Stock Option Plan (17), (20)
10(bb) - Form of Indemnity Agreement between the Company and each of its
directors and officers (10), (20)
10(cc) - Systems Center, Inc. Restated and Amended Restricted Stock Plan
(11)
10(dd) - Systems Center, Inc. Amended and Restated Nondiscretionary
Restricted Stock Plan (11)
10(ee) - Systems Center, Inc. 1982 Stock Option Plan (11)
10(ff) - Systems Center, Inc. 1992 Stock Incentive Plan (11)
10(gg) - Systems Center, Inc. 1983 Stock Plan (11)
10(hh) - Systems Center, Inc. Share Option Scheme (11)
10(ii) - Registration Rights Agreement dated as of July 1, 1993 among the
Company and the Selling Stockholders named therein (14)
10(jj) - KnowledgeWare, Inc. Incentive Stock Option Plan of 1984 (18)
10(kk) - KnowledgeWare, Inc. Second Incentive Stock Option Plan of 1984
(18)
10(ll) - KnowledgeWare, Inc. 1988 Stock Incentive Plan (18)
10(mm) - Consultation Agreement dated December 1, 1994 between the Company
and Francis A. Tarkenton (19), (20)
10(nn) - Form of Employment Agreement with Richard Connelly, Albert Hoover,
James Jenkins, Anne Vahala and Evan Wyly (15), (20)
10(oo) - Form of Employment Agreement with Richard Connelly, Albert Hoover,
James Jenkins, Anne Vahala and Evan Wyly (15), (20)
10(pp) - Form of Employment Agreement dated as of July 7, 1995 with Warner
C. Blow, George H. Ellis, Werner L. Frank, M. Gene Konopik,
Jeannette P. Meier, Phillip A. Moore, Clive A. Smith, A. Maria
Smith, Geno P. Tolari, Sterling L. Williams, Charles J. Wyly, Jr.
and Sam Wyly (15), (20)
10(qq) - Exchange Agreement among the Company and the Preferred
Stockholders named therein (15)
11 - Computation of Earnings Per Share, Year Ended September 30, 1994
(21)
21 - Subsidiaries (21)
23.1 - Consent of Ernst & Young LLP, Independent Auditors (21)
27 - Financial Data Schedule (21)
<PAGE>
- ------------
(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.
33-54961 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 on Form S-1 and incorporated herein by reference.
(9) 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.
(10) 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.
(11) Previously filed as an exhibit to the Company's Registration Statement No.
33-65402 on Form S-8 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Registration Statement No.
33-62401 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(14) Previously filed as an exhibit to the Company's Registration Statement No.
33-71706 on Form S-3 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995 and incorporated herein by
reference.
(16) Previously filed as an exhibit to the Company's Registration Statement No.
33-64073 on Form S-3 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Company's Registration Statement No.
33-53837 on Form S-3 and incorporated herein by reference.
(18) Previously filed as an exhibit to the Company's Registration Statement No.
33-56681 on Form S-8 and incorporated herein by reference.
(19) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated herein by
reference.
(20) 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.
(21) Filed herewith.
<PAGE>
EXHIBIT 4(b)
- --------------------------------------------------------------------------------
STERLING SOFTWARE, INC.
5 3/4% Convertible Subordinated Debentures
due 2003
------------------------
INDENTURE
Dated as of February 2, 1993
------------------------
BANK OF AMERICA TEXAS, NATIONAL ASSOCIATION
TRUSTEE
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE.................... 1
SECTION 1.1 Definitions.......................................... 1
SECTION 1.2 Other Definitions.................................... 4
SECTION 1.3 Incorporation by Reference of Trust Indenture Act.... 5
SECTION 1.4 Rules of Construction................................ 6
ARTICLE 2.
THE SECURITIES...................... 6
SECTION 2.1 Form and Dating...................................... 6
SECTION 2.2 Execution and Authentication......................... 6
SECTION 2.3 Registrar, Paying Agent and Conversion Agent......... 7
SECTION 2.4 Paying Agent to Hold Money in Trust.................. 8
SECTION 2.5 Securityholder Lists................................. 8
SECTION 2.6 Transfer and Exchange................................ 8
SECTION 2.7 Replacement Securities............................... 9
SECTION 2.8 Outstanding Securities............................... 10
SECTION 2.9 Treasury Securities.................................. 10
SECTION 2.10 Temporary Securities................................. 11
SECTION 2.11 Cancellation......................................... 11
ARTICLE 3.
REDEMPTION AND PURCHASES............................. 11
SECTION 3.1 Right to Redeem; Notice to Trustee................... 11
SECTION 3.2 Selection of Securities to be Redeemed............... 12
SECTION 3.3 Notice of Redemption................................. 12
SECTION 3.4 Effect of Notice of Redemption....................... 13
SECTION 3.5 Deposit of Redemption Price.......................... 13
SECTION 3.6 Securities Redeemed in Part.......................... 13
SECTION 3.7 Redemption of Securities at Option of the Holder
Upon Change in Control............................... 14
SECTION 3.8 Effect of Change in Control Purchase Notice.......... 17
SECTION 3.9 Deposit of Change in Control Purchase Price.......... 18
SECTION 3.10 Securities Purchased in Part......................... 19
SECTION 3.11 Compliance with Securities Laws upon
Purchase of Securities............................... 19
SECTION 3.12 Repayment to the Company............................. 19
(i)
<PAGE>
ARTICLE 4.
CONVERSION......................... 19
SECTION 4.1 Conversion Privilege................................. 19
SECTION 4.2 Conversion Procedure................................. 20
SECTION 4.3 Fractional Shares.................................... 21
SECTION 4.4 Taxes on Conversion.................................. 22
SECTION 4.5 Company to Provide Stock............................. 22
SECTION 4.6 Adjustment of Conversion Price....................... 22
SECTION 4.7 No Adjustment........................................ 26
SECTION 4.8 Equivalent Adjustments............................... 26
SECTION 4.9 Adjustment for Tax Purposes.......................... 26
SECTION 4.10 Notice of Adjustment................................. 27
SECTION 4.11 Notice of Certain Transactions....................... 27
SECTION 4.12 Effect of Reclassification,
Consolidation, Merger or Sale on
Conversion Privilege................................. 27
SECTION 4.13 Trustee's Disclaimer................................. 28
SECTION 4.14 Voluntary Reduction.................................. 29
ARTICLE 5.
SUBORDINATION..................... 29
SECTION 5.1 Securities Subordinated to Senior Indebtedness....... 29
SECTION 5.2 Securities Subordinated to Prior Payment
of All Senior Indebtedness on
Dissolution, Liquidation, Reorganization,
etc., of the Company................................. 29
SECTION 5.3 Securityholders to be Subrogated to Right
of Holders of Senior Indebtedness.................... 32
SECTION 5.4 Obligations of the Company
Unconditional........................................ 32
SECTION 5.5 Company Not to Make Payment with Respect
to Securities in Certain Circumstances............... 33
SECTION 5.6 Notice to Trustee.................................... 34
SECTION 5.7 Application by Trustee of Monies
Deposited with it.................................... 35
SECTION 5.8 Subordination Rights Not Impaired by Acts
or Omissions of Company or Holders of
Senior Indebtedness.................................. 35
SECTION 5.9 Trustee to Effectuate Subordination.................. 36
SECTION 5.10 Right of Trustee to Hold Senior
Indebtedness......................................... 36
SECTION 5.11 Article 5 Not to Prevent Events of
Default.............................................. 36
SECTION 5.12 No Fiduciary Duty Created to Holders of
Senior Indebtedness.................................. 36
SECTION 5.13 Article Applicable to Paying Agents.................. 36
(ii)
<PAGE>
ARTICLE 6.
COVENANTS........................ 37
SECTION 6.1 Payment of Securities................................ 37
SECTION 6.2 SEC Reports.......................................... 37
SECTION 6.3 Liquidation.......................................... 38
SECTION 6.4 Compliance Certificates.............................. 39
SECTION 6.5 Notice of Defaults................................... 39
SECTION 6.6 Payment of Taxes and Other Claims.................... 39
SECTION 6.7 Corporate Existence.................................. 39
SECTION 6.8 Maintenance of Properties............................ 40
SECTION 6.9 Further Instruments and Acts......................... 40
ARTICLE 7.
SUCCESSOR CORPORATION.............................. 40
SECTION 7.1 When Company May Merge, etc.......................... 40
SECTION 7.2 Successor Corporation Substituted.................... 41
ARTICLE 8.
DEFAULT AND REMEDIES............................... 41
SECTION 8.1 Events of Default.................................... 41
SECTION 8.2 Acceleration......................................... 43
SECTION 8.3 Other Remedies....................................... 44
SECTION 8.4 Waiver of Defaults and Events of Default............. 44
SECTION 8.5 Control by Majority.................................. 45
SECTION 8.6 Limitation on Suits.................................. 45
SECTION 8.7 Rights of Holders to Receive Payment................. 45
SECTION 8.8 Collection Suit by Trustee........................... 46
SECTION 8.9 Trustee may File Proofs of Claim..................... 46
SECTION 8.10 Priorities........................................... 47
SECTION 8.11 Undertaking for Costs................................ 47
SECTION 8.12 Waiver of Usury, Stay or Extension Laws.............. 47
ARTICLE 9.
TRUSTEE......................... 48
SECTION 9.1 Duties of Trustee.................................... 48
SECTION 9.2 Rights of Trustee.................................... 49
SECTION 9.3 Individual Rights of Trustee......................... 49
SECTION 9.4 Trustee's Disclaimer................................. 49
SECTION 9.5 Notice of Default of Events of Default............... 50
SECTION 9.6 Reports by Trustee to Holders........................ 50
SECTION 9.7 Compensation and Indemnity........................... 50
SECTION 9.8 Replacement of Trustee............................... 51
SECTION 9.9 Successor Trustee by Merger, etc..................... 52
SECTION 9.10 Eligibility; Disqualification........................ 52
(iii)
<PAGE>
SECTION 9.11 Preferential Collection of Claims Against Company..... 52
ARTICLE 10.
SATISFACTION AND DISCHARGE OF INDENTURE..................... 53
SECTION 10.1 Termination of Company's Obligations................. 53
SECTION 10.2 Application of Trust Money........................... 54
SECTION 10.3 Repayment to Company................................. 54
SECTION 10.4 Reinstatement........................................ 54
ARTICLE 11.
AMENDMENTS, SUPPLEMENTS AND WAIVERS......................... 55
SECTION 11.1 Without Consent of Holders........................... 55
SECTION 11.2 With Consent of Holders.............................. 55
SECTION 11.3 Compliance with Trust Indenture Act.................. 56
SECTION 11.4 Revocation and Effect of Consents.................... 56
SECTION 11.5 Notation On or Exchange of Securities................ 57
SECTION 11.6 Trustee to Sign Amendments, etc...................... 57
ARTICLE 12.
MISCELLANEOUS...................... 57
SECTION 12.1 Trust Indenture Act Controls......................... 57
SECTION 12.2 Notices.............................................. 57
SECTION 12.3 Communications by Holders with Other Holders......... 58
SECTION 12.4 Certificate and Opinion as to Conditions Precedent... 58
SECTION 12.5 Record Date for Vote or Consent of Securityholders... 59
SECTION 12.6 Rules by Trustee, Paying Agent, Registrar,
Conversion Agent..................................... 59
SECTION 12.7 Legal Holidays....................................... 59
SECTION 12.8 Governing Law........................................ 60
SECTION 12.9 No Adverse Interpretation of Other Agreements........ 60
SECTION 12.10 No Recourse Against Others........................... 60
SECTION 12.11 Successors........................................... 60
SECTION 12.12 Multiple Counterparts................................ 60
SECTION 12.13 Separability......................................... 60
SECTION 12.14 Table of Contents, Headings, etc..................... 60
EXHIBIT A Form of Debenture.................................... A-1
- ---------------------
* This Table of Contents shall not, for any purpose, be deemed to be a part of
this Indenture.
(iv)
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
Indenture
TIA Section Section
- ----------- ---------
<C> <S> <C>
(S) 310(a)(1)...................................................... 9.10
(a)(2)...................................................... 9.10
(a)(3)...................................................... N.A.**
(a)(4)...................................................... N.A.
(a)(5)...................................................... 9.10
(b)......................................................... 9.8;9.10
(c)......................................................... N.A.
(S) 311(a)......................................................... 9.11
(b)......................................................... 9.11
(c)......................................................... N.A.
(S) 312(a)......................................................... 2.5
(b)......................................................... 12.3
(c)......................................................... 12.3
(S) 313(a)......................................................... 9.6
(b)(1)...................................................... N.A.
(b)(2)...................................................... 9.6
(c)......................................................... 9.6;12.2
(d)......................................................... 9.6
(S) 314(a)......................................................... 6.2; 6.4;
12.2
(b)......................................................... N.A.
(c)(1)...................................................... 12.4(a)
(c)(2)...................................................... 12.4(a)
(c)(3)...................................................... N.A.
(d)......................................................... N.A.
(e)......................................................... 12.4(b)
(f)......................................................... N.A.
(S) 315(a)......................................................... 9.1(b)
(b)......................................................... 9.5;12.2
(c)......................................................... 9.1(a)
(d)......................................................... 9.1(c)
(e)......................................................... 8.11
(S) 316(a) (last sentence)......................................... 2.8
(a)(1)(A)................................................... 8.5
(a)(1)(B)................................................... 8.4
(a)(2)...................................................... N.A.
(b)......................................................... 8.7
(c)......................................................... 12.5
(S) 317(a)(1)...................................................... 8.8
(a)(2)...................................................... 8.9
(b)......................................................... 2.4
(S) 318(a)......................................................... 12.1
</TABLE>
* This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of this Indenture
** N.A. means Not Applicable.
(v)
<PAGE>
INDENTURE dated as of February 2, 1993, between STERLING SOFTWARE, INC., a
Delaware corporation (the "Company"), and BANK OF AMERICA TEXAS, NATIONAL
ASSOCIATION, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of the other and for the
equal and ratable benefit of the registered holders of the Company's 5 3/4%
Convertible Subordinated Debentures due 2003.
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 Definitions.
-----------
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meaning correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Associate" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act, as such Rule is in
effect on the date of this Indenture.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"Business Day" means a day that is not a Legal Holiday.
"Capitalized Lease Obligation" means indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with generally accepted accounting principles and the
amount of such indebtedness shall be the capitalized amount of such obligations
determined in accordance with such principles.
"Cash" or "cash" means such coin or currency of the United States as at any
time of payment is legal tender for the payment of public and private debts.
"Common Stock" means the common stock of the Company, par value $0.10 per
share, as it exists on the date of this Indenture or as it may be constituted
from time to time.
<PAGE>
"Company" means the party named as such in this Indenture until a successor
replaces it pursuant to this Indenture and thereafter means the successor.
"Default" or "default" means any event which is, or after notice or passage
of time, or both, would be, an Event of Default.
"Holder" or "Securityholder" means the person in whose name a Security is
registered on the Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time to
time pursuant to the terms of this Indenture.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer or Assistant Secretary of the Company;
provided, however, that for purposes of Section 6.4, "Officers' Certificate"
- -------- -------
means a certificate signed by the principal executive officer, principal
financial officer or principal accounting officer of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Person" or "person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, or any other entity or
organization, including a government or political subdivision or instrumentality
thereof.
"Principal" or "principal" of a debt security, including Securities, means
the principal of the security plus, when appropriate, the premium, if any, on
the security.
"Redemption Date" or "redemption date" when used with respect to any
Security to be redeemed, means the date fixed for such redemption pursuant to
this Indenture.
"Redemption Price" or "redemption price", when used with respect to any
Security to be redeemed, means the price fixed for such redemption pursuant to
this Indenture, as set forth in the form of Security annexed as Exhibit A
---------
hereto.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities" means the 5 3/4% Convertible Subordinated Debentures due 2003
or any of them (each a "Security"), as amended or
-2-
<PAGE>
supplemented from time to time, that are issued under this Indenture.
"Senior Indebtedness" means the following: (a) the principal of and
premium, if any, and interest (including, without limitation, any interest
accruing subsequent to the filing of a petition or other action concerning
bankruptcy or other similar proceedings, whether or not constituting an allowed
claim in any such proceedings) on, and fees, costs, enforcement expenses
(including legal fees and disbursements), collateral protection expenses and
other reimbursement or indemnity obligations in respect of, the following,
whether presently outstanding or hereafter incurred or created: all
indebtedness or obligations of the Company to any person, including but not
limited to banks and other lending institutions, for money borrowed (other than
that evidenced by the Securities) or in respect of credit or other banking
facilities and which is evidenced by a note, bond, debenture, loan agreement or
similar instrument or agreement (including purchase money obligations with an
original maturity in excess of one year and noncontingent obligations to
reimburse any bank or other person in respect of amounts paid under letters of
credit); (b) commitment or standby fees due and payable to lending institutions
with respect to credit facilities available to the Company; (c) all obligations
of the Company (i) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (ii) under interest rate
swaps, caps, collars, options and similar arrangements, and (iii) under any
foreign exchange contract, currency swap agreement, futures contract, currency
option contract, or other foreign currency hedge; (d) all obligations of the
Company for the payment of money relating to a Capitalized Lease Obligation; (e)
any liabilities of others described in the preceding clauses (a), (b), (c) and
(d) which the Company has guaranteed or which are otherwise its legal liability;
and (f) renewals, extensions, refundings, restructurings, amendments and
modifications of any such indebtedness or guarantee. Notwithstanding anything to
the contrary in this Indenture or the Securities, "Senior Indebtedness" shall
not include (w) any particular indebtedness, lease, fee, obligation, renewal,
extension, refunding, restructuring, amendment or modification if, under the
express provisions of the instrument creating or evidencing the same, or
pursuant to which the same is outstanding, such indebtedness, lease, fee or
obligation or such renewal, extension, refunding, restructuring, amendment or
modification thereof is stated to be not superior in right of payment to the
Securities, (x) indebtedness of the Company evidenced by the Company's 8%
Convertible Senior Subordinated Debentures (which indebtedness shall be deemed
to rank pari passu in right of payment with the Securities), (y) indebtedness of
---- -----
the Company (i) owing, directly or indirectly, to any person under or in respect
of any employee benefit plan of the Company or (ii) owing, directly or
indirectly, to any employee of the Company or any Affiliate of the Company, and
(z) the Securities.
-3-
<PAGE>
"Subsidiary" means any corporation of which at least a majority of the
outstanding capital stock having voting power under ordinary circumstances to
elect directors of such corporation shall at the time be held, directly or
indirectly, by the Company, by the Company and one or more Subsidiaries, or by
one or more Subsidiaries.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 and as in effect on the date of this Indenture,
except as provided in Section 11.3 hereof, and except to the extent any
amendment to the Trust Indenture Act expressly provides for application of the
Trust Indenture Act as in effect on another date.
"Trading Day" or "trading day" means any day on which the New York Stock
Exchange is open for trading.
"Trustee" means the party named as such in this Indenture until a successor
replaces it in accordance with the provisions of this Indenture and thereafter
means the successor.
"Trust Officer" means any officer within the Corporation Trust Department
(or any similarly titled or successor group) of the Trustee, including without
limitation any Vice President, Assistant Vice President, any trust officer, any
Assistant Secretary or any other officer customarily performing functions
similar to those performed by any of the above-designated officers who shall, in
any case, be responsible for the administration of this Indenture or have
familiarity with it, and also means, with respect to a particular corporate
matter, any other officer of the Trustee to whom corporate trust matters are
referred because of his knowledge of and familiarity with the particular
subject.
SECTION 1.2 Other Definitions.
-----------------
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Bankruptcy Law" 8.1
"Change in Control" 3.7
"Change in Control Purchase Date" 3.7
"Change in Control Purchase Notice" 3.7
"Change in Control Purchase Price" 3.7
"Company Order" 2.2
"Conversion Agent" 2.3
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
"Conversion Date"...................................... 4.2
"Conversion Price"..................................... 4.6
"Custodian"............................................ 8.1
"Default Notice"....................................... 5.5
"Determination Date"................................... 4.6
"Event of Default"..................................... 8.1
"Exchange Act"......................................... 3.7
"Legal Holiday"........................................ 12.7
"Material Subsidiary".................................. 8.1
"Paying Agent"......................................... 2.3
"Registrar"............................................ 2.3
"Unissued Shares"...................................... 3.7
"U.S. Government Obligations".......................... 10.1
</TABLE>
SECTION 1.3 Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC;
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Company or any other
obligor on the Securities.
All other terms used in this Indenture that are defined in the TIA, defined
by TIA reference to another statute or defined by SEC rule and not otherwise
defined herein have the meanings assigned to them therein.
-5-
<PAGE>
SECTION 1.4 Rules of Construction.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
on the date hereof, and any other reference in this Indenture to "generally
accepted accounting principles" refers to generally accepted accounting
principles in effect on the date hereof;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) "herein", "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE 2.
THE SECURITIES
SECTION 2.1 Form and Dating.
---------------
The Securities and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A, which is incorporated in and made part
---------
of this Indenture. The Securities may have notations, legends or endorsements
required by law, stock exchange rule, agreements to which the Company is subject
or usage. The Company shall approve, with the consent of the Trustee, the form
of the Securities and any notation, legend or endorsement on them. Each Security
shall be dated the date of its authentication.
SECTION 2.2 Execution and Authentication.
----------------------------
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities.
Typographic and other minor errors or defects in any such reproduction of the
seal or any such signature shall not affect the validity or enforceability of
any Security which has been authenticated and delivered by the Trustee.
-6-
<PAGE>
If an Officer whose signature is on a Security no longer holds that office
at the time the Trustee authenticates the Security, the Security shall be valid
nevertheless.
A Security shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Security. The signature
shall be conclusive evidence that the Security has been authenticated under this
Indenture.
The Trustee shall authenticate and make available for delivery Securities
for original issue in the aggregate principal amount of up to $115,000,000 upon
a written order or orders of the Company signed by two Officers or by an Officer
and an Assistant Treasurer or Assistant Secretary of the Company (a "Company
Order"). The Company Order shall specify the amount of Securities to be
authenticated and the date on which the original issue of Securities is to be
authenticated. The aggregate principal amount of Securities outstanding at any
time may not exceed $115,000,000, except as provided in Section 2.7.
The Trustee shall act as the initial authenticating agent. Thereafter, the
Trustee may appoint an authenticating agent acceptable to the Company to
authenticate Securities. An authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
The Securities shall be issuable only in registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof.
SECTION 2.3 Registrar, Paying Agent and Conversion Agent.
--------------------------------------------
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange (the "Registrar"), an
office or agency where Securities may be presented for payment (the "Paying
Agent"), an office or agency where Securities may be presented for conversion
(the "Conversion Agent") and an office or agency where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Registrar shall keep a register of the Securities and of their transfer and
exchange.
The Company shall enter into an appropriate agency agreement with any Agent
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such Agent. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture. If the
Company fails to maintain a Registrar, Paying Agent, Conversion Agent or agent
for service of notices and demands, or fails to give the
-7-
<PAGE>
foregoing notice, the Trustee shall act as such. The Company or any Affiliate of
the Company may act as Paying Agent (except for the purposes of Section 6.1 and
Article 10), Registrar or Conversion Agent.
The Company initially appoints the Trustee as Registrar, Paying Agent,
Conversion Agent and agent for service of notices and demands in connection with
the Securities.
SECTION 2.4 Paying Agent to Hold Money in Trust.
-----------------------------------
On or prior to each due date of the principal of or interest on any
Securities, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal or interest so becoming due. Subject to Section 5.7, the
Paying Agent shall hold in trust for the benefit of Securityholders or the
Trustee all money held by the Paying Agent for the payment of principal of or
interest on the Securities, and shall notify the Trustee of any default by the
Company (or any other obligor on the Securities) in making any such Payment. If
the Company or an Affiliate of the Company acts as Paying Agent, it shall on or
before each due date of the principal of or interest on any Securities segregate
the money and hold it as a separate trust fund. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and the
Trustee may at any time during the continuance of any default, upon written
request to a Paying Agent, require such Paying Agent to forthwith pay to the
Trustee all sums so held in trust by such Paying Agent. Upon doing so, the
Paying Agent (other than the Company) shall have no further liability for the
money.
SECTION 2.5 Securityholder Lists.
--------------------
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each semi-annual interest payment date and at such
other times as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.6 Transfer and Exchange
---------------------
When a Security is presented to the Registrar with a request to register a
transfer thereof or to exchange such security for an equal principal amount of
Securities of other authorized denominations, the Registrar shall register the
transfer or make the exchange as requested; provided that every security
presented or surrendered for registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer in form satisfactory
to the Registrar duly executed by the Holder thereof or his attorney duly
authorized in writing. To permit registration
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of transfers and exchanges, upon surrender of any Security for registration of
transfer or exchange at the office or agency maintained pursuant to Section 2.3,
the Company shall execute and the Trustee shall authenticate Securities at the
Registrar's request. Any exchange or transfer shall be without charge, except
that the Company or the Registrar may require payment of a sum sufficient to
cover any tax assessment or other governmental charge that may be imposed in
relation thereto, and provided further that this sentence shall not apply to
any exchange pursuant to Section 2.10, 3.6, 3.10, 4.2 (last paragraph) or 11.5.
Neither the Company, the Registrar nor the Trustee shall be required to
exchange or register a transfer of (a) any Securities for a period of 15 days
next preceding any selection of Securities to be redeemed or (b) any
Securities or portions thereof selected or called for redemption, including
pursuant to Section 3.7 (except, in the case of redemption of a Security in
part, the portion not to be redeemed).
All Securities issued upon any transfer or exchange of Securities shall be
valid obligations of the Company, evidencing the same debt, and entitled to the
same benefits under this Indenture as the Securities surrendered upon such
exchange or transfer or exchange.
SECTION 2.7 Replacement Securities.
----------------------
If any mutilated Security is surrendered to the Company, the Registrar or
the Trustee, or the Company, the Registrar and the Trustee receive evidence to
their satisfaction of the destruction, loss or theft of any Security, and there
is delivered to the Company, the Registrar and the Trustee such security or
indemnity as may be required by them to save each of them harmless, then, in the
absence of notice to the Company, the Registrar or the Trustee that such
Security has been acquired by a bona fide purchaser, the Company shall execute,
and upon its written request that Trustee shall authenticate and deliver, in
exchange for any such mutilated Security or in lieu of any such destroyed, lost
or stolen Security, a new Security of like tenor and principal amount, bearing
a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, or is about to be redeemed by the Company
pursuant to Article 3, the Company in its discretion may, instead of issuing a
new Security, pay or redeem such Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.7, the
Company may require the payment of a sum sufficient to cover any tax, assessment
or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee or the Registrar)
in connection therewith.
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<PAGE>
Every new Security issued pursuant to this Section 2.7 in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.8 Outstanding Securities.
----------------------
Securities outstanding at any time are all Securities authenticated by
the Trustee, except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.8 as not outstanding.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Company receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the Company)
holds on a redemption date or maturity date money sufficient to pay the
principal of, premium, if any, and accrued interest on Securities payable on
that date, then on and after that date such Securities cease to be outstanding
and interest on them ceases to accrue.
Subject to the restriction contained in Section 2.9, a Security does not
cease to be outstanding because the Company or an Affiliate of the Company holds
the Security.
SECTION 2.9 Treasury Securities.
-------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee knows are so owned shall be so disregarded. Securities so owned
which have been pledged in good faith shall not be disregarded if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to the Securities and that the pledgee is not the Company or any
other obligor on the Securities or any Affiliate of the Company or of such other
obligor.
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SECTION 2.10 Temporary Securities.
--------------------
Until definitive Securities are ready for delivery, the Company may prepare
and execute, and, upon the order of the Company, the Trustee shall authenticate
and deliver temporary Securities. Temporary Securities shall be substantially in
the form of definitive Securities but may have variations that the Company with
the consent of the Trustee considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate and deliver definitive Securities in exchange for temporary
Securities.
SECTION 2.11 Cancellation.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Conversion Agent shall
forward to the Trustee or its agent any Securities surrendered to them for
transfer, exchange, payment or conversion. The Trustee and no one else shall
cancel, in accordance with its standard procedures, all Securities surrendered
for transfer, exchange, redemption, payment, conversion or cancellation and
shall deliver the cancelled Securities to the Company. The Company may not issue
new Securities to replace Securities it has paid or delivered to the Trustee
for cancellation or that any Holder has converted pursuant to Article 4.
ARTICLE 3.
REDEMPTION AND PURCHASES
SECTION 3.1 Right to Redeem; Notice to Trustee.
----------------------------------
The Securities may not be redeemed at the option of the Company prior to
February 12, 1996. Thereafter, the Company may, at its option, redeem the
Securities, in whole or in part, at any time and form time to time, upon notice
as set forth below, and at the redemption prices set forth in paragraph 5 of the
form of Security attached hereto as Exhibit A, together with accrued interest up
---------
to, but not including, the Redemption Date.
If the Company elects to redeem Securities pursuant to paragraph 5 of the
Securities, it shall notify the Trustee at least 35 days prior to the redemption
date as fixed by the Company (unless a shorter notice shall be satisfactory to
the Trustee) of the redemption date and the principal amount of Securities to be
redeemed. If fewer than all of the Securities are to be redeemed, the record
date relating to such redemption shall be selected by the Company and given to
the Trustee, which record date shall not be less than ten days after the date of
notice to the Trustee.
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SECTION 3.2 Selection of Securities to be Redeemed.
--------------------------------------
If less than all of the Securities are to be redeemed, the Trustee shall,
not more than 60 days prior to the redemption date, select the Securities to be
redeemed by lot or by a method the Trustee considers fair and appropriate;
provided that such method is not prohibited by any stock exchange or market on
which the Securities are then listed. The Trustee shall make the selection from
the Securities outstanding and not previously called for redemption. Securities
in denominations of $1,000 may only be redeemed in whole. The Trustee may select
for redemption portions (equal to $1,000 or any multiple thereof) of the
principal of Securities that have denominations larger than $1,000. Provisions
of this Indenture that apply to Securities called for redemption also apply to
portions of Securities called for redemption.
SECTION 3.3 Notice of Redemption.
--------------------
At least 30 days but not more than 60 days before a redemption date, the
Company shall mail or cause to be mailed a notice of redemption by first-class
mail to each Holder of Securities to be redeemed at such Holder's address as it
appears on the Registrar's books.
The notice shall identify the Securities to be redeemed and shall state:
(1) The redemption date;
(2) the redemption price;
(3) the then current Conversion Price;
(4) the name and address of the Paying Agent and the Conversion Agent;
(5) that Securities called for redemption must be presented and
surrendered to the Paying Agent to collect the redemption price;
(6) that the Securities called for redemption may be converted at any
time before the close of business on the fifth Business Day immediately
preceding the redemption date;
(7) that Holders who wish to convert Securities must satisfy the
requirements in paragraph 8 of the Securities;
(8) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption shall cease accruing
on and after the redemption date and the only remaining right of the Holder
shall be to receive
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payment of the redemption price upon presentation and surrender to the
Paying Agent of the Securities; and
(9) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date, upon presentation and surrender of such Security, a new
Security or Securities in principal amount equal to the unredeemed portion
thereof will be issued.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense.
SECTION 3.4 Effect of Notice of Redemption.
------------------------------
Once notice of redemption is mailed, Securities called for redemption
become due and payable on the redemption date and at the redemption price stated
in the notice, except for Securities that are converted in accordance with the
provisions of Section 4.1 hereof. Upon presentation and surrender to the Paying
Agent, such Securities shall be paid at the redemption price, plus accrued
interest to the redemption date.
SECTION 3.5 Deposit of Redemption Price.
---------------------------
On or prior to the redemption date, the Company shall deposit with the
Paying Agent (or if the Company or an Affiliate of the Company acts as Paying
Agent, shall segregate and hold in trust) money sufficient to pay the redemption
price of and accrued interest on all Securities to be redeemed on that date,
other than Securities or portions thereof called for redemption on that date
which have been delivered by the Company to the Trustee for cancellation or have
been converted. The Paying Agent shall return to the Company any money not
required for that purpose because of the conversion of Securities pursuant to
Article 4 or otherwise. If such money is then held by the Company or an
Affiliate of the Company in trust and is not required for such purposes, it
shall be discharged from the trust.
SECTION 3.6 Securities Redeemed in Part.
---------------------------
Upon presentation and surrender of a Security that is redeemed in part, the
Company shall execute and the Trustee shall authenticate for and deliver to the
Holder a new Security equal in principal amount to the unredeemed portion of the
Security surrendered.
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SECTION 3.7 Redemption of Securities at Option of the Holder Upon Change in
---------------------------------------------------------------
Control.
-------
(a) if at any time that Securities remain outstanding there shall have
occurred a Change in Control (as hereinafter defined), Securities shall be
redeemed by the Company at the option of the Holder thereof, at a purchase price
(the "Change in Control Purchase Price") equal to the principal amount thereof
plus accrued interest up to and including the Change in Control Purchase Date,
as of the date that is 40 Business Days after the occurrence of the Change in
Control (the "Change in Control Purchase Date"), subject to satisfaction by or
on behalf of any Holder of the requirements set forth in subsection (c) of this
Section 3.7. Within ten days after any Change in Control requiring the Company
to deliver the notice to Holders provided for in subsection (b) of this Section
3.7, the Company shall so notify the Trustee.
A "Change in Control" shall be deemed to have occurred at such time after
the original issuance of the Securities as there shall occur:
(1) the acquisition by any person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or any successor provision to either of the foregoing) of
beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions,
of shares of capital stock of the Company entitling such person to
exercise 50% or more of the total voting power of all shares of
capital stock of the Company entitling the holders thereof to vote
generally in elections of directors; or
(2) any consolidation of the Company with, or merger of the Company
into, any other person, any merger of another person into the
Company, or any sale, lease or exchange of all or substantially
all of the property and assets of the Company to another person
(other than a merger (x) which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock of the Company or (y) which is
effected solely to change the jurisdiction of incorporation of the
Company and results in a reclassification, conversion or exchange
of outstanding shares of Common Stock into solely shares of common
stock);
provided, however, that a Change in Control shall not be deemed to have occurred
if (i) the closing price per share of the Common
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Stock (as determined in accordance with the second sentence of Section 4.6(e)
hereof) for each of any five trading days within the period of ten consecutive
trading days ending immediately after the later of the Change in Control or the
public announcement of the Change in Control (in case of a Change in Control
under clause (1) above) or ending immediately before the Change in Control (in
the case of a Change in Control under clause (2) above) shall equal or exceed
105% of the Conversion Price of the Securities in effect on each such trading
day or (ii) if all of the consideration (excluding cash payments for fractional
shares) in the transaction or series of transactions constituting the Change in
Control consists of shares of common stock traded on a national securities
exchange or quoted on the NASDAQ National Market System and as a result of such
transaction or series of transactions the Securities become convertible solely
into such common stock (excluding cash payments for fractional shares) and the
closing price of the consideration paid or received for each share of Common
Stock shall equal or exceed 105% of the Conversion Price of the Securities for
each of any five trading days within the period of ten consecutive trading days
immediately following the closing date of such transaction or the last
transaction of such series of such transactions, as the case may be. The
determination of whether a sale, lease or exchange of all or substantially all
of the property and assets of the Company has occurred shall be governed by the
internal law of the State of Delaware. A "beneficial owner" shall be determined
in accordance with Rule 13d-3 promulgated by the Commission under the Exchange
Act, as in effect on the date of execution of this Indenture, except that, for
purposes of this subsection (a), the number of shares of capital stock of the
Company entitling the holders thereof to vote generally in elections of
directors shall be deemed to include, in addition to all outstanding shares of
capital stock of the Company entitling the holders thereof to vote generally in
the election of directors and Unissued Shares of the Person with respect to
which the Change in Control determination is being made, all Unissued Shares of
all other Persons. As used herein, "Unissued Shares" shall mean shares of
capital stock of the Company not outstanding that are subject to options,
warrants, rights to purchase or conversion privileges exercisable within 60 days
following the date of determination of a Change in Control and that, upon
issuance, shall entitle the holders thereof to vote generally in the election of
directors.
(b) Within ten Business Days after the occurrence of a Change in Control,
the Company shall mail a written notice of Change in Control by first-class
mail to the Trustee and to each Holder (and to beneficial owners as required by
applicable law) and shall cause a copy of such notice to be published in a daily
newspaper of national circulation. The notice shall include the form of a
Change in Control Purchase Notice (as defined below) to be completed by the
Holder and shall state:
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(1) the date of such Change in Control and, briefly, the events
causing such Change in Control;
(2) the date by which the Change in Control Purchase Notice
pursuant to this section 3.7 must be given;
(3) the Change in Control Purchase Date;
(4) the Change in Control Purchase Price;
(5) briefly, the conversion rights of the Securities;
(6) the name and address of the Paying Agent and the Conversion
Agent;
(7) the Conversion Price and any adjustments thereto;
(8) that Securities as to which a Change in Control Purchase Notice
has been given may be converted into Common Stock only to the
extent that the Change in Control Purchase Notice has been
withdrawn in accordance with the terms of this Indenture;
(9) the procedures that the Holder must follow to exercise rights
under this Section 3.7;
(10) the procedures for withdrawing a Change in Control Purchase
Notice, including a form of notice of withdrawal; and
(11) that the Holder must satisfy the requirements set forth in the
Securities in order to convert the Securities.
(c) A Holder may exercise its rights specified in subsection (a) of this
Section 3.7, upon delivery of a written notice of the exercise of such rights (a
"Change in Control Purchase Notice") to the Paying Agent at any time prior to
the close of business on the Change in Control Purchase Date, stating:
(1) the certificate number of each Security that the Holder will
deliver to be purchased;
(2) the portion of the principal amount of each Security that the
Holder will deliver to be purchased, which portion must be
$1,000 or an integral multiple thereof; and
(3) that such Security shall be purchased pursuant to the terms and
conditions specified in this Indenture.
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<PAGE>
The delivery of such Security to the Paying Agent (together with all
necessary endorsements) at the office of the Paying Agent shall be a condition
to the receipt by the Holder of the Change in Control Purchase Price therefor;
provided, however, that such Change in Control Purchase Price shall be so paid
- -------- -------
pursuant to this Section 3.7 only if the Security so delivered to the Paying
Agent shall conform in all respects to the description thereof set forth in the
related Change in Control Purchase Notice.
The Company shall purchase from the Holder thereof, pursuant to this
Section 3.7, a portion of a Security if the principal amount of such portion is
$1,000 or an integral multiple of $1,000. Provisions of this Indenture that
apply to the purchase of all of a Security pursuant to Sections 3.7 through 3.12
also apply to the purchase of such portion of such Security.
Notwithstanding anything herein to the contrary, any Holder delivering to
the Paying Agent the Change in Control Purchase Notice contemplated by this
Section 3.7(c) shall have the right to withdraw such Change in Control Purchase
Notice in whole or in a portion thereof that is $1,000 or in an integral
multiple thereof at any time prior to the close of business on the Change in
Control Purchase Date by delivery of a written notice of withdrawal to the
Paying Agent in accordance with Section 3.8.
The Paying Agent shall promptly notify the Company of the receipt by it of
any Change in Control Purchase Notice or written withdrawal thereof.
SECTION 3.8 Effect of Change in Control Purchase Notice.
-------------------------------------------
Upon receipt by the Paying Agent of the Change in Control Purchase Notice
specified in Section 3.7(c), the Holder of the Security in respect of which such
Change in Control Purchase Notice was given shall (unless such Change in Control
Purchase Notice is withdrawn as specified below) thereafter be entitled to
receive solely the Change in Control Purchase Price with respect to such
Security. Such Change in Control Purchase Price shall be paid to such Holder
promptly following the later of (i) the Change in Control Purchase Date with
respect to such Security (provided the conditions in Section 3.7(c) have been
satisfied) and (ii) the time of delivery of such Security to the Paying Agent by
the Holder thereof in the manner required by Section 3.7(c). Securities in
respect of which a Change in Control Purchase Notice has been given by the
Holder thereof may not be converted into shares of Common Stock on or after the
date of the delivery of such Change in Control Purchase Notice unless such
Change in Control Purchase Notice has first been validly withdrawn.
A Change in Control Purchase Notice may be withdrawn by means of a written
notice of withdrawal delivered by the Holder to the office of the Paying Agent
at any time prior to the close of
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business on the Change in Control Purchase Date to which it relates,
specifying:
(1) the certificate number of each Security in respect of which
such notice of withdrawal is being submitted;
(2) the principal amount of the Security or portion thereof with
respect to which such notice of withdrawal is being
submitted; and
(3) the principal amount, if any, of such Security that remains
subject to the original Change in Control Purchase Notice
and that has been or will be delivered for purchase by the
Company.
There shall be no purchase of any Securities pursuant to Section 3.7 if
there has occurred (prior to, on or after, as the case may be, the giving, by
the Holders of such Securities, of the required Change in Control Purchase
Notice) and is continuing an Event of Default (other than a default in the
payment of the Change in Control Purchase Price with respect to such
Securities).
SECTION 3.9 Deposit of Change in Control Purchase Price.
--------------------------------------------
On or before the second Business Day immediately following a Change in
Control Purchase Date, the Company shall deposit with the Trustee or with the
Paying Agent (or, if the Company is acting as the Paying Agent, shall segregate
and hold in trust as provided in Section 2.4) an amount of money sufficient to
pay the aggregate Change in Control Purchase Price of all the Securities or
portions thereof that are to be purchased as of such Change in Control Purchase
Date. The manner in which the deposit required by this Section 3.9 is made by
the Company shall be at the option of the Company, provided that such deposit
shall be made in a manner such that the Trustee or the Paying Agent shall have
immediately available funds on the second Business Day immediately following
the Change in Control Purchase Date.
If the Paying Agent holds, in accordance with the terms hereof, money
sufficient to pay the Change in Control Purchase Price of any Security tendered
for redemption, then, on the second Business Day immediately subsequent to the
Change in Control Purchase Date, such Security will cease to be outstanding and
will be deemed paid, whether or not such Security is delivered to the Paying
Agent, and all other rights of the Holder in respect thereof shall terminate
(other than the right to receive the Change in Control Purchase Price upon
delivery of such Security).
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SECTION 3.10 Securities Purchased in Part.
----------------------------
Any Security that is to be purchased only in part shall be surrendered at
the office of the Paying Agent (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder thereof or such
Holder's attorney duly authorized in writing), and the Company shall execute and
the Trustee shall authenticate and deliver to the Holder of such Security,
without service charge, a new Security or Securities, or such authorized
denomination or denominations as may be requested by such Holder, in aggregate
principal amount equal to, and in exchange for, the portion of the principal
amount of the Security so surrendered that is not purchased.
SECTION 3.11 Compliance with Securities Laws upon Purchase of Securities.
-----------------------------------------------------------
In connection with any offer to purchase or purchase of Securities under
Section 3.7 hereof (provided that such offer or purchase constitutes an "issuer
tender offer" for purposes of Rule 13e-4 under the Exchange Act (which term, as
used herein, includes any successor provision thereto) at the time of such offer
or purchase), the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 under
the Exchange Act, (ii) file the related Schedule 13E-4 (or any successor
schedule, form or report) under the Exchange Act, and (iii) otherwise comply
with all Federal and state securities laws so as to permit the rights of the
Holders and obligations of the Company under Sections 3.7 through 3.10 to be
exercised in the time and in the manner specified therein.
SECTION 3.12 Repayment to the Company.
------------------------
Subject to the provisions of Section 5.7 to the extent that the aggregate
amount of cash deposited by the Company pursuant to Section 3.9 exceeds the
aggregate Change in Control Purchase Price of the Securities or portions thereof
to be purchased, then promptly after the second Business Day immediately
following the Change in Control Purchase Date the Trustee or the Paying Agent,
as the case may be, shall return any such excess to the Company.
ARTICLE 4.
CONVERSION
SECTION 4.1 Conversion Privilege.
--------------------
A Holder of a Security may convert such Security into Common Stock at any
time prior to maturity, at the conversion price then in effect; provided that,
if such Security is called for redemption pursuant to Article 3, such
conversion right shall terminate at the
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close of business on the fifth Business Day immediately preceding the redemption
date for such Security (unless the Company shall default in making the
redemption payment when due, in which case the conversion right shall terminate
at the close of business on the date such default is cured and such Security is
redeemed); provided, further, that, if the Holder of a Security presents such
--------- --------
Security for redemption prior to the close of business on the fifth Business Day
immediately preceding the redemption date for such Security, the right of
conversion shall terminate upon presentation of the Security to the Trustee
(unless the Company shall default in making the redemption payment when due, in
which case the conversion right shall terminate at the close of business on the
date such default is cured and such Security is redeemed). The number of shares
of Common Stock issuable upon conversion of a Security shall be determined by
dividing the principal amount of the Security or portion thereof surrendered for
conversion by the Conversion Price in effect on the conversion date. The initial
Conversion Price is set forth in paragraph 8 of the Securities and is subject to
adjustment as provided in this Article 4.
A Holder may convert a portion of a Security equal to $1,000 or any
integral multiple thereof. Provisions of this Indenture that apply to conversion
of all of a Security also apply to conversion of a portion of a Security.
A Security in respect of which a Holder has delivered a Change in Control
Purchase Notice pursuant to Section 3.7(c) exercising the option of such Holder
to require the Company to purchase such Security may be converted only if such
Purchase Notice is withdrawn by a written notice of withdrawal delivered to the
Paying Agent prior to the close of business on the Change in Control Purchase
Date in accordance with Section 3.8.
A Holder of Securities is not entitled to any rights of a holder of Common
Stock until such Holder has converted his Securities to Common Stock, and only
to the extent such Securities are deemed to have been converted to Common Stock
pursuant to this Article 4.
SECTION 4.2 Conversion Procedure.
--------------------
To convert a Security, a Holder must (i) complete and manually sign the
conversion notice on the back of the Security and deliver such notice to the
Conversion Agent, (ii) surrender the Security to the Conversion Agent, (iii)
furnish appropriate endorsements and transfer documents if required by the
Registrar or the Conversion Agent and (iv) pay any transfer or similar tax, if
required. The date on which the Holder satisfies all of those requirements is
the "Conversion Date". As soon as practicable after the Conversion Date, the
Company shall deliver to the Holder through the Conversion Agent a certificate
for the number of whole shares of
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Common Stock issuable upon the conversion and cash in lieu of any fractional
shares pursuant to Section 4.3.
The person in whose name the certificate is registered shall be deemed to
be a stockholder of record on the Conversion Date; provided, however, that no
-------- -------
surrender of a Security on any date when the stock transfer books of the
Company shall be closed shall be effective to constitute the person or persons
entitled to receive the shares of Common Stock upon such conversion as the
record holder or holders of such shares of Common Stock on such date, but such
surrender shall be effective to constitute the person or persons entitled to
receive such shares of Common Stock as the record holder or holders thereof for
all purposes at the close of business on the next succeeding day on which such
stock transfer books are open; provided, further, that such conversion shall be
-------- -------
at the Conversion Price in effect on the Conversion Date as if the stock
transfer books of the Company had not been closed. Upon conversion of a
Security, such person shall no longer be a Holder of such Security.
No payment or adjustment will be made for accrued interest on a converted
Security or for dividends or distributions on shares of Common Stock issued upon
conversion of a Security, but if any Holder surrenders a Security for conversion
after the close of business on the record date for the payment of an installment
of interest and before the close of business on the next interest payment date,
then, notwithstanding such conversion, the interest payable on such interest
payment date shall be paid to the Holder of such Security on such record date.
In such event, such Security, when surrendered for conversion, must be
accompanied by delivery of a check or draft payable to the Conversion Agent in
an amount equal to the interest payable on such interest payment date on the
portion so converted. If such payment does not accompany such Security, the
Security shall not be converted. If the Company defaults in the payment of
interest payable on the interest payment date, the Conversion Agent shall repay
such funds to the Holder.
If a Holder converts more than one Security at the same time, the number
of shares of Common Stock issuable upon the conversion shall be based on the
aggregate principal amount of Securities converted.
Upon surrender of a Security that is converted in part, the Company shall
execute, and the Trustee shall authenticate and deliver to the Holder, a new
Security equal in principal amount to the unconverted portion of the Security
surrendered.
SECTION 4.3 Fractional Shares.
-----------------
The Company will not issue fractional shares of Common Stock upon
conversion of Securities. In lieu thereof, the Company will pay an amount in
cash based upon the closing sale price of the
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Common Stock on the trading day immediately prior to the date of conversion.
SECTION 4.4 Taxes on Conversion.
-------------------
If a Holder converts a Security, the Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon such conversion. However, the Holder shall pay any such tax which is
due because the Holder requests the shares to be issued in a name other than the
Holder's name. The Conversion Agent may refuse to deliver the certificates
representing the Common Stock being issued in a name other than the Holder's
name until the Conversion Agent receives a sum sufficient to pay any tax which
will be due because the shares are to be issued in a name other than the
Holder's name. Nothing herein shall preclude any tax withholding required by law
or regulations.
SECTION 4.5 Company to Provide Stock.
------------------------
The Company shall, prior to issuance of any Securities hereunder, and from
time to time as may be necessary, reserve, out of its authorized but unissued
Common Stock a sufficient number of shares of Common Stock to permit the
conversion of all outstanding Securities for shares of Common Stock.
All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares or treasury shares, shall be duly authorized,
validly issued, fully paid and non-assessable and shall be free from preemptive
rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all Federal and state
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Securities, if any, and will list or cause to have quoted such
shares of Common Stock on each national securities exchange or in the
over-the-counter market or such other market on which the Common Stock is then
listed or quoted.
SECTION 4.6 Adjustment of Conversion Price.
------------------------------
The conversion price (the "Conversion Price") shall be adjusted from time
to time by the Company as follows:
(a) In case the Company shall (i) pay a dividend in shares of Common Stock
to holders of Common Stock, (ii) make a distribution in shares of Common Stock
to holders of Common Stock, (iii) subdivide its outstanding Common Stock into a
greater number of shares, or (iv) combine its outstanding Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior
thereto shall be adjusted so that the Holder of any Security thereafter
surrendered for conversion shall be entitled to receive
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the number of shares of Common Stock which he would have owned had such Security
been converted immediately prior to the happening of such event. An adjustment
made pursuant to this subsection (a) shall become effective immediately after
the record date in the case of a dividend in shares or distribution and shall
become effective immediately after the effective date in the case of subdivision
or combination.
(b) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them (for a period
commencing no earlier than the record date described below and expiring not more
than 60 days after such record date) to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at a price per share
less than the current market price per share of Common Stock (as determined in
accordance with subsection (e) below) at the record date for the determination
of stockholders entitled to receive such rights or warrants, the Conversion
Price in effect immediately prior thereto shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding on such record date, plus
the number of shares which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at such current market price,
and of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock offered (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever any such
rights or warrants are issued, and shall become effective immediately after such
record date. If at the end of the period during which such rights or warrants
are exercisable not all warrants or rights shall have been exercised, the
adjusted Conversion Price shall be immediately readjusted to what it would have
been based upon the number of additional shares of Common Stock actually issued
(or the number of shares of Common Stock issuable upon conversion of convertible
securities actually issued).
(c) In case the Company shall distribute to all or substantially all
holders of its Common Stock any shares of capital stock of the Company (other
than Common Stock), evidences of indebtedness or other non-cash assets
(including securities of any company other than the Company), or shall
distribute to all or substantially all holders of its Common Stock rights or
warrants to subscribe for or purchase any of its securities (excluding those
referred to in subsection (b) above), then in each such case the Conversion
Price shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
distribution by a fraction of which the numerator shall be the current market
price per share (as
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defined in subsection (e) below) of the Common Stock on the record date
mentioned below less the fair market value on such record date (as determined by
the Board of Directors of the Company, whose determination shall be conclusive
evidence of such fair market value) of the portion of the capital stock or
assets or evidences of indebtedness so distributed or of such rights or warrants
applicable to one share of Common Stock (determined on the basis of the number
of shares of Common Stock outstanding on the record date), and of which the
denominator shall be the market price per share (as defined in subsection (e)
below) of the Common Stock on such record date. Such adjustment shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such distribution. Notwithstanding the
foregoing, in the event that the Company shall distribute rights or warrants
(other than those referred to in subsection (b) above) ("Rights") pro rata to
holders of Common Stock, the Company may, in lieu of making any adjustment
pursuant to this Section 4.6, make proper provision so that each holder of a
Security who converts such Security (or any portion thereof) after the record
date for such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such conversion, in addition to the
shares of Common Stock issuable upon such conversion (the "Conversion Shares"),
a number of Rights to be determined as follows: (i) if such conversion occurs on
or prior to the date for the distribution to the holders of Rights of separate
certificates evidencing such Rights (the "Distribution Date"), the same number
of Rights to which a holder of a number of shares of Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the Rights; and
(ii) if such conversion occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares of Common Stock into which the
principal amount of the Security so converted was convertible immediately prior
to the Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.
(d) In case the Company shall, by dividend or otherwise, at any time
distribute (a "Triggering Distribution") to all or substantially all holders of
its Common Stock cash in an aggregate amount that, together with the aggregate
amount of any other cash distributions to all or substantially all holders of
its Common Stock made within the 12 months preceding the date of payment of the
Triggering Distribution and in respect of which no Conversion Price adjustment
pursuant to this Section 4.6 has been made, exceeds 20% of the product of the
current market price per share of Common Stock (as determined in accordance
with subsection (e) below) on the Business Day (the "Determination Date")
immediately preceding the day on which such Triggering Distribution is declared
by the Company multiplied by the number of shares of Common Stock outstanding on
such date (excluding shares held in the Treasury of
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the Company), the Conversion Price shall be reduced so that the same shall equal
the price determined by multiplying such Conversion Price in effect immediately
prior to the Determination Date by a fraction of which the numerator shall be
the current market price per share of the Common Stock (as determined in
accordance with subsection (e) below) on the Determination Day less the amount
of cash so distributed within such 12 months (including, without limitation, the
Triggering Distribution) applicable to one share of Common Stock (determined on
the basis of the number of shares of Common Stock outstanding on the
Determination Date) and the denominator shall be such current market price per
share of the Common Stock (as determined in accordance with subsection (e)
below) on the Determination Date, such reduction to become effective immediately
prior to the opening of business on the day following the date on which the
Triggering Distribution is paid.
(e) For the purpose of any computation under subsections (b), (c) and (d)
above, the current market price per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices for the 30 consecutive
trading days commencing 45 trading days before the Determination Date with
respect to distributions under subsection (d) above or the record date with
respect to distributions, issuances or other events requiring such computation
under subsections (b) or (c) above. The closing price for each day shall be the
last reported sales price or, in case no such reported sale takes place on such
date, the average of the reported closing bid and asked prices in either case on
the New York Stock Exchange Composite Tape, or if the Common Stock is not listed
or admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, the closing
sales price of the Common Stock as quoted by NASDAQ, or in case no reported
sales takes place, the average of the closing bid and asked prices as quoted by
NASDAQ or any comparable system, or if the Common Stock is not quoted on NASDAQ
or any comparable system, the closing sales price or, in case no reported sale
takes place, the average of the closing bid and asked prices, as furnished by
any two members of the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose.
(f) In any case in which this Section 4.6 shall require that an adjustment
be made following a record date or a Determination Date, as the case may be,
established for purposes of Section 4.6, the Company may elect to defer (but
only until five Business Days following the filing by the Company with the
Trustee of the certificate described in Section 4.10 below) issuing to the
holder of any Security converted after such record date or Determination Date
the shares of Common Stock and other capital stock of the Company issuable upon
such conversion over and above the shares of Common Stock and other capital
stock of the Company issuable upon such conversion only on the basis of the
Conversion Price prior to
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adjustment; and, in lieu of the shares the issuance of which is so deferred, the
Company shall issue or cause its transfer agents to issue due bills or other
appropriate evidence prepared by the Company or the right to receive such
shares.
SECTION 4.7 No Adjustment.
-------------
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 1% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
-------- -------
by reason of this Section 4.7 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article 4 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
No adjustment need be made for a transaction referred to in Section 4.6 if
all Securityholders are entitled to participate in the transaction on a basis
and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which holders of Common Stock
participate in the transaction. The Company shall give notice to the Trustee of
any such determination.
No adjustment need be made for rights to purchase Common Stock or
issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends or interest.
No adjustment need be made for a change in the par value or a change to no
par value of the Common Stock.
To the extent that the Securities become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
SECTION 4.8 Equivalent Adjustments.
----------------------
In the event that, as a result of an adjustment made pursuant to
Section 4.6 above, the holder of any Security thereafter surrendered for
conversion shall become entitled to receive any shares of capital stock of the
Company other than shares of its Common Stock, thereafter the Conversion Price
of such other shares so receivable upon conversion of any Securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in this Article 4.
SECTION 4.9 Adjustment for Tax Purposes.
---------------------------
The Company shall be entitled to make such reductions in the Conversion
Price, in addition to those required by Section 4.6, as it in its discretion
shall determine to be advisable in order that
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any stock dividends, subdivisions of shares, distributions of rights to purchase
stock or securities, or distribution of securities convertible into or
exchangeable for stock hereafter made by the Company to its stockholders shall
not be taxable.
SECTION 4.10 Notice of Adjustment.
--------------------
Whenever the Conversion Price is adjusted, the Company shall promptly mail
to Securityholders a notice of the adjustment and file with the Trustee an
Officers' Certificate briefly stating the facts requiring the adjustment and the
manner of computing it. The certificate shall be conclusive evidence of the
correctness of such adjustment.
SECTION 4.11 Notice of Certain Transactions.
------------------------------
In the event that:
(1) the Company takes any action which would require an adjustment
in the Conversion Price;
(2) the Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and stockholders
of the Company must approve the transaction; or
(3) there is a dissolution or liquidation of the Company,
the Company shall mail to Securityholders and file with the Trustee a notice
stating the proposed record or effective date, as the case may be. The Company
shall mail the notice at least ten days before such date. Failure to mail such
notice or any defect therein shall not affect the validity of any transaction
referred to in clause (1), (2) or (3) of this Section 4.11.
SECTION 4.12 Effect of Reclassification, Consolidation, Merger
-------------------------------------------------
or Sale on Conversion Privilege.
--------------------------------
If any of the following shall occur, namely: (i) any reclassification or
change of shares of Common Stock issuable upon conversion of Securities (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination); (ii) any
consolidation or merger to which the Company is a party other than a merger in
which the Company is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in name, or par value, or
from par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination) in, outstanding shares of Common
Stock; or (iii) any sale or conveyance of all or substantially all of the assets
of the
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Company as an entirety, then the Company, or such successor or purchasing
corporation, as the case may be, shall, as a condition precedent to such
reclassification, change, consolidation, merger, sale or conveyance, execute and
deliver to the Trustee a supplemental indenture providing that the Holder of
each Security then outstanding shall have the right to convert such Security
into the kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
deliverable upon conversion of such Security immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
supplemental indenture shall provide for adjustments of the Conversion Price
which shall be as nearly equivalent as may be practicable to the adjustments of
the Conversion Price provided for in this Article 4. If, in the case of any such
consolidation, merger, sale or conveyance, the stock or other securities and
property (including cash) receivable thereupon by a holder of Common Stock
includes shares of stock or other securities and property of a corporation other
than the successor or purchasing corporation, as the case may be, in such
consolidation, merger, sale or conveyance then such supplemental indenture shall
also be executed by such other corporation and shall contain such additional
provisions to protect the interests of the Holders of the Securities as the
Board of Directors of the Company shall reasonably consider necessary by reason
of the foregoing. The provisions of this Section 4.12 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
In the event the Company shall execute a supplemental indenture pursuant
to this Section 4.12, the Company shall promptly file with the Trustee (i) an
Officers' Certificate briefly stating the reasons therefor, the kind or amount
of shares of stock or securities or property (including cash) receivable by
Holders of the Securities upon the conversion of their Securities after any such
reclassification, change, consolidation, merger, sale or conveyance, any
adjustment to be made with respect thereto and that all conditions precedent
have been complied with and (ii) an Opinion of Counsel that all conditions
precedent have been complied with.
SECTION 4.13 Trustee's Disclaimer.
--------------------
The Trustee has no duty to determine when an adjustment under this
Article 4 should be made, how it should be made or what such adjustment should
be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 4.10. The Trustee makes no representation as to the validity
or value of any securities or assets issued upon conversion of Securities, and
the Trustee shall not be responsible for
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the Company's failure to comply with any provisions of this Article 4.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 4.12, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 4.12.
SECTION 4.14 Voluntary Reduction.
-------------------
The Company from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period; provided, that in no event may the Conversion Price be less then the
par value of a share of Common Stock.
ARTICLE 5.
SUBORDINATION
SECTION 5.1 Securities Subordinated to Senior Indebtedness.
----------------------------------------------
The Company covenants and agrees, and each holder of Securities issued
hereunder by his acceptance thereof likewise covenants and agrees, that all
Securities shall be issued subject to the provisions of this Article 5; and each
Person holding any Security, whether upon original issue or upon transfer or
assignment thereof, accepts and agrees to be bound by such provisions.
The payment of the principal of and interest on all Securities issued
hereunder (including without limitation in connection with any redemption of
Securities) shall, to the extent and in the manner hereinafter set forth, be
subordinated and subject in right of payment to the prior payment in full of
all Senior Indebtedness, whether outstanding at the date of this Indenture or
thereafter created, incurred, assumed or guaranteed.
SECTION 5.2 Securities Subordinated to Prior Payment of All
-----------------------------------------------
Senior Indebtedness on Dissolution, Liquidation,
------------------------------------------------
Reorganization, etc., of the Company.
------------------------------------
Upon any payment or distribution of the assets of the Company of any kind
or character, whether in cash, property or securities (including any collateral
at any time securing the Securities), to creditors upon any dissolution,
winding-up, total or partial liquidation or reorganization of the Company
(whether voluntary or involuntary, or in bankruptcy, insolvency, reorganization,
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liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the
Company, or otherwise), then in such event:
(a) all Senior Indebtedness (including principal thereof, interest
thereon and fees and expenses relating thereto) and the
reasonable fees and expenses of the Trustee shall first be paid
in full, in cash, or have provision made for such payment, before
any payment is made on account of the principal of or interest on
the indebtedness evidenced by the Securities or any deposit is
made pursuant to Section 6.3;
(b) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or
securities of the Company or any other company, trust or
corporation provided for by a plan of reorganization or
readjustment, junior, or the payment of which is otherwise
subordinate, at least to the extent provided in this Article 5,
with respect to the Securities, to the payment of all Senior
Indebtedness at that time outstanding and to the payment of all
securities issued in exchange therefor to the holders of the
Senior Indebtedness at the time outstanding), to which the
Holders or the Trustee on behalf of the Holders would be entitled
except for the provisions of this Article 5, including any such
payment or distribution which may be payable or deliverable by
reason of the payment of another debt of the Company being
subordinated to the payment of the Securities, shall be paid or
delivered by any debtor, Custodian or other person making such
payment or distribution, directly to the holders of the Senior
Indebtedness or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts remaining
unpaid on account of the principal of, interest on and fees and
expenses relating to the Senior Indebtedness held or represented
by each, for application to payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full after giving effect to any concurrent
payment or distribution, or provision therefor, to the holders of
such Senior Indebtedness; and
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(c) in the event that, notwithstanding the foregoing provisions of
this Section 5.2, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or
securities (other than securities of the Company as reorganized
or readjusted, or securities of the Company or any other company,
trust or corporation provided for by a plan of reorganization or
readjustment, junior, or the payment of which is otherwise
subordinate, at least to the extent provided for in this Article
5, with respect to the Securities, to the payment of all Senior
Indebtedness at the time outstanding and to the payment of all
securities issued in exchange therefor to the holders of Senior
Indebtedness at the time outstanding), shall be received by the
Trustee or the Holders before all Senior Indebtedness is paid in
full, or provision made for its payment, such payment or
distribution (subject to the provisions of Sections 5.6 and 5.7)
shall be held in trust for the benefit of, and shall be
immediately paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of Senior Indebtedness remaining
unpaid or unprovided for, or their representative or
representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of
such Senior Indebtedness may have been issued, ratably according
to the aggregate amounts remaining unpaid on account of the
principal of, interest on and fees and expenses relating to the
Senior Indebtedness held or represented by each, for application
to the payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full after
giving effect to any concurrent payment or distribution, or
provision therefor, to the holders of such Senior Indebtedness.
The Company shall give prompt notice to the Trustee of any dissolution,
winding-up, liquidation or reorganization of the Company.
Upon any distribution of assets of the Company referred to in this Article
5, the Trustee, subject to the provisions of Sections 9.1 and 9.2, and the
Holders shall be entitled to rely upon any order or decree by any court of
competent jurisdiction in which such dissolution, winding-up, liquidation or
reorganization proceeding is pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to the Trustee or to
the Holders, for the purpose of ascertaining the persons entitled to participate
in such distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the
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amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article 5.
SECTION 5.3 Securityholders to be Subrogated to Right of
--------------------------------------------
Holders of Senior Indebtedness.
------------------------------
Subject to the prior payment in full of all Senior Indebtedness then due,
the Holders shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of assets of the Company
applicable to the Senior Indebtedness until the principal of and interest on the
Securities shall be paid in full, and for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of assets,
whether in cash, property or securities, distributable to the holders of Senior
Indebtedness under the provisions hereof to which the Holders would be entitled
except for the provisions of this Article 5, and no payment pursuant to the
provisions of this Article 5 to the holders of Senior Indebtedness by the
Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Article 5 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 5.4 Obligations of the Company Unconditional.
----------------------------------------
Nothing contained in this Article 5 or elsewhere in this Indenture or in
any Security is intended to or shall impair, as among the Company, its creditors
other than the holders of Senior Indebtedness, and the Holders, the obligation
of the Company, which is absolute and unconditional, to pay to the Holders the
principal of and interest on the Securities, as and when the same shall become
due and payable in accordance with the terms of the Securities, or to affect
the relative rights of the Holders and other creditors of the Company other than
the holders of Senior Indebtedness, nor shall anything herein or therein prevent
the Trustee or any Holder from exercising all remedies otherwise permitted by
applicable law upon the happening of an Event of Default under this Indenture,
subject to the provisions of Article 8, and the rights, if any, under this
Article 5 of the holders of Senior Indebtedness in respect of assets, whether in
cash, property or securities, of the Company received upon the exercise of any
such remedy.
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SECTION 5.5 Company Not to Make Payment with Respect to Securities in Certain
-----------------------------------------------------------------
Circumstances.
-------------
(a) Upon the happening of a default in payment (whether at maturity or at
a date fixed for prepayment or by acceleration or otherwise) of the principal of
or interest on any Senior Indebtedness, as such default is defined under or in
respect of any Senior Indebtedness or in any agreement pursuant to which any
Senior Indebtedness has been incurred, then, unless and until the amount of such
Senior Indebtedness then due shall have been paid in full or provision made
therefor in a manner satisfactory to the holders of such Senior Indebtedness, or
such default shall have been cured or waived or shall have ceased to exist, the
Company shall not pay principal of or interest on the Securities or make any
deposit pursuant to Section 6.3 or 10.1 and shall not repurchase, redeem or
otherwise retire any Securities (collectively, "pay the Securities").
(b) Upon the happening of an event of default with respect to any Senior
Indebtedness (other than under circumstances when the terms of paragraph (a) of
this Section 5.5 are applicable), as such event of default is defined under or
in respect of any Senior Indebtedness or in any agreement pursuant to which any
Senior Indebtedness has been incurred, permitting the holders thereof to
immediately accelerate the maturity thereof, and upon written notice thereof
given to the Company and the Trustee by any holders of such Senior Indebtedness
or their representative(s) (a "Default Notice"), then, unless and until such
event of default shall have been cured or waived in writing by the holders of
such Senior Indebtedness or shall have ceased to exist, no direct or indirect
payment shall be made with respect to the principal of or interest on the
Securities or to acquire any of the Securities or on account of the redemption
provisions of the Securities; provided, however, that this paragraph (b) shall
-------- -------
not prevent the making of any such payment (which is not otherwise prohibited by
paragraph (a) of this Section 5.5) for more than 89 days after the Default
Notice shall have been given unless the Senior Indebtedness in respect of which
such event of default exists has been declared due and payable in its entirety,
in which case no such payment may be made until such acceleration has been
waived, rescinded or annulled, or such Senior Indebtedness shall have been paid
in full, or payment thereof shall be duly provided for in cash or in any other
manner satisfactory to the holders of such Senior Indebtedness. Notwithstanding
the foregoing, not more than one Default Notice shall be given with respect to
the same issue of Senior Indebtedness within a period of 360 consecutive days,
and no event of default which existed or was continuing on the date of any
Default Notice and was known to the holders of such issue of Senior Indebtedness
shall be made the basis for the giving of a subsequent Default Notice by the
holders of such issue of Senior Indebtedness.
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(c) In the event that, notwithstanding the foregoing provisions of this
Section 5.5, any payment on account of the principal of or interest on the
Securities shall be made by or on behalf of the Company and received by the
Trustee, any Holder or any Paying Agent (or, if the Company is acting as its own
Paying Agent, money for any such payment shall be segregated and held in trust),
after the happening of a default under any Senior Indebtedness of the type
specified in subsections (a) and (b) of this Section 5.5, then, unless and until
the amount of such Senior Indebtedness then due shall have been paid in full, or
provision made therefor or such default shall have been cured or waived, such
payment (subject, in each case, to the provisions of Sections 5.6 and 5.7 and
the proviso contained in such subsection (b)), be held in trust for the benefit
of, and shall be immediately paid over to, the holders of Senior Indebtedness or
their representative or representatives or the trustee or trustees under any
indenture under which any instruments evidencing any of the Senior Indebtedness
may have been issued, ratably according to the aggregate amounts remaining
unpaid on account of the principal of and interest on, and fees and other
charges in respect of the Senior Indebtedness held or represented by each, for
application to the payment of all Senior Indebtedness remaining unpaid to the
extent necessary to pay all Senior Indebtedness in accordance with its terms,
after giving effect to any concurrent payment or distribution to or for the
benefit of the holders of Senior Indebtedness. The Company shall give prompt
written notice to the Trustee of any default under any Senior Indebtedness or
under any agreement pursuant to which Senior Indebtedness may have been issued.
SECTION 5.6 Notice to Trustee.
-----------------
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article 5 or any other provision of this Indenture, the Trustee shall not at
any time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee, unless and until the
Trustee shall have received written notice thereof from the Company or from any
holder or holders of Senior Indebtedness or from their representative or
representatives; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Sections 9.1 and 9.2, shall be entitled to
assume conclusively that such facts do not exist.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a person representing himself to be a holder of Senior Indebtedness
(or a representative of such holder) to establish that such notice has been
given by a holder of Senior Indebtedness or a representative of any such holder.
In the event that the Trustee determines in good faith that further evidence is
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required with respect to the right of any person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article 5, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent of which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
each person under this Article 5, and if such evidence is not furnished, the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
SECTION 5.7 Application by Trustee of Monies Deposited with It.
--------------------------------------------------
Money or U.S. Government Obligations deposited in trust with the Trustee
pursuant to Sections 6.3 and 10.1 and not in violation of this Article 5 shall
be for the sole benefit of Securityholders and shall thereafter not be subject
to the subordination provisions of this Article 5. Otherwise, any deposit of
monies by the Company with the Trustee or any Paying Agent (whether or not in
trust) for the payment of the principal of or interest on any Securities shall
be subject to the provisions of Sections 5.1, 5.2, 5.3 and 5.5; except that, if
two Business Days prior to the date on which by the terms of this Indenture any
such monies may become payable for any purpose (including, without limitation,
the payment of either the principal of or interest on any Security) the Trustee
shall not have received with respect to such monies the notice provided for in
Section 5.6, then the Trustee or any Paying Agent shall have full power and
authority to receive such monies and to apply such monies to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such date. This Section 5.7
shall be construed solely for the benefit of the Trustee and the Paying Agent
and shall not otherwise affect the rights that holders of Senior Indebtedness
may have to recover any such payments from the Holders in accordance with the
provisions of this Article 5.
SECTION 5.8 Subordination Rights Not Impaired by Acts or Omissions of Company
-----------------------------------------------------------------
or Holders of Senior Indebtedness.
---------------------------------
No right of any present or future holders of any Senior Indebtedness to
enforce subordination, as herein provided, shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless or any knowledge thereof which any such holder may have or
be otherwise charged with. The holders of any Senior Indebtedness may extend,
renew, modify or amend the terms of such Senior Indebtedness or any security
therefor and release, sell or exchange such security and otherwise deal freely
with the Company, all
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without affecting the liabilities and obligations of the parties to this
Indenture or the Holders. No provision in any supplemental indenture which
affects the superior position of the holders of the Senior Indebtedness shall be
effective against the holders of the Senior Indebtedness unless the holders of
such Senior Indebtedness (required pursuant to the terms of such Senior
Indebtedness to give such consent) have consented thereto.
SECTION 5.9 Trustee to Effectuate Subordination.
-----------------------------------
Each holder of a Security by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article 5 and appoints the
Trustee his attorney-in-fact for any and all such purposes.
SECTION 5.10 Right of Trustee to Hold Senior Indebtedness.
--------------------------------------------
The Trustee, in its individual capacity, shall be entitled to all of the
rights set forth in this Article 5 in respect of any Senior Indebtedness at any
time held by it to the same extent as any other holder of Senior Indebtedness,
and nothing in this Indenture shall be construed to deprive the Trustee of any
of its rights as such holder.
SECTION 5.11 Article 5 Not to Prevent Events of Default.
------------------------------------------
The failure to make a payment on account of the principal of or interest on
the Securities by reason of any provision in this Article 5 shall not be
construed as preventing the occurrence of an Event of Default under Section 8.1.
SECTION 5.12 No Fiduciary Duty Created to Holders of Senior Indebtedness.
-----------------------------------------------------------
Notwithstanding any other provision in this Article 5, the Trustee shall
not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness by
virtue of the provisions of this Article 5.
SECTION 5.13 Article Applicable to Paying Agents.
-----------------------------------
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article 5 shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article 5 in addition to or in place of the Trustee; provided, however,
-------- -------
that Sections 5.6, 5.10 and 5.12 shall not apply to the Company if it acts as
Paying Agent.
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ARTICLE 6.
COVENANTS
SECTION 6.1 Payment of Securities.
---------------------
The Company shall promptly make all payments in respect of the Securities
on the dates and in the manner provided in the Securities and this Indenture.
An installment of principal or interest shall be considered paid on the date it
is due if the Paying Agent (other than the Company or an Affiliate of the
Company) holds on that date money designated for and sufficient to pay the
installment. The Company shall pay interest on overdue principal at the rate
borne by the Securities per annum; it shall pay interest on overdue installments
of interest at the same rate to the extent lawful.
SECTION 6.2 SEC Reports.
-----------
The Company shall file all reports and other information and documents
which it is required to file with the SEC pursuant to Section 13 or 15(d) of
the Exchange Act, and within 15 days after it files them with the SEC, the
Company shall file copies of all such reports, information and other documents
with the Trustee. The Company will cause any quarterly and annual reports
which it mails to its stockholders to be mailed to the Holders of the
Securities.
In the event the Company is at any time no longer subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will
prepare, for the first three quarters of each fiscal year, quarterly financial
statements substantially equivalent to the financial statements required to be
included in a report on Form 10-Q under the Exchange Act. The Company will also
prepare, on an annual basis, complete audited consolidated financial statements
including, but not limited to, a balance sheet, a statement of income and
retained earnings, a statement of changes in financial position and all
appropriate notes. All such financial statements will be prepared in accordance
with generally accepted accounting principles consistently applied, except for
changes with which the Company's independent accountants concur, and except that
quarterly statements may be subject to year-end adjustments. The Company will
cause a copy of such financial statements to be filed with the Trustee and
mailed to the Holders of the Securities within 50 days after the end of each of
the first three quarters of each fiscal year and within 95 days after the close
of each fiscal year. The Company will also comply with the other provisions of
TIA (S)314(a).
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<PAGE>
SECTION 6.3 Liquidation.
-----------
Subject to the provisions of Article 5, so far as they may be applicable
hereto, the Board of Directors or the stockholders of the Company may not adopt
a plan of liquidation which plan provides for, contemplates or the effectuation
of which is preceded by (a) the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company otherwise than
substantially as an entirety (Article 7 of this Indenture being the Article
which governs any such sale, lease, conveyance or other disposition
substantially as an entirety) and (b) the distribution of all or substantially
all of the proceeds of such sale, lease conveyance or other disposition and of
the remaining assets of the Company to the holders of the capital stock of the
Company, unless the Company shall in connection with the adoption of such plan
make provision for, or agree that prior to making any liquidating distributions
it will make provision for, the satisfaction of the Company's obligations
hereunder and under the Securities as to the payment of the principal and
interest thereof. The Company shall be deemed to make provision for such
payments only if (1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations maturing as to principal and interest in
such amounts and at such times as are sufficient, without consideration of any
reinvestment of such interest, to pay the principal of and interest on the
Securities then outstanding to maturity and to pay all other sums payable by it
hereunder or (2) there is an express assumption of the due and punctual payment
of the Company's obligations hereunder and under the Securities and the
performance and observance of all covenants and conditions to be performed by
the Company hereunder, by the execution and delivery of a supplemental indenture
in form satisfactory to the Trustee by a person who acquires, or will acquire
(otherwise than pursuant to a lease) a portion of the assets of the Company, and
which person will have assets (immediately after the acquisition) and aggregate
earnings (for such person's four full fiscal quarters immediately preceding such
acquisition) equal to not less than the assets of the Company (immediately
preceding such acquisition) and the aggregate earnings of the Company (for its
four full fiscal quarters immediately preceding the acquisition), respectively,
and which is a corporation organized under the laws of the United States,
any State thereof or the District of Columbia; provided, however, that the
-------- -------
Company shall not make any liquidating distribution until after (i) the Company
shall have certified to the Trustee with an Officers' Certificate at least five
days prior to the making of any liquidating distribution that it has complied
with the provisions of this Section 6.3 and (ii) has delivered to the Trustee an
Opinion of Counsel that all conditions precedent to such liquidation have been
complied with.
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<PAGE>
SECTION 6.4 Compliance Certificates.
-----------------------
The Company shall deliver to the Trustee within 90 days after the end of
each fiscal year of the Company, an Officers' Certificate as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in this Indenture and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or
Event of Default the Officers' Certificate shall describe the default or Event
of Default and the efforts to remedy the same. For the purposes of this Section
6.4, compliance shall be determined without regard to any grace period or
requirement of notice provided pursuant to the terms of this Indenture. The
Officers' Certificate need not comply with Section 12.4 hereof.
SECTION 6.5 Notice of Defaults.
------------------
In the event (i) that indebtedness of the Company in an aggregate amount in
excess of $7,500,000 is declared due and payable before its maturity because of
the occurrence of any default under such indebtedness, or (ii) of the occurrence
of any event which, with the giving of notice or the passage of time, or both,
would entitle the holder or holders of such indebtedness to declare such
indebtedness due and payable before its maturity, the Company will promptly give
written notice to the Trustee of such declaration.
SECTION 6.6 Payment of Taxes and Other Claims.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company, directly or by reason
of its ownership of any Subsidiary or upon the income, profits or property of
the Company and (2) all material lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company; provided, however, that the Company shall not be required to pay or
-------- -------
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which adequate provision has been made.
SECTION 6.7 Corporate Existence.
-------------------
Subject to Section 6.3 and Article 7, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence and rights (charter and statutory); provided, however, that
-------- -------
the Company shall not be required to preserve any right if the Board of
Directors shall determine in good faith that the preservation is no longer
desirable in the conduct of the Company's business and that the
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loss thereof is not, and will not be, adverse in any material respect to the
Holders.
SECTION 6.8 Maintenance of Properties.
-------------------------
Subject to Section 6.3, the Company will cause all material properties
owned, leased or licensed in the conduct of its business to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof and thereto, all as in the
reasonable judgment of the Company may be necessary so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times while any Securities are outstanding; provided, however, that nothing in
-------- -------
this Section 6.8 shall prevent the Company from discontinuing the maintenance of
any such properties if, in the reasonable judgement of the Board of Directors,
such discontinuance is desirable in the conduct of the Company's business and is
not, and will not be, adverse in any material respect to the Holders.
SECTION 6.9 Further Instruments and Acts.
----------------------------
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.
ARTICLE 7.
SUCCESSOR CORPORATION
SECTION 7.1 When Company May Merge, etc.
---------------------------
The Company shall not consolidate with or merge with or into, or transfer
all or substantially all of its assets to, any person unless:
(a) either the Company shall be the resulting or surviving entity or
such person is a corporation organized and existing under the laws of the
United States, a State thereof or the District of Columbia, and such person
expressly assumes by supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Securities and this Indenture (in which case all such
obligations of the Company shall terminate); and
(b) immediately before and immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of
the Company as a result of such
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<PAGE>
transaction as having been incurred by the Company at the time of such
transaction, no default or Event of Default shall have occurred and be
continuing.
The Company shall deliver to the Trustee prior to the proposed transaction
an Officers' Certificate and an Opinion of Counsel, each of which shall comply
with Section 12.4 and shall state that such consolidation, merger or transfer
and such supplemental indenture comply with this Article 7 and that all
conditions precedent herein provided for relating to such transaction have been
complied with; provided, however, that such Opinion of Counsel shall not address
Events of Default, except where such counsel has actual knowledge of any such
Event of Default.
SECTION 7.2 Successor Corporation Substituted.
---------------------------------
Upon any consolidation or merger, or any transfer of all or substantially
all of the assets of the Company in accordance with Section 7.1, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor corporation had been named as the Company
herein.
ARTICLE 8.
DEFAULT AND REMEDIES
SECTION 8.1 Events of Default.
-----------------
An "Event of Default" shall occur if:
(1) the Company defaults in the payment of interest on any
Security when the same becomes due and payable and the default
continues for a period of 30 days;
(2) the Company defaults in the payment of the principal of any
Security when the same becomes due and payable at maturity, upon
redemption or otherwise;
(3) the Company fails to comply with any of its other agreements
contained in the Securities or this Indenture and the default
continues for the period and after the notice specified below;
(4) the Company or any Material Subsidiary (as defined below) of
the Company shall fail to pay at maturity or at a date fixed for
prepayment or by acceleration (provided, however, such acceleration is
-------- -------
not withdrawn, cancelled or otherwise annulled within ten
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<PAGE>
days following the occurrence of such acceleration) principal of, premium,
if any, or interest under any bond, debenture, note or other evidence of
indebtedness for money borrowed or under any mortgage, indenture or other
instrument under which there may be issued or by which there may be secured
or evidenced any indebtedness for money borrowed by the Company or under
any guarantee of payment by the Company of indebtedness for money borrowed,
whether such indebtedness or guarantee now exists or shall hereafter be
created; provided, however, no such Event of Default shall exist under this
-------- -------
Section 8.1(4) unless the aggregate amount of such principal, premium, if
any, and interest which is due and unpaid whether by reason of maturity or
at a date fixed for prepayment or by acceleration (provided, such
acceleration is not withdrawn, cancelled or otherwise annulled within ten
days following the occurrence of such acceleration) is in excess of
$7,500,000;
(5) the Company or any Material Subsidiary pursuant to or within the
meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief against it in an
involuntary case or proceeding;
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property; or
(D) makes a general assignment for the benefit of its creditor;
or
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) if for relief against the Company or any Material Subsidiary
in an involuntary case or proceeding;
(B) appoints a Custodian of the Company or any Material
Subsidiary or for all or substantially all of the property of any of
them; or
(C) orders the liquidation of the Company or any Material
Subsidiary;
and in each case the order or decree remains unstayed and in effect for 60
days.
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<PAGE>
The term "Material Subsidiary" means a Subsidiary (including its
Subsidiaries) of the Company which meets either of the following conditions:
(a) the Company's and its other Subsidiaries' proportionate share of the total
assets (after intercompany eliminations) of the Subsidiary exceeds five percent
of the total assets of the Company and its Subsidiaries consolidated as of the
end of the Company's most recently completed fiscal year; or (b) the Company's
and its other Subsidiaries' equity in the income from continuing operations
before income taxes, extraordinary items and cumulative effect of a change in
accounting principle of the Subsidiary exceeds five percent of such income of
the Company and its Subsidiaries consolidated for the Company's most recently
completed fiscal year.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal
or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator, sequestrator or similar official under
any Bankruptcy Law.
A default under clause (3) is not an Event of Default until the Trustee
notifies the Company or the Holders of at least 25% in principal amount of the
Securities then outstanding notify the Company and the Trustee, of the default,
and the Company does not cure the default within 30 days after receipt of such
notice. The notice given pursuant to this Section 8.1 must specify the default,
demand that it be remedied and state that the notice is a "Notice of Default".
When a default is cured, it ceases.
Subject to the provisions of Sections 9.1 and 9.2, the Trustee shall not be
charged with knowledge of any Event of Default unless written notice thereof
shall have been given to a Trust Officer at the corporate trust office of the
Trustee by the Company, the Paying Agent, any Holder or an agent of any Holder.
SECTION 8.2 Acceleration.
------------
If an Event of Default (other than an Event of Default specified in Section
8.1(5) or (6)) occurs and is continuing, the Trustee may, by notice to the
Company, or the Holders of at least 25% in principal amount of the Securities
then outstanding may, by notice to the Company and the Trustee, and the Trustee
shall, upon the request of such Holders, declare all unpaid principal of and
accrued interest to the date of acceleration on the Securities then outstanding
(if not then due and payable) to be due and payable upon any such declaration,
and the same shall become and be immediately due and payable. If an Event of
Default specified in Section 8.1(5) or (6) occurs, all unpaid principal of and
accrued interest on the Securities then outstanding shall ipso facto become and
---- -----
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Securityholder. The Holders of a majority in principal
amount of the Securities then outstanding by notice to the Trustee may rescind
an acceleration
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and its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal of and accrued interest on the Securities which
has become due solely by such declaration of acceleration, have been cured or
waived; (ii) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid; (iii) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (iv) all payments due to the Trustee and any
predecessor Trustee under Section 9.7 have been made. Anything herein contained
to the contrary notwithstanding, in the event of any acceleration pursuant to
this Section 8.2, the Company shall not be obligated to pay any premium which
it would have had to pay if it had then elected to redeem the Securities
pursuant to paragraph 5 of the Securities, except in the case of any Event of
Default occurring by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding payment of
the premium which it would have had to pay if it had then elected to redeem the
Securities pursuant to paragraph 5 of the Securities, in which case an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law.
SECTION 8.3 Other Remedies.
--------------
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy by proceeding at law or in equity to collect the payment
of the principal of or interest on the Securities or to enforce the performance
of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 8.4 Waiver of Defaults and Events of Default.
----------------------------------------
Subject to Section 8.7 and 11.2, the Holders of a majority in principal
amount of the Securities then outstanding by notice to the Trustee may waive an
existing default or Event of Default and its consequences, except a default in
the payment of the principal of or interest on any Security as specified in
clauses (1) and (2) of Section 8.1. When a default or Event of Default is
waived, it is cured and ceases.
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SECTION 8.5 Control by Majority.
-------------------
The Holders of a majority in principal amount of the Securities then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of another Securityholder or the Trustee, or that may
involve the Trustee in personal liability; provided that the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction.
SECTION 8.6 Limitation on Suits.
--------------------
A Securityholder may not pursue any remedy with respect to this Indenture
or the Securities (except actions for payment of overdue principal or interest
or for the conversion of the Securities pursuant to Article 4) unless:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Securities make a written request to the Trustee to
pursue the remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Securities then outstanding.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.
SECTION 8.7 Rights of Holders to Receive Payment.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of the principal of and interest on the
Security, on or after the respective due dates expressed in the Security, or to
bring suit for the enforcement of any such payment on or after such respective
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dates, is absolute and unconditional and shall not be impaired or affected
without the consent of the Holder.
SECTION 8.8 Collection Suit by Trustee.
--------------------------
If an Event of Default in the payment of principal or interest specified in
Section 8.1(1) or (2) occurs and is continuing, the Trustee may recover judgment
in its own name and as trustee of an express trust against the Company or
another obligor on the Securities for the whole amount of principal and accrued
interest remaining unpaid, together with interest on overdue principal and, to
the extent that payment of such interest is lawful, interest on overdue
installments of interest, in each case at the rate per annum borne by the
Securities and such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 8.9 Trustee May File Proofs of Claim.
--------------------------------
The Trustee may file such proofs of claim and other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses, disbursements,
and advances of the Trustee, its agents and counsel) and the Securityholders
allowed in any judicial proceedings relative to the Company (or any other
obligor on the Securities), its creditors or its property and shall be entitled
and empowered to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same, and any Custodian in
any such judicial proceeding is hereby authorized by each Securityholder to make
such payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the Securityholders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 9.7, and to the extent that such payment
of the reasonable compensation, expenses, disbursements and advances in any such
proceedings shall be denied for any reason, payment of the same shall be secured
by a lien on, and shall be paid out of, any and all distributions, dividends,
monies, securities and other property which the Securityholders may be entitled
to receive in such proceedings, whether in liquidation or under any plan of
reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or the Trustee to
authorize or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.
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<PAGE>
SECTION 8.10 Priorities.
----------
If the Trustee collects any money pursuant to this Article 8, it shall pay
out the money in the following order:
First, to the Trustee for amounts due under Section 9.7;
-----
Second, to the holders of Senior Indebtedness to the extent required by
------
Article 5;
Third, to Securityholders for amounts due and unpaid on the Securities for
-----
principal and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for principal and
interest, respectively; and
Fourth, to the Company.
------
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 8.10.
SECTION 8.11 Undertaking for Costs.
---------------------
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in
its discretion may assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in the suit, having due regard to the merits
and good faith of the claims or defense made by the party litigant. This Section
8.11 does not apply to a suit made by the Trustee, a suit by a Holder pursuant
to Section 8.7, or a suit by Holders of more than 10% in principal amount of the
Securities then outstanding.
SECTION 8.12 Waiver of Usury, Stay or Extension Laws.
---------------------------------------
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any such
law and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution
of every such power as though no such law had been enacted.
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ARTICLE 9.
TRUSTEE
SECTION 9.1 Duties of Trustee.
-----------------
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties as are specifically
set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. The Trustee, however, shall examine any
certificates and opinions which by any provision hereof are
specifically required to be delivered to the Trustee to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section 9.1;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Trust Officer, unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.5.
(d) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee.
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<PAGE>
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 9.1.
(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 9.2 Rights of Trustee.
-----------------
Subject to Section 9.1:
(a) The Trustee may rely on any document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, which shall conform to
Section 12.4(b). The Trustee shall not be liable for any action it takes or
omits to take in good faith in reliance on such Certificate or Opinion.
(c) The Trustee may act through its agents and shall not be responsible
for the misconduct or negligence of any agent appointed with reasonable care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel, and the advice or opinion of
such counsel as to matters of law shall be full and complete authorization and
protection in respect of any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 9.3 Individual Rights of Trustee.
----------------------------
The Trustee in its individual or any other capacity may become the owner
or pledgee of Securities and may otherwise deal with the Company or an affiliate
of the Company with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights. However, the Trustee is subject to
Sections 9.10 and 9.11.
SECTION 9.4 Trustee's Disclaimer.
--------------------
The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Securities, it shall not be accountable for the Company's use
of the proceeds from the
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<PAGE>
Securities, and it shall not be responsible for any statement in the Securities
other than its certificate of authentication.
SECTION 9.5 Notice of Default or Events of Default.
--------------------------------------
If a default or an Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to each Securityholder notice of
the default or Event of Default within 90 days after it occurs. Except in the
case of a default or an Event of Default in payment of the principal of or
interest on any Security, the Trustee may withhold the notice if and so long as
a committee of its Trust Officers in good faith determines that withholding
notice is in the interest of Securityholders.
SECTION 9.6 Reports by Trustee to Holders.
-----------------------------
If such report is required by TIA (S)313, within 60 days after each May 15,
beginning with the May 15 following the date of this Indenture, the Trustee
shall mail to each Securityholder a brief report dated as of such May 15 that
complies with TIA (S)313(a). The Trustee also shall comply with TIA
(S)313(b)(2) and (c).
A copy of each report at the time of its mailing to Securityholders shall
be mailed to the Company and filed with the SEC and each stock exchange, if any,
on which the Securities are listed. The Company shall notify the Trustee
whenever the Securities become listed on any stock exchange and any changes in
the stock exchanges on which the Securities are listed.
SECTION 9.7 Compensation and Indemnity.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust). The Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses, and advances incurred or made by it. Such expenses may
include the reasonable compensation, disbursements and expenses of the Trustee's
agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless against,
any loss, liability or expense incurred by it in connection with its duties
under this Indenture or any action or failure to act as authorized or within the
discretion or rights or powers conferred upon the Trustee hereunder. The
Trustee shall notify the Company promptly of any claim asserted against the
Trustee for which it may seek indemnity. The Trustee shall have the option of
undertaking the defense of such claims; provided, however, that if the Trustee
-------- -------
opts not to defend itself, the Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need
not pay for
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<PAGE>
any settlement without its written consent, which consent shall not be
unreasonably withheld.
The Company need not reimburse the Trustee for any expense or indemnify it
against any loss or liability incurred by it when it has breached the applicable
standard of care for its conduct, if any, in connection with such loss or
liability.
To secure the Company's payment obligations in this Section, the Trustee
shall have a senior claim to which the Securities are hereby made subordinate on
all money or property held or collected by the Trustee, except such money or
property held in trust to pay the principal of and interest on particular
Securities. The obligations of the Company under this Section 9.7 to compensate
or indemnify the Trustee and to pay or reimburse the Trustee for expenses,
disbursements and advances shall be secured by a lien prior to that of the
Securities upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the benefit of the Holders of particular
Securities. The obligations of the Company under this Section 9.7 shall survive
the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.1(5) or (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy law.
SECTION 9.8 Replacement of Trustee.
----------------------
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the Securities then outstanding may remove the
Trustee by so notifying the Trustee and may, with the Company's written
consent, appoint a successor Trustee. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 9.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee become incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in principal amount of
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<PAGE>
the Securities then outstanding may petition any court of competent jurisdiction
for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 9.10 any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Immediately after that, the
retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee and be released from its obligations (exclusive of any
liabilities that the retiring Trustee may have incurred while acting as Trustee)
hereunder, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Securityholder.
Notwithstanding replacement of the Trustee pursuant to this Section 9.8,
the Company's obligations under Section 9.7 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 9.9 Successor Trustee by Merger, etc.
--------------------------------
If the Trustee consolidates with, merges or converts into, or transfers all
or substantially all of its corporate trust assets to, another corporation, the
resulting, surviving or transferee corporation without any further act shall be
the successor Trustee, provided such transferee corporation shall qualify and be
eligible under Section 9.10.
SECTION 9.10 Eligibility; Disqualification.
-----------------------------
The Trustee of this Indenture shall always satisfy the requirements of
paragraphs (1), (2) and (5) of TIA (S)310(a). If at any time the Trustee shall
cease to satisfy any such requirements, it shall resign immediately in the
manner and with the effect specified in this Article 9. The Trustee shall be
subject to the provisions of TIA (S)310(b). Nothing herein shall prevent the
Trustee from filing with the SEC the application referred to in the penultimate
paragraph of TIA (S)310(b).
SECTION 9.11 Preferential Collection of Claims Against Company.
-------------------------------------------------
The Trustee shall comply with TIA (S)311(a), excluding any creditor
relationship listed in TIA (S)311(b). A trustee who has resigned or been
removed shall be subject to TIA (S)311(a) to the extent indicated therein.
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<PAGE>
ARTICLE 10.
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 10.1 Termination of Company's Obligations.
------------------------------------
Subject to applicable rules of any stock exchange or system on which the
Securities are listed or quoted, the Company may terminate all of its
obligations under the Securities and this Indenture (excepting those obligations
referred to in the immediately succeeding paragraph) if all Securities
previously authenticated and delivered (other than destroyed, lost or stolen
Securities which have been replaced or paid or Securities for whose payment
money has theretofore been held in trust and thereafter repaid to the Company,
as provided in Section 10.3) have been delivered to the Trustee or the Paying
Agent for cancellation and the Company has paid all sums payable by it
hereunder, or if the Company irrevocably deposits in trust with the Trustee or
the Paying Agent, pursuant to a written trust agreement satisfactory to the
Trustee, money or U.S. Government Obligations (as defined below) maturing as to
principal and interest in such amounts and at such times as are sufficient,
without consideration of any reinvestment of such interest, to pay the principal
of and interest on the Securities then outstanding to maturity or to the date
fixed for redemption and to pay all other sums payable by it hereunder. The
Company may make an irrevocable deposit pursuant to this Section 10.1 only if at
such time it is not prohibited from doing so under the provisions of Article 5
and the Company shall have delivered to the Trustee and any such Paying Agent an
Officers' Certificate and an Opinion of Counsel to that effect and that all
other conditions to such deposit have been complied with.
The Company's obligations in paragraph 12 of the Securities and in Sections
2.3, 2.4, 2.5, 2.6, 2.7, 2.11, 6.1, 9.7, 9.8, 10.4, and Article 4 of the
Indenture shall survive until the Securities are no longer outstanding.
Thereafter, the Company's obligations in such paragraph 12 and in Section 9.7
shall survive.
After such irrevocable deposit, the Trustee upon request shall acknowledge
in writing the discharge of the Company's obligations under the Securities and
this Indenture, except for those surviving obligations specified above.
"U.S. Government Obligations" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the
United States is pledged.
-53-
<PAGE>
SECTION 10.2 Application of Trust Money.
--------------------------
The Trustee or the Paying Agent shall hold in trust, for the benefit of the
Holders, money or U.S. Government Obligations deposited with it pursuant to
Section 10.1, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of the
principal of and interest on the Securities. Money and U.S. Government
Obligations so held in trust shall not be subject to the subordination
provisions of Article 5.
SECTION 10.3 Repayment to Company.
--------------------
Subject to Section 10.1, the Trustee and the Paying Agent shall promptly
pay to the Company upon request any excess money or U.S. Government Obligations
held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request any
money held by them for the payment of principal or interest that remains
unclaimed for two years after a right to such money has matured; provided,
--------
however, that the Trustee or such Paying Agent, before being required to make
- -------
any such payment, may at the expense of the Company, cause to be published once
in a newspaper of general circulation in the City of New York or mail to each
Holder entitled to such money notice that such money remains unclaimed and that
after a date specified therein, which shall be at least 30 days from the date of
such publication or mailing, any unclaimed balance of such money then remaining
will be repaid to the Company. After payment to the Company, Securityholders
entitled to money must look to the Company for payment as general creditors
unless otherwise prohibited by law.
SECTION 10.4 Reinstatement.
-------------
If the Trustee or the Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 10.1 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 10.1 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with Section 10.1; provided, however,
-------- -------
that if the Company has made any payment of the principal of or interest on any
Securities because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive any such
payment from the money or U.S. Government Obligations held by the Trustee or the
Paying Agent.
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<PAGE>
ARTICLE 11.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.1 Without Consent of Holders.
--------------------------
The Company and the Trustee may amend or supplement this Indenture or the
Securities without notice to or consent of any Securityholder:
(a) to comply with Sections 4.12, 6.3 and 7.1;
(b) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
(c) to cure any ambiguity, defect or inconsistency, or to make any
other change that does not adversely affect the rights of any
Securityholder;
(d) to comply with the provisions of the TIA; or
(e) to appoint a successor Trustee.
SECTION 11.2 With Consent of Holders.
-----------------------
The Company and the Trustee may amend or supplement this Indenture or the
Securities without notice to any Securityholder with the written consent of the
Holders of 66-2/3% in principal amount of the Securities then outstanding. The
Holders of a majority in principal amount of the Securities then outstanding may
waive compliance in a particular instance by the Company with any provision of
this Indenture or the Securities without notice to any Securityholder. Subject
to Section 11.4, without the written consent of each Securityholder affected,
however, an amendment, supplement or waiver, including a waiver pursuant to
Section 8.4, may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of interest on
any Security;
(3) reduce the principal of or premium on or change the fixed
maturity of any Security or alter the redemption provisions with respect
thereto;
(4) alter the conversion provisions with respect to any Security in a
manner adverse to the holder thereof;
(5) waive a default in the payment of the principal of or premium or
interest on any Security;
-55-
<PAGE>
(6) make any changes in Section 8.4, 8.7 or this sentence;
(7) modify the provisions of Article 5 hereof in a manner adverse
to the Holders; or
(8) make any Security payable in money other than that stated in the
Security.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amendment, supplement or waiver.
An amendment under this Section 11.2 may not make any change that
adversely affects the rights under Article 5 of any holder of an issue of Senior
Indebtedness unless the holders of that issue, pursuant to its terms, consent to
the change.
SECTION 11.3 Compliance with Trust Indenture Act.
-----------------------------------
Every amendment to or supplement of this Indenture or the Securities shall
comply with the TIA as in effect at the date of such amendment or supplement.
SECTION 11.4 Revocation and Effect of Consents.
---------------------------------
Until an amendment, supplement or waiver becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent Holder
of a Security or portion of a Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not made on any
Security. However, any such Holder or subsequent Holder may revoke the consent
as to his Security or portion of a Security if the Trustee receives the notice
of revocation before the date the amendment, supplement or waiver becomes
effective.
After an amendment, supplement or waiver becomes effective, it shall bind
every Securityholder, unless it makes a change described in any of clauses (1)
through (8) of Section 11.2. In that case the amendment, supplement or waiver
shall bind each Holder of a Security who has consented to it and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security.
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<PAGE>
SECTION 11.5 Notation on or Exchange of Securities.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security, the
Trustee may require the Holder of the Security to deliver it to the Trustee. The
Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms.
SECTION 11.6 Trustee to Sign Amendments, etc.
-------------------------------
The Trustee shall sign any amendment or supplement authorized pursuant to
this Article 11 if the amendment or supplement does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may but need not sign it. In signing or refusing to sign such amendment
or supplement, the Trustee shall be entitled to receive and, subject to Section
9.1 shall be fully protected in relying upon, an Opinion of Counsel stating that
such amendment or supplement is authorized or permitted by this Indenture. The
Company may not sign an amendment or supplement until the Board of Directors or
a duly authorized committee thereof approves it.
ARTICLE 12.
MISCELLANEOUS
SECTION 12.1 Trust Indenture Act Controls.
----------------------------
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by any of Sections 310 to 317, inclusive, of the TIA through
operation of Section 318(c) thereof, such imposed duties shall control.
SECTION 12.2 Notices.
-------
Any notice or communication shall be given in writing and delivered in
person or mailed by first-class mail, postage prepaid, addressed as follows:
if to the Company:
Sterling Software, Inc.
8080 N. Central Expressway
Suite 1100
Dallas, Texas 75206
Attention: Chief Financial Officer
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<PAGE>
if to the Trustee:
Bank of America Texas, National Association
1500 Dragon, Suite A
Dallas, Texas 75207
Attention: Corporate Trust Department
Such notices or communications shall be effective when received.
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed by
first-class mail to him at his address shown on the register kept by the
Registrar.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication to a Securityholder is mailed in
the manner provided above, it is duly given, whether or not the addressee
receives it.
SECTION 12.3 Communications by Holders with Other Holders.
--------------------------------------------
Securityholders may communicate pursuant to TIA (S)312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other person shall
have the protection of TIA (S)312(c).
SECTION 12.4 Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
(a) Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee at the
request of the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent (including any covenants compliance with
which constitutes a condition precedent), if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent (including any covenants compliance
with which constitutes a condition precedent) have been complied with.
(b) Each Officers' Certificate and Opinion of Counsel with respect to
compliance with a condition or covenant provided for in
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<PAGE>
this Indenture (other than annual certificates provided pursuant to Section 6.4
hereof) shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such person, such
condition or covenant has been complied with; provided, however, that with
-------- -------
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 12.5 Record Date for Vote or Consent of Securityholders.
--------------------------------------------------
The Company (or, in the event deposits have been made pursuant to Sections
6.3 or 10.1, the Trustee) may set a record date for purposes of determining the
identity of Securityholders entitled to vote or consent to any action by vote or
consent authorized or permitted under this Indenture, which record date shall be
the later of ten days prior to the first solicitation of such vote or consent or
the date of the most recent list of Securityholders furnished to the Trustee
pursuant to Section 2.5 hereof prior to such solicitation. Notwithstanding the
provisions of Section 11.4 hereof, if a record date is fixed, those persons who
were Holders of Securities at such record date (or their duly designated
proxies), and only those persons, shall be entitled to take such action by vote
or consent or to revoke any vote or consent previously given, whether or not
such persons continue to be Holders after such record date.
SECTION 12.6 Rules by Trustee, Paying Agent, Registrar, Conversion Agent.
-----------------------------------------------------------
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar, Paying Agent or Conversion Agent may make reasonable
rules for its functions.
SECTION 12.7 Legal Holidays.
--------------
A "Legal Holiday" is a Saturday, Sunday or a day on which state or
Federally chartered banking institutions in New York, New York or the city and
state where the Trustee's corporate trust operations are located (which
initially are Dallas, Texas) are not
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<PAGE>
required to be open. If a payment date is a Legal Holiday at a place of payment,
payment may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
SECTION 12.8 Governing Law.
-------------
Except as specifically provided in subsection (a) of Section 3.7, the laws
of the State of Texas shall govern this Indenture and the Securities without
regard to principles of conflicts of law.
SECTION 12.9 No Adverse Interpretation of Other Agreements.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 12.10 No Recourse Against Others.
--------------------------
All liability described in paragraph 17 of the Securities of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.
SECTION 12.11 Successors.
----------
All agreements of the Company in this Indenture and the Securities shall
bind its successor. All agreements of the Trustee in this Indenture shall bind
its successor.
SECTION 12.12 Multiple Counterparts.
---------------------
The parties may sign multiple counterparts of this Indenture. Each signed
counterpart shall be deemed an original, but all of them together represent the
same agreement.
SECTION 12.13 Separability.
------------
In case any provisions in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.14 Table of Contents, Headings, etc.
--------------------------------
The table of contents, cross-reference sheet and headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof, and shall in no way modify or
restrict any of the terms or provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of
the 2nd day of February, 1993.
STERLING SOFTWARE, INC.
By: /s/ George H. Ellis
--------------------------------
Name: George H. Ellis
Title: Senior Vice President and
Chief Financial Officer
[SEAL]
Attest:
/s/ Jeannette P. Meier
- --------------------------------
Name: Jeannette P. Meier
Title: Senior Vice President, Secretary
and General Counsel
BANK OF AMERICA TEXAS,
NATIONAL ASSOCIATION
as Trustee
By: /s/ Dona A. Elder
---------------------------------
Name: Dona A. Elder
Title: Vice President
[SEAL]
Attest:
/s/ Dyan Bell
- --------------------------------
Name: Dyan Bell
Title: Trust Officer
<PAGE>
EXHIBIT A
[FORM OF FACE OF SECURITY]
Number
STERLING SOFTWARE, INC.
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE
5 3/4% Convertible Subordinated Debenture due 2003
Sterling Software, Inc. promises to pay to __________________ or registered
assigns, the principal sum of ______________ Dollars on February 1, 2003.
--------
Interest Payment Dates: February 1 and August 1
Record Dates: January 15 and July 15
In Witness Whereof, Sterling Software, Inc. has caused this instrument to
be executed in its corporate name by a facsimile signature of its President and
its Secretary and has caused the facsimile of its corporate seal to be affixed
hereunto or imprinted hereon.
This Debenture is convertible as specified on the other side of this
Debenture. Additional provisions of this Debenture are set forth on the other
side of this Debenture.
STERLING SOFTWARE, INC.
By:
---------------------
President
[SEAL]
Attest:
By:
---------------------
Secretary
Trustee's Certificate of
Authentication:
This is one of the Securities
referred to in the within-
mentioned Indenture.
Bank of America Texas, National Association
as Trustee
By:
---------------------
Dated:
A-1
<PAGE>
[FORM OF REVERSE SIDE OF SECURITY]
STERLING SOFTWARE, INC.
5 3/4% Convertible Subordinated Debenture due 2003
1. Interest.
--------
Sterling Software, Inc., a Delaware corporation (the "Company"), promises
to pay interest on the principal amount of this Debenture at the rate per annum
shown above. The Company shall pay interest semi-annually on February 1 and
August 1 of each year, commencing August 1, 1993. Interest on the Debentures
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of first issuance of the Debentures under
the Indenture (as defined below); provided that, if there is not an existing
default in the payment of interest, and if this Debenture is authenticated
between a record date referred to on the face hereof and the next succeeding
interest payment date, interest shall accrue from such interest payment date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. Method of Payment.
-----------------
The Company will pay interest on this Debenture (except defaulted interest)
to the person who is the Holder of this Debenture at the close of business on
the January 15 and July 15 next preceding the interest payment date. The Holder
must surrender this Debenture to the Paying Agent to collect payment of
principal. The Company will pay principal and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. The Company, however, may pay principal and interest by its check
payable in such money. It may mail an interest check to the Holder's registered
address.
3. Paying Agent, Registrar and Conversion Agent.
--------------------------------------------
Initially, Bank of America Texas, National Association (the "Trustee") will
act as Paying Agent, Registrar and Conversion Agent. The Company may change any
Paying Agent, Registrar or Conversion Agent without notice to the Holder. The
Company or any of its Subsidiaries may act as Paying Agent, Registrar or
Conversion Agent.
4. Indenture, Limitations.
----------------------
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its 5 3/4% Convertible Subordinated Debentures due 2003
(the "Debentures"), issued under an Indenture dated as of February 2, 1993 (the
"Indenture"), between the Company and the Trustee. The terms of this Debenture
include those stated in the Indenture and those made part of the
A-2
<PAGE>
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
(S)(S)77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990 and as
in effect on the date of the Indenture. This Debenture is subject to all such
terms, and the Holder of this Debenture is referred to the Indenture and said
Act for a statement of them.
The Debentures are subordinated unsecured obligations of the Company
limited to up to $115,000,000 aggregate principal amount. The Indenture does not
limit other debt of the Company, secured or unsecured, including Senior
Indebtedness.
5. Optional Redemption.
-------------------
The Debentures may not be redeemed at the option of the Company prior to
February 12, 1996. Thereafter, the Debentures may be redeemed at the Company's
option, in whole or in part, at any time and from time to time. If redeemed
during the period beginning February 12, 1996 through and including January 31,
1997, the redemption price for the Debentures is 104.025% of the principal
amount of the Debentures, together with accrued interest to, but not including,
the redemption date. The redemption prices for Debentures redeemed on or after
February 1, 1997 are as follows (expressed in percentages of principal amount),
together with accrued interest to, but not including, the redemption date:
If redeemed during the 12-month period beginning February 1
<TABLE>
<CAPTION>
Year Percentage Year Percentage
- ---- ---------- ---- ----------
<S> <C> <C> <C>
1997 103.450 2000 101.725
1998 102.875 2001 101.150
1999 102.300 2002 100.575
</TABLE>
6. Notice of Redemption.
--------------------
Notice of redemption will be mailed by first-class mail at least 30 days
but not more than 60 days before the redemption date to each Holder of
Debentures to be redeemed at his registered address. Debentures in denominations
larger than $1,000 may be redeemed in part, but only in whole multiples of
$1,000. On and after the redemption date, subject to the deposit with the Paying
Agent of funds sufficient to pay the redemption price, interest ceases to accrue
on Debentures or portions of them called for redemption.
7. Purchase of Debentures at Option of Holder Upon a Change in Control.
-------------------------------------------------------------------
At the option of the Holder and subject to the terms and conditions of the
Indenture, the Company shall become obligated to purchase all or any part
specified by the Holder (so long as the principal amount of such part is $1,000
or an integral multiple thereof) of the Debentures held by such Holder on the
date that is
A-3
<PAGE>
40 Business Days after a Change in Control as defined in the Indenture. The
Holder shall have the right to withdraw any Change in Control Purchase Notice by
delivering a written notice of withdrawal to the Paying Agent in accordance with
the terms of the Indenture. The obligation of the Company to pay the Change in
Control Purchase Price will be subject to the terms of agreements relating to
borrowings which constitute Senior Indebtedness.
8. Conversion.
----------
A Holder of a Debenture may convert such Debenture into shares of Common
Stock of the Company at any time prior to maturity; provided that if the
Debenture is called for redemption, the conversion right will terminate at the
close of business on the fifth Business Day immediately preceding the redemption
date for such Debenture (unless the Company shall default in making the
redemption payment when due, in which case the conversion right shall terminate
at the close of business on the date such default is cured and such Debenture is
redeemed); provided, further, that if the Holder of a Debenture presents such
-------- -------
Debenture for redemption prior to the close of business on the fifth Business
Day immediately preceding the redemption date for such Debenture, the right of
conversion shall terminate upon presentation of the Debenture to the Trustee
(unless the Company shall default in making the redemption payment when due, in
which case the conversion right shall terminate on the close of business on the
date such default is cured and such Debenture is redeemed). The initial
conversion price is $28.35 per share, subject to adjustment under certain
circumstances. The number of shares issuable upon conversion of a Debenture is
determined by dividing the principal amount converted by the conversion price in
effect on the conversion date. No payment or adjustment will be made for accrued
interest on a converted Debenture or for dividends or distributions on shares of
Common Stock issued upon conversion of a Debenture. No fractional shares will be
issued upon conversion; in lieu thereof, an amount will be paid in cash based
upon the market price (as defined) of the Common Stock on the last trading day
prior to the date of conversion.
To convert a Debenture, a Holder must (a) complete and manually sign the
conversion notice set forth below and deliver such notice to the Conversion
Agent, (b) surrender the Debenture to the Conversion Agent, (c) furnish
appropriate endorsements or transfer documents if required by the Registrar or
the Conversion Agent and (d) pay any transfer or similar tax, if required. If a
Holder surrenders a Debenture for conversion after the close of business on the
record date for the payment of an installment of interest and before the close
of business on the next interest payment date then, notwithstanding such
conversion, the interest payable on such interest payment date shall be paid to
the Holder of such Debenture on such Record Date. In such event, the Debenture
must be accompanied by payment of an amount equal to the interest payable on
such interest payment date on the principal amount of the Debenture or portion
thereof then converted. A
A-4
<PAGE>
Holder may convert a portion of a Debenture equal to $1,000 or any integral
multiple thereof.
A Debenture in respect of which a Holder had delivered a Change in Control
Purchase Notice exercising the option of such Holder to require the Company to
purchase such Debenture may be converted only if the Change in Control Purchase
Notice is withdrawn as provided above and in accordance with the terms of the
Indenture.
9. Subordination.
-------------
The indebtedness evidenced by the Debentures is, to the extent and in the
manner provided in the Indenture, subordinate and junior in right of payment to
the prior payment in full of all Senior Indebtedness of the Company, as defined
in the Indenture. Any Holder by accepting this Debenture agrees to and shall be
bound by such subordination provisions and authorizes the Trustee to give them
effect.
In addition to all other rights of Senior Indebtedness described in the
Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any terms of any instrument relating to the
Senior Indebtedness or any extension or renewal of the Senior Indebtedness.
10. Denominations, Transfer, Exchange.
---------------------------------
The Debentures are in registered form without coupons in denominations of
$1,000 and integral multiples of $1,000. A Holder may register the transfer of
or exchange Debentures in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or permitted by the Indenture.
11. Persons Deemed Owners.
---------------------
The Holder of a Debenture may be treated as the owner of it for all
purposes.
12. Unclaimed Money.
---------------
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent will pay the money back to the Company at
its request. After that, Holders entitled to money must look to the Company for
payment.
13. Amendment, Supplement, Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the
A-5
<PAGE>
Holders of 66-2/3% in principal amount of the Debentures then outstanding and
any past default or compliance with any provision may be waived in a particular
instance with the consent of the Holders of a majority in principal amount of
the Debentures then outstanding. Without the consent of or notice to any Holder,
the Company and the Trustee may amend or supplement the Indenture or the
Debentures to, among other things, provide for uncertificated Debentures in
addition to or in place of certificated Debentures, or to cure any ambiguity,
defect or inconsistency or make any other change that does not adversely affect
the rights of any Holder.
14. Successor Corporation.
---------------------
When a successor corporation assumes all the obligations of its
predecessor under the Debentures and the Indenture in accordance with the terms
and conditions of the Indenture, the predecessor corporation will be released
from those obligations.
15. Defaults and Remedies.
---------------------
An Event of Default is: default for 30 days in payment of interest on the
Debentures; default in payment of principal on the Debentures when due; failure
by the Company for 30 days after notice to it to comply with any of its other
agreements contained in the Indenture or the Debentures; certain events of
bankruptcy, insolvency or reorganization of the Company or any of its Material
Subsidiaries; and certain defaults on other indebtedness. If an Event of Default
(other than as a result of certain events of bankruptcy, insolvency or
reorganization), occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the Debentures then outstanding may declare all
unpaid principal of an accrued interest to the date of acceleration on the
Debentures then outstanding to be due and payable immediately, all as and to the
extent provided in the Indenture. If an Event of Default occurs as a result of
certain events of bankruptcy, insolvency or reorganization, all unpaid principal
of and accrued interest on the Debentures then outstanding shall become due and
payable immediately without any declaration or other act on the part of the
Trustee or any Holder, all as and to the extent provided in the Indenture.
Holders may not enforce the Indenture or the Debentures except as provided in
the Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
Holders of a majority in principal amount of the Debentures then outstanding may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of any continuing default (except a default in
payment of principal or interest) if it determines that withholding notice is in
their interests. The Company is required to file periodic reports with the
Trustee as to the absence of default.
A-6
<PAGE>
16. Trustee Dealings with the Company.
---------------------------------
The Trustee, in its individual or any other capacity, may make loans to,
accept deposits from, and perform services for the Company or an Affiliate of
the Company, and may otherwise deal with the Company or an Affiliate of the
Company, as if it were not the Trustee.
17. No Recourse Against Others.
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. The Holder of this Debenture by
accepting this Debenture waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Debenture.
18. Discharge Prior to Maturity.
---------------------------
If the Company deposits with the Trustee or the Paying Agent money or U.S.
Government Obligations sufficient to pay the principal of and interest on the
Debentures to maturity, the Company will be discharged from the Indenture except
for certain Sections thereof.
19. Authentication.
--------------
This Debenture shall not be valid until the Trustee or an authenticating
agent signs the certificate of authentication on the other side of this
Debenture.
20. Abbreviations and Definitions.
-----------------------------
Customary abbreviations may be used in the name of Holder or an assignee,
such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties),
JT TEN (= joint tenants with right of survivorship and not as tenants in
common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act).
All capitalized terms used in this Debenture and not specifically defined
herein are defined in the Indenture and are used herein as so defined.
21. Indenture to Control.
--------------------
In the case of any conflict between the provisions of this Debenture and
the Indenture, the provisions of the Indenture shall control.
The Company will furnish to any Holder, upon written request and without
charge, a copy of the Indenture. Requests may be made to: Sterling Software,
Inc., 8080 N. Central Expressway,
A-7
<PAGE>
Suite 1100, Dallas, Texas 75206, Attention: Chief Financial Officer.
A-8
<PAGE>
ASSIGNMENT FORM
To Assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x x
x x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
(Insert assignee's soc. sec. or tax I.D. no.)
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
- ------------------------------------------------------
agent to transfer this Debenture on the books of the
Company. The Agent may substitute another to act for him.
Date: -----------------------------------------------
*
Your signature: -------------------------------------
(Sign exactly as your name appears on
the other side of this Debenture)
*
- ------------------------------------------------------
(Sign exactly as your name appears on the other side of
this Debenture)
*Signature guaranteed by:
- ------------------------------------------------------
BY: -------------------------------------------------
- --------------
*The signature must be guaranteed by a bank, a trust company
or a member firm of the New York Stock Exchange.
<PAGE>
CONVERSION NOTICE
To convert this Debenture into Common Stock of the Company,
check the box:
xxxxx
x x
xxxxx
To convert only part of this Debenture, state the amount:
xxxxxxxxxxxxxxxxxxxxxxx
x x
x x
xxxxxxxxxxxxxxxxxxxxxxx
If you want the stock certificate made out in another person's
name, fill in the form below:
xxxxxxxxxxxxxxxxxxxxxxx
x x
x x
xxxxxxxxxxxxxxxxxxxxxxx
(insert other person's soc. sec. or tax I.D. no.)
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(Print or type other person's name, address and zip code)
Date:
-----------------------------------------------
*
Your Signature:
-------------------------------------
(Sign exactly as your name appears on
the other side of this Debenture)
*
- ------------------------------------------------------
(Sign exactly as your name appears on the other side of
this Debenture)
*Signature guaranteed by:
- ------------------------------------------------------
By:
-------------------------------------------------
- --------------
*The signature must be guaranteed by a bank, a trust company
or a member firm of the New York Stock Exchange.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Debenture purchased by the
Company pursuant to Section 3.7 of the Indenture, check the box:
xxxxx
x x
xxxxx
If you want to elect to have only part of this Debenture purchased
by the Company pursuant to Section 3.7 of the Indenture, state the amount:
$
------------
Date: Your Signature *
-------------- --------------------------
(Sign exactly as your name
appears on the other side
of this Debenture)
*
--------------------------
(Sign exactly as your name
appears on the other side
of this Debenture)
*Signature guaranteed by:
- -----------------------------------
By:
--------------------------------
- --------------
*The signature must be guaranteed by a bank, a trust company
or a member firm of the New York Stock Exchange.
<PAGE>
EXHIBIT 10(b)
AMENDED AND RESTATED STOCKHOLDER AGREEMENT
This AMENDED AND RESTATED STOCKHOLDER AGREEMENT (this "Agreement") is
entered into as of August 31 , 1994 to be effective as of July 31, 1994, by
-----
and between Sterling Software, Inc., a Delaware corporation (the "Buyer"), and
the stockholder listed on the signature page hereof (the "Stockholder").
WHEREAS, the Stockholder, as of the date hereof, is the owner of the
respective number of shares (the "Shares") of Common Stock, no par value (the
"Common Stock"), of KnowledgeWare, Inc., a Georgia corporation (the
"Corporation") set forth below the name of the Stockholder on the signature page
hereof;
WHEREAS, the Buyer and SSI Corporation, a Georgia corporation and a wholly-
owned subsidiary of the Buyer ("Merger Sub"), entered into an Agreement and Plan
of Merger with the Corporation dated as of July 31, 1994, and in reliance in
part upon the execution and delivery of this Agreement, the Buyer and Merger
Sub will enter into an Amended and Restated Agreement and Plan of Merger, dated
as of the date hereof (the "Merger Agreement;" capitalized terms not defined
herein shall have the meanings set forth in the Merger Agreement), with the
Corporation which provides that, among other things, upon the terms and subject
to the conditions thereof Merger Sub will be merged with and into the
Corporation, with the Corporation continuing as the surviving corporation and a
wholly-owned subsidiary of the Buyer (the "Merger"), and each outstanding share
of Common Stock, including the Shares, will, by reason of the Merger, be
converted into a fraction of a share of the Buyer's common stock, par value $.10
per share (the "Buyer Common Stock"), that is equal to the Exchange Ratio
(subject to the provisions of the Merger Agreement);
WHEREAS, in reliance upon the execution and delivery of this Agreement, the
Buyer will enter into an Amended and Restated Stock Option Agreement, dated as
of the date hereof (the "Stock Option Agreement"), with the Corporation pursuant
to which the Corporation has granted to the Buyer an option to acquire shares of
Common Stock upon the occurrence of certain events; and
WHEREAS, to induce the Buyer to enter into the Merger Agreement and the
Stock Option Agreement and to incur the obligations set forth therein, the
Stockholder is entering into this Agreement pursuant to which the Stockholder
agrees to vote in favor of the Merger and certain other matters as set forth
herein, and to make certain agreements with respect to the Shares upon the terms
and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreement set forth herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
Section 1. VOTING OF SHARES; IRREVOCABLE PROXY. The Stockholder agrees
that until the earlier of (i) the Effective Time and (ii) the termination of the
Merger Agreement (the earlier of such dates being hereinafter referred to as the
"Expiration Date"), the Stockholder shall vote all Shares owned by the
Stockholder at any meeting of the Corporation's stockholders (whether annual or
special and whether or not an adjourned or postponed meeting), or, if
applicable, take action by written consent (x) for adoption of the Merger
Agreement and in favor of the Merger and any other transaction contemplated by
the Merger Agreement, as such Merger Agreement may be modified or amended from
time to time (but not to reduce the Exchange Ratio), (y) against any action,
omission or agreement which would impede or interfere with, or have the effect
of discouraging, the Merger, including, without limitation, any Acquisition
Proposal other than the Merger, and (z) in favor of all nominees in the
Corporation's slate of directors nominated for election by a majority of the
Corporation's non-management directors. Any such vote shall be cast or consent
shall be given in accordance with such procedures relating thereto as shall
ensure that it is duly counted for purposes of determining that a quorum is
present and for purposes of recording the results of such vote or consent.
In the event that the Stockholder shall fail to comply with the provisions
of this Section 1 (as determined by the Buyer in its sole discretion), the
Stockholder hereby agrees that such failure shall result, without any further
action by the Stockholder, in the irrevocable appointment of the Buyer, until
termination of the Merger Agreement, as its attorney and proxy with full power
of substitution, to vote and otherwise act (by written consent or otherwise)
with respect to the Shares which the Stockholder is entitled to vote at any
meeting of stockholders of the Corporation (whether annual or special and
whether or not an adjourned or postponed meeting) or consent in lieu of any such
meeting or otherwise, on the matters and in the manner specified in Section 1
above. THE STOCKHOLDER ACKNOWLEDGES THAT THIS PROXY IS COUPLED WITH AN
INTEREST, AND CONSTITUTES, AMONG OTHER THINGS, AN INDUCEMENT FOR THE BUYER TO
ENTER INTO THE MERGER AGREEMENT, IS IRREVOCABLE AND SHALL NOT BE TERMINATED BY
OPERATION OF LAW UPON THE OCCURRENCE OF ANY EVENT, INCLUDING, WITHOUT
LIMITATION, THE DEATH OR INCAPACITY OF THE STOCKHOLDER. Notwithstanding any
provision contained in such proxy, such proxy shall terminate upon the
Expiration Date.
Section 2. COVENANTS OF THE STOCKHOLDER. The Stockholder covenants and
agrees for the benefit of the Buyer that, until the Expiration Date, it:
(a) will not sell, transfer, pledge, hypothecate, encumber, assign,
tender or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
hypothecation, encumbrance, assignment, tender or other disposition of (any
one or more of which, a "Transfer"), any of the Shares owned by it unless,
in connection with such Transfer, the transferee executes a counterpart of
this Agreement agreeing to be bound by the terms hereof;
(b) will, other than as expressly contemplated by this Agreement, not
grant any powers of attorney or proxies or consents in respect of any of
the Shares owned by it,
2
<PAGE>
deposit any of the Shares owned by it into a voting trust, enter into a
voting agreement with respect to any of the Shares owned by it or otherwise
restrict the ability of the holder of any of the Shares owned by it freely
to exercise all voting rights with respect thereto except for powers of
attorney granted in the ordinary course consistent with the terms of the
Merger Agreement;
(c) will not take any action which, if taken by the Corporation,
would be prohibited by Section 7.1 of the Merger Agreement;
(d) will use its best efforts to take, or cause to be taken, all
action, and do, or cause to be done, all things necessary or advisable in
order to consummate and make effective the transactions contemplated by
this Agreement including, without limitation, to enter into an affiliate's
letter substantially in the form of Annex A hereto; provided however, if
-------
the Stockholder is a director of the Corporation the provisions of this
paragraph (d) are subject to the fiduciary duties such Stockholder has to
the Corporation as a member of the Board of Directors; and
(e) will not exercise any appraisal or dissenter's rights, if any,
with respect to the Shares.
Section 3. COVENANTS OF THE BUYER. The Buyer covenants and agrees for
the benefit of the Stockholder that (a) immediately upon execution of this
Agreement, the Buyer shall enter, and cause Merger Sub to enter, into the Merger
Agreement, and (b) until the Expiration Date, it shall use its best efforts to
take, or cause to be taken, all action, and do, or cause to be done, all things
necessary or advisable in order to consummate and make effective the
transactions contemplated by this Agreement and the Merger Agreement, consistent
with the terms and conditions of each such agreement.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The
Stockholder represents and warrants to the Buyer that: (a) if applicable, the
Stockholder is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; (b) the execution,
delivery and performance by the Stockholder of this Agreement will not conflict
with, require a consent, waiver or approval under, or result in a breach or a
default under, its Certificate of Incorporation or By-laws (if applicable), or
any of the terms of any contract, commitment or other obligations (written or
oral) to which the Stockholder is bound, which breach would result in a material
adverse effect on the Stockholder; (c) this Agreement has been duly executed and
delivered by the Stockholder and constitutes a valid and binding obligation of
the Stockholder, enforceable against the Stockholder in accordance with its
terms; (d) if applicable, the execution, delivery and performance of this
Agreement and the consummation by it of the transactions contemplated hereby
have been approved by all necessary corporate action on its part; (e) other than
as set forth herein, the Stockholder has not entered into an irrevocable proxy
with respect to the Shares.
3
<PAGE>
The representations and warranties contained herein shall be made as of the
date hereof and as of each date from the date hereof through and including the
Closing.
Section 5. ADJUSTMENTS; ADDITIONAL SHARES. In the event (i) of any stock
dividend, stock split, recapitalization, reclassification, combination or
exchange of shares of capital stock of the Corporation on, of or affecting the
Shares, or (ii) the Stockholder shall acquire voting rights with respect to any
additional shares of Common Stock or other securities of the Corporation,
including any securities entitling the holder hereof to vote or give consent
with respect to the matters set forth in Section 1 hereof but excluding shares
of Common Stock of the Corporation as to which the holders thereof have granted
revocable proxies to the Stockholder in connection with the shareholders meeting
of the Corporation contemplated by Section 7.4 of the Merger Agreement, then the
terms of this Agreement shall apply to the shares of capital stock held by the
Stockholder immediately following the effectiveness of the events described in
clause (i) or the Stockholder becoming the beneficial owner thereof, as
described in clause (ii), as though they were Shares hereunder. As soon as
practicable after the receipt of such other capital stock or securities, the
Stockholder shall surrender to the Corporation all certificates or instruments
representing such for the purpose of affixing the legend set forth in Section 6
hereof.
Section 6. SPECIFIC PERFORMANCE. The Stockholder acknowledges that the
agreements contained in this Agreement are an integral part of the transactions
contemplated by the Merger Agreement and the Stock Option Agreement and that,
without these agreements, the Buyer and Merger Sub would not enter into the
Merger Agreement or the Stock Option Agreement, and acknowledges that damages
would be an inadequate remedy for any breach by it of the provisions of this
Agreement. Accordingly, the Stockholder and the Buyer each agree that the
obligations of the parties hereunder shall be specifically enforceable and
neither party shall take any action to impede the other from seeking to enforce
such right of specific performance. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
Section 7. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given by overnight
courier, by delivering the same in person, by telecopy (with confirmation), or
by registered or certified mail (return receipt requested) to the Stockholder at
the address listed on the signature page hereof, with a copy to Hicks, Maloof &
Campbell, Suite 2200, Marquis Two Tower, 285 Peachtree Center Avenue, N.E.,
Atlanta, Georgia 30303, Attention: Maurice N. Maloof, facsimile number (404)
420-7474, and to the Buyer at 8080 N. Central Expressway, Suite 1100, Dallas,
Texas 75206, Attention: President, facsimile number (214) 750-0905, with a copy
to Jackson & Walker, L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202,
Attention: Charles D. Maguire, Jr., Facsimile number (214) 953-5822, or to such
other address as any party may have furnished to the other in writing in
accordance herewith. Any such notice shall be deemed delivered and
4
<PAGE>
received on the date on which it is received if sent by overnight courier, hand-
delivered or telecopy, or on the fifth business day following the date on which
it is so mailed.
Section 8. BINDING EFFECT; SURVIVAL. Upon execution and delivery of this
Agreement by the Buyer, this Agreement shall become effective as to the
Stockholder at the time the Stockholder executes and delivers this Agreement.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, personal representatives, successors and
assigns.
Section 9. ASSIGNMENT. The Buyer may, without the consent of the
Stockholder, assign its rights hereunder to any direct or indirect wholly owned
subsidiary of the Buyer, provided that any such assignment shall not affect the
obligations of the Buyer hereunder.
Section 10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws.
Section 11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
Section 12. EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction hereof.
Section 13. ADDITIONAL AGREEMENTS; FURTHER ASSURANCE. Subject to the
terms and conditions herein provided, each of the parties hereto agrees to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement. The Stockholder
will provide the Buyer with all documents which may reasonably be requested by
the Buyer and will take reasonable steps to enable the Buyer to obtain all
rights and benefits provided it hereunder.
Section 14. AMENDMENT; WAIVER. No amendment or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by the Buyer and the Stockholder, in the case of an
amendment, or by the party which is the beneficiary of any such provision, in
the case of waiver or a consent to departure therefrom.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L.Williams
------------------------------
Name: Sterling L.Williams
----------------------------
Title: President
---------------------------
STOCKHOLDER:
- -----------
By: /s/ Francis A. Tarkenton
------------------------------
Name: Francis A. Tarkenton
--------------------------
Title:
_________________________
Address: 3340 Peachtree Rd., N.E.
Atlanta, Georgia 30326
Number of Shares: 1,194,515
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L.Williams
------------------------------
Name: Sterling L.Williams
----------------------------
Title: President
---------------------------
STOCKHOLDER:
- -----------
TARKENTON GROUP, INC.
By: /s/ Francis A. Tarkenton
------------------------------
Name: Francis A. Tarkenton
--------------------------
Title: Chairman
-------------------------
Address: 3340 Peachtree Rd., N.E.
Atlanta, Georgia 30326
Number of Shares: 34,694
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L.Williams
------------------------------
Name: Sterling L.Williams
----------------------------
Title: President
---------------------------
STOCKHOLDER:
- -----------
By: /s/ Donald P. Addington
------------------------------
Name: Donald P. Addington
--------------------------
Title:
-------------------------
Address: 3340 Peachtree Rd., N.E.
Atlanta, Georgia 30326
Number of Shares: - 0 -
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L.Williams
------------------------------
Name: Sterling L.Williams
----------------------------
Title: President
---------------------------
STOCKHOLDER:
- -----------
By: /s/ James Martin
------------------------------
Name: James Martin
--------------------------
Title:
-------------------------
Address: Tupenny House
Tucker's Town, Bermuda
Number of Shares: 1,545,500
6
<PAGE>
EXHIBIT 10(c)
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of
November 30, 1994 by and among Sterling Software, Inc., a Delaware corporation
(the "Buyer"), and the former stockholders of KnowledgeWare, Inc., a Georgia
corporation (the "Corporation"), listed on the signature page hereto (the
"Stockholders").
WHEREAS, the Buyer, SSI Corporation, a Georgia corporation and a wholly
owned subsidiary of the Buyer ("Merger Sub") and the Corporation entered into an
Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994 to
be effective as of July 31 (the "Merger Agreement"; capitalized terms not
defined herein shall have the meanings set forth in the Merger Agreement); and
WHEREAS, Section 7.13 of the Merger Agreement contemplates that Buyer will
enter into this Agreement; and
WHEREAS, certain of the Stockholders executed Amended and Restated
Stockholders Agreements (the "Stockholder Agreements") dated as of August 31,
1994 providing that such Stockholders would vote in favor of the transactions
contemplated by the Merger Agreement, and to induce such Stockholders to enter
into the Stockholders Agreement, the Buyer has agreed to grant such Stockholders
certain registration rights as set forth herein;
NOW THEREFORE, in consideration of the foregoing and the covenants set
forth herein, in the Merger Agreement and the Stockholders Agreements, the
Stockholder and Buyer agree as follows:
1. REGISTRATION RIGHTS. The Buyer shall prepare and file a registration
statement (on an appropriate form) under the Securities Act to permit the sale
or other disposition, on a delayed or continuous basis, of any or all shares of
Buyer Common Stock that have been acquired by or are issuable to the
Stockholders with respect to the Shares and the Corporation Options (if such
Stockholder is not otherwise able to sell such shares free from restriction
under the federal securities laws). The Buyer shall use its reasonable efforts
to cause such registration statement to become effective as promptly as
reasonably practicable following the filing thereof, and to obtain all consents
or waivers of other parties which are required thereof and to keep such
registration statement effective for such period as may be reasonably necessary
to effect such sale or other disposition; provided, however, Buyer shall not be
obligated to keep such registration statement effective after such time as all
Stockholders are eligible to sell their shares of Buyer Common Stock pursuant to
Rule 144 or 145 under the Securities Act without being subject to volume resale
limitations; and provided, further, the Buyer shall not be required to prepare
audited financial statements (other than annual audited financial statements) in
order to maintain the effectiveness of the registration statement. In
connection with any sale by any
<PAGE>
Stockholder of Buyer Common Stock pursuant to such registration statement, such
Stockholder must give and the Buyer must receive written notice of such
Stockholder's intention to make such a sale no less than two (2) nor more than
twenty (20) business days prior to the date of the proposed sale, which notice
shall include the number of shares proposed to be sold, the proposed plan of
distribution and the time period during the thirty (30) days following the date
of such notice during which the shares may be sold (the "Sale Period"), and such
Stockholder shall not, during any Sale Period, deliver any prospectus that is
part of such registration statement during any period of time when, but only so
long as, the Buyer gives such Stockholder written notice (a "Delay Notice") that
the Buyer is in possession of material non-public information that, in the
exercise of its reasonable judgement, would be required to be disclosed in such
registration statement in order to comply with the Securities Act and the rules
and regulations of the SEC thereunder; provided that the Buyer shall promptly
provide written notice to such Stockholder when such delay is no longer
applicable; provided further that no stockholder shall be so prevented from
selling such Buyer Common Stock for a period longer than ninety (90) consecutive
days (a "Delay Period") following receipt of a Delay Notice and any two Delay
Periods must be at least fifteen (15) days apart.
2. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Buyer. The Buyer agrees to indemnify and hold
harmless each Stockholder, its officers, directors, agents, employees,
representatives and each person or entity who controls such Stockholder (within
the meaning of the Securities Act), against all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue or alleged untrue statement of material fact
contained in any registration statement, any amendment or supplement thereto,
any prospectus or preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as the same arise out of
or are based upon any such untrue statement or omission contained in any
information furnished in writing to the Buyer by such Stockholder for use in the
preparation thereof. In connection with an underwritten offering, the Buyer will
indemnify the underwriters thereof, their officers and directors and each person
who controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the
Stockholders.
(b) Indemnification by Stockholders. In connection with any registration
statement in which a Stockholder is participating, each such Stockholder will
furnish to the Buyer in writing such information with respect to the name and
address of such Stockholder, the amount of Buyer Common Stock held by such
Stockholder and the nature of such holdings, and such other information as is
required by the Buyer for use in connection with any such registration statement
or prospectus and agrees to indemnify and hold harmless the Buyer, its
directors, officers, agents, employees, representatives and each person or
entity who controls the Buyer (within the meaning of the Securities Act),
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any untrue or
alleged untrue statement of material fact contained in any registration
statement, any
2
<PAGE>
amendment or supplement thereto, any prospectus or preliminary prospectus or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent that such
untrue statement is contained in or omission arises from any information
furnished in writing by such Stockholder for use in the preparation thereof. In
no event shall the liability of any selling Stockholder of Buyer Common Stock
hereunder be greater in amount than the dollar amount of the proceeds received
by such Stockholder upon the sale of the Buyer Common Stock giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such person of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such person will claim indemnification or contribution
pursuant to this Agreement and, unless in the reasonable judgment of such
indemnified party (i) a conflict of interest may exist between such indemnified
party and the indemnifying party with respect to such claim or (ii) the named
parties to any such action, suit, proceeding or investigation (including any
impleaded parties) include both an indemnifying party and an indemnified party,
and such indemnified party shall have been advised by counsel that there may be
one or more legal defenses available to it which are different from or
additional to those available to the indemnifying party, permit the indemnifying
party to assume the defense of such claim with counsel reasonably satisfactory
to such indemnified party. Whether or not such defense is assumed by the
indemnifying party, the indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld). No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or litigation. If the
indemnifying party is not entitled to, or elects not to, assume the defense of a
claim, it will not be obligated to pay the fees and expenses of more than one
counsel with respect to such claim, unless in the reasonable judgment of any
indemnified party a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such claim, in
which event the indemnifying party shall be obligated to pay the fees and
expenses of one additional counsel.
(d) Contribution. If the indemnification provided for in this Section 2
from the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any statement of a material fact or omission or alleged omission
to state a material fact has been made by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and
3
<PAGE>
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Section 2(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 2(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 2(d), no selling Stockholder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Buyer Common Stock of such selling Stockholder were
offered to the public exceeds the amount of any damages which such selling
Stockholder has otherwise been required to pay by reason of such untrue
statement or omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this Section 2, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Section 2(a) and (b) without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided for in
this Section 2(d).
3. MISCELLANEOUS.
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the exercise of registration rights granted hereunder,
including fees and expenses of its own counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement (including other
documents and instruments referred to herein or therein) (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof
and (ii) is not intended to confer upon any person other than the parties hereto
any rights or remedies hereunder. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or a
governmental entity to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
4
<PAGE>
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
(e) Descriptive Headings. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be given by overnight courier, by delivering the same in
person, by telecopy (with confirmation) or by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
If to the Buyer to:
Sterling Software, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Telecopier No.: (214) 750-0905
Attention: President
with a copy to:
Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Telecopier No.: (214) 953-5822
Attention: Charles D. Maguire, Jr.
If to the Stockholder to:
Such address as appears on the signature page hereof
Such notice shall be deemed delivered and received on the date on which it is
received if sent by overnight courier, hand-delivered or telecopy, or on the
fifth business day following the date on which it is so mailed.
(g) Counterparts. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
both parties need not sign the same counterpart.
5
<PAGE>
(h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party hereto.
(i) Specific Performance. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. The parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
-----
STERLING SOFTWARE, INC.
By: /s/ Jeannette P. Meier
------------------------------------
Name: Jeannette P. Meier
----------------------------------
Title: Executive Vice President
---------------------------------
Secretary and General Counsel
Address for Notice: STOCKHOLDERS:
------------
347962.07/D
6
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
1606 North Springs Drive /s/ Rick W. Gossett
- --------------------------- --------------------------------------------
Atlanta GA 30338
- ---------------------------
- ---------------------------
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ___________________________
Name __________________________
Title _________________________
Address for Notice: STOCKHOLDERS:
Old Orchard Road INTERNATIONAL BUSINESS MACHINES CORPORATION
Armonk, New York 10504
By: /s/ Lee A. Dayton
-------------------------------
Name: Lee A. Dayton
-----------------------------
Title:General Manager, Real Estate
----------------------------
and Business Development
A-11
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
3401 West End Avenue /s/ Sam A. Brooks
- --------------------------- --------------------------------------------
Suite 680
- ---------------------------
Nashville, TN 37203
- ---------------------------
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
Tuppenney House /s/ James Martin
- --------------------------- --------------------------------------------
Tuckerstown, HS02
- ---------------------------
Bermuda
- ---------------------------
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
/s/ P. E. Sadler
___________________________ --------------------------------------------
___________________________
___________________________
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
/s/ J. William Scruggs
___________________________ --------------------------------------------
___________________________
___________________________
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
1431 Garmon Ferry Rd /s/ Francis Tarkenton
- --------------------------- --------------------------------------------
Atlanta, GA 30326
- ---------------------------
___________________________
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS: /s/ Rick W. Gossett
Tarkenton Group Inc. by Tarkenton Group, Inc.
- --------------------------- --------------------------------------------
3340 Peachtree Road President
- ---------------------------
Atlanta GA 30326
- ---------------------------
5
<PAGE>
IN WITNESS WHEREOF, the Stockholders and the Buyer have caused this
Registration Rights Agreement to be signed, all as of the date first written
above.
BUYER:
STERLING SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice: STOCKHOLDERS:
2660 Peachtree Rd.N.W /s/ R. M. Haddrill
- --------------------------- --------------------------------------------
#23H
- ---------------------------
Atlanta GA 30325
- ---------------------------
5
<PAGE>
EXHIBIT 10(d)
ESCROW AGREEMENT
This Escrow Agreement ("Agreement"), dated as of November 30, 1994, among
Sterling Software, Inc., a Delaware corporation ("Sterling"), KnowledgeWare,
Inc., a Georgia corporation ("KnowledgeWare"), The First National Bank of Boston
(the "Agent") and Stuart Finestone as representative (the "Representative"),
W I T N E S S E T H:
-------------------
WHEREAS, Sterling, SSI Corporation, a Georgia corporation and wholly owned
subsidiary of Sterling ("Newco"), and KnowledgeWare are parties to that certain
Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994 to
be effective as of July 31, 1994 (as amended, the "Merger Agreement") pursuant
to which Newco will merge with and into KnowledgeWare; and
WHEREAS, pursuant to the Merger Agreement, Sterling is entitled to
indemnification under certain circumstances as set forth in the Merger
Agreement; and
WHEREAS, the purpose of this Agreement is to provide for the deposit of
484,771 shares of common stock, par value $0.10 per share, of Sterling
- -----------
("Buyer Common Stock") pursuant to the Merger Agreement to satisfy the rights of
Sterling to be indemnified under Section 7.18 of the Merger Agreement and to
provide for the distribution, if applicable, of any shares of Buyer Common Stock
to persons who as of the Effective Time (as defined in the Merger Agreement)
were holders of record ("Record Holders") of issued and outstanding Shares (as
defined in the Merger Agreement);
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, all capitalized terms not
-----------
defined herein shall have the meanings attributed to such terms in the Merger
Agreement. The parties acknowledge and agree that the term "Damages" also
includes amounts paid in settlement of any Action (including, without
limitation, fees and disbursements of counsel and investigation expenses
incurred in connection therewith).
2. Appointment of Agent and Representative.
---------------------------------------
(a) Sterling and KnowledgeWare hereby appoint the Agent as escrow agent
for the purposes set forth herein and the Agent hereby accepts such appointment
on the terms herein provided.
<PAGE>
(b) The Representative is hereby appointed as agent and representative of
the Record Holders for the purposes set forth herein and the Representative
accepts such appointment on the terms herein provided.
3. Escrowed Shares.
---------------
(a) For the purposes herein set forth, Sterling has caused to be deposited
with the Agent - 484,185 shares of Buyer Common Stock (the "Escrowed
-------------
Shares"). The Escrowed Shares shall be registered in the name of the Agent or
its nominee. If during the term of this Agreement there is declared a stock
dividend or stock split, all securities thereby issuable with respect to the
Escrowed Shares shall be deposited hereunder and shall be deemed "Escrowed
Shares" for the purposes of this Agreement. If during the term of this
Agreement there is paid any dividends (within the meaning of Section 301(c)(1)
of the Code) in cash or other property in respect of the Escrowed Shares, such
dividends shall be paid by the Agent to the Record Holders, pro rata, except
that any such dividends paid in respect of Escrowed Shares as to which a claim
exists pursuant to a Sterling Notice shall constitute and be deemed part of such
Escrowed Shares for purposes of this Agreement. If during the term of this
Agreement there is any other distribution which does not constitute a dividend
(within the meaning of Section 301(c)(1) of the Code) in cash or other property
in respect of the Escrowed Shares, such distribution shall be retained by the
Agent and shall constitute part of the "Escrowed Shares" for purposes of this
Agreement. The Escrowed Shares shall be held and disbursed by the Agent in
accordance with the terms of this Agreement.
(b) The Escrowed Shares held by the Agent pursuant to this Agreement shall
be deemed issued and outstanding. With respect to any matter on which
stockholders of Sterling have a right to vote, the Agent, on behalf of the
Record Holders, shall have the right to vote, or not vote, all Escrowed Shares
(or any portion thereof) in such manner as it deems appropriate as agent for the
Record Holders; provided that, at Sterling's expense, the Agent shall promptly
forward, or cause to be forwarded, copies of any proxies, proxy statements and
other soliciting materials to the Record Holders, and shall vote the applicable
portion of the Escrowed Shares in accordance with any written instructions
timely received by the Agent from any Record Holder.
(c) The Record Holders' interest in this Agreement and the Escrowed Shares
(prior to the disbursement thereof) may not be transferred except by operation
of law.
2
<PAGE>
4. Application of Escrow Deposit. The Escrowed Shares shall be held in
-----------------------------
escrow under the terms of this Agreement and released by the Agent upon the
following terms:
(a) Upon joint written notice and instruction from Sterling and the
Representative that the Escrowed Shares, or any portion thereof, should be
disbursed, the Agent shall make such disbursement in accordance with the
directions set forth in such joint written notice and instruction.
(b) If at any time, or from time to time, before the second
anniversary of the Effective Time, Sterling delivers to the Agent written
notice (a "Sterling Notice") asserting that Sterling is entitled to
indemnification as set forth in Section 7.18 of the Merger Agreement, which
Sterling Notice shall state the basis and amount of such claim, then the
Agent shall disburse, on the twentieth business day following receipt of
the Sterling Notice, all or such portion of the Escrowed Shares to Sterling
as specified in the Sterling Notice; provided that if the Agent receives
written notice from the Representative prior to such twentieth business day
that a dispute exists with respect to the claims made in the Sterling
Notice (a "Dispute Notice"), which Dispute Notice shall state the basis of
such dispute, the Agent shall continue to hold the Escrowed Shares (but
shall disburse to Sterling any portion of such Escrowed Shares as to which
no dispute exists) until directed otherwise pursuant to paragraph (a) above
or (c) below.
(c) If the Agent timely receives a Dispute Notice, the Agent shall
retain the Escrowed Shares subject of the Sterling Notice until the first
to occur of the following:
(i) receipt by the Agent of joint written instructions from
Sterling and the Representative, in which case the Agent shall
disburse the Escrowed Shares (or applicable portions thereof) as set
forth in such joint written instructions; or
(ii) receipt by the Agent of a written notice from either
Sterling or the Representative (a "Litigation Certificate") to the
effect that such person(s) has received a final non-appealable
judgment or order from a court of competent jurisdiction (and
attaching a copy of such judgment or order) resolving the dispute as
to the disbursement of the subject Escrowed Shares setting forth in
reasonable detail the substance of such judgment and instructions as
to the resulting disbursement of the Escrowed Shares (or applicable
portions thereof), in which case the Agent shall make such
disbursement (or portions thereof) on the twentieth business day
following receipt of the Litigation Certificate; provided that if
Sterling or the Representative delivers to the Agent a certificate
prior to such twentieth business day disputing the contents of the
Litigation Certificate (the "Countervailing Certificate"), then the
Agent, on the twentieth business day following receipt of the
Countervailing Certificate, shall interplead the subject Escrowed
Shares into, or file a declaratory judgment action with, a court of
competent jurisdiction to determine the rights of the parties to the
Escrowed
3
<PAGE>
Shares, unless prior to such twentieth business day the Agent receives
a joint written instruction pursuant to paragraph (c)(i) above.
(d) If, on the second anniversary of the Effective Time, there are
Escrowed Shares remaining undisbursed and not the subject of a Sterling
Notice or a Contingent Claim Notice (defined below), the Agent shall
disburse such Escrowed Shares to the Record Holders pro rata in accordance
with their relative record ownership of Shares issued and outstanding as of
the Effective Time.
(e) If, within 30 days prior to the second anniversary of the
Effective Time, Sterling, in its reasonable good faith judgment, believes
that there exist one or more Actions with respect to which Sterling would
be entitled to indemnification for Damages incurred subsequent to the
second anniversary of the Effective Time (each a "Contingent Claim" and
collectively, "Contingent Claims"), Sterling may give the Agent written
notice (a "Contingent Claim Notice") of such Contingent Claims, which
Contingent Claim Notice shall state the basis of the Contingent Claims and
Sterling's reasonable good faith estimate of the maximum amount of Damages
for which it would be entitled to indemnification with respect thereto. In
the event a Contingent Claim Notice is delivered, a number of Escrowed
Shares equal to the aggregate amount of such estimated Damages divided by
the most recently reported closing sales price of Buyer Common Stock on the
date of the Contingent Claim Notice shall remain subject to this Agreement,
and this Agreement shall remain in effect; provided that, with respect to
any Contingent Claim which has not been resolved on or prior to the fourth
anniversary of the Effective Time, any Escrowed Shares attributable to such
Contingent Claim and not disbursed shall be disbursed to the Record Holders
pro rata in accordance with their relative record ownership of Shares
issued and outstanding as of the Effective Time unless, as of the fourth
anniversary of the Effective Time, such Contingent Claim is then subject to
litigation or binding arbitration proceedings, in which case such Escrowed
Shares shall remain subject to this Agreement, and this Agreement shall
remain in effect, until the final, nonappealable resolution of such
proceedings.
(f) Notwithstanding any other provision of this Agreement, no
fractional shares of Buyer Common Stock will be issued to the Record
Holders and any Record Holder who would otherwise be entitled to receive a
fractional share will be entitled to receive a cash payment in lieu
thereof, which payment shall represent such holder's proportionate interest
in the net proceeds from the sale by the Agent, within ten business days
following the date the disbursement of such fractional share would have
been made, on behalf of all such Record Holders of the aggregate fractional
shares of Buyer Common Stock that such persons would be entitled to receive
but for this paragraph (f).
(g) For the purposes of this Agreement, whenever in this Agreement it
is provided that the Agent may or shall disburse Escrowed Shares to
Sterling, the Agent shall, as Sterling may direct in writing, either (i)
deliver to Sterling a stock certificate representing the appropriate number
of Escrowed Shares or (ii) sell an appropriate
4
<PAGE>
number of Escrowed Shares and deliver the proceeds therefrom to Sterling.
In determining the number of shares to be so disbursed or sold in respect
of Damages, the number of Escrowed Shares to be disbursed or sold shall be
equal to the number of shares (rounded to the nearer whole share)
determined by dividing the amount of Damages with respect to which Sterling
is entitled to be indemnified by the most recently reported closing sale
price of the Buyer Common Stock preceding the date Sterling delivers to the
Agent the Sterling Notice.
(h) Notwithstanding paragraph (g) above, in the event that the Agent
is required to sell any of the Escrowed Shares pursuant to Section 4(g) or
Section 12(c) or otherwise, Sterling may notify the Agent that the Agent
shall suspend its efforts to sell any or all of such shares until receipt
of further notice from Sterling, without giving any reason therefor, and
the Agent shall suspend such efforts until receipt of such further notice.
5. Communications with Representative.
----------------------------------
(a) Within a reasonable time following receipt of notice of an Action
for which Sterling believes it is entitled to indemnification, Sterling shall
give the Representative written notice of such Action, which notice shall
describe the material allegations of such Action.
(b) Within a reasonable time following the end of each calendar
quarter while this Agreement is in effect, Sterling shall deliver to the
Representative a written summary of the status of each Action with respect to
which Sterling is seeking indemnification.
(c) At least ten (10) days prior to settling any Action with respect
to which Sterling is seeking indemnification (or such shorter period as is then
consented to by the Representative), Sterling shall give the Representative
written notice thereof, which notice shall describe the material terms of such
settlement.
(d) Within a reasonable time after receiving a request therefor from
the Representative, Sterling shall furnish the Representative such additional
information relating to Actions as he may reasonably request from time to time.
6. Liability of the Agent. The duties of the Agent hereunder shall be
----------------------
limited to the observance of the express provisions of this Agreement. The
Agent shall not be subject to, or be obliged to recognize, any other agreement
between the parties hereto or directions or instructions not specifically set
forth or provided for herein. The Agent shall not make any disposition of
Escrowed Shares which is not expressly authorized by this Agreement. The Agent
may rely upon and act upon any instrument received by it pursuant to the
provisions of this Agreement which it in good faith believes to be genuine and
in conformity with the requirements of this Agreement. Except as expressly
provided in this Agreement, the Agent shall have no duty to determine or inquire
into the happening or occurrence of any event. Anything in this Agreement to
the contrary notwithstanding, the Agent shall not be liable to any person for
5
<PAGE>
anything which it may do or refrain from doing in connection with this
Agreement, unless the Agent is guilty of gross negligence or willful misconduct.
7. Duties of the Agent.
-------------------
(a) The Agent shall hold or sell the Escrowed Shares, or portions
thereof, as set forth herein.
(b) The Agent shall have no authority or obligation to invest funds
except as herein provided.
(c) Promptly following receipt by the Agent of any certificate or
notice (i) from Sterling or the Representative pursuant to Section 4, the
Agent shall promptly provide a copy thereof to the other and (ii) from any
Record Holder pursuant to Section 13, the Agent shall promptly provide a
copy thereof to Sterling and the Representative.
8. Indemnification of the Agent.
----------------------------
(a) Sterling and KnowledgeWare (solely to the extent of the Escrowed
Shares) each shall severally indemnify and hold the Agent, its employees,
officers, agents, successors and assigns harmless from and against any and
all loss, cost, damages or expenses (including reasonable attorneys' fees)
it or they may sustain by reason of the Agent's service as escrow agent
hereunder, except such a loss, cost, damage or expense (including
reasonable attorneys' fees) incurred by reason of such acts or omissions
for which the Agent is liable or responsible under the provisions of
Section 6 hereof.
(b) The Agent is hereby given a prior lien on all rights, titles and
interests of Sterling and the Record Holders in the Escrowed Shares,
including any property or cash (or cash equivalent) arising therefrom, in
order to protect, indemnify and reimburse the Agent for the costs,
expenses, fees and liabilities to which it is entitled pursuant to Section
8(a) above.
9. Fees of the Agent. The Agent's compensation for services hereunder
-----------------
shall be in accordance with Exhibit A. In the event extraordinary services are
---------
required of the Agent beyond the services described herein, compensation shall
be an amount that is fair and equitable based upon the services and
responsibility involved. Sterling shall pay the fees and expenses of the Agent
for serving as escrow agent.
10. Resignation of the Agent. The Agent may resign as escrow agent by
------------------------
giving each of Sterling and the Representative not less than 30 days' written
notice of the effective date of such resignation. Sterling shall have the right
to designate a substitute escrow agent, provided it is reasonably acceptable to
the Representative. If on or prior to the effective date of such resignation,
the Agent has not received written instructions from Sterling of a substitute
escrow agent, it shall thereupon deposit the Escrowed Shares into the registry
of a court of competent
6
<PAGE>
jurisdiction. The parties hereto intend that a substitute escrow agent shall be
appointed to fulfill the duties of the Agent hereunder for the remaining term of
this Agreement in the event of the Agent's resignation.
11. Remedies of the Agent.
---------------------
(a) In the event of any dispute hereunder, or if conflicting demands
or notices are made upon the Agent, or in the event the Agent in good faith
is in doubt as to what action it should take hereunder, the Agent shall
have the right to (i) stop all further proceedings in, and performance of,
this Agreement and instructions received hereunder, and/or (ii) file a suit
in interpleader and obtain an order from a court of competent jurisdiction
requiring all persons involved to interplead and litigate in such court
their several claims and rights with respect to the Escrowed Shares.
(b) While any legal proceeding arising out of this Agreement is
pending, the Agent shall have the right to stop all further proceedings in,
and performance of, this Agreement and instructions received hereunder
until all differences shall have been resolved by agreement or a final
order.
(c) The Agent may from time to time consult with legal counsel of its
own choosing in the event of any disagreement, controversy, question or
doubt as to the construction of any of the provisions hereof or its duties
hereunder, and it shall incur no liability and shall be fully protected in
acting in good faith in accordance with the opinion and instructions of
such counsel. Any such fees and expenses of such legal counsel shall be
considered part of the fees and expenses of the Agent for the purposes of
Section 9 of this Agreement.
12. Responsibilities of the Representative.
--------------------------------------
(a) The Representative is an attorney who has been designated by the
Board of Directors of KnowledgeWare with the consent of Sterling in its
reasonable discretion. The duties of the Representative hereunder shall be
limited to the observance of the express provisions of this Agreement. The
Representative shall not be subject to, or be obliged to recognize, any
other agreement between the parties hereto or directions or instructions
not specifically set forth or provided for herein. Anything in this
Agreement to the contrary notwithstanding, the Representative shall not be
liable to any Record Holder or any other person for anything which it may
do or refrain from doing in connection with this Agreement, unless the
Representative is guilty of willful misconduct.
(b) The Representative and its successors and assigns shall be
indemnified and held harmless, out of the Escrowed Shares, from and against
any and all loss, cost, damages or expenses (including reasonable
attorneys' fees) it or they may sustain by reason of the Representative's
services as representative hereunder, except such loss, cost, damage or
expense (including reasonable attorneys' fees) incurred by reason of such
7
<PAGE>
acts or omissions for which the Representative is responsible pursuant to
paragraph (a) above.
(c) The Representative's compensation for services hereunder shall be
at his normal hourly rate. The fees and reasonable expenses of the
Representative shall be paid out of the Escrowed Shares on a timely basis
upon presentation of invoices to the Agent, and shall be paid through the
sale by the Escrow Agent of a sufficient number of Escrowed Shares.
13. Resignation or Removal of the Representative. The Representative may
--------------------------------------------
resign as representative by giving Sterling, the Agent and each of the Record
Holders not less than 30 days' written notice of the effective date of such
resignation. Record Holders who as of the Effective Time owned of record at
least 51% of the issued and outstanding Shares may, by delivering written notice
to Sterling, the Agent and the Representative, remove the Representative with or
without cause. Prior to the effective date of such resignation or removal,
Record Holders who as of the Effective Time owned of record at least 51% of the
issued and outstanding Shares may deliver to Sterling and the Agent a written
designation of a substitute representative who shall be acceptable to Sterling
in its reasonable discretion. If no designation is made, the Representative
shall appoint a substitute representative, provided such substitute
representative is reasonably acceptable to Sterling.
14. Miscellaneous.
-------------
(a) Any notice or communication hereunder to Sterling, the
Representative or the Agent must be in writing and given by overnight
courier, depositing the same in the United States mail, addressed to the
person to be notified, postage prepaid and registered or certified with
return receipt requested, or by delivering the same in person. Such notice
shall be deemed received on the date on which it is received if sent by
overnight courier or hand-delivered or on the third business day following
the date on which it is so mailed. For purposes of notice, the addresses
shall be:
If to Sterling: Sterling Software, Inc.
8080 North Central Expressway
Suite 1100
Dallas, Texas 75206
Attn: General Counsel
with a copy to: Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attn: Charles D. Maguire, Jr.
8
<PAGE>
If to the Representative: Stuart Finestone
Suite 2540
Tower Place
3340 Peachtree Road, N.E.
Atlanta, Georgia 30326
If to the Agent: The First National Bank of Boston
Blue Hills Office Park
150 Royal Street; Mail Stop 45-02-15
Canton, MA 02021
Attention: Corporate Trust Division
Any notice or communication hereunder to a Record Holder must be in writing
and given by depositing the same in the United States mail, addressed to
the Record Holder as reflected on the records of the transfer agent for the
Shares as of the Effective Time, which notice shall be deemed received on
the fifth business day following the date on which it is so mailed. Any
party or Record Holder may change its address for notice by written notice
given to the other parties in accordance with this Section. In cases where
Sterling and the Representative may give joint written notice or
instructions to the Agent, such notice may be given by separate instruments
of similar tenor.
(b) This Agreement may be amended, modified or supplemented only by an
instrument in writing executed by Sterling, the Representative and the
Agent; provided that this Agreement may not be amended in a manner that
would materially and adversely affect the rights or benefits of the Record
Holders without the written consent of Record Holders who as of the
Effective Time owned of record at least 51% of the issued and outstanding
Shares.
(c) This Agreement and the agreements contemplated hereby constitute
the entire agreement of the parties regarding the subject matter hereof,
and supersede all prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof.
(d) This Agreement and the rights and obligations of the parties
hereto shall be governed by and construed and enforced in accordance with
the substantive laws (but not the rules governing conflicts of laws) of the
State of Texas.
(e) This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement
to be executed as of the day and year first above written.
STERLING:
--------
STERLING SOFTWARE, INC.
By: /s/ Jeannette P. Meier
---------------------------------------
Its: Executive Vice President,
--------------------------------------
Secretary and General Counsel
KNOWLEDGEWARE:
-------------
KNOWLEDGEWARE, INC.
By:_______________________________________
Its:______________________________________
AGENT:
-----
THE FIRST NATIONAL BANK OF BOSTON
By:_______________________________________
Its:______________________________________
REPRESENTATIVE:
--------------
__________________________________________
Stuart Finestone
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement
to be executed as of the day and year first above written.
STERLING:
--------
STERLING SOFTWARE, INC.
By:_______________________________________
Its:______________________________________
KNOWLEDGEWARE:
-------------
KNOWLEDGEWARE, INC.
By: /s/ Francis A. Tarkenton
---------------------------------------
Chairman of the Board and Chief
Executive Officer
Its:--------------------------------------
AGENT:
-----
THE FIRST NATIONAL BANK OF BOSTON
By:_______________________________________
Its:______________________________________
REPRESENTATIVE:
--------------
__________________________________________
Stuart Finestone
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement
to be executed as of the day and year first above written.
STERLING:
--------
STERLING SOFTWARE, INC.
By:_______________________________________
Its: _____________________________________
KNOWLEDGEWARE:
-------------
KNOWLEDGEWARE, INC.
By:_______________________________________
Its:______________________________________
AGENT:
-----
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ James Mogavero
---------------------------------------
Its: Authorized Officer
--------------------------------------
REPRESENTATIVE:
--------------
__________________________________________
Stuart Finestone
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement
to be executed as of the day and year first above written.
STERLING:
--------
STERLING SOFTWARE, INC.
By:_______________________________________
Its:______________________________________
KNOWLEDGEWARE:
-------------
KNOWLEDGEWARE, INC.
By:_______________________________________
Its:______________________________________
AGENT:
-----
THE FIRST NATIONAL BANK OF BOSTON
By:_______________________________________
Its:______________________________________
REPRESENTATIVE:
--------------
/s/ Stuart Finestone
-----------------------------------------
Stuart Finestone
10
<PAGE>
Exhibit A
SCHEDULE OF FEES
- --------------------------------------------------------------------------------
The fees of the Agent shall be as set forth in that certain letter
agreement between Sterling and the Agent attached hereto.
11
<PAGE>
BANK OF BOSTON LETTER HEAD APPEARS HERE
October 24, 1994
Mr. Al Hoover
Assistant General Counsel
Sterling Software, Inc.
8080 North Central Expressway Suite 1100
Dallas, TX 75206
Dear Mr. Hoover:
Thank you for providing Bank of Boston the opportunity to act as Escrow Agent
for Sterling Software, Inc. With over 300 escrows on our books, we are
experienced in handling these types of transactions and understand the need to
be responsive.
As I understand it, Bank of Boston would be required to hold stock in escrow for
a period of at least 2 years as a result of Sterling's acquisition of
KnowledgeWare Inc. The estimated closing date is mid November, 1994. The
agreement being used is provided by Sterling Software, Inc. Upon acceptance of
this agreement and stated fees please sign and return a copy to me at your
earliest convenience. The Administrator assigned to this escrow is Ms. Kecia
Banks at (617)575-2412.
Based on this understanding, Bank of Boston's fees to act as Escrow Agent are:
Acceptance Fee $1,000
Annual Administration Fee $1,750
Wire Transfers $20.00 per wire
Legal Fees Included
Out-of-pocket expenses Billed as incurred
As a matter of policy, the first year annual administration fee are due and
payable at the closing of the transaction with out-of-pocket expenses billed
shortly thereafter. The fees set forth in the enclosed schedule are subject to
change should circumstances warrant. The Bank also reserves the right to review
fees annually and increase them at a rate not to exceed the consumer price
index. If the transaction fails to close for reasons beyond the Bank's control,
we would expect to be reimbursed for out-of-pocket expenses incurred. Legal
review will be performed by Mark Nelson, Esq. the Securities Department Director
of Legal Affairs.
<PAGE>
[LOGO OF BANK OF BOSTON APPEARS HERE]
Thank you again for this opportunity. I look forward to working with you on this
transaction and in the future. If you have any questions on this proposal or our
capabilities, please call me at (617)575-2782.
Sincerely,
/s/ Jack O'Connor Accepted:
Vice President Sterling Software, Inc.
Securities Department
By: /s/ Albert K. Hoover
Title: Vice President
Date: 11-28-94
cc: T. Murphy
<PAGE>
EXHIBIT 10(r)
CONSULTATION AGREEMENT
----------------------
THIS AGREEMENT, made and entered into this 2nd day of July, 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 REC ENTERPRISES, INC.,
a Florida corporation, with its principal office and place of business at 620
Bridge Way Lane, Naples, Florida (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 businesses of Systems Center, 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
affecting the general welfare of Sterling. Consultant, through its officers,
including Robert E. Cook, shall make itself available for such advisory and
consultation purposes during all normal business hours as may be desired by
Sterling, upon reasonable notice, at such times and for such duration as may be
agreed upon.
2. As compensation for and in consideration of the services to be
performed hereunder, Sterling shall pay Consultant an annual fee of $240,000.00
per year. The term of this Agreement shall be from July 2, 1994 through July 1,
1996. Commencing July 2, 1994, Sterling shall pay to Consultant the $480,000.00
fee in twenty-four (24) equal monthly payments of $20,000.00, with the first
payment to be due on July 2, 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 or not Sterling avails itself of
Consultant's services at any time during the term of this Agreement. The
Consultant shall be reimbursed for all other authorized expenses such as travel,
food and lodging and which are incurred at the direction of Sterling consistent
with this Agreement. Sterling shall also make available at its Reston offices,
for the benefit and use by Consultant, office facilities such as secretarial
services, telephone and office space.
3. This Agreement shall terminate on July 1, 1996. This Agreement
may be terminated by Consultant at any time during the term of this Agreement,
but any compensation
-1-
<PAGE>
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. This
Agreement may be terminated by Sterling without further liability in the event
of the death of Mr. Robert E. Cook.
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
REC ENTERPRISES, INC.
By: /s/ ROBERT E. COOK
------------------------------------------
Robert E. Cook
President
-2-
<PAGE>
EXHIBIT 10(y)
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY96
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, 1995 through September 30, 1996,
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,
1996, 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 11
STERLING SOFTWARE, INC.
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 Subordinated Debentures (net of applicable
income taxes)............................................. 133 4,224
Interest income on investment of proceeds from assumed
conversion of options and warrants (net of applicable
income taxes)............................................. 70
------- -------
$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
JURISDICTION OF
NAME INCORPORATION
- -------------------- ---------------
Sterling Software (America), Inc. Delaware
Sterling Software (Mid America), Inc. Michigan
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 of America), Inc. Delaware
Condessa Gestao E Investimentos Lda Portugal
Sterling Software AB Sweden
Sterling Software GmbH Germany
Sterling Software International (U.K.) Limited United Kingdom
Sterling Software (Pacific) Pty Limited Australia
Sterling Software (Australia) Pty Limited Australia
Sterling Software (New Zealand) Limited New Zealand
Sterling Software (Benelux) NV Belgium
Sterling Software (Benelux) BVBA Belgium
Sterling Software (Netherlands) B.V. Netherlands
Sterling Software (France) SA France
Sterling Software France II 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 Ltd. United Kingdom
Sterling Software (U.K.) Limited United Kingdom
Sterling Software (Switzerland) AG Switzerland
Sterling Software (Italia) SRL Italy
KnowledgeWare SRL Italy
Systems Center AS Norway
Sterling Software (Portugal) - Informatica, LDA Portugal
Sterling Aplicaciones Informaticas (Espana), S.A. Spain
KnowledgeWare AB Sweden
KnowledgeWare AG Switzerland
Sterling Software (U.K.) II Limited. United Kingdom
Sterling Software Do Brasil Participacoes Ltda. Brazil
Sterling Software Do Brasil Ltda. Brazil
Systems Center Handelsgesellschaft M.B.H. Austria
Systems Center Pty Limited Australia
Systems Center Limited Hong Kong
Sterling Software (Virgin Islands), Inc. U.S. Virgin Islands
Sterling Software (Canada) Inc. Canada
Sterling Software International, Inc. Delaware
Sterling Software International SARL France
Sterling Software International (Australia), Limited Delaware
Sterling Software (Israel), Ltd. Israel
Sterling Software Leasing Company Delaware
Sterling Software (Scandinavia) AS Norway
Sterling Software (Southern), Inc. Georgia
KnowledgeWare GmbH Austria
KnowledgeWare (Far East) Limited Hong Kong
Matesys Mathematics Systems S.A. France
Matesys Corp. California
Southwest Beta Services, Inc. Delaware
<PAGE>
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/k/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. 33-13490, No. 33-35433, 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, No. 33-56679, No. 33-62057, No. 33-59107, No. 33-64073 and No. 33-
62401), and in the Registration Statements on Form S-8 (File No. 33-65402, No.
33-69926, No. 33-47131, No. 33-13532, No. 33-53833, No. 33-56681 and No. 33-
62059) of Sterling Software, Inc., and in the related Prospectuses of our report
dated November 16, 1995, 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, 1995.
Ernst & Young LLP
Dallas, Texas
November 16, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Sep-30-1995
<CASH> 175,305
<SECURITIES> 61,341
<RECEIVABLES> 183,734
<ALLOWANCES> 9,176
<INVENTORY> 0
<CURRENT-ASSETS> 444,054
<PP&E> 128,128
<DEPRECIATION> 59,716
<TOTAL-ASSETS> 714,180
<CURRENT-LIABILITIES> 221,649
<BONDS> 116,668
<COMMON> 2,653
0
0
<OTHER-SE> 345,685
<TOTAL-LIABILITY-AND-EQUITY> 714,180
<SALES> 588,167
<TOTAL-REVENUES> 588,167
<CGS> 190,563
<TOTAL-COSTS> 537,329
<OTHER-EXPENSES> 81,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,625
<INCOME-PRETAX> 52,894
<INCOME-TAX> 43,620
<INCOME-CONTINUING> 9,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,274
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
