<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
(_) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 1-8465
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(Address of principal executive offices)
(Zip Code)
(214) 891-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of May 3, 1996
- ----------------------------- ------------------------------------
Common Stock, $0.10 par value 34,895,103
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to Financial Statements
Page
----
Sterling Software, Inc. Consolidated Balance Sheets at March 31, 1996
and September 30, 1995................................................... 3
Sterling Software, Inc. Consolidated Statements of Operations for the
Three and Six Months Ended March 31, 1996 and 1995....................... 4
Sterling Software, Inc. Consolidated Statements of Stockholders' Equity
for the Six Months Ended March 31, 1996 and 1995......................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1996 and 1995................................. 6
Sterling Software, Inc. Notes to Consolidated Financial Statements......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 5. OTHER INFORMATION
Pro Forma Financial Data................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27
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STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
A S S E T S
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
1996 1995
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 508,826 $179,305
Marketable securities................................... 153,255 61,341
Accounts and notes receivable, net...................... 169,221 183,734
Deferred income taxes................................... 1,890
Prepaid expenses and other current assets............... 22,253 17,784
---------- --------
Total current assets................................. 853,555 444,054
Property and equipment, net of accumulated depreciation
of $64,868 at March 31, 1996 and $59,716 at
September 30, 1995...................................... 71,454 68,412
Computer software, net of accumulated amortization of
$115,851 at March 31, 1996 and $104,813 at
September 30, 1995...................................... 88,705 80,966
Excess cost over net assets acquired, net of accumulated
amortization of $26,453 at March 31, 1996 and
$23,362 at September 30, 1995........................... 82,538 85,903
Noncurrent deferred income taxes.......................... 17,960
Other assets.............................................. 8,348 16,885
---------- --------
$1,104,600 $714,180
========== ========
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Current liabilities:
Current portion of long-term debt......................... $ 4,462 $ 5,871
Income taxes payable...................................... 49,600 4,679
Accounts payable and accrued liabilities.................. 98,807 114,391
Deferred revenue.......................................... 100,091 96,708
---------- --------
Total current liabilities.............................. 252,960 221,649
Long-term debt.............................................. 1,446 116,668
Deferred income taxes....................................... 34,921
Other noncurrent liabilities................................ 29,879 27,525
Commitments and contingencies (Note 5)......................
Minority interest........................................... 18,586
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized..............................................
Common stock, $.10 par value; 75,000,000 shares
authorized; 35,715,000 and 26,529,000 shares issued
at March 31, 1996 and September 30, 1995, respectively.. 3,572 2,653
Additional paid-in capital................................ 640,370 336,752
Retained earnings......................................... 182,354 9,515
Less treasury stock, at cost: 1,381,000 and 56,000 shares
at March 31, 1996 and September 30, 1995, respectively.. (59,488) (582)
---------- --------
Total stockholders' equity............................. 766,808 348,338
---------- --------
$1,104,600 $714,180
========== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31 ENDED MARCH 31
----------------- ------------------
1996 1995 1996 1995
------ ------- ------ --------
<S> <C> <C> <C> <C>
Revenue:
Products............................. $ 66,440 $ 52,505 $118,815 $102,056
Product support...................... 44,905 39,308 89,576 73,979
Services............................. 52,644 46,394 104,250 88,590
-------- -------- -------- --------
163,989 138,207 312,641 264,625
Costs and expenses:
Cost of sales:
Products and product support....... 21,216 17,061 40,108 33,072
Services........................... 32,018 26,748 62,789 53,247
-------- -------- -------- --------
53,234 43,809 102,897 86,319
Product development and
enhancement......................... 8,974 11,356 18,334 20,802
Selling, general and administrative.. 65,510 51,916 124,442 100,931
Restructuring charge................. 19,512
Purchased research and development... 62,000
-------- -------- -------- --------
127,718 107,081 245,673 289,564
-------- -------- -------- --------
Income (loss) before other income
(expense), gain on subsidiary public
offering, minority interest and
income taxes........................ 36,271 31,126 66,968 (24,939)
Other income (expense):
Interest expense..................... (946) (2,210) (2,797) (4,200)
Investment income.................... 4,344 2,239 7,465 3,127
Other................................ 135 399 452 264
-------- -------- -------- --------
3,533 428 5,120 (809)
-------- -------- -------- --------
Income before gain on subsidiary public
offering, minority interest and
income taxes........................ 39,804 31,554 72,088 (25,748)
Gain on subsidiary public offering 239,936 239,936
Minority interest (1,157) (1,157)
-------- -------- -------- --------
Income (loss) before income
taxes............................... 278,583 31,554 310,867 (25,748)
Provision for income taxes............ 126,565 11,395 137,542 15,747
-------- -------- -------- --------
Net income (loss)..................... 152,018 20,159 173,325 (41,495)
Preferred stock dividends............. 49 98
-------- -------- -------- --------
Income (loss) applicable to
common stockholders................. $152,018 $ 20,110 $173,325 $(41,593)
======== ======== ======== ========
Income (loss) per common share:
Net income (loss):
Primary............................ $4.74 $.72 $5.72 $(1.85)
======== ======== ======== ========
Fully diluted...................... $4.42 $.67 $5.09 $(1.85)
======== ======== ======== ========
Average common shares outstanding. 29,450 23,526 28,032 22,490
======== ======== ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<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, 200 $20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804
1994......................
Net loss................. (41,495) (41,495)
Preferred stock dividends (98) (98)
Issuance of common stock
and treasury stock for
acquisition (Note 3).... 720 72 56,260 (1,701) 18,111 74,443
Common stock issuance
costs................... (788) (788)
Issuance of common stock
pursuant to stock options
and warrants............ 813 81 13,920 14,001
Issuance of common stock
to retirement plan...... 130 (8) 85 215
Other.................... 99 622 (8) 92 813
----- ------ ------ ------ -------- -------- ------ -------- --------
Balance at March 31, 1995.. 200 $20 23,911 $2,391 $261,685 $(40,399) 76 $ (802) $222,895
==== ===== ====== ====== ======== ======== ====== ======== ========
Balance at September 30, 26,529 $2,653 $336,752 $ 9,515 56 $ (582) $348,338
1995......................
Net income............... 173,325 173,325
Acquisition of common stock
for treasury............ 1,336 (59,372) (59,372)
Issuance of common stock
pursuant to stock options
and warrants, including
a tax benefit of $30,284 5,130 513 158,928 159,441
Issuance of common stock
pursuant to conversion of
5.75% Debentures......... 4,056 406 111,970 112,376
Proceeds from subsidiary
initial public offering,
net of minority interest
of $7,382................ 32,736 32,736
Issuance of common stock
to retirement plan....... (55) (11) 466 411
Other..................... 39 (486) (447)
------- ------ -------- -------- ----- -------- --------
Balance at March 31, 1996... 35,715 $3,572 $640,370 $182,354 1,381 $(59,488) $766,808
======= ====== ======== ======== ===== ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31
---------------------
1996 1995
--------- ----------
<S> <C> <C>
Operating activities:
Net income (loss).................................................................... $ 173,325 $(41,495)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on subsidiary public offering............................................... (239,936)
Minority interest................................................................ 1,157
Depreciation and amortization.................................................... 26,061 22,356
Provision for losses on accounts receivable...................................... 1,823 279
Provision for deferred income taxes.............................................. 57,571 3,403
Purchased research and development............................................... 62,000
Write-down of property and equipment and other assets............................ 2,462
Write-down of purchased and capitalized computer software costs.................. 6,215
Changes in operating assets and liabilities, net of effects of
business acquisitions:
Increase in accounts and notes receivable.................................... (236) (9,770)
Decrease (increase) in prepaids and other assets............................. (3,732) 293
Increase in accounts payable, accrued liabilities and income taxes...........
payable.................................................................... 52,254 1,319
Increase in deferred revenue................................................. 3,787 5,218
Other........................................................................ (3,362) (257)
--------- --------
Net cash provided by operating activities.................................. 68,712 52,023
Investing activities:
Purchases of property and equipment.................................................. (14,632) (21,847)
Purchases and capitalized cost of development of computer software................... (13,213) (9,504)
Business acquisitions, net of cash acquired.......................................... (7,186) (16,270)
Purchases of investments............................................................. (281,498) (62,672)
Proceeds from sales of investments................................................... 189,274 26,847
Other................................................................................ 660 317
--------- --------
Net cash used in investing activities...................................... (126,595) (83,129)
Financing activities:
Purchases of treasury stock.......................................................... (59,372)
Retirement and redemption of debt and capital lease obligations...................... (8,735) (14,280)
Proceeds from issuance of debt....................................................... 4,066 17,561
Proceeds from sales of installment and lease contracts receivable.................... 13,292 3,798
Preacquisition advances to business acquired......................................... (4,435)
Net proceeds from subsidiary public offering......................................... 307,576
Proceeds from issuance of common stock pursuant to stock options and
warrants.......................................................................... 129,157 14,001
Other................................................................................ 1,594 192
--------- --------
Net cash provided by financing activities.................................. 387,578 16,837
Effect of foreign currency exchange rate changes on cash............................... (174) 245
--------- --------
Increase (decrease) in cash and cash equivalents....................................... 329,521 (14,024)
Cash and cash equivalents at beginning of period....................................... 179,305 101,893
--------- --------
Cash and cash equivalents at end of period............................................. $ 508,826 $ 87,869
========= ========
Supplemental cash flow information:
Interest paid........................................................................ $ 4,176 $ 3,633
========= ========
Income taxes paid.................................................................... $ 3,186 $ 4,490
========= ========
Income tax refunds................................................................... $ 474 $ 470
========= ========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
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, including but not limited to
Sterling Commerce, Inc., (collectively, "Sterling Software", "Sterling" or the
"Company") after elimination of all significant intercompany balances and
transactions. Certain amounts for periods ended prior to March 31, 1996 have
been reclassified to conform to the current year presentation. The financial
statements have been prepared in conformity with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and the disclosure of
contingencies at March 31, 1996 and September 30, 1995 and the results of
operations for the three and six months ended March 31, 1996 and 1995,
respectively. While management has based its assumptions and estimates on the
facts and circumstances known at March 31, 1996, 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 certain 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.
-7-
<PAGE>
Cash Equivalents, Marketable Securities and Other Investments
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.
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
government obligations, which may include both investment grade and non-
investment grade securities. The fair values for marketable securities are
based on quoted market prices. All marketable securities and long-term
investments are classified as available-for-sale securities.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is unaudited
but, in the opinion of management, includes all adjustments, which are of a
normal recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Results of
operations for the periods presented herein are not necessarily indicative of
results of operations for the entire year.
3. SUBSIDIARY INITIAL PUBLIC OFFERING AND PROPOSED DISTRIBUTION
Sterling Commerce, Inc. ("Commerce"), previously a wholly owned subsidiary of
Sterling Software, completed its initial public offering (the "Offering") of
13,800,000 shares of common stock, par value $.01 per share ("Commerce Stock"),
on March 13, 1996. Pursuant to the Offering, Sterling Software sold to the
public 12,000,000 of the 73,200,000 shares of Commerce Stock then owned by it
and Commerce sold 1,800,000 previously unissued shares of Commerce Stock.
Sterling Software currently owns 61,200,000 shares of Commerce Stock,
constituting 81.6% of the total number of outstanding shares of Commerce Stock.
The Offering price was $24 per share of Commerce Stock resulting in net proceeds
to Sterling Software of approximately $267,458,000 after deducting underwriting
discounts and commissions and Sterling Software's pro rata share of Offering
expenses. The Offering resulted in net proceeds to Commerce of approximately
$40,118,000 after deducting underwriting discounts and commissions and
Commerce's pro rata share of Offering expenses. Sterling Software recorded a
gain of approximately $127,164,000, net of tax, from the sale of Commerce Stock
in the Offering.
Sterling Software incorporated Commerce as a wholly owned subsidiary in
December 1995. In contemplation of the Offering, among other things, (i)
Sterling Software caused to be transferred to or merged into Commerce all of the
subsidiaries previously comprising Sterling Software's Electronic Commerce
Group, (ii) Sterling Software caused to be transferred to Commerce certain
assets relating to the electronic commerce business previously conducted by
Sterling Software's International Group and certain assets relating to the
electronic commerce
-8-
<PAGE>
business conducted by Sterling Software's Federal Systems Group, and (iii)
Sterling Software entered into contractual arrangements with Commerce related
to, among other things, space sharing, tax allocations, international marketing
and certain services.
Sterling Software presently intends to distribute pro rata to its
stockholders as a dividend all or substantially all of its remaining shares of
Commerce Stock by means of a tax-free distribution (the "Distribution"). The
Sterling Software Board has conditioned the Distribution upon, among other
things, (i) the approval of both the Distribution and the Company's 1996 Stock
Option Plan by Sterling Software's stockholders, and (ii) the declaration by
Sterling Software's Board of Directors of a dividend of the shares of Commerce
Stock then owned by Sterling Software. The declaration of the dividend by the
Sterling Software Board to effect the Distribution is conditioned upon, among
other things, the receipt of a favorable ruling from the Internal Revenue
Service ("IRS") as to the tax-free nature of the Distribution and the absence of
any change in market conditions or other circumstances that would cause the
Board of Directors of Sterling Software to conclude that the Distribution is not
in the best interests of the stockholders of Sterling Software. Sterling
Software has applied to the IRS for a ruling as to the tax-free nature of the
Distribution. Sterling Software presently anticipates that the Distribution
will occur prior to September 30, 1996. Sterling Software has not determined
what action, if any, it would take if it were not to receive the favorable tax
ruling or the applicable stockholder approvals. No assurance can be given that
the favorable tax ruling or applicable stockholder approvals will be obtained or
that, in any event, the Distribution will occur, or that, if it does not receive
the favorable tax ruling or applicable stockholder approvals, Sterling Software
will not sell its shares of Commerce Stock to reduce its investment in Commerce.
The stockholder meeting for the purpose of considering and acting upon the
Distribution and adoption of the Company's 1996 Stock Option Plan will be held
on May 29, 1996.
The actual number of shares of Commerce Stock to be distributed with respect
to each outstanding share of Sterling Software common stock ("Software Stock")
will depend upon the number of shares of Software Stock outstanding on the
record date established by the Sterling Software Board (the "Distribution Record
Date"), the number of shares of Commerce Stock owned by Sterling Software on
such date and the number of shares of Commerce Stock, if any, which may be
required to be retained by Sterling Software to honor certain warrant
obligations, if such warrants are not exercised prior to the Record Date. In
any event, in excess of 99% of the shares of Commerce Stock owned by Sterling
Software will be included in the Distribution.
In connection with the Offering, Sterling Software accelerated the vesting of
substantially all outstanding options granted under Sterling Software's existing
stock option plans. Sterling Software received proceeds of approximately
$109,180,000 from the exercise of approximately 4,242,000 warrants and employee
stock options for the period from January 1, 1996 to March 31, 1996. If all
remaining outstanding options and warrants to purchase Software Stock at March
31, 1996 were exercised, approximately 4,214,000 additional shares of Software
Stock would be issued and outstanding, resulting in additional proceeds to
Sterling Software of $152,154,000. There can be no assurance, however, as to
whether or when any of such options or warrants will be exercised.
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<PAGE>
The Company has included pro forma financial statements in Part II, Item 5 of
this Form 10-Q to illustrate the effects of the proposed Distribution and the
redemption and conversion of the Company's 5.75% Convertible Subordinated
Debentures. See Note 7.
4. BUSINESS COMBINATION
On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a
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 Software
Stock valued at approximately $74,443,000 and reserved approximately 340,000
shares of Software 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, and KnowledgeWare. Of the
2,421,000 shares of Software 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. The Company has entered into settlement
agreements for all pending private civil actions and all of the Escrowed Shares
have been utilized pursuant to the indemnification provisions of the Merger
Agreement. See Note 5.
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. 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.
5. COMMITMENTS AND CONTINGENCIES
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.
KnowledgeWare, which was acquired on November 30, 1994, has been subject to
certain legal proceedings and claims in connection with KnowledgeWare's
restatement of its financial results for the first three quarters of its 1994
fiscal year and its financial results for its full 1994
-10-
<PAGE>
fiscal year 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 and RICO violations
under Federal and State law. All such private civil actions against
KnowledgeWare have been settled on the terms described in the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
The Securities and Exchange Commission ("Commission") continues its formal
investigation previously reported in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
The Company's management believes that, in view of its indemnification from
the Escrowed Shares and after giving effect to applicable reserves, the
settlements of the private civil actions and the ultimate resolution of the
Commission's investigation will not materially affect the financial condition or
results of operations of Sterling Software.
6. BUSINESS SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in four major markets classified as
Electronic Commerce, Systems Management, Federal Systems and Applications
Management. The Electronic Commerce business segment 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 Systems Management
business segment provides enterprise-wide systems management software for large
computing environments. The Federal Systems business segment provides highly
technical services to the federal government under several multi-year contracts
primarily in support of National Aeronautics and Space Administration ("NASA")
aerospace research projects and secure communications systems for the Department
of Defense. The Applications Management business segment focuses exclusively on
the applications management market. The business segment 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 Company's international operations are
responsible for sales and first level support of substantially all of the
Company's products outside the United States and Canada. The international
operating results are included, as applicable, in the Company's Electronic
Commerce, Systems Management and Applications Management business segments in
the tables contained herein. The international revenue of $41,786,000 and
$35,586,000 and operating profit, exclusive of intercompany royalties, of
$18,783,000 and $19,676,000 for the three months ended March 31, 1996 and 1995,
respectively, have been allocated to the business segments. The international
revenue of $79,976,000 and $67,620,000 and operating profit, exclusive of
intercompany royalties, of $36,575,000 and $36,069,000 for the six months ended
March 31, 1996 and 1995, respectively, have been allocated to these business
segments.
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<PAGE>
Financial information concerning the Company's operations, by business
segment, for the three and six months ended March 31, 1996 and 1995, restated to
conform to the current year presentation, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31 Ended March 31
------------------ -----------------
1996 1995 1996 1995
------ ------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Electronic Commerce............. $ 66,876 $ 48,810 $126,829 $ 96,715
Systems Management.............. 40,969 37,287 76,179 70,661
Federal Systems................. 26,815 24,590 53,077 48,255
Applications Management......... 28,228 25,347 54,687 45,357
Corporate and other............. 1,101 2,173 1,869 3,637
-------- -------- -------- --------
Consolidated totals............. $163,989 $138,207 $312,641 $264,625
======== ======== ======== ========
Operating Profit (Loss):
Electronic Commerce............. $ 21,491 $ 16,452 $ 42,024 $ 29,204
Systems Management.............. 15,535 13,460 27,160 24,596
Federal Systems................. 1,816 1,867 4,116 3,393
Applications Management......... 4,630 5,125 8,489 9,616
Restructuring charge............ (19,512)
Purchased research and (62,000)
development....................
Corporate and other............. (7,201) (5,778) (14,821) (10,236)
-------- -------- -------- --------
Consolidated totals........... $ 36,271 $ 31,126 $ 66,968 $(24,939)
======== ======== ======== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
inter-segment eliminations and the results of operations of the Company's retail
software division.
The Electronic Commerce business segment financial information presented above
is not presented on the same basis as the financial information presented in the
Commerce Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
primarily due to the allocations of the results of operations of Sterling
Software's international operations to the applicable business segments,
including Sterling's Electronic Commerce segment and the allocation of corporate
expense.
7. REDEMPTION AND CONVERSION OF 5.75% CONVERTIBLE SUBORDINATED DEBENTURES
On December 20, 1995, the Company gave notice of the redemption of all of the
$114,922,000 then outstanding principal amount of its 5.75% Convertible
Subordinated Debentures due February 1, 2003 (the "Debentures"). The effective
date of the redemption was February 12, 1996 (the "Redemption Date"). The
Debentures were convertible into shares of Software Stock. Approximately
$114,912,000 principal amount of the Debentures was presented for conversion. In
addition, approximately $78,000 principal amount of the Debentures had been
converted prior to the announcement of the redemption. Approximately 4,056,000
shares of Software Stock were issued upon conversion of the Debentures.
Approximately $10,000 principal amount of Debentures was redeemed for cash on
February 12, 1996. If the conversion had taken place at October 1, 1995
supplemental primary earnings per share would have been $5.21 for the six months
ended March 31, 1996.
-12-
<PAGE>
8. SHARE REPURCHASE PROGRAM
On October 2, 1995, the Company renewed a share repurchase program pursuant to
which it may repurchase shares of Software Stock from time to time through open
market transactions. Through March 31, 1996, approximately 1,336,000 shares of
Software Stock were repurchased at an aggregate amount of approximately
$59,372,000. Any further purchases of Software Stock pursuant to this program
will be made solely at the Company's discretion and may be discontinued at any
time without prior notice.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUBSIDIARY INITIAL PUBLIC OFFERING AND PROPOSED DISTRIBUTION
Commerce, previously a wholly owned subsidiary of Sterling Software,
completed the Offering of 13,800,000 shares of Commerce Stock on March 13, 1996.
Pursuant to the Offering, Sterling Software sold to the public 12,000,000 of the
73,200,000 shares of Commerce Stock then owned by it and Commerce sold 1,800,000
previously unissued shares of Commerce Stock. Sterling Software currently owns
61,200,000 shares of Commerce Stock, constituting 81.6% of the total number of
outstanding shares of Commerce Stock. The Offering price was $24 per share of
Commerce Stock resulting in net proceeds to Sterling Software of approximately
$267,458,000 after deducting underwriting discounts and commissions and Sterling
Software's pro rata share of Offering expenses. The Offering resulted in net
proceeds to Commerce of approximately $40,118,000 after deducting underwriting
discounts and commissions and Commerce's pro rata share of Offering expenses.
Sterling Software recorded a gain of approximately $127,164,000, net of tax,
from the sale of Commerce Stock in the Offering.
In connection with the Offering, Sterling Software accelerated the vesting of
substantially all outstanding options granted under Sterling Software's existing
stock option plans. Sterling Software received proceeds of approximately
$109,180,000 from the exercise of approximately 4,242,000 warrants and employee
stock options for the period from January 1, 1996 to March 31, 1996. If all
remaining outstanding options and warrants to purchase Software Stock at March
31, 1996 were exercised, approximately 4,214,000 additional shares of Software
Stock would be issued and outstanding, resulting in additional proceeds to
Sterling Software of approximately $152,154,000. There can be no assurance,
however, as to whether or when any of such options or warrants will be
exercised.
The Company has included pro forma financial statements in Part II, Item 5 of
this Form 10-Q to illustrate the effects of the proposed Distribution and the
redemption and conversion of the Company's 5.75% Convertible Subordinated
Debentures (the "Debentures").
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenue increased $25,782,000, or 19%, in the second quarter of 1996 over the
same period of 1995. The Electronic Commerce business segment ("EC") revenue
increased $18,066,000, or 37%, on the strength of a 54% increase in product
revenue, a 22% increase in product support revenue and a 30% increase in network
services revenue. The increase in EC products revenue is the result of
increased revenue in the communications and interchange software product lines.
EC product support revenue increased primarily as a result of an increase in the
installed customer base across all three product lines. The increased network
services revenue was due to an increase in the network services customer base,
primarily in the grocery, hardlines and retail vertical markets, and increases
in the network processing volume for existing customers. The Systems Management
business segment ("SM") revenue increased $3,682,000, or 10%. Products revenue
increased in the storage management and VM software product lines primarily due
to higher volume and products acquired in the first quarter of 1996. The
-14-
<PAGE>
Applications Management business segment ("AM") revenue increased $2,881,000, or
11%. AM's products and product support revenue increased 19% in the second
quarter of 1996 over the second quarter of 1995. The Federal Systems business
segment ("FS") revenue increased $2,225,000, or 9%, due to higher contract
billings in the Information Technology Division offset in part by lower contract
billings due to the completion of certain contracts at NASA. Revenue from
outside the United States and Canada represented approximately 26% of the
Company's revenue in both the second quarter of 1996 and the second quarter of
1995. Approximately 39% of the Company's total products revenue was generated
from non-mainframe products. This compares with 35% in the second quarter of
1995.
Total costs and expenses increased $20,637,000, or 19%. Total cost of sales
increased $9,425,000, or 22%, on a 19% increase in revenue is in part due to an
increase of $2,056,000, or 25%, in depreciation and amortization resulting from
a corresponding increase in property and equipment purchases and new products
and enhancements released from development. In addition, cost of sales increased
commensurate with higher levels of products, product support and services
revenue. Product development and enhancement expense for the second quarter of
1996 was $8,974,000, net of $6,847,000 of capitalized software costs as compared
to second quarter of 1995 product development and enhancement expense of
$11,356,000, net of $5,326,000 of capitalized software costs. The decrease in
gross product development and enhancement expense is primarily due to a
reduction of costs in the AM business segment due to the restructuring of that
segment. Development costs capitalized during the second quarter of 1996 and
1995 represented 43% and 32%, respectively, of the gross product development and
enhancement expense of the same respective quarters. The higher capitalized rate
is due to a higher number of development projects reaching technological
feasibility. Product development and enhancement 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. Software
amortization expense was $6,257,000 and $5,632,000 for the second quarter of
1996 and 1995, respectively. Selling, general and administrative expense
increased $13,594,000, or 26%, primarily due to an increase in sales, marketing
and customer support activities supporting the revenue growth in EC and
International.
Investment income increased $2,105,000 as a result of higher average balances
of investments in cash equivalents and marketable securities resulting from the
net proceeds from the Offering of approximately $307,576,000 and the proceeds
from the exercise of stock options of approximately $109,180,000 during the
second quarter of 1996. Income before other income (expense), gain on the
Offering, minority interest and income taxes was $36,721,000 in the second
quarter of 1996 as compared to income before other income (expense), gain on the
Offering, minority interest and income taxes of $31,126,000 in the second
quarter of 1995. Income before other income (expense), gain on the Offering,
minority interest and income taxes increased $5,145,000, or 17%, primarily due
to higher operating profits in EC, up 31% and SM, up 15%, lower interest expense
due to the redemption and conversion of the Debentures, down 57%, and higher
investment income, up 94% on higher average investment balances of cash
equivalents and marketable securities.
-15-
<PAGE>
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
Revenue increased $48,016,000, or 18%, in the first six months of 1996 over
the same period of 1995. Total EC revenue increased $30,114,000, or 31%, in the
first half of 1996 over the first half of 1995 Products revenue increased
$13,537,000, or 36%, related to sales growth of the communications and
interchange software product lines. Product support revenue increased primarily
as a result of an increase in the installed customer base across all three
product lines. Network services revenue increased $10,548,000 on the growth in
existing customer volume and the addition of new customers to the network
primarily in the grocery, retail and hardlines vertical markets SM revenue
increased $5,518,000, or 8%, primarily due to products and product support
revenue increases across all product lines and products acquired in the first
quarter of 1996. AM revenue grew $9,330,000, or 21%. Products and product
support revenue in the first six months of 1996 increased $8,600,000, or 22%,
over the first six months of 1995. Second quarter products revenue growth offset
products revenue declines reported in the first quarter of 1996 versus the first
quarter of 1995. In the first quarter of 1995, the operations outside the United
States and Canada closed several large contracts which were not repeated in the
first quarter of 1996 and subsequent to the Merger there was a reduced marketing
and sales emphasis on certain products which became non-strategic after the
Merger. FS revenue increased $4,822,000, or 10%, in the first six months of 1996
primarily due to higher contract billings in the Information Technology Division
offset in part by lower contract billings due to the completion of certain
contracts at NASA. Revenue in the first six months of 1996 from outside the
United States and Canada grew $12,356,000, or 18%, over the first six months of
1995. This revenue represented 26% of the Company's total revenue in both the
first half of 1996 and 1995. For the six months ended March 31, 1996, 41% of the
Company's products revenue was for products that run on hardware platforms other
than mainframe hardware. This compares to 35% for the same period in 1995.
Total costs and expenses decreased $43,891,000 primarily due to a $62,000,000
charge in the first quarter of 1995 for the portion of the purchase price of
KnowledgeWare attributed to in-process research and development and to a
$19,512,000 charge for restructuring in the first quarter of 1995 resulting from
the Merger. Total cost of sales increased $16,578,000, or 19%, in part due to an
increase of $2,396,000, or 14%, in depreciation and amortization resulting from
a corresponding increase in property and equipment purchases and new products
and enhancements released from development. In addition, cost of sales increased
commensurate with higher levels of products, product support and services
revenue. Product development and enhancement expense for the first six months of
1996 of $18,334,000 is net of $12,913,000 of capitalized software development
costs. This compares to product development and enhancement expense of
$20,802,000 for the first six months of 1995, which is net of $9,472,000 of
capitalized costs for the same period. The decrease in gross product development
and enhancement expense is primarily due to a reduction of costs in the AM
business segment due to the restructuring of that segment. Development costs
capitalized during the first six months of 1996 and 1995 represented 41% and
31%, respectively, of the gross product development and enhancement expense
incurred in the same respective periods. The higher capitalized rate is due to a
higher number of development projects reaching technological feasibility.
Software amortization expense was $11,777,000 and $11,529,000 in the first six
months of 1996 and 1995, respectively. Selling, general and administrative
expense increased $23,511,000, or 23%,
-16-
<PAGE>
primarily due to an increase in sales, marketing and customer support activities
supporting the revenue growth in EC and International.
Interest expense in the first six months of 1996 decreased $1,403,000 from
the first six months of 1995 primarily due to the redemption and conversion of
the Debentures. Investment income in the first six months of 1996 increased
$4,338,000 over the first six months of 1995 as a result of higher average
balances of cash equivalents and marketable securities resulting from the net
proceeds from the Offering of approximately $307,576,000 and the proceeds from
the exercise of stock options of approximately $129,157,000.
Income before other income (expense), gain on the Offering, minority interest
and income taxes was $66,968,000 in the first six months of 1996 as compared to
loss before other income (expense), gain on the Offering, minority interest and
incomes taxes of $24,939,000 in the first six months of 1995. Excluding the
$62,000,000 non-recurring charge for purchased research and development and the
$19,512,000 non-recurring charge for restructuring in the first six months of
1995, income before other income (expense), gain on the Offering, minority
interest and income taxes increased $10,395,000, or 29%, in part due to higher
operating profits in EC, up 44%, and SM, up 10%, partially offset by lower AM
operating profits, down 12%. In addition, interest expense declined and
investment income increased for the reasons noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$600,595,000 of working capital at March 31, 1996, which includes $508,826,000
of cash and cash equivalents and $153,255,000 of marketable securities. Net
cash flows from operations was $68,712,000 in the first six months of 1996 as
compared to $52,023,000 in the first six months of 1995. Days sales outstanding
at March 31, 1996 measured on a quarterly basis was 93 versus 107 at December
31, 1995 and 96 at September 30, 1995. Cash flows from operations, proceeds
from the Offering and the exercise of stock options, and available cash balances
were used to fund operations, purchases of cash equivalents, marketable
securities and capital expenditures, including software additions.
Sterling Software received net proceeds from the Offering of approximately
$267,458,000 after deducting underwriting discounts and commissions and Sterling
Software's pro rata share of offering expenses. The Offering resulted in net
proceeds to Commerce of approximately $40,118,000 after deducting underwriting
discounts and commissions and Commerce's pro rata share of offering expenses. In
connection with the Offering, Sterling Software accelerated the vesting of
substantially all outstanding options granted under Sterling Software's existing
stock option plans. Sterling Software received proceeds of approximately
$109,180,000 from the exercise of approximately 4,242,000 warrants and employee
stock options for the period from January 1, 1996 to March 31, 1996. At March
31, 1996 approximately 4,214,000 additional shares of Sterling Software common
stock would be issued and outstanding if all remaining outstanding options and
warrants were exercised and would result in additional proceeds of approximately
$152,154,000.
-17-
<PAGE>
On December 20, 1995, the Company gave notice of the redemption of all of
the $114,922,000 then outstanding principal amount of the Debentures. The
effective date of the redemption was February 12, 1996 (the "Redemption Date").
The Debentures were convertible into shares of Software Stock. Approximately
$114,912,000 principal amount of the Debentures was presented for conversion.
In addition, approximately $78,000 principal amount of the Debentures had been
converted prior to the announcement of the redemption. Approximately 4,056,000
shares of Software Stock were issued upon conversion of the Debentures.
Approximately $10,000 principal amount of Debentures was redeemed for cash on
February 12, 1996. The conversion of the Debentures will reduce the Company's
interest charges by approximately $1,700,000 per quarter.
At March 31, 1996, after the utilization of $1,130,000 for standby letters
of credit, $33,870,000 was available for borrowing on the Company's $35 million
revolving credit and term loan agreement. Certain of the Company's foreign
subsidiaries have separate lines of credit available for foreign exchange
exposure management and working capital requirements. These lines of credit are
guaranteed by Sterling Software. At March 31, 1996, $3,394,000 was outstanding
pursuant to foreign lines of credit and $19,356,000 was available for borrowing
thereunder.
On October 2, 1995, the Company renewed a share repurchase program pursuant
to which it may repurchase shares of Software Stock from time to time through
open market transactions. Through March 31, 1996, approximately 1,336,000
shares of Software Stock were repurchased at an aggregate amount of
approximately $59,372,000.
At March 31, 1996, 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 existing cash balances
and internally generated funds. No significant commitments exist for future
capital expenditures. The Company believes available balances of cash, cash
equivalents and investments in marketable securities combined with cash flows
from operations and amounts available under credit and term loan agreements are
sufficient to meet the Company's cash requirements for the foreseeable future.
OTHER MATTERS
Demand for many of the Company's products tends to improve with increased
inflation as customers strive to increase employee productivity and reduce
costs. However, the effect of inflation on the Company's relatively labor
intensive cost structure could adversely affect its results of operations to the
extent the Company might not be able to recover increased operating costs
through increased product licensing and prices.
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occur. Unrealized translation
gains and losses are included as an adjustment to retained earnings. The
Company has mitigated a portion of its currency exposure through decentralized
sales, marketing and support operations and through international development
-18-
<PAGE>
facilities, in which all costs are local currency based. When necessary, the
Company may also enter into hedge transactions in an effort to reduce its
exposure to currency exchange risks.
The Company maintains a strategy of acquiring businesses and products that
fill strategic market niches. This acquisition strategy contributes in part of
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.
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management. When used in SEC Filings, the words "anticipate," "contemplate,"
"estimate," "expect," "future," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
inherent uncertainties, including, in addition to any uncertainties specifically
identified in the text surrounding such statements, uncertainties with respect
to changes or developments in social, economic, business, industry, market,
legal and regulatory circumstances and conditions and actions taken or omitted
to be taken by third parties, including the Company's stockholders, customers,
suppliers, business partners and competitors, and legislative, regulatory,
judicial and other governmental authorities and officials. Consequently, actual
events, circumstances, consequences, effects and results may vary significantly
from those described in or contemplated by such forward looking statements or
information.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 30, 1994, Sterling Software, Inc. ("Sterling", "Sterling
Software" or the "Company") acquired KnowledgeWare, Inc. ("KnowledgeWare"), in a
stock-for-stock acquisition described in more detail in Note 4 under "Notes to
Consolidated Financial Statements" in Part I of this Report. In connection with
that transaction, Sterling Software placed 484,800 shares of its common stock in
escrow (the "Escrowed Shares") to cover certain losses that may result in
connection with any pending or threatened litigation, action, claim, proceeding,
dispute or investigation (including amounts paid in settlement) to which
Sterling Software is entitled to indemnification pursuant to the terms of the
merger agreement providing for the acquisition. A number of lawsuits were filed
against KnowledgeWare and certain of its former officers and directors alleging
violations of securities laws and related laws.
All such pending private civil actions against KnowledgeWare have been
settled on the terms described in the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995 and all of the Escrowed Shares have been
utilized pursuant to the indemnification provisions of the Merger Agreement. See
Note 5.
The Commission continues its formal investigation previously reported in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1995.
Sterling Software's management believes that, in view of Sterling
Software's indemnification from the Escrowed Shares and after giving effect to
applicable reserves, the settlements of the private civil actions and the
ultimate resolution of the Commission's investigation will not materially affect
the financial condition or results of operations of Sterling Software.
-20-
<PAGE>
ITEM 5. OTHER INFORMATION
PRO FORMA FINANCIAL DATA
The following unaudited financial data illustrate the effects on Sterling
Software of the conversion and redemption of the Debentures and the Distribution
(as such terms are defined in Note 3 to Notes to Consolidated Financial
Statements included in Part I of this report). The pro forma balance sheet is
based on the March 31, 1996 balance sheet of Sterling Software and assumes the
Distribution was consummated on that date. The pro forma statements of
operations data are based on the statements of operations data of Sterling
Software for the six months ended March 31, 1996 and 1995 and assumes that the
Distribution and the conversion and redemption of the Debentures were
consummated at the beginning of the fiscal periods presented.
The pro forma financial data of Sterling Software do not purport to represent
what the financial position or results of operations of Sterling Software would
have been if the transactions had in fact been consummated on such date or at
the beginning of the period indicated or to project the financial position or
results of operations for any future date or period. The pro forma adjustments
are estimates based upon currently available information and upon certain
assumptions that Sterling Software's management believes are reasonable in the
circumstances. Actual results may vary from these estimates.
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<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS STERLING
STERLING FOR THE SOFTWARE AS
SOFTWARE AT DISTRIBUTION ADJUSTED AT
MARCH 31, 1996 OF COMMERCE(1) MARCH 31, 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 508,826 $ (41,485) $467,341
Marketable securities................. 153,255 153,255
Accounts and notes receivable, net.... 169,221 (51,147) 118,074
Prepaid expenses and other current
assets............................. 22,253 (10,125) 12,128
---------- --------- --------
Total current assets............. 853,555 (102,757) 750,798
Property and equipment, net............. 71,454 (33,907) 37,547
Computer software, net.................. 88,705 (32,859) 55,846
Excess cost over net assets
acquired, net........................... 82,538 (10,044) 72,494
Other assets............................ 8,348 (4,223) 4,125
---------- --------- --------
Total assets..................... $1,104,600 $(183,790) 920,810
========== ========= ========
Current liabilities..................... $ 252,960 $ (56,946) $196,014
Long-term debt.......................... 1,446 1,446
Deferred income taxes................... 34,921 34,921
Other noncurrent liabilities............ 29,879 (25,834) 4,045
Minority interest....................... 18,586 (18,586)
Stockholders' equity:(2)
Common stock.......................... 3,572 3,572
Additional paid in capital............ 640,370 (32,736) 607,634
Retained earnings..................... 182,354 (49,688) 132,666
Less: treasury stock................. (59,488) (59,488)
---------- --------- --------
Total stockholders' equity....... 766,808 (82,424) 684,384
---------- --------- --------
Total liabilities & stockholders'
equity.......................... $1,104,600 $(183,790) $920,810
========== ========= ========
</TABLE>
See accompanying notes.
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<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Adjusted to give effect to the proposed Distribution.
(2) In connection with the Offering (as defined in Note 3 to Notes to
Consolidated Financial Statements included in Part I of this report),
Sterling Software accelerated the vesting of substantially all outstanding
options granted under Sterling Software's existing stock option plans.
Sterling Software received proceeds of approximately $109,180,000 from the
exercise of 4,242,000 warrants and employee stock options for the period
from January 1, 1996 to March 31, 1996. If all remaining options and
warrants to purchase Software Stock at March 31, 1996 were exercised, an
additional 4,214,000 shares of Software Stock would be issued and
outstanding, with resulting proceeds to the Company of approximately
$152,154,000. The impact of the potential exercise of Sterling Software's
remaining options and warrants has not been reflected in the accompanying
Pro Forma Consolidated Balance Sheet.
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<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS FOR PRO FORMA STERLING
STERLING THE DEBENTURE ADJUSTMENTS FOR SOFTWARE AS
SOFTWARE AT REDEMPTION AND THE DISTRIBUTION ADJUSTED AT
MARCH 31, 1996 CONVERSION OF COMMERCE(2) MARCH 31, 1996
----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Products............................ $118,815 $ (37,911) $ 80,904
Product support..................... 89,576 (27,261) 62,315
Services............................ 104,250 (44,887) 59,363
Royalties from affiliated companies. (8,167)
8,167 (4)
-------- ------- --------- --------
Total revenue...................... 312,641 (110,059) 202,582
Cost and expenses:
Cost of sales:
Products and product support........ 40,108 (15,059) 33,216
8,167 (4)
Services............................ 62,789 (10,193) 52,596
-------- ------- --------- --------
102,897 (17,085) 85,812
Product development and enhancement.. 18,334 (7,065) 11,269
Selling, general and administrative.. 124,442 (43,159) 83,033
1,750 (3)
-------- ------- --------- --------
Total costs and expenses........... 245,673 (65,559) 180,114
-------- ------- --------- --------
Income from operations............... 66,968 (44,500) 22,468
Interest expens..................... (2,797) 2,581 (1) 78 (138)
Investment income................... 7,465 (140) 7,325
Other............................... 452 272 724
-------- ------- --------- --------
5,120 2,581 210 7,911
-------- ------- --------- --------
Income before gain on subsidiary
public offering, minority
interest and income taxes............. 72,088 2,581 (44,290) 30,379
Gain on subsidiary public offering.. 239,936 (239,936) (5)
Minority interest................... (1,157) 1,157 (5)
-------- ------- --------- --------
Income before income taxes.............. 310,867 2,581 (283,069) 30,379
Provision for income taxes.............. 137,542 877 (17,016) 8,631
(112,772) (5)
-------- ------- --------- --------
Income from continuing operations....... $173,325 $1,704 $(153,281) $ 21,748
======== ======= ========= ========
Pro forma income from
continuing operations per
share.................................. $5.09 $.63
======== ========
</TABLE>
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<PAGE>
STERLING SOFTWARE, INC.
PRO FORMA STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS FOR PRO FORMA STERLING
STERLING THE DEBENTURE ADJUSTMENTS FOR SOFTWARE AS
SOFTWARE AT REDEMPTION AND THE DISTRIBUTION ADJUSTED AT
MARCH 31, 1995 CONVERSION OF COMMERCE(2) MARCH 31, 1995
-------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Products.............................. $102,056 $(30,366) $ 71,690
Product support....................... 73,979 (21,833) 52,146
Services.............................. 88,590 (34,701) 53,889
Royalties from affiliated companies... (4,471)
4,471 (4)
-------- -------- -------- --------
Total revenue....................... 264,625 (86,900) 177,725
Cost and expenses:
Cost of sales:
Products and product support.......... 33,072 (11,764) 25,779
4,471 (4)
Services.............................. 53,247 (7,476) 45,771
-------- -------- -------- --------
86,319 (14,769) 71,550
Product, development and enhancement.. 20,802 (7,631) 13,171
Selling, general and administrative... 100,931 (33,838) 68,843
1,750 (3)
Restructuring charges.................. 19,512 19,512
Purchased research and development..... 62,000 62,000
-------- -------- -------- --------
Total costs and expenses............. 289,564 (54,488) 235,076
-------- -------- -------- --------
Income (loss) from operations......... (24,939) (32,412) (57,351)
Interest expense...................... (4,200) 3,482 (1) 26 (692)
Investment income..................... 3,127 3,127
Other income.......................... 264 146 410
-------- -------- -------- --------
(809) 3,482 172 2,845
-------- -------- -------- --------
Income (loss) before income taxes......... (25,748) 3,482 (32,240) (54,506)
Provision (benefit) for income taxes...... 15,747 1,393 (12,196) 4,944
-------- -------- -------- --------
Income (loss) from continuing operations.. $(41,495) $2,089 $(20,044) $(59,450)
======== ======== ======== ========
Pro forma income (loss) from
continuing operations per share.......... $(1.85) $(2.24)
======== ========
</TABLE>
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<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
(1) Adjusted to give effect to the interest savings associated with the
conversion of the outstanding Debentures into Software Stock.
(2) Adjusted to give effect to the Distribution.
(3) Administrative charges incurred by Sterling Software allocated to Commerce
were approximately $875,000 and $1,750,000 in the three and six months ended
March 31, 1996 and 1995, respectively. This adjustment reflects the
addition of those costs to Sterling Software as if Commerce had been
historically distributed to stockholders.
(4) As owner of software products distributed by Sterling Software's
international operations, Commerce includes royalties received from Sterling
Software as revenue. Such revenues are eliminated in the pro forma
adjustment and are an expense to Sterling Software.
(5) This adjustment is to reflect the reclassification of the gain on the
Offering and minority interest to discontinued operations, which is expected
to occur if the Sterling Software Board approves the Distribution.
-26-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
2(a) - 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") (1)
2(b) - Agreement dated October 11, 1994 among the Company,
KnowledgeWare, Inc. and SSI Corporation (1)
2(c) - First Amendment to KWI Agreement and Plan of Merger (1)
3(a) - Certificate of Incorporation of the Company (2)
3(b) - Certificate of Amendment of Certificate of Incorporation of
the Company (3)
3(c) - Certificate of Amendment of Certificate of Incorporation of
the Company (4)
3(d) - Certificate of Amendment of Certificate of Incorporation of
the Company (5)
3(e) - Restated Bylaws of the Company (6)
4(a) - Indenture dated February 2, 1993 between the Company and Bank
of America Texas, National Association, as Trustee, including
the form of 5.75% Convertible Subordinated Debenture attached
as Exhibit A thereto (7)
4(b) - Warrant Agreement dated June 9, 1994 between KnowledgeWare,
Inc. and Trust Company Bank (8)
4(c) - Supplemental Warrant Agreement dated as of November 30, 1994
between KnowledgeWare, Inc. and Trust Company Bank (8)
10(a) - First Amendment and Modification Agreement dated January 31,
1996 by and between Sterling Software, Inc., The First National
Bank of Boston, Bank One, Texas, National Association and Bank
of America National Trust and Savings Association and The First
National Bank of Boston, as Agent (11)
10(b) - Form of CEO Agreement dated February 12, 1996 between the
Company and Sterling L. Williams (11)
10(c) - Form of Change-in-Control Severance Agreement dated as of
February 12, 1996 between the Company and each of its executive
officers (11)
-27-
<PAGE>
10(d) - Forms of Severance Agreements dated as of February 12, 1996
between the Company and each of its executive officers (other
than Sterling L. Williams) (11)
10(e) - Space Sharing Agreement dated as of March 4, 1996 by and
between the Company and Sterling Commerce, Inc. (9)
10(f) - Data Processing Agreement dated as of March 13, 1996 by and
between the Company and Sterling Commerce, Inc. (9)
10(g) - Tax Allocation Agreement dated as of March 4, 1996 by and
between the Company and Sterling Commerce, Inc. (9)
10(h) - Indemnification Agreement dated as of March 4, 1996 by and
between the Company and Sterling Commerce, Inc. (10)
10(i) - International Marketing Agreement dated as of March 4, 1996 by
and between Sterling Software International, Inc. and Sterling
Commerce International, Inc. (10)
10(j) - Master Software License Agreement dated as of March 4, 1996 by
and among the Company, Sterling Commerce, Inc. and their
respective subsidiaries parties thereto (10)
11(a) - Computation of Earnings Per Share, Three Months Ended March 31,
1996 (11)
11(b) - Computation of Earnings Per Share, Three Months Ended March 31,
1995 (11)
11(c) - Computation of Earnings Per Share, Six Months Ended March 31,
1996 (11)
27 - Financial Data Schedule (11)
- -----------------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-56185 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
(3) 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.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
-28-
<PAGE>
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registration Statement No. 33-80595 on
Form S-1 filed by Sterling Commerce, Inc. and incorporated herein by
reference.
(10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996 filed by Sterling Commerce, Inc. and incorporated
herein by reference.
(11) Filed herewith.
(b) Reports on Form 8-K.
During the three months ended March 31, 1996, the Company filed (i) a
Current Report on Form 8-K dated January 4, 1996 under Item 5 and (ii) a Current
Report on Form 8-K dated March 7, 1996 under Item 5.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING SOFTWARE, INC.
Date: May 9, 1996 /s/ Sterling L. Williams
------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 9, 1996 /s/ George H. Ellis
------------------------------------
George H. Ellis
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-30-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------
2(a) - 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") (1)
2(b) - Agreement dated October 11, 1994 among the
Company, KnowledgeWare, Inc. and SSI
Corporation (1)
2(c) - First Amendment to KWI Agreement and Plan of
Merger (1)
3(a) - Certificate of Incorporation of the Company (2)
3(b) - Certificate of Amendment of Certificate of
Incorporation of the Company (3)
3(c) - Certificate of Amendment of Certificate of
Incorporation of the Company (4)
3(d) - Certificate of Amendment of Certificate of
Incorporation of the Company (5)
3(e) - Restated Bylaws of the Company (6)
4(a) - Indenture dated February 2, 1993 between the
Company and Bank of America Texas, National
Association, as Trustee, including the form
of 5.75% Convertible Subordinated Debenture
attached as Exhibit A thereto (7)
4(b) - Warrant Agreement dated June 9, 1994 between
KnowledgeWare, Inc. and Trust Company Bank (8)
4(c) - Supplemental Warrant Agreement dated as of
November 30, 1994 between KnowledgeWare, Inc.
and Trust Company Bank (8)
10(a) - First Amendment and Modification Agreement
dated January 31, 1996 by and between Sterling
Software, Inc., The First National Bank of
Boston, Bank One, Texas, National Association
and Bank of America National Trust and Savings
Association and The First National Bank of Boston,
as Agent (11)
<PAGE>
10(b) - Form of CEO Agreement dated February 12, 1996
between the Company and Sterling L. Williams (11)
10(c) - Form of Change-in-Control Severance Agreement
dated as of February 12, 1996 between the Company
and each of its executive officers (11)
10(d) - Forms of Severance Agreements dated as of
February 12, 1996 between the Company and each
of its executive officers (other than
Sterling L. Williams) (11)
10(e) - Space Sharing Agreement dated as of March 4, 1996
by and between the Company and Sterling Commerce,
Inc. (9)
10(f) - Data Processing Agreement dated as of March 13, 1996
by and between the Company and Sterling Commerce,
Inc. (9)
10(g) - Tax Allocation Agreement dated as of March 4, 1996
by and between the Company and Sterling Commerce,
Inc. (9)
10(h) - Indemnification Agreement dated as of March 4, 1996
by and between the Company and Sterling Commerce,
Inc. (10)
10(i) - International Marketing Agreement dated as of March 4,
1996 by and between Sterling Software International,
Inc. and Sterling Commerce International, Inc. (10)
10(j) - Master Software License Agreement dated as of March 4,
1996 by and among the Company, Sterling Commerce, Inc.
and their respective subsidiaries parties thereto (10)
11(a) - Computation of Earnings Per Share, Three Months Ended
March 31, 1996 (11)
11(b) - Computation of Earnings Per Share, Three Months Ended
March 31, 1995 (11)
11(c) - Computation of Earnings Per Share, Six Months Ended
March 31, 1996 (11)
27 - Financial Data Schedule (11)
- --------------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
33-56185 on Form S-4 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 on Form S-1 and incorporated herein by reference.
<PAGE>
(3) 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.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 on Form S-8 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Registration Statement No.
33-56679 on Form S-3 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registration Statement No. 33-80595 on
Form S-1 filed by Sterling Commerce, Inc. and incorporated herein by
reference.
(10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996 filed by Sterling Commerce, Inc. and incorporated
herein by reference.
(11) Filed herewith.
<PAGE>
EXHIBIT 10(a)
FIRST AMENDMENT AND MODIFICATION AGREEMENT
FIRST AMENDMENT AND MODIFICATION AGREEMENT dated as of January 31, 1996
(the "Amendment") by and among STERLING SOFTWARE, INC., a Delaware corporation
(the "Company"); the direct and indirect subsidiaries of the Company listed on
the signature pages hereto (collectively, the "Sterling Subsidiaries"); THE
FIRST NATIONAL BANK OF BOSTON, BANK ONE, TEXAS, NATIONAL ASSOCIATION, and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (collectively, the "Banks");
and THE FIRST NATIONAL BANK OF BOSTON, AS AGENT (the "Agent") for the Banks,
amending certain provisions of the Second Amended and Restated Revolving Credit
and Term Loan Agreement dated as of August 24, 1995 (the "Agreement") among the
Company, the Banks and the Agent and the other Loan Documents (as defined in the
Agreement). Terms not otherwise defined herein which are defined in the
Agreement shall have the respective meanings assigned to such terms in the
Agreement.
WHEREAS, the Company has created a new, wholly owned subsidiary, Sterling
Commerce, Inc., a Delaware corporation ("SCI"), and intends to transfer certain
assets, including the capital stock of certain of the Sterling Subsidiaries, to
SCI;
WHEREAS, the Company intends to offer to the public a portion of the
common stock of SCI and to distribute the remaining common stock of SCI to the
Company's shareholders by means of a tax-free distribution;
WHEREAS, the Company has given irrevocable notice for the redemption of
its outstanding Subordinated Debentures to the registered holders thereof;
WHEREAS, in connection with the foregoing and certain related
transactions, the Company has requested that the Agent and the Banks agree to
issue certain consents and amend certain provisions of the Agreement and the
other Loan Documents;
WHEREAS, upon the terms and subject to the conditions contained herein,
the Agent and the Banks are willing to issue such consents and amend such
provisions;
NOW, THEREFORE, in consideration of the mutual agreements contained in
the Agreement, the other Loan Documents and this Amendment and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
(S)1. AMENDMENT OF (S)1.1 OF THE AGREEMENT. Section 1.1 of the
------------------------------------
Agreement is hereby amended by:
(a) deleting the definition of "Sterling Companies" in its
entirety and substituting in lieu thereof the following definition:
<PAGE>
-2-
"Sterling Companies. Collectively, the Company, the Sterling
-------- ---------
Subsidiaries and the Non-Guarantor Subsidiaries.";
(b) deleting the definition of "Sterling Subsidiaries" in its
entirety and substituting in lieu thereof the following definition:
"Sterling Subsidiaries. Collectively, those Subsidiaries of the
-------- ------------
Company or any of the Company's Subsidiaries listed on Schedule 1.6
-------- ---
hereto, and any other Subsidiary of the Company or any of its
Subsidiaries which (i) is acquired or created subsequent to the date
hereof, (ii) is organized under the laws of the District of Columbia or
any state of the United States, (iii) has its principal place of business
in the United States, (iv) does not do business exclusively outside the
United States and (v) is a party to and guarantor under the Guaranty.";
and
(c) inserting, in the places required by alphabetical order, the
following new definitions:
"Indemnification Agreement. The Indemnification Agreement
--------------- ---------
to be entered into by the Company and/or any of its Subsidiaries
(other than SCI and its Subsidiaries), on the one hand, and SCI
and/or any of its Subsidiaries, on the other hand, each
substantially in the form delivered by the Company to the Agent
in connection with the First Amendment and Modification Agreement
dated as of January 31, 1996 among the Company, the Sterling
Subsidiaries listed on the signature pages thereto, the Agent and
the Banks."
"SCI. Sterling Commerce, Inc., a Delaware corporation."
---
"Tax Allocation Agreement. The Tax Allocation Agreement to
--- ---------- ---------
be entered into by the Company and/or any of its Subsidiaries
(other than SCI and its Subsidiaries), on the one hand, and SCI
and/or any of its Subsidiaries, on the other hand, each
substantially in the form delivered by the Company to the Agent
in connection with the First Amendment and Modification Agreement
dated as of January 31, 1996 among the Company, the Sterling
Subsidiaries listed on the signature pages thereto, the Agent and
the Banks."
(S)2. REPLACEMENT OF SCHEDULES 1.3 AND 1.6 TO THE AGREEMENT. Schedules
----------------------------------------------------- ---------
1.3 and 1.6 to the Agreement are hereby deleted in their entirety, and Schedules
- --- --- --- ---------
1.3 and 1.6 attached hereto are hereby respectively substituted in lieu thereof.
- --- --- ---
(S)3. REPLACEMENT OF SCHEDULE 5.2 TO THE AGREEMENT. Schedule 5.2 to the
-------------------------------------------- -------- ---
Agreement is hereby deleted in its entirety, and Schedule 5.2 attached hereto is
-------- ---
hereby substituted in lieu thereof.
(S)4. REPLACEMENT OF SCHEDULE 5.6 OF THE AGREEMENT. Schedule 5.6 to the
-------------------------------------------- -------- ---
Agreement is hereby deleted in its entirety, and Schedule 5.6 attached hereto is
-------- ---
hereby substituted in lieu thereof.
<PAGE>
-3-
(S)5. AMENDMENT OF (S)9.1 OF THE AGREEMENT. Section 9.1 of the
------------------------------------
Agreement is hereby amended by:
(a) inserting the word "and" at the end of subsection (o)
thereof; and
(b) inserting, immediately after subsection (o) thereof and
immediately before the last sentence of (S)9.1, the following new
subsection (p) with the following text:
"(p) Indebtedness under the Tax Allocation Agreement and
(S)2 and (S)3 of the Indemnification Agreement."
(S)6. AMENDMENT OF (S)9.5 OF THE AGREEMENT. Section 9.5 of the
------------- --------------------
Agreement is hereby amended by deleting, from subparagraph (a)(i)(B) thereof,
the dollar amount "$20,000,000" and substituting in lieu thereof the dollar
amount "$60,000,000".
(S)7. AMENDMENT OF (S)9.7 OF THE AGREEMENT. Section 9.7 of the
------------------------------------
Agreement is hereby amended by deleting the period (".") at the end thereof and
substituting in lieu thereof the following text:
"; provided, however, that the Company may redeem all or any portion of
-------- --------
the Subordinated Debentures (up to a maximum of $100,000), pursuant to
the notice of redemption given to holders of the Subordinated Debentures
on January 5, 1996."
(S)8. AMENDMENT OF FINANCIAL COVENANTS.
--------------------------------
(a) Amendment of (S)10.3 of the Agreement. Section 10.3 of the
-------------------------------------
Agreement is hereby amended by deleting the text "(a) from June 30, 1995
through June 30, 1997 to be less than 1.0:1.0, and (b) from July 1, 1997
through Final Maturity, to be less than 1.25:1.0" and substituting in
lieu thereof the following text: "to be less than 1.25:1".
(b) Amendment of (S)10.5 of the Agreement. Section 10.5 of the
------------- ---------------------
Agreement is hereby deleted in its entirety, and the following new
(S)10.5 is hereby substituted in lieu thereof:
"(S)10.5. Liabilities to Net Worth Ratio. The Company shall not
------------------------------
cause or permit the ratio of Consolidated Total Liabilities to
Consolidated Net Worth at the end of any fiscal quarter of the Company
ending at any time from the Closing Date through Final Maturity to equal
or exceed 1.5:1.0."
(S)9. CONSENT TO CERTAIN TRANSACTIONS WITH RESPECT TO STERLING COMMERCE,
------------------------------------------------------------------
INC. The Company has informed the Agent and the Banks of the creation in
- ----
December, 1995 of SCI. The Company has also informed the Agent and the Banks
that it has effected or intends to effect the transactions described on Schedule
--------
9(a) hereto (collectively, the "Proposed Entity Formation Transactions"). The
- ----
Company has further informed the Agent and the Banks of its intention to:
<PAGE>
-4-
(a) transfer to SCI or one of its wholly owned Subsidiaries (i)
all of the issued and outstanding shares of capital stock of the
Subsidiaries of the Company previously comprising the Company's
Electronic Commerce Group and described on Schedule 9(a)(i) hereto, (ii)
-------- -------
certain assets relating to the electronic commerce business previously
conducted by the Company's International Group and described on Schedule
--------
9(a)(ii) hereto, and (iii) certain assets relating to the electronic
--------
commerce business conducted by the Company's Federal Systems Group and
listed on Schedule 9(a)(iii) hereto (collectively, the "Proposed
-------- ---------
Transfers");
(b) offer or cause SCI to offer for sale to the public, on or
before January 31, 1997, an aggregate number of shares of the common
stock of SCI not to exceed twenty percent (20%) of the total number of
outstanding shares of the common stock of SCI (the "Proposed Public
Offering"); and
(c) following the completion of the Proposed Public Offering,
distribute, on or before January 31, 1997, on a tax-free basis (upon the
Company's receipt of a favorable ruling from the Internal Revenue Service
as to the tax-free nature thereof), pro rata to its stockholders as a
---------
dividend, the Company's remaining shares of the common stock of SCI
(constituting that portion of the common stock of SCI not sold to the
public pursuant to the Proposed Public Offering) (the "Proposed
Distribution").
The Company has further informed the Agent and the Banks that the Proposed
Entity Formation Transactions, the Proposed Transfers, the issuance by SCI of
shares of its common stock to be offered as part of the Proposed Public Offering
(in an aggregate amount not to exceed twenty percent (20%) of the total number
of outstanding shares of the outstanding capital stock of SCI)(the "Proposed
Issuance"), the Proposed Public Offering and the Proposed Distribution require
the consent of the Agent and the Banks pursuant to (S)8.10, (S)8.14,
(S)8.16(b)(iv), (S)8.19, (S)9.9, (S)9.12, (S)9.16 and (S)11(r) of the Agreement.
The Company has requested that, to the extent required by the Agreement, the
Agent and the Banks consent to the Proposed Entity Formation Transactions, the
Proposed Transfers, the Proposed Issuance, the Proposed Public Offering and the
Proposed Distribution (collectively, the "Contemplated Transactions").
Subject to the terms and conditions contained herein, and provided that
any one or more variances in the final terms of the Contemplated Transactions
from the terms described herein or in the S-1 Registration Statement filed by
SCI with the Securities and Exchange Commission on December 20, 1995 would not,
in the aggregate, (a) have a material adverse effect on the Company and its
Subsidiaries taken as a whole, (b) have a material adverse effect on the ability
of the Company or any of the Sterling Subsidiaries to comply with its payment
obligations under the Loan Documents or (c) cause the Company to violate any of
its covenants contained in (S)(S)9.8, 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6 of
the Agreement, each of the Agent and the Banks hereby consents to the
Contemplated Transactions, solely to the extent that any of the Contemplated
Transactions would otherwise violate (S)8.10, (S)8.14, (S)8.16(b)(iv), (S)8.19
(with the consent provided with respect to (S)8.19 limited to the
<PAGE>
-5-
extent necessary to ensure that Sterling Commerce, Inc., a Wyoming corporation,
need not become a party to the Guaranty for so long as its sole business is
the holding of the Sterling Commerce, Inc. corporate name and for so long as the
conditions set forth in (S)8.17(b) and (c) of the Agreement are not otherwise
met), (S)9.9, (S)9.12, (S)9.16 and (S)11(r) of the Agreement. Notwithstanding
anything to the contrary herein contained, the consents provided in this (S)9
(i) shall not apply to any of the Contemplated Transactions occurring on or
after January 31, 1997, (ii) shall not apply to any public offering or other
transfer (other than the Proposed Distribution) pursuant to which the aggregate
number of shares so offered or transferred exceeds twenty percent (20%) of the
total number of outstanding shares of capital stock of SCI, (iii) shall not
apply to the extent that, prior to the occurrence of the Proposed Distribution,
the Company owns less than eighty percent (80%) of the issued and outstanding
capital stock of SCI, (iv) shall not apply to the Proposed Public Offering to
the extent that the proceeds thereof to SCI and the Company (net of brokerage
fees, minimums, transaction costs and other costs and expenses related to the
Proposed Public Offering) are less than $135,000,000 (with a minimum of
$100,000,000 of such proceeds to the Company), (v) shall not apply to any
distribution of capital stock of SCI as a dividend to the Company's shareholders
with respect to which the Company has not previously received the favorable
ruling of the Internal Revenue Service as to the tax-free nature thereof, and
(vi) shall not apply to any of the Contemplated Transactions in the event that
at the time of occurrence of any such Contemplated Transaction, any Default or
Event of Default shall have occurred and be continuing.
(S)10. AMENDMENT OF GUARANTY.
---------------------
(a) (i) Each of Sterling Software (Northern America), Inc.,
Sterling Software (America), Inc., and Sterling Software (Mid America),
Inc. (collectively, the "Electronic Commerce Subsidiaries") are currently
parties to, and guarantors under, the Guaranty. The Company has informed
the Agent and the Banks that, following the transfer of the capital stock
referred to in (S)9(a)(i) above, (i) each of the Electronic Commerce
Subsidiaries will become a wholly owned Subsidiary of SCI and an indirect
Subsidiary of the Company; (ii) Sterling Software (Northern America),
Inc. will change its name to Sterling Commerce (Northern America), Inc.;
(iii) Sterling Software (America), Inc. will change its name to Sterling
Commerce (America), Inc.; and (iv) Sterling Software (Mid America), Inc.
will change its name to Sterling Commerce (Mid America), Inc.
Notwithstanding any such change in corporate structure or names, each of
the Electronic Commerce Subsidiaries hereby confirms that it is, and
following such name change will remain, a Sterling Subsidiary for all
purposes of the Agreement and the other Loan Documents and a Guarantor
(as defined in the Guaranty) under the Guaranty for all purposes thereof,
bound by all terms and conditions thereof, and each of the Electronic
Commerce Subsidiaries further ratifies and confirms the Guaranty and its
obligations as a Guarantor thereunder in all respects.
(ii) (SS) North America is currently party to, and guarantor
under, the Guaranty. The Company has informed the Agent and the Banks
that promptly following the effective Date (as hereinafter defined) of
this Amendment, (SS) North America will merge into SCI, with SCI as the
<PAGE>
-6-
surviving entity. Until the completion of such merges, (SS) North America
hereby confirms that it is and shall remain a Sterling Subsidiary for all
purposes of the Agreement and the other Loan Documents, and a Guarantor
under the Guaranty for all purposes thereof, bound by all terms and
conditions thereof, and (SS) North America further ratifies and confirms
the Guarantor and its obligations as a Guarantor thereunder in all
respects.
(b) Pursuant to 8.19 of the Agreement, the Company shall cause
each of SCI, Sterling Commerce International, Inc. ("SC International")
and Sterling Commerce Leasing, Inc. ("SC Leasing") (SCI, SC International
and SC Leasing, collectively, the "New Guarantors") to become a Sterling
Subsidiary, as defined in the Agreement, and a party to, and a Guarantor
under, the Guaranty. Each of the Agent, the Banks, the Company, the New
Guarantors and the other Guarantors hereby agrees that, from and after
the Effective Date (as hereinafter defined), each of the New Guarantors
shall be a party to and bound by all terms and conditions of the Guaranty
and shall be a Guarantor for all purposes thereof and shall be a Sterling
Subsidiary for all purposes of the Agreement and the other Loan
Documents. Pursuant to the terms of the Guaranty, each of the New
Guarantors, together with each of the other Guarantors, hereby jointly
and severally unconditionally guarantees to the Agent and each of the
Banks that the Company will duly and punctually pay or perform, at the
time and place specified therefor, all of the Obligations, and agrees to
be bound by and to comply with all of the terms and conditions of, and to
perform all of the obligations of a Guarantor under, the Guaranty. Each
of the New Guarantors and the other Guarantors further agrees that the
address for notice for each of the New Guarantors referred to in (S)15 of
the Guaranty shall be the address set forth beneath such New Guarantor's
initial signature hereto.
(c) Each of the Agent and the Banks hereby agrees that upon the
occurrence of the Proposed Distribution upon the terms consented to by
the Agent and the Banks and set forth in (S)9 hereof and provided that no
--------
Default or Event of Default shall have occurred and be continuing at the
time of the occurrence of the Proposed Distribution and that the
Electronic Commerce Subsidiaries, SC International and SC Leasing remain
Subsidiaries of SCI, each of the Electronic Commerce Subsidiaries, SC
International, SC Leasing and SCI shall, effective at the time of the
occurrence of the Proposed Distribution, be automatically released from
its obligations under, and shall cease to be a party to, the Guaranty, it
being expressly understood that such release shall apply to any and all
Obligations, regardless of nature or amount, incurred by the Company or
the other Sterling Subsidiaries, whether before or after the effective
date, if any, of the Proposed Distribution, and (ii) each of SCI, the
Electronic Commerce Subsidiaries, SC International, SC Leasing and any
other Subsidiary of SCI set forth on Schedule 5.6 hereto or formed
-------- ---
following the date hereof shall cease to be a Guarantor or Non-Guarantor
Subsidiary for purposes of the Agreement and the other Loan Documents.
(S)11. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to
---------------------------
be effective as of January 31, 1996 (the "Effective Date") (provided, however,
-------- -------
that the amendments to (S)(S)9.5, 10.3, 10.4 and 10.5 of the Agreement set forth
in (S)(S)6 and
<PAGE>
-7-
8 of this Amendment shall only become effective upon the occurrence of
the Proposed Public Offering) upon the Agent's receipt of the following,
each in form and substance satisfactory to the Agent and the Banks:
(a) facsimile copies of original counterparts (to be followed
promptly by original counterparts) or original counterparts of this
Amendment, duly executed by each of the Company, the Sterling
Subsidiaries, including the New Guarantors, the Agent and the Banks;
(b) authorizing resolutions and incumbency certificates of each
of the Electronic Commerce Subsidiaries and the New Guarantors,
authorizing such company's execution and delivery of, and the performance
of its obligations under, this Amendment, certified by the Secretary or
Assistant Secretary of such Electronic Commerce Subsidiary or such New
Guarantor, as the case may be;
(c) copies of the charter documents and by-laws of each of the
Electronic Commerce Subsidiaries and the New Guarantors, certified by the
Secretary or Assistant Secretary of such Electronic Commerce Subsidiary
or, as the case may be, such New Guarantor;
(d) recent good standing certificates for each of the Electronic
Commerce Subsidiaries and the New Guarantors from the jurisdiction of its
incorporation and from each jurisdiction in which it has qualified to do
business as a foreign corporation; and
(e) an opinion of Jones, Day, Reavis & Pogue, counsel to the
Company and each of the New Guarantors, in form and substance
satisfactory to the Agent and the Banks.
(S)12. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each
---------------------------------------------------------
of the Company and the Sterling Subsidiaries, including each of the New
Guarantors, hereby represents and warrants to each of the Agent and the Banks as
follows:
(a) Each of the representations and warranties of the Company
and the Sterling Subsidiaries contained in the Agreement, the other Loan
Documents or in any document or instrument delivered pursuant to or in
connection with the Agreement, the other Loan Documents or this Amendment
was true as of the date as of which it was made, and no Default or Event
of Default has occurred and is continuing as of the date of this
Amendment; and
(b) This Amendment has been duly authorized, executed and
delivered by the Company and each of the Sterling Subsidiaries, including
each of the New Guarantors, and shall be in full force and effect upon
the satisfaction of the conditions set forth in (S)11 hereof, and the
agreements of the Company and each of the Sterling Subsidiaries,
including each of the New Guarantors, contained herein, in the Agreement,
as amended, or in the other Loan Documents, as amended, respectively
constitute the legal, valid and binding obligations of the Company and
each of the Sterling
<PAGE>
-8-
Subsidiaries, including each of the New Guarantors, party hereto or
thereto, enforceable against the Company or such Sterling Subsidiary,
including each of the New Guarantors, in accordance with their respective
terms; and
(c) Sterling Software (United States), Inc. has previously been
merged into Sterling Software (Southern), Inc. ("SS (Southern)"), with SS
(Southern) as the surviving entity, and as of September 30, 1995, no
longer constituted a Sterling Subsidiary or a Guarantor for purposes of
the Agreement and the other Loan Documents.
(S)13. RATIFICATION, ETC. Except as expressly amended hereby, the
-----------------
Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. All references in the Agreement or
such other Loan Documents or in any related agreement or instrument to the
Agreement or such other Loan Documents shall hereafter refer to such agreements
as amended hereby, pursuant to the provisions of the Agreement.
(S)14. NO IMPLIED WAIVER, ETC. Except as expressly provided herein,
----------------------
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any of the Obligations, any other obligations of the Company or any of
the Sterling Subsidiaries or any right of the Agent or the Banks consequent
thereon. The waivers and consents provided herein are limited strictly to their
terms. Neither the Agent nor any of the Banks shall have any obligation to
issue any further waiver or consent with respect to the subject matter hereof or
any other matter.
(S)15. COUNTERPARTS. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)16. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED
-------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAWS).
<PAGE>
-9-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
THE FIRST NATIONAL BANK
OF BOSTON, individually
and as Agent
By:/s/ Debra E. Del Vecchio
-------------------------
Title: Vice President
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:/s/ William R. Little
-------------------------
Title: Vice President
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION
By:/s/ Michael J. Dasher
-------------------------
Title: Managing Director
STERLING SOFTWARE, INC.
By:/s/ Richard Connelly
-------------------------
Title: Vice President,
Controller and
Assistant Treasurer
<PAGE>
-10-
STERLING COMMERCE, INC.
By:/s/ Albert K. Hoover
------------------------------------
Title: Vice President, Legal and
Assistant Secretary
Address: 8080 North Central Expressway
Suite 1100
Dallas, Texas 75206-1895
Telecopier: (214) 369-6463
STERLING COMMERCE INTERNATIONAL,
INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Vice President, Secretary and
Assistant Treasurer
Address: 8080 North Central Expressway
Suite 1100
Dallas, Texas 75206-1895
Telecopier: (214) 369-6463
STERLING COMMERCE LEASING, INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Vice President, Secretary and
Assistant Treasurer
Address: 8080 North Central Expressway
Suite 1100
Dallas, Texas 75206-1895
Telecopier: (214) 369-6463
<PAGE>
-11-
Each of the undersigned hereby acknowledges the foregoing Amendment as of the
Effective Date and agrees that its obligations under the Guaranty will extend to
the Agreement, as so amended, and the other Loan Documents, as so amended.
STERLING SOFTWARE (U.S.), INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(SOUTHERN), INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(U.S.A.), INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
INTERNATIONAL, INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE LEASING
COMPANY
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
<PAGE>
-12-
STERLING SOFTWARE
(UNITED STATES OF
AMERICA), INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING SOFTWARE
(U.S. OF AMERICA), INC.
By:/s/ Richard Connelly
-----------------------------------
Title: Assistant Treasurer
STERLING COMMERCE, INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Vice President, Legal and
Assistant Secretary
STERLING SOFTWARE
(NORTHERN AMERICA), INC.,
TO BE RENAMED STERLING COMMERCE
(NORTHERN AMERICA), INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Assistant Secretary
STERLING SOFTWARE
(AMERICA), INC.,
TO BE RENAMED STERLING COMMERCE
(AMERICA), INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Assistant Secretary
<PAGE>
-13-
STERLING SOFTWARE
(NORTH AMERICA), INC.,
TO BE MERGED
INTO STERLING COMMERCE, INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Assistant Secretary
STERLING SOFTWARE
(MID AMERICA), INC.,
TO BE RENAMED STERLING COMMERCE
(MID AMERICA), INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Assistant Secretary
STERLING COMMERCE INTERNATIONAL,
INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Vice President, Secretary and
Assistant Treasurer
STERLING COMMERCE LEASING, INC.
By:/s/ Albert K. Hoover
-----------------------------------
Title: Vice President, Secretary and
Assistant Treasurer
<PAGE>
-14-
SCHEDULE 1.3 TO THE AGREEMENT
-----------------------------
NON-GUARANTOR SUBSIDIARIES
--------------------------
<TABLE>
<CAPTION>
State of
Company Incorporation Chief Executive Office
- ------- --------------- ----------------------
<S> <C> <C>
Sterling Software (Midwest), Inc. Delaware Ohio
Southwest Beta Services Delaware Texas
Sterling ZeroOne, Inc. Delaware Virginia
ZeroOne Systems, Inc. Delaware Texas
Systems Center, Inc. Wyoming Texas
Data Management Information Delaware Virginia
NetMaster, Inc. Delaware Virginia
Matesys Corporation California Texas
KnowledgeWare International, Inc. Georgia Texas
IWK Corporation Delaware Texas
Sterling Commerce, Inc. Wyoming Texas
Sterling Software International
(Australia) Limited Delaware Texas
Sterling Commerce (U.S.), Inc. Delaware Texas
Sterling Software (Eastern), Inc.
(to be renamed Sterling
Software (United States of
America), Inc.) Delaware Virginia
</TABLE>
<PAGE>
-15-
SCHEDULE 1.6 TO THE AGREEMENT
-----------------------------
STERLING SUBSIDIARIES
---------------------
<TABLE>
<CAPTION>
Location of
State of Chief
Company Incorporation Executive Office
------- ------------- ----------------
<S> <C> <C>
Sterling Software (U.S.), Inc. Delaware Virginia
Sterling Software (Southern), Inc. Georgia Georgia
Sterling Software International, Inc. Delaware Texas
Sterling Software Leasing Company Delaware Texas
Sterling Software (U.S. of America), Inc. Delaware Virginia
Sterling Software (U.S.A.), Inc. California California
Sterling Commerce, Inc. Delaware Texas
Sterling Software (Northern America), Inc. Delaware Texas
(to be renamed Sterling Commerce
(Northern America), Inc.)
Sterling Software (America), Inc. Delaware Ohio
(to be renamed Sterling Commerce
(America), Inc.)
Sterling Software (North America), Inc. Delaware Texas
(Until its merger into Sterling Commerce,
Inc., with Sterling Commerce, Inc. as the
surviving entity)
Sterling Software (Mid America), Inc. Michigan Ohio
(to be renamed Sterling Commerce (Mid
America), Inc.)
Sterling Commerce International, Inc. Delaware Texas
Sterling Commerce Leasing, Inc. Delaware Texas
Sterling Software (United States of Delaware Texas
America), Inc.
(to be merged into the Company, with
the Company as the surviving entity)
</TABLE>
<PAGE>
-16-
SCHEDULE 5.2 TO THE AGREEMENT
-----------------------------
SUBSIDIARIES OF THE STERLING COMPANIES
--------------------------------------
Domestic Subsidiaries
- -------- ------------
1. Owned by the Company.
----- -- --- --------
<TABLE>
<CAPTION>
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- --------------- ------
<S> <C> <C>
Sterling Software (Midwest), Inc. 50,000 (Common) 1,000
Sterling Software (U.S.), Inc. 1,000 (Common) 1,000
Systems Center, Inc. (Wyoming) 1,000 (Common) 1,000
Sterling Software International, Inc. 50,000 (Common) 1,000
Sterling Software Leasing Company 10,000 (Common) 1,000
Sterling ZeroOne, Inc. 50,000 (Common) 1,000
Sterling Software (U.S.A.), Inc. 25,000 (Common) 995
ZeroOne Systems, Inc. 50,000 (Common) 1,000
Sterling Software (Southern), Inc. 10,000 (Common) 1,000
1,000 (Preferred) 0
Sterling Software (Southwest), Inc. 1,000 (Common) 0
Southwest Beta Services, Inc. 1,000 (Common) 1,000
Sterling Commerce, Inc. 100 (Common)/1/ 100/2/
100 (Preferred) 0
Sterling Software (U.S. of America), 5,000 (Common) 1,000
Inc.
Sterling Software (Eastern), Inc./3/ 10,000 (Common) 1,000
1,000 (Preferred) 0
Sterling Software International 50,000 (Common) 1,000
(Australia) Limited
Sterling Software (United States of 10,000 (Common) 1,000
America), Inc./4/ 1,000 (Preferred) 478
Sterling Software (North America),
Inc./5/ 5,000 (Common) 1,000
</TABLE>
___________________________
/1/ To be increased to 150,000,000 shares of common stock and 50,000,000
shares of preferred stock prior to the SCI Public Offering.
/2/ Will increase as a result of, among other things, (i) a reverse
stock split to be effected prior to the SCI Public Offering and (ii) the SCI
Public Offering.
/3/ To be renamed Sterling Software (United States of America), Inc.
following the merger of the existing Sterling Software (United States of
America), Inc. into the Company, with the Company as the surviving entity.
/4/ To be merged into the Company, with the Company as the surviving
entity.
/5/ To be merged into Sterling Commerce, Inc., with Sterling Commerce,
Inc. as the surviving entity.
<PAGE>
-17-
2. To Be Owned by Sterling Commerce, Inc.
-- -- ----- -- -------- --------- ----
<TABLE>
<CAPTION>
Subsidiary Authorized Issued
- ---------- ----------
Capital (Class) Shares
--------------- ------
<S> <C> <C>
Sterling Software (Northern America), 50,000 (Common)/6/ 10,000/7/
Inc. (to be renamed Sterling Commerce
(Northern America), Inc.)
Sterling Software (America), Inc. 50,000 (Common)/6/ 1,000
(to be renamed Sterling Commerce
(America), Inc.)
Sterling Commerce (U.S.), Inc. 1,000 (Common) 1,000
Sterling Commerce Leasing, Inc. 1,000 (Common) 1,000
Sterling Commerce International, Inc. 1,000 (Common) 1,000
Sterling Commerce, Inc., a Wyoming 1,000 (Common) 1,000
corporation
</TABLE>
3. Owned by Sterling Software (America), Inc., to be renamed Sterling
----- -- -------- -------- ---------- ----- -- -- ------- --------
Commerce (America), Inc.
-------- ---------- ----
<TABLE>
<CAPTION>
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- --------------- ------
<S> <C> <C>
Sterling Software (Mid America), Inc. 60,000 (Common)/6/ 1,000
(to be renamed Sterling Commerce 60,000 (Preferred) 0
(Mid America), Inc.
</TABLE>
4. Owned by Sterling Software (Southern), Inc.
----- -- -------- -------- ----------- ----
<TABLE>
<CAPTION>
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- --------------- ------
<S> <C> <C>
KnowledgeWare International, Inc. 1,000 (Common) 500
IWK Corporation 1,000 (Common) 0
</TABLE>
_____________________
/6/ Will be decreased to 1,000 shares of common stock by means of a
charter amendment promptly following the Proposed Transfers (as defined in the
First Amendment and Modification Agreement dated as of January 31, 1996 among
the Company, the Sterling Subsidiaries, the Agent and the Banks.)
/7/ Will be decreased to 1,000 shares promptly following the Proposed
Transfers.
<PAGE>
-18-
5. Owned by Matesys Mathematics Systems, S.A.
----- -- ------- ----------- -------- ----
<TABLE>
<CAPTION>
Authorized Issued
----------
Subsidiary Capital (Class) Shares
- ---------- --------------- ------
<S> <C> <C>
Matesys Corp. 1,000,000 (Common) 65,000
</TABLE>
6. Foreign Subsidiaries*
--------------------
<TABLE>
<CAPTION>
Place of
Incorporation
-------------
<S> <C>
Sterling Software (Pacific) Pty Limited Australia
Sterling Software (Australia) Pty Limited Australia
Systems Center Pty Limited Australia
Systems Center Handelgesellschaft M.B.H. Austria
KnowledgeWare G.M.B.H. Austria
Sterling Software (Benelux) NV Belgium
Sterling Software (Benelux) BVBA Belgium
Systems Center Benelux BVBA Belgium
Sterling Software do Brasil Ltda.** Brazil
Sterling Software do Brasil Participacoes Ltda. Brazil
Sterling Software (Canada), Inc. Canada
Sterling International Finance, Inc. British W. Indies
Sterling Software Denmark (Branch Office of Denmark
Sterling Software, Sweden AB)
KnowledgeWare AB, filial i Finland Finland
Sterling Consulting S.A. France
Matesys Mathematics Systems S.A. France
Sterling Software France II France
Sterling Software International (France) SARL France
Sterling Software (France) SA France
VM Software SARL France
Sterling Software GMBH Germany
</TABLE>
* All such subsidiaries are directly or indirectly 100% owned by Sterling
Software, Inc., except for certain de minimis shares held by employees or
local residents as nominee shareholders or as otherwise provided below.
** 49% ownership by Sterling Software do Brasil Participacoes Ltd.
<PAGE>
-19-
<TABLE>
<S> <C>
Systems Center Limited Hong Kong
KnowledgeWare (Far East) Limited Hong Kong
Sterling Software (Israel), Ltd. Israel
KnowledgeWare SRL Italy
Sterling Software (Italia) SRL Italy
Sterling Software (Japan) Ltd. Japan
Rellum Amsterdam B.V. Netherlands
Sterling Software (Netherlands) B.V. Netherlands
SCI Systems Center Netherlands/
Sterling Software (Netherlands) Netherlands
Sterling Software (Australia) PTY Limited New Zealand
Sterling Software (New Zealand) Limited New Zealand
Sterling Software (Scandinavia) AS Norway
Systems Center AS Norway
KnowledgeWare (Norway) Norway
Condessa Gestao E Investimentos Lda Portugal
Sterling Software (Portugal) - Informatica, Lda Portugal
Sterling Software (Singapore) PTE Ltd. Singapore
Sterling Aplicaciones Informaticas (Espana), S.A. Spain
KnowledgeWare AB Sweden
Sterling Software AB Sweden
Sterling Software (Switzerland) AG Switzerland
KnowledgeWare AG Switzerland
Sterling Software S.A. (In Liquidation) Switzerland
Sterling Software International (U.K.) Limited United Kingdom
Sterling Software (U.K.) Holdings, Ltd. United Kingdom
Sterling Software (U.K.) Limited United Kingdom
Sterling Software (U.K.) II Limited United Kingdom
VM Software (UK) Limited United Kingdom
Systems Center Limited United Kingdom
Sterling Software (Virgin Islands), Inc. Virgin Islands
KnowledgeWare Export, Inc. Virgin Islands
Sterling Electronic Commerce (Canada), Inc. Canada
Sterling Commerce (France), SARL France
Sterling Commerce GmbH Germany
Sterling Commerce (UK) Limited United Kingdom
</TABLE>
<PAGE>
-20-
SCHEDULE 5.6 TO THE AGREEMENT
-----------------------------
MAILING ADDRESSES OF THE COMPANY AND EACH OF THE STERLING SUBSIDIARIES
----------------------------------------------------------------------
Sterling Software, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Sterling Software (U.S.), Inc.
1650 Tysons Blvd., Suite 800
McLean, Virginia 22102-3915
Sterling Software (Southern), Inc.
3340 Peachtree Road, N.E., Suite 1100
Atlanta, Georgia 30326
Sterling Software International, Inc.
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Sterling Software Leasing Company
8080 N. Central Expressway, Suite 1100
Dallas, Texas 75206
Sterling Software (U.S. of America), Inc.
1800 Alexander Bell Drive
Reston, Virginia 22091
Sterling Software (U.S.A.), Inc.
11050 White Rock Road, Suite 100
Rancho Cordova, California 95670
Sterling Software (United States of America), Inc.
(to be merged into the Company, with the Company
as the surviving entity)
1800 Alexander Bell Drive
Reston, Virginia 22091
Sterling Commerce, Inc.
4600 Lakehurst Court
Dublin, Ohio 43017-0760
Sterling Software (Northern America), Inc.
(to be renamed Sterling Commerce (Northern America), Inc.)
15301 Dallas Parkway, Suite 400 LB 23
Dallas, Texas 75248
<PAGE>
-21-
Sterling Software (America), Inc.
(to be renamed Sterling Commerce (America), Inc.)
4600 Lakehurst Court
Dublin, Ohio 43017-0760
Sterling Software (North America), Inc.
(to be merged into Sterling Commerce, Inc., with
Sterling Commerce, Inc. as the surviving entity)
5215 North O'Connor Blvd., Suite 1500
Irving, Texas 75039-3771
Sterling Software (Mid America), Inc.
(to be renamed Sterling Commerce (Mid America), Inc.)
4600 Lakehurst Court
Dublin, Ohio 43017-0760
Sterling Commerce International, Inc.
4600 Lakehurst Court
Dublin, Ohio 43017-0760
Sterling Commerce Leasing, Inc.
4600 Lakehurst Court
Dublin, Ohio 43017-0760
<PAGE>
-22-
SCHEDULE 9(A)
-------------
TO
--
FIRST AMENDMENT AND MODIFICATION AGREEMENT
------------------------------------------
PROPOSED ENTITY FORMATION TRANSACTIONS
--------------------------------------
1. Distribution of all shares of preferred stock of Sterling Software (United
States of America), Inc. owned by Sterling Software (U.S.A.), Inc. to the
Company.
2. Merger of Sterling Software (United States of America), Inc. into the
Company (the "Merger").
3. Formation of Sterling Software (Eastern), Inc., a new wholly owned Delaware
Subsidiary of Sterling Software, Inc., to be renamed Sterling Software
(United States of America), Inc. ("SS (United States of America)"). SS
(United States of America) will be capitalized with 11,000 shares,
consisting of 10,000 shares of common stock and 1,000 shares of preferred
stock.
4. Merger of Sterling Software (North America), Inc. into SCI.
5. Formation of Sterling Commerce (U.S.), Inc., a new wholly owned Delaware
Subsidiary of SCI.
6. Formation of Sterling Commerce Leasing, Inc., a new wholly owned Delaware
Subsidiary of SCI.
7. Formation of Sterling Commerce International, Inc., a new wholly owned
Delaware Subsidiary of SCI.
8. Formation of Sterling Commerce, Inc., a new wholly owned Wyoming Subsidiary
of SCI.
9. Formation of Sterling Electronic Commerce (Canada), Inc., a new Canadian
Subsidiary of SCI.*
10.Formation of Sterling Commerce (France), SARL, a new French Subsidiary of
SCI.*
11.Formation of Sterling Commerce GmbH, a new German Subsidiary of SCI.*
12.Formation of Sterling Commerce (UK) Limited, a new United Kingdom
Subsidiary of SCI.*
____________________________
* To be wholly owned by SCI except for certain de minimis shares to be held
-- -------
by employees or local residents as nominee shareholders as required by
applicable law.
<PAGE>
-23-
SCHEDULE 9(A)(I)
----------------
TO
--
FIRST AMENDMENT AND MODIFICATION AGREEMENT
------------------------------------------
ELECTRONIC COMMERCE GROUP SUBSIDIARIES
--------------------------------------
Sterling Software (Northern America), Inc., to be renamed Sterling Commerce
(Northern America), Inc.
Sterling Software (America), Inc., to be renamed Sterling Commerce (America),
Inc.
Sterling Software (Mid America), Inc., to be renamed Sterling Commerce (Mid
America), Inc.
<PAGE>
-24-
SCHEDULE 9(A)(II)
-----------------
TO
--
FIRST AMENDMENT AND MODIFICATION AGREEMENT
------------------------------------------
Description of
Transferred Assets Relating to
The Electronic Commerce Business
Previously Conducted by the
International Group
Accounts receivable, furniture, fixtures, computers and other equipment and
other miscellaneous personal property, with an aggregate value for all such
assets, together with the assets listed on Schedule 9(a)(iii), not to
-------- ---------
exceed $5,000,000.
<PAGE>
-25-
SCHEDULE 9(A)(III)
------------------
TO
--
FIRST AMENDMENT AND MODIFICATION AGREEMENT
------------------------------------------
Description of
Transferred Assets Relating to
The Electronic Commerce Business
Previously Conducted by the
Federal Systems Group
Accounts receivable, prepaid expenses, employee loans, computers and other
equipment, prepaid advertising expenses, furniture, fixtures and other
miscellaneous personal property with an aggregate value for all such
assets, together with the assets listed on Schedule 9(a)(ii), not to exceed
-------- --------
$5,000,000.
<PAGE>
EXHIBIT 10(b)
CEO AGREEMENT
THIS CEO AGREEMENT ("Agreement") is made and entered into as of the 12th
day of February, 1996 by and between Sterling Software, Inc., a Delaware
corporation ("Sterling Software"), and Sterling L. Williams, an individual
("Williams").
RECITALS:
WHEREAS, Sterling Software acquires, develops, markets and supports a broad
range of products and services; and
WHEREAS, Sterling Software desires to continue to retain Williams as its
President and Chief Executive Officer; and
WHEREAS, Williams is willing to continue to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Williams agrees to render such managerial services as are
----------
customarily required of the President and Chief Executive Officer, and
Sterling Software agrees to utilize such services on the terms and
conditions contained herein. Sterling Software acknowledges that
Williams is also employed as President and Chief Executive Officer at
Sterling Commerce, Inc. ("Sterling Commerce"). Sterling Software
agrees that such employment is not inconsistent with this Agreement,
the level of Executive's compensation at Sterling Software having been
determined by Sterling Software with knowledge of Williams' employment
by Sterling Commerce and the demands on Williams' time and attention
required by such employment.
2. Compensation. As consideration for Williams' agreement to enter into
------------
this Agreement and the services to be performed hereunder, Williams
shall be paid an annual salary of $500,000, plus such annual increases
as shall be mutually agreeable. Williams shall also be entitled to
earn additional compensation in the nature of bonuses, deferred
compensation and other incentive compensation as mutually agreed.
Williams shall be entitled to such personal benefits as may be
mutually agreed. In addition, Mr. Williams shall be entitled to
participate in Sterling Software's Stock Option Plan, Employee Stock
Ownership Plan and/or 401(k) Plan, and, as
<PAGE>
mutually agreed, such other plans as are currently, or from time to
time made, available to Sterling Software's executive officers.
3. Term. This Agreement shall commence on the date on which the purchase
----
and sale of shares of common stock of Sterling Commerce pursuant to
its initial public offering of common stock first occurs and shall
continue in effect until such time as this Agreement is automatically
converted into a consulting agreement pursuant to subparagraph 5(i)
hereof; thereafter, the consulting agreement shall continue for a
period of five years.
4. Termination of Employment. The parties acknowledge that Williams is
-------------------------
employed "at will" and may be terminated by Sterling Software at any
time with or without cause. Notwithstanding anything in this
Agreement to the contrary, in the event Williams is terminated, with
or without cause, or Williams terminates his employment pursuant to
Section 5(i)(b) of this Agreement and Sterling Commerce offers to
Williams, and Williams accepts, an increase in compensation and
benefits as President and Chief Executive Officer of Sterling Commerce
such that Williams' compensation and benefits at Sterling Commerce
following such termination are reasonably equivalent to the combined
compensation and benefits Williams was entitled to at both Sterling
Commerce and Sterling Software prior to such termination, this
Agreement shall not be converted into a consulting agreement pursuant
to Section 5(i) of this Agreement and Williams shall not be entitled
to the consideration provided for in Section 5(v) of this Agreement.
5. Consulting Agreement.
--------------------
(i) This Agreement shall be automatically converted into a consulting
agreement in the event that (a) Sterling Software terminates
Williams' employment with or without cause or (b) Williams
terminates his employment as a result of a reduction in Williams'
salary, other compensation or perquisites below the level in
effect for the immediately preceding twelve month period; or as a
result of Williams' determination, in his sole judgment, that
there has been a significant reduction in the nature or scope of
Williams' authorities or duties.
(ii) The consulting agreement may be terminated by Williams in writing
at any time, but any compensation which has been paid as of the
date of termination shall be deemed to have been earned and there
shall be no repayment of any sums previously paid. In addition,
Williams shall have the right to terminate the consulting
agreement in accordance with paragraph 6 hereof. Sterling
Software may terminate the consulting agreement upon Williams'
death.
-2-
<PAGE>
(iii) During the term of the consulting agreement, Williams shall
serve in an advisory capacity to the Executive Committee of the
Board of Directors of Sterling Software, reporting directly to
the Executive Committee for the purpose of making operational,
strategic and financial recommendations affecting the general
welfare of Sterling Software. Williams shall make himself
available for a reasonable amount of such consulting and advisory
services during normal business hours and upon reasonable notice,
at such times and places as shall be mutually agreed upon. In no
event shall Williams expend in excess of thirty (30) days per
year performing such services for Sterling Software.
(iv) Any and all confidential information of Sterling Software to
which Williams may become privy in the performance of his
consulting services shall be treated as confidential by him and
shall not be communicated to or discussed with any party who is
not an officer or director of Sterling Software, unless Williams
is specifically authorized to do so by the Executive Committee of
the Board of Sterling Software. Williams shall not use any
information delivered to him by Sterling Software for his
personal gain, nor shall Williams act as a financial consultant
or advisor to any other person, partnership, corporation or other
business association in the computer industry (software, hardware
or services) during the term of the consulting agreement without
the prior written consent of Sterling Software, such consent not
to be unreasonably withheld.
(v) As consideration for his advisory and consulting services,
Williams shall be entitled to receive all amounts and to
participate in all programs (or the cash equivalent thereof)
described in paragraph 2 hereof; provided, however, that in no
-------- -------
event will Sterling Software be required to make any new grants
of options to Williams under Sterling Software's Option Plan
after conversion of this Agreement into a consulting agreement.
In the event Williams terminates his employment pursuant to
subsection (i)(b) hereof, the level of his compensation shall be
the greater of the compensation and benefits of the type
described in paragraph 2 hereof in effect on the date of his
termination or the compensation and benefits of the type
described in paragraph 2 hereof in effect twelve (12) months
prior to the date of termination. This compensation shall be
paid during the term of the consulting agreement without regard
to whether Sterling Software utilizes the services of Williams
for the maximum thirty (30) days per year specified in subsection
(iii) hereof, or does not avail itself of his services at any
time during the term hereof. In addition, Williams shall be
reimbursed for all other authorized expenses such as food and
first class travel and lodging which are incurred at the
direction of Sterling Software consistent with the
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terms hereof. Sterling Software shall make available to Williams
all office facilities of Sterling Software, including
secretarial, telephone and office space, or reimburse Williams
for the cost of obtaining comparable facilities from third
parties.
6. Change-in-Control. Sterling Software and Williams are parties to a
-----------------
Change-in-Control Severance Agreement, dated the date hereof (as such
agreement may be amended from time to time, the "Change-in-Control
Agreement"). Notwithstanding anything contained in this Agreement to
the contrary, in the event William's employment with Sterling Software
is terminated under circumstances in which this Agreement would
automatically be converted into a consulting agreement and Williams
would otherwise be entitled to receive payments and benefits under
both this Agreement and the Change-in-Control Agreement, Williams
shall have the right to elect to have this Agreement converted into a
consulting agreement pursuant to the terms hereof or to receive
payments and benefits under the Change-in-Control Agreement, but not
both. Within five business days following the termination of
William's employment with Sterling Software under circumstances in
which this Section 6 would apply, Sterling Software shall provide
Williams, in writing, a reasonably detailed determination of the
payments and other benefits under each of such consulting agreement
and the Change-in-Control Agreement. Williams shall make the election
provided for in this paragraph of this Section 6 within thirty
calendar days after William's receipt of the written determination
referred to in the preceding sentence; provided, however, that if such
election is not so made within such 30-day period, Williams shall be
irrevocably deemed to have elected to receive payments and benefits
under the Change-in-Control Agreement. Prior to the date on which
Williams makes or is deemed to have made the election referred to
above, he shall receive all benefits provided for in Section 5(v) of
this Agreement as if it had been converted to a consulting agreement.
In the event of a Change-in-Control following the conversion of this
Agreement into a consulting agreement, Williams shall have the option
of terminating the consulting agreement in writing at any time
following such Change-in-Control. Upon such termination of the
consulting agreement, Williams shall be entitled to receive in one
lump sum the aggregate of all unpaid amounts pursuant to paragraph
5(v) through the unexpired portion of the five (5) year consulting
agreement. Such lump sum shall be payable within ninety (90) days
following Williams' notice of termination of the consulting agreement.
Upon such termination by Williams, Williams shall have no further
obligations pursuant to paragraph 5(iii).
7. Full-time Employment. Sterling Software agrees that, if Williams'
--------------------
employment at Sterling Commerce is terminated, with or without cause
(including but not limited to a termination by Williams pursuant to
(i)
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Section 3(b) of that certain Change-in-Control Severance Agreement
between Sterling Commerce and Williams, dated the date hereof, or (ii)
pursuant to Section 5(i)(b) of that certain CEO Agreement between
Williams and Sterling Commerce, dated the date hereof) and Williams is
willing and able to devote his full-time efforts to Sterling Software,
Sterling Software shall promptly offer to increase Williams'
compensation and benefits under this Agreement to a level reasonably
equivalent to the combined compensation and benefits Williams was
entitled to at both Sterling Commerce and Sterling Software
immediately prior to such termination.
8. Termination of Prior Agreements. Upon the effectiveness of this
-------------------------------
Agreement pursuant to Section 3 of this Agreement, the Employment
Agreement between Williams and Sterling Software, dated January 1,
1993, as amended to the date hereof, shall terminate automatically and
shall thereafter be of no further force or effect. This Agreement,
upon its effectiveness pursuant to such Section 3, supersedes all
prior agreements, arrangements and understandings with respect to the
subject matter hereof.
9. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party set
forth below or such other places as may from time to time be
designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are actually
received.
If to Sterling Software, to: 8080 N. Central Expressway
Suite 1100
Dallas, Texas 75206
Attention: President
If to Williams, to: Sterling Software, Inc.
8080 N. Central Expressway
Suite 1100
Dallas, Texas 75206
Attention: Mr. Sterling L. Williams
(ii) This Agreement shall be binding upon Sterling Software and
Williams and their respective successors, assigns, heirs and
personal representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Agreement.
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<PAGE>
Executed by the parties hereto as of the date first set forth above.
/s/ STERLING L. WILLIAMS
_________________________________________________
Sterling L. Williams
STERLING SOFTWARE, INC.
By: /s/ JEANNETTE P. MEIER
____________________________________________
Name: Jeannette P. Meier
_______________________________________
Title: Executive Vice President
______________________________________
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EXHIBIT 10(c)
SSW MODEL
DUAL EMPLOYEE
-------------
(Williams, Ellis, Moore & Meier)
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
February __, 1996, by and between Sterling Software, Inc., a Delaware
corporation (the "Company"), and ______________________________ (the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and has made
and is expected to continue to make major contributions to the profitability,
growth and financial strength of the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not
less than the Executive's annual fixed or base compensation as in effect
for the Executive immediately prior to the occurrence of a Change in
Control or such higher rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or a committee thereof.
(b) "Change in Control" means the occurrence during the Term of any of
the following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors ("Voting Stock") of
such corporation or person
<PAGE>
immediately after such transaction are held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such
transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than two-thirds
of the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Directors of
the Company cease for any reason to constitute at least a majority
thereof; provided, however, that for purposes of this clause (v) each
Director who is first elected, or first nominated for election by the
Company's stockholders, by a vote of at least two-thirds of the
Directors of the Company (or a committee thereof) then still in office
who were Directors of the Company at the beginning of any such period
will be deemed to have been a Director of the Company at the beginning
of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), (C) any
Company-Sponsored employee stock ownership plan or any other employee
benefit plan of the Company or any Subsidiary, or (D) Sterling Software,
Inc. or any of its wholly owned subsidiaries (collectively, "SSW") either
files or becomes obligated to file a report or a proxy statement under or
in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or
any successor
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schedule, form or report or item therein) under the Exchange Act disclosing
beneficial ownership by it of shares of Voting Stock of the Company,
whether in excess of 20% or otherwise, or because the Company reports that
a change in control of the Company has occurred or will occur in the future
by reason of such beneficial ownership or any increase or decrease thereof;
provided however, that the exception contained in clause (D) above with
respect to the beneficial ownership of Voting Stock of the Company by SSW
shall expire, without further action, effective as of the date on which SSW
no longer beneficially owns more than 10% of the outstanding Voting Stock
of the Company.
(c) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement
income and welfare benefit policies, plans, programs or arrangements in
which Executive is entitled to participate, including without limitation
any stock option, stock purchase, stock appreciation, savings, pension,
401(k), employee stock ownership (ESOP), supplemental executive retirement,
or other retirement income or welfare benefit, deferred compensation,
incentive compensation, group or other life, health, medical/hospital or
other insurance (whether funded by actual insurance or self-insured by the
Company), disability, salary continuation, expense reimbursement, executive
automobile, tax and financial planning, club memberships, incentive travel,
tax reimbursement and other employee benefit policies, plans, programs or
arrangements that may now exist or any equivalent successor policies,
plans, programs or arrangements that may be adopted hereafter by the
Company, providing perquisites, benefits and service credit for benefits at
least as great in the aggregate as are payable thereunder prior to a Change
in Control.
(d) "Incentive Pay" means (i), if calculated at any time commencing
one year after the effectiveness of this Agreement pursuant to Section 1(f)
below, an annual amount equal to not less than the highest aggregate annual
bonus, incentive or other payments of cash compensation, in addition to
Base Pay, made or to be made in regard to services rendered in any calendar
year during the three calendar years (or such lesser number of calendar
years as this Agreement shall have been effective pursuant to Section 1(f),
below) immediately preceding the year in which the Change in Control
occurred pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company or any successor
thereto, providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control and (ii), if calculated at any time
prior to one year after the effectiveness of this Agreement pursuant to
Section 1(f) below, an amount equal to 100% of the aggregate of the
budgeted annual bonus, incentive or other budgeted payments of cash
compensation, in addition to Base Pay, at plan for such Executive.
(e) "Severance Period" means the period of time commencing on the date
of the first occurrence of a Change in Control and continuing until the
earliest of (i) the _____ anniversary of the occurrence of the Change in
Control, or (ii) the Executive's death; provided, however, that commencing
on each anniversary of the Change in Control, the Severance Period will
automatically be extended for an
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<PAGE>
additional year unless, not later than 90 calendar days prior to such
anniversary date, either the Company or the Executive shall have given
written notice to the other that the Severance Period is not to be so
extended.
(f) "Term" means the period commencing as of the date on which the
purchase and sale of shares of common stock of Sterling Commerce, Inc.
pursuant to its initial public offering of common stock first occurs and
expiring as of the later of (i) the close of business on December 31, 2000,
or (ii) the expiration of the Severance Period; provided, however, that (A)
commencing on January 1, 1997 and each January 1 thereafter, the term of
this Agreement will automatically be extended for an additional year
unless, not later than September 30 of the immediately preceding year, the
Company or the Executive shall have given notice that it or the Executive,
as the case may be, does not wish to have the Term extended and (B) subject
to the last sentence of Section 8, if, prior to a Change in Control, the
Executive ceases for any reason to be an employee of the Company or any
Subsidiary, thereupon without further action the Term shall be deemed to
have expired and this Agreement will immediately terminate and be of no
further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period with the right to severance compensation as provided in Section
4 upon the occurrence of one or more of the following events (regardless of
whether any other reason for such termination exists or has occurred, including
without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties attached to the
position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay and Incentive Pay, or (C) the
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<PAGE>
termination or denial of the Executive's rights to Employee Benefits or a
reduction in the scope or value thereof, any of which is not remedied by
the Company within 10 calendar days after receipt by the Company of written
notice from the Executive of such change, reduction or termination, as the
case may be;
(iii) A determination by the Executive (which determination will be
conclusive and binding upon the parties hereto provided it has been made in
good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered
Executive's performance of, or has caused Executive to suffer a substantial
reduction in, any of the authorities, powers, functions, responsibilities
or duties attached to the position held by the Executive immediately prior
to the Change in Control, which situation is not remedied within 10
calendar days after written notice to the Company from the Executive of
such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities or duties hereunder at least 20% more (in terms of
aggregate days in any calendar year or in any calendar quarter when
annualized for purposes of comparison to any prior year) than was required
of Executive in any of the three full years immediately prior to the Change
in Control without, in either case, his prior written consent; or
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor thereto.
(c) A termination by the Company pursuant to Section 3(a) or by
the Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights shall be
governed by the terms thereof. The Company and the Executive are parties to a
Severance Agreement, dated the date hereof (as such agreement may be amended
from time to time, the "Severance Agreement"). Notwithstanding anything
contained in this Agreement to the contrary, in the event the Executive's
employment with the Company is terminated under circumstances in which the
Executive
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<PAGE>
would otherwise be entitled to receive payments and benefits under both this
Agreement and the Severance Agreement, the Executive shall have the right to
elect to receive payments and benefits under either this Agreement or the
Severance Agreement, but not both (except that the Executive may in all events
receive all payments and benefits to which he or she is entitled under the
Severance Agreement during the period between the Termination Date and the
Election Date (as such terms are defined below)). Within five business days
following the date of the termination of the Executive's employment with the
Company under the circumstances described in the preceding sentence (the
"Termination Date"), which shall be the effective date of such termination if
the termination is pursuant to Section 3(a) or such other date that may be
specified by the Executive if the termination is pursuant to Section 3(b), the
Company shall provide the Executive, in writing, a reasonably detailed
determination of the payments and other benefits under each of this Agreement
and the Severance Agreement. Executive shall make the election provided for in
this Section 3(c) by providing the Company written notice thereof within 30 days
after the Executive's receipt of the written determination referred to in the
preceding sentence; provided, however, that if such election is not so made
within such 30-day period, the Executive shall be irrevocably deemed to have
elected to receive payments and benefits under this Agreement (the date on which
such election is so made or deemed to have been made being the "Election Date").
4. Severance Compensation: (a) If, following the occurrence of a Change
----------------------
in Control, the Company terminates the Executive's employment during the
Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (or, in the event that the circumstance described in
Section 3(c) hereof is applicable, within five business days after the
Election Date), a lump sum payment (the "Severance Payment") in an amount
equal to _____ times the sum of (A) Base Pay (at the highest rate in effect
for any period prior to the Termination Date), plus (B) Incentive Pay
(determined in accordance with the standard set forth in Section 1(d));
provided however, that Severance Payment shall be reduced by the aggregate
amount of all cash payments, if any, previously received by the Executive
pursuant to his or her Severance Agreement prior to the Election Date.
(ii) (A) for _____ months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are benefits under welfare plans (as
that term is used in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) substantially similar to those which the Executive
was receiving or entitled to receive immediately prior to the Termination
Date, and (B) such Continuation Period will be considered service with the
Company for the purpose of determining service credits and benefits due and
payable to the Executive under the Company's retirement income,
supplemental executive retirement and other benefit plans of the Company
applicable to the Executive, his dependents or his beneficiaries
immediately prior to the Termination Date. If and to the extent that any
benefit
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<PAGE>
described in subsection (A) or (B) of this Section 4(a)(ii) is not or
cannot be paid or provided under ERISA or any other applicable law or
regulation or under any policy, plan, program or arrangement of the
Company, then the Company will itself pay or provide for the payment to the
Executive, his dependents and beneficiaries, of such Employee Benefits.
Without otherwise limiting the purposes or effect of Section 5, Employee
Benefits otherwise receivable by the Executive pursuant to subsection (A)
of this Section 4(a)(ii) will be reduced to the extent comparable welfare
benefits are actually received by the Executive from another employer
during the Continuation Period following the Executive's Termination Date,
and any such benefits actually received by the Executive shall be reported
by the Executive to the Company. Notwithstanding the preceding sentence,
in the event that the Executive is required to pay any amounts in
connection with the receipt of such welfare benefits, the Company will be
obligated to promptly reimburse the Executive for the amounts paid by the
Executive to receive such benefits.
(b) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided hereunder on a timely basis, the Company will pay interest on
the amount or value thereof at an annualized rate of interest equal to the so-
called composite "prime rate" as quoted from time to time during the relevant
period in the Southwest Edition of The Wall Street Journal. Such interest will
-----------------------
be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such tax (such tax or taxes, together with any
such interest and penalties, being hereafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment or payments (collectively, a "Gross-Up Payment"); provided, however,
that no Gross-Up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with an
ISO described in clause (i). The Gross-Up Payment shall be in an amount such
that, after payment by the Executive of all taxes (including any
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interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Payment to the Executive. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it shall, at the
same time as it makes such determination, furnish the Company and the Executive
a written opinion to the effect that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or other tax
return. As a result of the uncertainty in the application of Section 4999 of
the Code (or any successor provision thereto) and the possibility of similar
uncertainty regarding applicable state or local tax law at the time of any
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 5(f) and the Executive thereafter is required to make a payment of
any Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by Section 5(b). Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company and the
Executive.
(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state
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and local tax returns, if relevant, as filed with the applicable taxing
authority, and such other documents reasonably requested by the Company,
evidencing such payment. If prior to the filing of the Executive's federal
income tax return, or corresponding state or local tax return, if relevant, the
Accounting Firm determines that the amount of the Gross-Up Payment should be
reduced, the Executive shall within five business days pay to the Company the
amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by Section 5(b)
shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within five business days after receipt from the Executive of
a statement therefor and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim and the
Executive shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive, subject to the provisions of Section 5(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 5(f), the Company shall control all proceedings taken in
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<PAGE>
connection with the contest of any claim contemplated by this Section 5(f) and,
at its sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at his
own cost and expense) and may, at its option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay the tax claimed and sue for a
refund, the Company shall advance the amount of such payment to the Executive on
an interest-free basis and shall indemnify and hold the Executive harmless, on
an after-tax basis, from any Excise Tax or income or other tax, including
interest or penalties with respect thereto, imposed with respect to such
advance; and provided further, however, that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which the contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of any such
contested claim shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without Executive's prior written consent except as required by law.
6. No Mitigation Obligation: The Company hereby acknowledges that it will
------------------------
be difficult and may be impossible for the Executive to find reasonably
comparable employment within a reasonable time period following the Termination
Date. In addition, the Company acknowledges that its severance pay plans and
policies applicable in general to its salaried employees typically do not
provide for mitigation, offset or reduction of any severance payments received
thereunder. Accordingly, the payment of the severance compensation by the
Company to the Executive in accordance with the terms of this Agreement is
hereby acknowledged by the Company to be reasonable, and the Executive will not
be required to
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<PAGE>
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor will any profits, income, earnings or other
benefits from any source whatsoever create any mitigation, offset, reduction or
any other obligation on the part of the Executive hereunder or otherwise, except
as expressly provided in the last two sentences of Section 4(a)(ii).
7. Legal Fees and Expenses. It is the intent of the Company that the
-----------------------
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
8. Employment Rights: Nothing expressed or implied in this Agreement will
-----------------
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company or any Subsidiary prior to or
following any Change in Control. Any event or occurrence described in Section
3(b)(i), (ii), (v) or (vi) hereof following the commencement of a discussion
with a third person that ultimately results in a Change in Control shall be
deemed to have occurred after a Change in Control for the purposes of this
Agreement.
9. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
10. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would
-11-
<PAGE>
be required to perform if no such succession had taken place. This Agreement
will be binding upon and inure to the benefit of the Company and any successor
to the Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor shall thereafter be deemed the "Company" for the purposes of
this Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 10(c), the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
11. Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 8080 North
Central Expressway, Suite 1100, Dallas, Texas 75206 (to the attention of the
President of the Company) and to the Executive at the Company's address, with a
copy to the Executive at his or her principal residence, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
12. Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
13. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid,
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<PAGE>
unenforceable or otherwise illegal will be reformed to the extent (and only to
the extent) necessary to make it enforceable, valid or legal.
14. Termination of Prior Agreements. Upon the effectiveness of this
-------------------------------
Agreement pursuant to Section 1(f) of this Agreement, the Employment Agreement
between Executive and Sterling Software, dated ____________, as amended to the
date hereof (the "Employment Agreement") shall terminate automatically and shall
thereafter be of no further force or effect; provided, however, that if this
Agreement is held wholly invalid, unenforceable or otherwise illegal, the
preceding clause shall have no effect and the Employment Agreement shall be
deemed to have continued at all times in force and effect. Subject to the
foregoing proviso, this Agreement, upon its effectiveness pursuant to such
Section 2, supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
15. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are to references to Sections of this
Agreement.
16. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By
--------------------------------
Sterling L. Williams
President &
Chief Executive Officer
----------------------------------
[Executive]
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<PAGE>
SSW MODEL
NON-DUAL EMPLOYEE
-----------------
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
February __, 1996, by and between Sterling Software, Inc., a Delaware
corporation (the "Company"), and ______________________________ (the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and has made
and is expected to continue to make major contributions to the profitability,
growth and financial strength of the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not
less than the Executive's annual fixed or base compensation as in effect
for the Executive immediately prior to the occurrence of a Change in
Control or such higher rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or a committee thereof.
(b) "Change in Control" means the occurrence during the Term of any of
the following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors ("Voting Stock") of
such corporation or person
<PAGE>
immediately after such transaction are held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such
transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than two-thirds
of the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), disclosing that any person (as the term
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding Voting Stock
of the Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
Directors of the Company cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this clause
(v) each Director who is first elected, or first nominated for
election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company (or a committee thereof) then
still in office who were Directors of the Company at the beginning of
any such period will be deemed to have been a Director of the Company
at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), (C) any
Company-Sponsored employee stock ownership plan or any other employee
benefit plan of the Company or any Subsidiary, or (D) Sterling Software,
Inc. or any of its wholly owned subsidiaries (collectively, "SSW") either
files or becomes obligated to file a report or a proxy statement under or
in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or
any successor
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<PAGE>
schedule, form or report or item therein) under the Exchange Act disclosing
beneficial ownership by it of shares of Voting Stock of the Company,
whether in excess of 20% or otherwise, or because the Company reports that
a change in control of the Company has occurred or will occur in the future
by reason of such beneficial ownership or any increase or decrease thereof;
provided however, that the exception contained in clause (D) above with
respect to the beneficial ownership of Voting Stock of the Company by SSW
shall expire, without further action, effective as of the date on which SSW
no longer beneficially owns more than 10% of the outstanding Voting Stock
of the Company.
(c) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement
income and welfare benefit policies, plans, programs or arrangements in
which Executive is entitled to participate, including without limitation
any stock option, stock purchase, stock appreciation, savings, pension,
401(k), employee stock ownership (ESOP), supplemental executive retirement,
or other retirement income or welfare benefit, deferred compensation,
incentive compensation, group or other life, health, medical/hospital or
other insurance (whether funded by actual insurance or self-insured by the
Company), disability, salary continuation, expense reimbursement, executive
automobile, tax and financial planning, club memberships, incentive travel,
tax reimbursement and other employee benefit policies, plans, programs or
arrangements that may now exist or any equivalent successor policies,
plans, programs or arrangements that may be adopted hereafter by the
Company, providing perquisites, benefits and service credit for benefits at
least as great in the aggregate as are payable thereunder prior to a Change
in Control.
(d) "Incentive Pay" means an annual amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash
compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company or any successor
thereto, providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control.
(e) "Severance Period" means the period of time commencing on the date
of the first occurrence of a Change in Control and continuing until the
earliest of (i) the _____ anniversary of the occurrence of the Change in
Control, or (ii) the Executive's death; provided, however, that commencing
on each anniversary of the Change in Control, the Severance Period will
automatically be extended for an additional year unless, not later than 90
calendar days prior to such anniversary date, either the Company or the
Executive shall have given written notice to the other that the Severance
Period is not to be so extended.
(f) "Term" means the period commencing as of the date on which the
purchase and sale of shares of common stock of Sterling Commerce, Inc.
pursuant
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<PAGE>
to its initial public offering of common stock first occurs and expiring as
of the later of (i) the close of business on December 31, 2000, or (ii) the
expiration of the Severance Period; provided, however, that (A) commencing
on January 1, 1997 and each January 1 thereafter, the term of this
Agreement will automatically be extended for an additional year unless, not
later than September 30 of the immediately preceding year, the Company or
the Executive shall have given notice that it or the Executive, as the case
may be, does not wish to have the Term extended and (B) subject to the last
sentence of Section 8, if, prior to a Change in Control, the Executive
ceases for any reason to be an employee of the Company or any Subsidiary,
thereupon without further action the Term shall be deemed to have expired
and this Agreement will immediately terminate and be of no further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period with the right to severance compensation as provided in Section
4 upon the occurrence of one or more of the following events (regardless of
whether any other reason for such termination exists or has occurred, including
without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties attached to the
position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay and Incentive Pay, or (C) the termination or denial of the Executive's
rights to Employee Benefits or a reduction in the scope or value thereof,
any of which is not remedied by the Company within 10 calendar days after
receipt by the Company of written notice from the Executive of such change,
reduction or termination, as the case may be;
<PAGE>
(iii) A determination by the Executive (which determination will be
conclusive and binding upon the parties hereto provided it has been made in
good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered
Executive's performance of, or has caused Executive to suffer a substantial
reduction in, any of the authorities, powers, functions, responsibilities
or duties attached to the position held by the Executive immediately prior
to the Change in Control, which situation is not remedied within 10
calendar days after written notice to the Company from the Executive of
such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities or duties hereunder at least 20% more (in terms of
aggregate days in any calendar year or in any calendar quarter when
annualized for purposes of comparison to any prior year) than was required
of Executive in any of the three full years immediately prior to the Change
in Control without, in either case, his prior written consent; or
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor thereto.
(c) A termination by the Company pursuant to Section 3(a) or by the
Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights shall be
governed by the terms thereof. The Company and the Executive are parties to a
Severance Agreement, dated the date hereof (as such agreement may be amended
from time to time, the "Severance Agreement"). Notwithstanding anything
contained in this Agreement to the contrary, in the event the Executive's
employment with the Company is terminated under circumstances in which the
Executive would otherwise be entitled to receive payments and benefits under
both this Agreement and the Severance Agreement, the Executive shall have the
right to elect to receive payments and benefits under either this Agreement or
the Severance Agreement, but not both (except that the Executive may in all
events receive all payments and benefits to which he or she is entitled under
the Severance Agreement during the period between the
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<PAGE>
Termination Date and the Election Date (as such terms are defined below)).
Within five business days following the date of the termination of the
Executive's employment with the Company under the circumstances described in the
preceding sentence (the "Termination Date"), which shall be the effective date
of such termination if the termination is pursuant to Section 3(a) or such other
date that may be specified by the Executive if the termination is pursuant to
Section 3(b), the Company shall provide the Executive, in writing, a reasonably
detailed determination of the payments and other benefits under each of this
Agreement and the Severance Agreement. Executive shall make the election
provided for in this Section 3(c) by providing the Company written notice
thereof within 30 days after the Executive's receipt of the written
determination referred to in the preceding sentence; provided, however, that if
such election is not so made within such 30-day period, the Executive shall be
irrevocably deemed to have elected to receive payments and benefits under this
Agreement (the date on which such election is so made or deemed to have been
made being the "Election Date").
4. Severance Compensation: (a) If, following the occurrence of a Change
----------------------
in Control, the Company terminates the Executive's employment during the
Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (or, in the event that the circumstance described in
Section 3(c) hereof is applicable, within five business days after the
Election Date), a lump sum payment (the "Severance Payment") in an amount
equal to _____ times the sum of (A) Base Pay (at the highest rate in effect
for any period prior to the Termination Date), plus (B) Incentive Pay
(determined in accordance with the standard set forth in Section 1(d));
provided however, that Severance Payment shall be reduced by the aggregate
amount of all cash payments, if any, previously received by the Executive
pursuant to his or her Severance Agreement prior to the Election Date.
(ii) (A) for _____ months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are benefits under welfare plans (as
that term is used in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) substantially similar to those which the Executive
was receiving or entitled to receive immediately prior to the Termination
Date, and (B) such Continuation Period will be considered service with the
Company for the purpose of determining service credits and benefits due and
payable to the Executive under the Company's retirement income,
supplemental executive retirement and other benefit plans of the Company
applicable to the Executive, his dependents or his beneficiaries
immediately prior to the Termination Date. If and to the extent that any
benefit described in subsection (A) or (B) of this Section 4(a)(ii) is not
or cannot be paid or provided under ERISA or any other applicable law or
regulation or under any policy, plan, program or arrangement of the
Company, then the Company will itself pay or provide for the payment to the
Executive, his dependents and beneficiaries, of such Employee Benefits.
Without otherwise limiting the purposes or effect of Section 5,
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<PAGE>
Employee Benefits otherwise receivable by the Executive pursuant to
subsection (A) of this Section 4(a)(ii) will be reduced to the extent
comparable welfare benefits are actually received by the Executive from
another employer during the Continuation Period following the Executive's
Termination Date, and any such benefits actually received by the Executive
shall be reported by the Executive to the Company. Notwithstanding the
preceding sentence, in the event that the Executive is required to pay any
amounts in connection with the receipt of such welfare benefits, the
Company will be obligated to promptly reimburse the Executive for the
amounts paid by the Executive to receive such benefits.
(b) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided hereunder on a timely basis, the Company will pay interest on
the amount or value thereof at an annualized rate of interest equal to the so-
called composite "prime rate" as quoted from time to time during the relevant
period in the Southwest Edition of The Wall Street Journal. Such interest will
-----------------------
be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such tax (such tax or taxes, together with any
such interest and penalties, being hereafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment or payments (collectively, a "Gross-Up Payment"); provided, however,
that no Gross-Up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with an
ISO described in clause (i). The Gross-Up Payment shall be in an amount such
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payment.
-7-
<PAGE>
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Payment to the Executive. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it shall, at the
same time as it makes such determination, furnish the Company and the Executive
a written opinion to the effect that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or other tax
return. As a result of the uncertainty in the application of Section 4999 of
the Code (or any successor provision thereto) and the possibility of similar
uncertainty regarding applicable state or local tax law at the time of any
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 5(f) and the Executive thereafter is required to make a payment of
any Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by Section 5(b). Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company and the
Executive.
(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and such
other documents reasonably requested by the Company, evidencing such payment.
If prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment
-8-
<PAGE>
should be reduced, the Executive shall within five business days pay to the
Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by Section 5(b)
shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within five business days after receipt from the Executive of
a statement therefor and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim and the
Executive shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive, subject to the provisions of Section 5(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either
-9-
<PAGE>
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the amount of
such payment to the Executive on an interest-free basis and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income or other tax, including interest or penalties with respect thereto,
imposed with respect to such advance; and provided further, however, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which the contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the
Company's control of any such contested claim shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and the Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without Executive's prior written consent except as required by law.
6. No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult and may be impossible for the Executive to find reasonably
comparable employment within a reasonable time period following the Termination
Date. In addition, the Company acknowledges that its severance pay plans and
policies applicable in general to its salaried employees typically do not
provide for mitigation, offset or reduction of any severance payments received
thereunder. Accordingly, the payment of the severance compensation by the
Company to the Executive in accordance with the terms of this Agreement is
hereby acknowledged by the Company to be reasonable, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income, earnings
or other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part
-10-
<PAGE>
of the Executive hereunder or otherwise, except as expressly provided in the
last two sentences of Section 4(a)(ii).
7. Legal Fees and Expenses: It is the intent of the Company that the
-----------------------
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
8. Employment Rights: Nothing expressed or implied in this Agreement will
-----------------
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company or any Subsidiary prior to or
following any Change in Control. Any event or occurrence described in Section
3(b)(i), (ii), (v) or (vi) hereof following the commencement of a discussion
with a third person that ultimately results in a Change in Control shall be
deemed to have occurred after a Change in Control for the purposes of this
Agreement.
9. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
10. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially
-11-
<PAGE>
all of the business or assets of the Company whether by purchase, merger,
consolidation, reorganization or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this Agreement), but will not
otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 10(c), the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
11. Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 8080 North
Central Expressway, Suite 1100, Dallas, Texas 75206 (to the attention of the
President of the Company) and to the Executive at the Company's address, with a
copy to the Executive at his or her principal residence, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
12. Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
13. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
-12-
<PAGE>
14. Termination of Prior Agreements. Upon the effectiveness of this
-------------------------------
Agreement pursuant to Section 1(f) of this Agreement, the Employment Agreement
between Executive and Sterling Software, dated ____________, as amended to the
date hereof (the "Employment Agreement") shall terminate automatically and shall
thereafter be of no further force or effect; provided, however, that if this
Agreement is held wholly invalid, unenforceable or otherwise illegal, the
preceding clause shall have no effect and the Employment Agreement shall be
deemed to have continued at all times in force and effect. Subject to the
foregoing proviso, this Agreement, upon its effectiveness pursuant to such
Section 2, supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
15. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are to references to Sections of this
Agreement.
16. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By
----------------------------------
Sterling L. Williams
President &
Chief Executive Officer
------------------------------------
[Executive]
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<PAGE>
EXHIBIT 10(d)
FORM: SSW DUAL EMPLOYEE (Ellis, Moore & Meier)
-----------------
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the
____ day of __________, 199_ by and between Sterling Software, Inc., a Delaware
corporation ("Sterling Software"), and ____________________, an individual
("Executive").
RECITALS:
WHEREAS, Sterling Software acquires, develops, markets and supports a broad
range of products and services; and
WHEREAS, Sterling Software desires to continue to retain Executive as its
____________________; and
WHEREAS, Executive is willing to continue to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Executive agrees to render such managerial services as
----------
are customarily required of the ____________________, and Sterling
Software agrees to utilize such services on the terms and conditions
contained herein. Sterling Software acknowledges that Executive is
also employed as a senior executive at Sterling Commerce, Inc.
("Sterling Commerce"). Sterling Software agrees that such employment
is not inconsistent with this Agreement, the level of Executive's
compensation at Sterling Software having been determined by Sterling
Software with knowledge of Executive's employment by Sterling Commerce
and the demands on Executive's time and attention required by such
employment.
2. Term. This Agreement shall commence on the date on which the purchase
----
and sale of shares of common stock of Sterling Commerce pursuant to
its initial public offering of common stock first occurs and shall
continue in effect for _____ (__) months after the "Notice Date" as
defined in paragraph 3 hereof.
3. Termination of Employment. The parties acknowledge that Executive is
-------------------------
employed "at will" and may be terminated by Sterling Software at any
time
<PAGE>
with or without cause. The Executive shall be entitled to termination
pay calculated in accordance with Section 4 hereof upon termination of
Executive's employment by Sterling Software, with or without cause.
The date on which a notice of termination is given to Executive by
Sterling Software shall be deemed the "Notice Date" with the
termination to be effective _____ (__) months following the Notice
Date. On the Notice Date, Executive shall be deemed to have been
assigned "no duties," shall vacate his or her office and shall resign
as an officer of Sterling Software and its subsidiaries. Since
Executive will be assigned "no duties" with Sterling Software,
Executive shall be free to pursue other employment or consulting
opportunities during the _____ month period in which Executive
receives termination pay.
4. Termination Pay. For purposes of this Agreement, if Executive's
---------------
employment is terminated (or deemed to be terminated) pursuant to
Section 3, upon receipt from Executive (or Executive's estate or
personal representative) of a fully executed release in form
reasonably acceptable to counsel for Sterling Software, Sterling
Software shall pay to Executive as termination pay:
(a) an amount equal to _____ hundred percent of (i) Executive's
aggregate monthly salary for the twelve (12) months immediately
preceding the Notice Date if the Notice Date is a date on or
after the first anniversary of the effectiveness of this
Agreement pursuant to Section 2 of this Agreement (the
"Anniversary Date"); or (ii) Executive's salary at the annual
rate in effect immediately preceding the Notice Date if the
Notice Date precedes the Anniversary Date; and
(b) an amount equivalent to the product of _____ times:
(i) if the Notice Date shall occur on or after the Anniversary
Date, the amount of Executive's aggregate bonuses during the
twelve months immediately prior to the Notice Date (the
"Last Bonus"), after deducting from such product one hundred
percent (100%) of the accrued but unpaid bonus amount
Executive is entitled to receive on the Notice Date,
pursuant to any bonus or incentive compensation plan of
Sterling Software, for periods of service after the period
for which Executive received or was entitled to receive the
Last Bonus or
(ii) if the Notice Date shall occur prior to the Anniversary
Date, an amount equal to the lesser of
-2-
<PAGE>
(x) the amount of the Last Bonus, if any, or
(y) 100% of the aggregate of the budgeted annual bonus,
incentive or other budgeted payments of cash
compensation, in addition to Base Pay, at plan for such
Executive in effect immediately prior to the Notice
Date,
after deducting from such product under this clause (ii) one
hundred percent (100%) of the accrued but unpaid bonus
amount Executive is entitled to receive on the Notice Date,
pursuant to any bonus or incentive plan of Sterling
Software, for periods of service after the period for which
Executive received or was entitled to receive the Last
Bonus, if any.
In the event of Executive's death or disability following the Notice
Date, Executive, Executive's estate or Executive's personal
representative, as the case may be, shall continue to receive the
termination payments provided for in this Section 4.
5. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in
Section 4 hereof shall be determined in good faith by Sterling
Software within 15 days following the Notice Date, and such
termination payments shall be distributed by Sterling Software to
Executive in _____ (__) equal bi-monthly installments beginning thirty
(30) days following the Notice Date and continuing bi-monthly
thereafter.
6. Continuation of Medical and Health Benefits. For a period of _____
-------------------------------------------
(__) months following the Notice Date, Sterling Software shall arrange
to provide Executive, at no additional charge to Executive, with life,
medical, dental, health, accident and disability insurance benefits
substantially similar to those that Executive is receiving or is
entitled to receive immediately prior to the Notice Date, which
benefits shall in no event be less than those benefits in effect
immediately prior to the Notice Date.
7. Continued Participation in Employee Plans. For a period of _____ (__)
-----------------------------------------
months following the Notice Date, the Executive shall continue to
participate in Sterling Software's Employee Stock Ownership Plan
and/or 401(k) Plan and any other such plans as may be adopted in the
future for the benefit and retention of Sterling Software's executive
officers. In no event will Sterling Software be required to make any
new grants of options to such Executive under Sterling Software's
Stock Option Plan after the Notice Date.
-3-
<PAGE>
8. Change-in-Control. Sterling Software and the Executive are parties to
-----------------
a Change-in-Control Severance Agreement, dated the date hereof (as
such agreement may be amended from time to time, the "Change-in-
Control Agreement"). Notwithstanding anything contained in this
Agreement to the contrary, in the event the Notice Date occurs under
circumstances in which the Executive would otherwise be entitled to
receive payments and benefits under both this Agreement and the
Change-in-Control Agreement, the Executive shall have the right to
elect to receive payments and benefits under either this Agreement or
the Change-in-Control Agreement, but not both. Within five business
days following the Notice Date under circumstances in which this
Section 8 would apply, Sterling Software shall provide the Executive,
in writing, a reasonably detailed determination of the payments and
other benefits under each of this Agreement and the Change-in-Control
Agreement. The Executive shall make the election provided for in this
Section 8 within thirty calendar days after Executive's receipt of the
written determination referred to in the preceding sentence; provided,
however, that if such election is not so made within such 30-day
period, the Executive shall be irrevocably deemed to have elected to
receive payments and benefits under the Change-in-Control Agreement.
Prior to the date on which Executive makes or is deemed to have made
the election referred to above, he shall receive all benefits under
Sections 4, 5, 6 and 7 of this Agreement as if the Executive had made
the election to receive benefits and payments under this Agreement.
9. Termination of Employment Under Certain Circumstances. In the event
-----------------------------------------------------
the Notice Date occurs and Sterling Commerce offers to Executive, and
Executive accepts, an increase in compensation and benefits as a
senior executive of Sterling Commerce such that Executive's
compensation and benefits at Sterling Commerce following the Notice
Date are reasonably equivalent to the combined compensation and
benefits Executive was entitled to at both Sterling Software and
Sterling Commerce prior to the Notice Date, Executive shall not be
entitled to the benefits provided for in Sections 4, 5, 6 and 7 of
this Agreement, notwithstanding anything in this Agreement to the
contrary.
10. Full-time Employment. Sterling Software agrees that, if Executive's
--------------------
employment at Sterling Commerce is terminated, with or without cause
(including but not limited to a termination by the Executive pursuant
to Section 3(b) of that certain Change-in-Control Severance Agreement
between Sterling Commerce and Executive, dated the date hereof) or
Executive has received from Sterling Commerce the notice of
termination contemplated in Section 3 of that certain Severance
Agreement between Executive and Sterling Commerce, dated the date
hereof, and in either event Executive is willing and able to devote
his or her full-time efforts to Sterling Software, Sterling Software
shall promptly offer to increase Executive's compensation and benefits
under this Agreement to a level
-4-
<PAGE>
reasonably equivalent to the combined compensation and benefits
Executive was entitled to at both Sterling Software and Sterling
Commerce immediately prior to such termination or notice of
termination, as the case may be.
11. Termination of Prior Agreements. Upon the effectiveness of this
-------------------------------
Agreement pursuant to Section 2 of this Agreement, the Employment
Agreement between Executive and Sterling Software, dated January 1,
1993, as amended to the date hereof, shall terminate automatically and
shall thereafter be of no further force or effect. This Agreement,
upon its effectiveness pursuant to such Section 2, supersedes all
prior agreements, arrangements and understandings with respect to the
subject matter hereof.
12. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party
set forth below or such other places as may from time to time
be designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are
actually received.
If to Sterling Software, to: 8080 N. Central Expressway
Suite 1100
Dallas, Texas 75206
Attention: President
If to Executive, to:
(ii) This Agreement shall be binding upon Sterling Software and
Executive and their respective successors, assigns, heirs and
personal representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Agreement.
-5-
<PAGE>
Executed by the parties hereto on the date first set forth above.
EXECUTIVE
---------------------------------------
Name:
----------------------------------
STERLING SOFTWARE, INC.
By:
------------------------------------
Sterling L. Williams
President and
Chief Executive Officer
-6-
<PAGE>
FORM: SSW NON-DUAL EMPLOYEE
---------------------
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the
____ day of __________, 199_ by and between Sterling Software, Inc., a Delaware
corporation ("Sterling Software"), and ____________________, an individual
("Executive").
RECITALS:
WHEREAS, Sterling Software acquires, develops, markets and supports a broad
range of products and services; and
WHEREAS, Sterling Software desires to continue to retain Executive as its
____________________; and
WHEREAS, Executive is willing to continue to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Executive agrees to render such managerial services as
----------
are customarily required of the ____________________, and Sterling
Software agrees to utilize such services on the terms and conditions
contained herein.
2. Term. This Agreement shall commence on the date on which the purchase
----
and sale of shares of common stock of Sterling Commerce, Inc. pursuant
to its initial public offering of common stock first occurs and shall
continue in effect for _____ (__) months after the "Notice Date" as
defined in paragraph 3 hereof.
3. Termination of Employment. The parties acknowledge that Executive is
-------------------------
employed "at will" and may be terminated by Sterling Software at any
time with or without cause. The Executive shall be entitled to
termination pay calculated in accordance with Section 4 hereof upon
termination of Executive's employment by Sterling Software, with or
without cause.
The date on which a notice of termination is given to Executive by
Sterling Software shall be deemed the "Notice Date" with the
termination to be
<PAGE>
effective _____ (__) months following the Notice Date. On the Notice
Date, Executive shall be deemed to have been assigned "no duties,"
shall vacate his or her office and shall resign as an officer of
Sterling Software and its subsidiaries. Since Executive will be
assigned "no duties" with Sterling Software, Executive shall be free
to pursue other employment or consulting opportunities during the
_____ month period in which Executive receives termination pay.
4. Termination Pay. For purposes of this Agreement, if Executive's
---------------
employment is terminated (or deemed to be terminated) pursuant to
Section 3, upon receipt from Executive (or Executive's estate or
personal representative) of a fully executed release in form
reasonably acceptable to counsel for Sterling Software, Sterling
Software shall pay to Executive as termination pay:
(a) an amount equal to _____ hundred percent of Executive's aggregate
monthly salary for the twelve (12) months immediately preceding
the Notice Date; and
(b) an amount equivalent to the product of _____ times the amount of
Executive's aggregate bonuses during the twelve months
immediately prior to the Notice Date (the "Last Bonus"), after
deducting from such product one hundred percent (100%) of the
accrued but unpaid bonus amount Executive is entitled to receive
on the Notice Date, pursuant to any bonus or incentive
compensation plan of Sterling Software, for periods of service
after the period for which Executive received or was entitled to
receive the Last Bonus.
In the event of Executive's death or disability following the Notice
Date, Executive, Executive's estate or Executive's personal
representative, as the case may be, shall continue to receive the
termination payments provided for in this Section 4.
5. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in
Section 4 hereof shall be determined in good faith by Sterling
Software within 15 days following the Notice Date, and such
termination payments shall be distributed by Sterling Software to
Executive in _____ (__) equal bi-monthly installments beginning thirty
(30) days following the Notice Date and continuing bi-monthly
thereafter.
6. Continuation of Medical and Health Benefits. For a period of _____
-------------------------------------------
(__) months following the Notice Date, Sterling Software shall arrange
to provide Executive, at no additional charge to Executive, with life,
medical, dental, health, accident and disability insurance benefits
substantially similar to those that Executive is receiving or is
entitled to receive
-2-
<PAGE>
immediately prior to the Notice Date, which benefits shall in no event
be less than those benefits in effect immediately prior to the Notice
Date.
7. Continued Participation in Employee Plans. For a period of _____ (__)
-----------------------------------------
months following the Notice Date, the Executive shall continue to
participate in Sterling Software's Employee Stock Ownership Plan
and/or 401(k) Plan and any other such plans as may be adopted in the
future for the benefit and retention of Sterling Software's executive
officers. In no event will Sterling Software be required to make any
new grants of options to such Executive under Sterling Software's
Stock Option Plan after the Notice Date.
8. Change-in-Control. Sterling Software and the Executive are parties to
-----------------
a Change-in-Control Severance Agreement, dated the date hereof (as
such agreement may be amended from time to time, the "Change-in-
Control Agreement"). Notwithstanding anything contained in this
Agreement to the contrary, in the event the Notice Date occurs under
circumstances in which the Executive would otherwise be entitled to
receive payments and benefits under both this Agreement and the
Change-in-Control Agreement, the Executive shall have the right to
elect to receive payments and benefits under either this Agreement or
the Change-in-Control Agreement, but not both. Within five business
days following the Notice Date under circumstances in which this
Section 8 would apply, Sterling Software shall provide the Executive,
in writing, a reasonably detailed determination of the payments and
other benefits under each of this Agreement and the Change-in-Control
Agreement. The Executive shall make the election provided for in this
Section 8 within thirty calendar days after Executive's receipt of the
written determination referred to in the preceding sentence; provided,
however, that if such election is not so made within such 30-day
period, the Executive shall be irrevocably deemed to have elected to
receive payments and benefits under the Change-in-Control Agreement.
Prior to the date on which Executive makes or is deemed to have made
the election referred to above, he shall receive all benefits under
Sections 4, 5, 6 and 7 of this Agreement as if the Executive had made
the election to receive benefits and payments under this Agreement.
9. Termination of Prior Agreements. Upon the effectiveness of this
-------------------------------
Agreement pursuant to Section 2 of this Agreement, the Employment
Agreement between Executive and Sterling Software, dated _______, as
amended to the date hereof, shall terminate automatically and shall
thereafter be of no further force or effect. This Agreement, upon its
effectiveness pursuant to such Section 2, supersedes all prior
agreements, arrangements and understandings with respect to the
subject matter hereof.
-3-
<PAGE>
10. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party
set forth below or such other places as may from time to time be
designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are
actually received.
If to Sterling Software, to: 8080 N. Central Expressway
Suite 1100
Dallas, Texas 75206
Attention: President
If to Executive, to:
(ii) This Agreement shall be binding upon Sterling Software and
Executive and their respective successors, assigns, heirs and
personal representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Agreement.
Executed by the parties hereto on the date first set forth above.
EXECUTIVE
------------------------------------
Name:
-------------------------------
STERLING SOFTWARE, INC.
By:
---------------------------------
Sterling L. Williams
President and
Chief Executive Officer
-4-
<PAGE>
EXHIBIT 11(a)
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
-------- --------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders.............................. $152,018 $152,018
Add: Interest expense on
amounts outstanding for the 5
3/4% Convertible Subordinated
Debentures (net of applicable
income taxes)............................ 542
-------- --------
$152,018 $152,560
======== ========
Shares:
Weighted average of shares 29,450 29,450
outstanding..............................
Add common shares issued on assumed 7,299 7,316
exercise of options and warrants
Less common shares assumed repurchased.... (4,710) (4,171)
-------- --------
32,039 32,595
========
Common shares issued on assumed
conversion of 5 3/4% Convertible
Subordinated Debentures.................... 1,915
--------
34,510
========
Earnings per common share:
Primary................................... $4.74
========
Fully diluted............................. $4.42
========
</TABLE>
<PAGE>
EXHIBIT 11(b)
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
-------- --------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders............................ $20,110 $20,110
Add: Interest expense on amounts
outstanding for the 5 3/4%
Convertible Subordinated Debentures
(net of applicable income taxes).... 439 1,042
Interest income on investment of
proceeds from assumed conversion of
options and warrants (net of
applicable income taxes)........... 605
-------- --------
$20,549 $21,757
======== ========
Shares:
Weighted average of shares outstanding.... 23,526 23,526
Add common shares issued on assumed
exercise of options and warrants......... (4,769) (4,769)
Less common shares assumed repurchased.... 9,877 9,877
-------- --------
28,634 28,634
========
Common shares issued on
assumed conversion of 5 3/4%
Convertible Subordinated
Debentures................................. 4,056
--------
32,690
========
Earnings per common share:
Primary................................... $.72
========
Fully diluted............................. $.67
========
</TABLE>
<PAGE>
EXHIBIT 11(c)
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
-------- --------
<S> <C> <C>
Earnings:
Earnings applicable to common
stockholders............................. $173,325 $173,325
Add: Interest expense on
amounts outstanding for the 5
3/4% Convertible Subordinated
Debentures (net of applicable
income taxes)............................ 1,703
-------- --------
$173,325 $175,028
======== ========
Shares:
Weighted average of shares
outstanding.............................. 28,032 28,032
Add common shares issued on assumed
exercise of options and warrants......... 7,875 7,920
Less common shares assumed repurchased.... (5,608) (4,544)
-------- --------
30,299 31,408
========
Common shares issued on assumed conversion
of 5 3/4% Convertible Subordinated
Debentures................................. 2,990
--------
34,398
========
Earnings per common share:
Primary................................... $5.72
========
Fully diluted............................. $5.09
========
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 508,826
<SECURITIES> 153,255
<RECEIVABLES> 169,221
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 853,555
<PP&E> 136,322
<DEPRECIATION> 64,868
<TOTAL-ASSETS> 1,104,600
<CURRENT-LIABILITIES> 252,960
<BONDS> 0
0
0
<COMMON> 3,572
<OTHER-SE> 763,236
<TOTAL-LIABILITY-AND-EQUITY> 1,104,600
<SALES> 312,641
<TOTAL-REVENUES> 312,641
<CGS> 102,897
<TOTAL-COSTS> 245,673
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,797
<INCOME-PRETAX> 310,867
<INCOME-TAX> 137,542
<INCOME-CONTINUING> 173,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,325
<EPS-PRIMARY> 5.72
<EPS-DILUTED> 5.09
</TABLE>
