<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8465
----------------
STERLING SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1873956
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
DALLAS, TEXAS 75206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 891-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
<S> <C>
Common Stock, $0.10 Par Value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of November 15, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $1,209,554,936 based on the closing
sales price of $33 1/8 of the Registrant's Common Stock on the New York Stock
Exchange.
As of November 15, 1996, 38,429,849 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Meeting of Stockholders of
Registrant to be held during 1997 are incorporated by reference in Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
STERLING SOFTWARE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FORM 10-K ITEM PAGE
-------------- ----
<C> <S> <C>
PART I.
Item 1. Business................................................ 1
Item 2. Properties.............................................. 13
Item 3. Legal Proceedings....................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..... 14
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 14
Item 6. Selected Financial Data................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16
Item 8. Financial Statements and Supplementary Data............. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 48
PART III.
Item 10. Directors and Executive Officers of the Registrant...... 48
Item 11. Executive Compensation.................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 48
Item 13. Certain Relationships and Related Transactions.......... 48
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 49
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Sterling Software, Inc. ("Sterling Software" or the "Company") was founded
in 198l and became a publicly owned corporation in 1983. Sterling Software is
a recognized worldwide supplier of software products and services within three
major markets classified as systems management, applications management and
federal systems. Sterling Software's international operations are responsible
for sales, marketing and first-level support of the Company's products outside
the United States and Canada. Consistent with Sterling Software's
decentralized operating structure, major markets are served by independently
operated business groups which consist of divisions that focus on specific
business niches within those markets. Sterling Software believes that its
decentralized organizational structure promotes operating flexibility,
improves responsiveness to customer requirements and focuses management on
achieving revenue and operating profit objectives. Sterling Software has
historically expanded its operations through internal growth and by business
and product acquisitions.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce, Inc. ("Sterling Commerce"), which owns and operates the businesses
formerly conducted by Sterling Software's electronic commerce business segment
(see "Sterling Commerce Initial Public Offering and Spin-Off" below). As used
in this Part I, the terms "Sterling Software" and the "Company" do not include
the business operations of Sterling Commerce. Further, to give effect to the
spin-off, Sterling Software has reclassified the results of Sterling Commerce
as discontinued operations in the accompanying Consolidated Financial
Statements.
As of September 30, 1996, Sterling Software's continuing business segments
were:
. the systems management business segment, which provides enterprise-wide
systems management software products for large computing environments.
The software products of this business segment specialize in storage
management, operations management and VM systems management. Sterling
Software addresses the needs of corporations as they move to
client/server computing environments, offering products that operate on a
variety of computer platforms and operating systems;
. the applications management business segment, which provides products for
developing new applications, revitalizing, integrating and extending
existing applications and facilitating enterprise information access.
These software tools allow customers to quickly develop and implement new
client/server applications, to integrate and improve existing
applications at the desktop and to transform data into information that
is useful for effective decision-making. Consulting and education
services are also offered to ensure customers are successful in using the
products; and
. the federal systems business segment, which provides highly technical
professional services to the federal government under several multi-year
contracts. Major customers of this business segment are the U.S.
Department of Defense ("DoD") and the National Aeronautics and Space
Administration ("NASA"). Federal Systems' personnel also serve as a
source of technical expertise for other divisions of Sterling Software
and provide technical services for non-governmental customers, as well.
Worldwide revenue from the Company's systems management, applications
management and federal systems business segments represented 39%, 25% and 26%,
respectively, of the Company's total revenue during 1996. See Notes 5 and 6 of
Notes to Consolidated Financial Statements.
In addition to the three business segments described above, Sterling
Software has international operations that sell and support the Company's
products through 30 offices in 17 countries and through agents and
distributors in 51 additional countries. International operating results
therefrom are included, as applicable, in the operating results of the systems
management and applications management business segments contained herein. The
Company's international operations also sell, market and provide first-level
support for certain of
1
<PAGE>
Sterling Commerce's electronic commerce products, the results of which are
included in the "Corporate and other" business segment. See "Shared Management
and Other Relationships with Sterling Commerce" below. Revenue from the
Company's international operations represented 38% of the Company's revenue
during 1996.
A large percentage of Sterling Software's business is recurring business
through annual and multi-year product support agreements, generally having
terms ranging from one to three years, fixed term product lease and rental
agreements, generally having terms ranging from month-to-month to year-to-year
and multi-year federal contracts generally having terms ranging from one to
five years. Recurring revenue represented 54% and 55% of the Company's total
revenue in 1996 and 1995, respectively. Sterling Software's customer base
includes 95 of the 100 largest and 410 of the 500 largest U.S. industrial and
service corporations, as ranked by 1995 revenues reported in Fortune.
SYSTEMS MANAGEMENT
The systems management business segment is conducted by Sterling Software's
Systems Management Group ("SMG"), with headquarters near Washington, D.C. SMG
provides enterprise-wide systems management software for large computing
environments. SMG's three divisions specialize in storage management, VM
systems management and operations management software. As of September 30,
1996, SMG employed approximately 450 people.
Under the SAMS family name, the Storage Management Division provides software
that manages, monitors, and automates data storage in both distributed and
centralized environments. These products provide enterprise-wide storage
management capabilities and include solutions for a variety of platforms,
including MVS, UNIX, Windows NT and NetWare. The key elements of the division's
enterprise storage management architecture remain consistent across multiple
platforms and allow organizations to: manage enterprise data storage in a
uniform manner; implement consistent storage management policies and standards;
provide centralized management of distributed data; and enforce the protection
of critical data, regardless of where it resides. SAMS:Vantage is a
client/server system that provides comprehensive automation, interactive
reporting, analysis and predictive modeling capabilities along with centralized
allocation control for all MVS data. SAMS:Expert delivers centralized
management of distributed storage across multiple platforms through on-line,
interactive reporting and automation of storage subsystems in UNIX, Windows NT
and NetWare environments. The division also offers additional products,
including SAMS:Allocate, a centralized allocation control system to make volume
pooling easier and SAMS:Disk, a data storage management system. SAMS:Select is
a high-performance backup accelerator for MVS data and SAMS:Compress is a data
compression tool available for MVS, IMS and DB2 data.
SMG's VM Software Division is the leading provider of comprehensive,
integrated systems management software for IBM's VM operating system. The
division has three product lines. The VM:Manager product family provides
solutions for automated operations, storage management, service-level
management, security and disaster recovery. VM:Manager enables VM sites to
control costs, improve performance and increase user productivity. In 1996, the
division introduced VM:Vantage, a client/server system for managing VM data
storage from a Windows-based desktop. VM:Vantage provides comprehensive
automation, reporting and analysis capabilities for VM data. In addition,
cross-platform managers can manage both VM and MVS storage with the shared
client technology of VM:Vantage and the Storage Management Division's
SAMS:Vantage. VM:Webserver, also introduced in 1996, is a World Wide Web server
for VM, which allows customers to exploit user-friendly web browsers to deliver
mainframe-based information to end-users on any platform. VM:Webserver acts as
a repository for home pages and documents created using Hypertext Markup
Language ("HTML") and also stores, retrieves, and processes information in
various formats, including text, graphics, sound, image, video and Java
applets.
SMG's networked systems management products are marketed by the Operations
Management Division under the SOLVE family name. This division provides
software for managing networked systems from a
2
<PAGE>
business service perspective. SOLVE products allow information systems to tie
operations and service objectives to the organization's business processes
through a methodology called service-driven operations. SOLVE:Netmaster
automates Systems Network Architecture ("SNA") and other network management
operations across a variety of enterprise platforms and SOLVE:Netmaster for
TCP/IP (Transmission Control Protocol/Internet Protocol), introduced during
1996, provides end-to-end management and monitoring of combined SNA and TCP/IP
networks from one console. SOLVE:Operations for MVS and SOLVE:Operations for
SNA provide desired-state, code-free, service-based automation of MVS systems
and SNA networks, respectively. Automated actions are mapped to service-level
obligations and business priorities, enabling customers to monitor and manage
resources as elements of a service commitment. SOLVE:Operations for OpenView
and SOLVE:Operations for NetView/AIX (formerly named SOLVE:Commander), are
UNIX-based products that enable customers to manage mainframe (MVS and SNA)
and distributed (Simple Network Management Protocol ("SNMP") and non-SNMP)
systems resources from a service-driven perspective in which resources are
seen in terms of the services, or business functions, they support.
SOLVE:Central, an integrated suite of products to record problem, change,
configuration and asset data in a single data repository, is comprised of:
SOLVE:Problem for problem tracking and resolution; SOLVE:Change for managing
the systems change process; SOLVE:Configuration for tracking software and
hardware configuration changes; SOLVE:Asset for business management of
computer assets and the services they deliver; and SOLVE:Viewpoint, a Windows-
based interface to the SOLVE:Central suite that brings administrative control
to the desktop.
Worldwide revenue from the Company's systems management business segment
represented 39% of the Company's revenue during both 1996 and 1995 and 43% of
the Company's revenue during 1994.
APPLICATIONS MANAGEMENT
The applications management business segment is conducted by Sterling
Software's Applications Management Group ("AMG"), with headquarters in
Atlanta, Georgia, and Sterling Software's Information Management Group
("IMG"), with headquarters near Los Angeles, California. IMG was formed on
October 1, 1996 to align two businesses focused on the business intelligence
market and is composed of two former AMG divisions, the Information Management
Division and the Data Access Division. IMG's two divisions develop software
products that facilitate enterprise information access and transform data into
information that is useful for effective decision-making. AMG's two divisions,
the Applications Development Division and the Desktop Integration Division,
focus exclusively on the client/server applications development market with
software tools for creating new client/server applications and tools for
integrating desktop, server and host applications. As of September 30, 1996,
AMG and IMG collectively employed approximately 350 people.
AMG's Applications Development Division markets PC-based products and
services under the KEY family name for business and systems modeling and
predictably developing new applications systems. The products combine business
and applications modeling with state-of-the-art rapid prototyping and visual
client/server development to produce applications for Windows, UNIX, OS/2,
OS/400 and MVS environments. A systematic approach to modeling, delivering and
managing applications throughout the development process is provided.
KEY:Workgroup is a Windows-based application development environment based on
an underlying object-oriented architecture that combines the strengths of
business and systems modeling with the capabilities of visual development. The
KEY:Workgroup family of products integrates workflow modeling, business
process reengineering, data analysis and visual development, allowing
developers to reuse objects and application components for development of
client/server applications. The Key:Workgroup components are: KEY:Advise,
KEY:Model, KEY:Empower and KEY:Assemble. KEY:Enterprise is an OS/2-based suite
of second generation client/server development and support products for
enterprise-class business applications. This product suite facilitates the
development of multi-tier, client/server applications, assisting users in
multiple development phases: planning, analysis, prototyping, design, code
generation, system documentation and maintenance. The KEY:Enterprise
components are: KEY:Advise, KEY:Analyze, KEY:Coordinate, KEY:Construct,
KEY:Design, KEY:Document, KEY:Guide, KEY:Plan and KEY:Team.
3
<PAGE>
AMG's Desktop Integration Division provides software products and services
under the STAR family name that assist organizations in their delivery of
client/server applications that integrate host, server and desktop systems
throughout the enterprise. The division's flagship product, STAR:Flashpoint,
is a Windows-based tool that, using visual development techniques, allows
users to incorporate and integrate information at the desktop as well as to
create graphical user interfaces for host-based applications. This division is
also developing a new product for expected release in December 1996,
STAR:View, that will provide end-users with intelligent access to host-based
applications via web browsers. STAR:View, which runs on a Windows NT server,
provides intelligent access to host applications via standard web browsers. It
translates the host data stream into HTML pages and then translates the HTML
pages back into the host datastream to return information to the host
application.
IMG's Information Management Division markets products and services under
the VISION family name that enable customers to extract value from their
existing corporate data and maximize the return on their information
technology investment by extending the life and usefulness of their legacy
applications. By improving existing applications, customers can reconcile
their legacy and new development strategies, ensuring they have the resources
to implement required new systems. VISION:Results is an information management
and report generation system for IBM enterprise servers and a dynamic
complement to COBOL. VISION:Builder and VISION:Transact are applications
development tools for batch and on-line environments, respectively, that
operate on major IBM enterprise server platforms. The VISION:Legacy suite of
tools addresses the functions required to assess the quality and
maintainability of applications, restructure old COBOL programs, redocument
the flow of control through legacy systems and graphically represent the
architecture and flow of existing systems. The VISION:Legacy suite of
products, including VISION:Inspect, VISION:Assess, VISION:Recode and
VISION:Redocument, helps address the "Year 2000" effort with system-wide
analysis capabilities and reports to help identify and modify date and date-
related fields. The division's consultants, assisted by the software products,
offer customized approaches to address the "Year 2000" issue.
IMG's Data Access Division markets managed data access products and services
under the CLEAR family name that enable business users to access corporate
data in an organized, efficient manner. CLEAR:Access and CLEAR:Manage are the
cornerstones of the product line and run on Windows, Windows NT, Windows 95
and Macintosh platforms. CLEAR:Access facilitates end-user access as a query
and reporting tool, allowing both novice and experienced users to easily
obtain, manipulate and view multi-dimensional data from more than 70
databases, ranging from relational databases to data warehouses and legacy
systems. CLEAR:Manage allows database managers to monitor and control database
access in a client/server environment.
Worldwide revenue from the Company's applications management business
segment represented 25%, 27% and 15% of the Company's revenue during 1996,
1995 and 1994, respectively.
FEDERAL SYSTEMS
The federal systems business segment is conducted by Sterling Software's
Federal Systems Group ("FSG"), with headquarters near Washington, D.C. FSG's
two divisions provide highly specialized technical professional services to
sectors of the federal government, generally under multi-year contracts. In
1996, Sterling Software began its 30th year of service to both NASA and the
DoD, FSG's major customers. In 1996, FSG was performing work under 107
contracts, many of which are for multi-year terms. As of September 30, 1996,
FSG employed approximately 1,200 people.
FSG's Information Technology Division provides highly technical professional
services, generally requiring top secret security clearances, to military
command and control, intelligence and weather agencies. The division
specializes in data handling, secure communications, networking, systems
integration and application development in support of varied technical
projects ranging from satellite data collection to counter-terrorism. In 1996,
this division expanded its work in weather and intelligence applications and
in network security through competitively awarded and follow-on contracts. The
division's computing resources include data processing
4
<PAGE>
facilities approved for classified operations and substantial hardware and
software configurations to support software life cycle activities in a
distributed processing environment.
FSG's Scientific Systems Division is a provider of scientific software
support and highly technical professional services to civil sectors of the
federal government, particularly in scientific and engineering areas, and a
provider of specialty software products in advanced visualization and virtual
reality. The division's contracts include projects for spacecraft imagery,
supercomputing outsourcing, systems administration and network security, and
applications such as aerodynamics, aerospace testing and transportation
safety. Under contract to NASA, the division's engineers designed and now
operate the NASA Science Internet and developed the prototypes of new
knowledge-based air traffic management software which was successfully field-
tested by the Federal Aviation Administration at airports in Denver and
Dallas/Fort Worth. The division's customers include the Jet Propulsion
Laboratory, the NASA Ames, Lewis and Marshall Centers and the Executive Office
of the President. In 1996, the division and its staff received various
recognition awards and honors from its customers, including the NASA Quality
Award.
Revenue from the federal systems business segment represented 26% of the
Company's revenue during both 1996 and 1995 and 33% of the Company's revenue
during 1994.
INTERNATIONAL OPERATIONS
Sterling Software's International Group ("IG") and Asia Pacific Group
("APG") are the exclusive channels to international markets for Sterling
Software's products, with responsibility for sales, marketing and first-level
support of all Sterling Software products and services outside of the United
States and Canada. The groups also operate under a three-year exclusive
marketing and services agreement with Sterling Commerce for the sales,
marketing and first-level support of Sterling Commerce's CONNECT and GENTRAN
families of products sold in markets outside of the U.S. and Canada. CONNECT
products enable customers to send and retrieve data electronically and GENTRAN
products convert data into and out of standard electronic commerce formats.
See "Shared Management and Other Relationships with Sterling Commerce" below.
IG operates through four regional divisions representing France and
Northern, Central and Southern Europe, and the Distributor Division, which
represents Sterling Software's agents and distributors in Europe, the Middle
East, South Africa, Israel and Latin America. APG was formed on October 1,
1996 from IG's former Pacific Division. APG operates through two regional
divisions representing Japan and Australia, and a business unit, Distributor
Operations, which represents Sterling Software's agents and distributors in
the Pacific Rim.
The France Division, with an office in Paris, France, has responsibility for
direct sales in France and French- speaking Switzerland. The Northern Europe
Division, headquartered in London, England, has responsibility for direct
sales in the United Kingdom, Denmark, Finland, Belgium, The Netherlands and
Scandinavia, and has offices in eight European cities. The Central Europe
Division, headquartered in Dusseldorf, Germany, has responsibility for direct
sales in Germany, German-speaking Switzerland and Austria, and has offices in
five European cities. The Southern Europe Division, headquartered in Rome,
Italy, has responsibility for all sales in Italy and direct sales in Spain and
Portugal. The division has offices in five European cities. IG's Distributor
Division, headquartered in London, England, manages agents and distributors in
41 countries, including South Africa, Israel, Spain, Portugal and Mexico, and
countries in areas that include the Middle East, Eastern Europe and Central
and South America.
APG's Japan Division, headquartered in Tokyo, Japan with an office in Osaka,
has responsibility for direct and certain indirect sales in Japan. The
Australia Division, headquartered in Sydney, Australia, has responsibility for
direct sales in Australia and New Zealand and has offices in three cities.
APG's Distributor Operations, headquartered in Singapore, manages agents and
distributors in territories that include China, Hong Kong, India, Indonesia,
Korea, Malaysia, the Philippines, Taiwan, Thailand and Singapore.
As of September 30, 1996, IG and APG collectively employed approximately 500
people. Revenue from the Company's international operations represented 38% of
the Company's revenue during both 1996 and 1995
5
<PAGE>
and 32% of the Company's revenue during 1994. As noted above, Sterling
Software's international operating results are included, as applicable, in the
operating results of the systems management and applications management
business segments. The results of the Company's international operations
related to selling, marketing and providing first-level support for certain of
Sterling Commerce's electronic commerce products are included in the
"Corporate and other" business segment.
STERLING COMMERCE INITIAL PUBLIC OFFERING AND SPIN-OFF
On March 13, 1996, Sterling Software completed an initial public offering
(the "Offering") of 13.8 million shares, or 18.4%, of Sterling Commerce, a
subsidiary formed to operate the business of Sterling Software's former
Electronic Commerce Group. Sterling Software sold to the public 12 million
shares of Sterling Commerce common stock, par value $.01 per share ("Commerce
Stock"), then owned by it and Sterling Commerce sold 1.8 million previously
unissued shares of Commerce Stock. Net proceeds, after deducting underwriting
discounts and commissions and other Offering expenses, were approximately
$265,458,000 to Sterling Software.
Sterling Software incorporated Sterling Commerce as a wholly owned
subsidiary in December 1995 and (i) caused to be transferred to Sterling
Commerce all of the subsidiaries previously comprising Sterling Software's
Electronic Commerce Group and certain assets relating to operations of the
Electronic Commerce Group previously conducted by Sterling Software's
International Group and Federal Systems Group, and (ii) entered into
contractual arrangements with Sterling Commerce related to, among other
things, tax matters, international marketing, indemnification, space sharing
and certain services.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce with the pro rata distribution (the "Distribution") of its remaining
81.6% ownership in Sterling Commerce to Sterling Software stockholders by
means of a tax-free dividend. To give effect to the spin-off, Sterling
Software has reclassified the results of Sterling Commerce as discontinued
operations in the accompanying Consolidated Financial Statements.
SHARED MANAGEMENT AND OTHER RELATIONSHIPS WITH STERLING COMMERCE
Management
The Board of Directors of Sterling Software (the "Board") currently has ten
members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are directors
of Sterling Software and are also directors of Sterling Commerce. Mr. Sterling
L. Williams is President, Chief Executive Officer and a member of the Board
and is also Chairman of the Board of Directors of Sterling Commerce. In
addition, Jeannette P. Meier serves as Executive Vice President, Chief
Financial Officer, General Counsel and Secretary of both companies and Phillip
A. Moore serves as an Executive Vice President of both companies. Neither the
length of service for any particular individual nor the capacity or capacities
in which he or she may serve either Sterling Software or Sterling Commerce (or
both) has been determined as of the date of this report.
Sterling Software and Sterling Commerce have significant contractual and
other ongoing relationships as discussed below under "Intercompany
Agreements." Conflicts of interest may arise between Sterling Software and
Sterling Commerce in a number of areas relating to such ongoing relationships,
including potential competitive business activities, international marketing
functions, tax and employee benefit matters, indemnity arrangements, and the
continued service of certain directors and executive officers of each of
Sterling Software and Sterling Commerce as directors and executive officers of
the other company. The Board will utilize such procedures in evaluating the
terms and provisions of any material transactions between Sterling Software
and Sterling Commerce and their respective affiliates as the Board may deem
appropriate in light of its fiduciary duties under state law.
6
<PAGE>
Intercompany Agreements
In anticipation of the Offering, Sterling Software and Sterling Commerce
entered into a number of agreements (the "Intercompany Agreements") for the
purpose of defining certain relationships between them. Certain of the more
significant Intercompany Agreements are summarized below. As a result of
Sterling Software's ownership interest in Sterling Commerce, the terms of such
agreements were not the result of arm's-length negotiation. Copies of certain
of the Intercompany Agreements, including those described below, have been
filed as exhibits to this report.
Tax Allocation Agreement. Sterling Software and Sterling Commerce have
entered into a tax allocation agreement (the "Tax Allocation Agreement") to
provide for (i) the allocation of payments of taxes for periods during which
Sterling Software (or any of its affiliates other than Sterling Commerce and
its subsidiaries) and Sterling Commerce or any of its subsidiaries are
included in the same consolidated group for federal income tax purposes or the
same consolidated, combined or unitary returns for state, local or foreign tax
purposes, (ii) the allocation of responsibility for the filing of tax returns,
(iii) the conducting of tax audits and the handling of tax controversies, and
(iv) various related matters. For periods during which Sterling Commerce
and/or its subsidiaries are included in Sterling Software's consolidated
federal income tax returns or consolidated, combined or unitary state tax
returns (which periods include the period between the Offering and the
Distribution), Sterling Commerce is required to pay to or is entitled to
receive from Sterling Software its allocable portion of the consolidated
federal and state income tax liability or refunds, respectively. Sterling
Commerce is directly responsible for separate state, local and foreign tax
returns and related liabilities for itself and its subsidiaries for all
periods.
International Marketing Agreement. A subsidiary of each of Sterling Software
and Sterling Commerce have entered into a marketing services agreement (the
"International Marketing Agreement") pursuant to which Sterling Software acts
as the exclusive distributor (directly and through subdistributors) of
Sterling Commerce's GENTRAN and CONNECT families of products in markets
outside the United States and Canada and is responsible for sales, marketing
and first-level support of such products in those markets. The International
Marketing Agreement, which expires in March 1999, provides for the payment to
Sterling Commerce of royalties equal to 50% of the net revenue that Sterling
Software derives from licenses of Sterling Commerce's GENTRAN and CONNECT
families of products and related product support services, with the balance of
such net revenue to be retained by Sterling Software as payment for the
services provided by it under the International Marketing Agreement. The
International Marketing Agreement obligates Sterling Software to use efforts
in the marketing of Sterling Commerce's software products and the provision of
related services comparable to those used by Sterling Software in connection
with the marketing of its own products and services. Although it is not
anticipated that products and services offered by Sterling Software will be
directly competitive with the products and services offered by it on behalf of
Sterling Commerce, the International Marketing Agreement does not expressly
prohibit Sterling Software from offering such products and services (subject
to the obligations described in the preceding sentence).
Indemnification Agreement. Sterling Software and Sterling Commerce have
entered into an indemnification agreement (the "Indemnification Agreement").
Under the Indemnification Agreement, subject to limited exceptions, Sterling
Commerce is required to indemnify Sterling Software and its directors,
officers, employees, agents and representatives for liabilities under federal
or state securities laws as a result of the Offering or the Distribution. The
Indemnification Agreement also provides that each party thereto (the
"Indemnifying Party") will indemnify the other party thereto and its
directors, officers, employees, agents and representatives (each, an
"Indemnified Party") for liabilities that may be incurred by an Indemnified
Party relating to, resulting from or arising out of (i) the businesses,
operations or assets conducted or owned or formerly conducted or owned by the
Indemnifying Party and its subsidiaries (except, in the case where Sterling
Software is the Indemnifying Party, the businesses, operations and assets of
Sterling Commerce and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering. In addition, the Indemnification Agreement and a subsequent
agreement between Sterling Software and Sterling Commerce provide that
Sterling Commerce will indemnify Sterling Software and its directors,
officers, employees, agents and representatives for any liabilities resulting
from or arising out of
7
<PAGE>
certain acts, failures to act or the provision of incorrect factual information
by Sterling Commerce in connection with the Internal Revenue Service ("IRS")
ruling request that cause the Distribution to be taxable to Sterling Software
or its stockholders.
The Indemnification Agreement also provides that each party thereto (the
"Obligor Party") (i) will use reasonable efforts to obtain the release of the
other party thereto (the "Guarantor Party") from its obligation under or in
respect of all material guarantees, surety and performance bonds, letters of
credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for
any liabilities incurred under such guarantees, bonds, letters of credit and
other arrangements, and (iii) will reimburse the Guarantor Party for its direct
costs (or, in certain circumstances, the Obligor Party's pro rata share of such
direct costs) of maintaining such guarantees, bonds, letters of credit and
other arrangements pending the release of the Guarantor Party thereunder.
PRODUCT LICENSES
Sterling Software's software products are generally licensed for perpetual
use or for a fixed term. Sterling Software typically does not sell or otherwise
transfer title to its software products. The Company's license agreements
generally restrict the use of the product to designated sites or central
processing units and prohibit reproduction, transfer or disclosure of the
product; however, some license agreements may cover multiple sites or multiple
central processing units at one site. In 1996, 1995 and 1994, 44%, 42% and 37%,
respectively, of the Company's revenue consisted of products revenue. During
both 1996 and 1995, 36% of total software revenue, and during 1994, 15% of
total software revenue, was derived from platforms other than stand-alone
mainframes.
PRODUCT SUPPORT
Product support is available to Sterling Software customers, typically
through annual contracts generally priced from 12% to 22% of the then-current
license fee. Sterling Software's product support contracts allow customers to
receive updated versions of Sterling Software's software products when and if
they become available, as well as telephone access to Sterling Software's
technical personnel. In 1996, 28%, and in both 1995 and 1994, 29% of the
Company's revenue consisted of product support revenue.
SERVICES
Sterling Software's services primarily include technical professional
services in support of federal government contracts provided through Sterling
Software's Federal Systems Group. Sterling Software provides training and
education in support of its products generally in the form of customer training
seminars, videos and instruction materials. Sterling Software also offers
product-specific consulting and education services within the Applications
Management Group and Information Management Group to ensure customers are
successful in using those groups' products. In 1996, 1995 and 1994, 28%, 29%
and 33%, respectively, of the Company's revenue consisted of services revenue.
PRODUCT DEVELOPMENT
Each division within Sterling Software's Systems Management Group,
Applications Management Group and Information Management Group has its own
development function. Sterling Software's product development programs in each
of these businesses include the enhancement of existing products and
introduction of new products based upon current and anticipated customer needs.
Each development lab operates as a profit center with revenues derived from
intercompany royalties earned on products sold in the domestic and
international markets. The Company believes that this organizational structure
facilitates development cost control and focuses the development function on
the customer's needs. Approximately 250 of Sterling Software's employees were
engaged in product development at September 30, 1996. Gross product development
costs in 1996, 1995 and 1994 were $36,448,000, $39,359,000 and $28,566,000,
respectively, of which the Company capitalized $15,527,000, $11,657,000 and
$8,061,000, respectively, as the cost of developing and testing new or
significantly enhanced software products.
8
<PAGE>
SALES AND MARKETING
Consistent with its decentralized operating structure, Sterling Software
conducts its sales and marketing activities in multiple software divisions
focused on specific product markets. Sterling Software sells its products and
services through a combination of direct sales and telesales organizations, and
in certain foreign countries, through independent agents and distributors. The
use of telesales has proven effective in reaching customers at a minimal cost.
Each division within the Systems Management Group, Applications Management
Group and Information Management Group has its own United States sales and
marketing organization. In addition, the Company's International Group and Asia
Pacific Group have their own sales functions to focus specifically on the
international marketplace for each of Sterling Software's product lines and
Sterling Commerce's CONNECT and GENTRAN families of products. At September 30,
1996, Sterling Software employed approximately 350 sales representatives.
CUSTOMERS
Sterling Software's customers include 95 of the 100 largest and 410 of the
500 largest U.S. industrial and service corporations, as ranked by 1995
revenues in Fortune. In the year ended September 30, 1996, agencies, branches,
and departments of the federal government accounted for approximately 26% of
the Company's consolidated revenue.
COMPETITION
The computer software and services industry is highly competitive. Sterling
Software competes with both large companies with substantially greater
resources and small specialized companies that compete in a particular
geographic region or market niche. Sterling Software also competes with
internal programming staffs of corporations and, increasingly, with hardware
manufacturers. Some internal programming staffs of corporations are capable of
developing products similar to those offered by the Company. In general,
however, the Company believes that the time and costs associated with custom
software development significantly exceed the time and costs required to
license and install the comparable Sterling Software product. Also, competition
within the Company's federal business is increasing because of continued
federal budget constraints and cutbacks.
Sterling Software believes that its products will continue to be chosen by
customers due to superior product functionality, reliability and technical
support, ease of product installation and use, close integration between the
products and customer business applications and, finally, the Company's history
of success and reputation for providing quality products.
EMPLOYEES
Sterling Software's business is dependent upon its ability to attract and
retain qualified personnel, who are in limited supply. The Company's operations
could be adversely affected if it were to lose the services of a significant
number of qualified employees or if it were unable to obtain additional
qualified employees when needed. To attract and retain qualified personnel, the
Company strives to maintain excellent employee relations, attractive office
facilities and challenging working environments, and offers competitive
compensation and benefits packages.
At September 30, 1996, the Company employed approximately 2,600 people.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company has numerous trademarks that are registered in the United States
and various foreign countries and certain copyrights that are registered with
the United States Copyright Office. Additionally, the Company is actively
pursuing patents on certain key technologies. In general, however, management
believes that the competitive position of the Company depends primarily on the
skill, knowledge and experience of Sterling Software's personnel and their
ability to develop, market and support software products, and that its
9
<PAGE>
business is not materially dependent on copyright protection, trademarks or
patents. The Company believes that all of its products are of a proprietary
nature and its licensing agreements generally prohibit program disclosure. It
is possible, however, for product users or competitors to copy portions of the
Company's products without its consent.
Licenses for a number of software products have been granted to the Company
for its own use or for remarketing to its customers. In the aggregate, these
licenses are material to the business of the Company, but the Company believes
that the loss of any one of these licenses would not materially affect the
Company's results of operations or financial position.
The SAMS, VM, SOLVE, KEY, STAR, VISION and CLEAR families of product names
used herein are registered or unregistered trademarks owned by the Company.
BACKLOG
Sterling Software's backlog relates principally to the uncompleted portion
of multi-year professional services contracts with agencies of the federal
government, including renewal options with government agencies, a portion of
which is restricted by law to a term ending on the last day of the government
agencies' then current fiscal year.
Determination of the Company's backlog involves estimation, particularly
with respect to customer requirements contracts and multi-year contracts of a
cost-reimbursement or incentive nature. A large portion of the Company's
federal government contracts is funded for one year or less and is subject to
contract award, extension or expiration at different times during the year,
and all of the Company's federal government contracts are subject to
termination by the government. Based upon past practices, the Company believes
that the contract renewal options included in existing contracts will be
exercised for the full period designated in such contracts, but no assurance
can be given that such contracts will be renewed.
Total backlog, including federal government contract renewal options not yet
exercised and multi-year product support contracts at September 30, 1996 and
1995, was $170,912,000 and $223,581,000, respectively. Of these amounts, 97%
and 98%, respectively, related to federal government sources, primarily in the
Company's Federal Systems Group. The dollar value of federal government
renewal options not yet exercised or funded included in the Company's total
backlog at September 30, 1996 and 1995, was $65,951,000 and $57,846,000,
respectively. Approximately $66,162,000 of the total September 30, 1996
backlog is expected to be realized in the year ending September 30, 1997.
10
<PAGE>
EXECUTIVE OFFICERS
The following information regarding the executive officers of Sterling
Software is as of November 25, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- --- ------------------------------------------------
<S> <C> <C>
Sam Wyly 62 Chairman of the Board and Director
Charles J. Wyly, Jr. 63 Vice Chairman of the Board and Director
Sterling L. Williams 53 President, Chief Executive Officer and Director
Geno P. Tolari 53 Executive Vice President and Chief Operating
Officer
Werner L. Frank 67 Executive Vice President
M. Gene Konopik 53 Executive Vice President and Group President
Jeannette P. Meier 49 Executive Vice President, Chief Financial
Officer, General Counsel and Secretary
Phillip A. Moore 54 Executive Vice President and Director
Clive A. Smith 42 Executive Vice President and Group President
B. Carole Morton 51 Senior Vice President and Group President
Donald E. Annala 48 Vice President, Business Development
Richard Connelly 45 Vice President, Treasurer
Pamela L. Isbell 37 Vice President, Financial Planning
James E. Jenkins, Jr. 43 Vice President, Finance
James R. Johnson 49 Vice President and Group President
Julie G. Kupp 33 Vice President, Investor Relations
Don J. McDermett, Jr. 38 Vice President, Legal
Evan A. Wyly 35 Vice President and Director
Laura Appling 34 Controller
</TABLE>
Sam Wyly co-founded Sterling Software in 1981 and since such time has served
as Chairman of the Board and a director. Mr. Wyly has served as a director of
Sterling Commerce since December 1995. In 1963, Mr. Wyly founded University
Computing Company, a computer software and services company ("University"),
and served as President or Chairman from 1963 until 1979. University created a
computer utility network, one of the earliest and most successful marriages of
computing and telecommunications. University was one of the original
participants in the software products industry in the late 1960s when the then
market-dominant IBM unbundled computer hardware and software. In 1968, Mr.
Wyly founded Datran, Inc., which was envisioned as the nation's first all-
digital switched "telephone company for computers" and contributed to the
break up of AT&T's telephone monopoly and the resulting benefits of increased
competition in the telecommunications industry. These Wyly-founded companies
are among the forerunners of today's electronic commerce industry. Mr. Wyly
co-founded Earth Resources Company, an oil refining and silver mining company,
and served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and
his brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse
chain in 1967. It grew to approximately 600 restaurants by 1989, during which
time he served as Chairman. Mr. Wyly currently serves as Chairman of Michaels
Stores, Inc. ("Michaels Stores"), a specialty retail chain (which has grown
from 70 to 525 stores in 12 years of Wyly control), and as President of
Maverick Capital, Ltd., an investment fund management company. Sam Wyly is the
father of Evan A. Wyly. Sam Wyly is the Chairman of the Executive Committee
and the 1996 Stock Option Committee of the Sterling Software Board.
Charles J. Wyly, Jr. co-founded Sterling Software in 1981 and since such
time has served as a director and as Vice Chairman since 1984. Mr. Wyly has
served as a director of Sterling Commerce since December 1995. Mr. Wyly served
as an officer and director of University Computing Company from 1964 to 1975,
including President from 1969 to 1973. Mr. Wyly and Sam Wyly founded Earth
Resources Company and Charles J. Wyly, Jr. served as Chairman of the Board
from 1968 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse
chain from 1967 to 1989. Mr. Wyly currently serves as Vice Chairman of
Michaels Stores. Charles J. Wyly, Jr. is the father-in-law of Donald R.
Miller, Jr., a director of Sterling Software. Mr. Wyly is a member of the
Executive Committee and the 1996 Stock Option Committee of the Sterling
Software Board.
11
<PAGE>
Sterling L. Williams co-founded Sterling Software in 1981 and since such
time has served as President, Chief Executive Officer and a director of
Sterling Software. Mr. Williams has served as Chairman of the Board and a
director of Sterling Commerce since December 1995 and also currently serves as
a director of INPUT, an information technology market research company. Mr.
Williams is a member of the Executive Committee and the 1996 Stock Option
Committee of the Sterling Software Board.
Geno P. Tolari has served as an Executive Vice President of Sterling
Software since March 1990 and as Chief Operating Officer since April 1996.
From November 1986 to March 1990 he served as a Senior Vice President of
Sterling Software. Mr. Tolari has also served as President of Sterling
Software's Systems Management Group since December 1, 1994 and he served as
President of the Federal Systems Group from October 1985 until December 1994.
Werner L. Frank has served as an Executive Vice President of Sterling
Software since April 1996. He served as Executive Vice President, Business
Development from December 1994 to April 1996. From October 1984 until December
1994 Mr. Frank served as an Executive Vice President of Sterling Software.
From July 1993 until December 1994 Mr. Frank served as President of Sterling
Software's former Enterprise Software Group. From 1985 until July 1993 Mr.
Frank served as President of Sterling Software's former Systems Software
Group.
M. Gene Konopik has served as an Executive Vice President of Sterling
Software and President of Sterling Software's Federal Systems Group since
December 1994. From July 1993 until December 1994 Mr. Konopik served as the
President of Sterling Software's Information Technology Division. Prior to
July 1993 he served as the President of the former Intelligence and Military
Division of Sterling Software.
Jeannette P. Meier has served as Executive Vice President (since July 1993),
as Chief Financial Officer (since June 1996) and as General Counsel and
Secretary (since 1985) of Sterling Software. Prior to July 1993, Ms. Meier
served as Senior Vice President of Sterling Software. Ms. Meier has served as
Executive Vice President, Secretary and General Counsel of Sterling Commerce
since December 1995 and as Chief Financial Officer of Sterling Commerce since
June 1996.
Phillip A. Moore co-founded Sterling Software in 1981 and since such time
has served as a director of Sterling Software. He has served as Executive Vice
President since April 1996. From October 1995 to April 1996 he served as
Executive Vice President and Chief Technology Officer of Sterling Software.
From July 1993 until October 1995 Mr. Moore served as Executive Vice
President, Technology of Sterling Software. Prior to July 1993, Mr. Moore
served as Senior Vice President, Technology of Sterling Software. Mr. Moore
has served as Executive Vice President of Sterling Commerce since December
1995.
Clive A. Smith has served as an Executive Vice President of Sterling
Software since December 1994 and President of its International Group since
October 1994. From July 1993 until October 1994 Mr. Smith served as the
President of the former Europe Division and from September 1990 until July
1993 he served as the President of the former International Division.
B. Carole Morton has served as a Senior Vice President of Sterling Software
and President of Sterling Software's Information Management Group since
October 1996. She has also served as President of the Information Management
Division since October 1995. Ms. Morton served as President of Sterling
Software's former Applications Engineering Division from December 1994 until
October 1995 and President of the former Applications Management Division from
July 1993 through November 1994. Prior to July 1993, she served as President
of the former Dylakor Division.
Donald E. Annala has served as a Vice President, Business Development of
Sterling Software since October 1996. Mr. Annala served as President of the VM
Software Division from October 1995 until September 1996 and Vice President,
Finance for Sterling Commerce's Network Services Group from July 1993 until
September 1995. Prior to July 1993, Mr. Annala served as Vice President,
Finance of the Federal Systems Group, Vice President, Business Development of
the former Systems Software Group, President of the former Answer System
Division, and Vice President, Finance of the former Systems Software Group.
12
<PAGE>
Richard Connelly has served as Vice President of Sterling Software since
July 1993 and as Treasurer of Sterling Software since April 1996. He also has
served as Vice President, Finance and Administration for Sterling Software's
System Management Group since October 1996. From October 1992 until April 1996
Mr. Connelly also served as the Controller of Sterling Software and from June
1987 until October 1992 he served as Director of Accounting of Sterling
Software.
Pamela L. Isbell has served as Vice President, Financial Planning of
Sterling Software since April 1996. From April 1988 until April 1996 Ms.
Isbell served as a Financial Analyst of Sterling Software.
James E. Jenkins, Jr. has served as Vice President, Finance of Sterling
Software since April 1996. From May 1994 to April 1996 Mr. Jenkins served as
Vice President, Tax and from May 1986 until May 1994 he served as Director of
Tax of Sterling Software.
James R. Johnson has served as a Vice President of Sterling Software and
President of Sterling Software's Asia Pacific Group since October 1996. From
July 1993 to October 1996 he served as President of the former Pacific
Division. Mr. Johnson served as Vice President, Business Development, of the
former Systems Software Group from July 1992 to July 1993. Prior to July 1992,
he was President of the former Software Labs Division.
Julie G. Kupp has served as Vice President, Investor Relations of Sterling
Software since April 1996. From September 1995 to April 1996 Ms. Kupp served
as Director, Investor Relations and from April 1995 to September 1995 she
served as Senior Financial Analyst of Sterling Software. From December 1993 to
April 1995 Ms. Kupp served as Director of Accounting. Prior to December 1993,
Ms. Kupp was employed by Ernst & Young LLP, most recently as Audit Senior
Manager.
Don J. McDermett, Jr. has served as Vice President, Legal of Sterling
Software since July 1996. Prior to that time he was employed for twelve years
by Thompson & Knight, P.C., a Dallas-based law firm, having been a senior
shareholder in that firm's corporate practice group since 1993.
Evan A. Wyly has served as a director of Sterling Software since July 1992
and as a Vice President of Sterling Software since December 1994. Mr. Wyly has
been a Partner of Maverick Capital, Ltd. since 1991. In 1988, he founded
Premier Partners Incorporated, a private investment firm, and served as
President prior to joining Maverick Capital. Mr. Wyly also serves as a
director of Sterling Commerce and as a director and officer of Michaels
Stores.
Laura Appling has served as Controller of Sterling Software since April
1996. From July 1993 to April 1996 Ms. Appling served as Vice President,
Finance for Sterling Commerce's Banking Systems Group. From October 1992 to
July 1993 Ms. Appling served as Senior Financial Analyst for Sterling Software
and from August 1991 to October 1992 Ms. Appling served as Accounting Director
for the international operations of Sterling Software. Prior to August 1991,
Ms. Appling served as Director of Accounting for Sterling Software and as
Director of Accounting for Sterling Commerce's Banking Systems Group.
ITEM 2. PROPERTIES.
The Company leases offices and facilities in or near more than 60 cities in
the United States, Canada, and worldwide. Major U.S. facilities are located in
the following metropolitan areas: Los Angeles, Palo Alto, San Francisco,
Sacramento and San Bernardino, California; Atlanta, Georgia; Cleveland, Ohio;
Omaha, Nebraska; Rome, New York; Washington, D.C.; and Dallas, Texas. The
Company's major international facilities are located in London and Reading,
England; Paris, France; Toronto, Canada; Dusseldorf, Stuttgart, Munich and
Frankfurt, Germany; Zurich, Switzerland; Brussels, Belgium; Utrecht, The
Netherlands; Stavanger and Oslo, Norway; Danderyd, Sweden; Tokyo, Japan;
Sydney and Melbourne, Australia; Madrid, Spain; Lisbon, Portugal; Rome, Milan
and Turin, Italy; Tefen, Israel; and Singapore. The Company believes that its
facilities are adequate for its immediate needs and that additional or
substitute space is available if needed to accommodate expansion.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare"), in a stock-for-stock acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Merger with KnowledgeWare, Inc." On March 14, 1995, the Securities and
Exchange Commission (the "Commission") entered an Order Directing Private
Investigation and Designating Officers to take Testimony titled "In the Matter
of KnowledgeWare, Inc. (NY-6231)." The investigation generally relates to
(i) trading in KnowledgeWare securities from July 1, 1992 through the time of
the stock-for-stock transaction by which Sterling Software acquired
KnowledgeWare, (ii) KnowledgeWare's compliance with its Commission filing and
reporting obligations and (iii) the adequacy and/or accuracy of
KnowledgeWare's public disclosures, recordkeeping and accounting controls. In
addition to potential successor liability of the wholly-owned subsidiary that
was merged into KnowledgeWare, Sterling Software may have an indemnity
obligation with respect to certain individuals who may be subject to the
Commission's investigation. Sterling Software's management believes that,
after giving effect to applicable reserves, the ultimate resolution of the
Commission's investigation will not materially affect the financial condition
or results of operations of Sterling Software.
The Company is also subject to certain legal proceedings and claims that
arise in the ordinary conduct of its business. In the opinion of management,
the amount of ultimate liability, if any, with respect to these actions, net
of applicable reserves and available insurance, will not materially affect the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's $0.10 par value common stock (the "Software Stock"), has been
traded on the New York Stock Exchange since March 28, 1990, under the symbol
"SSW". Prior to that time, the Software Stock was traded on the American Stock
Exchange since May 4, 1983. The high and low sales prices for the Software
Stock for the periods indicated are set forth below.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended September 30, 1996:
Quarter Ended:
December 31, 1995.......................................... $62 3/8 $40
March 31, 1996............................................. $72 5/8 $48 3/4
June 30, 1996.............................................. $81 3/8 $70 3/8
September 30, 1996......................................... $77 1/2 $62 7/8
Year Ended September 30, 1995:
Quarter Ended:
December 31, 1994.......................................... $36 7/8 $28 5/8
March 31, 1995............................................. $38 3/8 $34 1/4
June 30, 1995.............................................. $39 5/8 $32 7/8
September 30, 1995......................................... $47 7/8 $38 1/4
</TABLE>
At November 15, 1996, the Company had approximately 1,151 holders of record
of Software Stock.
With the exception of the distribution of shares of Commerce Stock on
September 30, 1996, the Company did not pay dividends on the Software Stock
during the three years ended September 30, 1996. Under the terms of the
Company's existing credit agreement, the Company is generally prohibited from
making distributions on the Software Stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------------------------------
1996 1995 (2) 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data (1):
Revenue..................... $ 439,171 $396,311 $325,903 $303,207 $293,958
Cost of sales............... 182,239 160,735 143,889 149,454 146,487
Product development and
enhancement................ 20,921 27,702 20,505 20,919 15,748
Selling, general and
administrative............. 175,237 147,552 112,380 115,403 123,603
Income from continuing
operations before
restructuring charge,
purchased research and
development, other income
(expense), income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.................. 60,774 60,322 49,129 17,431 8,120
Restructuring charge (3).... 19,512 87,622 11,515
Purchased research and
development................ 62,000
Income (loss) from
continuing operations
before income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.................. 84,886 (18,656) 46,346 (73,153) (9,586)
Income (loss) from continu-
ing operations before
extraordinary item and cu-
mulative effect of a change
in accounting principle.... 60,598 (33,656) 30,586 (48,041) (14,165)
Income from discontinued
operations, net of taxes... 51,187 42,930 27,753 15,194 8,983
Gain on the initial public
offering of subsidiary, net
of taxes................... 126,103
Income (loss) applicable to
common stockholders........ 237,888 9,129 58,143 (38,106) (6,656)
Average common shares
outstanding................ 32,316 23,649 19,812 17,507 15,496
Per common share data:
Income (loss) from continu-
ing operations before
extraordinary item and cu-
mulative effect of a change
in accounting principle:
Primary.................... 1.78 (1.43) 1.33 (2.80) (1.01)
Fully diluted.............. 1.73 (1.43) 1.29 (2.80) (1.01)
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle:
Primary.................... 6.98 .39 2.54 (1.93) (.43)
Fully diluted.............. 6.65 .39 2.31 (1.93) (.43)
Income (loss) before
cumulative effect of a
change in accounting
principle:
Primary.................... 6.98 .39 2.54 (2.02) (.43)
Fully diluted.............. 6.65 .39 2.31 (2.02) (.43)
Net income (loss):
Primary.................... 6.98 .39 2.54 (2.18) (.43)
Fully diluted.............. 6.65 .39 2.31 (2.18) (.43)
Balance sheet data (1):
Working capital............. $ 732,918 $218,713 $122,961 $ 57,106 $ 35,308
Total assets................ 1,097,613 657,711 444,661 364,087 317,677
Long-term debt.............. 116,668 115,932 117,532 80,743
Other noncurrent
liabilities................ 36,397 21,845 18,867 18,331 9,781
Stockholders' equity........ 879,491 348,338 175,804 97,697 117,565
</TABLE>
- --------
(1) Restated to reflect the results of operations and net assets of Sterling
Commerce as a discontinued operation. On September 30, 1996, Sterling
Software completed the spin-off of Sterling Commerce. See Note 2 of Notes
to Consolidated Financial Statements.
15
<PAGE>
(2) On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock-
for-stock acquisition accounted for as a purchase. Accordingly, the
operating results of KnowledgeWare are included in the Company's results
of operations from the date of the acquisition. The results of operations
include $62,000,000 of purchased research and development costs, which is
the portion of the purchase price attributable to in-process research and
development and which was charged to expense in accordance with purchase
accounting guidelines. The 1995 results of operations also include a
charge for restructure costs of $19,512,000 to integrate KnowledgeWare's
business into the Company's operations. The restructure charge includes
employee termination costs, costs related to the elimination of duplicate
facilities, the write-off of costs related to certain software products
which were not actively marketed and other out of pocket costs related to
the reorganization. Cash costs and expenses directly related to the
acquisition of KnowledgeWare and unrelated to the restructuring of the
Company were accounted for as a cost of the acquisition. See Note 3 of
Notes to Consolidated Financial Statements.
(3) The 1993 restructuring charges reflect the cost of combination of Sterling
Software and Systems Center, Inc. ("Systems Center") including transaction
costs and charges relating to the elimination of duplicate facilities and
equipment, severance costs, and the write-off of costs related to certain
software products not actively marketed by the Company. The 1992
restructuring charges include severance and other costs related to System
Center's reduction in workforce, elimination of duplicate facilities, and
the sale of certain AS/400 and UNIX utility products.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SUBSIDIARY INITIAL PUBLIC OFFERING AND SPIN-OFF
Sterling 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 its 73,200,000 shares of Commerce Stock and Sterling Commerce
sold 1,800,000 of previously unissued shares of Commerce Stock. The Offering
price was $24 per share of Commerce Stock, resulting in net proceeds to
Sterling Software of approximately $265,458,000 after deducting underwriting
discounts and commissions and Sterling Software's pro rata share of Offering
expenses. Sterling Software recorded a gain of approximately $126,103,000, 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
stock option plans in existence at the time of the Offering. Sterling Software
received proceeds of approximately $276,637,000 from the exercise of
approximately 9,224,000 employee stock options and warrants during 1996. Under
the terms of Sterling Software's existing stock option plans, options that
were unexercised with respect to 81,681 shares of Software Stock at the close
of business on September 30, 1996 were adjusted to thereafter be exerciseable
with respect to 207,950 shares of Software Stock at exercise prices ranging
from $3.36 to $32.40, to preserve the economic value of such options.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce with the distribution of its remaining 81.6% ownership in Sterling
Commerce to Sterling Software stockholders by means of a tax-free dividend.
Holders of record of Software Stock as of the close of business on September
30, 1996 received 1.59260 shares of Commerce Stock for each share of Software
Stock owned on such date. The distribution resulted in the reduction of
Sterling Software's stockholders' equity in the amount of $113,549,000,
representing the book value of net assets distributed.
MERGER WITH KNOWLEDGEWARE, INC.
On November 30, 1994, Sterling Software acquired KnowledgeWare, a Georgia
corporation based in Atlanta, Georgia which was a leading provider of
applications development software and services, for approximately $106
million, in a stock-for-stock acquisition (the "Merger"). In connection with
the Merger, the Company issued approximately 2,421,000 shares of Software
Stock valued at approximately $74,443,000 and reserved approximately 340,000
additional 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
16
<PAGE>
Merger of approximately $31,672,000. The Merger, which was accounted for as a
purchase, was completed pursuant to the terms of an Amended and Restated
Agreement and Plan of Merger dated as of August 31, 1994, as amended (the
"Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation
and a recently organized wholly owned subsidiary of the Company ("Merger
Sub"), and KnowledgeWare. Of the 2,421,000 shares of Software Stock issued,
approximately 484,800 shares were placed in escrow (the "Escrowed Shares") to
cover certain losses and claims with respect to which the Company was entitled
to indemnification pursuant to the terms of the Merger Agreement. In October
1995, approximately 278,000 of the Escrowed Shares were released in connection
with the settlement of certain securities litigation brought against
KnowledgeWare and in January 1996, Sterling Software, acting under its
indemnification rights, received the remaining Escrowed Shares to reimburse it
for a portion of the amounts paid in the settlement of certain other
litigation brought against KnowledgeWare and for costs and expenses related to
these and other claims for which Sterling Software was entitled to
indemnification. See Note 3 of Notes to Consolidated Financial Statements.
Cash costs of approximately $31,672,000 related to the Merger are included
in the aggregate cost of the Merger and consisted of employee termination
costs, transaction costs, costs associated with the elimination of duplicate
facilities, and other direct costs of the acquisition. Substantially all of
these costs had been paid at September 30, 1996.
A restructuring charge of approximately $19,512,000 related to combining
KnowledgeWare and the Company is included in the results of operations for
1995. The restructuring charge includes employee termination costs, costs
related to the elimination of duplicate facilities, the write-off of costs
related to certain software products which were not actively marketed and
other out of pocket costs related to the reorganization. Cash costs and
expenses directly related to the acquisition of KnowledgeWare and unrelated to
the restructuring of the Company were accounted for as a cost of the
acquisition. Of the total restructuring charge of $19,512,000, approximately
$8,377,000 was a non-cash charge and the remaining $11,135,000 required cash
outlays, substantially all of which had been paid at September 30, 1996.
RESULTS OF OPERATIONS
The results of Sterling Software's international operations are included in
the systems management and applications management business segments for
management's discussion and analysis of financial condition and results of
operations. Sterling Software's results of operations reflect the
reclassification of Sterling Commerce as a discontinued operation, giving
effect to the spin-off of Sterling Commerce on September 30, 1996. The results
of the Company's international operations related to selling, marketing and
providing first-level support for certain of Sterling Commerce's electronic
commerce products are included in the "Corporate and other" business segment.
1996 Compared to 1995
Total revenue increased $42,860,000, or 11%, in 1996 over 1995 due to
increases in all three of the Company's business segments as well as increases
in sales of certain electronic commerce products internationally. A subsidiary
of each of Sterling Software and Sterling Commerce have entered into an
International Marketing Agreement (see Note 2 to the Consolidated Financial
Statements) pursuant to which Sterling Software acts as the exclusive
distributor (directly and through subdistributors) of Sterling Commerce's
GENTRAN and CONNECT families of products in markets outside of the United
States and Canada and is responsible for sales, marketing and first-level
support of such products in those markets. The International Marketing
Agreement, which expires in March 1999, provides for the payment to Sterling
Commerce of royalties equal to 50% of the net revenue that Sterling Software
derives from licenses of Sterling Commerce's GENTRAN and CONNECT families of
products and related product support services, with the balance of such net
revenue to be retained by Sterling Software as payment for the services
provided under the International Marketing Agreement. Total revenue generated
from Sterling Software's international operations was $167,845,000 in 1996 and
$152,026,000 in 1995, representing an increase of $15,819,000, or 10%, over
1995. Revenue from the Company's international operations represented 38% of
total revenue in both 1996 and 1995. The Company expects revenue from its
international operations to continue to constitute a significant percentage of
its revenue. The net negative impact of foreign currency exchange rates on
revenue resulting from a stronger U.S. dollar was approximately $2,000,000 in
1996.
17
<PAGE>
The Company's recurring revenue includes revenue from annual and multi-year
product support agreements generally having terms ranging from one to three
years, fixed term product lease and rental agreements generally having terms
ranging from month-to-month to year-to-year, and multi-year federal contracts
generally having terms ranging from one to five years. Like most federal
contracts, Sterling Software's federal contracts permit termination by the
government for convenience or for failure to obtain funding. Recurring revenue
increased $17,535,000, or 8%, in 1996 over 1995, primarily due to a $9,649,000
increase in revenue from product support agreements and an $11,012,000
increase in revenue from multi-year federal contracts partially offset by a
decrease in revenue from fixed term product lease and rental agreements.
Recurring revenue represented 54% of total revenue in 1996 compared to 55% of
total revenue in 1995.
During both 1996 and 1995, 36% of total software revenue was derived from
platforms other than stand-alone mainframes.
Revenue from the systems management business segment increased $16,147,000,
or 10%, in 1996 over 1995 primarily due to an increase of 16% in products
revenue. Products revenue increased across all product lines. Product support
revenue increased 1% primarily due to increases in the storage management and
operations management product lines partially offset by declines in the VM
product line due to the continuing trend of consolidation and downsizing by
customers using the VM operating system. Approximately 51% of the systems
management business segment's 1996 revenue was derived from the Company's
international operations, compared to 54% in 1995.
Revenue from the applications management business segment increased
$2,595,000, or 2%, in 1996 over 1995 primarily due to an increase in products
revenue in the information management product line partially offset by
products and product support revenue declines of approximately $9,200,000
related to products no longer actively marketed and product marketing rights
no longer owned in 1996 versus 1995. The increase in the applications
management business segment revenue was also partially offset by a decline in
consulting services revenue due to the elimination of the Consulting Services
Division as part of the restructure of the applications management business
segment in the first quarter of 1996. In addition, the applications management
business segment revenue increase was partially offset by decreases in
products and product support revenue in the applications development product
line. The Company expects the market for Computer Aided Software Engineering
("CASE") development tools to continue to decline. The Company believes 1997
will also be impacted by the transfer in the fourth quarter of 1996 of two
products to a third party and a decision to discontinue active marketing of a
third product in 1997; revenue from these three products was approximately
$4,600,000 in 1996. Approximately 35% of the applications management business
segment's 1996 revenue was derived from the Company's international
operations, compared to 39% in 1995.
Federal systems revenue increased $10,486,000, or 10%, in 1996 over 1995
primarily due to higher contract billings in the Information Technology
Division, offset in part by lower contract billings in the Scientific Systems
Division due to the completion of certain contracts at NASA.
Total costs and expenses decreased $39,104,000, or 9%, in 1996 compared to
1995. In 1995, total costs and expenses included restructuring costs of
$19,512,000 for the restructuring resulting from the acquisition of
KnowledgeWare and the write-off of $62,000,000 of purchased research and
development costs resulting from the application of purchase accounting
guidelines in recording the Merger. The restructure costs included employee
termination costs, costs related to the elimination of duplicate facilities,
the write-off of costs related to certain software products which were not
actively marketed and other out-of-pocket costs related to the reorganization.
Excluding the restructure costs and the write-off of purchased research and
development costs in 1995, total costs and expenses increased $42,408,000, or
13%, in 1996 over 1995.
Total cost of sales increased $21,504,000, or 13%, commensurate with the
increase in total revenue. Cost of sales represented 41% of revenue in both
1996 and 1995.
Product development expense for 1996 of $20,921,000, net of $15,527,000 of
amounts capitalized pursuant to Statement of Financial Accounting Standard No.
86, "Accounting for the Costs of Computer Software to be
18
<PAGE>
Sold, Leased or Otherwise Marketed" ("FAS 86"), decreased $6,781,000 from 1995
primarily due to a reduction of gross development costs in the applications
management business segment due to the restructuring of that segment in the
first quarter of 1996. Capitalized development costs represented 43% and 30%
of gross development costs for 1996 and 1995, respectively. The higher
capitalization rate is due to a greater number of development projects having
reached technological feasibility in 1996 compared to 1995. The capitalization
rate fluctuates from period to period depending in part upon the number and
status of software development projects which are in process.
Selling, general and administrative expense increased $27,685,000, or 19%,
in 1996 over 1995 primarily due to increased sales, marketing and customer
support activities supporting revenue growth in the Company's international
operations, offset by declines in the applications management business segment
due to the restructuring of that segment in the first quarter of 1996.
Interest expense decreased $5,221,000 in 1996 compared to 1995 primarily due
to the redemption in the second quarter of 1996 of the Company's 5 3/4%
Convertible Subordinated Debentures (the "Debentures") (see Note 10 to the
Consolidated Financial Statements). Investment income in 1996 increased
$17,857,000 over 1995 as a result of higher average cash and cash equivalents
and marketable securities balances resulting from the net proceeds from the
Offering of approximately $265,458,000 and the proceeds from the exercise of
stock options and warrants of approximately $276,637,000.
Income from continuing operations before income taxes in 1996 was
$84,886,000 compared to a loss from continuing operations before income taxes
in 1995 of $18,656,000. The loss from continuing operations before income
taxes in 1995 can be attributed to the Merger restructure costs of $19,512,000
and the write-off of $62,000,000 of purchased research and development costs
pursuant to the application of purchase accounting guidelines. Excluding the
restructure costs and the write-off of purchased research and development
costs in 1995, income (loss) from continuing operations before income taxes
increased $22,030,000, or 35%, over 1995, primarily due to higher profits in
the systems management and federal systems business segments partially offset
by lower profits in the applications management business segment. The net
impact on operating profit from foreign currency exchange rate fluctuations
was not significant in 1996.
The Company's income from continuing operations was positively affected by a
lower effective tax rate in 1996 versus 1995. The Company does not believe
that the effective tax rate for 1996 is reflective of what Sterling Software's
effective tax rate will be in future filing periods. The Company believes that
the effective rate in future filing periods will be higher than in 1996.
1995 Compared to 1994
Total revenue increased $70,408,000, or 22%, in 1995 over 1994. Revenue
generated from Sterling Software's international operations was $152,026,000
in 1995 and $103,824,000 in 1994, representing an increase of $48,202,000, or
46%, over 1994. Revenue from the Company's international operations
represented 38% and 32% of total revenue in 1995 and 1994, respectively. The
net positive impact of changes in foreign currency exchange rates on revenue
resulting from a weaker U.S. dollar was approximately $11,000,000 in 1995.
The Company's recurring revenue includes revenue recurring through annual
and multi-year product support agreements generally having terms ranging from
one to three years, fixed term product lease and rental agreements generally
having terms ranging from month-to-month to year-to-year, and multi-year
federal contracts generally having terms from one to five years. Recurring
revenue increased $11,372,000, or 6%, in 1995 over 1994 and represented 55% of
total revenue in 1995 compared to 63% of total revenue in 1994. This decrease
in the percentage of recurring revenue to total revenue is primarily due to a
lower relative percentage of revenue from annual product support contracts
acquired in the acquisition of KnowledgeWare and the impact of purchase
accounting guidelines on the revenue recognized from such contracts and a
general decrease in revenue from multi-year federal contracts.
19
<PAGE>
For 1995, 36% of total software revenue was derived from platforms other
than stand-alone mainframes. This compares to 15% for the previous year.
Revenue from the systems management business segment increased $13,004,000,
or 9%, in 1995 over 1994 primarily due to an increase of 18% in product
revenue. Revenue from products and product support increased in storage
management and operations management product lines and was partially offset by
a decrease in VM product support revenue. The VM product support revenue
decrease was primarily due to consolidation and downsizing by customers using
the VM operating system. Approximately 54% of the systems management business
segment's 1995 revenue was derived from the Company's international
operations. This compares to 53% in 1994.
Revenue from the applications management business segment increased
$57,275,000, or 115%, in 1995 over 1994 primarily due to the businesses
acquired from KnowledgeWare in November 1994. As a direct result of this
acquisition, all the components of revenue increased in 1995 over 1994.
Products revenue increased 117%, product support revenue increased 73%, and
services revenue, primarily consulting services, increased significantly.
Product support revenue in 1995 was negatively impacted by approximately
$13,655,000 due to the application of purchase price accounting guidelines
which prohibit the post-acquisition recognition of deferred revenue acquired
in an acquisition. Consulting and training services revenue, previously an
immaterial component of the applications management business segment revenue,
represented 12% of total applications management revenue in the 1995 period.
In 1995, approximately 39% of applications management revenue was derived from
the Company's international operations. This compares to 22% in 1994. The
increase was primarily attributable to the KnowledgeWare acquisition.
Federal systems business segment revenue decreased $5,271,000, or 5%, in
1995 compared to 1994 primarily due to lower contract billings at NASA Ames
resulting from lower billable costs and fewer federal contracts than in 1994.
Total costs and expenses increased $140,727,000, or 51%, in 1995 over 1994.
In 1995, total costs and expenses included restructuring expenses of
$19,512,000 for the restructuring resulting from the acquisition of
KnowledgeWare and the write-off of $62,000,000 of purchased research and
development costs resulting from the application of purchase accounting
guidelines in recording the Merger. The restructure charge included employee
termination costs, costs related to the elimination of duplicate facilities,
the write-off of costs related to certain software products which were not
actively marketed and other out-of-pocket costs related to the reorganization.
Cash costs and expenses directly related to the acquisition of KnowledgeWare
and related to the restructuring of the Company were accounted for as a cost
of the acquisition. Of the total restructuring charge of $19,512,000,
approximately $8,377,000 was a non-cash charge and the remaining $11,135,000
required cash outlays, substantially all of which had been paid at September
30, 1996.
Total cost of sales increased $16,846,000, or 12%, in 1995 over 1994
primarily due to increased consulting services and product support costs of
businesses acquired in the KnowledgeWare acquisition partially offset by lower
contract costs associated with lower billings in the federal systems business
segment. In addition, approximately $13,493,000 of product support costs
related to customer support contracts acquired in the KnowledgeWare
acquisition were offset against a liability for product support costs accrued
at the Merger date in accordance with purchase accounting guidelines. Cost of
sales includes $20,221,000 and $14,133,000 of depreciation and amortization in
1995 and 1994, respectively.
Product development expense for 1995 of $27,702,000, net of $11,657,000 of
amounts capitalized pursuant to FAS 86 increased $7,197,000, or 35%, compared
to 1994 product development expense of $20,505,000, net of $8,061,000 of
amounts capitalized pursuant to FAS 86. The increase is primarily due to the
increased gross product development expense relating to products acquired in
the Merger as well as the decrease in the capitalization of software
development costs. Development costs capitalized represented 30% and 28% of
gross development costs for 1995 and 1994, respectively.
20
<PAGE>
Selling, general and administrative expense increased $35,172,000, or 31%,
in 1995 over 1994 primarily due to increased sales, marketing, and
administrative support personnel in the applications management business
segment and in Sterling Software's international operations due to businesses
acquired in the Merger and increased international sales personnel to support
continuing revenue growth.
Interest expense increased in 1995 over 1994 due to higher average
international borrowings to manage foreign currency risks and to maintain
increased working capital requirements after the Merger. Investment income was
also higher due to the higher average cash balances available for investment,
as well as higher interest rates in 1995 versus 1994. The net positive impact
on operating profit from the foreign currency exchange rates effect of the
weaker U.S. dollar was approximately $4,000,000. The loss from continuing
operations before income taxes was $18,656,000 in 1995 as compared to income
from continuing operations before income taxes of $46,346,000 in 1994. The
loss from continuing operations before income taxes in 1995 can be attributed
to the Merger restructure costs of $19,512,000 and the write-off of
$62,000,000 of purchased research and development costs pursuant to the
application of purchase accounting guidelines in recording the Merger.
Excluding the restructure charges and write-off of purchased research and
development costs, income from continuing operations before income taxes was
$62,856,000, an increase of $16,510,000, or 36%, over 1994, primarily due to
higher profits in the systems management business segment, up 13%, and in the
applications management business segment, up 88%.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$732,918,000 of working capital at September 30, 1996, which includes
$524,237,000 of cash and equivalents and $231,919,000 of marketable
securities. For the year, net cash flows from operations were $61,161,000.
Days sales outstanding at September 30, 1996, measured on a quarterly basis,
was 95 days versus 107 days at September 30, 1995. Cash flows from operations
and the proceeds from the exercise of stock options and warrants during 1996
were used to increase working capital, to fund capital expenditures and
software additions and to make approximately $92,000,000 of income tax
payments.
Sterling Software received net proceeds from the Offering of approximately
$265,458,000 after deducting underwriting discounts and commissions and
Sterling Software'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 $276,637,000 in
1996 and $63,597,000 in 1995 from the exercise of the Company's stock options
and warrants.
Capitalized software expenditures of $15,852,000, the majority of which were
costs capitalized pursuant to FAS 86, were made during 1996, compared to
$12,287,000 in 1995. The systems management business segment capitalized
$10,666,000 of software expenditures during 1996, primarily for the
development of systems management and storage management products and
enhancements. Capitalized software expenditures in the applications management
business segment were $5,186,000 for software enhancements of that segment's
products.
On October 2, 1995, the Company renewed a share repurchase program
authorizing the repurchase of shares of Software Stock from time to time
through open market transactions. From October 2, 1995 to March 31, 1996,
approximately 1,336,000 shares of Software Stock were repurchased under the
program for an aggregate purchase price of approximately $59,372,000. No
shares of Software Stock have been repurchased subsequent to March 31, 1996,
and it is the Company's present intention not to resume the repurchase of
Software Stock.
On August 24, 1995, the Company entered into an amended Revolving Credit and
Term Loan Agreement ("Loan Agreement") with a borrowing capacity of
$35,000,000. The Loan Agreement is unsecured and contains various restrictions
on the Company, including limitations on additional borrowings, repurchase of
subordinated debt, payment of dividends, acquisitions, and capital
expenditures. The Loan Agreement also requires that certain
21
<PAGE>
financial ratios be maintained. Borrowings under the Loan Agreement bear
interest at the higher of the bank's prime rate or the Federal Funds Effective
Rate plus one-half percent. Borrowings, if any, outstanding on August 24, 1998
will be due in four equal installments at the end of each subsequent quarter.
There were no amounts borrowed during 1996 or outstanding under the Loan
Agreement at September 30, 1996. At September 30, 1996, after the utilization
of approximately $1,788,000 for standby letters of credit, approximately
$33,212,000 was available for borrowing under the Loan Agreement. Certain of
the Company's foreign subsidiaries have separate lines of credit totaling
$21,295,000 available for foreign exchange exposure management and working
capital requirements. These lines of credit are guaranteed by Sterling
Software, Inc. At September 30, 1996, $251,000 was outstanding pursuant to
foreign lines of credit.
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 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 the Debentures was redeemed for cash on February
12, 1996. If the conversion had taken place at October 1, 1995, supplemental
primary net earnings per share would have been $6.65 for the year ended
September 30, 1996.
At September 30, 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 cash flow from
operations. The Company believes available cash balances, cash equivalents and
short-term investments combined with cash flows from operations and amounts
available under existing 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 increase with increases
in the rate of inflation as customers strive to improve 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 is unable to recover increased operating
costs through increased prices for products and services.
The assets and liabilities of the Companys 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 facilities, in which all costs are local-
currency based. The Company has, and may in the future, enter into hedging
transactions in an effort to reduce its exposure to currency exchange risks.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed in part to the Company's growth in revenue and operating profit
before restructuring charges. The impact of future acquisitions on continued
growth in revenue and operating profit cannot presently be determined.
FORWARD-LOOKING INFORMATION
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 the beliefs of the Companys management as well
as estimates and assumptions made by, and information currently available to,
the Companys management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
22
<PAGE>
expressions, as they relate to Sterling Software or Sterling Software's
management, identify forward-looking statements. Such statements reflect the
current views of Sterling Software with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to Sterling
Software's operations and results of operations, competitive factors and
pricing pressures, shifts in market demand, the performance and needs of the
industries served by Sterling Software, the costs of product development and
other risks and 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,
legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
significantly from those anticipated, believed, estimated, expected, intended
or planned.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ 25
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1996 and 1995.............. 26
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1995 and 1994.................................................... 27
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994...................................... 28
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.................................................... 29
Notes to Consolidated Financial Statements.............................. 30
</TABLE>
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling Software, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Software, Inc. (the "Company") as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audit also included the financial statement schedule listed under Item 14(a)
of the Company's Annual Report on Form 10-K for the year ended September 30,
1996. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Software, Inc. at September 30, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Dallas, Texas
November 20, 1996
25
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 524,237 $178,910
Marketable securities (Note 7)......................... 231,919 61,341
Accounts and notes receivable, net (Note 8)............ 133,383 134,579
Income tax receivable.................................. 8,000
Prepaid expenses and other current assets.............. 17,104 14,743
---------- --------
Total current assets................................. 914,643 389,573
Property and equipment, net (Note 9)..................... 39,330 42,574
Computer software, net of accumulated amortization of
$84,099 in 1996 and $70,701 in 1995 (Note 1)............ 57,488 48,703
Excess cost over net assets acquired, net of accumulated
amortization of $26,128 in 1996 and $20,275 in 1995..... 69,504 75,644
Noncurrent deferred income taxes (Note 12)............... 2,986 35,709
Net assets of discontinued operations (Note 2)........... 53,187
Other assets (Notes 1 and 7)............................. 13,662 12,321
---------- --------
$1,097,613 $657,711
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 10)............ $ 388 $ 5,871
Income taxes payable................................... 4,679
Accounts payable and accrued liabilities (Note 11)..... 77,349 94,522
Amounts due to Sterling Commerce....................... 35,134
Deferred revenue....................................... 68,854 65,788
---------- --------
Total current liabilities............................ 181,725 170,860
Long-term debt (Note 10)................................. 116,668
Noncurrent deferred revenue.............................. 15,778 11,134
Other noncurrent liabilities............................. 20,619 10,711
Contingencies and commitments (Notes 4, 13 and 17)
Stockholders' equity (Notes 14 and 15):
Preferred stock, $.10 par value; 10,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.10 par value; 75,000,000 shares
authorized; 39,807,000 and 26,529,000 shares issued in
1996 and 1995, respectively........................... 3,981 2,653
Additional paid-in capital............................. 804,451 336,752
Retained earnings...................................... 130,156 9,515
Less treasury stock, at cost; 1,372,000 and 56,000
shares in 1996 and 1995, respectively................. (59,097) (582)
---------- --------
Total stockholders' equity........................... 879,491 348,338
---------- --------
$1,097,613 $657,711
========== ========
</TABLE>
See accompanying notes.
26
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Products...................................... $192,464 $168,300 $121,942
Product support............................... 123,401 113,752 95,799
Services...................................... 123,306 114,259 108,162
-------- -------- --------
439,171 396,311 325,903
Costs and expenses:
Cost of sales:
Products and product support................. 72,201 57,726 48,549
Services..................................... 110,038 103,009 95,340
-------- -------- --------
182,239 160,735 143,889
Product development and enhancement........... 20,921 27,702 20,505
Selling, general and administrative........... 175,237 147,552 112,380
Restructuring charges (Note 3)................ 19,512
Purchased research and development............ 62,000
-------- -------- --------
378,397 417,501 276,774
-------- -------- --------
Income (loss) from continuing operations before
other income (expense) and income taxes........ 60,774 (21,190) 49,129
Other income (expense):
Interest expense.............................. (3,361) (8,582) (6,598)
Investment income............................. 26,854 8,997 1,490
Other......................................... 619 2,119 2,325
-------- -------- --------
24,112 2,534 (2,783)
-------- -------- --------
Income (loss) from continuing operations before
income taxes................................... 84,886 (18,656) 46,346
Provision for income taxes (Note 12)............ 24,288 15,000 15,760
-------- -------- --------
Income (loss) from continuing operations........ 60,598 (33,656) 30,586
Discontinued operations, net of applicable
income taxes (Note 2):
Income from discontinued operations, net...... 51,187 42,930 27,753
Gain on the initial public offering of
subsidiary, net.............................. 126,103
-------- -------- --------
177,290 42,930 27,753
-------- -------- --------
Net income...................................... 237,888 9,274 58,339
Preferred stock dividends....................... 145 196
-------- -------- --------
Income applicable to common stockholders........ $237,888 $ 9,129 $ 58,143
======== ======== ========
Income (loss) per common share:
Income (loss) from continuing operations
Primary...................................... $ 1.78 $ (1.43) $ 1.33
======== ======== ========
Fully diluted................................ $ 1.73 $ (1.43) $ 1.29
======== ======== ========
Net income
Primary...................................... $ 6.98 $ .39 $ 2.54
======== ======== ========
Fully diluted................................ $ 6.65 $ .39 $ 2.31
======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------ ------------- ----------------
NUMBER NUMBER ADDITIONAL RETAINED NUMBER TOTAL
OF PAR OF PAR PAID-IN EARNINGS OF STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) SHARES COST EQUITY
-------- ------- ------ ------ ---------- --------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993..... 200 $ 20 19,917 $1,992 $169,825 $(54,582) 1,837 $(19,558) $ 97,697
Net income....................... 58,339 58,339
Preferred stock dividends........ (196) (196)
Issuance of common stock pursuant
to stock options and warrants
(Note 15)....................... 2,461 246 21,660 21,906
Issuance of common stock to
retirement plan (Note 16)....... 544 (41) 434 978
Other............................ 35 (2,989) (3) 34 (2,920)
-------- ------- ------ ------ -------- -------- ------ -------- --------
Balance at September 30, 1994..... 200 20 22,378 2,238 192,064 572 1,793 (19,090) 175,804
Net income....................... 9,274 9,274
Preferred stock dividends........ (145) (145)
Issuance of common stock and
treasury stock for acquisition,
net of issuance costs........... 720 72 55,515 (1,701) 18,111 73,698
Issuance of common stock pursuant
to stock options and warrants
including tax benefit of $25,251
(Note 15)....................... 3,431 343 88,505 88,848
Issuance of common stock to
retirement plan (Note 16)....... 607 (28) 304 911
Other............................ (200) (20) 61 (186) (8) 93 (52)
-------- ------- ------ ------ -------- -------- ------ -------- --------
Balance at September 30, 1995..... 26,529 2,653 336,752 9,515 56 (582) 348,338
Net income....................... 237,888 237,888
Acquisition of common stock for
treasury........................ 1,336 (59,372) (59,372)
Issuance of common stock pursuant
to stock options and warrants
including tax benefit of $47,112
(Note 15)....................... 9,222 922 322,827 323,749
Issuance of common stock pursuant
to conversion of 5 3/4%
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
Distribution of subsidiary....... (113,549) (113,549)
Issuance of common stock to
retirement plan (Note 16)....... 127 (20) 857 984
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax (Note 1).. (1,178) (1,178)
Other............................ 39 (2,520) (2,481)
------ ------ -------- -------- ------ -------- --------
Balance at September 30, 1996.... 39,807 $3,981 $804,451 $130,156 1,372 $(59,097) $879,491
====== ====== ======== ======== ====== ======== ========
</TABLE>
See accompanying notes.
28
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income................................... $ 237,888 $ 9,274 $ 58,339
Less: Income from discontinued operations.... (177,290) (42,930) (27,753)
--------- --------- --------
Income (loss) from continuing operations..... 60,598 (33,656) 30,586
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization.............. 31,599 27,916 19,805
Provision for losses on accounts
receivable................................ 4,857 4,351 3,559
Provision for deferred income taxes........ 11,411 11,124 17,971
Purchased research and development......... 62,000
Write-down of property and equipment and
other assets.............................. 2,479
Write-down of purchased and capitalized
computer software costs................... 6,446
Changes in operating assets and
liabilities, net of effects of business
acquisitions:
Increase in accounts and notes
receivable............................... (3,153) (25,757) (15,236)
Increase in amounts due to Sterling
Commerce................................. 35,134
Increase in prepaid expenses and other
assets................................... (16,109) (4,973) (2,511)
Decrease in accounts payable, accrued
liabilities and income taxes payable..... (61,541) (4,852) (3,267)
Increase in deferred revenue.............. 546 9,088 7,491
Other..................................... (2,181) (1,127) (2,800)
--------- --------- --------
Net cash provided by operating
activities.............................. 61,161 53,039 55,598
Investing activities:
Purchases of property and equipment.......... (11,991) (22,467) (6,098)
Purchases and capitalized cost of development
of computer software........................ (15,852) (12,287) (11,768)
Business acquisitions net of cash acquired... (7,001) (15,090) (425)
Purchases of investments..................... (576,299) (143,827) (95,940)
Proceeds from sales of investments........... 406,072 129,749 102,518
Other........................................ 379 (88) 2,450
--------- --------- --------
Net cash used in investing activities.... (204,692) (64,010) (9,263)
Financing activities:
Purchases of treasury stock.................. (59,372)
Preferred stock dividends.................... (145) (196)
Retirement and redemption of debt and capital
lease obligations........................... (13,222) (73,128) (24,535)
Proceeds from issuance of debt, net of
issuance costs.............................. 6,014 68,832 26,172
Acquisition of KnowledgeWare, Inc. loan from
IBM Credit Corporation and advances to
KnowledgeWare, Inc.......................... (4,435) (18,133)
Net proceeds from subsidiary public
offering.................................... 265,458
Proceeds from issuance of common stock
pursuant to the exercise of stock options
and warrants................................ 276,637 63,597 21,906
Other........................................ (4,162) 1,165 (2,743)
--------- --------- --------
Net cash provided by financing
activities.............................. 471,353 55,886 2,471
Cash flows provided by discontinued
operations.................................... 17,819 32,354 22,534
Effect of foreign currency exchange rate
changes on cash............................... (314) 127 435
--------- --------- --------
Increase in cash and equivalents............... 345,327 77,396 71,775
Cash and cash equivalents at beginning of
year.......................................... 178,910 101,514 29,739
--------- --------- --------
Cash and cash equivalents at end of year....... $ 524,237 $ 178,910 $101,514
========= ========= ========
Supplemental cash flow information:
Interest paid................................ $ 4,453 $ 7,968 $ 7,286
========= ========= ========
Income taxes paid............................ $ 91,902 $ 10,243 $ 2,974
========= ========= ========
</TABLE>
See accompanying notes.
29
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sterling Software, Inc. ("Sterling Software" or the "Company") was founded
in 198l and became a publicly owned corporation in 1983. Sterling Software is
a recognized worldwide supplier of software products and services within three
major markets classified as systems management, applications management and
federal systems. Sterling Software's international operations are responsible
for sales, marketing and first-level support of the Company's products outside
the United States and Canada. Consistent with Sterling Software's
decentralized operating structure, major markets are served by independently
operated business groups which consist of divisions that focus on specific
business niches within those markets. See Notes 5 and 6. Sterling Software
believes that its decentralized organizational structure promotes operating
flexibility, improves responsiveness to customer requirements and focuses
management on achieving revenue and operating profit objectives. Sterling
Software has historically expanded its operations through internal growth and
by business and product acquisitions.
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software (See Notes 2 and 3) after elimination of all significant intercompany
balances and transactions. Certain amounts for periods ended prior to
September 30, 1996, have been reclassified to conform to the current year
presentation, including restatements to reflect the discontinuation of
Sterling Software's former Electronic Commerce Group. The financial statements
have been prepared in conformity with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and the disclosure of contingencies at
September 30, 1996 and 1995 and the results of operations for the years ended
September 30, 1996, 1995 and 1994. While management has based their
assumptions and estimates on the facts and circumstances known at September
30, 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 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 other long-term contracts is recognized
30
<PAGE>
using the percentage-of-completion method of accounting. Losses on long-term
contracts are recognized when the current estimate of total contract costs
indicates a loss on a contract is probable.
Software Development Costs
The Company capitalizes the costs of developing and testing new or
significantly enhanced software products in accordance with the provisions of
Statement of Financial Accounting Standard No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." Unamortized
software development costs of $36,242,000 and $28,562,000 are included in
"Computer software, net" at September 30, 1996 and 1995, respectively.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to twenty years.
Computer software costs are amortized on a product-by-product basis using the
greater of the amount computed by taking the ratio of current year net revenue
to estimated future net revenue or the amount computed by the straight-line
method over periods ranging from three to seven years. Excess costs over the
net assets of businesses acquired are amortized on a straight-line basis over
periods of seven to forty years. Other intangible assets are amortized on a
straight-line basis over periods of three to ten years.
Depreciation and amortization consists of the following for the years ended
September 30, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $11,463 $ 9,922 $ 6,271
Purchased computer software........................ 5,926 4,203 1,194
Capitalized computer software development costs.... 7,871 8,505 10,012
Excess costs over net assets of businesses
acquired.......................................... 5,839 4,894 2,124
Intangible assets.................................. 500 392 204
------- ------- -------
$31,599 $27,916 $19,805
======= ======= =======
</TABLE>
Income Taxes
The Company's income taxes are presented in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability method of accounting for income
taxes. Under the asset and liability method, a deferred tax asset or liability
is recognized for estimated future tax effects attributable to temporary
differences and carryforwards. The measurement of deferred income tax assets
is adjusted by a valuation allowance, if necessary, to recognize future tax
benefit only to the extent, based on available evidence, it is more likely
than not it will be realized. The effect on deferred taxes of a change in
income tax rates is recognized in the period that includes the enactment date.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company intends to continue applying the
existing accounting requirements for stock options and stock-based awards as
contained in APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company will provide pro forma disclosures as required under FAS 123.
Earnings Per Common Share
Primary earnings per common share data is computed using the weighted
average number of common shares and common share equivalents represented by
stock options and warrants, if such stock options and warrants have a dilutive
effect in the aggregate. For purposes of this computation, income applicable
to common
31
<PAGE>
stockholders is adjusted to reflect use of net cash proceeds on the assumed
exercise of stock options and warrants to purchase outstanding long-term debt
or government securities, if such stock options and warrants have a dilutive
effect.
Fully diluted earnings per common share computations assume, in addition,
the conversion of the Company's 5 3/4% Convertible Subordinated Debentures
(the "Debentures") in the 1996 and 1994 computations, if such conversions have
a dilutive effect. Upon assumed conversion of the Debentures, income
applicable to common stockholders is adjusted to reflect the elimination of
after tax interest expense related to the Debentures. For purposes of this
computation, income applicable to common stockholders is also adjusted to
reflect use of net cash proceeds on the assumed exercise of stock options and
warrants to purchase outstanding long-term debt or government securities, if
such stock options and warrants have a dilutive effect.
For the year ended September 30, 1995, neither the common share equivalents
nor the assumed conversion of the Debentures had a dilutive effect on the loss
per share calculations. Accordingly, the net loss per common share
calculations for such period is based on the weighted average number of common
shares outstanding during the year.
The numbers of shares used in the computations of primary and fully diluted
income per common share for the year ended September 30, 1996 were 34,071,000
and 36,045,000, respectively. The number of shares used in the computations of
net income per common share for the year ended September 30, 1995 was
23,649,000. The numbers of shares used in the computations of primary and
fully diluted income per common share for the year ended September 30, 1994,
were 22,923,000 and 26,979,000, respectively.
Foreign Currency Translation
The assets and liabilities of consolidated wholly owned non-U.S. operations
are translated into U.S. dollars at exchange rates in effect as of the
respective balance sheet dates. Revenue and expense accounts of these
operations are translated at average exchange rates prevailing during the
period the transactions occur. Unrealized translation gains and losses are
included as an adjustment to retained earnings.
Cash and Equivalents
Cash equivalents consist primarily of highly liquid investments in
repurchase agreements backed by U.S. Treasury securities and investment-grade
commercial paper of various issuers, with maturities of three months or less
when purchased. Cash equivalents are recorded at fair value.
Marketable Securities and Other Investments
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities, including commercial paper, medium term notes, U.S.
government obligations, investment fund partnerships and certificates of
deposit, which may include both investment grade and non-investment grade
securities. The fair values for marketable securities are based on quoted
market prices.
All marketable securities and long-term investments are classified as
available-for-sale securities. Unrealized holding gains and losses on
securities available-for-sale are recorded as a component of stockholders'
equity, net of any related tax effect. The amortized cost of debt securities
in this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in values judged to be other-than-
temporary, if any, on available-for-sale securities are included in investment
income.
Other Assets
Included in "other assets" in the consolidated balance sheet are noncurrent
marketable securities (see Note 7), debt issuance costs related to the
issuance of the Debentures (see Note 10), long-term deposits, certain
intangibles and other noncurrent assets.
32
<PAGE>
2. DISCONTINUED OPERATIONS
Sterling Commerce, Inc. ("Sterling 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 its 73,200,000 shares of Commerce
Stock and Sterling Commerce sold 1,800,000 of previously unissued shares of
Commerce Stock. The Offering price was $24 per share of Commerce Stock
resulting in net proceeds to Sterling Software of approximately $265,458,000
after deducting underwriting discounts and commissions and Sterling Software's
pro rata share of Offering expenses. Sterling Software recorded a gain of
approximately $126,103,000, net of tax, from the sale of Commerce Stock in the
Offering.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce with the pro rata distribution (the "Distribution") of its remaining
81.6% ownership in Sterling Commerce to Sterling Software's shareholders by
means of a tax-free dividend. Holders of record of the Company's $0.10 par
value common stock ("Software Stock") as of the close of business on September
30, 1996 received 1.59260 shares of Commerce Stock for each share of Software
Stock owned on such date. The Distribution resulted in the reduction of
Sterling Software stockholder's equity in the amount of $113,549,000,
representing the book value of net assets distributed.
Prior year's financial statements have been restated to reflect the
discontinuation of the Sterling Software electronic commerce business segment.
The income from discontinued operations reflected in the table below is
inclusive of minority interest held by stockholders outside of Sterling
Software. Summary operating results of discontinued operations, excluding the
above gain, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue........................................ $267,773 $203,578 $155,916
Total costs and expenses....................... $172,568 $131,550 $109,511
Income before income taxes..................... $ 96,422 $ 71,550 $ 46,255
Income taxes................................... $ 38,030 $ 28,620 $ 18,502
Income from discontinued operations, net....... $ 58,392 $ 42,930 $ 27,753
</TABLE>
Due to the spin-off of Sterling Commerce, the Sterling Commerce net assets
at September 30, 1996 are not included in Sterling Software's September 30,
1996 Consolidated Balance Sheet. The net assets of Sterling Commerce have been
segregated in the September 30, 1995 Consolidated Balance Sheet and are
summarized below (in thousands):
<TABLE>
<S> <C>
Current assets................................................ $ 56,054
Property and equipment, net................................... 25,838
Computer software, net........................................ 32,263
Excess cost over net assets acquired, net..................... 10,259
Other assets.................................................. 4,564
Current liabilities........................................... (52,362)
Deferred income taxes......................................... (17,749)
Other noncurrent liabilities.................................. (5,680)
--------
Net assets.................................................... $ 53,187
========
</TABLE>
In anticipation of the Offering, Sterling Software and Sterling Commerce
entered into a number of agreements (the "Intercompany Agreements") for the
purpose of defining certain relationships between them. As a result of
Sterling Software's ownership interest in Sterling Commerce, the terms of such
agreements were not the result of arm's-length negotiation. The Intercompany
Agreements include a tax allocation agreement, an international marketing
agreement, a space sharing agreement and a services agreement. The tax
allocation agreement states that for periods during which Sterling Commerce
and/or its subsidiaries are included in Sterling Software's consolidated
federal income tax returns or consolidated, combined or unitary state tax
returns (which
33
<PAGE>
periods include the period between the Offering and the Distribution), Sterling
Commerce is required to pay to or is entitled to receive from Sterling Software
its allocable portion of the consolidated federal and state income tax
liability or refunds, respectively. Additionally, the tax allocation agreement
contains provisions for the handling of tax controversies. The international
marketing agreement defines the terms pursuant to which Sterling Software acts
as the exclusive distributor through March 1999 of certain of Sterling
Commerce's products in markets outside the United States and Canada. The
international marketing agreement provides for the payment to Sterling Commerce
of royalties equal to 50% of the net revenue that Sterling Software derives
from licenses of Sterling Commerce's interchange and communications software
products and related product support services. The space sharing agreement
defines the terms pursuant to which Sterling Commerce and Sterling Software are
allowed to utilize a portion of each other's office facilities. The services
agreement, which terminated effective as of the Distribution, included
provisions related to central cash management whereby Sterling Commerce
advanced to Sterling Software, on a daily basis, all cash generated by Sterling
Commerce which was not needed to meet daily cash requirements.
As a result of various transactions between the Company and Sterling
Commerce, including royalties due to Sterling Commerce as a result of the
Company acting as an international distributor, tax and other expenses charged
to Sterling Commerce and Sterling Commerce's participation in the Company's
central cash management program (which participation terminated upon completion
of the Distribution on September 30, 1996), amounts payable to and receivable
from Sterling Commerce arose from time to time. At September 30, 1996 the
Company held amounts due to Sterling Commerce of approximately $35,134,000,
which were remitted to Sterling Commerce subsequent to September 30, 1996.
Sterling Software remains the guarantor of certain office lease and other
obligations of Sterling Commerce incurred pursuant to instruments executed
prior to the Distribution. The aggregate liability of Sterling Software with
respect to its guaranty of such obligations is approximately $40,000,000.
Sterling Commerce is obligated to indemnify Sterling Software for any
liabilities incurred by Sterling Software as guarantor of such obligations, and
Sterling Commerce has agreed to use reasonable efforts to obtain Sterling
Software's release from its obligations under the related guarantees.
Additionally, certain executive officers of Sterling Software are also
executive officers of Sterling Commerce and will continue to serve in such dual
capacities for some period following the Distribution.
3. BUSINESS COMBINATIONS
On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a
leading provider of applications development software and services, for
approximately $106 million, in a stock-for-stock acquisition (the "Merger"). In
connection with the Merger, the Company issued approximately 2,421,000 shares
of 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 agreement (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 to cover certain losses and claims with
respect to which the Company was entitled to indemnification pursuant to the
terms of the Merger Agreement. Since the Merger, all such escrowed shares have
been released from escrow and used to satisfy certain losses and claims.
The operating results of KnowledgeWare are included in the Company's results
of operations from November 30, 1994, 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, the portion of the purchase price
attributed to in-process research and development, which was charged to expense
in accordance with purchase accounting guidelines. The $62,000,000 charge has
no related tax benefit. The results of operations for the first quarter of 1995
also include a charge for restructure costs of $19,512,000 to integrate
KnowledgeWare's business into the
34
<PAGE>
Company's operations. The restructure charge includes employee termination
costs, costs related to the elimination of duplicate facilities, the write-off
of costs related to certain software products which were not actively marketed
and other out-of-pocket costs related to the reorganization. Cash costs and
expenses directly related to the acquisition of KnowledgeWare and unrelated to
the restructuring of the Company are accounted for as a cost of the
acquisition. Of the total restructuring charge of $19,512,000, approximately
$8,377,000 was a non-cash charge and the remaining $11,135,000 were required
cash outlays, substantially all of which had been paid as of September 30,
1996.
4. LEGAL PROCEEDINGS AND CLAIMS
On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock-
for-stock acquisition. On March 14, 1995, the Securities and Exchange
Commission (the "Commission") entered an Order Directing Private Investigation
and Designating Officers to take Testimony titled "In the Matter of
KnowledgeWare, Inc. (NY-6231)." The investigation generally relates to (i)
trading in KnowledgeWare securities from July 1, 1992 through the time of the
stock-for-stock transaction by which Sterling Software acquired KnowledgeWare,
(ii) KnowledgeWare's compliance with the Commission's filing and reporting
obligations and (iii) the adequacy and/or accuracy of KnowledgeWare's public
disclosures, recordkeeping and accounting controls. In addition to the
potential successor liability of the wholly-owned subsidiary that was merged
into KnowledgeWare, Sterling Software may have an indemnity obligation with
respect to certain individuals who may be subject to the SEC investigation.
Sterling Software's management believes that, after giving effect to
applicable reserves, the ultimate resolution of the Commission's investigation
will not materially affect the financial condition or results of operations of
Sterling Software.
The Company is also 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 and available insurance, will not materially affect the
financial condition or results of operations of the Company.
5. SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in three major markets classified as
systems management, applications management and federal systems. Major markets
are represented through independently operated business segments. The systems
management business segment provides enterprise-wide systems management
software for large computing environments. The applications management
business segment provides products for developing new applications,
revitalizing, integrating and extending existing applications and facilitating
enterprise information access. The federal systems business segment provides
highly technical professional services to the federal government under several
multi-year contracts primarily in support of two major customers, the National
Aeronautics and Space Administration and the Department of Defense. The
Company's international operations are responsible for sales, marketing and
first-level support of the Company's products outside of the United States and
Canada. These international operating results are included, as applicable, in
the Company's systems management and applications management segments in the
business segment tables contained herein. The Company's international
operations also sell, market and provide first-level support outside of the
United States and Canada for certain electronic commerce products, the results
of which are included in "Corporate and other." International operating
results allocated to these business segments included revenue of $167,845,000,
$152,026,000 and $103,824,000 and international operating profit (exclusive of
intercompany royalties) of $74,105,000, $72,684,000 and $48,892,000 for 1996,
1995 and 1994, respectively.
35
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the years ended September 30, 1996, 1995 and 1994, is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS 1996 1995 1994
----------------- ---------- --------- --------
<S> <C> <C> <C>
Revenue:
Systems Management...................... $ 170,804 $ 154,657 $141,653
Federal Systems......................... 112,188 101,702 106,973
Applications Management................. 109,804 107,209 49,934
Corporate and other..................... 46,375 32,743 27,343
---------- --------- --------
Consolidated totals................... $ 439,171 $ 396,311 $325,903
========== ========= ========
Operating Profit (Loss):
Systems Management...................... $ 65,858 $ 55,471 $ 49,015
Federal Systems......................... 7,982 6,648 7,260
Applications Management................. 16,408 21,320 11,314
Restructuring charge.................... (19,512)
Purchased research and development...... (62,000)
Corporate and other..................... (29,474) (23,117) (18,460)
---------- --------- --------
Consolidated totals................... $ 60,774 $ (21,190) $ 49,129
========== ========= ========
Identifiable Assets:
Systems Management...................... $ 135,845 $ 115,729 $ 95,318
Federal Systems......................... 68,809 56,737 56,476
Applications Management................. 107,713 125,410 35,153
Corporate and other..................... 785,246 306,648 214,663
Discontinued operations................. 53,187 43,051
---------- --------- --------
Consolidated totals................... $1,097,613 $ 657,711 $444,661
========== ========= ========
Capital Expenditures (including additions
to computer software):
Systems Management...................... $ 14,597 $ 11,808 $ 10,699
Federal Systems......................... 1,255 1,518 1,225
Applications Management................. 6,603 7,753 4,156
Corporate and other..................... 5,388 13,675 1,786
---------- --------- --------
Consolidated totals................... $ 27,843 $ 34,754 $ 17,866
========== ========= ========
Depreciation and Amortization:
Systems Management...................... $ 12,230 $ 10,612 $ 9,456
Federal Systems......................... 2,290 2,196 2,099
Applications Management................. 12,926 11,390 5,082
Corporate and other..................... 4,153 3,718 3,168
---------- --------- --------
Consolidated totals................... $ 31,599 $ 27,916 $ 19,805
========== ========= ========
Revenue from the U.S. Government:
Systems Management...................... $ 3,521 $ 3,250 $ 2,460
Federal Systems......................... 104,052 97,650 103,580
Applications Management................. 5,169 2,930 576
---------- --------- --------
Consolidated totals................... $ 112,742 $ 103,830 $106,616
========== ========= ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
intersegment eliminations, cash balances, marketable securities, long-term
investments, deferred income tax balances, other assets, the results of
operations and assets of the Company's retail software division, and the
results of operations for the international distribution of certain electronic
commerce products.
36
<PAGE>
6. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations in the United States and international markets at
September 30, 1996, 1995 and 1994 and for the years then ended are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
GEOGRAPHICAL SEGMENT INFORMATION 1996 1995 1994
-------------------------------- ---------- -------- --------
<S> <C> <C> <C>
Revenue:
United States................................ $ 252,181 $225,923 $204,342
Europe....................................... 88,611 89,659 57,834
Canada and Latin America..................... 15,099 12,801 12,151
Pacific...................................... 36,905 35,185 24,233
Corporate and other.......................... 46,375 32,743 27,343
---------- -------- --------
$ 439,171 $396,311 $325,903
========== ======== ========
Operating Profit (Loss):
United States................................ $ 72,824 $ 54,940 $ 53,761
Europe....................................... 9,773 16,925 7,682
Canada and Latin America..................... 3,681 4,332 3,632
Pacific...................................... 3,970 7,242 2,514
Restructuring charges........................ (19,512)
Purchased research and development........... (62,000)
Corporate and other.......................... (29,474) (23,117) (18,460)
---------- -------- --------
$ 60,774 $(21,190) $ 49,129
========== ======== ========
Identifiable Assets:
United States................................ $ 217,021 $200,527 $125,890
Europe....................................... 82,537 77,856 40,005
Canada and Latin America..................... 3,573 4,438 9,672
Pacific...................................... 9,236 15,055 11,380
Corporate and other.......................... 785,246 306,648 214,663
Discontinued operations...................... 53,187 43,051
---------- -------- --------
$1,097,613 $657,711 $444,661
========== ======== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
intersegment eliminations, cash balances, marketable securities, long-term
investments, deferred income tax balances, other assets, the results of
operations and assets of the Company's retail software division, and the
results of operations for the international distribution of certain electronic
commerce products.
7. MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS
At September 30, 1996 and 1995, all of the Company's marketable securities
and other long-term investments were classified as available-for-sale and
consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------
AGGREGATE AMORTIZED HOLDING HOLDING
FAIR VALUE COST BASIS GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
September 30, 1996
Current:
Commercial paper................... $ 33,468 $ 33,468
U.S. corporate notes............... 76,115 76,577 $ 25 $ 487
U.S. government obligations........ 76,062 76,265 89 292
Municipal obligations.............. 25,507 25,501 6
Other.............................. 20,767 21,889 28 1,150
-------- -------- ------- ---------
$231,919 $233,700 $ 148 $ 1,929
======== ======== ======= =========
Noncurrent........................... $ 1,000 $ 1,000
======== ========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------
AGGREGATE AMORTIZED HOLDING HOLDING
FAIR VALUE COST BASIS GAINS LOSSES
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
September 30, 1995
Current:
Commercial paper................. $ 3,978 $ 3,978
U.S. corporate notes............. 46,746 46,741 $ 42 $ 37
U.S. government obligations...... 1,195 1,203 8
Municipal obligations............ 7,500 7,500
Other............................ 1,922 1,922
------- ------- -------- --------
$61,341 $61,344 $ 42 $ 45
======= ======= ======== ========
Noncurrent......................... $ 1,000 $ 1,000
======= =======
</TABLE>
At September 30, 1996, scheduled maturities of investments in debt
securities are: $143,184,000 within one year and $82,273,000 between one and
five years.
8. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Trade................................................... $115,427 $117,445
Unbilled................................................ 24,032 24,310
-------- --------
139,459 141,755
Less: Allowance for doubtful accounts................... 6,076 7,176
-------- --------
$133,383 $134,579
======== ========
</TABLE>
At September 30, 1996 and 1995, accounts receivable include $35,975,000 and
$33,020,000, respectively, due under contracts with the federal government and
related agencies. The remainder of the Company's receivables are due
principally from corporations in diverse industries located in North America
and Europe.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Computer and peripheral equipment......................... $38,663 $39,844
Furniture, fixtures and other equipment................... 33,067 35,514
Leasehold improvements.................................... 9,629 7,989
------- -------
81,359 83,347
Less accumulated depreciation............................. 42,029 40,773
------- -------
$39,330 $42,574
======= =======
</TABLE>
38
<PAGE>
10. LONG-TERM DEBT
Long-term debt consists of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- --------
<S> <C> <C>
Debentures.................................................. $ $114,987
Capital leases and other debt............................... 388 7,552
---- --------
388 122,539
Less amounts due within one year............................ 388 5,871
---- --------
$ $116,668
==== ========
</TABLE>
On December 20, 1995, the Company gave notice of the redemption of all of
the $114,922,000 then outstanding principal amount of its Debentures. The
effective date of the redemption was February 12, 1996. 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 net earnings per share would have been $6.65 for the year ended
September 30, 1996.
On August 24, 1995, the Company entered into an amended loan agreement
("Loan Agreement") with a borrowing capacity of $35,000,000. The Loan
Agreement is unsecured and contains various restrictions on the Company,
including limitations on additional borrowings, repurchase of subordinated
debt, payment of dividends, acquisitions and capital expenditures. The Loan
Agreement also requires that certain financial ratios be maintained.
Borrowings under the Loan Agreement bear interest at the higher of the bank's
prime rate or the Federal Funds Effective Rate plus one-half percent.
Borrowings, if any, outstanding on August 24, 1998 will become due in four
equal installments at the end of each subsequent quarter. There were no
amounts borrowed during 1996 and 1995 or outstanding under the Loan Agreement
at September 30, 1996. At September 30, 1996, after the utilization of
approximately $1,788,000 for standby letters of credit, approximately
$33,212,000 was available for borrowing under the Loan Agreement.
Certain of the Company's foreign subsidiaries have $21,295,000 of available
borrowing capacity under separate lines of credit for foreign exchange
exposure management and working capital requirements. These lines of credit
are guaranteed by Sterling Software, Inc. At September 30, 1996, $251,000 was
outstanding pursuant to foreign lines of credit.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Trade accounts payable.................................... $16,712 $22,041
Accrued compensation...................................... 37,242 30,386
Accrued restructuring and acquisition costs............... 4,017 18,624
Other accrued liabilities................................. 19,378 23,471
------- -------
$77,349 $94,522
======= =======
</TABLE>
Accrued restructuring and acquisition costs are primarily due to the
Company's restructuring as a result of the acquisition of KnowledgeWare (see
Note 3) and are primarily for the remaining commitments pursuant to operating
leases of duplicate facilities.
39
<PAGE>
12. INCOME TAXES
The provision for income taxes on income (loss) from continuing operations
is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 10,055 $ 4,449 $ (3,653)
State.......................................
Foreign..................................... 2,822 700 2,585
Deferred:
Federal..................................... 10,551 9,087 13,646
State....................................... 2,970 764 1,003
Foreign..................................... (2,110) 2,179
-------- -------- --------
$ 24,288 $ 15,000 $ 15,760
======== ======== ========
</TABLE>
The effective income tax rate on income (loss) from continuing operations
before income taxes differed from the federal income tax statutory rate for
the following reasons (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal
statutory rate............................. $ 29,703 $ (6,530) $ 16,221
Increases (reductions) in tax expense
(benefit) resulting from:
Purchased research and development for
which no federal income tax benefit was
recognized............................... 21,700
Recognition of previously unrecognized
deferred income tax asset................ (7,853) (1,197) (728)
Amortization of excess cost over net
assets................................... 1,680 1,761 885
Foreign sales corporation................. (1,568) (2,163)
State income taxes, net of federal
benefit.................................. 2,970 764 (158)
Other..................................... (644) 665 (460)
-------- -------- --------
$ 24,288 $ 15,000 $ 15,760
======== ======== ========
</TABLE>
Income (loss) before income taxes includes foreign pretax earnings (losses)
of $3,525,000, $(4,300,000) and $12,104,000 for the years ended September 30,
1996, 1995 and 1994, respectively.
40
<PAGE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax asset as of September 30 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards..................... $ 44,167 $ 66,812
General business and alternative minimum tax credit
carryforwards....................................... 5,073 7,304
Foreign tax credit carryforwards..................... 6,583 8,188
Foreign taxes creditable on undistributed foreign
source income....................................... 5,397 5,397
Reserves and restructuring accruals.................. 12,640 10,331
-------- --------
Deferred income tax assets......................... 73,860 98,032
-------- --------
Deferred income tax liabilities:
Capitalized software costs........................... 11,292 18,654
Depreciation and amortization........................ 2,110 (3,249)
Other future income tax liabilities.................. 13,626 6,571
-------- --------
Deferred income tax liabilities.................... 27,028 21,976
-------- --------
Deferred income tax asset net of deferred income tax
liability........................................... 46,832 76,056
Less valuation allowance............................. (43,846) (41,920)
-------- --------
Net deferred income tax asset...................... $ 2,986 $ 34,136
======== ========
</TABLE>
The valuation allowance relates principally to certain net operating loss
and credit carryforwards. Although realization is not assured, management
believes that future taxable income based on expected future earnings of the
Company will more likely than not utilize a portion of the net operating loss
carryforwards, tax credit carryforwards and other future tax deductions in
existence at September 30, 1996, equivalent to the net deferred income tax
asset. As there can be no assurances on amounts in excess of the net deferred
income tax asset, the aforementioned valuation allowance has been recorded and
may change as estimates during the carryforward periods change.
At September 30, 1996, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $87,500,000 and
$11,656,000 respectively. These carryforwards will expire at various times
between 1997 and 2009, with approximately $87,500,000 of the net operating
loss carryforwards expiring between 2007 and 2009. The usage of substantially
all of these carryforwards is restricted to future taxable income of certain
of the Company's wholly owned subsidiaries and limited by Section 382 of the
Internal Revenue Code. Thus, the Company's usage of these carryforwards cannot
be assured.
13. COMMITMENTS
The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1996, 1995 and 1994 was
$19,366,000, $26,359,000 and $21,235,000, respectively. At September 30, 1996,
minimum future rental payments due under all operating leases, net of future
sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................ $18,594
1998............................................................ 16,916
1999............................................................ 13,365
2000............................................................ 8,472
2001............................................................ 7,198
Thereafter...................................................... 12,820
-------
$77,365
=======
</TABLE>
41
<PAGE>
14. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock, par
value $0.10 per share ("Preferred Stock"), of which 200,000 shares designated
as Series B Junior Preferred Stock ("Junior Preferred Stock") were issued and
outstanding at September 30, 1994. The 200,000 shares of the Company's Junior
Preferred Stock outstanding at September 30, 1994 were exchanged on June 27,
1995 for warrants to purchase 269,380 shares of the Company's Common Stock.
The warrants became fully exercisable on September 25, 1995 at an exercise
price of $36.50 per share and were subsequently exercised. The Board of
Directors of the Company is authorized, without action by the stockholders, to
issue Preferred Stock and fix for each series the number of shares,
designation, dividend rights, voting rights, redemption rights, and other
rights.
15. STOCK OPTIONS AND WARRANTS
In April 1996, Sterling Software's Board of Directors adopted and in May
1996 Sterling Software's stockholders approved the 1996 Stock Option Plan. In
September 1996, the 1996 Stock Option Plan was amended to conform to certain
modifications to Rule 16b-3 under the Securities Exchange Act of 1934. At
September 30, 1996, 7,750,000 shares were reserved for future grants of
options under the 1996 Stock Option Plan. Subsequent to September 30, 1996,
options to acquire 7,124,500 shares of Software Stock were granted under the
1996 Stock Option Plan. Options granted pursuant to the 1996 Stock Option Plan
become exerciseable generally within 90 days of the date of grant or at a rate
of 25% per year and expire either five or ten years from the date of grant. A
tax benefit of $47,112,000 associated with the exercise of options and
warrants is credited to paid in capital in 1996. As a result of the approval
of the 1996 Stock Option Plan, Sterling Software's Board of Directors will not
issue any of the remaining 1,293,000 options available for grant under
Sterling Software's other stock option plans.
Stock option transactions are summarized below for the three years ended
September 30, 1996:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER EXERCISE EXERCISE
OF SHARES PRICE PRICE
----------- ---------------- -------------
<S> <C> <C> <C>
Outstanding at September 30, 1993
(3,797,865 shares exercisable)... 7,189,326 $ 2.10 - $ 39.23 $ 126,177,497
Granted during the year......... 520,800 24.00 - 34.50 15,901,475
Terminated and cancelled during
the year....................... (117,804) 2.12 - 39.23 (2,110,416)
Exercised during the year....... (1,131,559) 2.10 - 26.10 (15,034,772)
----------- -------------
Outstanding at September 30, 1994
(3,893,745 shares exercisable)... 6,460,763 2.12 - 36.92 124,933,784
Options associated with KWI
acquisition.................... 166,173 13.80 - 149.73 8,314,254
Granted during the year......... 4,886,547 29.00 - 45.88 161,278,929
Terminated and cancelled during
the year....................... (184,972) 7.63 - 101.34 (5,601,581)
Exercised during the year....... (3,242,780) 2.12 - 36.92 (59,610,840)
----------- -------------
Outstanding at September 30, 1995
(3,781,222 shares exercisable)... 8,085,731 229,314,546
Granted during the year......... 1,147,675 41.75 - 56.88 48,640,094
Terminated and cancelled during
the year....................... (239,512) 13.38 - 149.73 (8,289,942)
Exercised during the year....... (8,912,213) 2.12 - 76.38 (265,902,230)
----------- -------------
Outstanding at September 30, 1996
(81,681 shares exercisable)...... 81,681 8.55 - 82.46 $ 3,762,468
=========== =============
</TABLE>
In connection with the Offering, Sterling Software accelerated the vesting
of substantially all outstanding options granted under Sterling Software's
stock option plans in existence at the time of the Offering. Under the terms
of Sterling Software's stock option plans, options that were unexercised with
respect to 81,681 shares of
42
<PAGE>
Software Stock at the close of business on September 30, 1996 were adjusted to
thereafter be exerciseable with respect to 207,950 shares at exercise prices
ranging from $3.36 to $32.40 to preserve the economic value of such options.
During 1996, 1995 and 1994, 310,097, 189,300, and 1,329,035 warrants with an
aggregate exercise price of $10,734,659, $4,012,704 and $8,336,473,
respectively, were exercised for shares of Software Stock. Also, in 1996,
82,650 warrants with an aggregate exercise price of $8,750,155 were cancelled.
At September 30, 1996, no warrants were outstanding.
16. POSTRETIREMENT BENEFITS
The Company has a plan to provide retirement benefits under the provisions
of Section 401(k) of the Internal Revenue Code for full time employees and for
part-time employees who have completed a specified term of service. Pursuant
to this plan, eligible participants may elect to contribute a percentage of
their annual gross compensation and the Company will contribute additional
amounts, as provided by the plan. Benefits under the plan are limited to the
assets of the plan. Company contributions charged to expense during 1996, 1995
and 1994 were $2,315,000 $2,474,000 and $2,034,000, respectively. One-half of
the Company's contributions are invested in Software Stock. Effective October
1, 1996, the portion of the plan consisting of the Company's contributions was
designated as an employee stock ownership plan. During 1996, 1995 and 1994,
the investment of the Company's contributions included 19,665, 28,597 and
40,700 shares of Software Stock, respectively. These share contributions
include those with respect to Sterling Commerce employees through September
30, 1996, the date of the spin-off. See Note 2.
Certain of the Company's subsidiaries also provide healthcare benefits to
eligible retired employees. These benefits are subject to deductibles,
copayment provisions and other limitations including retiree premium
contributions. The Company's policy is to fund the cost of the postretirement
healthcare coverage in amounts determined at the discretion of management. A
plan amendment was adopted in October 1994 that reduced the number of
employees eligible for participation in the postretirement benefit plan and
reduced the Company's future costs for certain eligible participants. The
impact of the amendment in 1995 was a curtailment gain of approximately
$1,400,000. The Company and its subsidiaries may amend or change the plan
periodically, or may terminate the plan.
The following table sets forth the computation of accrued postretirement
healthcare benefit costs at September 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $ 775 $ 785
Fully eligible active plan participants.................... 977 1,010
Other active plan participants............................. 1,259 1,116
------ ------
3,011 2,911
Assets at fair market value................................ 1,766 1,648
------ ------
Projected benefit obligation in excess of assets at fair
market value................................................ 1,245 1,263
Unrecognized net gain (loss)................................. 1,768 2,001
------ ------
Accrued postretirement benefit cost........................ $3,013 $3,264
====== ======
</TABLE>
43
<PAGE>
The following table presents net periodic postretirement healthcare benefit
costs for the years ended September 30, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost...................................... $ 98 $ 108 $ 633
Interest cost..................................... 205 241 366
Actual asset return............................... (112) (90) (8)
Net amortization and deferral..................... (233) (208) 57
------- ------- --------
Net periodic postretirement benefit cost........ $ (42) $ 51 $ 1,048
======= ======= ========
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at September 30, 1996. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (healthcare cost trend rate) is 9.5% for 1997 and is assumed
to decrease gradually to 5% after 9 years and remain at that level thereafter.
At September 30, 1995, the weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7.5%. The weighted
average healthcare cost trend rate was 10% for 1996 and was assumed to
decrease gradually to 5% after 10 years and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed healthcare cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1996 by $336,600 and the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for 1996 by $26,300.
17. CHANGE-IN-CONTROL AND SEVERANCE ARRANGEMENTS
As of September 30, 1996, the Company had change-in-control agreements with
fourteen officers that grant the right to receive payments based on the
individual officer's respective salary, bonus and benefits if there has been a
change in control (as defined) in the Company and termination of employment
has occurred. At September 30, 1996, the maximum liability for salaries,
bonuses and benefits under these agreements was approximately $44,000,000.
As of September 30, 1996, the Company had entered into severance agreements
with ten officers of the Company providing for payments based on the
individual officer's respective salary and bonus and continuation of benefits
if the Company terminates the officer's employment. In addition, the Company
has entered into a CEO agreement that provides for an annual base salary plus
agreed-upon bonuses or benefits and converts to a consulting agreement upon
the occurrence of certain events. The Company has also entered into a
consulting agreement with one of its directors that provides for severance
payments based on the director's consulting fee upon the occurrence of certain
events. At September 30, 1996, the aggregate commitment for future salaries,
fees, bonuses and benefits under these agreements was approximately
$15,000,000.
44
<PAGE>
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1996 and
1995 are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1996 (1):
Revenue
Products........................ $ 34,972 $ 45,932 $ 50,027 $ 61,533
Product support................. 31,194 31,121 30,397 30,689
Services........................ 29,819 29,544 30,122 33,821
-------- -------- -------- --------
95,985 106,597 110,546 126,043
Cost of sales
Products and product support.... 15,154 18,062 17,665 21,320
Services........................ 26,076 26,520 26,767 30,675
-------- -------- -------- --------
41,230 44,582 44,432 51,995
Product development and
enhancement...................... 6,072 5,197 4,618 5,034
Selling, general and
administrative................... 38,677 42,606 45,115 48,839
Income from continuing
operations....................... 9,018 12,776 17,358 21,446
Income applicable to common
stockholders..................... 21,307 152,018 29,394 35,169
Average common shares
outstanding...................... 26,630 29,450 35,758 37,432
Income per common share:
Income from continuing
operations:
Primary......................... $ .31 $ .40 $ .47 $ .57
Fully diluted................... .30 .39 .47 .57
Net income:
Primary......................... $ .72 $ 4.74 $ .80 $ .93
Fully diluted................... .66 4.42 .80 .93
Year ended September 30, 1995 (1)
(2):
Revenue
Products........................ $ 34,232 $ 37,458 $ 44,651 $ 51,959
Product support................. 24,205 27,941 29,699 31,907
Services........................ 25,159 28,730 28,430 31,940
-------- -------- -------- --------
83,596 94,129 102,780 115,806
Cost of sales
Products and product support.... 12,430 13,349 14,309 17,638
Services........................ 22,762 23,009 27,851 29,387
-------- -------- -------- --------
35,192 36,358 42,160 47,025
Product development and
enhancement...................... 5,847 7,324 7,955 6,576
Selling, general and
administrative................... 31,712 35,381 37,168 43,291
Restructuring charges............. 19,512
Purchased research and
development...................... 62,000
Income (loss) from continuing
operations....................... (70,381) 10,591 11,343 14,791
Income (loss) applicable to common
stockholders..................... (61,704) 20,110 22,240 28,483
Average common shares
outstanding...................... 21,476 23,526 24,118 25,469
Income per common share:
Income (loss) from continuing
operations:
Primary......................... $ (3.28) $ .38 $ .41 $ .52
Fully diluted................... (3.28) .37 .39 .49
Income (loss) per common share:
Net income (loss):
Primary........................ $ (2.87) $ .72 $ .79 $ 1.00
Fully diluted.................. (2.87) .67 .73 .90
</TABLE>
45
<PAGE>
- --------
(1) Restated to reflect the results of operations of Sterling Commerce as a
discontinued operation. On September 30, 1996, Sterling Software completed
the spin-off of Sterling Commerce. See Note 2.
(2) On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock-
for-stock acquisition accounted for as a purchase. Accordingly, the
operating results of KnowledgeWare are included in the Company's results
of operations from the date of the acquisition. The results of operations
include $62,000,000 of purchased research and development costs, which is
the portion of the purchase price attributable to in- process research and
development and which was charged to expense in accordance with purchase
accounting guidelines. The 1995 results of operations also include a
charge for restructure costs of $19,512,000 to integrate KnowledgeWare's
business into the Company's operations. The restructure charge includes
employee termination costs, costs related to the elimination of duplicate
facilities, the write-off of costs related to certain software products
which were not actively marketed, and other out of pocket costs related to
the reorganization. Legal costs and expenses directly related to the
acquisition of KnowledgeWare and unrelated to the restructuring are
accounted for as a cost of the acquisition. See Note 3.
Information concerning the Company's operations by business segment for each
quarter of 1996, 1995 and 1994 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Revenue:
Systems Management............ $ 35,210 $ 40,969 $ 42,558 $ 52,067
Federal Systems............... 26,262 26,815 27,553 31,558
Applications Management....... 26,459 28,228 28,244 26,873
Corporate and other........... 8,054 10,585 12,191 15,545
-------- -------- -------- --------
Consolidated totals......... $ 95,985 $106,597 $110,546 $126,043
======== ======== ======== ========
Operating Profit (Loss):
Systems Management............ $ 11,625 $ 15,535 $ 16,389 $ 22,309
Federal Systems............... 2,300 1,816 2,038 1,828
Applications Management....... 3,859 4,630 6,155 1,764
Corporate and other........... (7,778) (7,769) (8,201) (5,726)
-------- -------- -------- --------
Consolidated totals......... $ 10,006 $ 14,212 $ 16,381 $ 20,175
======== ======== ======== ========
Year ended September 30, 1995:
Revenue:
Systems Management............ $ 33,374 $ 37,287 $ 37,821 $ 46,175
Federal Systems............... 23,665 24,590 25,372 28,075
Applications Management....... 20,010 25,347 29,548 32,304
Corporate and other........... 6,547 6,905 10,039 9,252
-------- -------- -------- --------
Consolidated totals......... $ 83,596 $ 94,129 $102,780 $115,806
======== ======== ======== ========
Operating Profit (Loss):
Systems Management............ $ 11,136 $ 13,460 $ 14,154 $ 16,721
Federal Systems............... 1,526 1,867 1,953 1,302
Applications Management....... 4,491 5,125 5,284 6,420
Restructuring charge.......... (19,512)
Purchased research and
development.................. (62,000)
Corporate and other........... (6,308) (5,386) (5,894) (5,529)
-------- -------- -------- --------
Consolidated totals......... $(70,667) $ 15,066 $ 15,497 $ 18,914
======== ======== ======== ========
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1994:
Revenue:
Systems Management............. $35,442 $34,046 $32,539 $39,626
Federal Systems................ 24,718 26,945 27,296 28,014
Applications Management........ 11,893 11,972 12,212 13,857
Corporate and other............ 5,263 7,311 7,657 7,112
------- ------- ------- -------
Consolidated totals.......... $77,316 $80,274 $79,704 $88,609
======= ======= ======= =======
Operating Profit (Loss):
Systems Management............. $12,936 $12,129 $10,723 $13,227
Federal Systems................ 1,614 1,694 2,391 1,561
Applications Management........ 2,604 1,367 3,181 4,162
Corporate and other............ (5,731) (4,157) (4,485) (4,087)
------- ------- ------- -------
Consolidated totals.......... $11,423 $11,033 $11,810 $14,863
======= ======= ======= =======
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of the Company is set forth in the
Proxy Statement to be provided to stockholders in connection with the
Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement") under
the heading "Election of Directors," which information is incorporated herein
by reference. The name, age and position of each executive officer of the
Company is set forth under the heading "Executive Officers" in Part I of this
report, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is set forth in the Proxy
Statement under the heading "Management Compensation," which information is
incorporated herein by reference. Information contained in the Proxy Statement
under the caption "Management Compensation--Report of the Executive and Stock
Option Committees on Executive Compensation" and "--Stock Performance Chart"
is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Management and Certain Stockholders," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the headings "Management Compensation--
Executive and Stock Option Committee Interlocks and Insider Participation" and
"Certain Transactions," which information is incorporated herein by reference.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1996, 1995 and 1994.
3. Exhibits:
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Company (1)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company (2)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company (3)
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company (4)
3.5 Restated Bylaws of the Company (5)
4.1 Form of Common Stock Certificate (6)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II") (2), (16)
10.2 Amendment to SERP II (2), (16)
10.3 KnowledgeWare, Inc. 1988 Stock Incentive Plan (7), (16)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(8), (16)
10.5 1996 Executive Compensation Plan for Group Presidents (9), (16)
10.6 1997 Executive Compensation Plan for Group Presidents (16), (17)
10.7 Employment Agreement with Werner L. Frank (10) (16)
10.8 Consultation Agreement dated December 1, 1994 between the Company
and Francis A. Tarkenton (10), (16)
10.9 Consulting Agreement dated October 1, 1996 between the Company and
Michael C. French (16), (17)
10.10 CEO Agreement dated February 12, 1996 between the Company and
Sterling L. Williams (11), (16)
10.11 Form of Change-in-Control Severance Agreement dated as of February
12, 1996 between the Company and each of Sam Wyly, Charles J. Wyly,
Jr., Sterling L. Williams, Jeannette P. Meier, and certain other
executive officers and directors of the Company (11), (16)
10.12 Form of Amendment to Change-in-Control Severance Agreement dated as
of June 18, 1996, between the Company and each of Sam Wyly, Charles
J. Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain
other executive officers and directors of the Company (12), (16)
10.13 Form of Severance Agreement dated as of February 12, 1996 between
the Company and each of Jeannette P. Meier and certain other
executive officers and directors of the Company (other than Sterling
L. Williams) (11), (16)
10.14 Form of Change-in-Control Severance Agreement between the Company
and certain officers of the Company (16), (17)
</TABLE>
49
<PAGE>
<TABLE>
<C> <S>
10.15 Form of Severance Agreement between the Company and certain officers
of the Company (16), (17)
10.16 Form of Indemnity Agreement between the Company and each of its
directors and officers(2)
10.17 Second Amended and Restated Revolving Credit and Term Loan Agreement
dated August 24, 1995 by and among the Company and The First
National Bank of Boston, as Agent, and the Banks listed on Schedule
1.1 thereto(13)
10.18 First Amendment and Modification Agreement dated January 31, 1996 by
and between the Company, 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)
10.19 Second Amendment and Modification Agreement dated November 20, 1996
by and between the Company, The First National Bank of Boston,
BankOne, Texas, National Association and Bank of America National
Trust and Savings Association and The First National Bank of Boston,
as Agent(17)
10.20 Space Sharing Agreement dated as of March 4, 1996 between the
Company and Sterling Commerce, Inc.(14)
10.21 Data Processing Agreement dated as of March 13, 1996 between the
Company and Sterling Commerce, Inc.(14)
10.22 Tax Allocation Agreement dated as of March 4, 1996 between the
Company and Sterling Commerce, Inc.(14)
10.23 Indemnification Agreement dated as of March 4, 1996 between the
Company and Sterling Commerce, Inc.(15)
10.24 International Marketing Agreement dated as of March 4, 1996 between
Sterling Software International, Inc. and Sterling Commerce
International, Inc.(15)
10.25 Master Software License Agreement dated as of March 4, 1996 by and
among the Company, Sterling Commerce, Inc. and their respective
subsidiaries parties thereto(15)
10.26 Agreement dated as of September 19, 1996 by Sterling Commerce, Inc.
for the benefit of the Company(17)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1996(17)
11.2 Computation of Earnings Per Share, Year Ended September 30, 1994(17)
21.1 Subsidiaries of the Company(17)
23.1 Consent of Ernst & Young LLP(17)
27.1 Financial Data Schedule(17)
</TABLE>
(b). Reports on Form 8-K.
During the three-month period ended September 30, 1996, the Company
filed two Current Reports on Form 8-K. The reports, dated September 23,
1996 and September 30, 1996, included information under Item 5--Other
Events.
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement
No. 2-82506 and incorporated herein by reference.
(2) 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.
(3) Previously filed as an exhibit to the Company's Registration Statement
No. 33-69926 and incorporated herein by reference.
50
<PAGE>
(4) 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.
(5) Previously filed as an exhibit to the Company's Registration Statement
No. 33-47131 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement
No. 33-56681 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Registration Statement
No. 333-13303 and incorporated herein by reference.
(9) 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.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1994 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Registration Statement
No. 33-62401 and incorporated herein by reference.
(14) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference.
(15) Previously 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.
(16) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(17) Filed herewith.
51
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STERLING SOFTWARE, INC.
Date: November 25, 1996 /s/ Sterling L. Williams
By __________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 25, 1996 /s/ Jeannette P. Meier
By __________________________________
Jeannette P. Meier
Executive Vice President, Chief
Financial Officer, General Counsel
and Secretary
(Principal Financial and Accounting
Officer)
52
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: November 25, 1996 /s/ Robert J. Donachie
By __________________________________
Robert J. Donachie
Chairman of the Audit Committee and
Director
Date: November 25, 1996 /s/ Michael C. French
By __________________________________
Michael C. French
Director
Date: November 25, 1996 /s/ Phillip A. Moore
By __________________________________
Phillip A. Moore
Executive Vice President and
Director
Date: November 25, 1996 /s/ Charles J. Wyly, Jr.
By __________________________________
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
Date: November 25, 1996 /s/ Evan A. Wyly
By __________________________________
Evan A. Wyly
Vice President and Director
Date: November 25, 1996 /s/ Donald R. Miller, Jr.
By __________________________________
Donald R. Miller, Jr.
Director
Date: November 25, 1996 /s/ Francis A. Tarkenton
By __________________________________
Francis A. Tarkenton
Director
Date: November 25, 1996 /s/ B. Joseph White
By __________________________________
B. Joseph White
Director
Date: November 25, 1996 /s/ Sterling L. Williams
By __________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director
Date: November 25, 1996 /s/ Sam Wyly
By __________________________________
Sam Wyly
Chairman of the Board and Director
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Company (1)
3.2 Certificate of Amendment of Certificate of Incorporation of the Company
(2)
3.3 Certificate of Amendment of Certificate of Incorporation of the Company
(3)
3.4 Certificate of Amendment of Certificate of Incorporation of the Company
(4)
3.5 Restated Bylaws of the Company (5)
4.1 Form of Common Stock Certificate (6)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II") (2), (16)
10.2 Amendment to SERP II Agreement (2), (16)
10.3 KnowledgeWare, Inc. 1988 Stock Incentive Plan (7)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan (8),
(16)
10.5 1996 Executive Compensation Plan for Group Presidents (9), (16)
10.6 1997 Executive Compensation Plan for Group Presidents (16), (17)
10.7 Employment Agreement with Werner L. Frank (10), (16)
10.8 Consultation Agreement dated December 1, 1994 between the Company and
Francis A. Tarkenton (10), (16)
10.9 Consulting Agreement dated October 1, 1996 between the Company and
Michael C. French (16), (17)
10.10 CEO Agreement dated February 12, 1996 between the Company and Sterling
L. Williams (11), (16)
10.11 Form of Change-in-Control Severance Agreement dated as of February 12,
1996 between the Company and each of Sam Wyly, Charles J. Wyly, Jr.,
Sterling L. Williams, Jeannette P. Meier, and certain other executive
officers and directors of the Company (11), (16)
10.12 Form of Amendment to Change-in-Control Severance Agreement dated as of
June 18, 1996, between the Company and each of Sam Wyly, Charles J.
Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain other
executive officers and directors of the Company (12), (16)
10.13 Form of Severance Agreement dated as of February 12, 1996 between the
Company and each of Jeannette P. Meier and certain other executive
officers and directors of the Company (other than Sterling L. Williams)
(11), (16)
10.14 Form of Change-in-Control Severance Agreement between the Company and
certain officers of the Company (16), (17)
10.15 Form of Severance Agreement between the Company and certain officers of
the Company (16), (17)
10.16 Form of Indemnity Agreement between the Company and each of its
directors and officers (2)
10.17 Second Amended and Restated Revolving Credit and Term Loan Agreement
dated August 24, 1995 by and among the Company and The First National
Bank of Boston, as Agent, and the Banks listed on Schedule 1.1 thereto
(13)
10.18 First Amendment and Modification Agreement dated January 31, 1996 by and
between the Company, 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)
10.19 Second Amendment and Modification Agreement dated November 20, 1996 by
and between the Company, The First National Bank of Boston, BankOne,
Texas, National Association and Bank of America National Trust and
Savings Association and The First National Bank of Boston, as Agent (17)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.20 Space Sharing Agreement dated as of March 4, 1996 between the Company
and Sterling Commerce, Inc. (14)
10.21 Data Processing Agreement dated as of March 13, 1996 between the Company
and Sterling Commerce, Inc. (14)
10.22 Tax Allocation Agreement dated as of March 4, 1996 between the Company
and Sterling Commerce, Inc. (14)
10.23 Indemnification Agreement dated as of March 4, 1996 between the Company
and Sterling Commerce, Inc. (15)
10.24 International Marketing Agreement dated as of March 4, 1996 between
Sterling Software International, Inc. and Sterling Commerce
International, Inc. (15)
10.25 Master Software License Agreement dated as of March 4, 1996 by and among
the Company, Sterling Commerce, Inc. and their respective subsidiaries
parties thereto (15)
10.26 Agreement dated as of September 19, 1996 by Sterling Commerce, Inc. for
the benefit of the Company (17)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1996 (17)
11.2 Computation of Earnings Per Share, Year Ended September 30, 1994 (17)
21.1 Subsidiaries of the Company (17)
23.1 Consent of Ernst & Young LLP (17)
27.1 Financial Data Schedule (17)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement No.
2-82506 and incorporated herein by reference.
(2) 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.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
33-69926 and incorporated herein by reference.
(4) 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.
(5) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement No.
33-56681 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Registration Statement No.
333-13303 and incorporated herein by reference.
(9) 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.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1994 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Registration Statement
No. 33-62401 and incorporated herein by reference.
(14) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference.
(15) Previously 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.
(16) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the form.
(17) Filed herewith.
<PAGE>
SCHEDULE II
STERLING SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts at September
30, 1994.............. $6,245,000 $3,559,000 $ (257,000)(1) $(3,015,000)(2) $6,532,000
========== ========== =========== =========== ==========
Allowance for doubtful
accounts at September
30, 1995.............. $6,532,000 $4,351,000 $(1,563,000)(1) $(2,144,000)(2) $7,176,000
========== ========== =========== =========== ==========
Allowance for doubtful
accounts at September
30, 1996.............. $7,176,000 $4,857,000 $(1,998,000)(1) $(3,959,000)(2) $6,076,000
========== ========== =========== =========== ==========
</TABLE>
- --------
(1) Offsets to deferred revenue.
(2) Accounts written off.
<PAGE>
EXHIBIT 10.6
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY97
PURPOSE
- -------
The purpose of the Executive Compensation Plan ("Plan") is to provide rewards
for Group Presidents based on their ability to achieve and exceed specific Group
objectives.
ELIGIBILITY
- -----------
All Group Presidents ("Participants") are eligible to participate in the Plan.
Eligibility of certain persons to participate in the Plan may be changed at any
time at the sole discretion of the Chief Operating Officer of Sterling Software,
Inc. ("COO").
EFFECTIVE PERIOD
- ----------------
The Plan is in effect beginning October 1, 1996 through September 30, 1997,
subject to change at any time at the sole discretion of the COO. The Plan does
not constitute an employment agreement and the COO reserves the right to
terminate the employment of the Participants without cause at any time.
GROUP OBJECTIVES
- ----------------
Certain Plan compensation will be based on the achievement of specific Group
Operating Profit Objectives. Each Participant in the Plan agrees to provide a
detailed action plan to achieve his assigned Group Objectives against which his
performance will subsequently be measured. Group Objectives, their achievement
and the methods of measuring achievement will be determined by the COO for the
purposes of this Plan. Objectives are subject to change at any time at the sole
discretion of the COO in the exercise of his reasonable business judgment.
COMPENSATION TERMS
- ------------------
The amounts and types of compensation to be received under the Plan will be
determined by each Participant's Executive Compensation Agreement ("Agreement").
PAYMENTS
- --------
Salaries provided for under the Agreement are payable bi-weekly from the
effective date of the Agreement. Contingent compensation provided for under the
Agreement is payable (i) no later than sixty days after the applicable quarter
end with respect to compensation based upon quarterly objectives and (ii) no
later than ninety-five days after the fiscal year end with respect to
compensation based upon annual objectives. No payment of contingent
compensation will be
<PAGE>
EXECUTIVE COMPENSATION PLAN
Page Two
made unless a Participant is a full-time employee of Sterling Software, Inc.
acting in the capacity of a Group President at quarter end, with respect to any
quarterly objective, or at September 30, 1997, with respect to an annual
objective; provided however that in the event of termination of a Participant's
employment as a result of the death or disability of a Participant while acting
in the capacity of a Group President, Sterling Software, Inc. shall pay to such
Participant a prorated portion of the contingent compensation provided for
herein provided that at least 90% of the Group Operating Profit had been
attained on a prorata basis as of the Participant's termination of employment.
-2-
<PAGE>
EXHIBIT 10.9
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made and entered into
as of the 1st day of October, 1996, by and between Sterling Software, Inc., a
Delaware corporation (the "Company"), and Michael C. French, an individual (the
"Consultant").
RECITALS:
A. The Company has obtained and is desirous of continuing to obtain
certain legal, financial and other strategic consulting services from the
Consultant, and the Consultant has provided and wishes to continue to provide
such services to the Company, all upon the terms and conditions set forth in
this Agreement.
B. Therefore, in consideration of the mutual convenants and
agreements herein set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Consultant hereby agree as follows:
AGREEMENT:
Section 1. Consulting Services. The Consultant shall provide such
-------------------
legal, financial and other strategic consulting services for the Company as the
Chairman of the Board of Directors or the Chief Executive Officer of the Company
may from time to time reasonably request. The Consultant acknowledges and
agrees that he also may be asked to provide such services to certain
subsidiaries and affiliates of the Company and that he shall do so on the same
basis as he is to provide services to the Company. All references to the
Company in this Agreement shall also include any such subsidiary or affiliate,
unless otherwise clearly required by the context. In providing services to the
Company under this Agreement, the Consultant shall be at all times under and
subject to the direction and supervision of the Chairman of the Board of
Directors and the Chief Executive Officer of the Company.
Section 2. Consulting Fees; Expenses. As consideration for providing
-------------------------
services to the Company under this Agreement, the Consultant shall be entitled
to a fee, payable by the Company on a monthly basis (or on any other periodic
basis hereafter agreed to by the Company and the Consultant), of $17,500 per
month. In addition to the fees provided for above, the Consultant shall be
entitled to reimbursement from the Company of any direct, out-of-pocket expenses
incurred by the Consultant during the course of providing services to the
Company under this Agreement.
Section 3. Termination. This Agreement shall continue from and after
-----------
the date hereof until terminated in accordance with the following subsections:
(a) Either party may terminate this Agreement for any reason by giving
the other party 30 days prior written notice of such termination. If the
Consultant terminates this Agreement pursuant to this Section 3(a) or if the
Company terminates this Agreement because of gross
<PAGE>
misconduct on the part of the Consultant (which finding of gross misconduct must
be made by a majority of the Company's directors and memorialized in a
resolution duly adopted thereby), the Company shall be obligated to pay the
Consultant the monthly consulting fee specified above for the month in which
such termination occurs, but thereafter shall have no obligation to pay any
consulting fees hereunder. If the Company terminates this Agreement for any
other reason (other than the death or Total Disability (as defined below) of the
Consultant, which circumstances are governed by subsections (b) and (c) below),
the Consultant shall be entitled to receive from the Company the monthly
consulting fee specified above for a period of 36 months from and after the
month in which such termination occurs, provided that the Consultant executes
and delivers to the Company a release and confidentiality agreement reasonably
satisfactory to the Company.
(b) This Agreement shall terminate automatically upon the death of the
Consultant. In such event, the Company shall be obligated to pay the estate of
the Consultant the monthly consulting fee specified above for a period of 36
months from and after the month in which such death occurs.
(c) This Agreement may be terminated by the Company upon the Total
Disability of the Executive. As used herein, the term "Total Disability" shall
mean the Executive's inability to render any services under this Agreement for a
period of six consecutive calendar months. In order to terminate this Agreement
as a result of the Consultant's Total Disability, the Company shall notify the
Executive (or an appropriate representative thereof) of such termination in
writing. If the Company terminates this Agreement pursuant to this Section
3(c), the Consultant shall be entitled to receive from the Company the monthly
consulting fee specified above for a period of 36 months from and after the
month in which such termination occurs, provided that the Consultant (or an
appropriate representative thereof) executes and delivers to the Company a
release and confidentiality agreement reasonably satisfactory to the Company.
Section 4. Confidentiality; Related Matters. The Consultant shall
--------------------------------
not use, for his personal gain or benefit or the personal gain or benefit of any
member of his family, any confidential or proprietary information of the Company
which is obtained by or provided to the Consultant consistent with the purposes
and intent of this Agreement. During the term of this Agreement and for so long
as he receives consulting fees hereunder, the Consultant shall not act as a
legal or financial consultant or advisor to any other person or entity in the
computer software, hardware or services industry without the prior written
consent of the Company's Chief Executive Officer or the Chairman of its Board of
Directors. During the term of this Agreement and for so long as he receives
consulting fees hereunder, the Consultant shall not, on his own behalf or on
behalf of others, solicit, divert or hire away, or attempt to solicit, divert or
hire away, any person employed by the Company.
Section 5. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the Company (and its subsidiaries) and the Consultant with
respect to the subject matter hereof and supersedes all prior agreements and
understandings, both written and oral, between the Company (and its
subsidiaries) and the Consultant with respect to such subject matter.
-2-
<PAGE>
Section 6. Binding Effect; Assignment. This Agreement shall be
--------------------------
binding upon and inure to the benefit of only the Company (and its subsidiaries)
and the Consultant and their respective successors and permitted assigns.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by either of the parties hereto without the prior written
consent of the other party. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any person other than the Company (and its
subsidiaries) and the Consultant, and their respective successors and permitted
assigns, any rights, benefits or remedies of any nature whatsoever.
Section 7. Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of Texas.
Section 8. Descriptive Headings. The descriptive headings herein are
--------------------
inserted for convenience of reference only, do not constitute a part of this
Agreement and shall not affect in any manner the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the Company and the Consultant have executed and
delivered this Agreement as of the date first above written.
STERLING SOFTWARE, INC.
By: /s/ Sterling L. Williams
------------------------
Sterling L. Williams, President and
Chief Executive Officer
/s/ Michael C. French
---------------------
Michael C. French
-3-
<PAGE>
EXHIBIT 10.14
[Form of Agreement for Executives with Severance Agreement]
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated
as of _________ __, 199_, 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 is
expected 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 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
immediately after such transaction are held in the aggregate by
the holders of Voting Stock of the Company immediately prior to
such transaction;
<PAGE>
(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"), or (C) any Company-sponsored employee
stock ownership plan or any other employee benefit plan of the Company or any
Subsidiary 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 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.
-2-
<PAGE>
(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 date first set forth above, 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 in effect)
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 date first set forth above,
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 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 first set forth
above and expiring as of the later of (i) the close of business on
December 31, 200_, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 199_ 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
-3-
<PAGE>
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.
(a) 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;
(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
-4-
<PAGE>
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.
(b) 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 as of __________ __, 199_ (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 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
-5-
<PAGE>
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, 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
-6-
<PAGE>
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.
(a) 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
-7-
<PAGE>
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.
(b) 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 this Section 5. Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment shall be binding upon the Company
and the Executive.
(c) 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 should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(d) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
this Section 5 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.
(e) 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
-8-
<PAGE>
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 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.
(f) 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
-9-
<PAGE>
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 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.
-10-
<PAGE>
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 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.
(a) 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.
(b) 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
-11-
<PAGE>
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.
14. 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.
15. 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.
16. Termination of Prior Agreements. The [title of agreement] between
-------------------------------
Executive and Sterling Software, dated _______________, as amended to the date
hereof (the "Prior 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 Prior Agreement shall be deemed to
have continued at all times in force and effect. Subject to the foregoing
proviso, this Agreement supersedes all prior agreements, arrangements and
understandings with respect to the subject matter hereof.
-12-
<PAGE>
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]
-13-
<PAGE>
EXHIBIT 10.15
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 retain Executive as its
____________________; and
WHEREAS, Executive is willing to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. 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 first set forth above
----
and shall continue in effect for _____ (__) months after the "Notice
Date" as defined in Section 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 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.
<PAGE>
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, or cause one of its subsidiaries to 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 (or, if Executive shall not have been employed
for such twelve month period, an amount equal to _______ hundred
percent of Executive's annual salary rate in effect immediately
prior to the Notice Date); and
(b) an amount equivalent to the product of _____ times:
(i) if Executive shall have completed at least twelve months
employment with Sterling Software prior to the Notice 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 Executive shall not have completed at least twelve months
employment with Sterling Software prior to the Notice Date,
an amount equal to the greater of
(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 the Executive's annual
base salary, 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.
-2-
<PAGE>
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, 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 Plans after the Notice Date.
8. Change-in-Control. Sterling Software and the Executive are parties to
-----------------
a Change-in-Control Severance Agreement, dated as of ________ __, 199
(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,
-3-
<PAGE>
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. 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.
(iv) 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 Sterling
Software. 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.
-4-
<PAGE>
10. Termination of Prior Agreements. The [title of agreement] between
-------------------------------
Executive and Sterling Software, dated _______________, as amended to
the date hereof (the "Prior 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 Prior Agreement shall be deemed to have continued at all times in
force and effect. Subject to the foregoing proviso, this Agreement
supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
Executed by the parties hereto as of the date first set forth above.
EXECUTIVE
---------------------------------
Name:
----------------------------
STERLING SOFTWARE, INC.
By:
------------------------------
Sterling L. Williams
President and
Chief Executive Officer
-5-
<PAGE>
EXHIBIT 10.19
SECOND AMENDMENT AND MODIFICATION AGREEMENT
SECOND AMENDMENT AND MODIFICATION AGREEMENT dated as of November 20, 1996
(this "Amendment") by and among STERLING SOFTWARE, INC., a Delaware corporation
(the "Company"); the direct and indirect subsidiaries of the Company listed on
the signature pages hereto (collectively, the "Sterling Subsidiaries"); THE
FIRST NATIONAL BANK OF BOSTON, 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 (as heretofore amended, 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 requested that the Agent and the Banks amend
certain provisions of the Agreement;
WHEREAS, upon the terms and subject to the conditions contained herein, the
Agent and the Banks are willing to amend such provisions of the Credit
Agreement;
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)9.9 of the Agreement. Section 9.9(e) of the
------------------------------------
Agreement is hereby deleted in its entirety, and the following new subsection
(e) is hereby substituted in lieu thereof:
"(e) Sales of Sterling Accounts Receivable pursuant to the Sterling
Accounts Receivable Agreements (i) with respect to sales of such Sterling
Accounts Receivable pursuant to or in connection with which the Company or
any of its Subsidiaries incurs Indebtedness, in an aggregate amount
outstanding at any time not to exceed $35,000,000, and (ii) with respect to
all other sales of any Sterling Accounts Receivable, in an aggregate amount
outstanding at any time not to exceed $75,000,000;"
(S)2. Amendment of (S)10.2 of the Agreement. Section 10.2 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 for purposes of calculating the ratio of
-------- -------
Operating Cash Flow to Interest Charges for the fiscal quarter of the
Company ending September 30, 1996, cash taxes paid by the Company during
such fiscal
<PAGE>
-2-
quarter in an amount not to exceed $43,500,000 shall not be deducted from
the calculation of Operating Cash Flow."
(S)3. Replacement of Schedules 1.3, 1.6, 5.2 and 5.6 to the Agreement.
---------------------------------------------------------------
Schedules 1.3, 1.6, 5.2, and 5.6 to the Agreement are hereby deleted in their
- ------------- --- --- ---
entirety, and Schedules 1.3, 1.6, 5.2, and 5.6 attached hereto are respectively
------------- --- --- ---
substituted in lieu thereof.
(S)4. Conditions To Effectiveness. This Amendment shall be deemed to be
---------------------------
effective as of September 30, 1996 (the "Effective Date") upon the Agent's
receipt on or before November 20, 1996, of 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, the Agent and the Banks.
(S)5. Representations and Warranties; No Default; Authorization. Each of
---------------------------------------------------------
the Company and the Sterling Subsidiaries hereby represents and warrants to each
of the Agent and the Banks as follows:
(a) Each of the representations and warranties of the Company and
the Sterling Subsidiaries contained in the 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, and shall be in full
force and effect upon the satisfaction of the conditions set forth in (S)4
hereof, and the agreements of the Company and each of the Sterling
Subsidiaries, contained herein, in the Agreement, as herein or heretofore
amended, or in the other Loan Documents, as heretofore amended,
respectively constitute the legal, valid and binding obligations of the
Company and each of the Sterling Subsidiaries, party hereto or thereto,
enforceable against the Company or such Sterling Subsidiary, in accordance
with their respective terms; and
(c) Sterling Software (United States of America), Inc. has
previously been merged into the Company, with the Company as the surviving
entity, and accordingly is no longer a guarantor under the Guaranty or a
Sterling Subsidiary.
(S)6. 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.
<PAGE>
-3-
(S)7. 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)8. 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)9. 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 CHOICE OR CONFLICTS OF LAWS).
<PAGE>
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
THE FIRST NATIONAL BANK
OF BOSTON, individually
and as Agent
By:
-------------------------------
Title:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
-------------------------------
Title:
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION
By:
-------------------------------
Title:
STERLING SOFTWARE, INC.
By:
-------------------------------
Title:
<PAGE>
-5-
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:
-------------------------------
Title:
STERLING SOFTWARE
(SOUTHERN), INC.
By:
-------------------------------
Title:
STERLING SOFTWARE
(U.S.A.), INC.
By:
-------------------------------
Title:
STERLING SOFTWARE
INTERNATIONAL, INC.
By:
-------------------------------
Title:
STERLING SOFTWARE LEASING
COMPANY
By:
-------------------------------
Title:
<PAGE>
-6-
STERLING SOFTWARE (U.S. OF
AMERICA), INC.
By:
-------------------------------
Title:
<PAGE>
-7-
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 California
ZeroOne Systems, Inc. Delaware Texas
Systems Center, Inc. Wyoming Texas
Data Management Information Delaware Virginia
NetMaster, Inc. Delaware Virginia
Matesys Corporation California Texas
IWK Corporation Delaware Texas
Sterling Software International
(Australia) Limited Delaware Texas
Sterling Software (Eastern), Inc. Delaware Texas
</TABLE>
<PAGE>
-8-
Schedule 1.6 to the Agreement
-----------------------------
Sterling Subsidiaries
---------------------
<TABLE>
<CAPTION>
State of Location 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), Delaware Virginia
Inc.
Sterling Software (U.S.A.), Inc. California California
</TABLE>
<PAGE>
-9-
Schedule 5.2 to the Agreement
-----------------------------
Subsidiaries of the Sterling Companies
--------------------------------------
<TABLE>
<CAPTION>
Domestic Subsidiaries
- ---------------------
1. Owned by the Company.
--------------------
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- -------------- ------
<S> <C> <C>
Sterling Software 50,000 (Common) 1,000
(Midwest), Inc.
Sterling Software (U.S.), 1,000 (Common) 1,000
Inc.
Systems Center, Inc. 1,000 (Common) 1,000
(Wyoming)
Sterling Software 50,000 (Common) 1,000
International, Inc.
Sterling Software Leasing 10,000 (Common) 1,000
Company
Sterling ZeroOne, Inc. 50,000 (Common) 1,000
Sterling Software 25,000 (Common) 995
(U.S.A.), Inc.
ZeroOne Systems, Inc. 50,000 (Common) 1,000
Sterling Software 10,000 (Common) 1,000
(Southern), Inc.
1,000 (Preferred) 0
Sterling Software 1,000 (Common) 0
(Southwest), Inc.
Southwest Beta Services, 1,000 (Common) 1,000
Inc.
Sterling Software (U.S. of 5,000 (Common) 1,000
America), Inc.
Sterling Software 10,000 (Common) 1,000
(Eastern), Inc. 1,000 (Preferred) 0
Sterling Software 50,000 (Common) 1,000
International
(Australia) Limited
2. Owned by Sterling Software (Southern), Inc.
------------------------------------------
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- -------------- ------
<S> <C> <C>
IWK Corporation 1,000 (Common) 0
</TABLE>
<PAGE>
-10-
3. Owned by Matesys Mathematics Systems, S.A.
------------------------------------------
<TABLE>
<CAPTION>
Authorized Issued
Subsidiary Capital (Class) Shares
- ---------- --------------- ------
<S> <C> <C>
Matesys Corp. 1,000,000 65,000
</TABLE>
<TABLE>
<CAPTION>
4. Foreign Subsidiaries*
--------------------
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 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 (Branch Office of Finland
Sterling Software AB)
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 Ltda.
<PAGE>
-11-
<TABLE>
<CAPTION>
<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
Sterling Software (Netherlands) B.V. Netherlands
SCI Systems Center Netherlands/
Sterling Software (Netherlands) (Branch of Netherlands
Sterling Software (Benelux) NV)
Sterling Software (Australia) PTY Limited New Zealand
(New Zealand Branch)
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
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
</TABLE>
<PAGE>
-12-
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
<PAGE>
EXHIBIT 10.26
AGREEMENT CONCERNING
REVENUE RULING
This Agreement Concerning Revenue Ruling (this "Agreement") is made
and entered into as of the 19th day of September 1996, by Sterling Commerce,
Inc., a Delaware corporation ("Commerce"), for the benefit of Sterling Software,
Inc., a Delaware corporation ("Software"), and the other parties herein
specified.
A. Subject to the receipt of the Revenue Ruling (as defined below)
and authorization by its Board of Directors, Software intends to distribute to
the holders of its Common Stock, par value $.10 per share, all of the shares of
Common Stock, par value $.01 per share, of Commerce ("Commerce Stock") held by
Software (the "Distribution").
B. Software has applied to the Internal Revenue Service (the "IRS")
for a revenue ruling (the "Revenue Ruling") as to the tax free nature of the
Distribution under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code").
C. As a condition to the issuance of the Revenue Ruling, Software has
made representations to the IRS regarding various matters, some of which involve
facts and circumstances after the Distribution over which Commerce will have
sole control and discretion.
NOW, THEREFORE, in consideration of the benefit to Commerce resulting
from the Distribution, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Commerce hereby agrees
as follows:
1. Options. Without the prior written consent of Software, Commerce
-------
will not amend or take any other action that would have the effect of
accelerating prior to the "Target Date" (as defined below) the time at which any
options to purchase Commerce Stock heretofore granted may be exercised. As used
herein, the term "Target Date" shall mean the second business day following the
first anniversary of the record date for the Distribution. Further, without the
prior written consent of Software, Commerce will not hereafter grant any
options, warrants or other securities evidencing the right to purchase, or
convertible into, shares of Commerce Stock that could be exercised or converted
prior to the Target Date. In addition, without the prior written consent of
Software, Commerce will not enter into any amendment to the Sterling Commerce,
Inc. Savings and Security Plan (the "Commerce Plan") which would have the effect
of increasing the amount of Commerce Stock transferred to the Commerce Plan
within twelve months following the Distribution.
2. Representations. Commerce represents and warrants to Software as
---------------
follows:
(a) to the best of the knowledge and belief of the management of
Commerce, there is no plan or intention by the shareholders of Commerce to
sell, exchange or
-1-
<PAGE>
otherwise dispose of any of their stock in, or securities of, Software or
Commerce subsequent to the Distribution;
(b) there is no plan or intention to liquidate Commerce, to merge
Commerce with any other corporation, or to sell, exchange, or otherwise
dispose of Commerce's assets or those of any of its subsidiaries subsequent
to the Distribution, except in the ordinary course of business;
(c) the representations with respect to Commerce set forth in the
submission from Software's outside counsel and accountants to the IRS dated
March 12, 1996 are true and correct in all material respects;
(d) except for those transactions described in Software's
submissions to the IRS requesting the Revenue Ruling, there have not been
and are not expected to be consummated by Commerce any other transactions
in connection with the Distribution;
(e) Commerce has not been and is not currently engaged in
negotiations with any party concerning any transaction involving the
acquisition by Commerce of assets or stock in consideration for the
issuance of stock by Commerce;
(f) following the Distribution, Commerce will continue the active
conduct of its business independently and, subject to the sharing of the
services of certain executive officers of Software and subject to Software
and its subsidiaries continuing to market software products of Commerce in
international markets, all as previously disclosed to the IRS, with
Commerce's separate employees;
(g) payments made in connection with all continuing transactions
entered into by Commerce with Software will be for fair market value and
based on arm's length terms and conditions; and
(h) except for inter-company payables incurred in the ordinary
course of business, Commerce will not incur indebtedness to Software and
will not extend credit to Software. None of the indebtedness owed by
Commerce to Software after the Distribution will constitute stock or
securities within the meaning of Section 355 of the Code.
Each representation set forth above shall be deemed to have been made by
Commerce effective as of the first time such representation was made to the IRS
in connection with Software's pursuit of the Revenue Ruling and effective as of
the date the IRS issues the Revenue Ruling.
3. Indemnification. Commerce agrees to indemnify and hold Software
---------------
and its directors, officers, employees, agents and representatives harmless from
and against any and all losses, claims, damages, costs, expenses, penalties,
taxes and the like to the extent resulting directly or indirectly from
Commerce's breach of any provision of this Agreement.
-2-
<PAGE>
4. Effectiveness of Agreement. This Agreement shall become effective
--------------------------
immediately upon Software's receipt of the Revenue Ruling and shall continue
thereafter without contractual limitation until the later to occur of (i) the
expiration of the period of limitations for the assessment of tax with respect
to the taxable year of Software or any of its stockholders in which the
Distribution occurs, and (ii) the final resolution of any claims asserted prior
to the expiration of the limitations period described in clause (i) above
against Commerce under this Agreement.
5. Miscellaneous. This Agreement (a) shall be governed by and
-------------
interpreted in accordance with the laws of the State of Texas, (b) constitutes
the entire agreement and understanding of Commerce concerning the subject matter
hereof and supersedes all prior agreements and understandings with respect
thereto; provided, however that the Indemnification Agreement dated as of March
4, 1996 (the "Indemnification Agreement"), and the Tax Allocation Agreement
dated as of March 4, 1996 (collectively, the "Prior Agreements"), both by and
between Software and Commerce, are not intended to be superseded by this
Agreement; provided further, however, that to the extent of any conflict between
the Prior Agreements and this Agreement, this Agreement shall control with
respect to such conflict, and (c) may be amended only by virtue of a writing
duly executed by Software and Commerce. Except for Software and the parties
entitled to indemnification pursuant to Section 3 hereof (Software and each of
such parties being each hereinafter called an "Indemnitee"), each of whom is an
intended third party beneficiary hereunder, nothing expressed or implied in this
Agreement shall be construed to give any person or entity other than such
Indemnitees any legal or equitable right hereunder. If an Indemnitee receives
notice of the assertion of any claim or the commencement of any action or
proceeding by any person or entity (a "Third Party Claim"), which claim or
action reasonably could be expected to form the basis for a claim of
indemnification under this Agreement, the procedures set forth in Section 5 of
the Indemnification Agreement shall apply to such Third Party Claim, and are
incorporated herein. For purposes of applying Section 5 of the Indemnification
Agreement, as used therein the term "Agreement" shall mean and refer to this
Agreement, the term "Third Party Claim" shall have the meaning set forth above,
and the term "Indemnifying Party" shall mean and refer to Commerce.
[Remainder of page intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, Commerce has executed and delivered this Agreement as
of the date first above written.
STERLING COMMERCE, INC.
By: /s/ Steven P. Shiflet
---------------------
Steven P. Shiflet,
Vice President, Finance
-4-
<PAGE>
EXHIBIT 11.1
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
-------- --------
<S> <C> <C>
Earnings:
Earnings applicable to common stockholders................ $237,888 $237,888
Add: Interest expense on amounts outstanding for the 5
3/4% Convertible Subordinated Debentures (net of
applicable income taxes) through
date of conversion................................. 1,685
-------- --------
$237,888 $239,573
======== ========
Shares:
Weighted average shares outstanding....................... 32,316 32,316
Add common shares issued on assumed exercise of options
and warrants............................................. 4,904 4,930
Less common shares assumed repurchased.................... (3,149) (2,696)
-------- --------
34,071 34,550
========
Common shares issued on assumed conversion of 5 3/4%
Convertible Subordinated Debentures through date of
conversion................................................ 1,495
--------
36,045
========
Earnings per common share:
Primary................................................... $ 6.98
========
Fully diluted............................................. $ 6.65
========
</TABLE>
<PAGE>
EXHIBIT 11.2
STERLING SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED SEPTEMBER 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
------- -------
<S> <C> <C>
Earnings:
Earnings applicable to common stockholders.................. $58,143 $58,143
Add: Interest expense on amounts outstanding for the 5 3/4%
Convertible Subordinated Debentures (net of
applicable income taxes)............................. 133 4,224
Interest income on investment of proceeds from assumed
conversion of options and warrants (net of applicable
income taxes)........................................... 70
------- -------
$58,276 $62,437
======= =======
Shares:
Weighted average shares outstanding......................... 19,812 19,812
Add common shares issued on assumed exercise of options and
warrants................................................... 7,228 7,228
Less common shares assumed repurchased...................... (4,117) (4,117)
------- -------
22,923 22,923
=======
Common shares issued on assumed conversion of 5 3/4%
Convertible Subordinated Debentures......................... 4,056
-------
26,979
=======
Earnings per common share:
Primary..................................................... $ 2.54
=======
Fully diluted............................................... $2.31
=======
</TABLE>
<PAGE>
EXHIBIT 21.1
STERLING SOFTWARE, INC.
LIST OF SUBSIDIARIES
Name Jurisdiction of Incorporation
- --------------------------- -----------------------------
Sterling Software (Midwest), Inc. Delaware
Sterling Software (U.S.), Inc. Delaware
Sterling Software (U.S.A.), Inc. California
Condessa Gestao E Investimentos Lda Portugal
Sterling Software AB Sweden
Sterling Software GmbH Germany
Sterling Software International (U.K.) Limited United Kingdom
Sterling Software (Pacific) Pty Limited Australia
Sterling Software (Australia) Pty Limited Australia
Sterling Software (New Zealand) Limited New Zealand
Sterling Software (Benelux) NV Belgium
Sterling Software (Benelux) BVBA Belgium
Sterling Software (Netherlands) B.V. Netherlands
Sterling Software (France) SA France
Sterling Software France II France
Sterling Software (Japan) Ltd. Japan
Sterling Software (Singapore) PTE Ltd. Singapore
Sterling Software (U.S. of America), Inc. Delaware
Sterling Software (U.K.) Holdings Ltd. United Kingdom
Sterling Software (U.K.) Limited United Kingdom
Sterling Software (Switzerland) AG Switzerland
Sterling Software (Italia) SRL Italy
KnowledgeWare SRL Italy
Systems Center AS Norway
Sterling Software (Portugal) - Informatica, LDA Portugal
Sterling Aplicaciones Informaticas (Espana), S.A. Spain
KnowledgeWare AB Sweden
Sterling Software (U.K.) II Limited. United Kingdom
Sterling Software Do Brasil Participacoes Ltda. Brazil
Sterling Software Do Brasil Ltda. (Owned 49%) Brazil
Systems Center Handelsgesellschaft M.B.H. Austria
Systems Center Pty Limited Australia
Systems Center Limited Hong Kong
Sterling Software (Virgin Islands), Inc. U.S. Virgin Islands
Sterling Software (Canada) Inc. Canada
Sterling Software International, Inc. Delaware
Sterling Software International SARL France
Sterling Software International (Australia), Limited Delaware
Sterling Software (Israel), Ltd. Israel
Sterling Software Leasing Company Delaware
Sterling Software (Scandinavia) AS Norway
Sterling Software (Southern), Inc. Georgia
KnowledgeWare GmbH Austria
KnowledgeWare (Far East) Limited Hong Kong
Matesys Mathematics Systems S.A. France
Matesys Corp. California
Southwest Beta Services, Inc. Delaware
Sterling International Finance, Inc. British West Indies
<PAGE>
Notes:
- ------
1. Indented names are subsidiaries of subsidiaries.
2. Inclusion in the list is not a representation that the subsidiary is a
significant subsidiary.
3. Except as noted, the voting shares of all subsidiaries are 100% owned by
Sterling Software, Inc., its subsidiaries or employee nominees.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (File No. 333-13303, No. 33-71706, No. 33-54961, No. 33-56685, No.
33-56677, No. 33-32699, 33-56683, 33-62057 and No. 33-64073), and in the
Registration Statements on Form S-8 (File No. 33-65402, No. 33-69926, No. 33-
56681, No. 33-53833 and No. 33-62059) of Sterling Software, Inc., and in the
related Prospectuses of our report dated November 20, 1996, with respect to the
consolidated financial statements and schedule of Sterling Software, Inc.
included in this Annual Report on Form 10-K for the year ended September 30,
1996.
Ernst & Young LLP
Dallas, Texas
November 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE STERLING SOFTWARE, INC. ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 524,237
<SECURITIES> 231,919
<RECEIVABLES> 133,383
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 914,643
<PP&E> 81,359
<DEPRECIATION> 42,029
<TOTAL-ASSETS> 1,097,613
<CURRENT-LIABILITIES> 181,725
<BONDS> 0
0
0
<COMMON> 3,981
<OTHER-SE> 875,510
<TOTAL-LIABILITY-AND-EQUITY> 1,097,613
<SALES> 439,171
<TOTAL-REVENUES> 439,171
<CGS> 182,239
<TOTAL-COSTS> 378,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,361)
<INCOME-PRETAX> 84,886
<INCOME-TAX> 24,288
<INCOME-CONTINUING> 60,598
<DISCONTINUED> 177,290
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237,888
<EPS-PRIMARY> 6.98
<EPS-DILUTED> 6.65
</TABLE>
