<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): JUNE 30, 1997
STERLING SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-8465 75-1873956
(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
300 CRESCENT COURT, SUITE 1200, DALLAS, TEXAS 75201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 981-1000
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
June 30, 1997:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired. On June 30, 1997, Sterling
Software, Inc. (the "Company") and certain of its subsidiaries completed the
acquisition (the "Acquisition") of certain assets (including the capital stock
of certain foreign subsidiaries) of Texas Instruments Incorporated ("Texas
Instruments") pursuant to an Asset Purchase Agreement, dated April 18, 1997, as
amended pursuant to Amendment Nos. 1 and 2 thereto. Such assets constitute
substantially all of the assets formerly used by Texas Instruments' Software
Division ("TI Software") in connection with its business of developing,
marketing, licensing, supporting and maintaining applications development
software and providing related consulting services. The financial statements
required to be filed by Item 7(a) of Form 8-K are filed herewith as Exhibit
99.1.
(b) Pro Forma Financial Information. The pro forma financial information
required to be filed by Item 7(b) of Form 8-K is filed herewith as Exhibit 99.2.
(c) Exhibits:
Exhibit
Number Exhibit
------- -------
23 Consent of Ernst & Young LLP.
99.1 Financial Statements of the Software Business of Texas
Instruments Incorporated as of the three months ended
March 31, 1997 and 1996 (unaudited) and the year ended
December 31, 1996 with Report of Independent Auditors.
99.2 Unaudited Pro Forma Combined Condensed Balance Sheet of
the Company and TI Software as of March 31, 1997; and
Unaudited Pro Forma Combined Condensed Statements of
Operations of the Company and TI Software for the six
months ended March 31, 1997 and for the year ended
September 30, 1996.
- 2 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
STERLING SOFTWARE, INC.
By: /s/ R. Logan Wray
---------------------------------------------
R. Logan Wray
Senior Vice President and
Chief Financial Officer
Dated: August 13, 1997
- 3 -
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER EXHIBIT
- ------- -------
23 Consent of Ernst & Young LLP.
99.1 Financial Statements of the Software Business of Texas
Instruments Incorporated as of the three months ended March 31,
1997 and 1996 (unaudited) and the year ended December 31, 1996
with Report of Independent Auditors.
99.2 Unaudited Pro Forma Combined Condensed Balance Sheet of the
Company and TI Software as of March 31, 1997; and Unaudited Pro
Forma Combined Condensed Statements of Operations of the Company
and TI Software for the six months ended March 31, 1997 and the
year ended September 30, 1996.
- 4 -
<PAGE>
EXHIBIT 23
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, No. 33-56683, No. 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 June 12, 1997, with respect to the
financial statements of the Software Business of Texas Instruments Incorporated
included in this Current Report (Form 8-K) of Sterling Software, Inc., filed
with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
August 11, 1997
<PAGE>
EXHIBIT 99.1
Financial Statements
Software Business
of Texas Instruments Incorporated
Three Months Ended March 31, 1997 and 1996
(unaudited) and Year Ended December 31, 1996
with Report of Independent Auditors
<PAGE>
Software Business
of Texas Instruments Incorporated
Financial Statements
Three Months Ended March 31, 1997 and 1996
(unaudited) and Year ended December 31, 1996
CONTENTS
Report of Independent Auditors...................................... 3
Audited Financial Statements
Statements of Assets to be Acquired and Liabilities to be Assumed... 4
Statements of Operations............................................ 5
Statements of Cash Flows............................................ 6
Notes to Financial Statements....................................... 7
2
<PAGE>
Report of Independent Auditors
The Board of Directors
Texas Instruments Incorporated
We have audited the accompanying statements of assets to be acquired and
liabilities to be assumed of the Software Business of Texas Instruments
Incorporated (the "Software Business" as defined in Note 1) as of December 31,
1996, and the related statements of operations and cash flows for the year ended
December 31, 1996. These financial statements are the responsibility of the
management of Texas Instruments Incorporated. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets to be acquired and liabilities to be assumed
of the Software Business at December 31, 1996, and the results of its operations
and its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
June 12, 1997
3
<PAGE>
Software Business
of Texas Instruments Incorporated
Statements of Assets to be Acquired and Liabilities to be Assumed
(In thousands of dollars)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $966 in
1997 and $986 in 1996 59,647 56,014
Prepaid expenses 4,384 3,837
-----------------------
Total current assets 64,031 59,851
Equipment, at cost 15,574 17,847
Less accumulated depreciation (9,146) (11,136)
-----------------------
Equipment, net 6,428 6,711
Capitalized software development costs,
net 17,261 18,951
Other assets, net 24,773 30,115
-----------------------
Total assets 112,493 115,628
-----------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses 23,814 30,853
Deferred revenue 33,173 16,622
-----------------------
Total current liabilities 56,987 47,475
-----------------------
Net assets 55,506 68,153
=======================
</TABLE>
See accompanying notes.
4
<PAGE>
Software Business
of Texas Instruments Incorporated
Statements of Operations
(In thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
1997 1996 1996
------------------------------------
(unaudited)
<S> <C> <C> <C>
Net revenues:
Products 11,715 21,035 83,612
Product support 14,445 15,465 62,178
Services 23,158 28,511 113,135
------------------------------------
49,318 65,011 258,925
Costs and expenses:
Cost of sales:
Products and product support 14,289 10,596 51,596
Services 18,944 21,503 90,939
------------------------------------
33,233 32,099 142,535
Marketing, general, and
administrative 31,385 33,433 133,540
Research and development 2,252 2,529 10,362
Write-off of goodwill and intangibles 4,326 - -
------------------------------------
Total 71,196 68,061 286,437
------------------------------------
Loss from operations (21,878) (3,050) (27,512)
Other expense (net) 1,820 594 1,628
------------------------------------
Loss before provision for income taxes (23,698) (3,644) (29,140)
Provision for income taxes 280 1,232 2,179
Net loss (23,978) (4,876) (31,319)
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
Software Business
of Texas Instruments Incorporated
Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
1997 1996 1996
-------------------------------------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss (23,978) (4,876) (31,319)
Depreciation and amortization 4,211 3,460 13,948
Write-off of goodwill and intangibles 4,326 - -
Write-off of capitalized software - - 757
(Increase) decrease in working
capital:
Accounts receivable (3,633) 10,105 21,106
Prepaid expenses (547) (801) (705)
Deferred revenue 16,551 15,953 (1,730)
Accounts payable and accrued
expenses (7,039) (4,539) (3,517)
-----------------------------------
Net cash provided by (used in)
operating activities (10,109) 19,302 (1,460)
Cash flows from investing activities:
Additions to equipment (439) (972) (2,776)
Capitalized software development costs (783) (2,772) (13,656)
Other - (133) (61)
----------------------------------
Net cash used in investing activities (1,222) (3,877) (16,493)
Cash flows from financing activities:
Net transfers (to) from Texas
Instruments 11,331 (15,425) 17,953
----------------------------------
Net cash (used in) provided by
financing activities 11,331 (15,425) 17,953
----------------------------------
Net change in cash and cash equivalents - - -
Cash and cash equivalents at beginning
of period - - -
----------------------------------
Cash and cash equivalents at end of
period - - -
==================================
</TABLE>
See accompanying notes.
6
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Texas Instruments Incorporated ("TI") and Sterling Software Inc. (the "Buyer")
entered into an Asset Purchase Agreement (the "Agreement") on April 18, 1997
under which, on the contractually designated closing date, the Buyer will
acquire certain assets and assume certain liabilities of the Texas Instruments
Software Division and TI's non-U.S. Assigning Subsidiaries (as defined in the
Agreement), and the Buyer will acquire all issued and outstanding shares of
capital stock in TI's non-U.S. Transferred Subsidiaries (as defined in the
Agreement) (such division and subsidiaries of TI together are referred to as the
"Software Business"). The financial statements present the assets to be
acquired and liabilities to be assumed and results of operations and cash flows
of the Software Business based upon the structure of the transaction as
described in the Agreement, and this transaction is herein referred to as the
Acquisition.
The financial statements are not intended to be a complete presentation of the
financial position, results of operations and cash flows as if the Software
Business had operated as a stand-alone company. The financial statements have
been prepared in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates. The statements of income and cash flows for the three months ended
March 31, 1997 and 1996, and the statement of assets to be acquired and
liabilities to be assumed at March 31, 1997, are not audited but reflect all
adjustments which are of a normal recurring nature and are, in the opinion of
management, necessary to a fair statement of the results of the periods shown.
Intercompany balances and transactions within the Software Business have been
eliminated.
The Software Business engages in the design, development, marketing, sale,
licensing, and maintenance of applications development software, and it provides
related consulting services. The principal markets served include large
corporations and certain governmental agencies, primarily located in the United
States, Europe, and Asia.
TI provides various services to the Software Business including, but not limited
to, facilities management, data processing, security, payroll and employee
benefits administration, insurance administration, duplicating and
telecommunications services. TI allocates these expenses and all other central
operating costs, first on the basis of direct usage when identifiable, with the
remainder allocated among TI's businesses on the basis of their respective
revenues, headcount, or other measures. In the opinion of management
7
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of TI, these methods of allocating costs are reasonable. These expenses totaled
$23.5 million in 1996 and $4.5 million for the three months ended March 31,
1997. See also Note 5 for occupancy charges included in these expenses.
The Software Business participates in a centralized cash management system
wherein cash receipts are transferred to and cash disbursements are funded by
TI. Since cash and cash equivalents related to the Software Business
operations will not be acquired by the Buyer, they are excluded from the
statements of assets to be acquired and liabilities to be assumed.
Revenue
Revenue from license fees for standard software products is recognized when the
software is delivered, provided no significant future vendor obligations exist
and collection is probable. Service revenue is 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 as incurred.
Such costs are generally incurred ratably over the contract period.
If sales contracts include the right to receive future products, a portion of
the software product revenue is deferred and recognized as products are
delivered.
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.
In 1996, sales directly to agencies of the U.S. Government comprised
approximately 13% of total revenues.
8
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs
The Software Business 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." Research and
development costs are expensed as incurred.
Depreciation and Amortization
Equipment is depreciated primarily using the 150% declining balance method over
five years. Fully depreciated assets are written off against accumulated
depreciation. Capitalized software development costs are amortized on a
product-by-product basis using the straight-line method over three years.
Goodwill is amortized using the straight-line basis over 15 years, and other
intangibles are amortized using the straight-line basis over 4 to 15 years.
Depreciation and amortization consists of the following for the year ended
December 31, 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
Equipment 2,930
Capitalized software development costs 7,619
Goodwill 1,172
Other intangibles 2,227
------
13,948
======
</TABLE>
Income Taxes
The operations of the Software Business are included in the consolidated income
tax returns of TI. Pursuant to the Agreement, TI will retain substantially all
income tax liabilities and rights to all tax refunds relating to operations
prior to the closing date of the Acquisition. Accordingly, the statements of
assets to be acquired and liabilities to be assumed do not reflect current or
prior period income tax receivables or payables. The income tax provisions
included in the statements of operations have been determined as if the Software
Business were a separate taxpayer.
9
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates.
Revenue and expense accounts of these operations are translated at average
exchange rates prevailing during the period the transactions occur.
2. OTHER ASSETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
------------------------
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Goodwill 9,065 11,040
Other intangibles 15,677 18,879
Other assets 31 196
-------------------------
24,773 30,115
=========================
</TABLE>
Goodwill and other intangibles are associated with the acquisition of JMA
Information Engineering Limited and its subsidiaries (collectively "JMA") in
1991. The total cost for acquiring JMA was $47.6 million. Amounts assigned to
other intangibles recorded at acquisition were based on appraised values.
During the first quarter of 1997, the Software Business disposed of three
European subsidiaries originally acquired under the JMA transaction. A charge
of $4.3 million was taken to write off goodwill and other intangibles associated
with these subsidiaries.
10
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
------------------------
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Accounts payable - trade 6,355 10,614
Customer deposits 1,589 2,508
Accrued payroll and benefits 6,624 8,811
Accrued non-income taxes 3,476 4,876
Accrued severance 4,311 1,787
Other 1,459 2,257
------------------------
23,814 30,853
========================
</TABLE>
4. RISK CONCENTRATION
Financial instruments which subject the Software Business to concentrations of
credit risk primarily relate to accounts receivable. Contracts involving the
U.S. Government do not require collateral or other security. The Software
Business conducts ongoing credit evaluations of domestic non-U.S. Government
customers and generally does not require collateral or other security from these
customers. The Software Business generally requires international customers to
furnish letters of credit or make advance payments in amounts sufficient to
limit the Software Business' credit risk to a minimal level. Historically, the
Software Business has not incurred any significant credit-related losses.
5. RENTAL EXPENSE AND LEASE COMMITMENTS
The Software Business occupies various facilities which are either owned or
leased by TI. The statement of income includes occupancy charges from TI of
$11.1 million in 1996 and $1.6 million and $2.9 million, respectively, for the
three months ended March 31, 1997 and 1996. These charges include depreciation,
rent, and taxes (as applicable) incurred by TI and allocated to the Software
Business based on the square footage of facilities occupied. The occupancy
charges historically allocated to the Software Business do not necessarily
represent current market rates to lease such facilities. TI will execute lease
agreements with the Buyer at agreed-upon rates in connection with TI-owned
facilities that will be utilized by the Buyer after the Acquisition is
completed.
11
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
5. RENTAL EXPENSE AND LEASE COMMITMENTS (CONTINUED)
The Software Business also directly leases certain facilities and equipment from
third parties under operating leases, many of which contain renewal options and
escalation clauses. Total rental expense on such operating leases amounted to
$1.1 million in 1996. The following indicates minimum rental commitments in
succeeding years under these Software Business leases at December 31, 1996 (in
millions): 1997 - $1.5; 1998 - $1.6; 1999 - $1.5; 2000 - $1.3; 2001 -
$.9; later years - $5.2.
In connection with the Acquisition, TI will assign to the Buyer certain non-
cancelable operating lease commitments with third parties. The following
indicates minimum rental commitments in succeeding years under these TI leases
as of December 31, 1996 (in millions): 1997 - $ 2.1; 1998 - $2.1; 1999 -
$1.6; 2000 - $1.5; 2001 - $1.5; later years - $6.4.
6. INCOME TAXES
The provision for income taxes represents current tax expense for non-U.S.
entities. The effective tax rate for the year ended December 31, 1996 was
different from the United States statutory rate for the reasons set forth below
(in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
Computed tax at statutory rate (10,199)
Unbenefited losses 15,407
Effect of non-U.S. rates (1,739)
Utilization of net operating losses (1,491)
Other 201
---------
Provision for income taxes 2,179
=========
</TABLE>
At December 31, 1996, net operating loss carryforwards of $20.1 million were
available for certain non-U.S. subsidiaries to be acquired by the Buyer and
expire in years 1997-2006.
12
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
6. INCOME TAXES (CONTINUED)
Deferred income taxes at December 31, 1996 included the following (in thousands
of dollars):
<TABLE>
<CAPTION>
<S> <C>
Net operating losses 7,679
Accrued expenses 1,609
--------
9,288
Less: valuation allowance (9,288)
--------
--
========
</TABLE>
7. RETIREMENT PLANS
The Software Business offers defined contribution pension plans to employees at
certain European subsidiaries. Employer contributions are generally made to
such plans on a discretionary basis. During 1996, the Software Business
incurred expenses of $2.8 million for contributions to these plans.
Employees of the Software Business also participate in certain defined benefit
pension plans and retiree health care benefit plans offered by TI. The costs of
such plans attributed to the Software Business are included in the statements of
operations. However, the liabilities for the plans are not reflected in the
statements of assets to be acquired and liabilities to be assumed as the
Agreement stipulates that TI will retain such liabilities as of the closing date
of the Acquisition.
8. SPECIAL ACTIONS
Income before provision for income taxes for 1996 and the first quarter of 1997
include pretax charges of $3.2 million and $5.8 million, respectively, for
voluntary and involuntary severance actions. These actions affected
approximately 70 employees of the Software Business in each period. Under the
terms of the Agreement, only accrued severance liabilities as they pertain to
Transferred Subsidiaries will be assumed by the Buyer.
13
<PAGE>
Software Business
of Texas Instruments Incorporated
Notes to Financial Statements
9. GEOGRAPHIC AREA DATA
The following geographic area data include revenues, costs and expenses
generated by and assets employed in operations located in each area in 1996 (in
thousands of dollars):
<TABLE>
<CAPTION>
NET LOSS BEFORE IDENTIFIABLE
REVENUES TAXES ASSETS
---------------------------------------------
<S> <C> <C> <C>
United States 115,363 (29,294) 70,167
Europe 124,190 (1,222) 40,921
Other Areas 19,372 1,376 4,540
------------------------------------------
258,925 (29,140) 115,628
==========================================
</TABLE>
In 1996, sales to unaffiliated non-U.S. customers comprised approximately 56% of
total revenues.
14
<PAGE>
EXHIBIT 99.2
------------
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The Acquisition will be accounted for as a purchase business combination by
the Company. The pro forma combined condensed financial statements are based on
the historical financial statements of the Company and TI Software. This
exhibit to the Company's Current Report on Form 8-K/A includes the following
unaudited pro forma combined condensed financial statements: (i) Unaudited Pro
Forma Combined Condensed Balance Sheet of the Company and TI Software as of
March 31, 1997; (ii) Unaudited Pro Forma Combined Condensed Statements of
Operations of the Company and TI Software for the six months ended March 31,
1997 and the year ended September 30, 1996; and (iii) related notes thereto.
The unaudited pro forma combined condensed balance sheet assumes the Acquisition
had been consummated on March 31, 1997. The unaudited pro forma combined
condensed statements of operations assume the Acquisition had been consummated
on October 1, 1995.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results
of operations that would have been reported if the Acquisition had been
consummated as presented in the accompanying unaudited pro forma combined
condensed financial statements, nor is it necessarily indicative of the
Company's future financial position or results of operations. The pro forma
adjustments and the assumptions on which they are based are described in the
accompanying notes to unaudited pro forma combined condensed financial
statements.
These unaudited pro forma combined condensed financial statements are based
on and should be read in conjunction with the historical consolidated financial
statements and related notes thereto of the Company and the financial statements
and notes thereto of TI Software for the year ended December 31, 1996.
- 1 -
<PAGE>
STERLING SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PURCHASE
TI ACCOUNTING
STERLING SOFTWARE ADJUSTMENTS PRO FORMA
HISTORICAL HISTORICAL (NOTE 2) COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 571,501 $(165,000) (a) $ 406,501
Marketable securities.................. 183,649 183,649
Accounts and notes receivable, net..... 117,730 $ 59,647 177,377
Income tax receivable.................. 6,100 6,100
Prepaid expenses and other current
assets................................ 17,998 4,384 (2,147) (c) 20,235
---------- ---------- ----------- ----------
Total current assets.................. 896,978 64,031 (167,147) 793,862
Property and equipment, net............. 50,315 6,428 (1,705) (c) 47,858
(7,180) (d)
Computer software, net.................. 62,217 17,261 6,793 (c) 68,680
(17,591) (d)
Excess cost over net assets acquired,
net.................................... 66,621 24,742 31,009 (c) 83,417
(38,955) (d)
Noncurrent deferred income taxes........ 28,232 (c) 48,561
20,329 (d)
Other assets............................ 15,498 31 15,529
Investment in TI Software Division...... 214,774 (a)
(55,506) (b)
(159,268) (c)
---------- ---------- ----------- ----------
Total assets............................ $1,091,629 $112,493 $(146,215) $1,057,907
========== ========== =========== ==========
Current liabilities:
Notes payable and current portion of
long term debt........................ $ 1,352 $ 1,352
Accounts payable and accrued
liabilities........................... 65,927 $ 23,814 $ 47,896 (a) 185,781
12,531 (c)
35,613 (d)
Deferred revenue....................... 70,796 33,173 103,969
---------- ---------- ----------- ----------
Total current liabilities............. $ 138,075 56,987 96,040 291,102
Other noncurrent liabilities and
deferred revenue....................... 45,326 1,878 (a) 53,902
6,698 (d)
Stockholders' equity:
Preferred stock........................
Common stock........................... 3,989 3,989
Additional paid-in capital............. 805,640 805,640
Retained earnings...................... 157,365 55,506 (55,506) (b) (37,960)
(109,617) (c)
(85,708) (d)
Less treasury stock................... (58,766) (58,766)
---------- ---------- ----------- ----------
Total stockholders' equity............. 908,228 55,506 (250,831) 712,903
---------- ---------- ----------- ----------
Total liabilities and stockholders'
equity................................. $1,091,629 $112,493 $(146,215) $1,057,907
========== ========== =========== ==========
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
STERLING SOFTWARE, INC
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TI Software
--------------------------------------------------------
Sterling Deduct Add
Historical Historical Historical Pro Forma
Six Months Historical Nine Months Three Months Six Months Purchase
Ended Year Ended Ended Ended Ended Accounting
March 31, December 31, September March 31, March 31, Adjustments Pro Forma
1997 1996 30, 1996 1997 1997 (Note 3) Combined
---------- ------------ ----------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products.................. $ 84,135 $ 83,612 $ 62,953 $ 11,715 $ 32,374 $116,509
Product support........... 59,515 62,178 45,660 14,445 30,963 90,478
Services.................. 60,235 113,135 85,837 23,158 50,456 110,691
--------- ---------- --------- ---------- --------- ---------
Total revenue............ 203,885 258,925 194,450 49,318 113,793 317,678
Costs and expenses:
Cost of sales:
Products and product
support................. 35,520 51,596 36,571 14,289 29,314 $ (2,979) (a) 59,042
(2,666) (b)
(147) (c)
Services.................. 52,364 90,939 67,307 18,944 42,576 (1,426) (b) 93,435
(79) (c)
--------- ---------- --------- ---------- --------- --------- ---------
87,884 142,535 103,878 33,233 71,890 (7,297) 152,477
Selling, general and
administrative........... 84,292 133,540 96,688 31,385 68,237 (5,013) (a) 147,516
Product development and
enhancement.............. 9,817 10,362 6,544 2,252 6,070 15,887
Write-off of goodwill and
intangibles.............. 4,326 4,326 (4,326) (a)
--------- ---------- --------- ---------- --------- --------- ---------
Total costs and expenses. 181,993 286,437 207,110 71,196 150,523 (16,636) 315,880
--------- ---------- --------- ---------- --------- --------- ---------
Income (loss) before other
income(expense) and
income taxes ............ 21,892 (27,512) (12,660) (21,878) (36,730) 16,636 1,798
Other income (expense)..... 21,104 (1,628) (835) (1,820) (2,613) 18,491
--------- ---------- --------- ---------- --------- --------- ---------
Income (loss) before income
taxes................... 42,996 (29,140) (13,495) (23,698) (39,343) 16,636 20,289
Provision for income taxes. 14,932 2,179 224 280 2,235 (10,120) (d) 7,047
--------- ---------- --------- ---------- --------- --------- ---------
Net income (loss).......... $ 28,064 $(31,319) $(13,719) $(23,978) $(41,578) $ 26,756 $ 13,242
========= ========== ========= ========== ========= ========= =========
Income per common
share (Note 4):
Net income:
Primary................. $.72 $.34
========= =========
Fully diluted........... $.72 $.34
========= =========
Shares used to compute per
share data:
Primary................. 39,006 39,006
========= =========
Fully diluted........... 39,006 39,006
========= =========
</TABLE>
See accompanying notes.
- 3 -
<PAGE>
STERLING SOFTWARE, INC
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TI Software
---------------------------------------------------------
Deduct Add
Sterling Historical Historical
Historical Historical Three Months Three Months Pro Forma Purchase
Year Ended Year Ended Ended Ended Year Ended Accounting
September 30, December 31, December 31, December 31, September 30, Adjustments Pro Forma
1996 1996 1996 1995 1996 (Note 3) Combined
------------- ------------ ------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products.................. $192,464 $ 83,612 $ 20,659 $ 33,931 $ 96,884 $289,348
Product support........... 123,401 62,178 16,518 14,130 59,790 183,191
Services.................. 123,306 113,135 27,298 27,978 113,815 237,121
------------ ------------ ----------- ----------- ---------- ----------- ---------
Total revenue............ 439,171 258,925 64,475 76,039 270,489 709,660
Costs and expenses:
Cost of sales:
Products and product
support.................. 72,201 51,596 15,025 14,980 51,551 $(1,000) (a) 117,003
(5,449) (b)
(300) (c)
Services.................. 110,038 90,939 23,632 23,019 90,326 (2,734) (b) 197,479
(151) (c)
------------ ------------ ------------ ------------ ----------- --------- ---------
182,239 142,535 38,657 37,999 141,877 (9,634) 314,482
Selling, general and
administrative........... 175,237 133,540 36,852 46,953 143,641 (8,500) (a) 310,378
Product development and
enhancement.............. 20,921 10,362 3,818 3,189 9,733 30,654
------------ ------------ ------------ ------------ ----------- --------- ---------
Total costs and expenses. 378,397 286,437 79,327 88,141 295,251 (18,134) 655,514
------------ ------------ ------------ ------------ ----------- --------- ---------
Income (loss) from
continuing operations
before other income
(expense) and income taxes 60,774 (27,512) (14,852) (12,102) (24,762) 18,134 54,146
Other income (expense)..... 24,112 (1,628) (793) 50 (785) 23,327
------------ ------------ ------------ ------------ ----------- --------- ---------
Income (loss) from
continuing operations
before income taxes....... 84,886 (29,140) (15,645) (12,052) (25,547) 18,134 77,473
Provision for income taxes. 24,288 2,179 1,955 426 650 1,750 (d) 26,688
------------ ------------ ------------ ------------ ----------- --------- ---------
Income (loss) from
continuing operations..... $ 60,598 $(31,319) $(17,600) $(12,478) $(26,197) $ 16,384 $ 50,785
============ ============ ============ ============ =========== ========= =========
Income per common
share (Note 4):
Income from continuing
operations:
Primary................. $1.78 $1.49
============ =========
Fully diluted........... $1.73 $1.46
============ =========
Shares used to compute per
share data:
Primary................. 34,071 34,071
============ =========
Fully diluted........... 36,045 36,045
============ =========
</TABLE>
See accompanying notes.
- 4 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The Acquisition will be accounted for as a purchase business combination by
the Company. The accompanying unaudited pro forma combined condensed
financial statements reflect an aggregate purchase price of approximately
$214.8 million, consisting of cash paid to Texas Instruments plus costs
directly related to the Acquisition as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to Texas Instruments.......... $165,000
Investment advisor, legal,
accounting and other professional
fees and expenses...................... 4,904
TI Software employee severance and
benefits............................... 28,696
Elimination of duplicate
facilities and leases of TI
Software............................... 10,578
Other costs related to the
Acquisition............................ 5,596
--------
$214,774
========
</TABLE>
For purposes of the accompanying unaudited pro forma combined condensed
balance sheet, the aggregate purchase price has been allocated to the net
assets acquired, with the remainder recorded as excess cost over net assets
acquired on the basis of preliminary estimates of fair values. These
preliminary estimates of fair value were determined by the Company's
management based primarily on information furnished by management of TI
Software and an independent valuation of acquired software and research and
development. The final allocation of the purchase price will be based on a
complete evaluation of the assets and liabilities of TI Software.
Accordingly, the information presented herein may differ from the final
purchase price allocation.
The Company also expects to incur costs of approximately $106.0 million
primarily related to the reorganization of the Company's operations in
connection with the Acquisition, including the write-down of certain
software and excess cost over net assets acquired recorded in connection
with previous acquisitions and, to a lesser extent, to the termination of
the Company's International Distributor Agreement with a subsidiary of
Sterling Commerce, Inc., as more fully described in Item 5 of the Company's
Current Report on Form 8-K dated June 30, 1997, and the write-down of
certain excess cost over net assets acquired related to the Company's
federal systems business.
- 5 -
<PAGE>
2. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The accompanying unaudited pro forma combined condensed balance sheet
assumes the Acquisition was consummated on March 31, 1997 and reflects the
following pro forma adjustments:
(a) To record the aggregate cost of the Acquisition described in Note 1
above.
(b) To eliminate TI Software's historical equity balances.
(c) To record the allocation of the purchase price for the Acquisition to
the assets and liabilities acquired as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficit).................... $ (7,634)
Property and equipment....................... 4,723
Software..................................... 24,054
Purchased research and development
costs charged to expense in the
third quarter of fiscal 1997................. 137,849
Other assets................................. 31
Excess cost over net assets acquired......... 55,751
--------
$214,774
========
</TABLE>
(d) To record additional costs primarily related to the reorganization of
the Company's operations in connection with the Acquisition, including
the write-down of certain software and excess cost over net assets
acquired in connection with previous acquisitions and, to a lesser
extent, to the termination of the Company's International Distributor
Agreement with a subsidiary of Sterling Commerce, Inc. and the write-
down of certain excess cost over net assets acquired related to the
Company's federal systems business, net of the related deferred income
tax benefit. The components of the reorganization charge are as
follows (in thousands):
<TABLE>
<S> <C>
Employee termination costs........... $ 18,539
Write-down of software products
which will no longer be actively
marketed........................... 17,591
Write-down of excess cost over
net assets acquired................ 38,955
Elimination of duplicate
facilities and equipment........... 19,993
Out of pocket costs related to
the reorganization................. 5,109
Other costs.......................... 5,850
--------
$106,037
========
</TABLE>
- 6 -
<PAGE>
3. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma combined condensed statements of
operations have been prepared as if the Acquisition was consummated as of
October 1, 1995 and reflect the following pro forma adjustments:
(a) To eliminate nonrecurring restructuring costs and write-down of
goodwill and other intangibles incurred by TI Software in periods
prior to the Acquisition.
(b) To record amortization of software acquired in the Acquisition
computed using the straight-line method over its remaining estimated
economic life (five years), less the historical amortization related
to certain software written down by the Company related to the
reorganization of the Company's operations in connection with the
Acquisition.
(c) To record amortization of excess cost over net assets acquired over
ten years, less amortization related to certain excess cost over net
assets acquired recorded in connection with previous acquisitions
written down by the Company related to the reorganization of the
Company's operations in connection with the Acquisition.
(d) To adjust the provision for income taxes to reflect the impact of the
results of operations of the Acquisition and related pro forma
adjustments.
4. UNAUDITED PRO FORMA COMBINED EARNINGS PER COMMON SHARE DATA
The unaudited pro forma combined primary earnings per common share data is
computed by dividing pro forma combined income per share by the weighted
average number of common shares and common share equivalents represented by
stock options and warrants, if the exercise of such stock options and
warrants would have a dilutive effect in the aggregate. For purposes of
this computation, pro forma combined income applicable to common
stockholders is adjusted to reflect the assumed use of net cash proceeds on
the assumed exercise of stock options and warrants treated as common share
equivalents to purchase outstanding long term debt or government
securities.
The pro forma combined fully diluted earnings per common share data
reflect, in addition to the foregoing, the assumed conversion of the
Company's 5 3/4% Convertible Subordinated Debentures due 2003 into common
shares, if such conversion would have a dilutive effect, including an
adjustment to reflect the elimination of after-tax interest expense
attributable to such debentures.
- 7 -
