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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
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8465
STERLING SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1873956
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 981-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.10 Par Value New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock, $0.10
Par Value
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. [X]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant was $1,262,736,131, based on the closing sales
price of $34 5/16 of the Registrant's Common Stock on the New York Stock
Exchange on November 10, 1997.
As of November 10, 1997, 38,587,938 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
the Registrant to be held during 1998 are incorporated by reference in Part
III.
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STERLING SOFTWARE, INC.
TABLE OF CONTENTS
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FORM 10-K ITEM PAGE
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PART I.
Item 1. Business................................................... 1
Item 2. Properties................................................. 12
Item 3. Legal Proceedings.......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders........ 12
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 13
Item 6. Selected Financial Data.................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 21
Item 8. Financial Statements and Supplementary Data................ 22
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
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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 l983. Sterling Software is
a recognized worldwide supplier of software products and services within three
major markets: systems management, applications management and federal
systems. Consistent with Sterling Software's decentralized operating
structure, major markets are served by independently operated business groups
which consist of divisions and business units that focus on specific business
niches within those markets. See Notes 5 and 6 of Notes to Consolidated
Financial Statements. 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.
In connection with the Company's acquisition of the Software Division of
Texas Instruments Incorporated ("TI Software"), on June 30, 1997, the Company
reorganized into three highly-focused business groups: the Systems Management
Group, the Applications Management Group and the Federal Systems Group. The
reorganization resulted in the Systems Management and Applications Management
groups assuming direct responsibility for the international distribution of
their products. The Company's Federal Systems Group was not significantly
affected by the reorganization.
As of September 30, 1997, the Company's business groups were organized as
follows:
. The Systems Management Group, headquartered in Plano, Texas, provides
products that enable customers to ensure the quality of service of
mission-critical information technology ("IT") applications across
enterprise networked computing environments. The group specializes in
automation, network management, service desk, storage management and VM
systems management products. Linking these products is the group's
Business-Centric Automation initiative, a pragmatic, business-focused
approach to ensuring the availability and reliability of these
applications;
. The Applications Management Group, headquartered in Plano, Texas,
provides application development products and services for business
modeling through code generation, as well as products and services that
enable customers to extend the life and usefulness of legacy
applications and to facilitate enterprise information access. These
software products provide developers the ability to build model-based
applications through traditional and object-oriented techniques and to
maximize the life, reuse and value of their legacy systems; and
. The Federal Systems Group, headquartered in McLean, Virginia, provides
specialized IT services to the federal government under numerous multi-
year contracts. Major customers of this group include 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 specialized technical services for non-governmental
customers.
Worldwide revenue from the Company's Systems Management, Applications
Management and Federal Systems Groups represented 38%, 29% and 25%,
respectively, of the Company's total 1997 revenue. Revenue from the Company's
international operations represented 37% of the Company's 1997 revenue. See
Notes 5 and 6 of Notes to Consolidated Financial Statements.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce, Inc. ("Sterling Commerce"), which owns and operates the businesses
conducted by Sterling Software's former Electronic Commerce Group. The results
of operations of Sterling Commerce for 1996 and 1995 have been classified as
discontinued operations in the accompanying Consolidated Financial Statements.
Through June 30, 1997, the Company sold, marketed and provided first-level
support outside of the United States and Canada for Sterling
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Commerce's interchange and communications software products, the results of
which are included in the business segment information presented in the
accompanying Consolidated Financial Statements under "Corporate and other".
See "Shared Management and Other Relationships with Sterling Commerce" below.
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 52% and 54% of the Company's
total revenue in 1997 and 1996, respectively. Sterling Software's customer
base includes approximately 95 of the 100 largest, and approximately 400 of
the 500 largest, U.S. industrial and service corporations, ranked by 1996
revenues as reported in Fortune magazine.
At September 30, 1997, the Company employed approximately 3,100 employees in
85 offices worldwide. The Company has direct sales and marketing offices in 22
countries and distributors and agents in an additional 33 countries.
SYSTEMS MANAGEMENT GROUP
Effective June 30, 1997, Sterling Software reorganized the Systems
Management Group by combining the Company's former Systems Management Group
and the related portions of the Company's international operations. The new
Systems Management Group, comprised of five divisions and one business unit,
provides products that enable customers to ensure the quality of service of
mission-critical IT applications across enterprise networked computing
environments. The group specializes in automation, network management, service
desk, storage management and VM systems management products. Linking these
products is the group's Business-Centric Automation initiative, a pragmatic,
business-focused approach to ensuring the availability and reliability of
these applications. The purpose of Business-Centric Automation is to correlate
system and network resources to the business applications that depend on these
functions, and to provide the complete context that IT management personnel
need to match their activities to the priorities of their business. As of
September 30, 1997, the group employed approximately 700 people. Worldwide
revenue from the Systems Management Group represented 38% of the Company's
revenue during 1997 and 39% of the Company's revenue during both 1996 and
1995.
The Operations Management Division provides three product lines under the
SOLVE family name. SOLVE:Netmaster automates network management operations
across large-scale enterprises. This product family provides management and
monitoring of both Systems Network Architecture ("SNA") and Transmission
Control Protocol/Internet Protocol ("TCP/IP") networks from one console. The
SOLVE:Operations product family provides and participates in enterprise-wide
automation solutions, addressing both mainframe (OS/390 and SNA) and
distributed (Simple Network Management Protocol ("SNMP") and non-SNMP) systems
resources. SOLVE:Operations products are available as standalone products
within the OS/390 environment and as plug-in components for three enterprise
management platforms: Hewlett-Packard's "OpenView" and "OpenView
IT/Operations" and Tivoli's "Tivoli/TME 10 NetView". SOLVE:Operations is the
cornerstone of the System Management Group's Business-Centric Automation
initiative. The SOLVE:Operations correlation engine maps system and network
resources to the services or business functions they support and the service-
level requirements and business priorities associated with these services and
functions. This product allows customers to monitor and manage resources as
elements of their service commitment. SOLVE:Central is an integrated suite of
products for running the enterprise IT service desk and is comprised of:
SOLVE:Problem for problem tracking and resolution; SOLVE:Change for managing
the systems change process; SOLVE:Configuration for tracking software and
hardware configuration changes; and SOLVE:Asset for business management of
computer assets and the services they deliver.
The Storage Management Division provides software products under the SAMS
family name. These products manage, monitor and automate data storage in both
distributed and centralized environments. SAMS:Vantage is a client/server
system that provides comprehensive automation, interactive reporting, analysis
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and predictive modeling capabilities for enterprise-wide storage. SAMS:Vantage
delivers centralized management of distributed storage across OS/390, UNIX,
Windows NT and NetWare environments. The SAMS:Vantage storage management
approach is designed to remain consistent across platforms and to 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. On the OS/390 platform, SAMS:Vantage ties into
the division's data management products providing a comprehensive OS/390
storage management suite. The input/output ("I/O") component of SAMS:Vantage,
the first I/O performance monitor to work across multiple RAID (redundant array
of inexpensive disks) subsystems and DASD (data access storage devices),
analyzes I/O performance and recommends device specific solutions to improve
response times and increase efficiency. The SAMS family of products also
includes SAMS:Disk, a data storage management backup and recovery system;
SAMS:Recover, a disaster recovery product that complements IBM's DFHSM product;
and SAMS:Allocate, a centralized allocation control system. In addition, in
1997, the division introduced SAMS:Vista, a comprehensive tape management
reporting system which enhances tape management systems and assists in the
management of robotic tape systems and high capacity tape devices.
The VM Software Division, through its VM family of products, provides systems
management software and World Wide Web enabling software for IBM's VM/ESA
operating system. The VM:Manager product family provides integrated solutions
for automated operations, storage management, service-level management,
security and disaster recovery and database administration. VM:Manager is
designed to enable VM sites to operate at maximum availability with minimal
systems administration personnel, thereby controlling costs, improving
performance and increasing user productivity. The VM:Webserver product family
enables customers to deliver World Wide Web services from the VM operating
system and to deliver VM applications and data across intranets or the
Internet. VM:Webserver 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, images, video and Java applets. VM:Webserver for
OfficeVision is a turn-key World Wide Web interface to the E-mail and
calendaring features of IBM's OfficeVision/VM, a mainframe-based office
automation solution. VM:Webserver Gateway, released in 1997, provides a
general-purpose, VM-based tool for web-enabling IBM mainframe applications,
including those running on OS/390 (or previous versions of MVS) and VSE/ESA.
The Systems Management Group's new Europe and Asia Pacific Divisions and the
Latin America Operation have responsibility for sales, marketing and first-
level support of the group's products outside of the United States and Canada.
The Europe Division is responsible for direct and indirect sales and support in
Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Norway,
Portugal, Spain, Sweden, Switzerland, The Netherlands and the United Kingdom.
The division's distributor operation manages agents and distributors in
international markets not served by direct operations, including Eastern
Europe, the Middle East and South Africa. The Asia Pacific Division is
responsible for direct and indirect sales and support in Asia and the Pacific
Rim, including Australia, Japan, Malaysia, New Zealand, Singapore and South
Korea. The group's Latin America Operation is responsible for direct sales and
support of the group's products in Brazil and indirect sales and support in
other Latin American markets.
APPLICATIONS MANAGEMENT GROUP
Effective June 30, 1997, Sterling Software reorganized the Applications
Management Group by combining the Company's former Applications Management and
Information Management groups, the related portion of the Company's
international operations and the business formerly operated by TI Software. The
new Applications Management Group, comprised of three divisions, provides
application development products and services for business modeling through
code generation, as well as products and services that enable customers to
extend the life and usefulness of legacy applications and to facilitate
enterprise information access. These software products provide developers the
ability to build model-based applications through traditional and object-
oriented techniques and to maximize the life, reuse and value of their legacy
systems. As of September 30, 1997,
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the group employed approximately 1,100 people. Worldwide revenue from the
Company's Applications Management Group represented 29%, 25% and 27% of the
Company's revenue during 1997, 1996 and 1995, respectively.
The new Applications Development Division markets application development
products and services for business modeling through code generation. Its new
COOL family of products is designed to provide developers the ability to build
model-based applications through traditional and object-oriented techniques.
COOL:Biz is a comprehensive business modeling toolset that promotes an
understanding of organizations and processes with a "common language" for
communicating business needs. The product's methodology for process mapping and
job design allows business and IT professionals to work together to design
business processes. COOL:Dat supports integrated data, data flow and database
modeling. COOL:Dat's conceptual, logical and physical data models are
maintained separately to provide flexibility, but are linked so that changes in
one are reflected in the others, resulting in integrated modeling and
development projects. COOL:Gen is designed to allow developers to model and
generate error free code in a structured, repeatable manner. With COOL:Gen,
high-level specifications are driven forward into dynamic, scalable
applications targeting multiple platforms. COOL:Jex is an object-oriented
analysis and design solution supporting the Unified Modeling Language industry
standard notation and allows modeling of complex application requirements,
driven directly from business requirements. COOL:Cubes, expected to be released
in the first-half of 1998, will represent the latest in component based
development technology and will contain tools for modeling specifications and
architectures, plus component design techniques to maximize reuse of computer
software code.
The Information Management Division markets products and services under the
VISION family name that enable customers to extract value from their existing
corporate data and maximize the return on their IT investment by extending the
life and usefulness of their legacy applications. By improving existing
applications, customers can reconcile their legacy and new development
strategies, conserving resources to permit the implementation of 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 application 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 also offers consulting services in
conjunction with its software products to provide customized approaches to
address the "Year 2000" issue. In addition, the VISION family of products
includes database query and reporting products that monitor and control
databases. VISION:Clearaccess facilitates end-user access as a query and
reporting tool and VISION:Clearmanage allows database managers to monitor and
control database access in a client/server environment.
The Applications Management Group's new Applications International Division
is responsible for sales, marketing and first-level support of the group's
products outside of the United States and Canada. The division operates through
three regions, representing Central Europe, Western Europe and Asia Pacific, as
well as a distributor operation. The two European regions are responsible for
direct sales and support in Austria, Belgium, France, Germany, Holland, Italy,
Portugal, Spain, Switzerland and the United Kingdom. The Asia Pacific region is
responsible for sales and support in Asia and the Pacific Rim, including
Australia, Japan, Malaysia, New Zealand, Singapore and South Korea. The
distributor operation manages agents and distributors in international markets
not served by direct operations.
FEDERAL SYSTEMS GROUP
The Federal Systems Group, comprised of two divisions, provides specialized
IT services to the federal government under numerous multi-year contracts. In
1997, Sterling Software began its 31st year of service to
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both NASA and the DoD, the group's major customers. In 1997, the group was
performing work under 142 contracts. Federal Systems' personnel also serve as
a source of technical expertise for other divisions of Sterling Software and
provide specialized technical services for non-governmental customers. As of
September 30, 1997, the group employed approximately 1,200 people. Revenue
from the Federal Systems Group represented 25% of the Company's revenue during
1997 and 26% of the Company's revenue during both 1996 and 1995.
The Information Technology Division provides specialized IT 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 1997, the division expanded
its work in weather applications, intelligence applications and command,
control and communications through competitively awarded and follow-on
contracts. The division also increased its commercial work in electronic image
management. The division's computing resources include data processing
facilities approved for classified operations and substantial hardware and
software configurations to support software life cycle activities in a
distributed processing environment.
The Scientific Systems Division is a provider of scientific software support
and specialized IT 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 theoretical and experimental 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 and the NASA Ames, Lewis and Marshall Centers. In 1997,
the division was a member of the industry team that won the Stratospheric
Observatory for Infrared Astronomy (SOFIA) contract to modify and operate a
Boeing 747-carried infrared telescope to conduct scientific astronomy
missions. In 1997, the division and its staff received various honors and
awards from its customers, including a NASA-Ames Total Quality Management
Incentive Award and the nomination of two of the division's developed
applications for the NASA 1997 Software of the Year Award.
SHARED MANAGEMENT AND OTHER RELATIONSHIPS WITH STERLING COMMERCE
The Board of Directors of Sterling Software (the "Board") currently has nine
members. Messrs. Sterling L. Williams, Sam Wyly, Charles J. Wyly, Jr. and Evan
A. Wyly are officers and directors of Sterling Software and are also directors
of Sterling Commerce. In addition, Sterling L. Williams is the Chairman of the
Board of Sterling Commerce and Jeannette P. Meier serves as an Executive Vice
President of both Sterling Software and of Sterling Commerce.
On March 13, 1996, Sterling Commerce completed the initial public offering
(the "Offering") of 13,800,000 shares of its common stock, par value $0.01 per
share ("Commerce Stock"). 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 then ownership interest in Sterling
Commerce, the terms of such Intercompany Agreements were not the result of
arm's length negotiation. The Intercompany Agreements included a tax
allocation agreement, an indemnification agreement and an international
distributor agreement. The tax allocation agreement provides that for periods
during which Sterling Commerce and/or its subsidiaries are included in the
Company's consolidated federal income tax returns or consolidated, combined or
unitary state tax returns, the Company is required to pay to or is entitled to
receive from Sterling Commerce its allocable portion of the consolidated
federal and state income tax liability or refunds, respectively. The
indemnification agreement provides, among other things, 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
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Indemnified Party relating to (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 the Company 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 provides that Sterling Commerce will indemnify the
Company and its directors, officers, employees, agents and representatives for
any liabilities resulting from or arising out of 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
Sterling Software's pro rata distribution (the "Distribution") of its remaining
ownership interest in Sterling Commerce to be taxable to the Company or its
stockholders. The international distributor agreement (the "International
Distributor Agreement"), which was terminated effective as of June 30, 1997,
defined the terms pursuant to which the Company acted as the exclusive
distributor of certain Sterling Commerce products in markets outside the United
States and Canada. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Combinations,
Divestitures and Reorganizations--Termination of International Distributor
Agreement" and Note 3 of Notes to Consolidated Financial Statements.
Conflicts of interest may arise between Sterling Software and Sterling
Commerce in a number of areas relating to such ongoing contractual and other
relationships, including potential competitive business activities, 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.
PRODUCT LICENSES
Sterling Software's products are generally licensed under perpetual use,
fixed-term or usage-based agreements. 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 1997, 1996 and 1995, 43%, 44%
and 42%, respectively, of the Company's revenue consisted of products revenue.
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 products when and if they
become available, as well as bug fixing and Internet and telephone access to
Sterling Software's technical personnel. In 1997, 1996, and 1995, 26%, 28% and
29%, respectively, of the Company's revenue consisted of product support
revenue.
SERVICES
Services provided by Sterling Software primarily include specialized IT
services in support of federal government contracts provided through the
Company's Federal Systems Group. Sterling Software provides training and
education in support of its software products, 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 to better enable customers to successfully use the group's
products. In 1997, 1996 and 1995, 31%, 28% and 29%, respectively, of the
Company's revenue consisted of services revenue.
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PRODUCT DEVELOPMENT
Each domestic division within Sterling Software's Systems Management,
Applications Management and Federal Systems groups has its own development
function. Sterling Software's product development programs in each of these
divisions include the enhancement of existing products and introduction of new
products based upon current and anticipated customer needs. The Company
believes that this organizational structure facilitates development cost
control and focuses the development function on the customer's needs.
Approximately 400 of Sterling Software's employees were engaged in product
development at September 30, 1997. Gross product development costs in 1997,
1996 and 1995 were $42,421,000, $36,448,000 and $39,359,000, respectively, of
which the Company capitalized $19,307,000, $15,527,000 and $11,657,000,
respectively, as the cost of developing and testing new or significantly
enhanced software products.
Most of the products currently offered by the Company are Year 2000
compliant, with the remaining currently offered products expected to become
compliant in 1998 through new releases. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Other Matters".
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 domestic division within the Systems Management and Applications
Management groups has its own United States sales and marketing organization.
In addition, the Systems Management and Applications Management groups have
divisions and business units which focus specifically on the international
marketplace for their respective product lines. Additionally, the Federal
Systems Group has its own sales organization which focuses specifically on
specialized IT service offerings to the federal IT market.
CUSTOMERS
Sterling Software's customers include approximately 95 of the 100 largest,
and approximately 400 of the 500 largest, U.S. industrial and service
corporations, ranked by 1996 revenues as reported in Fortune magazine. In the
year ended September 30, 1997, agencies, branches, and departments of the
federal government accounted for approximately 25% 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 comparable Sterling Software products. Also, competition
within the Company's federal business is increasing because of continued
federal budget constraints and cutbacks. In addition, continuing consolidation
among providers of technical services to the federal government is increasing
the size and market presence of many of the Company's competitors in this
market segment.
Sterling Software believes that its products will continue to be selected 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.
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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. The market for highly qualified
personnel in the IT industry is extremely competitive, making it difficult for
companies in this industry, including Sterling Software, to attract and retain
qualified employees. 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, 1997, the Company employed approximately 3,100 people.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright, patent and
trademark laws, confidentiality procedures and contractual provisions to
protect its intellectual property rights. The Company routinely enters into
nondisclosure and confidentiality agreements with employees, contractors,
consultants, vendors and customers, and its software licenses generally
prohibit the unauthorized use or disclosure of the Company's proprietary
intellectual property rights. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as the laws of the United
States. In general, however, management believes that the competitive position
of the Company depends primarily on the skill, knowledge, creativity and
experience of Sterling Software's personnel and their ability to develop,
market and support software products, and that its business is not materially
dependent on copyright protection, trademarks or patents.
The Company does not believe that any of its products infringe on the valid
proprietary rights of third parties in any material respect. However, a large
number of patents, trademarks and copyrights have been, and are being, issued,
registered or asserted in the software industry and there can be no assurance
that the Company is aware of all such intellectual property rights that may
pose a risk of infringement by the Company's products, especially with respect
to United States patents, which can cover extremely broad concepts and the
applications for which are confidential until the patents are issued.
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 significant 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 financial position or results of operations.
The COOL, VISION, SAMS, VM and SOLVE families of product names and the marks
"Sterling Software" and "Business-Centric Automation" 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
8
<PAGE>
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, 1997 and
1996, was $240,485,000 and $170,912,000, respectively. Of these amounts, 96%
and 97%, 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, 1997 and 1996, was $113,981,000 and $65,951,000,
respectively. Approximately $104,019,000 of the September 30, 1997 backlog is
expected to be realized in the year ending September 30, 1998.
EXECUTIVE OFFICERS
The following information regarding the executive and other officers of
Sterling Software is as of November 15, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Sam Wyly 63 Chairman of the Board and Director
Charles J. Wyly, Jr. 64 Vice Chairman of the Board and Director
Sterling L. Williams 54 President, Chief Executive Officer and Director
Geno P. Tolari 54 Executive Vice President and Chief Operating Officer
Werner L. Frank 68 Executive Vice President
M. Gene Konopik 54 Executive Vice President and Group President
Jeannette P. Meier 50 Executive Vice President, Finance and Administration and Secretary
F.L. "Mike" Harvey 59 Senior Vice President and Group President
Don J. McDermett, Jr. 39 Senior Vice President and General Counsel
B. Carole Morton 51 Senior Vice President and Division President
Gillian M. Parrillo 50 Senior Vice President and Group President
R. Logan Wray 38 Senior Vice President and Chief Financial Officer
Ivan S. Hughes(1) 45 Vice President, Organizational Development
Pamela L. Isbell(1) 38 Vice President, Financial Planning
Julie Kupp(1) 34 Vice President, Investor Relations
Evan A. Wyly 35 Vice President and Director
Laura Appling(1) 35 Controller
Susan D. Tiholiz(1) 49 Treasurer
</TABLE>
--------
(1) Although Ivan S. Hughes, Pamela L. Isbell, Julie Kupp, Laura Appling
and Susan D. Tiholiz are officers of the Company, the Company does not
consider such employees to be "executive officers" of the Company, as
that term is defined in regulations promulgated by the Securities and
Exchange Commission (the "Commission").
Sam Wyly co-founded Sterling Software in 1981 and since such time has served
as Chairman of the Board and a director. In 1963, Mr. Wyly founded University
Computing Company, a computer software and services company, and served as
President or Chairman from 1963 until 1979. University Computing created a
computer utility network, one of the earliest and most successful marriages of
computing and telecommunications. University Computing 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
9
<PAGE>
approximately 600 restaurants by 1989, during which time Sam Wyly served as
Chairman. Sam Wyly currently serves as Chairman of Michaels Stores, Inc.
("Michaels Stores"), a specialty retail chain (which has grown from 70 to 525
stores in 13 years of Wyly control), a director of Sterling Commerce, and as a
partner 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 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. He served as an
officer and director of University Computing Company, a computer software and
services company, from 1964 to 1975, including President from 1969 to 1973. Mr.
Wyly and his brother, Sam Wyly, founded Earth Resources Company, an oil
refining and silver mining 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 and as a director of Sterling Commerce. Charles J. Wyly, Jr.
is the father-in-law of Donald R. Miller, Jr., a director of the Company. Mr.
Wyly is a member of the Executive Committee and the 1996 Stock Option Committee
of the Board.
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. From December 1995 to October 1996 Mr.
Williams served as Chief Executive Officer of Sterling Commerce. He 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 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 served as President of the Systems Management Group from December
1994 until February 1997 and 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, Finance &
Administration of Sterling Software since May 1997 and as Secretary since 1985.
Prior to May 1997, she served as Executive Vice President (since July 1993), as
Chief Financial Officer (since June 1996) and as General Counsel (since 1985)
of Sterling Software. Prior to July 1993, Ms. Meier served as Senior Vice
President of Sterling Software. Ms. Meier also serves as Executive Vice
President of Sterling Commerce.
F.L. "Mike" Harvey has served as a Senior Vice President of Sterling Software
since June 1997 and as President of the Applications Management Group since
October 1996. From March 1993 through June 1997, he served as President of
Omega Consulting Group Inc., a software consulting company, and from February
1992 to February 1993 he served as Vice President of Restrac Inc., a human
resources software company.
Don J. McDermett, Jr. has served as Senior Vice President and General Counsel
of Sterling Software since May 1997. From July 1996 until May 1997 he served as
Vice President, Legal of Sterling Software. Prior to that
10
<PAGE>
time Mr. McDermett was employed for 12 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.
B. Carole Morton has served as a Senior Vice President of Sterling Software
and President of Sterling Software's Information Management Division since
October 1995. From October 1996 through June 1997 she also served as President
of the former Information Management Group. 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.
Gillian M. Parrillo has served as a Senior Vice President of Sterling
Software since February 1997 and as President of Sterling Software's Systems
Management Group since July 1997. Ms. Parrillo served as Group President of
the former International Group from February 1997 until July 1997 and as
President of the Storage Management Division from October 1995 until February
1997. She served as President of the former Distributor Division from July
1993 until September 1995. Prior to July 1993, Ms. Parrillo served as Vice
President of Distributor Operations for Systems Center, Inc.
R. Logan Wray has served as Senior Vice President and Chief Financial
Officer of the Company since May 1997. Prior to that time he was employed by
Ernst & Young LLP, a national accounting firm, having been a partner in that
firm since 1994.
Ivan S. Hughes has served as Vice President, Organizational Development of
the Company since June 1997. Prior to joining the Company he was employed for
19 years by Texas Instruments Incorporated, where he served as Human Resources
Director for TI Software from July 1995 to June 1997 and as Human Resources
Director for the European, Middle Eastern and African operations of TI
Software from June 1992 to July 1995.
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.
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, a national accounting firm, most
recently as Audit Senior Manager.
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. He has been
a Managing Partner of Maverick Capital, Ltd., an investment fund management
company, since 1991. In 1988, Mr. Wyly founded Premier Partners Incorporated,
a private investment firm, and served as President prior to joining Maverick
Capital, Ltd. Mr. Wyly also serves as a director of Sterling Commerce and as a
director and officer of Michaels Stores, a specialty retail chain.
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.
Susan D. Tiholiz has served as Treasurer of the Company since November 1997.
She served as Director of Treasury from June 1996 until November 1997 and as a
consultant to the Company from December 1995 to June 1996. Prior to joining
the Company, Ms. Tiholiz was employed for 17 years by Atlantic Richfield
Company (ARCO), a global energy company, serving in various capacities within
finance, treasury and human resources, most recently as a financial manager in
its domestic natural gas marketing unit.
11
<PAGE>
ITEM 2. PROPERTIES.
With its principal executive office located in Dallas, Texas, the Company
leases offices and facilities in or near more than 70 cities in the United
States and worldwide. Headquarters offices for the Company's groups and
divisions are located in the following cities: Bellevue, Nebraska; London,
England; McLean, Virginia; Paris, France; Plano, Texas; Rancho Cordova,
California; Redwood City, California; Reston, Virginia; Sydney, Australia; and
Woodland Hills, California. Other major United States and international
facilities are located in Amsterdam, The Netherlands; Atlanta, Georgia;
Brussels, Belgium; Dusseldorf, Germany; Herndon, Virginia; Milan, Italy; San
Bernardino, California; Tokyo, Japan and Wiesbaden, Germany.
ITEM 3. LEGAL PROCEEDINGS.
On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare"), in a stock-for-stock acquisition. On March 14, 1995, 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 the
potential liability of the Company's wholly owned subsidiary that was the
surviving corporation in the KnowledgeWare merger, Sterling Software may have
an indemnity obligation with respect to certain individuals who may be subject
to the Commission's investigation. While any legal investigation or proceeding
involves inherent uncertainty, Sterling Software's management believes based
upon presently available information that the ultimate resolution of the
Commission's investigation will not materially affect the financial condition
or results of operations of the Company.
The Company is also subject to certain legal proceedings and claims that
arise in the normal course of its business. In the opinion of management, the
amount of the liability, if any, ultimately incurred by Sterling Software with
respect to any existing proceedings and claims, 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.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.10 per share ("Common Stock"), is
traded on the New York Stock Exchange under the symbol "SSW". The high and low
sales prices for the Common Stock for the periods indicated are set forth
below.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended September 30, 1997(1):
Quarter Ended:
December 31, 1996............................................ $34 5/8 $28 1/4
March 31, 1997............................................... $32 5/8 $27 1/4
June 30, 1997................................................ $33 5/8 $27 3/8
September 30, 1997........................................... $36 3/4 $30 7/8
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
</TABLE>
- --------
(1) The sales prices for all periods subsequent to September 30, 1996 reflect
the tax-free Distribution by Sterling Software of all shares of Commerce
Stock held by Sterling Software to record holders of Common Stock on the
close of business on that date. Stockholders received 1.59260 shares of
Commerce Stock for each share of Common Stock owned as of that date.
At November 10, 1997, the Company had approximately 1,022 holders of record
of Common Stock.
With the exception of the tax-free Distribution of shares of Commerce Stock
to the Company's stockholders on September 30, 1996, the Company did not pay
dividends on the Common Stock during the two years ended September 30, 1997 and
does not expect to pay dividends in the foreseeable future.
13
<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
--------------------------------------------------
1997(1) 1996 1995(2) 1994 1993(3)
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenue.................. $ 488,978 $ 439,171 $396,311 $325,903 $303,207
Cost of sales............ 199,806 182,239 160,735 143,889 149,454
Product development and
enhancement............. 23,114 20,921 27,702 20,505 20,919
Selling, general and
administrative.......... 197,341 175,237 147,552 112,380 115,403
Income from continuing
operations before
reorganization costs,
purchased research and
development, other
income (expense), income
taxes, extraordinary
item and cumulative
effect of a change in
accounting principle.... 68,717 60,774 60,322 49,129 17,431
Reorganization costs..... 106,037 19,512 87,622
Purchased research and
development............. 137,849 62,000
Income (loss) from
continuing operations
before income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle............... (136,396) 84,886 (18,656) 46,346 (73,153)
Income (loss) from
continuing operations
before extraordinary
item and cumulative
effect of a change in
accounting principle.... (132,968) 60,598 (33,656) 30,586 (48,041)
Income from discontinued
operations, net of
taxes................... 51,187 42,930 27,753 15,194
Gain on the initial
public offering of
subsidiary, net of
taxes................... 126,103
Income (loss) applicable
to common stockholders.. (132,968) 237,888 9,129 58,143 (38,106)
Average common shares
outstanding............. 38,494 32,316 23,649 19,812 17,507
Per common share data:
Income (loss) from
continuing operations
before extraordinary
item and cumulative
effect of a change in
accounting principle:
Primary................ (3.45) 1.78 (1.43) 1.33 (2.80)
Fully diluted.......... (3.45) 1.73 (1.43) 1.29 (2.80)
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle:
Primary................ (3.45) 6.98 .39 2.54 (1.93)
Fully diluted.......... (3.45) 6.65 .39 2.31 (1.93)
Net income (loss):
Primary................ (3.45) 6.98 .39 2.54 (2.18)
Fully diluted.......... (3.45) 6.65 .39 2.31 (2.18)
Balance sheet data:
Working capital.......... $ 558,746 $ 732,918 $218,713 $122,961 $ 57,106
Total assets............. 1,065,658 1,097,613 657,711 444,661 364,087
Long-term debt........... 116,668 115,932 117,532
Other noncurrent liabili-
ties.................... 49,249 36,397 21,845 18,867 18,331
Stockholders' equity..... 748,254 879,491 348,338 175,804 97,697
</TABLE>
14
<PAGE>
- --------
(1) On June 30, 1997, Sterling Software completed the acquisition of TI
Software for approximately $214,774,000 including costs directly related
to the acquisition. The acquisition was accounted for in accordance with
the purchase method of accounting and, accordingly, the results of
operations of TI Software are included in the Company's results of
operations from the date of acquisition. The 1997 results of operations
include $137,849,000 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 the
purchase method of accounting. The 1997 results of operations also include
reorganization costs of $106,037,000 primarily related to the
reorganization of the Company's operations in connection with the
acquisition of TI Software and the termination of the Company's
International Distributor Agreement with Sterling Commerce. These
reorganization costs also include the write-down of certain excess cost
over net assets acquired related to the Company's federal systems
business. The tax benefit related to the purchased research and
development and reorganization costs was $39,737,000. See Item. 7
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Business Combinations, Divestitures and Reorganizations"
and Notes 2 and 3 of Notes to Consolidated Financial Statements.
(2) The 1995 results of operations include $62,000,000 of purchased research
and development costs charged to expense in accordance with the purchase
method of accounting in connection with the merger of the Company with
KnowledgeWare, as well as $19,512,000 of reorganization costs primarily
related to the reorganization of the Company's operations in connection
with the merger. See Note 2 of Notes to Consolidated Financial Statements.
(3) The 1993 results of operations include $87,622,000 of reorganization costs
primarily related to the reorganization of the Company's operations in
connection with the combination of Sterling Software and Systems Center,
Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BUSINESS COMBINATIONS, DIVESTITURES AND REORGANIZATIONS
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the
"Acquisition") of certain assets (including the capital stock of certain
foreign subsidiaries) of Texas Instruments Incorporated ("Texas Instruments").
Such assets constitute substantially all of the assets used by TI Software in
its business of developing, marketing, licensing, supporting and maintaining
application development software and providing related consulting services.
The results of operations of TI Software are included in the Company's results
of operations from the date of the Acquisition.
The cash purchase price paid for such assets was $165,000,000 and was funded
from the Company's available cash balances. The total cost of the Acquisition
was approximately $214,774,000, including costs directly related to the
Acquisition of approximately $49,774,000, consisting of employee termination
costs, transaction costs, costs associated with the elimination of duplicate
facilities and other direct costs. Results of operations for 1997 include
$137,849,000 of purchased research and development costs, which is the portion
of the purchase price attributed to in-process research and development, and
which was charged to expense in accordance with the purchase method of
accounting.
Termination of International Distributor Agreement
Sterling Commerce, formerly a wholly owned subsidiary of Sterling Software
formed to operate the business of Sterling Software's former Electronic
Commerce Group, completed the Offering of 13,800,000 shares of Commerce Stock
on March 13, 1996. In anticipation of the Offering, Sterling Software and
Sterling Commerce entered into the International Distributor Agreement
pursuant to which Sterling Software acted as the exclusive distributor of
certain Sterling Commerce products in markets outside the United States and
Canada. Effective as
15
<PAGE>
of June 30, 1997, Sterling Software and Sterling Commerce entered into an
agreement terminating the International Distributor Agreement.
Contemporaneously with such termination, Sterling Software sold to Sterling
Commerce certain of the assets formerly used by Sterling Software in
connection with the distribution of certain Sterling Commerce products outside
the United States and Canada. In addition, Sterling Software and Sterling
Commerce entered into certain short-term transitional arrangements relating to
facilities sharing and administrative and other services.
In consideration of the termination of the International Distributor
Agreement and the sale of assets described above, Sterling Commerce (i) paid
to Sterling Software $5,226,000 on June 30, 1997, (ii) subsequently paid to
Sterling Software $10,076,000, which was equal to the net book value of the
acquired assets and (iii) assumed certain liabilities of Sterling Software.
Reorganization Costs
The Company's results of operations for 1997 include reorganization costs of
$106,037,000 primarily related to the reorganization of the Company's
operations in connection with the Acquisition and the termination of the
Company's International Distributor Agreement with Sterling Commerce. These
reorganization costs also include the write-down of certain excess cost over
net assets acquired related to the Company's federal systems business.
Of the total reorganization costs, approximately $63,726,000 is a non-cash
cost and the remaining $42,311,000 requires cash outlays. Currently, the
Company does not expect to incur costs related to this reorganization in
excess of the amount charged to operations in 1997.
SUBSIDIARY INITIAL PUBLIC OFFERING AND SPIN-OFF
Sterling Commerce 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.
On September 30, 1996, Sterling Software completed the spin-off of Sterling
Commerce with the pro rata Distribution of its remaining 81.6% ownership in
Sterling Commerce to Sterling Software's stockholders by means of a tax-free
dividend. Holders of record of Common Stock as of the close of business on
September 30, 1996 received 1.59260 shares of Commerce Stock for each share of
Common 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.
RESULTS OF OPERATIONS
The results of operations of Sterling Commerce for 1996 and 1995 have been
classified as discontinued operations in the accompanying Consolidated
Financial Statements.
1997 Compared to 1996
Total revenue increased $49,807,000, or 11%, in 1997 over 1996 due to
increases in all three of the Company's business segments. Total revenue
generated from Sterling Software's international operations was $179,880,000
and $167,845,000 in 1997 and 1996, respectively, representing an increase of
$12,035,000, or 7%, primarily due to increases in the systems management
business segment (up 4%) and in the applications management business segment
(up 35%). The significant increase in international revenue from the
applications management business segment is primarily attributable to revenue
from the new Applications International
16
<PAGE>
Division, which includes the international operations that were acquired in
the Acquisition. The increase in international revenue from Sterling
Software's products and services was partially offset by a decline in revenue
from sales of Sterling Commerce's interchange and communications software
products and services due to the termination of the International Distributor
Agreement during 1997. In addition, international operating results were
adversely impacted by foreign currency exchange rate fluctuations in 1997, as
a result of a stronger U.S. dollar. Had foreign currency exchange rates
remained consistent with the previous year, international revenue would have
been higher in 1997 by approximately $11,000,000. Revenue from the Company's
international operations represented 37% of total revenue for 1997 and 38% for
1996. The Company currently expects revenue from its international operations
to constitute a larger percentage of the Company's total revenue in future
reporting periods.
The Company's recurring revenue includes revenue from 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 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 represented 52% of total revenue
in 1997 compared to 54% in the 1996.
Revenue from the systems management business segment increased $13,875,000,
or 8%, in 1997 over 1996 primarily due to an increase of 15% in products
revenue partially offset by a slight decline in product support revenue. The
increase in products revenue was mainly attributable to strong domestic and
international product sales in the operations management and storage
management product lines. Approximately 49% of the systems management business
segment's 1997 revenue was derived from the Company's international
operations, compared to 51% in 1996.
Revenue from the applications management business segment increased
$33,138,000, or 30% in 1997 over 1996 due to a 20% increase in products
revenue, a 13% increase in product support revenue and a 161% increase in
services revenue. The significant increase in revenue from the applications
management business segment is primarily attributable to revenue from the new
Applications Development and Applications International divisions, which
include the domestic and international operations that were acquired in the
Acquisition. Approximately 37% of the applications management business
segment's 1997 revenue was derived from the Company's international
operations, compared to 35% in 1996.
Revenue from the federal systems business segment increased $9,602,000 or
9%, due to higher contract billings in both the Information Technology
Division and the Scientific Systems Division and due to a contract with the
intelligence community added to the Company's federal systems business segment
as a result of the Acquisition. In June 1997, NASA announced that the
Scientific Systems Division was not selected for continuation of a contract
with NASA's Ames Research Center for Federal Information Processing Services;
however, the selection of another bidder was later rescinded. Although the
final outcome of this procurement remains uncertain, the Company continues to
perform services for NASA's Ames Research Center under an extension of the
existing contract.
Total costs and expenses increased $285,750,000 in 1997 compared to 1996.
Excluding the Acquisition-related reorganization costs of $106,037,000 and the
write-off of purchased research and development costs of $137,849,000 in 1997,
total costs and expenses increased $41,864,000, or 11%, in 1997 compared to
1996.
Total cost of sales increased $17,567,000, or 10%, in 1997 compared to 1996,
commensurate with the increase in revenue. Cost of sales represented 41% of
revenue in 1997 and 1996.
Product development expense for 1997 was $23,114,000, net of $19,307,000 of
capitalized software costs, as compared with 1996 product development expense
of $20,921,000, net of $15,527,000 of capitalized software costs. Gross
product development expense was 12% of non-federal revenue in 1997 compared
with 11% in 1996. Capitalized development costs represented 46% and 43% of
gross development costs in 1997 and 1996,
17
<PAGE>
respectively. Product development expenses and the capitalization rate
historically have fluctuated, and may in the future continue to fluctuate,
from period to period depending in part upon the number and status of software
development projects which are in process.
Selling, general and administrative expense increased $22,104,000, or 13%,
in 1997 compared to 1996 and represented 40% of revenue in both 1997 and 1996.
Interest expense decreased $2,821,000 in 1997 compared to 1996 due to the
redemption in 1996 of the Company's 5.75% Convertible Subordinated Debentures
(the "Debentures"). See Note 10 of Notes to Consolidated Financial Statements.
Investment income increased $12,048,000 in 1997 over 1996 as a result of
higher average cash and cash equivalents and marketable securities balances.
The Company's loss from continuing operations before taxes was $136,396,000
in 1997 as compared to income from continuing operations before taxes of
$84,886,000 in 1996. Excluding the $137,849,000 charge for purchased research
and development and the $106,037,000 of reorganization costs, income from
continuing operations before taxes increased $22,604,000, or 27%, in 1997
compared to 1996 primarily due to higher operating profits in all three of the
Company's business segments and increases in investment income.
The Company's effective tax rate for the year ended September 30, 1997 was
34% before the net tax benefit related to the reorganization costs and
purchased research and development costs, as described above, compared to an
effective tax rate of 29% for 1996. The effective tax rate benefit for the
year ended September 30, 1997 of 3% significantly varies from the U.S.
statutory rate due primarily to technology acquired in jurisdictions with a
statutory rate below the U.S. rate and the write-down of excess cost over net
assets acquired recorded in connection with previous acquisitions.
Income from discontinued operations, net, for 1996 represents the
classification of the results of operations of Sterling Commerce as
discontinued. See Note 3 of Notes to Consolidated Financial Statements.
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. See
"Business Combinations, Divestitures and Reorganizations--Termination of
International Distributor 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. Had
foreign currency exchange rates remained consistent with the previous year,
international revenue would have been higher in 1996 by approximately
$2,000,000. Revenue from the Company's international operations represented
38% of total revenue in both 1996 and 1995. The Company's recurring revenue,
as described above, represented 54% of total revenue in 1996 compared to 55%
of total revenue in 1995.
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. In addition, the applications management
business segment revenue increase was partially offset by decreases in
products and product support revenue in the application development product
line and by a decline in consulting services
18
<PAGE>
revenue due to the elimination of the Consulting Services Division during
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. Excluding the reorganization costs of $19,512,000 and purchased research
and development costs of $62,000,000, in connection with the merger of the
Company with KnowledgeWare 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%, in 1996 compared to 1995,
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
capitalized software costs, decreased $6,781,000 from 1995 primarily due to a
reduction of gross development costs in the applications management business
segment. 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. Product development
expenses and the capitalization rate historically have fluctuated, and may in
the future continue to fluctuate, from period to period depending in part upon
the number and status of software development projects which are in process.
Selling, general and administrative expense increased $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.
Interest expense decreased $5,221,000 in 1996 compared to 1995 primarily due
to the redemption in 1996 of the Debentures. See Note 10 of Notes to
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 primarily 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 is due to reorganization costs of $19,512,000 and $62,000,000 of
purchased research and development costs related to the merger with
KnowledgeWare and expensed in accordance with the purchase method of
accounting. Excluding the reorganization costs and the write-off of purchased
research and development costs in 1995, income 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 and losses from the sale of certain electronic commerce products
internationally.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$558,746,000 of working capital at September 30, 1997, which includes
$435,726,000 of cash and equivalents and $206,965,000 of marketable
securities. For the year, net cash flows from operations were $124,703,000.
Cash flows from operations, together with other available cash, were used to
fund the Acquisition and related costs and to fund additions to property and
equipment and capitalized software.
The total cost of the Acquisition was approximately $214,774,000, including
costs directly related to the Acquisition of approximately $49,774,000. The
Company's 1997 results of operations include reorganization costs of
$106,037,000 primarily related to the reorganization of the Company's
operations in connection with
19
<PAGE>
the Acquisition and the termination of the International Distributor Agreement
with Sterling Commerce. Of the total reorganization costs, approximately
$63,726,000 consisted of non-cash costs and the remaining $42,311,000 required
cash outlays. Of the aggregate $92,085,000 of costs directly related to the
Acquisition and reorganization costs requiring cash outlays, approximately
$40,539,000 had been paid at September 30, 1997.
Capitalized software expenditures in 1997 were $19,418,000, primarily for
the development of the Company's products and enhancements, compared to
$15,852,000 in 1996.
Effective July 1, 1997, the Company entered into an amended Revolving Credit
Agreement ("Credit Agreement") with an unsecured borrowing capacity of
$35,000,000. The Credit Agreement requires that certain financial ratios be
maintained. Borrowings under the Credit Agreement will bear interest at the
lower of the lender's base rate or the Eurodollar lending rate plus one-half
percent and will mature on June 30, 2000. No amounts were borrowed during 1997
or outstanding under the Credit Agreement at September 30, 1997. At September
30, 1997, after the utilization of approximately $1,443,000 for standby
letters of credit, approximately $33,557,000 was available for borrowing under
the Credit Agreement. Certain of the Company's foreign subsidiaries have
separate lines of credit totaling $21,305,000 that are used for foreign
exchange exposure management and working capital requirements. These lines of
credit are guaranteed by Sterling Software, Inc. At September 30, 1997,
$1,081,000 was outstanding pursuant to these foreign lines of credit.
During 1996, Sterling Software received proceeds of approximately
$276,637,000 from the exercise of approximately 9,222,000 employee stock
options and warrants. Also in 1996, the Company sold to the public 12,000,000
of its 73,200,000 shares of Commerce Stock resulting in net proceeds to the
Company of approximately $265,458,000, after deducting underwriting discounts
and commissions and the Company's pro rata share of Offering expenses.
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,
effective February 12, 1996. Approximately $114,912,000 principal amount of
the Debentures were converted into 4,056,000 shares of Common Stock.
On October 2, 1995, the Company renewed a share repurchase program
authorizing the repurchase of shares of its Common Stock from time to time
through open-market transactions. From October 2, 1995 to March 31, 1996,
approximately 1,336,000 shares of Common Stock were repurchased under the
program for an aggregate purchase price of approximately $59,372,000. No
shares of Common Stock have been repurchased subsequent to March 31, 1996, and
it is the Company's present intention not to resume the repurchase of Common
Stock.
At September 30, 1997, the Company's existing capital commitments consisted
primarily 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 credit 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, or increased sales of, its products and
services.
The assets and liabilities of the Company's 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
20
<PAGE>
exposure through decentralized sales, marketing and support operations and
through international development facilities, in which substantially all costs
are local-currency based. In the past, the Company has entered, 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 reorganization and purchased research and development costs. The impact
of future acquisitions on continued growth in revenue and operating profit
cannot presently be determined.
As widely reported, all users of IT systems are contending with the "Year
2000" compliance issue, i.e., the issue of whether those systems are capable
of processing without error or interruption date-related data from more than
one century. The Company does not expect to incur significant expense in
ensuring that its internal IT systems are Year 2000 compliant, nor does it
anticipate any significant difficulties in attaining such compliance. In
addition, most of the products currently offered by the Company are Year 2000
compliant, with the remaining currently offered products expected to become
compliant in 1998 through new releases. Because Year 2000 compliance is
integrated into its normal product development activities, the Company does
not expect to incur any significant incremental expense in addressing the Year
2000 compliance issue in its products. The Company's products operate on and
in IT systems consisting of third party hardware and software, some of which
may not be fully Year 2000 compliant. Regardless of whether the Company's
products are Year 2000 compliant, there can be no assurance that customers
will not assert Year 2000 related claims against the Company.
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, and information currently
available to, the Company's management, as well as estimates and assumptions
made by the Company's management. When used in SEC Filings, words such as
"anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and
similar 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, competitors, and
legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying estimates or assumptions prove incorrect, actual results
or outcomes may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not required.
21
<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............................................ 23
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and 1996........... 24
Consolidated Statements of Operations for the Years Ended September 30,
1997, 1996 and 1995.................................................... 25
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995...................................... 26
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.................................................... 27
Notes to Consolidated Financial Statements.............................. 28
</TABLE>
22
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. Our
audits 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,
1997. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 the Company at
September 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1997 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.
/s/ Ernst & Young LLP
Dallas, Texas
November 7, 1997
23
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 435,726 $ 524,237
Marketable securities............................... 206,965 231,919
Accounts and notes receivable, net.................. 149,422 133,383
Income tax receivable............................... 9,941 8,000
Prepaid expenses and other current assets........... 24,847 17,104
---------- ----------
Total current assets.............................. 826,901 914,643
Property and equipment, net........................... 48,598 39,330
Computer software, net of accumulated amortization of
$87,258 in 1997 and $84,099 in 1996.................. 70,422 57,488
Excess cost over net assets acquired, net of
accumulated amortization of $20,650 in 1997 and
$26,128 in 1996...................................... 84,701 69,504
Noncurrent deferred income taxes...................... 22,130 2,986
Other assets.......................................... 12,906 13,662
---------- ----------
$1,065,658 $1,097,613
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............ $ 172,700 $ 77,737
Amounts due to Sterling Commerce, Inc............... 35,134
Deferred revenue.................................... 95,455 68,854
---------- ----------
Total current liabilities......................... 268,155 181,725
Noncurrent deferred revenue........................... 20,432 15,778
Other noncurrent liabilities.......................... 28,817 20,619
Contingencies and commitments
Stockholders' equity:
Common stock, $.10 par value; 75,000,000 shares
authorized; 39,904,000 and 39,807,000 shares issued
in 1997 and 1996, respectively..................... 3,990 3,981
Additional paid-in capital.......................... 806,021 804,451
Retained earnings (deficit)......................... (3,506) 130,156
Less treasury stock, at cost; 1,352,000 and
1,372,000 shares in 1997 and 1996, respectively.... (58,251) (59,097)
---------- ----------
Total stockholders' equity........................ 748,254 879,491
---------- ----------
$1,065,658 $1,097,613
========== ==========
</TABLE>
See accompanying notes.
24
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Revenue:
Products..................................... $ 210,434 $192,464 $168,300
Product support.............................. 129,426 123,401 113,752
Services..................................... 149,118 123,306 114,259
--------- -------- --------
488,978 439,171 396,311
Costs and expenses:
Cost of sales:
Products and product support................. 69,783 72,201 57,726
Services..................................... 130,023 110,038 103,009
--------- -------- --------
199,806 182,239 160,735
Product development and enhancement.......... 23,114 20,921 27,702
Selling, general and administrative.......... 197,341 175,237 147,552
Reorganization costs......................... 106,037 19,512
Purchased research and development........... 137,849 62,000
--------- -------- --------
664,147 378,397 417,501
--------- -------- --------
Income (loss) from continuing operations before
other income (expense) and income taxes....... (175,169) 60,774 (21,190)
Other income (expense):
Interest expense............................. (540) (3,361) (8,582)
Investment income............................ 38,902 26,854 8,997
Other........................................ 411 619 2,119
--------- -------- --------
38,773 24,112 2,534
--------- -------- --------
Income (loss) from continuing operations before
income taxes.................................. (136,396) 84,886 (18,656)
Provision (benefit) for income taxes........... (3,428) 24,288 15,000
--------- -------- --------
Income (loss) from continuing operations....... (132,968) 60,598 (33,656)
Discontinued operations, net of applicable in-
come taxes:
Income from discontinued operations, net...... 51,187 42,930
Gain on the initial public offering of subsid-
iary, net.................................... 126,103
--------- -------- --------
177,290 42,930
--------- -------- --------
Net income (loss).............................. (132,968) 237,888 9,274
Preferred stock dividends...................... 145
--------- -------- --------
Income (loss) applicable to common stockhold-
ers........................................... $(132,968) $237,888 $ 9,129
========= ======== ========
Income (loss) per common share:
Income (loss) from continuing operations
Primary.................................... $ (3.45) $ 1.78 $ (1.43)
========= ======== ========
Fully diluted.............................. $ (3.45) $ 1.73 $ (1.43)
========= ======== ========
Net income (loss)
Primary.................................... $ (3.45) $ 6.98 $ .39
========= ======== ========
Fully diluted.............................. $ (3.45) $ 6.65 $ .39
========= ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(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, 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........... 3,431 343 88,505 88,848
Issuance of common stock to
retirement plan.............. 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........... 9,222 922 322,827 323,749
Issuance of common stock
pursuant to conversion of
5.75 % Debentures............ 4,056 406 111,970 112,376
Proceeds from subsidiary
initial public offering, net
of minority interest of
$7,382....................... 32,736 32,736
Distribution of subsidiary.... (113,549) (113,549)
Issuance of common stock to
retirement plan.............. 127 (20) 857 984
Adjustment to unrealized
gains (losses) on available-
for-sale securities, net of
tax.......................... (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
Net loss...................... (132,968) (132,968)
Issuance of common stock
pursuant to stock options,
including tax benefit of
$450......................... 104 10 1,865 1,875
Issuance of common stock to
retirement plan.............. (295) (20) 845 550
Adjustment to unrealized
gains (losses) on available-
for-sale securities, net of
tax.......................... 2,381 2,381
Other......................... (7) (1) (3,075) 1 (3,075)
------ ------ -------- -------- ------ -------- --------
Balance at September 30, 1997.. 39,904 $3,990 $806,021 $ (3,506) 1,352 $(58,251) $748,254
====== ====== ======== ======== ====== ======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................. $(132,968) $237,888 $ 9,274
Less: Income from discontinued operations..... (177,290) (42,930)
--------- -------- --------
Income (loss) from continuing operations...... (132,968) 60,598 (33,656)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization............... 34,520 31,599 27,916
Provision for losses on accounts
receivable................................. 3,950 4,857 4,351
(Benefit) provision for deferred income
taxes...................................... (19,145) 11,411 9,851
Purchased research and development.......... 137,849 62,000
Reorganization costs........................ 63,726 8,925
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Decrease (increase) in accounts and notes
receivable............................... 28,294 (3,153) (25,757)
(Decrease) increase in amounts due to
Sterling Commerce, Inc. ................. (35,134) 35,134
Increase in prepaid expenses and other
assets................................... (1,095) (16,109) (4,973)
Increase (decrease) in accounts payable,
accrued liabilities and income taxes
payable.................................. 38,034 (61,541) (4,852)
Increase in deferred revenue.............. 183 546 9,088
Other..................................... 6,489 (2,181) 146
--------- -------- --------
Net cash provided by operating
activities............................. 124,703 61,161 53,039
Investing activities:
Purchases of property and equipment........... (26,631) (11,991) (22,467)
Purchases and capitalized cost of development
of computer software......................... (19,418) (15,852) (12,287)
Business acquisitions, net of cash acquired... (194,871) (7,001) (15,090)
Purchases of investments...................... (255,888) (576,299) (143,827)
Proceeds from sales of investments............ 284,703 406,072 129,749
Other......................................... 584 379 (88)
--------- -------- --------
Net cash used in investing activities... (211,521) (204,692) (64,010)
Financing activities:
Purchases of treasury stock................... (59,372)
Preferred stock dividends..................... (145)
Retirement and redemption of debt and capital
lease obligations............................ (7,483) (13,222) (73,128)
Proceeds from issuance of debt, net of
issuance costs............................... 8,166 6,014 68,832
Net proceeds from subsidiary public offering.. 265,458
Proceeds from issuance of common stock
pursuant to the exercise of stock options and
warrants..................................... 1,425 276,637 63,597
Other......................................... (1,487) (4,162) (3,270)
--------- -------- --------
Net cash provided by financing
activities............................. 621 471,353 55,886
Cash flows provided by discontinued operations.. 17,819 32,354
Effect of foreign currency exchange rate changes
on cash........................................ (2,314) (314) 127
--------- -------- --------
(Decrease) increase in cash and equivalents..... (88,511) 345,327 77,396
Cash and cash equivalents at beginning of year.. 524,237 178,910 101,514
--------- -------- --------
Cash and cash equivalents at end of year........ $ 435,726 $524,237 $178,910
========= ======== ========
Supplemental cash flow information:
Interest paid................................. $ 540 $ 4,453 $ 7,968
========= ======== ========
Income taxes paid............................. $ 6,308 $ 91,902 $ 10,243
========= ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
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: systems management, applications management and federal systems.
Consistent with Sterling Software's decentralized operating structure, major
markets are served by independently operated business groups which consist of
divisions and business units 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.
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software after elimination of all significant intercompany balances and
transactions. Certain amounts for periods ended prior to September 30, 1997,
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and the
disclosure of contingencies at September 30, 1997 and 1996 and the results of
operations for the years ended September 30, 1997, 1996 and 1995. While
management has based their assumptions and estimates on the facts and
circumstances currently known, 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 allow customers to receive updated versions of
Sterling Software's products when and if they become available, as well as bug
fixing, and Internet and telephone access to the Company's technical personnel.
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 specialized information technology ("IT") services provided to
the federal government under multi-year contracts is recognized as the services
are performed. Revenue for services provided under other long-term contracts is
recognized using the percentage-of-completion method of accounting. Losses on
long-term
28
<PAGE>
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 ("FAS 86"), "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
Unamortized software development costs of $40,116,000 and $36,242,000 are
included in "Computer software, net" at September 30, 1997 and 1996,
respectively.
Pursuant to FAS 86, costs are capitalized when technological feasibility of
the product is established. Technological feasibility is established either
upon the completion of a detailed program design or the completion of a
working model. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
judgment by management with respect to certain external factors, including,
but not limited to, anticipated future revenues, estimated economic life and
changes in software and hardware technologies. Software development
capitalized costs include, among other things, programmers salaries and
benefits, outside contractor costs, computer time and allocated facilities
costs.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to 20 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 40 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, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $13,644 $11,463 $ 9,922
Purchased computer software........................ 6,731 5,926 4,203
Capitalized computer software development costs.... 9,605 7,871 8,505
Excess costs over net assets of businesses ac-
quired............................................ 4,278 5,839 4,894
Intangible assets.................................. 262 500 392
------- ------- -------
$34,520 $31,599 $27,916
======= ======= =======
</TABLE>
Income Taxes
The Company's income taxes are presented in accordance with the provisions
of Statement of Financial Accounting Standard No. 109 ("FAS 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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," in accounting for its
employee stock options and stock based
29
<PAGE>
awards. Under APB 25, if the exercise price of an employee's stock option
equals or exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The Company will provide pro
forma disclosures as required under Statement of Financial Accounting Standard
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation".
Earnings Per Common Share
Primary earnings per common share data is computed using the weighted average
number of common shares and common share equivalents represented by stock
options and warrants, if such stock options and warrants have a dilutive effect
in the aggregate. For purposes of this computation, income applicable to common
stockholders is adjusted to reflect use of net cash proceeds on the assumed
exercise of stock options and warrants to purchase outstanding long-term debt
or government securities, if such stock options and warrants have a dilutive
effect in the aggregate.
For the years ended September 30, 1997 and 1995, the net loss per common
share calculations for such periods is based on the weighted average number of
common shares outstanding during the year. The numbers of shares used in the
computations of net loss per common share was 38,494,000 and 23,649,000 for the
years ended September 30, 1997 and 1995, respectively. 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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 ("FAS 128"), "Earnings Per
Share," which is required to be adopted for both interim and annual financial
statements for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. This change is expected to
result in restated earnings per share as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
--------------------
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Income (loss) from continuing operations:
Basic............................................... $(3.45) $1.88 $(1.43)
Diluted............................................. $(3.45) $1.75 $(1.43)
Net income (loss):
Basic............................................... $(3.45) $7.36 $ .39
Diluted............................................. $(3.45) $6.73 $ .39
</TABLE>
Foreign Currency Translation
The assets and liabilities of the Company's 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.
Cash and Equivalents
Cash equivalents consist primarily of highly liquid investments in
investment-grade commercial paper of various issuers and repurchase agreements
backed by U.S. Treasury securities, with maturities of three months or less
when purchased. Cash equivalents are recorded at fair value.
Marketable Securities and Other Investments
The Company currently invests excess cash in a diversified portfolio of
marketable securities consisting of a variety of investment-grade securities,
including commercial paper, medium-term notes, U.S. government
30
<PAGE>
obligations and certificates of deposit. 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.
Excess Cost Over Net Assets Acquired
Excess cost over net assets acquired is amortized on a straight-line basis
over periods of seven to 40 years. The carrying amount of such costs which are
not associated with other assets acquired in a purchase business combination
is reviewed by management if facts and circumstances suggest that such amount
may be impaired. If this review indicates that the costs will not be
recoverable, as determined based on the estimated discounted future cash flows
of the entity acquired over the remaining amortization period, the carrying
amount is reduced by the estimated shortfall of cash flows. The carrying
amount of costs associated with other assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amount of those assets may not be
recoverable.
Recent Developments
In October 1997 the FASB approved the American Institute of Certified Public
Accountants Statement of Position ("SOP 97-2"), "Software Revenue
Recognition," which will be effective for transactions occurring after
September 30, 1998. The Company's accounting policy for software revenue
recognition is generally in compliance with SOP 97-2 and its adoption is not
expected to have a material impact on the financial position or results of
operations of the Company.
In June 1997 the FASB issued Statement of Financial Accounting Standard No.
130 ("FAS 130"), "Reporting Comprehensive Income". FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. FAS 130 is effective
for fiscal years beginning after December 15, 1997. The adoption of FAS 130
will require additional disclosure in the Company's financial statements but
will not have any impact on the financial position or results of operations of
the Company.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The adoption of FAS 131 is not expected to have a material impact on
the information the Company currently discloses about its business segments.
2. BUSINESS ACQUISITIONS AND REORGANIZATIONS
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the
"Acquisition") of certain assets (including the capital stock of certain
foreign subsidiaries) of Texas Instruments Incorporated ("Texas Instruments").
Such assets constituted substantially all of the assets used by Texas
Instruments' Software Division ("TI Software") in its business of developing,
marketing, licensing, supporting and maintaining
31
<PAGE>
application development software and providing related consulting services.
The results of operations of TI Software are included in the Company's results
of operations from the date of the Acquisition.
The cash purchase price paid for such assets was $165,000,000 and was funded
from the Company's available cash balances. The total cost of the Acquisition
was approximately $214,774,000, including costs directly related to the
Acquisition of approximately $49,774,000, consisting of employee termination
costs, transaction costs, costs associated with the elimination of duplicate
facilities and other direct costs. The components of the aggregate cost were
as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to Texas Instruments..................................... $165,000
TI Software employee severance and benefits........................ 28,696
Elimination of duplicate facilities and leases of TI Software...... 10,578
Transaction costs.................................................. 4,904
Other costs........................................................ 5,596
--------
$214,774
========
</TABLE>
The Acquisition has been accounted for in accordance with the purchase
method of accounting. The aggregate purchase price has been allocated to the
assets and liabilities acquired, with the remainder recorded as excess cost
over net assets acquired, based on estimates of fair values as follows (in
thousands):
<TABLE>
<S> <C>
Working capital (deficit)......................................... $(10,100)
Property and equipment............................................ 4,530
Software.......................................................... 24,054
Purchased research and development costs charged to expense....... 137,849
Other liabilities................................................. (32)
Excess cost over net assets acquired.............................. 58,473
--------
$214,774
========
</TABLE>
The estimates of fair value were determined by the Company's management
based on information furnished by the management of TI Software and an
independent valuation of acquired software and research and development. The
cost of the Acquisition which was allocable to purchased research and
development costs was charged to expense in 1997 in accordance with the
purchase method of accounting.
The following unaudited pro forma information presents the Company's results
of operations as if the Acquisition had occurred at October 1, 1996. The pro
forma information has been prepared by combining the results of operations of
the Company and TI Software for the years ended September 30, 1997 and 1996,
adjusted for the elimination of charges for purchased research and development
costs and reorganization costs, additional amortization expense and the
resulting impact on the provision for income taxes. This pro forma information
does not purport to be indicative of what would have occurred had the
Acquisition and related reorganization occurred as of that date or of results
of operations which may occur in the future (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
-----------------
1997 1996
-------- --------
<S> <C> <C>
Revenue................................................... $653,353 $709,660
Income before other income (expense) and income taxes..... $ 40,400 $ 54,146
Income from continuing operations......................... $ 50,769 $ 50,785
Income from continuing operations per share............... $ 1.28 $ 1.46
</TABLE>
32
<PAGE>
Acquisition of KnowledgeWare
On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare"), a provider of applications development software and
services, for approximately $106,000,000, in a stock-for-stock acquisition
(the "Merger") accounted for in accordance with the purchase method of
accounting. In connection with the Merger, the Company issued approximately
2,421,000 shares of the Company's common stock, par value $0.10 per share
("Common Stock"), valued at approximately $74,443,000 and reserved
approximately 340,000 shares of Common Stock for issuance upon exercise of
KnowledgeWare's options and warrants. In addition, the Company incurred costs
directly related to the Merger of approximately $31,672,000.
The results of operations of KnowledgeWare are included in the Company's
results of operations from the date of the Merger. In addition, the 1995
results of operations include $62,000,000 of purchased research and
development costs charged to expense in accordance with the purchase method of
accounting.
Reorganization Costs
The Company's 1997 results of operations include costs of $106,037,000
primarily related to the reorganization of the Company's operations in
connection with the Acquisition and the termination of the International
Distributor Agreement dated March 4, 1996 (the "International Distributor
Agreement") with Sterling Commerce, Inc. ("Sterling Commerce"), formerly a
wholly owned subsidiary of Sterling Software formed to operate the business of
Sterling Software's former Electronic Commerce Group. These reorganization
costs also include the write-down of certain excess cost over net assets
acquired related to the Company's federal systems business. Of the total
reorganization costs, approximately $63,726,000 consisted of non-cash costs
and the remaining $42,311,000 required cash outlays, $13,504,000 of which had
been paid as of September 30, 1997. The components of the reorganization costs
were as follows (in thousands):
<TABLE>
<S> <C>
Employee termination costs........................................ $ 18,539
Write-down of software products which will not be actively market-
ed............................................................... 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>
The Company's 1995 results of operations include reorganization costs of
$19,512,000 primarily related to the reorganization of the Company's
operations in connection with the Merger with KnowledgeWare. Of the total
reorganization costs, approximately $8,377,000 consisted of non-cash costs and
the remaining $11,135,000 required cash outlays, substantially all of which
had been paid as of September 30, 1996.
3. DISCONTINUED OPERATIONS
Sterling Commerce completed the initial public offering (the "Offering") of
13,800,000 shares of its common stock, par value $0.01 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 stockholders by
means of a tax-free dividend. Holders of record of Common Stock as of the
close of business on
33
<PAGE>
September 30, 1996 received 1.59260 shares of Commerce Stock for each share of
Common 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.
The results of operations of Sterling Commerce for 1996 and 1995 have been
classified as discontinued operations. The income from discontinued operations
reflected in the table below is inclusive of minority interest held by
stockholders other than Sterling Software. Summary operating results of
discontinued operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenue................................................. $267,773 $203,578
Total costs and expenses................................ $172,568 $131,550
Income before income taxes.............................. $ 96,422 $ 71,550
Income taxes............................................ $ 38,030 $ 28,620
Income from discontinued operations, net................ $ 58,392 $ 42,930
</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 then ownership interest in Sterling Commerce, the terms of such
Intercompany Agreements were not the result of arm's-length negotiation. The
Intercompany Agreements included a tax allocation agreement, an indemnification
agreement and the International Distributor Agreement. The tax allocation
agreement provides that for periods during which Sterling Commerce and/or its
subsidiaries are included in the Company'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), the Company is
required to pay to or entitled to receive from Sterling Commerce its allocable
portion of the consolidated federal and state income tax liability or refunds,
respectively. The indemnification agreement provides, among other things, 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 (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 the Company 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 provides that Sterling Commerce will indemnify the
Company and its directors, officers, employees, agents and representatives for
any liabilities resulting from or arising out of 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 the Company or its stockholders. The
International Distributor Agreement, which was terminated effective as of June
30, 1997 as described below, defined the terms pursuant to which the Company
acted as the exclusive distributor of certain Sterling Commerce products in
markets outside the United States and Canada.
Pursuant to a Termination Agreement dated June 30, 1997, by and between
Sterling Software and Sterling Commerce, the International Distributor
Agreement was terminated. Contemporaneously with such termination, Sterling
Software sold to Sterling Commerce certain of the assets formerly used by
Sterling Software in connection with the distribution of certain Sterling
Commerce products outside the United States and Canada. In addition, Sterling
Software and Sterling Commerce entered into certain short-term transitional
arrangements relating to facilities sharing and administrative and other
services.
In consideration of the termination of the International Distributor
Agreement and the sale of assets described above, Sterling Commerce (i) paid to
Sterling Software $5,226,000 on June 30, 1997, (ii) subsequently paid to
Sterling Software $10,076,000, which was equal to the net book value of the
acquired assets, and (iii) assumed certain liabilities of Sterling Software.
34
<PAGE>
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 and
receivable from Sterling Commerce arise from time to time. At September 30,
1996, the Company had amounts due to Sterling Commerce of $35,134,000, which
were remitted to Sterling Commerce subsequent to 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 liability of the Company's wholly owned subsidiary that was the
surviving corporation in the KnowledgeWare Merger, Sterling Software may have
an indemnity obligation with respect to certain individuals who may be subject
to the Commission's investigation. While any legal investigation or proceeding
involves inherent uncertainty, Sterling Software's management believes based
upon presently available information that the ultimate resolution of the
Commission's investigation will not materially affect the financial condition
or results of operations of the Company.
The Company is also subject to certain legal proceedings and claims that
arise in the normal course of its business. In the opinion of management, the
amount of the liability, if any, ultimately incurred by Sterling Software with
respect to any existing proceedings and claims, 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: systems
management, applications management and federal systems. Major markets are
represented through independently operated business segments. The systems
management business segment provides products that enable customers to ensure
the quality of service of IT applications across enterprise networked
computing environments. The applications management business segment provides
application development products and services for business modeling through
code generation, as well as products and services that enable customers to
extend the life and usefulness of legacy applications and to facilitate
enterprise information access. The federal systems business segment provides
specialized IT services to the federal government under numerous multi-year
contracts primarily in support of two major customers, the National
Aeronautics and Space Administration and the Department of Defense. Through
June 30, 1997, the Company sold, marketed and provided first-level support
outside of the United States and Canada for Sterling Commerce's interchange
and communications software products, the results of which are included in the
business segment information under "Corporate and other".
35
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the years ended September 30, 1997, 1996 and 1995, is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS 1997 1996 1995
----------------- ---------- ---------- --------
<S> <C> <C> <C>
Revenue:
Systems Management..................... $ 184,679 $ 170,804 $154,657
Applications Management................ 142,942 109,804 107,209
Federal Systems........................ 121,790 112,188 101,702
Corporate and other.................... 39,567 46,375 32,743
---------- ---------- --------
Consolidated totals.................. $ 488,978 $ 439,171 $396,311
========== ========== ========
Operating Profit (Loss):
Systems Management..................... $ 70,629 $ 65,858 $ 55,471
Applications Management................ 20,842 16,408 21,320
Federal Systems........................ 8,689 7,982 6,648
Reorganization costs................... (106,037) (19,512)
Purchased research and development..... (137,849) (62,000)
Corporate and other.................... (31,443) (29,474) (23,117)
---------- ---------- --------
Consolidated totals.................. $ (175,169) $ 60,774 $(21,190)
========== ========== ========
Identifiable Assets:
Systems Management..................... $ 150,549 $ 135,845 $115,729
Applications Management................ 194,641 107,713 125,410
Federal Systems........................ 58,445 68,809 56,737
Corporate and other.................... 662,023 785,246 306,648
Discontinued operations................ 53,187
---------- ---------- --------
Consolidated totals.................. $1,065,658 $1,097,613 $657,711
========== ========== ========
Capital Expenditures (including additions
to computer software):
Systems Management..................... $ 16,919 $ 14,597 $ 11,808
Applications Management................ 8,968 6,603 7,753
Federal Systems........................ 1,284 1,255 1,518
Corporate and other.................... 18,878 5,388 13,675
---------- ---------- --------
Consolidated totals.................. $ 46,049 $ 27,843 $ 34,754
========== ========== ========
Depreciation and Amortization:
Systems Management..................... $ 16,014 $ 12,230 $ 10,612
Applications Management................ 13,674 12,926 11,390
Federal Systems........................ 2,231 2,290 2,196
Corporate and other.................... 2,601 4,153 3,718
---------- ---------- --------
Consolidated totals.................. $ 34,520 $ 31,599 $ 27,916
========== ========== ========
Revenue from the U.S. Government:
Systems Management..................... $ 4,140 $ 3,521 $ 3,250
Applications Management................ 7,455 5,169 2,930
Federal Systems........................ 112,802 104,052 97,650
---------- ---------- --------
Consolidated totals.................. $ 124,397 $ 112,742 $103,830
========== ========== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
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, through June 30, 1997, the results of
operations relating to the international distribution of certain Sterling
Commerce products.
36
<PAGE>
6. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations in the United States and international markets at
September 30, 1997, 1996 and 1995 and for the years then ended are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
GEOGRAPHICAL SEGMENT INFORMATION 1997 1996 1995
-------------------------------- ---------- ---------- --------
<S> <C> <C> <C>
Revenue:
United States........................... $ 294,273 $ 252,181 $225,923
Europe.................................. 106,848 88,611 89,659
Pacific................................. 33,789 36,905 35,185
Canada and Latin America................ 14,501 15,099 12,801
Corporate and other..................... 39,567 46,375 32,743
---------- ---------- --------
$ 488,978 $ 439,171 $396,311
========== ========== ========
Operating Profit (Loss):
United States........................... $ 74,948 $ 72,824 $ 54,940
Europe.................................. 12,664 9,773 16,925
Pacific................................. 7,265 3,970 7,242
Canada and Latin America................ 5,283 3,681 4,332
Reorganization costs.................... (106,037) (19,512)
Purchased research and development...... (137,849) (62,000)
Corporate and other..................... (31,443) (29,474) (23,117)
---------- ---------- --------
$ (175,169) $ 60,774 $(21,190)
========== ========== ========
Identifiable Assets:
United States........................... $ 226,944 $ 217,021 $200,527
Europe.................................. 145,111 82,537 77,856
Pacific................................. 25,900 9,236 15,055
Canada and Latin America................ 5,680 3,573 4,438
Corporate and other..................... 662,023 785,246 306,648
Discontinued operations................. 53,187
---------- ---------- --------
$1,065,658 $1,097,613 $657,711
========== ========== ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
cash balances, marketable securities, long-term investments, deferred income
tax balances, other assets, the results of operations of the Company's retail
software division, and, through June 30, 1997, the results of operations
relating to the international distribution of certain Sterling Commerce
products.
7. MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS
At September 30, 1997 and 1996, 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
FAIR COST HOLDING HOLDING
VALUE BASIS GAINS LOSSES
--------- --------- ------- -------
<S> <C> <C> <C> <C>
September 30, 1997
Commercial paper....................... $ 14,887 $ 14,887
U.S. corporate notes................... 96,520 96,337 $ 291 $(108)
U.S. government obligations............ 14,947 15,018 (71)
Municipal obligations.................. 74,140 73,982 161 (3)
Other.................................. 6,471 4,864 1,607
-------- -------- ------ -----
$206,965 $205,088 $2,059 $(182)
======== ======== ====== =====
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
GROSS
UNREALIZED
---------------
AGGREGATE AMORTIZED
FAIR COST HOLDING HOLDING
VALUE BASIS GAINS LOSSES
--------- --------- ------- -------
<S> <C> <C> <C> <C>
September 30, 1996
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)
======== ======== ==== =======
</TABLE>
At September 30, 1997, scheduled maturities of investments in debt
securities are: $96,325,450 principal amount within one year and $104,160,651
principal amount 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>
1997 1996
-------- --------
<S> <C> <C>
Trade................................................... $141,981 $115,427
Unbilled................................................ 19,593 24,032
-------- --------
161,574 139,459
Less: Allowance for doubtful accounts................... 12,152 6,076
-------- --------
$149,422 $133,383
======== ========
</TABLE>
At September 30, 1997 and 1996, accounts receivable include $38,806,000 and
$35,975,000, 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,
Europe and Asia Pacific, which mitigates exposure to concentrations of credit
risk. Trade receivables are generally not collateralized. The Company performs
periodic credit evaluations of its customers' financial conditions.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Computer and peripheral equipment......................... $39,734 $38,663
Furniture, fixtures and other equipment................... 35,731 33,067
Leasehold improvements.................................... 15,563 9,629
------- -------
91,028 81,359
Less: Accumulated depreciation............................ 42,430 42,029
------- -------
$48,598 $39,330
======= =======
</TABLE>
10. LONG-TERM DEBT
Effective July 1, 1997, the Company entered into an amended Revolving Credit
Agreement ("Credit Agreement") with an unsecured borrowing capacity of
$35,000,000. The Credit Agreement requires that certain financial ratios be
maintained. Borrowings under the Credit Agreement will bear interest at the
lower of the lender's base rate or the Eurodollar lending rate plus one-half
percent and will mature on June 30, 2000. No amounts were borrowed during 1997
or outstanding under the Credit Agreement at September 30, 1997. At September
30, 1997, after the utilization of approximately $1,443,000 for standby
letters of credit, approximately $33,557,000 was available for borrowing under
the Credit Agreement. Certain of the Company's foreign subsidiaries have
separate lines of credit totaling $21,305,000 that are used for foreign
exchange exposure management and working capital requirements. These lines of
credit are guaranteed by Sterling Software, Inc. At September 30, 1997,
$1,081,000 was outstanding pursuant to these foreign lines of credit.
38
<PAGE>
On December 20, 1995, the Company gave notice of the redemption of all of
the $114,922,000 then outstanding principal amount of its 5.75% Convertible
Subordinated Debentures (the "Debentures"), effective February 12, 1996.
Approximately $114,912,000 principal amount of the Debentures were converted
into 4,056,000 shares of Common Stock.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Trade accounts payable................................... $ 41,777 $16,712
Accrued compensation..................................... 49,728 37,242
Accrued acquisition and reorganization costs............. 45,545 4,017
Other accrued liabilities................................ 35,650 19,766
-------- -------
$172,700 $77,737
======== =======
</TABLE>
Accrued acquisition and reorganization costs at September 30, 1997 are
primarily due to the Acquisition and subsequent reorganization and are
primarily for the remaining commitments pursuant to employee termination costs
and the elimination of duplicate facilities and equipment.
12. INCOME TAXES
The provision (benefit) for income taxes on income (loss) from continuing
operations is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $11,309 $10,055 $ 4,449
State............................................ 2,310
Foreign.......................................... 2,098 2,822 700
Deferred:
Federal.......................................... (17,330) 10,551 9,087
State............................................ (1,685) 2,970 764
Foreign.......................................... (130) (2,110)
------- ------- -------
$(3,428) $24,288 $15,000
======= ======= =======
</TABLE>
39
<PAGE>
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
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal statutory
rate.......................................... $(47,739) $29,703 $(6,530)
Increases (reductions) in tax expense (benefit)
resulting from:
Purchased research and development for which
no income tax benefit was recognized........ 36,251 21,700
Taxes on foreign subsidiaries' income at
rates less than the U.S. federal statutory
rates....................................... (1,307)
Recognition of previously unrecognized
deferred income tax asset................... (3,022) (7,853) (1,197)
Amortization and write-down of excess cost
over net assets acquired.................... 14,663 1,680 1,761
Foreign sales corporation.................... (1,891) (1,568) (2,163)
State income taxes, net of federal benefit... (125) 2,970 764
Other........................................ (258) (644) 665
-------- ------- -------
$ (3,428) $24,288 $15,000
======== ======= =======
</TABLE>
Income (loss) before income taxes includes foreign pretax earnings (losses)
of $7,269,000, $3,525,000 and $(4,300,000) for the years ended September 30,
1997, 1996 and 1995, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax asset as of September 30 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards....................... $35,116 $44,167
General business and alternative minimum tax credit
carryforwards......................................... 5,219 5,073
Foreign tax credit carryforwards....................... 6,583
Foreign taxes creditable on undistributed foreign
source income......................................... 5,397 5,397
Reserves and reorganization accruals................... 59,924 12,640
------- -------
Deferred income tax assets........................... 105,656 73,860
------- -------
Deferred income tax liabilities:
Capitalized software costs............................. 12,958 11,292
Depreciation and amortization.......................... 2,253 2,110
Other future income tax liabilities.................... 27,491 13,626
------- -------
Deferred income tax liabilities...................... 42,702 27,028
------- -------
Deferred income tax asset net of deferred income tax
liability............................................. 62,954 46,832
Less valuation allowance............................... (40,824) (43,846)
------- -------
Net deferred income tax asset........................ $22,130 $ 2,986
======= =======
</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, 1997, 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.
40
<PAGE>
At September 30, 1997, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $63,750,000 and
$5,220,000, respectively. These carryforwards will expire at various times
between 1998 and 2009, with approximately $63,750,000 of the net operating
loss carryforwards expiring between 2007 and 2009. The utilization 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 of 1986, as amended (the "Code").
Thus, the Company's utilization 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, 1997, 1996 and 1995 was
$22,667,000, $19,366,000 and $26,359,000, respectively. At September 30, 1997,
minimum future rental payments due under all operating leases, net of
estimated future sublease income, are as follows (in thousands):
<TABLE>
<S> <C>
1998.......................................... $ 26,859
1999.......................................... 23,729
2000.......................................... 18,212
2001.......................................... 13,958
2002.......................................... 9,207
Thereafter.................................... 31,923
--------
$123,888
========
</TABLE>
14. PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred
stock, par value $0.10 per share ("Preferred Stock"). The Board of Directors
of Sterling Software has authorized the issuance of up to 750,000 shares of
Preferred Stock, designated as Series A Junior Participating Preferred Stock
("Series A Junior Preferred Stock"), pursuant to the terms of the Rights
Agreement dated as of December 18, 1996 (the "Rights Plan"). 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. RIGHTS PLAN
On December 18, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Common Stock
outstanding at the close of business on December 31, 1996 (the "Record Date"),
pursuant to the terms of the Rights Plan. The Rights Plan also provides,
subject to specified exceptions and limitations, that shares of Common Stock
issued after the Record Date will be entitled to and accompanied by Rights.
Pursuant to the Rights Plan, one Right to purchase 1/100th of a share of
Series A Junior Preferred Stock (structured so as to be substantially the
equivalent of a share of Common Stock) is attached to each issued and
outstanding share of Common Stock. Subject to certain conditions, each Right
entitles the holder to purchase 1/100th of a share of Series A Junior
Preferred Stock at a price (the "Purchase Price") of $200.00 per 1/100th of a
share of Junior Preferred Stock (subject to adjustment).
In general, the Rights will not become exercisable, or transferable apart
from the shares of Common Stock, unless a person or group of affiliated or
associated persons becomes the beneficial owner of, or commences a tender
offer that would result in beneficial ownership of, 15% or more of the
outstanding shares of Common Stock (any such person or group of persons being
referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under
certain circumstances, each Right (other than any Rights that are or were
beneficially owned by an Acquiring Person, which Rights will be void) could
become exercisable to purchase at the Purchase Price a number of shares of
Common Stock (or, in certain circumstances, the common stock of a company into
which the Company is merged or consolidated or to which the Company sells all
or substantially all of its assets) having a market value equal to two times
the Purchase Price. The Rights will expire on December 31, 2006, unless
earlier redeemed by Sterling Software at a redemption price of $.01 per Right
(subject to adjustment), or otherwise exchanged or amended in accordance with
the terms of the Rights Plan.
41
<PAGE>
16. 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
amendments to the rules promulgated under Section 16 of the Securities
Exchange Act of 1934. At September 30, 1997, 485,545 shares were reserved for
future grants of options under the 1996 Stock Option Plan. Options granted
pursuant to the 1996 Stock Option Plan become exercisable 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. Any tax benefit associated with the
exercise of options and warrants is credited to paid-in capital. 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 existing stock option plans.
Options that were unexercised with respect to 81,681 shares of Common Stock
at the close of business on September 30, 1996 were adjusted to thereafter be
exercisable with respect to 207,950 shares at exercise prices ranging from
$3.36 to $32.40 to preserve the economic value of such options after the spin-
off of Sterling Commerce. Stock option transactions are summarized below for
the three years ended September 30, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
October 1.............. 81,681 $46.06 8,085,731 $28.36 6,460,763 $19.34
Conversion adjustment... 126,269
Options assumed in the
Merger................. 166,173 50.25
Options granted......... 9,551,900 28.27 1,147,675 42.33 4,886,547 29.79
Options exercised....... (104,503) 13.61 (8,912,213) 27.69 (3,242,780) 17.70
Options terminated and
canceled............... (497,193) 26.33 (239,512) 36.26 (184,972) 29.52
--------- ---------- ----------
Options outstanding at
September 30........... 9,158,154 28.51 81,681 46.06 8,085,731 28.36
========= ========== ==========
Options exercisable at
September 30........... 4,601,704 28.03 81,681 46.06 3,781,222 30.26
========= ========== ==========
Options available for
grant at September 30.. 485,545 7,750,000 1,293,704
========= ========== ==========
</TABLE>
Information related to options outstanding at September 30, 1997 is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------ --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.99--
$27.25 1,171,118 8 Years $26.83 573,718 $26.40
$27.26--
$28.25 6,790,150 8 Years $28.25 4,000,000 $28.25
$28.26--
$35.50 1,196,886 6 Years $31.63 27,986 $29.39
--------- ---------
9,158,154 4,601,704
========= =========
</TABLE>
During 1996 and 1995, 310,097 and 189,300 warrants with an aggregate
exercise price of $10,734,659 and $4,012,704, respectively, were exercised for
shares of Common Stock. Also, in 1996, 82,650 warrants with an aggregate
exercise price of $8,750,155 were canceled. At September 30, 1997 and 1996, no
warrants were outstanding.
42
<PAGE>
FAS 123 requires disclosure of pro forma net earnings and net earnings per
common share information computed as if the Company had accounted for its
employee stock options granted subsequent to October 1, 1995 under the fair
value method set forth in FAS 123. The fair value of the Company's outstanding
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions.
<TABLE>
<CAPTION>
YEARS
ENDED
SEPTEMBER
30
----------
1997 1996
---- ----
<S> <C> <C>
Expected option life in years.................................. 4.0 4.0
Risk-free interest rate........................................ 5.74% 6.14%
Volatility factor.............................................. 0.40 0.40
</TABLE>
The Company does not have a history of paying dividends and none have been
assumed in estimating the fair value of the options.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because, among other things, changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. In addition, because FAS 123 is applicable
only to options granted subsequent to October 1, 1995, the pro forma
information does not reflect the pro forma effect of all previous stock option
grants of the Company. Therefore, the pro forma information is not necessarily
indicative of future amounts until FAS 123 is applied to all outstanding stock
options.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
-------------------
1997 1996
--------- --------
<S> <C> <C>
Pro forma net income (loss)............................ $(174,180) $226,037
Pro forma net income (loss) per share:
Primary.............................................. $ (4.52) $ 6.63
Fully diluted........................................ $ (4.52) $ 6.32
Weighted-average fair value of options granted during
the year.............................................. $ 12.00 $ 6.58
</TABLE>
17. POSTRETIREMENT BENEFITS
The Company has a plan to provide retirement benefits under the provisions
of Section 401(k) of the 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 1997, 1996 and 1995
were $2,829,000, $2,315,000 and $2,474,000, respectively. One-half of the
Company's contributions are invested in Common 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 1997, 1996 and 1995,
the investment of the Company's contributions included 19,771, 19,665 and
28,597 shares of Common Stock, respectively. These share contributions include
those made with respect to Sterling Commerce employees through September 30,
1996, the date of the spin-off.
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 such postretirement
healthcare coverage in amounts determined at the discretion of management. A
plan amendment was adopted in October 1994 that reduced
43
<PAGE>
the number of employees eligible for participation in the postretirement
benefit plan and reduced the Company's future cost for certain eligible
participants. The impact of the amendment in 1995 was a curtailment gain of
approximately $1,400,000. A plan amendment was adopted in October 1997 that
extended coverage to non-spouse dependents of eligible retirees. This
amendment is not expected to add additional expense or liability to the plan.
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>
1997 1996
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $1,122 $ 775
Fully eligible active plan participants.................... 930 977
Other active plan participants............................. 1,141 1,259
------ ------
3,193 3,011
Assets at fair market value................................ 1,924 1,766
------ ------
Projected benefit obligation in excess of assets at fair
market value................................................ 1,269 1,245
Unrecognized net gain (loss)................................. 1,670 1,768
------ ------
Accrued postretirement benefit cost........................ $2,939 $3,013
====== ======
</TABLE>
The following table presents net periodic postretirement healthcare benefit
costs for the years ended September 30 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost............................................. $ 86 $ 98 $ 108
Interest cost............................................ 221 205 241
Actual asset return...................................... (159) (112) (90)
Net amortization and deferral............................ (223) (233) (208)
----- ----- -----
Net periodic postretirement benefit cost............... $ (75) $ (42) $ 51
===== ===== =====
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at September 30, 1997 and 1996. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits ("Healthcare Cost Trend Rate") is 9% for 1998 and is assumed
to decrease gradually to 5% after 8 years and remain at that level thereafter.
The weighted average Healthcare Cost Trend Rate was 9.5% for 1997 and is
assumed to decrease gradually to 5% after 9 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
Rate by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1997 by $188,400 and the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for 1997 by $12,900.
18. CHANGE-IN-CONTROL AND EMPLOYMENT ARRANGEMENTS
As of September 30, 1997, the Company had change-in-control agreements with
18 of its officers providing for payments based on the individual officer's
respective salary, bonus and benefits if there is a change-in-control (as
defined) in the Company and termination of employment occurs. The change-in-
control agreements further provide that the Company will make certain payments
to each officer party thereto to compensate such officer for the economic
effect of such officer's liability to pay excise taxes to the extent that
payments received by
44
<PAGE>
such officer, pursuant to the change-in-control agreement, stock option
agreements or otherwise, are considered as "contingent on a change in
ownership or control" under Section 280G of the Code (the "Tax Payment").
Additionally, the Company has agreed to make the Tax Payment to one former
officer of the Company with respect to excise taxes determined to be payable
on benefits received by such former officer under a stock option agreement
with the Company. Based on certain assumptions, at September 30, 1997, the
Company's maximum liability for salaries, bonuses, benefits and Tax Payments
under these agreements was estimated to be approximately $44,000,000. The
Company's actual liability, if any, under these agreements will depend on a
number of factors, including the level of salaries, bonuses and benefits being
received by the then covered officers prior to a change-in-control and the
price at which any change-in-control transaction occurs.
As of September 30, 1997, the Company had entered into severance agreements
with 14 of its officers 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 an agreement with one executive officer that provides for an
annual base salary plus agreed-upon bonuses and 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
compensation upon the occurrence of certain events. At September 30, 1997, the
Company's maximum estimated liability for future salaries, fees, bonuses and
benefits under these agreements was approximately $15,000,000.
45
<PAGE>
19. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1997 and
1996 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, 1997 (1):
Revenue
Products....................... $36,556 $47,579 $ 52,234 $74,065
Product support................ 30,336 29,179 29,106 40,805
Services....................... 30,249 29,986 32,904 55,979
------- ------- -------- -------
97,141 106,744 114,244 170,849
Cost of sales
Products and product support... 16,554 18,966 17,668 16,595
Services....................... 26,308 26,056 29,350 48,309
------- ------- -------- -------
42,862 45,022 47,018 64,904
------- ------- -------- -------
Product development and
enhancement..................... 4,806 5,011 4,532 8,765
Selling, general and
administrative.................. 40,732 43,560 45,288 67,761
Reorganization costs............. 106,037
Purchased research and
development..................... 137,849
Income (loss) from continuing
operations...................... 12,740 15,324 (185,463) 24,431
Average common shares
outstanding..................... 38,439 38,466 38,533 38,549
Income (loss) per common share:
Net income (loss):
Primary...................... $ .33 $ .40 $ (4.81) $ .62
Fully diluted................ .33 .40 (4.81) .61
Year ended September 30, 1996:
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
</TABLE>
46
<PAGE>
Information concerning the Company's operations by business segment for each
quarter of 1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBERN 30
----------- -------- --------- -------------
<S> <C> <C> <C> <C>
Year ended September 30,
1997(1):
Revenue:
Systems Management............ $ 36,950 $ 43,916 $ 46,045 $ 57,768
Applications Management....... 21,952 21,834 22,015 77,141
Federal Systems............... 27,858 27,954 30,919 35,059
Corporate and other........... 10,381 13,040 15,265 881
-------- -------- --------- --------
Consolidated totals......... $ 97,141 $106,744 $ 114,244 $170,849
======== ======== ========= ========
Operating Profit (Loss):
Systems Management............ $ 12,889 $ 17,099 $ 18,530 $ 22,111
Applications Management....... 2,224 2,824 3,378 12,416
Federal Systems............... 2,395 2,303 1,826 2,165
Reorganization costs.......... (106,037)
Purchased research and
development.................. (137,849)
Corporate and other........... (8,767) (9,075) (6,328) (7,273)
-------- -------- --------- --------
Consolidated totals......... $ 8,741 $ 13,151 $(226,480) $ 29,419
======== ======== ========= ========
Year ended September 30, 1996:
Revenue:
Systems Management............ $ 35,210 $ 40,969 $ 42,558 $ 52,067
Applications Management....... 26,459 28,228 28,244 26,873
Federal Systems............... 26,262 26,815 27,553 31,558
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
Applications Management....... 3,859 4,630 6,155 1,764
Federal Systems............... 2,300 1,816 2,038 1,828
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
Applications Management....... 20,010 25,347 29,548 32,304
Federal Systems............... 23,665 24,590 25,372 28,075
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
Applications Management....... 4,491 5,125 5,284 6,420
Federal Systems............... 1,526 1,867 1,953 1,302
Reorganization costs.......... (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>
- --------
(1) On June 30, 1997, Sterling Software completed the acquisition of TI
Software for approximately $214,774,000 including costs directly related to
the acquisition. The acquisition was accounted for in accordance with the
purchase method of accounting and, accordingly, the results of operations
of TI Software are included in the Company's results of operations from the
date of acquisition. The 1997 results of operations include $137,849,000 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 the purchase method of
accounting. The 1997 results of operations also include reorganization
costs of $106,037,000 primarily related to the reorganization of the
Company's operations in connection with the acquisition of TI Software and
the termination of the Company's International Distributor Agreement with
Sterling Commerce. These reorganization costs also include the write-down
of certain excess cost over net assets acquired related to the Company's
federal systems business. The tax benefit related to the purchased research
and development and reorganization costs was $39,737,000.
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 1998 Annual Meeting of Stockholders (the "Proxy Statement") under
the heading "Proposal I--Election of Directors," which information is
incorporated herein by reference. Information concerning compliance with
Section 16 of the Securities Exchange Act of 1934, as amended, by persons
subject to such Section is set forth in the Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," 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 headings "Management Compensation" and "Proposal I--
Election of Directors," 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 Schedule:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1997, 1996 and 1995.
3. Exhibits:
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (2)
3.1 Certificate of Incorporation of the Company, as amended (3)
3.2 Restated Bylaws of the Company (4)
4.1 Form of Common Stock Certificate (5)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (6)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (7), (8)
10.2 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(8), (9)
10.3 Form of Stock Option Agreement between the Company and each of Sam
Wyly and Charles J. Wyly, Jr. (8), (19)
10.4 Form of Stock Option Agreement between the Company and Sterling L.
Williams (8), (19)
10.5 Form of Stock Option Agreement between the Company and Jeannette P.
Meier (8), (19)
10.6 Form of Stock Option Agreement between the Company and Geno P. Tolari
(8), (19)
10.7 1997 Executive Compensation Plan for Group Presidents (8), (11)
10.8 1998 Executive Compensation Plan for Group Presidents (8), (19)
10.9 Employment Agreement, dated December 1, 1994, between the Company and
Werner L. Frank (8), (12)
10.10 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (8), (11)
10.11 Agreement, dated February 12, 1996, between the Company and Sterling
L. Williams (8), (13)
10.12 Form of Change-in-Control Severance Agreement, dated February 12,
1996, between the Company and each of Sam Wyly, Charles J. Wyly, Jr.,
Sterling L. Williams, Jeannette P. Meier and Geno P. Tolari (8), (13)
10.13 Form of Amendment to Change-in-Control Severance Agreement, dated June
18, 1996, between the Company and each of Sam Wyly, Charles J. Wyly,
Jr., Sterling L. Williams, Jeannette P. Meier and Geno P. Tolari (8),
(14)
</TABLE>
49
<PAGE>
<TABLE>
<C> <S>
10.14 Form of Severance Agreement, dated February 12, 1996, between the
Company and each of Jeannette P. Meier and Geno P. Tolari (8), (13)
10.15 Form of Amendment to Severance Agreement, dated August 15, 1997,
between the Company and each of Jeannette P. Meier and Geno P. Tolari
(8), (19)
10.16 Form of Indemnity Agreement between the Company and each of its
directors and officers (7)
10.17 Sterling Software, Inc. Deferred Compensation Plan (adopted effective
February 1, 1997) (8), (15)
10.18 First Amendment to Sterling Software, Inc. Deferred Compensation Plan,
dated October 27, 1997 (8), (19)
10.19 Third Amended and Restated Revolving Credit Agreement, dated July 1,
1997, by and among the Company, BankBoston, N.A. and Bank One, Texas,
National Association and BankBoston, N.A. as agent for itself and Bank
One, Texas, National Association (16)
10.20 Tax Allocation Agreement, dated March 4, 1996, between the Company and
Sterling Commerce, Inc. (17)
10.21 Indemnification Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (18)
10.22 International Distributor Agreement, dated March 4, 1996, between
Sterling Software International, Inc. and Sterling Commerce
International, Inc. (18)
10.23 Amendment No. 1 to International Distributor Agreement, dated January
31, 1997, between Sterling Commerce B.V. and Sterling Software
International, Inc. (3)
10.24 Termination Agreement, dated June 30, 1997, between Sterling Software
International, Inc. and Sterling Commerce B.V. (2)
10.25 Master Software License Agreement, dated March 4, 1996, by and among
the Company, Sterling Commerce, Inc. and their respective subsidiaries
parties thereto (18)
10.26 Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the
benefit of the Company (11)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1996 (19)
21.1 Subsidiaries of the Company (19)
23.1 Consent of Ernst & Young LLP (19)
27.1 Financial Data Schedule (19)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference. In accordance with Item 601 of Regulation S-K, this copy of
the Asset Purchase Agreement does not include the schedules or exhibits
thereto, which schedules and exhibits are listed in the table of contents
to the Asset Purchase Agreement. The Company agrees to furnish
supplementary to the Securities and Exchange Commission a copy of such
schedules and exhibits upon request.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated June 30, 1997, as amended, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement
No. 33-47131 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated December 18, 1996 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
50
<PAGE>
(8) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(9) Previously filed as an exhibit to the Company's Registration Statement
No. 333-13303 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, 1995 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1996 and incorporated herein by
reference.
(12) 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.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Company's Registration Statement
No. 333-37653 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference.
(17) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference.
(18) 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.
(19) Filed herewith.
(b) Reports on Form 8-K.
During the three-month period ended September 30, 1997, the Company filed
one Current Report on Form 8-K (the "Report"). The Report, dated June 30,
1997 and filed with the Securities and Exchange Commission on July 1, 1997,
included information under Item 2--Acquisition or Disposition of Assets and
Item 5--Other Events. On August 13, 1997, the Report was amended to include
the financial statements and exhibits required by Item 7 of Form 8-K.
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 18, 1997 /s/ Sterling L. Williams
By: _________________________________
Sterling L. Williams President,
Chief Executive Officer and
Director (Principal Executive
Officer)
Date: November 18, 1997 /s/ R. Logan Wray
_____________________________________
R. Logan Wray Senior Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
52
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: November 18, 1997 /s/ Robert J. Donachie
-------------------------------------
Robert J. Donachie
Chairman of the Audit Committee
and Director
Date: November 18, 1997 /s/ Michael C. French
-------------------------------------
Michael C. French
Director
Date: November 18, 1997 /s/ Phillip A. Moore
-------------------------------------
Phillip A. Moore
Director
Date: November 18, 1997 /s/ Charles J. Wyly, Jr.
-------------------------------------
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
Date: November 18, 1997 /s/ Evan A. Wyly
-------------------------------------
Evan A. Wyly
Vice President and Director
Date: November 18, 1997 /s/ Donald R. Miller, Jr.
-------------------------------------
Donald R. Miller, Jr.
Director
Date: November 18, 1997 /s/ Alan W. Steelman
-------------------------------------
Alan W. Steelman
Director
Date: November 18, 1997 /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 18, 1997 /s/ Sam Wyly
-------------------------------------
Sam Wyly
Chairman of the Board and Director
53
<PAGE>
SCHEDULE II
STERLING SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<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, 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
========== ========== =========== =========== ===========
Allowance for doubtful
accounts at September
30, 1997.............. $6,076,000 $3,950,000 $ 4,436,000 (3) $(2,310,000)(2) $12,152,000
========== ========== =========== =========== ===========
</TABLE>
- --------
(1) Offsets to deferred revenue.
(2) Accounts written off.
(3) Offsets to deferred revenue and allowances for doubtful accounts acquired
in the acquisition of the Software Division of Texas Instruments
Incorporated.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (2)
3.1 Certificate of Incorporation of the Company, as amended (3)
3.2 Restated Bylaws of the Company (4)
4.1 Form of Common Stock Certificate (5)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (6)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (7), (8)
10.2 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(8), (9)
10.3 Form of Stock Option Agreement between the Company and each of Sam
Wyly and Charles J. Wyly Jr. (8), (19)
10.4 Form of Stock Option Agreement between the Company and Sterling L.
Williams (8), (19)
10.5 Form of Stock Option Agreement between the Company and Jeannette P.
Meier (8), (19)
10.6 Form of Stock Option Agreement between the Company and Geno P. Tolari
(8), (19)
10.7 1997 Executive Compensation Plan for Group Presidents (8), (11)
10.8 1998 Executive Compensation Plan for Group Presidents (8), (19)
10.9 Employment Agreement, dated December 1, 1994 between the Company and
Werner L. Frank (8), (12)
10.10 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (8), (11)
10.11 Agreement, dated February 12, 1996, between the Company and Sterling
L. Williams (8), (13)
10.12 Form of Change-in-Control Severance Agreement, dated February 12,
1996, between the Company and each of Sam Wyly, Charles J. Wyly, Jr.,
Sterling L. Williams, Jeannette P. Meier and Geno P. Tolari (8), (13)
10.13 Form of Amendment to Change-in-Control Severance Agreement, dated June
18, 1996, between the Company and each of Sam Wyly, Charles J. Wyly,
Jr., Sterling L. Williams, Jeannette P. Meier and Geno P. Tolari (8),
(14)
10.14 Form of Severance Agreement, dated February 12, 1996, between the
Company and each of Jeannette P. Meier and Geno P. Tolari (8), (13)
10.15 Form of Amendment to Severance Agreement, dated August 15, 1997,
between the Company and each of Jeannette P. Meier and Geno P. Tolari
(8), (19)
10.16 Form of Indemnity Agreement between the Company and each of its
directors and officers (7)
10.17 Sterling Software, Inc. Deferred Compensation Plan (adopted effective
February 1, 1997) (8), (15)
10.18 First Amendment to Sterling Software, Inc. Deferred Compensation Plan,
dated October 27, 1997 (8), (19)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19 Third Amended and Restated Revolving Credit Agreement, dated July 1,
1997, by and among the Company, BankBoston, N.A. and Bank One, Texas,
National Association and BankBoston, N.A. as agent for itself and Bank
One, Texas, National Association (16)
10.20 Tax Allocation Agreement, dated March 4, 1996, between the Company and
Sterling Commerce, Inc. (17)
10.21 Indemnification Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (18)
10.22 International Distributor Agreement, dated March 4, 1996, between
Sterling Software International, Inc. and Sterling Commerce
International, Inc. (18)
10.23 Amendment No. 1 to International Distributor Agreement, dated January
31, 1997, between Sterling Commerce B.V. and Sterling Software
International, Inc. (3)
10.24 Termination Agreement, dated June 30, 1997, between Sterling Software
International, Inc. and Sterling Commerce B.V. (2)
10.25 Master Software License Agreement, dated March 4, 1996, by and among
the Company, Sterling Commerce, Inc. and their respective subsidiaries
parties thereto (18)
10.26 Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the
benefit of the Company (11)
11.1 Computation of Earnings Per Share, Year Ended September 30, 1996 (19)
21.1 Subsidiaries of the Company (19)
23.1 Consent of Ernst & Young LLP (19)
27.1 Financial Data Schedule (19)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference. In accordance with Item 601 of Regulation S-K, this copy of
the Asset Purchase Agreement does not include the schedules or exhibits
thereto, which schedules and exhibits are listed in the table of contents
to the Asset Purchase Agreement. The Company agrees to furnish
supplementary to the Securities and Exchange Commission a copy of such
schedules and exhibits upon request.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated June 30, 1997, as amended, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement
No. 33-47131 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated December 18, 1996 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
(8) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(9) Previously filed as an exhibit to the Company's Registration Statement
No. 333-13303 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, 1995 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1996 and incorporated herein by
reference.
<PAGE>
(12) 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.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Company's Registration Statement
No. 333-37653 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30 , 1997 and incorporated herein by
reference.
(17) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference.
(18) 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.
(19) Filed herewith.
<PAGE>
Exhibit 10.3
STERLING SOFTWARE, INC.
1996 STOCK OPTION PLAN
Stock Option Agreement
----------------------
This Stock Option Agreement (the "Agreement") is entered into by and
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
________ (the "Participant"). The Company and the Participant agree as follows:
1. Grant of Stock Option. The Company hereby grants to the Participant
---------------------
effective as of ________ (the "Date of Grant"), upon the terms and conditions
set forth below and subject to the terms and conditions of the Company's 1996
Stock Option Plan (the "Plan"), an option (the "Stock Option") to purchase from
the Company a total of ________ shares of the Company's common stock, par value
$0.10 per share ("Common Stock"), at an exercise price per share equal to
________ (the "Option Price"). Any terms, when used in this Agreement with
initial capital letters but not defined herein, have the same meanings as in the
Plan, the provisions of which are incorporated into this Agreement by reference.
The Participant acknowledges receipt of a copy of the Plan.
2. Time of Exercise. The Stock Option may be exercised, in whole or in
----------------
part, at any time on or after the ninetieth (90th) day after the Date of Grant,
without regard to whether the Participant is an employee or director of the
Company or any Subsidiary at the time of exercise. Notwithstanding the
foregoing, in the event of a Change in Control (as defined in Section 1(c) of
the Change-in-Control Severance Agreement dated ________ between the Participant
and the Company and any amendments thereto) or a threatened Change in Control,
all of the unexercised portion of this Stock Option will become immediately
exercisable, and the right of the Participant to exercise the Stock Option as to
such unexercised portion will continue for the entire term described in Section
3 below, regardless of whether the Participant's employment with the Company or
any Subsidiary terminates before the expiration of such term. Whether a Change
in Control is threatened will be determined solely by the Board. In no event may
the Stock Option be exercised in whole or in part, however, after the expiration
of the term described in Section 3 below.
3. Term. The Stock Option will expire and all rights under this Agreement
----
will terminate on the tenth anniversary of the Date of Grant.
4. Restrictions on Exercise. The Stock Option:
------------------------
(a) may be exercised only with respect to full shares and no fractional
shares of Common Stock will be issued upon exercise of the Stock Option;
and
(b) may be exercised in whole or in part, but no certificates
representing shares subject to the Stock Option will be delivered if any
requisite registration with, clearance by, or consent, approval or
authorization of, any governmental authority of any kind
<PAGE>
having jurisdiction over the exercise of the Stock Option, or issuance
of securities upon such exercise, has not been obtained or secured.
5. Manner of Exercise. The Stock Option may be exercised by written
------------------
notice to the Company of the number of shares being purchased and the Option
Price to be paid, accompanied by full payment of the Option Price (a) in cash or
by check acceptable to the Company, (b) by the transfer to the Company of shares
of Common Stock owned by the Participant for at least six months and having an
aggregate fair market value per share at the date of exercise equal to the
aggregate Option Price (provided that the payment method described in this
clause (b) will not be available at any time that the Company is prohibited from
purchasing or acquiring such shares of Common Stock), or (c) by a combination of
any of the foregoing, provided that payment of the Option Price may also be made
by deferred payment from the proceeds of sale through a bank or broker of some
or all of the shares to which the exercise relates. Any federal, state or local
taxes required to be paid or withheld at the time of exercise will be paid or
withheld in full prior to any delivery of shares upon exercise.
6. Transferability of Stock Options. This Stock Option may be
--------------------------------
transferred by the Participant on five days prior written notice to the Company.
Such notice period may be waived in the discretion of the Secretary of the
Company. In the event of a transfer, the transferee will succeed to all of the
rights, restrictions and obligations of the Participant under this Agreement.
7. Rights as Stockholder. Neither the Participant nor any of the
---------------------
Participant's beneficiaries will be deemed to have any rights as a stockholder
with respect to any shares covered by the Stock Option until the issuance of a
certificate to the Participant for such shares.
8. Adjustments. The number of shares of Common Stock covered by the Stock
-----------
Option evidenced by this Agreement, and the Option Price thereof, will be
subject to adjustment as provided in the Plan. No adjustment will be made for
dividends or other rights for which the record date is prior to the issuance of
the certificate or certificates representing shares issued pursuant to the Stock
Option.
9. Rights in Event of Death of Participant. In the event of the death of
---------------------------------------
the Participant, the Stock Option may be exercised by the Participant's estate
or a person who acquired the right to exercise the Stock Option by bequest or
inheritance or by reason of the death of the Participant. In no event may the
Stock Option be exercised after the expiration date set forth in Section 3.
10. Stock Purchased for Investment. Unless the shares are covered by a
------------------------------
then current and effective registration statement under the Securities Act of
1933, as then in effect, the Participant, by accepting the Stock Option,
represents, warrants, covenants and agrees on behalf of the Participant and the
Participant's transferees that all shares of Common Stock purchased upon the
exercise of the Stock Option will be acquired for investment and not for resale
or distribution, and that upon each exercise of any portion of the Stock Option,
the person entitled to exercise the same will furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares are being acquired in good faith for investment
-2-
<PAGE>
and not for resale or distribution. The Participant agrees to furnish or execute
such documents as the Company in its discretion deems necessary to (a) evidence
such exercise of the Stock Option, (b) determine whether registration is then
required under the Securities Act of 1933, as then in effect, and (c) comply
with or satisfy the requirements of the Securities Act of 1933, or any other
federal, state or local law, as then in effect.
11. Notices. Each notice relating to this Agreement will be in writing and
-------
delivered in person or by certified mail to the proper address. Each notice
will be deemed to have been given on the date it is received. Each notice to
the Company will be addressed to it at its principal office, now 300 Crescent
Court, Suite 1200, Dallas, Texas 75201, attention of the Secretary. Each notice
to the Participant or other person or persons then entitled to exercise the
Stock Option will be addressed to the Participant or such other person or
persons at the Participant's address specified below. Anyone to whom a notice
may be given under this Agreement may designate a new address by notice to that
effect.
12. Employment. This Agreement does not confer upon the Participant any
----------
right to be employed or to continue in the employ of the Company or any
Subsidiary, nor does it in any way interfere with the right of the Company or
any Subsidiary to terminate the employment of the Participant at any time.
13. No Obligation to Exercise Stock Option. This Agreement does not
--------------------------------------
impose any obligation upon the Participant to exercise the Stock Option.
14. Amendments. The Special Stock Option Committee, the Stock Option
----------
Committee or the Board, as authorized pursuant to the Plan, may, without the
consent of the Participant, amend this Agreement, or otherwise take action, to
accelerate the time or times at which the Stock Option may be exercised, to
extend the term described in Section 3 above, to waive any other condition or
restriction applicable to the Stock Option or to the exercise of the Stock
Option, to reduce the Option Price and to make any other change permitted to be
made under the Plan without the consent of the Participant; and may amend the
Agreement in any other respect with the consent of the Participant.
15. Governing Law. This Agreement is intended to be performed in the
-------------
State of Texas and will be construed and enforced in accordance with and
governed by the laws of such State, except as to matters of corporate law, which
will be governed by the laws of the State of Delaware.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have executed this
Agreement as of the ________.
STERLING SOFTWARE, INC.
By:
--------------------------------------------
Sterling L. Williams
President and Chief Executive Officer
PARTICIPANT:
-----------------------------------------------
Signature
-----------------------------------------------
Print Name
Social Security Number
------------------------
Address for Notice:
-----------------------------------------------
-----------------------------------------------
-4-
<PAGE>
Exhibit 10.4
STERLING SOFTWARE, INC.
1996 STOCK OPTION PLAN
Stock Option Agreement
----------------------
This Stock Option Agreement (the "Agreement") is entered into by and
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
________ (the "Participant"). The Company and the Participant agree as follows:
1. Grant of Stock Option. The Company hereby grants to the Participant
---------------------
effective as of ________ (the "Date of Grant"), upon the terms and conditions
set forth below and subject to the terms and conditions of the Company's 1996
Stock Option Plan (the "Plan"), an option (the "Stock Option") to purchase from
the Company a total of ________ shares of the Company's common stock, par value
$0.10 per share ("Common Stock"), at an exercise price per share equal to
________ (the "Option Price"). Any terms, when used in this Agreement with
initial capital letters but not defined herein, have the same meanings as in the
Plan, the provisions of which are incorporated into this Agreement by reference.
The Participant acknowledges receipt of a copy of the Plan.
2. Time of Exercise. The Stock Option may be exercised, in whole or in
----------------
part, at any time on or after the Date of Grant, without regard to whether the
Participant is an employee or director of the Company or any Subsidiary at the
time of exercise. In no event may the Stock Option be exercised in whole or in
part, however, after the expiration of the term described in Section 3 below.
3. Term. The Stock Option will expire and all rights under this
----
Agreement will terminate on the tenth anniversary of the Date of Grant.
4. Restrictions on Exercise. The Stock Option:
------------------------
(a) may be exercised only with respect to full shares and no fractional
shares of Common Stock will be issued upon exercise of the Stock Option;
and
(b) may be exercised in whole or in part, but no certificates
representing shares subject to the Stock Option will be delivered if any
requisite registration with, clearance by, or consent, approval or
authorization of, any governmental authority of any kind having
jurisdiction over the exercise of the Stock Option, or issuance of
securities upon such exercise, has not been obtained or secured.
5. Manner of Exercise. The Stock Option may be exercised by written
------------------
notice to the Company of the number of shares being purchased and the Option
Price to be paid, accompanied by full payment of the Option Price (a) in cash or
by check acceptable to the Company, (b) by the transfer to the Company of shares
of Common Stock owned by the Participant for at least six months and having an
aggregate fair market value per share at the date of exercise equal to the
<PAGE>
aggregate Option Price (provided that the payment method described in this
clause (b) will not be available at any time that the Company is prohibited from
purchasing or acquiring such shares of Common Stock), or (c) by a combination of
any of the foregoing, provided that payment of the Option Price may also be made
by deferred payment from the proceeds of sale through a bank or broker of some
or all of the shares to which the exercise relates. Any federal, state or local
taxes required to be paid or withheld at the time of exercise will be paid or
withheld in full prior to any delivery of shares upon exercise.
6. Transferability of Stock Options. This Stock Option may be
--------------------------------
transferred by the Participant on five days prior written notice to the Company.
Such notice period may be waived in the discretion of the Secretary of the
Company. In the event of a transfer, the transferee will succeed to all of the
rights, restrictions and obligations of the Participant under this Agreement.
7. Rights as Stockholder. Neither the Participant nor any of the
---------------------
Participant's beneficiaries will be deemed to have any rights as a stockholder
with respect to any shares covered by the Stock Option until the issuance of a
certificate to the Participant for such shares.
8. Adjustments. The number of shares of Common Stock covered by the Stock
-----------
Option evidenced by this Agreement, and the Option Price thereof, will be
subject to adjustment as provided in the Plan. No adjustment will be made for
dividends or other rights for which the record date is prior to the issuance of
the certificate or certificates representing shares issued pursuant to the Stock
Option.
9. Rights in Event of Death of Participant. In the event of the death of
---------------------------------------
the Participant, the Stock Option may be exercised by the Participant's estate
or a person who acquired the right to exercise the Stock Option by bequest or
inheritance or by reason of the death of the Participant. In no event may the
Stock Option be exercised after the expiration date set forth in Section 3.
10. Stock Purchased for Investment. Unless the shares are covered by a
------------------------------
then current and effective registration statement under the Securities Act of
1933, as then in effect, the Participant, by accepting the Stock Option,
represents, warrants, covenants and agrees on behalf of the Participant and the
Participant's transferees that all shares of Common Stock purchased upon the
exercise of the Stock Option will be acquired for investment and not for resale
or distribution, and that upon each exercise of any portion of the Stock Option,
the person entitled to exercise the same will furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares are being acquired in good faith for investment and not for resale or
distribution. The Participant agrees to furnish or execute such documents as the
Company in its discretion deems necessary to (a) evidence such exercise of the
Stock Option, (b) determine whether registration is then required under the
Securities Act of 1933, as then in effect, and (c) comply with or satisfy the
requirements of the Securities Act of 1933, or any other federal, state or local
law, as then in effect.
-2-
<PAGE>
11. Notices. Each notice relating to this Agreement will be in writing
-------
and delivered in person or by certified mail to the proper address. Each notice
will be deemed to have been given on the date it is received. Each notice to the
Company will be addressed to it at its principal office, now 300 Crescent Court,
Suite 1200, Dallas, Texas 75201, attention of the Secretary. Each notice to the
Participant or other person or persons then entitled to exercise the Stock
Option will be addressed to the Participant or such other person or persons at
the Participant's address specified below. Anyone to whom a notice may be given
under this Agreement may designate a new address by notice to that effect.
12. Employment. This Agreement does not confer upon the Participant any
----------
right to be employed or to continue in the employ of the Company or any
Subsidiary, nor does it in any way interfere with the right of the Company or
any Subsidiary to terminate the employment of the Participant at any time.
13. No Obligation to Exercise Stock Option. This Agreement does not
--------------------------------------
impose any obligation upon the Participant to exercise the Stock Option.
14. Amendments. The Special Stock Option Committee, the Stock Option
----------
Committee or the Board, as authorized pursuant to the Plan, may, without the
consent of the Participant, amend this Agreement, or otherwise take action, to
accelerate the time or times at which the Stock Option may be exercised, to
extend the term described in Section 3 above, to waive any other condition or
restriction applicable to the Stock Option or to the exercise of the Stock
Option, to reduce the Option Price and to make any other change permitted to be
made under the Plan without the consent of the Participant; and may amend the
Agreement in any other respect with the consent of the Participant.
15. Governing Law. This Agreement is intended to be performed in the
-------------
State of Texas and will be construed and enforced in accordance with and
governed by the laws of such State, except as to matters of corporate law, which
will be governed by the laws of the State of Delaware.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have executed this
Agreement as of the ________.
STERLING SOFTWARE, INC.
By:
-------------------------------------------
Jeannette P. Meier
Executive Vice President
PARTICIPANT:
-----------------------------------------------
Signature
-----------------------------------------------
Print Name
Social Security Number:
----------------------
Address for Notice:
-----------------------------------------------
-----------------------------------------------
-4-
<PAGE>
Exhibit 10.5
STERLING SOFTWARE, INC.
1996 STOCK OPTION PLAN
Stock Option Agreement
----------------------
This Stock Option Agreement (the "Agreement") is entered into by and
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
________ (the "Participant"). The Company and the Participant agree as follows:
1. Grant of Stock Option. The Company hereby grants to the Participant
---------------------
effective as of ________ (the "Date of Grant"), upon the terms and conditions
set forth below and subject to the terms and conditions of the Company's 1996
Stock Option Plan (the "Plan"), an option (the "Stock Option") to purchase from
the Company a total of ________ shares of the Company's common stock, par value
$0.10 per share ("Common Stock"), at an exercise price per share equal to
________ (the "Option Price"). Any terms, when used in this Agreement with
initial capital letters but not defined herein, have the same meanings as in the
Plan, the provisions of which are incorporated into this Agreement by reference.
The Participant acknowledges receipt of a copy of the Plan.
2. Time of Exercise. The Stock Option may be exercised, in whole or in
----------------
part, according to the following schedule:
<TABLE>
<CAPTION>
Percentage
Exercisable Periods
----------- -------
<S> <C>
0% Immediately
25% On the first anniversary of the Date of Grant
50% On the second anniversary of the Date of Grant
75% On the third anniversary of the Date of Grant
100% On the fourth anniversary of the Date of Grant
</TABLE>
Notwithstanding the foregoing schedule, in the event of a Change in
Control (as defined in Section 1(c) of the Change-in-Control Severance Agreement
dated ________ between the Participant and the Company and any amendments
thereto) or a threatened Change in Control, all of the unexercised portion of
this Stock Option will become immediately exercisable. Whether a Change in
Control is threatened will be determined solely by the Board.
The unexercised portion of the Stock Option from one annual period may
be carried over to a subsequent annual period or periods, and the right of the
Participant to exercise the Stock Option as to such unexercised portion will
continue for the entire term described in Section 3 below, without regard to
whether the Participant is an employee or director of the
<PAGE>
Company or any Subsidiary at the time of exercise. In no event may the Stock
Option be exercised in whole or in part, however, after the expiration of such
term.
3. Term. The Stock Option will expire and all rights under this
----
Agreement will terminate on the tenth anniversary of the Date of Grant.
4. Restrictions on Exercise. The Stock Option:
------------------------
(a) may be exercised only with respect to full shares and no
fractional shares of Common Stock will be issued upon exercise of the
Stock Option; and
(b) may be exercised in whole or in part, but no certificates
representing shares subject to the Stock Option will be delivered if any
requisite registration with, clearance by, or consent, approval or
authorization of, any governmental authority of any kind having
jurisdiction over the exercise of the Stock Option, or issuance of
securities upon such exercise, has not been obtained or secured.
5. Manner of Exercise. The Stock Option may be exercised by written
------------------
notice to the Company of the number of shares being purchased and the Option
Price to be paid, accompanied by full payment of the Option Price (a) in cash or
by check acceptable to the Company, (b) by the transfer to the Company of shares
of Common Stock owned by the Participant for at least six months and having an
aggregate fair market value per share at the date of exercise equal to the
aggregate Option Price (provided that the payment method described in this
clause (b) will not be available at any time that the Company is prohibited from
purchasing or acquiring such shares of Common Stock), or (c) by a combination of
any of the foregoing, provided that payment of the Option Price may also be made
by deferred payment from the proceeds of sale through a bank or broker of some
or all of the shares to which the exercise relates. Any federal, state or local
taxes required to be paid or withheld at the time of exercise will be paid or
withheld in full prior to any delivery of shares upon exercise.
6. Transferability of Stock Options. This Stock Option may be
--------------------------------
transferred by the Participant on five days prior written notice to the Company.
Such notice period may be waived in the discretion of the Secretary of the
Company. In the event of a transfer, the transferee will succeed to all of the
rights, restrictions and obligations of the Participant under this Agreement.
7. Rights as Stockholder. Neither the Participant nor any of the
---------------------
Participant's beneficiaries will be deemed to have any rights as a stockholder
with respect to any shares covered by the Stock Option until the issuance of a
certificate to the Participant for such shares.
8. Adjustments. The number of shares of Common Stock covered by the Stock
-----------
Option evidenced by this Agreement, and the Option Price thereof, will be
subject to adjustment as provided in the Plan. No adjustment will be made for
dividends or other rights for which the record date is prior to the issuance of
the certificate or certificates representing shares issued pursuant to the Stock
Option.
-2-
<PAGE>
9. Rights in Event of Death or Termination of Employment as a Result of
--------------------------------------------------------------------
Disability of Participant. If the Participant dies or terminates employment as
- -------------------------
a result of disability prior to termination of the Participant's rights to
exercise the Stock Option, any unexercised portion of the Stock Option will
become immediately exercisable and may be exercised, subject to all conditions
of the Plan and this Agreement, until the expiration of the term set forth in
Section 3. In the event of the death of the Participant, the Stock Option may
be exercised by the Participant's estate or a person who acquired the right to
exercise the Stock Option by bequest or inheritance or by reason of the death of
the Participant. For purposes of this section, the Executive Committee of the
Board will have sole discretion to determine whether termination of a
Participant's employment has occurred "as a result of disability." In no event
may the Stock Option be exercised after the expiration date set forth in Section
3.
10. Stock Purchased for Investment. Unless the shares are covered by a
------------------------------
then current and effective registration statement under the Securities Act of
1933, as then in effect, the Participant, by accepting the Stock Option,
represents, warrants, covenants and agrees on behalf of the Participant and the
Participant's transferees that all shares of Common Stock purchased upon the
exercise of the Stock Option will be acquired for investment and not for resale
or distribution, and that upon each exercise of any portion of the Stock Option,
the person entitled to exercise the same will furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares are being acquired in good faith for investment and not for resale or
distribution. The Participant agrees to furnish or execute such documents as the
Company in its discretion deems necessary to (a) evidence such exercise of the
Stock Option, (b) determine whether registration is then required under the
Securities Act of 1933, as then in effect, and (c) comply with or satisfy the
requirements of the Securities Act of 1933, or any other federal, state or local
law, as then in effect.
11. Notices. Each notice relating to this Agreement will be in writing and
-------
delivered in person or by certified mail to the proper address. Each notice
will be deemed to have been given on the date it is received. Each notice to
the Company will be addressed to it at its principal office, now 300 Crescent
Court, Suite 1200, Dallas, Texas 75201, attention of the Secretary. Each notice
to the Participant or other person or persons then entitled to exercise the
Stock Option will be addressed to the Participant or such other person or
persons at the Participant's address specified below. Anyone to whom a notice
may be given under this Agreement may designate a new address by notice to that
effect.
12. Employment. This Agreement does not confer upon the Participant any
----------
right to be employed or to continue in the employ of the Company or any
Subsidiary, nor does it in any way interfere with the right of the Company or
any Subsidiary to terminate the employment of the Participant at any time.
13. No Obligation to Exercise Stock Option. This Agreement does not
--------------------------------------
impose any obligation upon the Participant to exercise the Stock Option.
-3-
<PAGE>
14. Amendments. The Special Stock Option Committee, the Stock Option
----------
Committee or the Board, as authorized pursuant to the Plan, may, without the
consent of the Participant, amend this Agreement, or otherwise take action, to
accelerate the time or times at which the Stock Option may be exercised, to
extend the term described in Section 3 above, to waive any other condition or
restriction applicable to the Stock Option or to the exercise of the Stock
Option, to reduce the Option Price and to make any other change permitted to be
made under the Plan without the consent of the Participant; and may amend the
Agreement in any other respect with the consent of the Participant.
15. Governing Law. This Agreement is intended to be performed in the
-------------
State of Texas and will be construed and enforced in accordance with and
governed by the laws of such State, except as to matters of corporate law, which
will be governed by the laws of the State of Delaware.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have executed this
Agreement as of the ________.
STERLING SOFTWARE, INC.
By:
-----------------------------------------
Sterling L. Williams
President and Chief Executive Officer
PARTICIPANT:
--------------------------------------------
Signature
--------------------------------------------
Print Name
Social Security Number:
---------------------
Address for Notice:
--------------------------------------------
--------------------------------------------
-5-
<PAGE>
Exhibit 10.6
STERLING SOFTWARE, INC.
1996 STOCK OPTION PLAN
Stock Option Agreement
----------------------
This Stock Option Agreement (the "Agreement") is entered into by and
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
________ (the "Participant"). The Company and the Participant agree as follows:
1. Grant of Stock Option. The Company hereby grants to the Participant
---------------------
effective as of ________ (the "Date of Grant"), upon the terms and conditions
set forth below and subject to the terms and conditions of the Company's 1996
Stock Option Plan (the "Plan"), an option (the "Stock Option") to purchase from
the Company a total of ________ shares of the Company's common stock, par value
$0.10 per share ("Common Stock"), at an exercise price per share equal to
________ (the "Option Price"). Any terms, when used in this Agreement with
initial capital letters but not defined herein, have the same meanings as in the
Plan, the provisions of which are incorporated into this Agreement by reference.
The Participant acknowledges receipt of a copy of the Plan.
2. Time of Exercise. The Stock Option may be exercised, in whole or in
----------------
part, according to the following schedule:
<TABLE>
<CAPTION>
Percentage
Exercisable Periods
----------- -------
<S> <C>
0% Immediately
25% On the first anniversary of the Date of Grant
50% On the second anniversary of the Date of Grant
75% On the third anniversary of the Date of Grant
100% On the fourth anniversary of the Date of Grant
</TABLE>
Notwithstanding the foregoing schedule, in the event of a Change in
Control (as defined in Section 1(c) of the Change-in-Control Severance Agreement
dated ________ between the Participant and the Company and any amendments
thereto) or a threatened Change in Control, all of the unexercised portion of
this Stock Option will become immediately exercisable, and the right of the
Participant to exercise the Stock Option as to such unexercised portion will
continue for the entire term described in Section 3 below, regardless of whether
the Participant's employment with the Company or any Subsidiary terminates
before the expiration of such term. Whether a Change in Control is threatened
will be determined solely by the Board.
<PAGE>
The unexercised portion of the Stock Option from one annual period may
be carried over to a subsequent annual period or periods, and the right of the
Participant to exercise the Stock Option as to such unexercised portion will
continue for the entire term described in Section 3 below, subject to the
provisions of Section 9 and 10 below. In no event may the Stock Option be
exercised in whole or in part, however, after the expiration of such term.
3. Term. The Stock Option will expire and all rights under this Agreement
----
will terminate on the tenth anniversary of the Date of Grant.
4. Restrictions on Exercise. The Stock Option:
------------------------
(a) may be exercised only with respect to full shares and no fractional
shares of Common Stock will be issued upon exercise of the Stock Option;
and
(b) may be exercised in whole or in part, but no certificates
representing shares subject to the Stock Option will be delivered if any
requisite registration with, clearance by, or consent, approval or
authorization of, any governmental authority of any kind having
jurisdiction over the exercise of the Stock Option, or issuance of
securities upon such exercise, has not been obtained or secured.
5. Manner of Exercise. The Stock Option may be exercised by written notice
------------------
to the Company of the number of shares being purchased and the Option Price to
be paid, accompanied by full payment of the Option Price (a) in cash or by check
acceptable to the Company, (b) by the transfer to the Company of shares of
Common Stock owned by the Participant for at least six months and having an
aggregate fair market value per share at the date of exercise equal to the
aggregate Option Price (provided that the payment method described in this
clause (b) will not be available at any time that the Company is prohibited from
purchasing or acquiring such shares of Common Stock), or (c) by a combination of
any of the foregoing, provided that payment of the Option Price may also be made
by deferred payment from the proceeds of sale through a bank or broker of some
or all of the shares to which the exercise relates. Any federal, state or local
taxes required to be paid or withheld at the time of exercise will be paid or
withheld in full prior to any delivery of shares upon exercise.
6. Transferability of Stock Options. This Stock Option may be transferred
--------------------------------
by the Participant on five days prior written notice to the Company. Such notice
period may be waived in the discretion of the Secretary of the Company. In the
event of a transfer, the transferee will succeed to all of the rights,
restrictions and obligations of the Participant under this Agreement.
7. Rights as Stockholder. Neither the Participant nor any of the
---------------------
Participant's beneficiaries will be deemed to have any rights as a stockholder
with respect to any shares covered by the Stock Option until the issuance of a
certificate to the Participant for such shares.
-2-
<PAGE>
8. Adjustments. The number of shares of Common Stock covered by the Stock
-----------
Option evidenced by this Agreement, and the Option Price thereof, will be
subject to adjustment as provided in the Plan. No adjustment will be made for
dividends or other rights for which the record date is prior to the issuance of
the certificate or certificates representing shares issued pursuant to the Stock
Option.
9. Rights in Event of Death or Termination of Employment as a Result of
--------------------------------------------------------------------
Disability of Participant. If the Participant dies or terminates employment as
- -------------------------
a result of disability prior to termination of the Participant's rights to
exercise the Stock Option, any unexercised portion of the Stock Option will
become immediately exercisable and may be exercised, subject to all conditions
of the Plan and this Agreement, until the expiration of the term set forth in
Section 3. In the event of the death of the Participant, the Stock Option may
be exercised by the Participant's estate or a person who acquired the right to
exercise the Stock Option by bequest or inheritance or by reason of the death of
the Participant. For purposes of this section, the Executive Committee of the
Board will have sole discretion to determine whether termination of a
Participant's employment has occurred "as a result of disability." In no event
may the Stock Option be exercised after the expiration date set forth in
Section 3.
10. Rights in Event of Termination of Employment Other Than as a Result of
----------------------------------------------------------------------
Death or Disability. With respect to a Participant who is an employee of the
- -------------------
Company or any Subsidiary on the Date of Grant, if the Participant ceases to be
employed by the Company and all Subsidiaries, other than as a result of death or
disability, prior to the termination of the Participant's rights to exercise the
Stock Option, any unexercised portion of the Stock Option will continue to vest
in accordance with Section 2 and will be exercisable through the 90th day
following the last day on which the Participant is entitled to receive any
compensation, including but not limited to severance or termination payments
("Compensation"), from the Company. With respect to a Participant who is an
employee of the Company or any Subsidiary on the Date of Grant and who
subsequently ceases to be employed by the Company and all Subsidiaries due to
"retirement," the Stock Option will continue to vest in accordance with Section
2 and will be exercisable until the expiration of the term set forth in Section
3 unless, within 60 days after the date of the Participant's "retirement," the
Executive Committee of the Board, in its sole discretion, takes action to
disapprove of such "retirement". In the event of such disapproval, the Stock
Option will be exercisable through the 90th day following the last day on which
the Participant is entitled to receive any Compensation. For purposes of this
Agreement, "retirement" will mean termination of employment as a result of a
voluntary resignation by the Participant on or after the date on which the
Participant has been employed by the Company or any Subsidiary for ten years or
more. In no event may the Stock Option be exercised after the expiration date
set forth in Section 3.
-3-
<PAGE>
11. Stock Purchased for Investment. Unless the shares are covered by a then
------------------------------
current and effective registration statement under the Securities Act of 1933,
as then in effect, the Participant, by accepting the Stock Option, represents,
warrants, covenants and agrees on behalf of the Participant and the
Participant's transferees that all shares of Common Stock purchased upon the
exercise of the Stock Option will be acquired for investment and not for resale
or distribution, and that upon each exercise of any portion of the Stock Option,
the person entitled to exercise the same will furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares are being acquired in good faith for investment and not for resale or
distribution. The Participant agrees to furnish or execute such documents as the
Company in its discretion deems necessary to (a) evidence such exercise of the
Stock Option, (b) determine whether registration is then required under the
Securities Act of 1933, as then in effect, and (c) comply with or satisfy the
requirements of the Securities Act of 1933, or any other federal, state or local
law, as then in effect.
12. Notices. Each notice relating to this Agreement will be in writing and
-------
delivered in person or by certified mail to the proper address. Each notice will
be deemed to have been given on the date it is received. Each notice to the
Company will be addressed to it at its principal office, now 300 Crescent Court,
Suite 1200, Dallas, Texas 75201, attention of the Secretary. Each notice to the
Participant or other person or persons then entitled to exercise the Stock
Option will be addressed to the Participant or such other person or persons at
the Participant's address specified below. Anyone to whom a notice may be given
under this Agreement may designate a new address by notice to that effect.
13. Employment. This Agreement does not confer upon the Participant any
----------
right to be employed or to continue in the employ of the Company or any
Subsidiary, nor does it in any way interfere with the right of the Company or
any Subsidiary to terminate the employment of the Participant at any time.
14. No Obligation to Exercise Stock Option. This Agreement does not impose
--------------------------------------
any obligation upon the Participant to exercise the Stock Option.
15. Amendments. The Special Stock Option Committee, the Stock Option
----------
Committee or the Board, as authorized pursuant to the Plan, may, without the
consent of the Participant, amend this Agreement, or otherwise take action, to
accelerate the time or times at which the Stock Option may be exercised, to
extend the term described in Section 3 above, to waive any other condition or
restriction applicable to the Stock Option or to the exercise of the Stock
Option, to reduce the Option Price and to make any other change permitted to be
made under the Plan without the consent of the Participant; and may amend the
Agreement in any other respect with the consent of the Participant.
16. Governing Law. This Agreement is intended to be performed in the State
-------------
of Texas and will be construed and enforced in accordance with and governed by
the laws of such State, except as to matters of corporate law, which will be
governed by the laws of the State of Delaware.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have executed this
Agreement as of the ________.
STERLING SOFTWARE, INC.
By:
--------------------------------------
Sterling L. Williams
President and Chief Executive Officer
PARTICIPANT:
-----------------------------------------
Signature
-----------------------------------------
Print Name
Social Security Number:
------------------
Address for Notice:
-----------------------------------------
-----------------------------------------
-5-
<PAGE>
Exhibit 10.8
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY98
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, 1997 through September 30, 1998,
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, 1998, 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 10.15
AMENDMENT TO
SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made and
entered into as of the 15th day of August, 1997, by and between Sterling
Software, Inc., a Delaware corporation ("Sterling Software"), and ________, an
individual (the "Executive").
RECITALS:
WHEREAS, Sterling Software and the Executive are parties to a Severance
Agreement dated as of ________ (the "Agreement"); and
WHEREAS, Sterling Software and the Executive desire to amend the Agreement
in the manner set forth in this Amendment;
NOW, THEREFORE, Sterling Software and the Executive hereby agree as
follows:
1. Amendment. Section 4(b) of the Agreement is hereby amended in its
---------
entirety to read as follows:
(b) an amount equivalent to the product of ________ times:
(i) 100% of the Plan Bonus Amount (as hereinafter defined) in effect
immediately prior to the Notice Date, or
(ii) if no Plan Bonus Amount shall be in effect or readily determinable
by Sterling Software with respect to the Executive immediately
prior to the Notice Date, an amount equal to the aggregate amount
of the bonus, incentive or other cash compensation, in addition to
(but not including) the Executive's annual base salary, received
by the Executive pursuant to any bonus, incentive compensation,
performance, discretionary pay or similar agreement, policy, plan,
program or arrangement (whether or not funded) of the Company
during the 365 days immediately prior to the Notice Date.
As used herein, the term "Plan Bonus Amount" shall mean the aggregate
amount (calculated to avoid duplication, on an annualized basis and
with respect only to the fiscal year of Sterling Software in which the
Notice Date occurs) of the budgeted or otherwise authorized or
contemplated bonus, incentive or other cash compensation, in addition
to (but not including) the Executive's base salary, to be paid to the
Executive under any bonus, incentive compensation, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company upon attainment of
100% of the plan or
<PAGE>
target amount specified in such agreement, policy, plan, program or
arrangement, whether or not attained at the time of termination.
2. References to and Continuation of Agreement. On and after the date
-------------------------------------------
hereof, each reference in the Agreement to "this Agreement," "hereunder,"
"hereof," "herein," or words of like import referring to the Agreement will be a
reference to the Agreement as amended by this Amendment. Except as specifically
amended by this Amendment, the Agreement will remain in full force and effect
and is hereby ratified and confirmed.
3. Governing Law. The validity, interpretation, construction and
-------------
performance of this Amendment will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to
conflict of laws principles of such State.
4. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By:
-------------------------------------
Sterling L. Williams,
President & Chief Executive Officer
----------------------------------------
-2-
<PAGE>
Exhibit 10.18
FIRST AMENDMENT
TO
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
--------------------------
This First Amendment (this "Amendment") to the Sterling Software, Inc.
Deferred Compensation Plan (the "Plan") is made and entered into effective as of
the 27th day of October, 1997, with reference to the following facts:
A. The Company implemented the Plan effective as of February 1, 1997.
B. The Committee wishes to amend the Plan in the manner specified in this
Amendment and both the Committee and the Trustee have been furnished with an
opinion of counsel, as required by Section 8.4(e) of the Plan, to the effect
that this Amendment complies with the amendment requirements of Section 8.4 of
the Plan.
NOW, THEREFORE, it is agreed as follows:
1. Section 1.2(k) of the Plan is hereby amended to read in its entirety as
follows:
(a) "Eligible Individual" for a Plan Year means (i) a common law employee
-------------------
of the Company whose Compensation is paid on a United States payroll in United
States dollars and (A) whose Compensation equaled or exceeded the Threshold
Amount in the prior calendar year (or, in the case of an employee employed only
during a portion of such prior calendar year, whose annualized Compensation
would have equaled or exceeded the Threshold Amount), or (B) who satisfied any
alternative eligibility criteria established by the Committee pursuant to
Section 7.3(iv) of the Plan; (ii) a member of the Board of Directors who is not
a common law employee of the Company; or (iii) a consultant who is not a common
law employee of the Company and who is designated by the Committee as eligible
to participate in the Plan. An individual's status as an Eligible Individual for
a Plan Year shall be determined prior to the first day of such Plan Year.
Notwithstanding the foregoing, the Committee may in its discretion (I) determine
in writing that an otherwise Eligible Individual may not participate in this
Plan for one or more Plan Years, and (II) determine to admit a newly hired
employee (whether hired through an acquisition or otherwise) into the Plan on a
date other than the first day of a Plan Year and to establish criteria for the
admission of such newly hired employees in addition to or in lieu of those set
forth above, provided that such criteria are consistent with the purpose of the
Plan to provide benefits for a select group of management or highly compensated
employees. An individual who is classified by the Company as an independent
contractor whose compensation for services is reported by the Company on a form
other than Form W-2 or any successor form for reporting wages paid to employees
will not be an Eligible Individual, unless the Committee specifically designates
such individual by name as an Eligible Individual pursuant to clause (iii)
above.
<PAGE>
2. The second sentence of Section 3.1(a) of the Plan is hereby amended to
read in its entirety as follows:
For each subsequent Plan Year, an Eligible Individual may make an election
to defer Compensation by filing an Election Form with the Committee on or
before the December 31 preceding the Plan Year for which the election is to
be effective or, in the case of a newly hired employee who is admitted into
the Plan on a date other than the first day of a Plan Year, on or before
the date such employee receives his first payroll distribution from the
Company.
3. The third and fourth sentences of Section 3.2(a) of the Plan are hereby
amended to read in their entirety as follows:
The Committee may in its discretion change from time to time the Funds
available for hypothetical investment, provided Participants are given at
least 90 days' prior written notice of the effective date of the deletion
of any Fund (including, without limitation, the deletion of a Fund in
connection with the substitution of a new Fund in its place); it being
understood, however, that where the deletion of a Fund is beyond the
control of the Committee (e.g., where the provider of a Matching Investment
unilaterally effects such a deletion), the Committee's obligation shall be
to give Participants written notice of the effective date of such deletion
as promptly as practicable after the Committee obtains knowledge thereof.
The Committee may in its discretion add new Funds at any time and
Participants shall be given written notice of such additions as promptly as
practicable after the Committee decides to add a new Fund.
4. The second sentence of Section 3.2(b) of the Plan is hereby amended to
read in its entirety as follows:
Effective as of the beginning of any calendar month, a Participant may change
the Fund designations made under this Section 3.2 by filing a new designation,
on a form provided by the Committee, at least 15 days prior to the end of the
immediately preceding calendar month.
5. Section 7.3(iv) of the Plan is hereby amended to read in its entirety
as follows:
(iv) determine the Threshold Amount applicable to any Plan Year after the
first Plan Year and establish alternative criteria, consistent with the
purpose of the Plan to provide benefits to a select group of management or
highly compensated employees, for what shall constitute an employee of the
Company an Eligible Individual with respect to any given Plan Year, in
addition to or in lieu of the eligibility criteria set forth in Section 1.2(k)
of the Plan;
6. This Amendment will be effective as of the date first set forth above.
As amended hereby, the Plan is in all respects ratified, confirmed and approved
and shall continue in full force and effect.
2
<PAGE>
7. Capitalized terms used and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Plan.
IN WITNESS WHEREOF, this Amendment has been executed on behalf of the
Company as of the date first set forth above.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
-----------------------------------------
Don J. McDermett, Jr.
Senior Vice President & General Counsel
3
<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
5.75% 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 5.75%
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 21.1
STERLING SOFTWARE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
Sterling Software (Eastern), Inc................. Delaware
Sterling Software International, Inc............. Delaware
Sterling Software International SARL........... France
Sterling Software Leasing Company................ Delaware
Sterling Software (Midwest), Inc................. Delaware
Sterling Software (Southern), Inc................ Georgia
Sterling Software (Australia) II Pty Limited... Australia
Sterling Software Beratungs und Vertriebs
GmbH.......................................... Austria
Sterling Software (Canada) II, Inc./Logiciel
Sterling (Canada) II, Inc..................... Canada
Sterling Software (Korea) Limited.............. Korea
Sterling Software (Malaysia) Sdn. Bhd.......... Malaysia
Sterling Software (Singapore) II Pte Ltd....... Singapore
Sterling Software (Espana) II S.L.............. Spain
Sterling Software (UK) III Limited............. United Kingdom
Sterling Software (Ireland) I Limited........ Ireland
Sterling Software (Netherlands) II B.V....... Netherlands
Sterling Software (Benelux) II N.V./S.A.... Belgium
Sterling Software (France) III S.A......... France
Sterling Software II GmbH.................. Germany
Sterling Software (Italia) II Srl.......... Italy
Sterling Software (Netherlands) III B.V.... Netherlands
Sterling Software (Switzerland) II S.A..... Switzerland
Sterling Software (UK) IV Limited............ United Kingdom
Sterling Software (U.S.), Inc.................... Delaware
Sterling Software (U.S.A.), Inc.................. California
Sterling Software (U.S. of America), Inc......... Delaware
Southwest Beta Services, Inc..................... Delaware
Sterling Software (Pacific) Pty Limited.......... Australia
Sterling Software (Australia) Pty Limited...... Australia
Systems Center Handelsgesellschaft M.B.H......... Austria
Sterling Software (Benelux) NV................... Belgium
Sterling Software (Benelux) BVBA............... Belgium
Sterling Software do Brasil Participacoes Ltda... Brazil
Sterling Software do Brasil Ltda. (49%
subsidiary)................................... Brazil
Sterling Software (Canada), Inc.................. Canada
Sterling Software France II...................... France
Sterling Software (France) SA.................... France
Sterling Software GmbH........................... Germany
KnowledgeWare G.M.B.H.......................... Austria
Sterling Software (Israel), Ltd.................. Israel
Sterling Software (Italia) Srl................... Italy
Sterling Software (Japan) Ltd.................... Japan
Sterling Software Technology KK................ Japan
Sterling Software (Netherlands) I BV............. Netherlands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
Sterling Software International Marketing........ Cayman Islands
Sterling Software (Netherlands Antilles) NV.... Netherlands Antilles
Sterling Software (Netherlands) IV BV........ Netherlands
Sterling Software (New Zealand) Limited.......... New Zealand
Sterling Software (Scandinavia) AS............... Norway
Sterling Software (Portugal)--Informatica, Lda... Portugal
Sterling Software (Singapore) PTE Ltd............ Singapore
Sterling Software (Espana), S.A.................. Spain
Sterling Software AB............................. Sweden
Sterling Software (Switzerland) AG............... Switzerland
Sterling Software (UK) II Limited................ United Kingdom
Sterling Software (UK) Limited................. United Kingdom
Sterling Software (Virgin Islands), Inc.......... U.S. Virgin Islands
</TABLE>
Notes:
1. Indented names are subsidiaries of subsidiaries.
2. Inclusion in the list is not a representation that the subsidiary is a
significant subsidiary.
3. Except as noted, the voting shares of all subsidiaries are 100% owned by
Sterling Software, Inc., its subsidiaries or employee nominees.
<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. 33-56683, No. 33-62057 and No. 33-64073), and in the
Registration Statements on Form S-8 (File No. 333-37653, No. 33-65402, No. 33-
69926, No. 33-56681 and No. 33-62059) of Sterling Software, Inc. and in the
related Prospectuses of our report dated November 7, 1997, 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,
1997.
/s/ Ernst & Young LLP
Dallas, Texas
November 18, 1997
<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, 1997 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 435,726
<SECURITIES> 206,965
<RECEIVABLES> 149,422
<ALLOWANCES> 12,152
<INVENTORY> 0
<CURRENT-ASSETS> 826,901
<PP&E> 48,598
<DEPRECIATION> 42,430
<TOTAL-ASSETS> 1,065,658
<CURRENT-LIABILITIES> 268,155
<BONDS> 0
0
0
<COMMON> 3,990
<OTHER-SE> 744,264
<TOTAL-LIABILITY-AND-EQUITY> 1,065,658
<SALES> 488,978
<TOTAL-REVENUES> 488,978
<CGS> 199,806
<TOTAL-COSTS> 664,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,950
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (136,396)
<INCOME-TAX> (3,428)
<INCOME-CONTINUING> (132,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,968)
<EPS-PRIMARY> (3.45)
<EPS-DILUTED> (3.45)
</TABLE>
