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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, 1998
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)
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DELAWARE 75-1873956
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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:
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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
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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]
As of November 10, 1998, 82,441,492 shares of the Registrant's Common Stock
were outstanding.
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant was $2,081,053,559, based on the $26 3/16 closing
sales price of the Registrant's Common Stock on the New York Stock Exchange on
November 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Meeting of Stockholders of
the Registrant to be held during 1999 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.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 14
Item 6. Selected Financial Data.................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 25
Item 8. Financial Statements and Supplementary Data................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 52
PART III.
Item 10. Directors and Executive Officers of the Registrant......... 52
Item 11. Executive Compensation..................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 52
Item 13. Certain Relationships and Related Transactions............. 52
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 53
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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 worldwide developer and supplier of application development, information
management and systems management software products and services, as well as a
supplier of specialized information technology ("IT") services for sectors of
the federal government. Sterling Software's customer base includes 91 of the
100 largest U.S. industrial and service corporations, as ranked by 1997
revenues in Fortune magazine. Sterling Software's business segments are as
follows:
. The application management business segment provides solutions for both
enterprise-scale application development and information management.
Application development solutions include products and services for
business modeling through code generation. These solutions provide
customers the ability to build component-based applications through
model-based code generation using traditional and object-oriented
techniques, to reuse what they have built through components and to
protect their investment in legacy assets. Information management
solutions include products and services that enable customers to
facilitate enterprise information access and to extend the life and
usefulness of legacy applications. These solutions help enterprises
address issues related to complex implementation challenges such as data
warehousing, intranets and application management, using technologies
that enhance business intelligence, integrate applications and improve
information access through web browsers.
. The systems management business segment provides solutions that enable
customers to simplify the use of multiple computing environments and to
increase the productivity of information systems, ultimately ensuring
that the systems meet the business needs of the organization. These
solutions include enterprise-level network management products,
enterprise-level storage management products and comprehensive VM
systems management products.
. The federal systems business segment provides specialized IT services
for sectors of the federal government, as well as state and local
governments. Major customers include the U.S. Department of Defense
("DoD"), the military services, U.S. national intelligence agencies, the
Federal Aviation Administration ("FAA") and the National Aeronautics and
Space Administration ("NASA").
Worldwide revenue from the Company's application management, systems
management and federal systems business segments represented 51%, 28% and 21%,
respectively, of the Company's total 1998 revenue. Revenue from the Company's
international operations represented 39% of the Company's total 1998 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 business
conducted by Sterling Software's former electronic commerce business segment.
The results of operations of Sterling Commerce for 1996 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
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".
A large percentage of Sterling Software's business is recurring through
annual and multi-year contracts. Product support contracts generally have
terms that range from one to three years, fixed-term product lease and rental
contracts generally have terms that range from month-to-month to year-to-year
and multi-year federal contracts generally have terms that range from one to
five years. Recurring revenue represented 46% and 48% of the Company's total
revenue in 1998 and 1997, respectively.
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Consistent with Sterling Software's decentralized operating structure, the
Company's businesses are served by independent operating groups. Within each
of these groups are divisions that focus on specific business niches. In
keeping with the Company's decentralized philosophy, the management team of
each group and division is largely autonomous. 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 through
business and product acquisitions.
At September 30, 1998, the Company employed approximately 3,500 employees in
90 offices worldwide. The Company has direct sales offices in 22 countries and
distributors and agents in an additional 38 countries.
APPLICATION MANAGEMENT
The application management business segment provides solutions for both
enterprise-scale application development and information management through
its COOL and VISION product families, respectively. Worldwide revenue from the
application management business segment represented 51%, 39% and 36% of the
Company's total revenue during 1998, 1997 and 1996, respectively.
The COOL family of products is designed to provide customers the ability to
build component-based applications through model-based code generation using
traditional and object-oriented techniques, to reuse what they have built
through components and to protect their investment in legacy assets. 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:Spex, released in February 1998, represents the latest in
component-based development technology. Using COOL:Spex, developers model
component interfaces and architect component-based applications that directly
support business requirements documented in COOL:Biz. COOL:Spex produces
technology-independent component specifications that maximize reuse. COOL:Gen
is designed to allow developers to model and generate error-free code in a
structured, repeatable manner. With COOL:Gen, high-level component
specifications are driven forward into dynamic, scalable applications
targeting multiple platforms, including the World Wide Web. COOL:Plex is a
model-based development environment that leverages pattern technology to
rapidly deliver high-quality, adaptable applications for Windows NT and AS/400
platforms. COOL:Jex is an object-oriented analysis and design solution
supporting the Unified Modeling Language industry standard notation. COOL:Jex
allows modeling of complex application requirements, driven directly from
business requirements. The COOL portfolio also includes COOL:2E, an AS/400
development environment supporting model-based code generation of AS/400
applications; COOL:Enterprise, an OS/2 development environment supporting
model-based code generation of MVS, Unix and Windows applications; and
COOL:Xtras, a set of supporting utilities for Web reporting and AS/400 model
and application management.
The COOL product portfolio was expanded on October 26, 1998, with the
Company's acquisition of Cayenne Software, Inc. ("Cayenne"). See "Recent
Developments". The acquired products include COOL:BusinessTeam, a logical data
and process modeling tool; COOL:DBA, a relational database design and
generation tool; and COOL:Teamwork, a structured engineering tool for
requirements documentation and systems design of real-time and embedded
systems. Additionally, COOL:Jex now includes the functionality from Cayenne's
object-oriented analysis and design tool, which offered extensions in both the
number of language generation targets available, as well as support for key
functionality needed to satisfy bid-driven market requirements. COOL:Jex's
extensions and code generation capabilities now support the development of
real-time or embedded systems, client/server applications, as well as intranet
and Internet solutions.
The VISION family of products enables customers to facilitate enterprise
information access and to extend the life and usefulness of legacy
applications. These solutions help enterprises address issues related to
complex implementation challenges such as data warehousing, intranets and
application management, using technologies
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that enhance business intelligence, integrate applications and improve
information access through web browsers. 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 products addresses the functions required to assess the
quality and maintainability of applications, restructure old COBOL programs,
re-document 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. VISION:Phaseshift and VISION:Simulate, among others, were
recently added to the Company's year 2000 portfolio of products.
VISION:Phaseshift provides an interface to system resources and data files. It
intercepts requests for date and time data and "windows" the dates back 28
years in an encapsulated environment. VISION:Simulate is a testing tool that
allows for the simulation of dates into the future to test applications
without changing the system date. The VISION family also includes Business
Intelligence products such as VISION:Clearaccess, VISION:Clearmanage,
VISION:Webaccess and VISION:Dimensions. VISION:Clearaccess facilitates end-
user data access as a query and reporting tool, and VISION:Clearmanage allows
database managers to monitor and control database access in a client/server
environment. VISION:Webaccess is a Java-based, thin client computing solution
for total enterprise data access and analysis over the World Wide Web. Using
wizard technology, VISION:Webaccess allows users to point and click their way
through queries, view and refresh previously created reports and charts, and
create ad hoc reports and charts for quick analysis. VISION:Dimensions is an
online analytical processing tool that provides flexible and dynamic access to
business data in multidimensional databases for online analysis, reporting and
graphical representation.
As of September 30, 1998, the application management business employed
approximately 1,400 people. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Combinations,
Divestitures and Reorganizations--Acquisition of Synon Corporation" and "--
Acquisition of TI Software" for a description of recent acquisitions in this
business segment.
SYSTEMS MANAGEMENT
The systems management business segment provides solutions that enable
customers to simplify the use of multiple computing environments and to
increase the productivity of information systems, ultimately ensuring that the
systems meet the business needs of the organization. The SOLVE family of
products focuses on enterprise-level network management, the SAMS family of
products focuses on enterprise-level storage management and the VM family of
products focuses on systems management solutions for the VM operating
environment. Guiding these solutions is the group's Business-Centric
Enterprise Management initiative, a pragmatic, business-focused approach to
ensuring the availability and reliability of business critical applications
and the IT infrastructure upon which they rely. Worldwide revenue from the
systems management business segment represented 28%, 32% and 33% of the
Company's total revenue during 1998, 1997 and 1996, respectively.
The SOLVE family of products helps customers manage their networked
enterprise from a business-service perspective. SOLVE:Netmaster automates
network management operations across large-scale enterprises. The
SOLVE:Netmaster products provide for centralized command and control,
diagnostics, performance management and alert and status monitoring of TCP/IP
(Transmission Control Protocol/Internet Protocol), SNA (Systems Network
Architecture) and SNMP (Simple Network Management Protocol) network events.
The SOLVE:Operations products provide and participate in enterprise-wide
systems automation solutions, addressing both mainframe and distributed
systems from a single point. SOLVE:Operations products are available as stand-
alone 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:Diplomat
allows multiple customer information applications to share information with
multiple help desk applications without modifying the applications themselves.
This allows enterprises to synchronize their business support applications and
maximize customer service, while at the same time
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preserving the investment in these applications. 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 SAMS family of products manages, monitors and automates data storage in
both distributed and centralized environments. SAMS:Vantage, OS/390 Edition,
is a client/server system that provides comprehensive automation, interactive
reporting, analysis and predictive modeling capabilities for complex OS/390
storage environments. SAMS:Vantage, Network Edition, delivers consolidated
management of distributed storage across UNIX, Windows NT, NetWare and OS/2
environments; it also incorporates a view of mainframe storage. SAMS:Vantage,
ADSM Edition, is a tailored version of the product that adds value to IBM's
Adstar Distributed Storage Manager (ADSM). From one workstation, the product
identifies and manages critical data defects and solves problems
automatically, charts trends and forecasts capacity across platforms. The
SAMS:Vantage storage management approach is designed to remain consistent
across multiple platforms and to allow organizations to: manage enterprise
data storage in a uniform manner, implement consistent storage management
policies and standards, provide consolidated 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.
SAMS:Perform, the input/output ("I/O") performance monitoring component of
SAMS:Vantage, is the first I/O performance monitor to work across multiple
RAID (redundant array of inexpensive disks) subsystems and DASD (data access
storage devices). The product 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 centralized mainframe data
storage management backup and recovery system; SAMS:Allocate, a centralized
allocation control system; and SAMS:Vista, an automated tape storage
management component of SAMS:Vantage, OS/390 Edition, that enhances tape
management systems and assists in the management of robotic tape systems and
high-capacity tape devices.
The VM family of products provides systems management software and 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, recovery and SFS (Shared File
System) management. 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:Webgateway 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:Webgateway is a World Wide Web server for
VM that allows customers to utilize user-friendly web browsers to deliver
mainframe-based information to end-users on any platform. VM:Webgateway acts
as a repository for home pages and documents created using HTML (Hypertext
Markup Language) and also stores, retrieves and processes information in
various formats including text, graphics, sound, images, video and Java
applets. VM:Webgateway's OfficeVision interface option adds a graphical user
interface to the calendar and E-mail features of IBM's OfficeVision/VM, a
mainframe-based office automation solution.
As of September 30, 1998, the Systems Management business employed
approximately 800 people.
FEDERAL SYSTEMS
The federal systems business segment provides specialized IT services for
sectors of the federal government, as well as state and local governments.
Major customers include the DoD, the military services, U.S. national
intelligence agencies, the FAA and NASA. In 1998, Sterling Software began its
32nd year of service to both NASA and the DoD. In 1998, the Company's federal
systems business was performing work under approximately 190 contracts.
Revenue from the federal systems business segment represented 21%, 21% and 22%
of the Company's total revenue during 1998, 1997 and 1996, respectively.
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The Information Technology Division of this business focuses on four
operational areas: intelligence systems, advanced systems, weather systems and
state and local governments. The division specializes in secure
communications, message and data handling, weather forecast production and
distribution, and systems integration and application development in support
of various projects ranging from satellite data collection to counter-
terrorism. Division computing resources include facilities approved for
classified operations and substantial hardware and software configurations to
support software lifecycle development activities in distributed processing
environments. The division's software engineering and software development
processes are certified at Software Engineering Institute Capability Maturity
Model (SEI CMM) Level 3 and International Standards Organization (ISO) 9001.
Customers include U.S. Air Force command, control and communications
organizations, the Defense Intelligence Agency and other national intelligence
organizations.
The Applied Systems Division of this business has four operational areas:
simulation, modeling and training; advanced systems; command, control,
communications, computers, surveillance and reconnaissance (C4ISR); and space
and transportation systems. The division specializes in tactical military
intelligence and data fusion; command and control; advanced database
techniques; modeling, constructive, live and virtual simulation; and strategic
planning. In addition, the division specializes in software and support
services for airborne and space flight systems, data acquisition and control
systems, and air traffic management. Customers include U.S. Army intelligence
and battle command organizations, the FAA, NASA and the U.S. Air Force.
As of September 30, 1998, the federal systems business employed
approximately 1,200 people. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Combinations,
Divestitures and Reorganizations--Acquisition of Mystech Associates, Inc." for
a description of recent acquisitions in this business segment.
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 prohibit reproduction, transfer or disclosure of the
product and generally restrict the use of the product to designated sites or
central processing units. However, some license agreements may cover multiple
sites or multiple central processing units at one site. In 1998, 1997 and
1996, product revenue accounted for 40%, 41% and 42%, respectively, of the
Company's total revenue.
PRODUCT SUPPORT
Product support is available to Sterling Software customers, typically
through annual contracts generally priced from 12% to 22% of the 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 1998, 1997 and 1996, product
support revenue accounted for 26%, 27% and 28%, respectively, of the Company's
total revenue.
SERVICES
Services provided by Sterling Software primarily consist of specialized IT
services in support of federal government contracts provided through the
Company's federal systems business. In addition, 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
its application management business to better enable customers to successfully
use its products. In 1998, 1997 and 1996, services revenue accounted for 34%,
32% and 30%, respectively, of the Company's total revenue.
PRODUCT DEVELOPMENT
Each domestic division within Sterling Software's application management,
systems management and federal systems businesses has its own development
function. Sterling Software's product development programs
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in each of these businesses include the enhancement of existing products and
introduction of new products based upon current and anticipated customer
needs. The Company believes that its decentralized organizational structure
facilitates development cost control and focuses the development function on
the customers' needs. Approximately 470 of Sterling Software's employees were
engaged in product development as of September 30, 1998. Gross product
development costs in 1998, 1997 and 1996 were $63,118,000, $51,370,000 and
$44,582,000, respectively, of which the Company capitalized $26,956,000,
$21,711,000 and $18,180,000, respectively, as the cost of developing and
testing new or significantly enhanced software products.
Each of the Company's product divisions has completed a year 2000 assessment
of its currently offered products. This assessment included internal testing
of the year 2000 capabilities of these products. The Company believes that the
vast majority of its currently offered products are year 2000 compliant, and
expects virtually all of its remaining currently offered products to become
compliant during the early part of calendar 1999 through new releases. In any
event, the Company expects that all of its currently offered products will be
year 2000 compliant before the end of calendar 1999. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Other Matters--Year 2000 Issues".
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 application management and systems
management businesses has its own U.S. sales and marketing organization. In
addition, the application management and systems management businesses have
divisions and business units that focus specifically on the international
marketplace for their respective product lines. The federal systems business
has its own sales organization, which focuses specifically on specialized IT
service offerings to the federal IT market.
CUSTOMERS
Sterling Software's customers include 91 of the 100 largest U.S. industrial
and service corporations, ranked by 1997 revenues in Fortune magazine. In the
year ended September 30, 1998, agencies, branches and departments of the
federal government accounted for approximately 22% of the Company's total
revenue.
COMPETITION
The computer software and services industry is rapidly evolving and 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 with hardware
manufacturers. 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.
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
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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 work environments, and
offers competitive compensation and benefits packages.
At September 30, 1998, the Company employed approximately 3,500 people.
INTELLECTUAL PROPERTY
Sterling Software's success depends in part on its technology and
intellectual property. The Company relies primarily on a combination of
copyright, patent and trademark laws, confidentiality procedures and
contractual provisions to protect its intellectual property. The Company
routinely enters into nondisclosure and confidentiality agreements with
employees, contractors, consultants, vendors and customers, and its product
license agreements generally prohibit the unauthorized use or disclosure of
the Company's proprietary intellectual property. 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 in any
material respect on the valid proprietary rights of third parties. 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 business, financial condition or results of operations.
The COOL, VISION, SAMS, VM and SOLVE families of product names and the mark
"Sterling Software" 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 (on short notice). Based upon past experience,
the Company believes that the contract renewal options included in existing
contracts will be exercised for the full period designated in such contracts,
but no assurance can be given that such contracts will be renewed.
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Total backlog, including federal government contract renewal options not yet
exercised and multi-year product support contracts at September 30, 1998 and
1997, was $254,123,000 and $246,381,000, respectively. Of these amounts, 96%
and 94%, respectively, related to federal government sources, primarily in the
Company's federal systems business. The dollar value of federal government
renewal options not yet exercised or funded included in the Company's total
backlog at September 30, 1998 and 1997, was $159,421,000 and $113,981,000,
respectively. Approximately $91,526,000 of the September 30, 1998 backlog is
expected to be realized in the year ending September 30, 1999.
RECENT DEVELOPMENTS
On October 26, 1998, Sterling Software acquired Cayenne, a global supplier
of analysis and design solutions for application and database development, in
a cash transaction valued at approximately $11,400,000. The acquisition will
be accounted for in accordance with the purchase method of accounting and,
accordingly, the results of operations of Cayenne will be included in the
Company's results of operations from the date of the acquisition and will be
reported under the application management business segment. The Company
expects to incur non-recurring charges to operations in the first quarter of
1999, currently estimated to aggregate between $25,000,000 and $40,000,000,
primarily related to the reorganization of the Company's operations and the
write-off of purchased research and development costs in connection with the
acquisition.
EXECUTIVE OFFICERS
The following information regarding the executive and other officers of
Sterling Software is as of November 13, 1998.
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NAME AGE POSITION
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Sam Wyly 64 Chairman of the Board and Director
Charles J. Wyly, 65 Vice Chairman of the Board and Director
Jr.
Sterling L. 55 President, Chief Executive Officer and Director
Williams
Geno P. Tolari 55 Executive Vice President and Chief Operating Officer
M. Gene Konopik 55 Executive Vice President and Group President
John R. Cook 54 Senior Vice President, Business Development
F.L. "Mike" 60 Senior Vice President and Group President
Harvey
Don J. 40 Senior Vice President, General Counsel and Secretary
McDermett, Jr.
B. Carole Morton 52 Senior Vice President and Group President
Mark A. Theel 41 Senior Vice President and Group President
R. Logan Wray 39 Senior Vice President and Chief Financial Officer
Ivan S. Hughes* 46 Vice President, Organizational Development
Pamela L. 39 Vice President, Financial Planning
Isbell*
Julie G. Kupp* 35 Vice President, Investor Relations
Laura Appling* 36 Controller
Susan D. 50 Treasurer
Tiholiz*
</TABLE>
--------
* Although Ivan S. Hughes, Pamela L. Isbell, Julie G. 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.
Sam Wyly has served as Chairman of the Board since co-founding the Company
in 1981. He also serves as Chairman of the Executive and 1996 Stock Option
Committees of the Board. Companies founded by Mr. Wyly were among the
forerunners of the computer software and electronic commerce industries. In
1963, he founded University Computing Company, which became one of the largest
computer service and software companies.
8
<PAGE>
His data transmission company, Datran, Inc., was one of the pioneering
telecommunications ventures that broke up the telephone monopoly. Sterling
Commerce (a provider of electronic commerce software and network services), a
leader in this industry, was spun off to the Company's stockholders in 1996
and now has a market value in excess of $3 billion. Mr. Wyly currently serves
as Chairman of the Executive Committee of the Board of Directors of Sterling
Commerce, Chairman of Michaels Stores, Inc. and Partner of the General Partner
of Maverick Capital, Ltd., an investment fund management company that he
founded. Mr. Wyly is the father of Evan Wyly, also a director of the Company.
Charles J. Wyly, Jr. co-founded the Company in 1981 and since such time has
served as a director of the Company, 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 its 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, Inc. and as a director of Sterling
Commerce. Charles J. Wyly, Jr. is the father-in-law of Donald R. Miller, Jr.,
also 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 the Company in 1981 and since such time has
served as President, Chief Executive Officer and a director of the Company.
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
also served as Chief Executive Officer of Sterling Commerce. 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 to February 1997 and as President of the Federal
Systems Group from October 1985 to December 1994.
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 to December 1994, Mr. Konopik served as the
President of Sterling Software's Information Technology Division.
John R. Cook has served as Senior Vice President, Business Development of
Sterling Software since December 1997. He served as Vice President, Business
Development of Sterling Software's former Applications Management Group from
July 1997 to December 1997. From June 1995 to June 1997, he served the
Software Division of Texas Instruments Incorporated ("TI Software") as Vice
President and General Manager--The Americas (from January 1997 to July 1997)
and as Vice President--Strategy and New Business Creation (from June 1995 to
December 1996). From October 1993 to June 1995, he served as the Chief
Executive Officer of the BankA Enterprise of Andersen Consulting, an
international consulting firm.
F.L. "Mike" Harvey has served as a Senior Vice President of Sterling
Software since June 1997 and as President of the Systems Management Group
since October 1998. He served as President of the former Applications
Management Group from October 1996 to October 1998. From March 1993 to June
1997, he served as President of Omega Consulting Group Inc., a software
consulting company.
Don J. McDermett, Jr. has served as Senior Vice President and General
Counsel of Sterling Software since May 1997 and as Secretary since October
1998. From July 1996 to May 1997, he served as Vice President, Legal of
Sterling Software. Prior to that time Mr. McDermett was employed 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
since October 1996, as President of Sterling Software's new Information
Management Group since October 1998 and as President of
9
<PAGE>
the Information Management Division since October 1995. From October 1996 to
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 to October 1995 and
President of the former Applications Management Division from July 1993 to
November 1994.
Mark A. Theel has served as a Senior Vice President of Sterling Software
since November 1998, as President of Sterling Software's new Application
Development Group since October 1998 and as President of the Application
Development Division since January 1996. From December 1994 to December 1995,
Mr. Theel served as Vice President, Labs of the Application Development
Division and from July 1993 to November 1994, he served as Vice President,
Labs of the former Applications Management Division.
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 to 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.
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.
Susan D. Tiholiz has served as Treasurer of the Company since November 1997.
She served as Director of Treasury from June 1996 to 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.
CERTAIN CONSIDERATIONS RELATIVE TO THE COMPANY
Sterling Software and its businesses are subject to a number of risks,
including those enumerated below. Any or all of such risks could have a
material adverse effect on the business, financial condition and results of
operations of the Company and on the market price for the Company's Common
Stock. See also Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Forward-Looking Information".
Market Risks; Factors Affecting Quarterly Financial Results
The market price of Sterling Software's common stock, par value $0.10 per
share ("Common Stock"), is subject to fluctuation, and there can be no
assurance that the price of the Common Stock will not decline from time to
time. Factors such as actual or anticipated fluctuations in quarterly
financial results, changes in earnings estimates by securities analysts and
announcements of material events by Sterling Software, its major customers or
its competitors, as well as general industry or global or regional economic
conditions, may cause the market price of the Common Stock to fluctuate,
perhaps substantially.
10
<PAGE>
Fluctuations in Sterling Software's quarterly financial results could result
from a variety of factors, including changes in the levels of revenue derived
from sales of software products and services, market acceptance of new and
enhanced versions of the products and services of Sterling Software or its
competitors, the size and timing of significant orders, changes in operating
expenses, changes in Sterling Software's strategy, the effect of acquisitions
and general industry and global or regional economic factors. Sterling
Software has limited or no control over many of these factors.
Competition
As noted above under "Competition," the computer software and services
industry is rapidly evolving and highly competitive. Sterling Software
generally expects competition to remain intense in the future from both
existing competitors and other companies that may enter Sterling Software's
markets. Sterling Software believes that its ability to compete successfully
in its markets depends on numerous factors, including product performance,
functionality and reliability, price and customer service and support. There
can be no assurance that new or established competitors will not offer
products and services that are superior to and/or lower in price than those of
Sterling Software.
Technological Change; Dependence on New and Enhanced Products
The computer software and services industry is characterized by rapid
technological change, frequent new product and service introductions and
evolving industry standards. Sterling Software's future success will depend in
significant part on its ability to anticipate industry standards, continue to
apply advances in software product and service technologies, enhance existing
software products and services and develop, introduce, acquire and support new
software products and services in order to meet changing customer needs on a
timely basis. There can be no assurance that Sterling Software will be
successful in developing, acquiring or marketing new or enhanced products or
services that respond to technological change or evolving industry standards,
that Sterling Software will not experience difficulties that could delay or
prevent the successful development, acquisition or marketing of such products
or services or that its new or enhanced products and services will adequately
meet the requirements of the marketplace or achieve market acceptance.
Like most companies in the IT industry, the Company has been and is
continuing to address the impact of the so-called "year 2000" issue. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Other Matters--Year 2000 Issues".
Growth Through Acquisitions
Sterling Software's growth has been significantly enhanced through
acquisitions of other businesses, products and technologies. If Sterling
Software is unable to continue to make appropriate acquisitions on attractive
terms, it may be more difficult for Sterling Software to achieve growth levels
consistent with those historically achieved. There can be no assurance as to
Sterling Software's ability to make attractive acquisitions, the timing
thereof or the ultimate benefits therefrom to Sterling Software.
The integration of operations following any significant acquisition requires
the dedication of management resources, and may be complicated by the
necessity of integrating personnel with disparate business backgrounds and
corporate cultures. In addition, the retention of key employees of any
business acquired by Sterling Software may be critical to ensure continued
advancement, development and support of the acquired business' technology, as
well as on-going sales and marketing efforts. Consequently, there can be no
assurance that Sterling Software's ability to increase or maintain revenue
will not be diminished by management distractions, loss of personnel or other
factors resulting from any significant acquisition.
Dependence on Key Personnel and Ability to Attract Qualified Personnel
Sterling Software's performance depends substantially on the performance of
its executive officers and key employees. Sterling Software's business is also
dependent upon its ability to attract and retain highly qualified
11
<PAGE>
managerial, technical and sales personnel. Competition for such personnel is
intense. There can be no assurance that Sterling Software can retain its key
managerial, technical and sales personnel or that it can attract, assimilate
or retain such personnel in the future.
Risks Associated with International Operations
Revenue from Sterling Software's international operations represented 39%,
38% and 39% of Sterling Software's fiscal 1998, 1997 and 1996 revenue,
respectively. Sterling Software is currently incurring, and expects to
continue to incur, significant costs in developing and marketing its products
and services through its international operations. Sterling Software's ability
to successfully maintain and expand its software products and related services
business internationally will depend upon, among other things, its ability to
attract and retain talented and qualified managerial, technical and sales
personnel, as well as software product and related services customers outside
the United States.
International operations are subject to certain inherent risks, including
unexpected changes in regulatory requirements, tariffs and other trade
barriers, software piracy, difficulties in staffing foreign operations, longer
payment cycles, increased difficulties in collecting accounts receivable and
potentially adverse tax consequences. To the extent international sales are
denominated in foreign currencies, the conversion to U.S. dollars of amounts
arising from international operations may contribute to fluctuations in
Sterling Software's results of operations. In the past, Sterling Software has
entered into, and may in the future enter into, hedging transactions in an
effort to reduce its exposure to currency exchange risks.
Risks Associated with Government Contracts
Federal government contracts historically have been a significant part of
Sterling Software's business, representing approximately 21%, 21% and 22% of
Sterling Software's total revenue during fiscal 1998, 1997 and 1996,
respectively. A large portion of Sterling Software'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
Sterling Software's federal government contracts are subject to termination by
the government for convenience or for failure to obtain funding. Based upon
past experience, Sterling Software believes that the contract renewal options
included in existing contracts will be exercised for the full period
designated in such contracts, but no assurance can be given that such
contracts will be renewed. See "Backlog" above.
Certain Antitakeover Provisions
Certain provisions of the Delaware General Corporation Law, Sterling
Software's Certificate of Incorporation (the "Certificate of Incorporation")
and Bylaws and certain agreements to which Sterling Software is a party
(including the Rights Agreement, dated December 18, 1996, between Sterling
Software and BankBoston, N.A., as amended) may have the effect of delaying,
deterring or preventing a change in control of Sterling Software. In addition,
the Certificate of Incorporation authorizes the issuance of up to 125,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock, par value
$0.10 per share ("Preferred Stock"), of Sterling Software. The Board of
Directors of Sterling Software has the power to determine the price and terms
under which any such additional capital stock may be issued and to fix the
terms of such Preferred Stock, and existing stockholders of Sterling Software
will not have preemptive rights with respect thereto.
ITEM 2. PROPERTIES.
With its principal executive office located in Dallas, Texas, the Company
leases offices and facilities in or near more than 85 cities in the United
States and worldwide. Headquarters offices for the Company's groups and
divisions are located in the following cities: Bellevue, Nebraska; Brussels,
Belgium; London, England; Falls Church, Virginia; McLean, Virginia; Paris,
France; Plano, Texas; Rancho Cordova, California; Reston, Virginia; Sydney,
Australia; and Woodland Hills, California. Other major United States and
international facilities are located in Amsterdam, The Netherlands; Atlanta,
Georgia; Dusseldorf, Germany; Herndon, Virginia; Milan, Italy; Tokyo, Japan;
and Wiesbaden, Germany.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal proceedings and claims that arise in
the normal course of its business. While many of these matters involve
inherent uncertainty, the Company's management believes that the amount of the
liability, if any, ultimately incurred by Sterling Software with respect to
any such existing proceedings and claims, net of applicable reserves and
available insurance, will not materially affect the business, financial
condition or results of operations of the Company. The foregoing statement
concerning the belief of the Company's management is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act
of 1995. Actual results could vary. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Forward-Looking
Information".
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.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "SSW". The high and low sales prices (as adjusted for periods prior
to April 6, 1998 to reflect a 2-for-1 stock split) 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, 1998:
Quarter Ended:
December 31, 1997........................................ $20 27/32 $16 1/4
March 31, 1998........................................... $28 13/16 $17 3/4
June 30, 1998............................................ $30 1/4 $23 11/16
September 30, 1998....................................... $32 13/16 $20 1/8
Year Ended September 30, 1997:
Quarter Ended:
December 31, 1996........................................ $17 5/16 $14 1/8
March 31, 1997........................................... $16 5/16 $13 5/8
June 30, 1997............................................ $16 13/16 $13 11/16
September 30, 1997....................................... $18 3/8 $15 7/16
</TABLE>
At November 10, 1998, the Company had 1,022 holders of record of Common
Stock.
The Company did not pay any cash dividends on the Common Stock during the
two years ended September 30, 1998 and does not expect to pay such dividends
in the foreseeable future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.
The Company's financial statements for periods prior to the acquisition of
Synon Corporation ("Synon") represent the combined financial statements of the
previously separate entities. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business
Combinations, Divestitures and Reorganizations" and Note 2 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------------------------------
1998(1) 1997(2) 1996 1995(3) 1994
--------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenue.................... $ 719,943 $ 569,202 $ 513,761 $467,093 $391,283
Cost of sales.............. 287,666 236,736 217,551 191,776 169,982
Product development and
enhancement............... 36,162 29,659 26,402 32,644 24,609
Selling, general and
administrative............ 264,450 231,185 206,648 181,482 145,762
Income from continuing
operations before
reorganization costs,
purchased research and
development, other income
(expense) and income
taxes..................... 131,665 71,622 63,160 61,191 50,930
Reorganization costs....... 45,162 106,037 19,512
Purchased research and
development............... 137,849 62,000
Income (loss) from
continuing operations
before income taxes....... 119,837 (134,556) 86,912 (17,705) 48,097
Income (loss) from
continuing operations..... 76,044 (131,897) 62,117 (32,942) 31,900
Income from discontinued
operations,
net of taxes (4).......... 51,187 42,930 27,753
Gain on the initial public
offering of subsidiary,
net of taxes (4).......... 126,103
Income (loss) applicable to
common stockholders....... 76,044 (131,897) 239,407 9,843 59,457
Weighted average common
shares
outstanding (5)........... 80,638 79,588 67,226 49,889 42,207
Per common share data (5):
Income (loss) from
continuing operations:
Basic.................... $ .94 $ (1.66) $ .92 $ (.66) $ .75
Diluted.................. .89 (1.66) .86 (.66) .64
Net income (loss):
Basic.................... .94 (1.66) 3.56 .20 1.41
Diluted.................. .89 (1.66) 3.26 .20 1.13
Balance sheet data:
Working capital............ $ 673,301 $ 556,552 $ 730,107 $214,656 $119,573
Total assets............... 1,197,599 1,100,278 1,130,579 689,082 476,589
Long-term debt............. 117,265 117,404
Other noncurrent
liabilities............... 68,812 49,751 37,020 22,107 19,128
Stockholders' equity....... 861,558 757,491 887,336 354,636 182,616
</TABLE>
- - --------
(1) Results of operations for 1998 include reorganization costs of $45,162,000
primarily related to the reorganization of the Company's operations in
connection with the acquisition of Synon, and to a lesser extent, to the
acquisition of Mystech Associates, Inc. ("Mystech"). See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Business Combinations, Divestitures and Reorganizations"
and Note 2 of Notes to Consolidated Financial Statements.
15
<PAGE>
(2) On June 30, 1997, Sterling Software completed the acquisition of
substantially all of the assets used by TI Software for approximately
$214,774,000. The acquisition was accounted for in accordance with the
purchase method of accounting. Results of operations for 1997 include
$137,849,000 of purchased research and development costs charged to
expense in accordance with the purchase method of accounting. Results of
operations for 1997 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 arrangement with Sterling Commerce.
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.
(3) Results of operations for 1995 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 that merger.
(4) On March 13, 1996, Sterling Commerce, a former wholly owned subsidiary of
Sterling Software, completed the initial public offering (the "Offering")
of 13,800,000 shares of its common stock, par value $0.01 per share
("Commerce Stock"). 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 previously unissued shares of Commerce
Stock. The Offering resulted 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.
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. 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 1994 to 1996 have been classified as
discontinued operations. 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.
(5) All share and per share data have been restated for dates and periods
ended prior to April 6, 1998 to retroactively reflect a 2-for-1 stock
split effected by means of a dividend of one share of Common Stock for
each outstanding share of Common Stock and for dates and periods ended
prior to December 31, 1997 to conform with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". See Note 1 of Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BUSINESS COMBINATIONS, DIVESTITURES AND REORGANIZATIONS
Acquisition of Mystech Associates, Inc.
On July 9, 1998, Sterling Software acquired Mystech, a federal information
technology services contractor, in a stock-for-stock merger transaction (the
"Mystech Merger"). As a result of the transaction, Sterling Software issued
approximately 769,000 shares of Common Stock in exchange for the previously
outstanding shares of Mystech common stock and has reserved approximately
174,000 shares of Common Stock for issuance upon exercise of assumed Mystech
stock options. The Mystech Merger was accounted for as a pooling of interests,
and the Mystech organization was added to the Company's federal systems
business. However, the impact of the pooling of interests accounting on the
Company's historical financial statements was not material. Therefore, the
Company's financial statements for periods prior to the Mystech Merger have
not been restated for this transaction.
Acquisition of Synon Corporation
On July 31, 1998, Sterling Software acquired Synon, a provider of
application development software and services, in a stock-for-stock merger
transaction (the "Synon Merger") accounted for as a pooling of interests.
16
<PAGE>
As a result of the transaction, Sterling Software issued approximately
2,603,000 shares of Common Stock in exchange for the previously outstanding
shares of Synon capital stock and reserved approximately 375,000 shares of
Common Stock for issuance upon exercise of assumed Synon stock options. The
Company's financial statements for periods prior to the Synon Merger,
including the results of the application management business segment, have
been restated to represent the combined financial statements of the previously
separate entities.
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the "TI
Software Acquisition") of certain assets (including the capital stock of
certain foreign subsidiaries) of Texas Instruments Incorporated. Such assets
constitute substantially all of the assets used by TI Software in its
application development tools business. The results of operations of TI
Software are included in the Company's results of operations from the date of
the TI Software 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 TI Software
Acquisition was approximately $214,774,000, including costs directly related
to the TI Software 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 Arrangement
Effective as of June 30, 1997, Sterling Software and Sterling Commerce, a
former wholly owned subsidiary of Sterling Software formed to operate the
business of Sterling Software's former Electronic Commerce Group, completed an
agreement terminating an international distributor arrangement pursuant to
which Sterling Software acted as the exclusive distributor of Sterling
Commerce's interchange and communications software products in markets outside
the United States and Canada. The results of the Company's international
operations related to selling, marketing and providing first level support for
these products outside the United States and Canada through June 30, 1997 are
included in the business segment information presented herein under "Corporate
and other".
Reorganization Costs
The Company's results of operations for 1998 include reorganization costs of
$45,162,000 primarily related to the reorganization of the Company's
operations in connection with the Synon Merger, and to a lesser extent, the
Mystech Merger. Of the total reorganization costs, approximately $9,552,000
consisted of non-cash costs and the remaining $35,610,000 required cash
outlays. These costs are comprised of employee termination costs, costs
related to the elimination of duplicate facilities, the write-down of software
products that will not be actively marketed, transaction costs and other
direct costs of the reorganization. At September 30, 1998, the remaining
balance to be paid was $22,818,000. Currently, the Company does not expect to
incur costs related to these reorganizations in excess of the amount charged
to operations in 1998.
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 TI Software Acquisition and the termination
of an international distributor arrangement with Sterling Commerce in the
third quarter of 1997. 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. At September 30, 1998, the remaining balance to be paid was
$12,344,000, which consists primarily of commitments under lease arrangements
for office space and equipment. The Company does not expect to incur costs
related to this reorganization in excess of the amount charged to operations
in 1997.
17
<PAGE>
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. 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 have been classified
as discontinued operations in the accompanying Consolidated Financial
Statements.
RESULTS OF OPERATIONS
1998 Compared to 1997
Total revenue increased $150,741,000, or 26%, in 1998 over 1997 due to
revenue increases in all three of the Company's business segments, partially
offset by a decline in corporate and other revenue due to the termination of
an international distributor arrangement with Sterling Commerce in the third
quarter of 1997. Revenue from the application management, systems management
and federal systems business segments increased 64%, 11% and 22%,
respectively, in 1998 over 1997. Both the application management business
segment and the federal systems business segment benefited substantially from
the domestic and international operations acquired by Sterling Software in the
TI Software Acquisition.
Total revenue generated from the Company's international operations was
$277,428,000 and $217,347,000 in 1998 and 1997, respectively, representing an
increase of $60,081,000, or 28%, due to increases in international revenue
generated by the application management business segment (up 102%) and the
systems management business segment (up 6%). The overall increase in
international revenue was partially offset by a decline in revenue from sales
of Sterling Commerce's software products due to the termination of an
international distributor arrangement in the third quarter of 1997. In
addition, international operating results in 1998 were adversely impacted by
foreign currency exchange rate fluctuations as a result of a stronger U.S.
dollar. Had foreign currency exchange rates remained consistent with the
previous year, international revenue for 1998 would have been approximately
$15,000,000 greater. Revenue from the Company's international operations
represented 39% of total revenue in 1998 compared to 38% of total revenue in
1997.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years 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 decreased to 46% of total revenue in 1998 compared to 48% in 1997,
primarily due to the significant increase in products and services revenue
from the application management business segment. Overall, services revenue
increased from 32% of total revenue in 1997 to 34% of total revenue in 1998.
This increase resulted primarily from generally higher levels of consulting
services associated with product sales in the application management segment.
Revenue from the application management business segment increased
$142,847,000, or 64%, in 1998 over 1997 due to a 75% increase in products
revenue, a 58% increase in product support revenue and a 55% increase
18
<PAGE>
in services revenue. The significant increase in revenue from the application
management business segment is primarily attributable to revenue from the
application development products and services acquired in the TI Software
Acquisition. Approximately 50% of the application management business
segment's total revenue in 1998 was derived from the Company's international
operations, compared to 40% in 1997.
Revenue from the systems management business segment increased $19,850,000,
or 11%, in 1998 over 1997 primarily due to a 17% increase in products revenue
partially offset by a 1% decline in product support revenue due in part to the
adverse impact of foreign currency exchange rate fluctuations as a result of a
stronger U.S. dollar. The increase in products revenue was mainly attributable
to strong domestic product sales across all systems management product lines
and strong international product sales in the network management product line.
Approximately 47% of the systems management business segment's total revenue
in 1998 was derived from the Company's international operations, compared to
49% in 1997.
Revenue from the federal systems business segment increased $26,983,000, or
22%, in 1998 over 1997 due primarily to a contract added to the Company's
federal systems business segment as a result of the TI Software Acquisition,
revenue added as a result of the Mystech Merger and, to a lesser extent, to
higher contract billings. As previously reported, while the Company was not
selected for continuation of a contract with NASA's Ames Research Center, the
Company continued to provide services under the pre-existing contract through
June 30, 1998, at which time the contract was terminated.
Total costs and expenses decreased $108,026,000, or 15%, in 1998 compared to
1997. Excluding the reorganization costs of $45,162,000 related to the Synon
Merger and the Mystech Merger in the fourth quarter of 1998 and reorganization
costs of $106,037,000 and the write-off of purchased research and development
costs of $137,849,000 related to the TI Software Acquisition in the third
quarter of 1997, total costs and expenses increased $90,698,000, or 18%, in
1998 compared to 1997.
Total cost of sales increased $50,930,000, or 22%, in 1998 compared to 1997
and represented 40% and 42% of total revenue in 1998 and 1997, respectively.
Cost of sales for products and product support decreased $8,220,000, or 10%,
in 1998 compared to 1997 and represented 15% and 21% of products and product
support revenue in 1998 and 1997, respectively. The decrease in cost of sales
for products and product support is primarily attributable to the decrease in
royalties payable to Sterling Commerce due to the termination of an
international distributor arrangement, as well as a decrease in royalties
payable to other third parties related to products no longer marketed by the
Company. Cost of sales for services increased $59,150,000, or 38%, in 1998
compared to 1997 and represented 88% and 85% of services revenue in 1998 and
1997, respectively. The significant increase in cost of sales for services is
primarily attributable to the increase in services revenue from the
application management business segment.
Product development expense for 1998 was $36,162,000, net of $26,956,000 of
capitalized software development costs, as compared to 1997 product
development expense of $29,659,000, net of $21,711,000 of capitalized software
development costs. Gross product development expense was 11% of non-federal
revenue in both 1998 and 1997. Capitalized development costs represented 43%
of gross development costs in 1998 compared to 42% of gross development costs
for 1997. The increase in both total and capitalized software development
costs in 1998 over 1997 is attributable to an increase in product development
efforts that were in process. 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 that are in process.
Selling, general and administrative expenses increased $33,265,000, or 14%,
in 1998 compared to 1997 and represented 37% and 41% of total revenue in 1998
and 1997, respectively. The decrease in selling, general and administrative
expenses as a percentage of total revenue is primarily attributable to the
cost structure implemented by the Company in connection with the TI Software
Acquisition and related reorganization in the third quarter of 1997 and cost
savings resulting from the termination of the Company's international
distributor arrangement with Sterling Commerce.
19
<PAGE>
Investment income decreased $4,819,000 in 1998 compared to 1997 as a result
of lower average cash and cash equivalents balances primarily due to the use
of cash in connection with the TI Software Acquisition and the related
reorganization in the third quarter of 1997.
Income from continuing operations before income taxes in 1998 was
$119,837,000, compared to a loss from continuing operations before income
taxes of $134,556,000 for 1997. However, excluding the reorganization costs of
$45,162,000 related to the Synon Merger and Mystech Merger in the fourth
quarter of 1998 and the reorganization costs of $106,037,000 and the write-off
of purchased research and development costs of $137,849,000 related to the TI
Software Acquisition in the third quarter of 1997, income from continuing
operations before taxes increased $55,669,000, or 51%, primarily due to higher
profits in the application management and systems management business segments
partially offset by a decline in investment income.
The Company's effective tax rate for 1998 was 37% compared to an effective
tax rate for 1997 of 34%, before the net tax benefit related to the 1997
reorganization costs and purchased research and development costs. The 1998
effective tax rate was adversely impacted by unbenefitted losses incurred by
Synon in 1998 prior to the Synon Merger. The 1997 effective tax rate benefit
of 2% varies from the U.S. statutory rate due primarily to the write-down of
excess cost over net assets acquired recorded in connection with previous
acquisitions and the effect of non-U.S. tax rates.
1997 Compared to 1996
Total revenue increased $55,441,000, or 11%, in 1997 over 1996 due to
revenue increases in all three of the Company's business segments. Revenue
from the application management, systems management and federal systems
business segments increased 21%, 8% and 9%, respectively, in 1997 over 1996.
Total revenue generated from Sterling Software's international operations
was $217,347,000 and $202,613,000 in 1997 and 1996, respectively, representing
an increase of $14,734,000, or 7%, primarily due to increases in the
application management business segment (up 23%) and in the systems management
business segment (up 4%). The significant increase in international revenue
from the application management business segment is primarily attributable to
revenue from the sale of application development products and services
acquired in the TI Software 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 software products and
services due to the termination of an international distributor arrangement in
the third quarter of 1997. In addition, international operating results in
1997 were adversely impacted by foreign currency exchange rate fluctuations as
a result of a stronger U.S. dollar. Had foreign currency exchange rates
remained consistent with the previous year, international revenue for 1997
would have been approximately $11,000,000 greater. Revenue from the Company's
international operations represented 38% of total revenue for 1997 compared to
39% of total revenue for 1996.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years 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 48% of total revenue in 1997 compared to 50% in 1996.
Revenue from the application management business segment increased
$38,772,000, or 21%, in 1997 over 1996 due to a 16% increase in products
revenue, a 9% increase in product support revenue and a 49% increase in
services revenue. The significant increase in revenue from the application
management business segment is primarily attributable to revenue from the
application development products and services acquired in the TI Software
Acquisition. Approximately 40% of the application management business
segment's 1997 and 1996 revenue was derived from the Company's international
operations.
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
20
<PAGE>
revenue. The increase in products revenue was mainly attributable to strong
domestic and international product sales in the network management and storage
management product lines. Approximately 49% of the systems management business
segment's total revenue in 1997 was derived from the Company's international
operations, compared to 51% in 1996.
Revenue from the federal systems business segment increased $9,602,000, or
9%, in 1997 over 1996 due to higher contract billings and due to a contract
with the intelligence community added to the Company's federal systems
business segment as a result of the TI Software Acquisition.
Total costs and expenses increased $290,865,000, or 65% in 1997 compared to
1996. Excluding the reorganization costs of $106,037,000 and the write-off of
purchased research and development costs of $137,849,000 related to the TI
Software Acquisition in the third quarter of 1997, total costs and expenses
increased $46,979,000, or 10%, in 1997 compared to 1996.
Total cost of sales increased $19,185,000, or 9%, in 1997 compared to 1996,
roughly commensurate with the increase in total revenue. Cost of sales
represented 42% of revenue in 1997 and 1996.
Product development expense for 1997 was $29,659,000, net of $21,711,000 of
capitalized software development costs, as compared to 1996 product
development expense of $26,402,000, net of $18,180,000 of capitalized software
development costs. Gross product development expense was 11% of non-federal
revenue in both 1997 and 1996. Capitalized development costs represented 42%
and 41% of gross development costs in 1997 and 1996, respectively.
Selling, general and administrative expense increased $24,537,000, or 12%,
in 1997 compared to 1996 and represented 41% and 40% of total revenue in 1997
and 1996, respectively.
Interest expense decreased $2,895,000 in 1997 compared to 1996 due to the
redemption in 1996 of the Company's 5.75% Convertible Subordinated Debentures.
See Note 10 of Notes to Consolidated Financial Statements. Investment income
increased $12,052,000 in 1997 over 1996 as a result of higher average cash and
cash equivalents balances.
The Company's loss from continuing operations before taxes was $134,556,000
in 1997 as compared to income from continuing operations before taxes of
$86,912,000 in 1996. Excluding the TI Software Acquisition-related
reorganization costs of $106,037,000 and the write-off of purchased research
and development costs of $137,849,000, income from continuing operations
before taxes increased $22,418,000, or 26%, 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 1997 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 2% significantly varies from the U.S.
statutory rate due primarily to the write-down of excess cost over net assets
acquired recorded in connection with previous acquisitions and the effect of
non-U.S. tax rates.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$673,301,000 of working capital at September 30, 1998, which includes
$397,312,000 of cash and cash equivalents and $310,537,000 of marketable
securities. Net cash provided by operating activities was $101,685,000 in 1998
compared to $128,611,000 in 1997. Net cash provided by operating activities in
1998 was reduced by payments made during the period of approximately
$12,792,000 directly related to the Synon Merger and the Mystech Merger and
the related
21
<PAGE>
reorganizations that occurred in the fourth quarter of 1998. Also, net cash
provided by operating activities in 1998 and 1997 was reduced by payments of
approximately $28,793,000 and $40,539,000, respectively, directly related to
the TI Software Acquisition and the related reorganization that occurred in
the third quarter of 1997. Operating cash flows in 1997 were negatively
impacted by royalty and certain other payments of approximately $32,000,000
made to Sterling Commerce during that year.
Investing activities used $162,381,000 of cash in 1998 compared to
$216,222,000 in 1997. Net cash used in investing activities in 1997 included
the $165,000,000 payment to Texas Instruments on June 30, 1997 in connection
with the TI Software Acquisition. Capital expenditures for 1998 were
$33,200,000 compared to $29,003,000 for 1997. Purchases and capitalized costs
of computer software were $27,854,000 and $21,860,000 for 1998 and 1997,
respectively. Cash provided by operating activities, together with other
available cash, was used to fund capital expenditures and additions to
computer software.
Financing activities provided $20,881,000 of cash in 1998 compared to
$281,000 in 1997. Sterling Software received proceeds of approximately
$17,895,000, $1,460,000 and $276,729,000 from the exercise of employee stock
options and warrants in 1998, 1997 and 1996, respectively. In 1996, the
Company also 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.
The Company is party to a bank credit agreement (the "Credit Agreement")
which provides for unsecured revolving credit loans of up to $35,000,000.
Borrowings under the Credit Agreement, which expires on June 30, 2000, bear
interest at the lower of the lender's base rate or a Eurodollar lending rate
plus one-half percent. No amounts were borrowed under the Credit Agreement
during 1998 or 1997. At September 30, 1998, after giving effect to outstanding
standby letters of credit in the aggregate amount of $4,140,000, approximately
$30,860,000 was available for borrowing under the Credit Agreement.
At September 30, 1998, the Company's short and long-term cash commitments,
including remaining costs related to the Synon Merger, the Mystech Merger, the
TI Software Acquisition and the related reorganizations, consisted primarily
of commitments under lease arrangements for office space and equipment, as
well as commitments with respect to employee severance obligations that arose
in connection with the Synon Merger and the Mystech Merger. The Company
intends to meet such obligations primarily from cash provided by operating
activities.
The Company believes available cash balances, cash equivalents and short-
term investments combined with cash provided by operating activities and
amounts available under existing credit agreements are sufficient to meet the
Company's cash requirements for the foreseeable future.
OTHER MATTERS
Foreign Currency Matters
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 applicable
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 exposure to
foreign currency exchange rate fluctuations 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.
Acquisition Strategy
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed significantly to the Company's growth in revenue and operating
profit before reorganization and purchased research and development costs. The
impact of future acquisitions on
22
<PAGE>
continued growth in revenue and operating profit cannot presently be
determined. The Company expects to finance future acquisitions, if any,
through a combination of cash on hand and cash from operations and the
possible issuance of equity or debt securities.
Year 2000 Issues
The following discussion regarding year 2000 matters constitutes a "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
Like most companies in the IT industry, the Company has been and is
continuing to address the impact of the so-called "year 2000" issue. This
issue is the result of computer programs written using two digits rather than
four to define calendar years. These programs may recognize a date using "00"
as the year 1900 rather than the year 2000, potentially resulting in complete
system failures or miscalculations causing significant disruption of normal
business activities. The Company has been and is continuing to assess and
resolve year 2000 issues associated with the Company's products, its material
internal systems and its material third party relationships. These efforts
have been under way for some time and should be completed well before
December 31, 1999.
Each of the Company's product divisions has completed a year 2000 assessment
of its currently offered products. This assessment included internal testing
of the year 2000 capabilities of these products. The Company has no plans to
have its products tested by an independent third party. The Company believes
that the vast majority of its currently offered products are year 2000
compliant, and expects virtually all of its remaining currently offered
products to become compliant during the early part of calendar 1999 through
new releases. In any event, the Company expects that all of its currently
offered products will be year 2000 compliant before the end of calendar 1999.
Because year 2000 compliance is generally integrated into its normal product
development activities, the Company has not incurred and does not expect to
incur any significant incremental expenses in addressing this issue in its
product lines. The Company believes that a small number of customers who
receive product support from the Company are operating product versions that
may not be year 2000 compliant or products that the Company has replaced or
intends to replace with comparable, year 2000 compliant products. The Company
believes that the vast majority of such customers are migrating and will
continue to migrate to compliant versions and products through new releases,
which the Company is strongly encouraging. In addition, certain former
customers may be operating non-compliant versions of products in respect of
which the Company's agreed-upon product support and warranty periods have
expired. The Company has not undertaken an assessment of whether these former
customers are taking appropriate steps to address any related year 2000
issues.
The Company does not expect customers who purchase or migrate to year 2000
compliant versions of its products to experience any year 2000 failures caused
by such products. In addition, the Company believes that its licenses and
other agreements contain customary and appropriate limitations on the
Company's obligations with respect to any year 2000 failures that may be
caused by its current or former products. However, there can be no assurance
that the Company's expectations and beliefs as to these matters will prove to
be accurate. Moreover, the Company's products are used in IT systems comprised
of third-party hardware and software, some of which may not be year 2000
compliant. Various commentators have predicted that a significant amount of
litigation may arise out of year 2000 compliance issues. While the Company has
not been subject to any year 2000 claims or lawsuits to date, there can be no
assurance that customers or former customers will not bring claims or lawsuits
against the Company seeking compensation for losses associated with year 2000-
related failures. A material adverse outcome in a year 2000 claim or lawsuit--
as is the case with any claim or lawsuit-- could have a material adverse
effect on the Company's business, financial condition and results of
operations.
An assessment of the Company's material internal systems (including embedded
systems) is nearing completion. Due to its predominant use of relatively
current "off-the-shelf" software and systems (as opposed to older legacy or
custom designed systems), the Company expects that its internal systems will
require only minimal corrective measures, some of which have already been
completed and/or are currently in process. Moreover, as a result of its
decentralized operating structure, the Company's non-compliant systems tend to
be more limited in their effect and easier to correct. Consequently, the
Company does not anticipate the internal and
23
<PAGE>
external costs of the corrective measures to be significant. The vast majority
of these measures are expected to be completed by mid-1999, with remaining
measures expected to be completed before December 31, 1999.
The Company has begun a year 2000 assessment of its material third party
supplier relationships. The assessment is being conducted through formal
communications with such suppliers, testing of relevant equipment, systems or
interfaces and a review of the year 2000 information made publicly available
by such suppliers. The Company plans to substantially complete the assessment
of these relationships prior to the end of calendar 1998 and, promptly upon
discovery of any readiness issues that are material to the Company, to begin
efforts to obtain adequate readiness assurances from the relevant third
parties. There can be no assurance that the Company will receive all
information necessary to fully evaluate the year 2000 readiness of all
material suppliers. Moreover, the Company relies in various ways, both
domestically and internationally, on governments, utilities, communications
service providers, financial institutions and other third parties to conduct
normal business operations. There can be no assurance that suppliers and other
third parties upon whom the Company is reliant will not suffer business
interruptions caused by year 2000 issues. Such interruptions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to the risks described above, some commentators predict that
historical purchasing patterns and trends in the software industry may be
affected by customers replacing or upgrading applications or systems to
address year 2000 issues. The Company has not experienced any discernable
trend indicating a recent or impending material reduction in demand for the
Company's products. However, there can be no assurance that year 2000 issues
will not affect future customer purchasing patterns, possibly resulting in
lower demand for the Company's products.
Although the Company believes that its year 2000 readiness efforts are
designed to appropriately identify and address those year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully
effective. Moreover, year 2000 issues present many risks that are simply
beyond the Company's control, such as the potential effects of year 2000
issues on the economy in general and on the Company's business partners and
customers in particular. Except as described above, the Company has not
established "contingency plans" to address potential consequences of the year
2000 issue. However, the Company intends to continue to evaluate both existing
and newly identified year 2000 risks and to develop and implement such further
responsive measures as it deems appropriate.
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 forward-looking statements. Such statements
are based upon the beliefs and assumptions of, and on information available
to, the Company's management. The following statements are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995: (i) statements preceded by, followed by or that
include the words "may", "will", "could", "should", "believe", "expect",
"future", "potential", "anticipate", "intend", "plan", "estimate" or
"continue" or the negative or other variations thereof and (ii) other
statements regarding matters that are not historical facts. Such forward-
looking statements are subject to various risks and uncertainties, including
(i) risks and uncertainties relating to the possible invalidity of the
underlying beliefs and assumptions, (ii) possible changes or developments in
social, economic, business, industry, market, legal and regulatory
circumstances and conditions, and (iii) actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners,
competitors and legislative, regulatory, judicial and other governmental
authorities and officials. In addition to any risks and uncertainties
specifically identified in the text surrounding such forward-looking
statements, the statements in the immediately preceding sentence and the
statements under captions such as "Risk Factors", "Certain Considerations
Relative to the Company" and "Special Considerations" in the SEC Filings
constitute cautionary statements identifying important factors that could
cause actual amounts, results, events and circumstances to differ materially
from those reflected in such forward-looking statements.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investment portfolio of marketable
securities. The Company does not use derivative financial instruments in its
investment portfolio. The stated objectives of the Company's investment
guidelines are: safety of principal, liquidity, maximization of yield and
diversification of risk. The Company places its investments with high credit
quality U.S. issuers, principally the United States Treasury, highly rated
corporations and tax-exempt issuers and limits the amount of credit exposure
to any one issuer. The Company's marketable securities portfolio includes only
those securities with active secondary or resale markets to ensure portfolio
liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's marketable securities. A
substantial portion of the interest income earned on municipal obligations is
exempt from federal and state income taxes. At September 30, 1998, the
weighted average maturity of the marketable securities portfolio was less than
180 days. The fair value of the marketable securities portfolio is affected by
changes in short-term U.S. dollar interest rates.
<TABLE>
<CAPTION>
MATURITY
---------------------- FAIR VALUE AT
1999 2000 2001 TOTAL SEPTEMBER 30, 1998
------- ------ ----- ------- ------------------
<S> <C> <C> <C> <C> <C>
Commercial paper.......... 51,734 51,734 51,734
Average interest rate.... 5.59% 5.59%
U.S. corporate notes...... 81,402 3,017 5,182 89,601 90,319
Average interest rate.... 6.26% 6.00% 6.02% 6.24%
U.S. government
obligations.............. 20,001 20,001 20,023
Average interest rate.... 5.39% 5.39%
Municipal obligations..... 120,307 21,326 141,633 141,835
Average interest rate.... 4.92% 5.45% 4.97%
Other..................... 6,333 6,333 6,626
Average interest rate.... 6.12% 6.12%
Total investment
portfolio................ 279,777 24,343 5,182 309,302 310,537
Average interest rate.... 5.48% 5.52% 6.02% 5.48%
</TABLE>
FOREIGN CURRENCY RISK
The Company conducts business in various foreign currencies, primarily in
Canada, Brazil, Europe, Australia, Japan and other Asian countries. As a
result, the Company is exposed to the effect of foreign currency exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated revenues
and expenses. The Company mitigates a portion of its exposure to foreign
currency exchange rate fluctuations 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 exposure to foreign currency exchange rate fluctuations. As of
September 30, 1998, the Company was not engaged in a foreign currency hedging
program.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STERLING SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 27
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1997........... 28
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997 and 1996.................................................... 29
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996...................................... 30
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996.................................................... 31
Notes to Consolidated Financial Statements.............................. 32
</TABLE>
26
<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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. 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,
1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at September 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1998 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 6, 1998
27
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 397,312 $ 436,955
Marketable securities................................ 310,537 206,965
Accounts and notes receivable, net................... 200,428 167,268
Income tax receivable................................ 750 9,941
Prepaid expenses and other current assets............ 31,503 28,459
---------- ----------
Total current assets............................... 940,530 849,588
Property and equipment, net............................ 66,726 52,242
Computer software, net of accumulated amortization of
$112,734 in 1998 and $98,785 in 1997.................. 81,606 77,040
Excess cost over net assets of businesses acquired, net
of accumulated amortization of $27,316 in 1998 and
$30,718 in 1997....................................... 76,086 84,983
Noncurrent deferred income taxes....................... 4,378 23,178
Other assets........................................... 28,273 13,247
---------- ----------
$1,197,599 $1,100,278
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 161,790 $ 186,188
Deferred revenue..................................... 105,439 106,848
---------- ----------
Total current liabilities.......................... 267,229 293,036
Noncurrent deferred revenue............................ 27,649 20,432
Other noncurrent liabilities........................... 41,163 29,319
Contingencies and commitments
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued.............................
Common stock, $.10 par value; 125,000,000 and
75,000,000 shares authorized in 1998 and 1997,
respectively; 84,845,000 and 82,412,000 shares
issued in 1998 and 1997, respectively............... 8,485 8,241
Additional paid-in capital........................... 858,615 832,675
Retained earnings (deficit).......................... 50,462 (25,174)
Less treasury stock, at cost; 2,599,000 and 2,704,000
shares in 1998 and 1997, respectively............... (56,004) (58,251)
---------- ----------
Total stockholders' equity......................... 861,558 757,491
---------- ----------
$1,197,599 $1,100,278
========== ==========
</TABLE>
See accompanying notes.
28
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Revenue:
Products..................................... $291,255 $ 234,240 $214,709
Product support.............................. 183,631 150,886 144,596
Services..................................... 245,057 184,076 154,456
-------- --------- --------
719,943 569,202 513,761
Costs and expenses:
Cost of sales:
Products and product support............... 71,229 79,449 81,540
Services................................... 216,437 157,287 136,011
-------- --------- --------
287,666 236,736 217,551
Product development and enhancement.......... 36,162 29,659 26,402
Selling, general and administrative.......... 264,450 231,185 206,648
Reorganization costs......................... 45,162 106,037
Purchased research and development........... 137,849
-------- --------- --------
633,440 741,466 450,601
-------- --------- --------
Income (loss) from continuing operations before
other income (expense) and income taxes....... 86,503 (172,264) 63,160
Other income (expense):
Interest expense............................. (424) (540) (3,435)
Investment income............................ 34,087 38,906 26,854
Other........................................ (329) (658) 333
-------- --------- --------
33,334 37,708 23,752
-------- --------- --------
Income (loss) from continuing operations before
income taxes.................................. 119,837 (134,556) 86,912
Provision (benefit) for income taxes........... 43,793 (2,659) 24,795
-------- --------- --------
Income (loss) from continuing operations....... 76,044 (131,897) 62,117
Discontinued operations, net of applicable
income taxes:
Income from discontinued operations, net...... 51,187
Gain on the initial public offering of
subsidiary, net.............................. 126,103
-------- --------- --------
177,290
-------- --------- --------
Net income (loss).............................. $ 76,044 $(131,897) $239,407
======== ========= ========
Income (loss) per common share:
Income (loss) from continuing operations
Basic...................................... $ .94 $ (1.66) $ .92
======== ========= ========
Diluted.................................... $ .89 $ (1.66) $ .86
======== ========= ========
Net income (loss)
Basic...................................... $ .94 $ (1.66) $ 3.56
======== ========= ========
Diluted.................................... $ .89 $ (1.66) $ 3.26
======== ========= ========
</TABLE>
See accompanying notes.
29
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------- ----------------
NUMBER ADDITIONAL RETAINED NUMBER TOTAL
OF PAR PAID-IN EARNINGS OF STOCKHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) SHARES COST EQUITY
------ ------ ---------- -------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995, as previously
reported............... 26,529 $2,653 $336,752 $ 9,515 56 $ (582) $348,338
Adjustment for stock
dividend.............. 26,529 2,653 (2,653) 56
Adjustment for pooling
of interests with
Synon................. 2,591 259 30,296 (24,257) 6,298
Net income............. 239,407 239,407
Acquisition of common
stock for treasury.... 2,671 (59,372) (59,372)
Issuance of common
stock pursuant to
stock options and
warrants, including
tax benefit of
$47,112............... 18,453 1,845 321,996 323,841
Issuance of common
stock pursuant to
conversion of 5.75%
Debentures............ 8,112 811 111,565 112,376
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 401(k) plan.. 127 (39) 857 984
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ (1,178) (1,178)
Other.................. 41 (2,586) (2,545)
------ ------ -------- -------- ----- -------- --------
Balance at September 30,
1996................... 82,214 8,221 830,860 107,352 2,744 (59,097) 887,336
Net loss............... (131,897) (131,897)
Issuance of common
stock pursuant to
stock options,
including tax benefit
of $450............... 212 21 1,889 1,910
Issuance of common
stock to 401(k) plan.. (295) (40) 845 550
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ 2,381 2,381
Other.................. (14) (1) 221 (3,010) 1 (2,789)
------ ------ -------- -------- ----- -------- --------
Balance at September 30,
1997................... 82,412 8,241 832,675 (25,174) 2,704 (58,251) 757,491
Net income............. 76,044 76,044
Issuance of common
stock pursuant to
stock options,
including tax benefit
of $4,700............. 1,327 133 22,462 22,595
Issuance of common
stock to 401(k) plan.. (303) (102) 2,189 1,886
Issuance of common
stock to employee
stock purchase plan... 337 34 5,494 (3) 58 5,586
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ (418) (418)
Adjustment for pooling
of interests with
Mystech............... 769 77 (1,713) 4,628 2,992
Other.................. (4,618) (4,618)
------ ------ -------- -------- ----- -------- --------
Balance at September 30,
1998................... 84,845 $8,485 $858,615 $ 50,462 2,599 $(56,004) $861,558
====== ====== ======== ======== ===== ======== ========
</TABLE>
See accompanying notes.
30
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................. $ 76,044 $(131,897) $239,407
Less: Income from discontinued operations..... (177,290)
-------- --------- --------
Income (loss) from continuing operations...... 76,044 (131,897) 62,117
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization............... 44,693 38,544 35,758
Provision for losses on accounts
receivable................................. 5,157 5,191 6,879
Provision (benefit) for deferred income
taxes...................................... 18,800 (19,125) 11,451
Purchased research and development.......... 137,849
Reorganization costs........................ 9,552 63,726
Changes in operating assets and liabilities,
net of effects of business acquisitions:
(Increase) decrease in accounts and notes
receivable............................... (49,435) 26,298 (6,392)
(Decrease) increase in amounts due to
Sterling Commerce, Inc................... (35,134) 35,134
Increase in prepaid expenses and other
assets................................... (6,045) (2,495) (15,412)
(Decrease) increase in accounts payable,
accrued liabilities and income taxes
payable.................................. (11,989) 40,259 (61,081)
(Decrease) increase in deferred revenue... (1,951) (1,339) 484
Other..................................... 16,859 6,734 (2,164)
-------- --------- --------
Net cash provided by operating
activities............................. 101,685 128,611 66,774
Investing activities:
Purchases of property and equipment........... (33,200) (29,003) (13,959)
Purchases and capitalized cost of development
of computer software......................... (27,854) (21,860) (18,505)
Business acquisitions, net of cash acquired... (634) (194,871) (7,001)
Purchases of investments...................... (342,807) (255,888) (576,299)
Proceeds from sales of investments............ 240,495 284,703 406,072
Other......................................... 1,619 697 585
-------- --------- --------
Net cash used in investing activities... (162,381) (216,222) (209,107)
Financing activities:
Purchases of treasury stock................... (59,372)
Retirement and redemption of debt and capital
lease obligations............................ (3,400) (8,144) (13,477)
Proceeds from issuance of debt, net of
issuance costs............................... 3,482 8,166 5,900
Net proceeds from subsidiary public offering.. 265,458
Proceeds from issuance of common stock
pursuant to the exercise of stock options and
warrants..................................... 17,895 1,460 276,729
Proceeds from issuance of common stock to
employee stock purchase plan................. 5,586
Other......................................... (2,682) (1,201) (4,226)
-------- --------- --------
Net cash provided by financing
activities............................. 20,881 281 471,012
Cash flows provided by discontinued operations.. 17,819
Effect of foreign currency exchange rate changes
on cash........................................ 172 (2,314) (314)
-------- --------- --------
(Decrease) increase in cash and equivalents..... (39,643) (89,644) 346,184
Cash and cash equivalents at beginning of year.. 436,955 526,599 180,415
-------- --------- --------
Cash and cash equivalents at end of year........ $397,312 $ 436,955 $526,599
======== ========= ========
Supplemental cash flow information:
Interest paid................................. $ 369 $ 544 $ 4,501
======== ========= ========
Income taxes paid............................. $ 2,400 $ 6,670 $ 91,954
======== ========= ========
</TABLE>
See accompanying notes.
31
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
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 worldwide developer and supplier of application development, information
management and systems management software products and services, as well as a
supplier of specialized information technology ("IT") services for sectors of
the federal government.
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, 1998,
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 and liabilities, the
disclosure of contingencies at September 30, 1998 and 1997 and the results of
operations for the years ended September 30, 1998, 1997 and 1996. While
management has based its estimates and assumptions on the facts and
circumstances known to it as of the date of this report, actual amounts may
differ from such estimates and assumptions.
Revenue
Revenue from license fees for standard software products is recognized when
the software is delivered, provided no significant future vendor obligations
exist and collection is probable. Service revenue and revenue from products
involving installation or other services are recognized as the services are
performed.
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.
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.
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 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
contracts are recognized when the current estimate of total contract costs
indicates a loss on a contract is probable.
Returns and allowances and other similar adjustments to revenue involving
software products historically have not been material to the Company's results
of operations.
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"),
32
<PAGE>
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". 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. Unamortized software development costs of
$54,382,000 and $46,734,000 are included in "Computer software, net", at
September 30, 1998 and 1997, respectively.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to 15 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 seven years.
Depreciation and amortization consists of the following for the years ended
September 30, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $16,094 $15,596 $13,396
Purchased computer software........................ 7,708 6,731 5,926
Capitalized computer software development costs.... 13,083 11,551 9,970
Excess cost over net assets of businesses
acquired.......................................... 7,570 4,403 5,964
Intangible assets.................................. 238 263 502
------- ------- -------
$44,693 $38,544 $35,758
======= ======= =======
</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 such benefit 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, employee stock purchase plan and other stock based
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.
Common Stock and Earnings Per Common Share
Effective October 1, 1997, Sterling Software adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 128 ("FAS
128"), "Earnings per Share". FAS 128 sets forth new rules for
33
<PAGE>
computing earnings per share which replace previously reported "primary" and
"fully diluted" earnings per share with "basic" and "diluted" earnings per
share. Basic earnings per common share data is computed using the weighted
average number of common shares outstanding for the relevant period. Diluted
earnings per common share data is computed using the weighted average number
of common shares outstanding plus common share equivalents represented by
stock options, warrants and convertible debentures, if such stock options,
warrants and convertible debentures have a dilutive effect in the aggregate.
Earnings per share amounts for all periods have been presented, and where
necessary restated, in accordance with FAS 128.
On March 11, 1998, the Sterling Software Board of Directors authorized a 2-
for-1 stock split that was effected by means of a dividend of one share of the
Company's common stock, par value $0.10 per share ("Common Stock"), for each
share of Common Stock outstanding (the "Stock Split Dividend"). The Stock
Split Dividend was paid on April 3, 1998 to holders of record on March 20,
1998. Common share and per share amounts for all periods have been restated to
reflect the Stock Split Dividend.
The following table sets forth the computation of basic and diluted earnings
per share for the years ended September 30, 1998, 1997 and 1996 (in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- --------- --------
<S> <C> <C> <C>
BASIC:
Net income (loss)............................ $76,044 $(131,897) $239,407
======= ========= ========
Weighted average common shares outstanding... 80,638 79,588 67,226
======= ========= ========
Net income (loss) per common share........... $ .94 $ (1.66) $ 3.56
======= ========= ========
DILUTED:
Net income (loss)............................ $76,044 $(131,897) $239,407
Effect of dilutive convertible debentures.... 1,685
------- --------- --------
$76,044 $(131,897) $241,092
======= ========= ========
Weighted average common shares outstanding... 80,638 79,588 67,226
Effect of dilutive employee stock options and
warrants.................................... 4,869 3,675
Effect of dilutive convertible debentures.... 2,990
------- --------- --------
Adjusted weighted average common shares and
assumed conversions......................... 85,507 79,588 73,891
======= ========= ========
Net income (loss) per common share........... $ .89 $ (1.66) $ 3.26
======= ========= ========
</TABLE>
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the United
States are generally prepared using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated into
U.S. dollars at exchange rates in effect as of the applicable balance sheet
date and any resulting translation adjustments are included as an adjustment
to retained earnings. Revenue and expense items of these subsidiaries are
translated at average exchange rates during the month the transactions occur.
Gains and losses from foreign currency transactions are included in net
earnings. Foreign currency transaction gains and losses historically have not
been material to the Company's results of operations.
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.
34
<PAGE>
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 obligations,
municipal 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 March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 requires companies to
capitalize qualifying computer software costs which are incurred during the
application development stage and amortize them over the software's estimated
useful life. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The adoption SOP 98-1 is not expected to have a material impact on
the financial position or results of operations of the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("FAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". FAS 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. The adoption of FAS
133 is not expected to have a material impact on the financial position or
results of operations of the Company.
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. In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP 98-4") which defers certain
provisions of SOP 97-2 for one year (until fiscal years beginning after
December 15, 1998). Detailed implementation guidelines for the provisions of
SOP 97-2 which were deferred have not been issued. The Company's accounting
policy for software revenue recognition is generally in compliance with SOP
97-2, as amended by SOP 98-4, and adoption of these SOP's, as currently
issued, is not expected to have a material impact on the financial position or
results of operations of the Company.
35
<PAGE>
2. BUSINESS ACQUISITIONS, DIVESTITURES AND REORGANIZATIONS
Acquisition of Mystech Associates, Inc.
On July 9, 1998, Sterling Software acquired Mystech Associates, Inc.
("Mystech"), a federal information technology services contractor, in a stock-
for-stock merger transaction (the "Mystech Merger"). As a result of the
transaction, Sterling Software issued approximately 769,000 shares of Common
Stock in exchange for the previously outstanding shares of Mystech common
stock and has reserved approximately 174,000 shares of Common Stock for
issuance upon exercise of assumed Mystech stock options. The Mystech Merger
was accounted for as a pooling of interests and the Mystech organization was
added to the Company's federal systems business. However, the impact of the
pooling of interests accounting on the Company's historical financial
statements was not material. Therefore, the Company's financial statements for
periods prior to the Mystech Merger have not been restated for this
transaction.
Acquisition of Synon Corporation
On July 31, 1998, Sterling Software acquired Synon Corporation ("Synon"), a
provider of application development software and services, in a stock-for-
stock merger transaction (the "Synon Merger") accounted for as a pooling of
interests. As a result of the transaction, Sterling Software issued
approximately 2,603,000 shares of Common Stock in exchange for the previously
outstanding shares of Synon capital stock and has reserved approximately
375,000 shares of Common Stock for issuance upon exercise of assumed Synon
stock options. The Company's financial statements for periods prior to the
Synon Merger, including the results of the application management business
segment, have been restated to represent the combined financial statements of
the previously separate entities.
Separate and combined results of Sterling Software and Synon are as follows
(in thousands):
<TABLE>
<CAPTION>
STERLING
SOFTWARE SYNON COMBINED
--------- ------- --------
<S> <C> <C> <C>
Nine Months Ended June 30, 1998 (unaudited)
Revenue..................................... $ 469,771 $57,483 $527,254
Net income (loss)........................... 75,734 (7,285) 68,449
Year Ended September 30, 1997
Revenue..................................... 488,978 80,224 569,202
Net income (loss)........................... (132,968) 1,071 (131,897)
Year Ended September 30, 1996
Revenue..................................... 439,171 74,590 513,761
Income from continuing operations........... 60,598 1,519 62,117
Net income.................................. 237,888 1,519 239,407
</TABLE>
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the "TI
Software 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
Texas Instruments' Software Division ("TI Software") in its business of
developing, marketing and supporting 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 TI Software 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 TI Software
Acquisition was approximately $214,774,000, including costs directly related
to the TI Software 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
36
<PAGE>
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. 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 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 TI Software 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 following unaudited pro forma information presents the Company's results
of operations as if the TI Software 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 TI Software 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.......................................... $ 733,577 $ 784,250
Income before other income (expense) and income
taxes........................................... $ 43,306 $ 56,532
Income from continuing operations................ $ 51,840 $ 52,304
Income from continuing operations per share...... $ .65 $ .73
</TABLE>
Termination of International Distributor Arrangement
Effective as of June 30, 1997, Sterling Software and 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, completed an agreement terminating an international
distributor arrangement pursuant to which Sterling Software acted as the
exclusive distributor of Sterling Commerce's interchange and communications
software products in markets outside the United States and Canada. The results
of the Company's international operations related to selling, marketing and
providing first level support for these products outside of the United States
and Canada through June 30, 1997 are included in the business segment
information presented herein under "Corporate and other".
37
<PAGE>
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 Stated and Canada. In consideration of the termination of the
international distributor arrangement and the sale of assets described above,
Sterling Commerce (i) paid to Sterling Software $5,226,000 on June 30, 1997
and (ii) subsequently paid to Sterling Software $10,076,000, which was equal
to the net book value of the acquired assets and certain assumed liabilities
of Sterling Software.
Reorganization Costs
The Company's results of operations for 1998 include reorganization costs of
$45,162,000 primarily related to the reorganization of the Company's
operations in connection with the Synon Merger and, to a lesser extent, the
Mystech Merger. Of the total reorganization costs, approximately $9,552,000
consisted of non-cash costs and the remaining $35,610,000 required cash
outlays. At September 30, 1998, the remaining balance to be paid was
$22,818,000. Currently, the Company does not expect to incur costs related to
these reorganizations in excess of the amounts charged to operations in 1998.
The components of the aggregate reorganization costs were as follows (in
thousands):
<TABLE>
<S> <C>
Employee termination costs......................................... $17,342
Write-down of software products which will not be actively
marketed.......................................................... 6,397
Elimination of duplicate facilities and equipment.................. 8,295
Out of pocket costs related to the reorganization.................. 9,535
Other costs........................................................ 3,593
-------
$45,162
=======
</TABLE>
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 TI Software Acquisition and the termination
of the international distributor arrangement with Sterling Commerce in the
third quarter of 1997. 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. At September 30, 1998, the remaining balance to be paid was
$12,344,000, which consists primarily of commitments under lease arrangements
for office space and equipment. The Company does not expect to incur costs
related to this reorganization in excess of the amount charged to operations
in 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
marketed......................................................... 17,591
Write-down of excess cost over net assets acquired................ 38,955
Elimination of duplicate facilities and equipment................. 19,993
Out of pocket costs related to the reorganization................. 5,109
Other costs....................................................... 5,850
--------
$106,037
========
</TABLE>
3. DISCONTINUED OPERATIONS
Sterling Commerce completed an initial public offering (the "Offering") of
13,800,000 shares of its common stock ("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.
38
<PAGE>
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. 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 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 for the year ended September 30, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Revenue............................................................ $267,773
Total costs and expenses........................................... $172,568
Income before income taxes......................................... $ 96,422
Income taxes....................................................... $ 38,030
Income from discontinued operations, net........................... $ 58,392
</TABLE>
4. LEGAL PROCEEDINGS AND CLAIMS
The Company is subject to various legal proceedings and claims that arise in
the normal course of its business. While many of these matters involve
inherent uncertainty, the Company's management believes that the amount of the
liability, if any, ultimately incurred by Sterling Software with respect to
any such existing proceedings and claims, net of applicable reserves and
available insurance, will not materially affect the business, financial
condition or results of operations of the Company.
5. SEGMENT INFORMATION
Sterling Software is a worldwide developer and supplier of application
development, information management and systems management software products
and services, as well as a supplier of specialized IT services for sectors of
the federal government. The Company addresses these major markets through
three business segments. The application management business segment provides
solutions for both enterprise-scale application development and information
management. Application development solutions include products and services
for business modeling through code generation. Information management
solutions include products and services that enable customers to facilitate
enterprise information access and to extend the life and usefulness of legacy
applications. The systems management business segment provides solutions that
enable customers to simplify the use of multiple computing environments and to
increase the productivity of information systems, ultimately ensuring that the
systems meet the business needs of the organization. The federal systems
business segment provides specialized IT services for sectors of the federal
government, as well as state and local governments. Though June 30, 1997, the
Company's international operations sold, marketed and provided first-level
support outside of the United States and Canada for certain software products
of Sterling Commerce, the results of which are included in the business
segment information under "Corporate and other".
39
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the years ended September 30, 1998, 1997 and 1996, is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
BUSINESS SEGMENT INFORMATION 1998 1997 1996
---------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Application Management................... $ 366,013 $ 223,166 $ 184,394
Systems Management....................... 204,529 184,679 170,804
Federal Systems.......................... 148,773 121,790 112,188
Corporate and other...................... 628 39,567 46,375
---------- ---------- ----------
Consolidated totals.................... $ 719,943 $ 569,202 $ 513,761
========== ========== ==========
Operating Profit (Loss):
Application Management................... $ 75,981 $ 23,747 $ 18,794
Systems Management....................... 77,337 70,629 65,858
Federal Systems.......................... 9,911 8,689 7,982
Reorganization costs..................... (45,162) (106,037)
Purchased research and development....... (137,849)
Corporate and other...................... (31,564) (31,443) (29,474)
---------- ---------- ----------
Consolidated totals.................... $ 86,503 $ (172,264) $ 63,160
========== ========== ==========
Identifiable Assets:
Application Management................... $ 256,737 $ 229,261 $ 140,679
Systems Management....................... 187,310 150,549 135,845
Federal Systems.......................... 67,290 58,445 68,809
Corporate and other...................... 686,262 662,023 785,246
---------- ---------- ----------
Consolidated totals.................... $1,197,599 $1,100,278 $1,130,579
========== ========== ==========
Capital Expenditures (including additions
to computer software):
Application Management................... $ 34,239 $ 13,782 $ 11,224
Systems Management....................... 19,745 16,919 14,597
Federal Systems.......................... 1,145 1,284 1,255
Corporate and other...................... 5,925 18,878 5,388
---------- ---------- ----------
Consolidated totals.................... $ 61,054 $ 50,863 $ 32,464
========== ========== ==========
Depreciation and Amortization:
Application Management................... $ 21,084 $ 17,698 $ 17,085
Systems Management....................... 16,485 16,014 12,230
Federal Systems.......................... 2,346 2,231 2,290
Corporate and other...................... 4,778 2,601 4,153
---------- ---------- ----------
Consolidated totals.................... $ 44,693 $ 38,544 $ 35,758
========== ========== ==========
Revenue from the U.S. Government:
Application Management................... $ 10,635 $ 7,455 $ 5,169
Systems Management....................... 3,364 4,140 3,521
Federal Systems.......................... 140,822 112,802 104,052
---------- ---------- ----------
Consolidated totals.................... $ 154,821 $ 124,397 $ 112,742
========== ========== ==========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
cash balances, marketable securities, income tax balances, other assets,
inter-segment eliminations and, through June 30, 1997, the results of
operations relating to the international distribution of certain Sterling
Commerce software products.
40
<PAGE>
6. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations in North America and other markets at September 30,
1998, 1997 and 1996 and for the years then ended are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
GEOGRAPHICAL INFORMATION 1998 1997 1996
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
North America and Latin America....... $ 454,599 $ 353,061 $ 308,398
Europe................................ 213,601 136,311 115,743
Asia-Pacific.......................... 51,115 40,263 43,245
Corporate and other................... 628 39,567 46,375
---------- ---------- ----------
$ 719,943 $ 569,202 $ 513,761
========== ========== ==========
Operating Profit (Loss):
North America and Latin America....... $ 125,804 $ 82,344 $ 79,108
Europe................................ 30,333 13,039 9,593
Asia-Pacific.......................... 7,092 7,682 3,933
Reorganization costs.................. (45,162) (106,037)
Purchased research and development.... (137,849)
Corporate and other................... (31,564) (31,443) (29,474)
---------- ---------- ----------
$ 86,503 $ (172,264) $ 63,160
========== ========== ==========
Identifiable Assets:
North America and Latin America....... $ 303,828 $ 253,376 $ 240,257
Europe................................ 176,026 156,401 93,547
Asia-Pacific.......................... 31,483 28,478 11,529
Corporate and other................... 686,262 662,023 785,246
---------- ---------- ----------
$1,197,599 $1,100,278 $1,130,579
========== ========== ==========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
cash balances, marketable securities, income tax balances, other assets, inter-
segment eliminations and, through June 30, 1997, the results of operations
relating to the international distribution of certain Sterling Commerce
software products.
7. MARKETABLE SECURITIES
At September 30, 1998 and 1997, 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
AGGREGATE AMORTIZED UNREALIZED
FAIR COST HOLDING
VALUE BASIS GAINS
--------- --------- ----------
<S> <C> <C> <C>
September 30, 1998
Commercial paper............................. $ 51,734 $ 51,734
U.S. corporate notes......................... 90,319 89,601 $ 718
U.S. government obligations.................. 20,023 20,001 22
Municipal obligations........................ 141,835 141,633 202
Other........................................ 6,626 6,333 293
-------- -------- ------
$310,537 $309,302 $1,235
======== ======== ======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
GROSS
UNREALIZED
---------------
AMORTIZED
AGGREGATE COST HOLDING HOLDING
FAIR VALUE BASIS GAINS LOSSES
---------- --------- ------- -------
<S> <C> <C> <C> <C>
September 30, 1996
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>
At September 30, 1998, scheduled maturities of investments in debt
securities were: $277,345,000 principal amount within one year and $29,792,000
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>
1998 1997
-------- --------
<S> <C> <C>
Trade.................................................. $181,256 $161,861
Unbilled............................................... 36,295 19,593
-------- --------
217,551 181,454
Less: Allowance for doubtful accounts.................. 17,123 14,186
-------- --------
$200,428 $167,268
======== ========
</TABLE>
At September 30, 1998 and 1997, accounts receivable include $45,820,000 and
$38,806,000, 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>
1998 1997
------- -------
<S> <C> <C>
Computer and peripheral equipment........................ $45,729 $48,098
Furniture, fixtures and other equipment.................. 47,158 39,705
Leasehold improvements................................... 23,671 16,710
------- -------
116,558 104,513
Less: Accumulated depreciation........................... 49,832 52,271
------- -------
$66,726 $52,242
======= =======
</TABLE>
10. CREDIT AGREEMENT AND LONG-TERM DEBT
Effective July 1, 1997, the Company entered into an amended bank credit
agreement ("Credit Agreement"). 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 1998 or outstanding under the Credit Agreement at September
30, 1998. At September 30, 1998, after giving effect to outstanding standby
letters of credit in the aggregate amount of approximately $4,140,000,
approximately $30,860,000 was available
42
<PAGE>
for borrowing under the Credit Agreement. Certain of the Company's foreign
subsidiaries have separate lines of credit totaling $9,305,000 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, 1998, $1,500,000 was outstanding pursuant to these foreign lines of
credit.
On December 20, 1995, the Company gave notice of the redemption of all of
the $114,922,000 then outstanding principal amount of its 5.75% Convertible
Subordinated Debentures (the "Debentures"), effective February 12, 1996. As a
result, 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>
1998 1997
-------- --------
<S> <C> <C>
Trade accounts payable................................. $ 31,571 $ 45,723
Accrued compensation................................... 57,169 53,951
Accrued acquisition and reorganization costs........... 34,276 45,641
Other accrued liabilities.............................. 38,774 40,873
-------- --------
$161,790 $186,188
======== ========
</TABLE>
Accrued acquisition and reorganization costs at September 30, 1998 were
primarily due to the Synon Merger, the Mystech Merger and the TI Software
Acquisition and related reorganizations, 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
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 17,011 $ 11,309 $ 10,055
State......................................... 2,928 2,310
Foreign....................................... 5,054 2,098 2,822
Deferred:
Federal....................................... 16,557 (17,330) 10,551
State......................................... 1,489 (1,685) 2,970
Foreign....................................... 754 639 (1,603)
-------- -------- --------
$ 43,793 $ (2,659) $ 24,795
======== ======== ========
</TABLE>
43
<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
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal statutory
rate.......................................... $41,943 $(47,095) $30,419
Increases (reductions) in tax expense (benefit)
resulting from:
Purchased research and development for which
no income tax benefit was recognized........ 36,251
Effect of non-U.S. tax rates................. (4,553) (1,182)
Recognition of previously unrecognized
deferred income tax asset................... (3,022) (8,062)
Nondeductible excess cost over net assets
acquired.................................... 564 14,663 1,680
Foreign sales corporation.................... (1,896) (1,891) (1,568)
State income taxes, net of federal benefit... 4,417 (125) 2,970
Unbenefitted losses.......................... 3,112
Other........................................ 206 (258) (644)
------- -------- -------
$43,793 $ (2,659) $24,795
======= ======== =======
</TABLE>
Income (loss) before income taxes includes foreign pretax earnings (losses)
of $11,253,000, $(7,021,000) and $1,128,000 for the years ended September 30,
1998, 1997 and 1996, respectively.
Deferred income tax assets and liabilities 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 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards....................... $37,669 $35,558
General business and alternative minimum tax credit
carryforwards......................................... 6,799 6,639
Foreign tax credit carryforwards....................... 1,232 1,232
Foreign taxes creditable on undistributed foreign
source income......................................... 5,397 5,397
Reserves and reorganization accruals................... 60,295 61,245
------- -------
Deferred income tax assets........................... 111,392 110,071
------- -------
Deferred income tax liabilities:
Capitalized software costs............................. 21,729 15,283
Depreciation and amortization.......................... 5,709 2,253
Other future income tax liabilities.................... 35,438 27,491
------- -------
Deferred income tax liabilities...................... 62,876 45,027
------- -------
Deferred income tax asset net of deferred income tax
liability............................................. 48,516 65,044
Less valuation allowance............................... (44,138) (41,866)
------- -------
Net deferred income tax asset........................ $ 4,378 $23,178
======= =======
</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, 1998, 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.
44
<PAGE>
At September 30, 1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $61,609,000 and
$6,799,000, respectively. These carryforwards will expire at various times
between 1999 and 2009, with approximately $61,609,000 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, 1998, 1997 and 1996 was
$28,691,000, $26,435,000 and $23,121,000, respectively. At September 30, 1998,
minimum future rental payments due under all operating leases, net of
estimated future sublease income, were as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................ $ 29,429
2000............................................................ 25,029
2001............................................................ 20,262
2002............................................................ 12,228
2003............................................................ 10,849
Thereafter...................................................... 46,198
--------
$143,995
========
</TABLE>
14. STOCKHOLDERS' EQUITY
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 1,250,000 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, as amended (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.
Increase in Authorized Common Stock
On March 11, 1998, the Sterling Software stockholders approved an amendment
to the Company's Certificate of Incorporation increasing the number of
authorized shares of Common Stock from 75,000,000 shares to 125,000,000
shares.
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 $100.00 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
45
<PAGE>
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.
Stock Options and Warrants
In May 1996 Sterling Software's stockholders approved the 1996 Stock Option
Plan. At September 30, 1998, 883,888 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 at a rate of 25% per year and
expire either five or ten years from the date of grant, although options may
be granted with shorter vesting periods and shorter terms. Any tax benefit
associated with the exercise of options and warrants is credited to paid-in
capital.
Options granted under previous Company option plans that were unexercised
with respect to 163,362 shares of Common Stock at the close of business on
September 30, 1996 were adjusted to thereafter be exercisable with respect to
415,900 shares at exercise prices ranging from $1.68 to $16.20 to preserve the
economic value of such options after the spin-off of Sterling Commerce. See
"Conversion adjustment" in the table below.
Stock option transactions, restated to retroactively reflect the Stock Split
Dividend and the Synon Merger, are summarized below for the three years ended
September 30, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ---------------------
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
beginning of year, as
previously reported........ 8,085,731 $28.36
Adjustment for the Stock
Split Dividend............. 8,085,731
Adjustment for pooling of
interests with Synon....... 364,000 10.15
-----------
Options outstanding at
beginning of year, as
restated................... 18,686,785 $14.19 757,483 $ 9.63 16,535,462 $14.09
Options assumed in the
Mystech Merger............. 174,146 10.49
Options granted............. 842,482 23.44 19,185,277 14.27 2,365,843 20.93
Options exercised........... (1,327,084) 13.48 (212,036) 6.87 (17,833,548) 14.92
Options terminated and
canceled................... (635,611) 15.24 (1,043,939) 13.84 (562,812) 16.43
Conversion adjustment....... 252,538
---------- ---------- -----------
Options outstanding at end
of year.................... 17,740,718 14.61 18,686,785 14.19 757,483 9.63
========== ========== ===========
Options exercisable at end
of year.................... 10,694,178 14.03 9,399,391 13.93 569,764 9.22
========== ========== ===========
Options available for grant
at end of year............. 883,888 971,090 15,500,000
========== ========== ===========
</TABLE>
46
<PAGE>
Information related to options outstanding at September 30, 1998 is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ------------ ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$2.00--$13.63 2,564,985 7 Years $13.19 1,681,241 $12.97
$ 13.64--
$14.13 12,473,575 7 Years $14.13 8,526,675 $14.13
$ 14.14--
$30.06 2,702,158 5 Years $18.19 486,262 $16.04
------------ ------------
17,740,718 10,694,178
============ ============
</TABLE>
During 1996, 620,194 warrants with an aggregate exercise price of
$10,734,659 were exercised for shares of Common Stock. Also in 1996, 165,300
warrants with an aggregate exercise price of $8,750,155 were canceled. At
September 30, 1998, 1997 and 1996, no warrants were outstanding.
Employee Stock Purchase Plan
In February 1998 Sterling Software's stockholders approved the Company's
Employee Stock Purchase Plan ("ESPP"). Under provisions of the ESPP, employees
can purchase Common Stock at a specified price through payroll deductions
during an offering period, currently established on a semi-annual basis. In
July 1998, approximately 340,000 shares were issued to employees under the
ESPP. At September 30, 1998, approximately $3,160,000 had been contributed by
employees that will be used to purchase shares at the end of the offering
period in December 1998. At September 30, 1998, the Company could issue up to
approximately 133,000 shares under the ESPP, based on withholdings through
September 30, 1998 and the Company's stock price at September 30, 1998.
FAS 123
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 and the Company's
ESPP 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
------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Expected option life in years.................. 4.0 4.0 4.0
Risk-free interest rate........................ 5.59% 6.14% 5.74%
Volatility factor.............................. 0.40 0.40 0.40
</TABLE>
The Company does not have a history of paying cash dividends and none have
been assumed in estimating the fair value of its options or rights under the
ESPP.
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 measure of the fair
value of its employee stock options or ESPP participation rights. For purposes
of pro forma disclosures, the estimated fair value of the options and ESPP
participation rights is amortized to expense over the options' vesting periods
and the ESPP's semi-annual offering 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
47
<PAGE>
grants of the Company. Therefore, the pro forma information is not necessarily
indicative of future results until FAS 123 is applied to all outstanding stock
options.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------
1998 1997 1996
------- --------- --------
<S> <C> <C> <C>
Pro forma net income (loss).................... $64,658 $(172,864) $227,556
Pro forma net income (loss) per share:
Basic........................................ $ .80 $ (2.17) $ 3.38
Diluted...................................... $ .76 $ (2.17) $ 3.10
Weighted average fair value of options granted
during the year............................... $ 9.24 $ 6.00 $ 3.29
</TABLE>
15. 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 1998, 1997 and 1996
were $3,908,000, $2,829,000 and $2,315,000, 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 1998, 1997 and 1996,
the investment of the Company's contributions included 102,407, 39,542 and
39,330 shares of Common Stock, respectively.
16. CHANGE-IN-CONTROL AND EMPLOYMENT ARRANGEMENTS
As of September 30, 1998, the Company had change-in-control agreements with
21 of its current or former officers providing for payments based on the
individual officer's respective cash compensation and/or 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 individual party thereto to compensate such
individual for the economic effect of such individual's liability to pay
excise taxes to the extent that payments received by such individual, 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 (each, a "Tax Payment"). Based on certain
assumptions, at September 30, 1998, the Company's maximum liability for cash
compensation, benefits and Tax Payments under these agreements was estimated
to be approximately $45,000,000. 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 individuals
prior to a change in control and the price at which any change-in-control
transaction occurs.
As of September 30, 1998, the Company had entered into severance agreements
with 13 of its officers providing for payments based on the individual
officer's respective cash compensation 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 termination payments, based on the director's consulting
compensation, upon the occurrence of certain events. At September 30, 1998,
the Company's maximum estimated liability for future salaries, fees, bonuses
and benefits under these agreements was approximately $15,000,000.
48
<PAGE>
17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated operating results for each quarter of 1998 and
1997 are summarized below (in thousands, except per share data). The Company's
financial statement for periods prior to the Synon Merger represent the
combined financial statements of the previously separate entities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- --------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1998:
Revenue
Products...................... $ 65,917 $ 71,078 $ 72,592 $ 81,668
Product support............... 45,910 45,656 46,425 45,640
Services...................... 57,052 60,850 61,774 65,381
-------- -------- --------- --------
168,879 177,584 180,791 192,689
Cost of sales
Products and product support.. 18,072 16,991 17,007 19,159
Services...................... 51,108 53,513 54,708 57,108
-------- -------- --------- --------
69,180 70,504 71,715 76,267
Product development and
enhancement.................... 10,608 9,410 8,090 8,054
Selling, general and
administrative................. 69,004 67,993 66,407 61,046
Reorganization costs............ 45,162
Income from continuing
operations..................... 17,322 23,916 27,211 7,595
Weighted average common shares
outstanding.................... 79,785 80,015 80,650 82,075
Income per common share:
Net income:
Basic....................... $ .22 $ .30 $ .34 $ .09
Diluted..................... .21 .28 .32 .09
Year ended September 30, 1997:
Revenue
Products...................... $ 44,603 $ 52,052 $ 57,433 $ 80,152
Product support............... 35,813 34,533 34,405 46,135
Services...................... 39,200 38,635 41,718 64,523
-------- -------- --------- --------
119,616 125,220 133,556 190,810
Cost of sales
Products and product support.. 18,935 21,252 20,054 19,208
Services...................... 33,018 32,852 36,435 54,982
-------- -------- --------- --------
51,953 54,104 56,489 74,190
Product development and
enhancement.................... 6,437 6,491 6,236 10,495
Selling, general and
administrative................. 50,301 51,178 53,281 76,425
Reorganization costs............ 106,037
Purchased research and
development.................... 137,849
Income (loss) from continuing
operations..................... 14,363 15,283 (185,433) 23,890
Weighted average common shares
outstanding.................... 79,477 79,530 79,666 79,699
Income (loss) per common share:
Net income (loss):
Basic....................... $ .18 $ .19 $ (2.33) $ .30
Diluted..................... .18 .19 (2.33) .29
</TABLE>
49
<PAGE>
Information concerning the Company's operations by business segment for each
quarter of 1998, 1997 and 1996 is set forth below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- --------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1998:
Revenue:
Application Management......... $ 92,525 $ 91,365 $ 93,649 $ 88,474
Systems Management............. 42,061 50,314 49,983 62,171
Federal Systems................ 33,665 35,905 37,159 42,044
Corporate and other............ 628
-------- -------- --------- --------
Consolidated totals.......... $168,879 $177,584 $ 180,791 $192,689
======== ======== ========= ========
Operating Profit (Loss):
Application Management......... $ 11,809 $ 16,591 $ 20,418 $ 27,163
Systems Management............. 13,838 18,680 19,524 25,295
Federal Systems................ 2,239 2,468 2,412 2,792
Reorganization costs........... (45,162)
Corporate and other............ (7,799) (8,062) (7,775) (7,928)
-------- -------- --------- --------
Consolidated totals.......... $ 20,087 $ 29,677 $ 34,579 $ 2,160
======== ======== ========= ========
Year ended September 30, 1997:
Revenue:
Application Management......... $ 44,427 $ 40,310 $ 41,327 $ 97,102
Systems Management............. 36,950 43,916 46,045 57,768
Federal Systems................ 27,858 27,954 30,919 35,059
Corporate and other............ 10,381 13,040 15,265 881
-------- -------- --------- --------
Consolidated totals.......... $119,616 $125,220 $ 133,556 $190,810
======== ======== ========= ========
Operating Profit (Loss):
Application Management......... $ 4,408 $ 3,120 $ 3,522 $ 12,697
Systems Management............. 12,889 17,099 18,530 22,111
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.......... $ 10,925 $ 13,447 $(226,336) $ 29,700
======== ======== ========= ========
Year ended September 30, 1996:
Revenue:
Application Management......... $ 47,393 $ 45,244 $ 46,838 $ 44,919
Systems Management............. 35,210 40,969 42,558 52,067
Federal Systems................ 26,262 26,815 27,553 31,558
Corporate and other............ 8,054 10,585 12,191 15,545
-------- -------- --------- --------
Consolidated totals.......... $116,919 $123,613 $ 129,140 $144,089
======== ======== ========= ========
Operating Profit (Loss):
Application Management......... $ 6,702 $ 3,912 $ 6,163 $ 2,017
Systems Management............. 11,625 15,535 16,389 22,309
Federal Systems................ 2,300 1,816 2,038 1,828
Corporate and other............ (7,778) (7,769) (8,201) (5,726)
-------- -------- --------- --------
Consolidated totals.......... $ 12,849 $ 13,494 $ 16,389 $ 20,428
======== ======== ========= ========
</TABLE>
50
<PAGE>
18. SUBSEQUENT EVENTS
On October 26, 1998, Sterling Software acquired Cayenne Software, Inc.
("Cayenne"), a global supplier of analysis and design solutions for
application and database development, in a cash transaction valued at
approximately $11,400,000. The acquisition will be accounted for in accordance
with the purchase method of accounting and, accordingly, the results of
operations of Cayenne will be included in the Company's results of operations
from the date of the acquisition and will be reported under the application
management business segment. The Company expects to incur non-recurring
charges to operations in the first quarter of 1999, currently estimated to
aggregate between $25,000,000 and $40,000,000, primarily related to the
reorganization of the Company's operations and the write-off of purchased
research and development costs in connection with the acquisition.
51
<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 will be set forth in the
Proxy Statement to be provided to stockholders in connection with the
Company's 1999 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 will be 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 will be 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 will be 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 will
be 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.
52
<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, 1998, 1997 and 1996.
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)
2.2 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 (3)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (4)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(5)
2.5 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(2), (22)
3.1 Certificate of Incorporation of the Company, as amended (6)
3.2 Restated Bylaws of the Company (7)
4.1 Form of Common Stock Certificate (8)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (9)
4.3 First Amendment to Rights Agreement, dated as of March 12, 1998, by and
between the Company and BankBoston, N.A., as Rights Agent (10)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (11), (12)
10.2 Sterling Software, Inc. Amended and Restated Employee Stock Purchase
Plan (effective as of March 20, 1998) (6), (12)
10.3 Sterling Software, Inc. Deferred Compensation Plan (restated effective
November 21, 1997) (12), (21)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(12), (13)
10.5 Form of Stock Option Agreement between the Company and each of Sam Wyly
and Charles J. Wyly, Jr. (12), (14)
10.6 Form of Stock Option Agreement between the Company and Sterling L.
Williams (12), (14)
10.7 Form of Stock Option Agreement between the Company and Geno P. Tolari
(12), (14)
10.8 Form of Stock Option Agreement between the Company and Jeannette P.
Meier (12), (14)
10.9 Form of Amendment to Stock Option Agreement, dated March 20, 1998,
between the Company and each of its executive officers (6), (12)
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
10.10 Fiscal 1998 Executive Compensation Plan for Group Presidents (12),
(14)
10.11 Fiscal 1999 Executive Compensation Plan for Group Presidents (12),
(21)
10.12 Employment Agreement, dated September 30, 1998, between the Company
and Jeannette P. Meier (12), (21)
10.13 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (12), (15)
10.14 CEO Agreement, dated February 12, 1996, between the Company and
Sterling L. Williams (12), (16)
10.15 Amendment to CEO Agreement, dated May 31, 1998, between the Company
and Sterling L. Williams (12), (21)
10.16 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 and Geno P. Tolari (12), (16)
10.17 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 and Geno P. Tolari (12), (17)
10.18 Form of Severance Agreement, dated February 12, 1996, between the
Company and Geno P. Tolari (12), (16)
10.19 Form of Amendment to Severance Agreement, dated August 15, 1997,
between the Company and Geno P. Tolari (12), (14)
10.20 Form of Indemnity Agreement between the Company and each of its
directors and officers (11)
10.21 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 (18)
10.22 Tax Allocation Agreement, dated March 4, 1996, between the Company and
Sterling Commerce, Inc. (19)
10.23 Indemnification Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (20)
10.24 Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the
benefit of the Company (15)
21.1 Subsidiaries of the Company (21)
23.1 Consent of Ernst & Young LLP (21)
27.1 Financial Data Schedule (21)
</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 (SEC File No. 97605952).
(2) In accordance with Item 601 of Regulation S-K, the schedules and
exhibits relating to the agreement have been omitted. The Company will
furnish supplementally to the Securities and Exchange Commission such
schedules and exhibits upon request.
(3) 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
(SEC File No. 97633732).
(4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming
a part of the Company's Registration Statement No. 333-53747 and
incorporated herein by reference (SEC File No. 98632583).
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated June 21, 1998 and incorporated herein by reference (SEC File No.
98652676).
54
<PAGE>
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (SEC File No. 98602908).
(7) Previously filed as an exhibit to the Company's Registration Statement
No. on Form 8-A/A filed on May 27, 1998 and incorporated herein by
reference (SEC File No. 98632257).
(8) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference (SEC File No. S766400).
(9) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated December 18, 1996 and incorporated herein by reference (SEC File
No. 96682898).
(10) Previously filed as an exhibit to the Company's Registration Statement
No. on Form 8-A/A filed April 3, 1998 and incorporated herein by
reference (SEC File No. 98587026).
(11) 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 (SEC File No. 93278187).
(12) 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.
(13) Previously filed as an exhibit to the Company's Registration Statement
No. 333-13303 and incorporated herein by reference (SEC File No.
96638532).
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997 and incorporated herein by
reference (SEC File No. 97724719).
(15) 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 (SEC File No. 96672084).
(16) 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 (SEC File No. 96560921).
(17) 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 (SEC File No. 96609257).
(18) 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 (SEC File No. 97660034).
(19) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference
(File/ID #001-14196, SEC File No. 96042701).
(20) 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 (File ID #001-14196, SEC File
No. 96560893).
(21) Filed herewith.
(22) Previously filed as an exhibit to the Current Report on Form 8-K dated
August 27, 1998 filed by Cayenne Software, Inc. and incorporated herein
by reference (File ID #000-19682, SEC File No. 98700698).
(b) Reports on Form 8-K.
None.
55
<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 17, 1998 /s/ Sterling L. Williams
By __________________________________
Sterling L. Williams President,
Chief Executive Officer and
Director (Principal Executive
Officer)
Date: November 17, 1998 /s/ R. Logan Wray
_____________________________________
R. Logan Wray Senior Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
56
<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 17, 1998 /s/ Robert J. Donachie
-------------------------------------
Robert J. Donachie
Director
Date: November 17, 1998 /s/ Michael C. French
-------------------------------------
Michael C. French
Director
Date: November 17, 1998 /s/ Phillip A. Moore
-------------------------------------
Phillip A. Moore
Director
Date: November 17, 1998 /s/ Charles J. Wyly, Jr.
-------------------------------------
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
Date: November 17, 1998 /s/ Evan A. Wyly
-------------------------------------
Evan A. Wyly
Director
Date: November 17, 1998 /s/ Donald R. Miller, Jr.
-------------------------------------
Donald R. Miller, Jr.
Director
Date: November 17, 1998 /s/ Alan W. Steelman
-------------------------------------
Alan W. Steelman
Director
Date: November 17, 1998 /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 17, 1998 /s/ Sam Wyly
-------------------------------------
Sam Wyly
Chairman of the Board and Director
57
<PAGE>
SCHEDULE II
STERLING SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<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, 1996.............. $ 8,640,000 $6,879,000 $(1,998,000)(1) $(5,575,000)(2) $ 7,946,000
=========== ========== =============== =============== ===========
Allowance for doubtful
accounts at September
30, 1997.............. $ 7,946,000 $5,191,000 $ 4,436,000(3) $(3,387,000)(2) $14,186,000
=========== ========== =============== =============== ===========
Allowance for doubtful
accounts at September
30, 1998.............. $14,186,000 $5,157,000 $ 2,048,000(1) $(4,268,000)(2) $17,123,000
=========== ========== =============== =============== ===========
</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>
1490-10K-98
<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)
2.2 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 (3)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (4)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(5)
2.5 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(2), (22)
3.1 Certificate of Incorporation of the Company, as amended (6)
3.2 Restated Bylaws of the Company (7)
4.1 Form of Common Stock Certificate (8)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (9)
4.3 First Amendment to Rights Agreement, dated as of March 12, 1998, by
and between the Company and BankBoston, N.A., as Rights Agent (10)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (11), (12)
10.2 Sterling Software, Inc. Amended and Restated Employee Stock Purchase
Plan (effective as of March 20, 1998) (6), (12)
10.3 Sterling Software, Inc. Deferred Compensation Plan (restated effective
November 21, 1997) (12), (21)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(12), (13)
10.5 Form of Stock Option Agreement between the Company and each of Sam
Wyly and Charles J. Wyly, Jr. (12), (14)
10.6 Form of Stock Option Agreement between the Company and Sterling L.
Williams (12), (14)
10.7 Form of Stock Option Agreement between the Company and Geno P. Tolari
(12), (14)
10.8 Form of Stock Option Agreement between the Company and Jeannette P.
Meier (12), (14)
10.9 Form of Amendment to Stock Option Agreement, dated March 20, 1998,
between the Company and each of its executive officers (6), (12)
10.10 Fiscal 1998 Executive Compensation Plan for Group Presidents (12),
(14)
10.11 Fiscal 1999 Executive Compensation Plan for Group Presidents (12),
(21)
10.12 Employment Agreement, dated September 30, 1998, between the Company
and Jeannette P. Meier (12), (21)
10.13 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (12), (15)
10.14 CEO Agreement, dated February 12, 1996, between the Company and
Sterling L. Williams (12), (16)
10.15 Amendment to CEO Agreement, dated May 31, 1998, between the Company
and Sterling L. Williams (12), (21)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.16 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 and Geno P. Tolari (12), (16)
10.17 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 and Geno P. Tolari (12), (17)
10.18 Form of Severance Agreement, dated February 12, 1996, between the Company and Geno P. Tolari (12),
(16)
10.19 Form of Amendment to Severance Agreement, dated August 15, 1997, between the Company and Geno P.
Tolari (12), (14)
10.20 Form of Indemnity Agreement between the Company and each of its directors and officers (11)
10.21 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 (18)
10.22 Tax Allocation Agreement, dated March 4, 1996, between the Company and Sterling Commerce, Inc. (19)
10.23 Indemnification Agreement, dated March 4, 1996, between the Company and Sterling Commerce, Inc. (20)
10.24 Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the benefit of the Company (15)
21.1 Subsidiaries of the Company (21)
23.1 Consent of Ernst & Young LLP (21)
27.1 Financial Data Schedule (21)
</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 (SEC File No. 97605952).
(2) In accordance with Item 601 of Regulation S-K, the schedules and exhibits
relating to the agreement have been omitted. The Company will furnish
supplementally to the Securities and Exchange Commission such schedules
and exhibits upon request.
(3) 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
(SEC File No. 97633732).
(4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming
a part of the Company's Registration Statement No. 333-53747 and
incorporated herein by reference (SEC File No. 98632583).
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated June 21, 1998 and incorporated herein by reference (SEC File No.
98652676).
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (SEC File No. 98602908).
(7) Previously filed as an exhibit to the Company's Registration Statement
No. on Form 8-A/A filed on May 27, 1998 and incorporated herein by
reference (SEC File No. 98632257).
(8) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference (SEC File No. S766400).
(9) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated December 18, 1996 and incorporated herein by reference (SEC File
No. 96682898).
(10) Previously filed as an exhibit to the Company's Registration Statement
No. on Form 8-A/A filed April 3, 1998 and incorporated herein by
reference (SEC File No. 98587026).
(11) 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 (SEC File No. 93278187).
<PAGE>
(12) 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.
(13) Previously filed as an exhibit to the Company's Registration Statement
No. 333-13303 and incorporated herein by reference (SEC File No.
96638532).
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997 and incorporated herein by
reference (SEC File No. 97724719).
(15) 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 (SEC File No. 96672084).
(16) 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 (SEC File No. 96560921).
(17) 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 (SEC File No. 96609257).
(18) 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 (SEC File No. 97660034).
(19) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference
(File/ID #001-14196, SEC File No. 96042701).
(20) 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 (File ID #001-14196, SEC File
No. 96560893).
(21) Filed herewith.
(22) Previously filed as an exhibit to the Current Report on Form 8-K dated
August 27, 1998 filed by Cayenne Software, Inc. and incorporated herein
by reference (File ID #000-19682, SEC File No. 98700698).
<PAGE>
EXHIBIT 10.3
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
(RESTATED EFFECTIVE NOVEMBER 21, 1997)
<PAGE>
TABLE OF CONTENTS
Section Page
- - ------- ----
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title .............................................................. 2
1.2 Definitions ........................................................ 2
ARTICLE II.
PARTICIPATION
2.1 Participation....................................................... 5
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation..................................... 6
3.2 Investment Elections................................................ 7
3.3 Match Funding....................................................... 8
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts................................................ 8
4.2 Quarterly Statements................................................ 9
ARTICLE V.
VESTING
5.1 Account............................................................. 9
ARTICLE VI.
DISTRIBUTIONS
6.1 Form and Time of Payment............................................ 9
6.2 Death Benefits...................................................... 10
6.3 Unscheduled Early Distributions..................................... 11
6.4 Scheduled Early Distributions....................................... 12
(i)
<PAGE>
6.5 Change in Control Withdrawals....................................... 12
6.6 Financial Hardship Withdrawals...................................... 12
6.7 Inability To Locate Participant..................................... 13
6.8 Directors and Consultants........................................... 13
6.9 Claims Procedure.................................................... 14
ARTICLE VII.
ADMINISTRATION
7.1 Committee........................................................... 15
7.2 Committee Action.................................................... 15
7.3 Powers and Duties of the Committee.................................. 15
7.4 Construction and Interpretation..................................... 16
7.5 Information......................................................... 16
7.6 Compensation, Expenses and Indemnity................................ 17
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor......................................... 17
8.2 Restriction Against Assignment..................................... 18
8.3 Withholding........................................................ 18
8.4 Amendment, Modification, Suspension or Termination................. 18
8.5 Governing Law...................................................... 19
8.6 Receipt or Release................................................. 20
8.7 Payments on Behalf of Persons Under Incapacity..................... 20
8.8 Successors and Assigns............................................. 20
8.9 No Employment Rights............................................... 20
8.10 Headings, etc. Not Part of Agreement............................... 20
(ii)
<PAGE>
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
Sterling Software, Inc., a Delaware corporation (the "Company") acting on
behalf of itself and its designated subsidiaries, hereby adopts the provisions
of this restated plan document to govern the operation and administration of the
Sterling Software, Inc. Deferred Compensation Plan (the "Plan"), effective as of
November 21, 1997.
RECITALS
1. Effective as of February 1, 1997, the Plan was adopted and established
by the Company, acting on behalf of itself and its designated subsidiaries, as
an unfunded supplemental retirement plan for the benefit of selected highly
compensated employees, directors and consultants and their respective
beneficiaries. Benefits under the Plan are to paid by the Company from its
general assets or from the assets of the trust hereinafter described.
2. Concurrently with the adoption and establishment of the Plan, the
Company entered into a trust agreement with First American Trust Company, as
trustee, and established a trust (the "Trust") to hold and manage certain assets
contributed by the Company in connection with the Plan. The Trust is intended to
qualify as a "grantor trust" under the Internal Revenue Code of 1986, as
amended, with the principal and income of the Trust to be treated as assets and
income of the Company for federal and state income tax purposes.
3. The assets of the Plan held in the Trust will at all times be subject
to the claims of the general creditors of the Company.
4. Effective as of October 27, 1997, the Plan was amended in certain
respects by the First Amendment thereto dated such date (the "First Amendment").
Also effective as of October 27, 1997, the Committee (as defined in the Plan)
authorized the substitution of the Aetna Variable Encore Fund in place of the
Janus Aspen Short-Term Bond Portfolio, as one of the Funds (as defined in the
Plan) available for hypothetical investment by Participants (as defined in the
Plan) in the Plan.
5. Solely for purposes of restating the Plan document to incorporate
therein the amendments to the Plan effected by the First Amendment and to
reflect the Fund substitution, all as described above, the Company has executed
and delivered this restated Plan document effective as of November 21, 1997.
<PAGE>
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title.
-----
This Plan shall be known as the Sterling Software, Inc. Deferred
Compensation Plan.
1.2 Definitions.
-----------
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
(a) "Account" means for each Participant the bookkeeping account
-------
maintained by the Committee on the books of the Company that is credited with
amounts equal to (i) the portion of the Participant's Compensation that he or
she elects to defer, and (ii) the deemed earnings on such deferred Compensation
that are credited pursuant to Section 4.1(ii).
(b) "Beneficiary" or "Beneficiaries" means the beneficiary or
----------- -------------
beneficiaries last designated in writing by a Participant, in accordance with
procedures established by the Committee, to receive benefits under the Plan in
the event of the Participant's death. No beneficiary designation shall become
effective unless and until it is filed with the Committee during the
Participant's lifetime.
(c) "Board of Directors" or "Board" means the Board of Directors of
------------------ -----
Sterling Software, Inc. Any determination or other action specified in this Plan
to be made, taken or effectuated by the Board may be made, taken or effectuated
by the Executive Committee of the Board.
(d) "Change in Control" means the occurrence of any of the following
-----------------
events:
(i) the Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than two-thirds of the combined voting
power of the then-outstanding securities entitled to vote generally in the
election of directors ("Voting Stock") of such corporation or person
immediately after such transaction are held in the aggregate by the holders
of Voting Stock of the Company immediately prior to such transaction;
(ii) the Company sells or otherwise transfers all or substantially all
of its assets to another corporation or other legal person, and as a result
of such sale or transfer less than two-thirds of the combined voting power
of the then-outstanding Voting Stock of such corporation or person
immediately after such sale or transfer is held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such sale or
transfer;
(iii) there is a report filed on Schedule 13D or Schedule 14D-1 (or
any
2
<PAGE>
successor schedule, form or report), each as promulgated pursuant to the
Secu rities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities representing
20% or more of the combined voting power of the then-outstanding Voting
Stock of the Company;
(iv) the Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in response
to Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) that a change in control of the Company has occurred or will
occur in the future pursuant to any then-existing contract or transaction;
or
(v) if, during any period of two consecutive years, individuals who at
the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority thereof; provided,
however, that for purposes of this clause (v) each director who is first
elected, or first nominated for election by the Company's stockholders, by
a vote of at least two-thirds of the directors of the Company (or a
committee thereof) then still in office who were directors of the Company
at the beginning of any such period will be deemed to have been a director
of the Company at the beginning of such period.
Notwithstanding the foregoing provisions of clauses (iii) or (iv) above, unless
otherwise determined in a specific case by majority vote of the Board, a "Change
in Control" will not be deemed to have occurred for purposes of clause (iii) or
clause (iv) above solely because (A) the Company, (B) an entity in which the
Company directly or indirectly beneficially owns 50% or more of the outstanding
Voting Stock (a "Subsidiary"), or (C) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock
of the Company, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has occurred or will occur in
the future by reason of such beneficial ownership or any increase or decrease
thereof.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Administrative Committee appointed to
---------
administer the Plan in accordance with Article VII.
(g) "Company" means Sterling Software, Inc., a Delaware corporation,
-------
any successor corporation to Sterling Software, Inc. satisfying the requirements
of Section 8.8 and any entity that is directly or indirectly controlled by
Sterling Software, Inc. or in which Sterling Software, Inc. has a significant
equity or investment interest, as determined by the Board.
3
<PAGE>
(h) "Compensation" means the following items of remuneration payable
------------
to an Eligible Individual for services rendered to the Company during a calendar
year: Salary, Incentive Bonus, annual retainer and meeting fees payable to
members of the Board and fees payable to consultants. An Eligible Individual's
Compensation shall be computed before giving effect to the Eligible Individual's
salary reduction elections under Code Sections 125 or 401(k) and the Eligible
Individual's deferral election under Section 3.1 of this Plan.
(i) "Distributable Amount" means the balance of a Participant's Account
--------------------
at any given time.
(j) "Effective Date" means February 1, 1997.
--------------
(k) "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.
(l) "Fund" or "Funds" means one or more of the investment funds or
---- -----
contracts selected by the Committee pursuant to Section 7.3(i).
(m) "Incentive Bonus" means any cash incentive compensation payable to
---------------
a Participant in addition to the Participant's Salary.
(n) "Initial Election Period" for an Eligible Individual means the 30-
-----------------------
day period ending January 31, 1997.
(o) "Interest Rate" means, for any Fund and for any month, an amount
-------------
expressed as a percentage equal to the net rate of gain or loss on the assets of
such Fund during such month.
4
<PAGE>
(p) "Participant" means any Eligible Individual who elects to defer
-----------
Compensation in accordance with Section 3.1.
(q) "Plan" means the Sterling Software, Inc. Deferred Compensation
----
Plan set forth herein, as amended from time to time in accordance with Section
8.4.
(r) "Plan Year" means the 12-consecutive month period beginning
---------
January 1 and ending December 31 of each year, provided that the first Plan Year
shall be a short year beginning February 1, 1997 and ending December 31, 1997.
(s) "Salary" means for any calendar year (i) in the case of an
------
employee of the Company whose compensation from the Company does not include
commission income, the employee's base salary during the calendar year and (ii)
in the case of an employee of the Company whose compensation from the Company
includes commission income, the total of the employee's base salary plus
commissions during the calendar year. Salary excludes any other form of
compensation such as Incentive Bonuses, restricted stock, income from stock
options or stock appreciation rights, severance payments, moving expenses, car
or other special allowances, reimbursements for taxes or any other remuneration
for personal services included in an Eligible Individual's taxable income.
(t) "Threshold Amount" means, for the first Plan Year, the sum of
----------------
$120,000 and, for any subsequent Plan Year, such other amount as may be
determined by the Committee pursuant to Section 7.3.
(u) "Trust" means the trust established by the Trust Agreement.
-----
(v) "Trust Agreement" means the Sterling Software, Inc. Deferred
---------------
Compensation Plan Trust Agreement dated as of February 1, 1997, by and between
the Company and First American Trust Company, as Trustee.
(w) "Trustee" means First American Trust Company or any successor
-------
trustee appointed pursuant to the Trust Agreement.
ARTICLE II.
PARTICIPATION
2.1 Participation.
-------------
An Eligible Individual shall become a Participant in the Plan for a Plan
Year by electing to defer all or a portion of his or her Compensation for such
Plan Year in accordance with Section 3.1, by completing all required
applications for life insurance (as determined by the Committee in its
discretion), and by complying with any applicable medical underwriting
requirements of the issuer of any policy of insurance on the life of the
Eligible Individual.
5
<PAGE>
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation.
-------------------------------
(a) Elections. For the first Plan Year, each Eligible Individual may elect
---------
to defer Compensation by filing with the Committee an election that conforms to
the requirements of this Section 3.1, on a form provided by the Committee (an
"Election Form"), no later than the last day of the Initial Election Period. 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. An Eligible
Individual who does not elect to defer Compensation for a Plan Year may become a
Participant with respect to a subsequent Plan Year 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.
(b) General Rule. Subject to the limitations set forth in subsection (c)
------------
below, an Eligible Individual may elect to defer any whole percentage of his or
her Compensation up to 100%; provided, however, that if an Eligible Individual's
deferral election would reduce the Compensation paid to the Eligible Individual
to an amount that is less than (i) the amount necessary to satisfy the Eligible
Individual's portion of applicable employment taxes for the Plan Year, (ii)
amounts necessary to satisfy any other benefit plan elections or loan repayments
for the Plan Year under any other plan sponsored by the Company and (iii) any
income taxes payable with respect to taxable compensation that is not eligible
for deferral, then the Participant must remit to the Company, at the time or
times requested by the Company, any amounts necessary to permit the Company to
satisfy its obligation to withhold such taxes, implement such benefit plan
elections or deduct such loan repayments. In addition, a deferral election made
by an Eligible Individual will not be effective unless and until the Eligible
Individual completes all required applications for life insurance (as determined
by the Committee in its discretion).
(c) Minimum Deferrals. For each Plan Year during which an Eligible
-----------------
Individual is a Participant, the minimum dollar amount of Compensation that may
be deferred by the Eligible Individual under the Plan is $5,000. To the extent
that a Participant's actual deferrals in a Plan Year are less than $5,000, such
deferrals, together with earnings or loss thereon through the last day of such
Plan Year, will be refunded as promptly as practicable after the end of such
Plan Year.
(d) Effect of Deferral Election. An election to defer Compensation shall
---------------------------
be first effective with respect to Salary or director or consultant fees earned
during the first pay period beginning after the end of the Initial Election
Period or, for Plan Years beginning after 1997, the
6
<PAGE>
pay period beginning on the first day of the Plan Year, and with respect to the
Incentive Bonus payable for the Company's fiscal year ending within the Plan
Year (or for any fiscal quarters within such fiscal year) for which the election
is made.
(e) Duration of Compensation Deferral Election. Any deferral election made
------------------------------------------
under this Section 3.1 shall be irrevocable and shall apply only to the
Compensation payable with respect to services performed during the Plan Year for
which the election is made.
3.2 Investment Elections.
--------------------
(a) The Committee shall provide each Participant with a list of multiple
Funds available for hypothetical investment and each Participant may designate,
on a form provided by the Committee, one or more of such Funds in which his or
her Account will be deemed to be invested for purposes of determining the amount
of earnings to be credited to such Account. The list shall consist of at least
five Funds, collectively offering a wide range of investment options (domestic
and international) with a spectrum of risk and return potential (from
conservative, low risk/low return potential to aggressive, high risk/high return
potential), comparable as a whole to the initial list of Funds attached hereto
as Exhibit A. 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.
(b) In making the investment designation pursuant to this Section 3.2, the
Participant may specify that all, or any whole percentage, of his or her Account
will be deemed to be invested in one or more of the Funds designated by the
Committee (with a minimum of 5% of the Account balance deemed to be invested in
any one Fund and all such designations in the aggregate not to exceed 100% of
the Participant's Account balance). 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.
(c) If a Participant fails to elect a Fund under this Section 3.2, or if
the Participant's investment designation is less than 100% of his or her Account
balance, for any portion of the Account balance for which no investment
designation has been made he or she shall be deemed to have designated the Fund
that the Committee determines in its sole judgment to have the least risk of
loss of principal.
7
<PAGE>
3.3 Match Funding.
-------------
To the extent authorized by the Committee in its discretion, and in such case
to the fullest extent practicable, the Company shall match fund (in terms of
both timing and amount) all of its obligations to Participants under the Plan by
acquiring and contributing to the Trust, or by causing the Trustee to acquire or
maintain on behalf of the Trust, life insurance investments ("Matching
Investments") corresponding as closely as possible to amounts from time to time
allocated to the Investment Fund Subaccounts (as hereinafter defined) of all
Participants. To the extent that the Company wishes to prefund Matching
Investments for a given Plan Year, such Matching Investments shall be maintained
in the Fund offering the least risk of loss of principal, or a conservative
money market fund, until such Matching Investments are periodically allocated to
investment options corresponding to the periodic deferral amounts of the
Participants. Notwithstanding the foregoing, the Company and the Trustee may
maintain cash reserves in an amount reasonably necessary to pay benefits under
and administer this Plan.
While the Plan is in existence the Company shall at all times comply with its
duties and obligations under the Trust Agreement, and all Participants and their
beneficiaries are expressly acknowledged by the Company to be bona fide third
party beneficiaries under the Trust Agreement.
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts.
--------------------
The Committee shall establish and maintain an Account for each Participant
under the Plan. Each Participant's Account shall be further divided into
separate subaccounts ("Investment Fund Subaccounts"), each of which corresponds
to a Fund elected by the Participant pursuant to Section 3.2. A Participant's
Account shall be debited and credited as follows:
(i) As of the last day of each month, the Committee shall credit the
Investment Fund Subaccounts of the Participant's Account with an amount
equal to any Compensation deferred by the Participant during all pay
periods ending in that month in accordance with the Participant's election;
that is, the portion of the Participant's deferred Compensation that the
Participant has elected to be deferred and deemed to be invested in a
certain Fund shall be credited to the Investment Fund Subaccount
corresponding to that Fund.
(ii) As of the last day of each month, each Investment Fund Subaccount
of a Participant's Account shall be credited with earnings in an amount
determined by multiplying the balance credited to such Investment Fund
Subaccount as of the last day of the preceding month by the Interest Rate
for the corresponding Fund for the then current month. To the extent any
such Interest Rate is negative in any month (due to a net loss in
8
<PAGE>
the applicable Fund), the applicable Investment Fund Subaccount will be
debited in the same manner.
(iii) As of the first day of each calendar quarter, each Investment Fund
Subaccount will be debited or credited to appropriately reflect any change
in Fund designations made by Participants pursuant to Section 3.2.
4.2 Quarterly Statements.
--------------------
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Account on a quarterly basis.
ARTICLE V.
VESTING
5.1 Account.
-------
A Participant's interest in his or her Account shall be 100% vested at all
times.
ARTICLE VI.
DISTRIBUTIONS
6.1 Form and Time of Payment.
------------------------
(a) Forms of Payment. A Participant's Distributable Amount will be paid
----------------
either in quarterly installments over a period of 5, 10, 15 or 20 years, as the
Participant shall elect, or in a lump sum payment. All Participants will be
required to elect a form of payment; however, a Participant electing to have
that portion of the Distributable Amount attributable to any Plan Year paid in
quarterly installments will be so paid with respect to such portion only if the
Participant terminates employment with the Company (i) at or after attaining age
55; (ii) after having completed at least ten years of service; (iii) as a result
of a long-term disability, as defined in the Company's then-existing long-term
disability plan in which the Participant is eligible to participate; or (iv) as
a result of the Participant's death. The Distributable Amount payable to
Participants in all other circumstances will be paid in a lump sum payment,
unless the Participant requests in writing within 30 days after such termination
that the Committee permit the payment of his or her Distributable Amount in
quarterly installments over a period of 5, 10, 15 or 20 years. The Committee
shall have the full discretion and authority to grant or deny any such request.
(b) Payment Election. Each Participant shall elect, at the time of his or
----------------
her election to defer Compensation under the Plan for a Plan Year, to have that
portion of his or her
9
<PAGE>
Distributable Amount attributable to such Plan Year paid in installments as
described in subsection (a) above or in a lump sum payment. A Participant's
installment payment election will be honored only if the Participant is eligible
for installment payments at his or her termination of employment or as permitted
by the Committee, all as provided in subsection (a) above. In the event a
Participant fails to make a payment election with respect to a Plan Year as
provided in this subsection (b) and is otherwise eligible for installment
payments at termination of employment, the Participant's Distributable Amount
attributable to such Plan Year will be paid to the Participant (or the
Participant's Beneficiary, if the Participant terminates employment by reason of
death) in quarterly installments payable over a period of 10 years.
(c) Payment Commencement Date. Unless a Participant receives an early
-------------------------
distribution with respect to the Distributable Amount for a Plan Year pursuant
to Section 6.3, Section 6.4, Section 6.5 or Section 6.6, such Distributable
Amount (or remaining portion thereof) will be paid after the Participant
terminates employment with the Company. Lump sum payments will be paid as soon
as practicable following the Participant's termination of employment but in no
event later than 90 days after the date of such termination. Quarterly
installment payments will begin on the first business day of the second month of
the calendar quarter following the calendar quarter in which the Participant
terminates employment and will continue to be made on the second business day of
each subsequent calendar quarter until the applicable portion of the
Distributable Amount has been fully distributed. Each quarterly installment
payment will be made pro rata from the Participant's Investment Fund Subaccounts
according to the balances in such Subaccounts. During the period in which
quarterly installment payments are being made, the Participant's Account will
continue to be credited monthly with earnings pursuant to Section 4.1(ii) of the
Plan, the Participant (or his or her Beneficiary) may continue to change Fund
designations pursuant to Section 3.2 of the Plan, and quarterly installment
payments will be adjusted annually to reflect earnings, gains and losses until
all amounts credited to his or her Account under the Plan have been distributed.
To the fullest extent practicable, but subject to such annual adjustments,
quarterly installment payments shall be comparable in amount over the entire
distribution period.
(d) Change in Payment Election. A Participant who has not terminated
--------------------------
employment with the Company may change his or her form of payment with respect
to the portion of the Distributable Amount attributable to one or more Plan
Years to one of the payment forms permitted by the Plan, provided the
Participant files a written election with the Committee to change such payment
form at least one year prior to the date that payment of such portion of his or
her Distributable Amount would otherwise be made. In addition, a Participant who
has elected scheduled early distributions pursuant to Section 6.4 may defer the
scheduled distribution dates in accordance with Section 6.4. A Participant's
payment election with respect to a given Plan Year may not be changed after
payment of that portion of the Distributable Amount attributable to such Plan
Year has been made or has begun.
(e) Exception for Small Benefits. Notwithstanding the foregoing provisions
----------------------------
of this Section 6.1 or of Section 6.2, if a Participant's Distributable Amount
does not exceed $25,000, the Distributable Amount shall automatically be
distributed in the form of a lump sum payment.
6.2 Death Benefits. If a Participant dies while employed by the Company, or
--------------
after termination of employment, the Participant's Distributable Amount shall be
paid to the Participant's
10
<PAGE>
Beneficiary in the same form and in accordance with the same payment schedule
under which the Distributable Amount was being or would have been paid to the
Participant.
6.3 Unscheduled Early Distributions. Subject to paragraph (vi) below,
-------------------------------
Participants shall be permitted to request to withdraw amounts from their
Accounts at any time ("Early Distributions"). Upon receiving a withdrawal
request, the Committee shall determine, in its sole discretion, whether to
permit any such withdrawal and the amount, if any, to be withdrawn, subject to
the following restrictions:
(i) The election to take an Early Distribution shall be made by filing
a form provided by and filed with the Committee.
(ii) The maximum amount payable to a Participant in connection with an
Early Distribution shall in all cases equal 90% of the amount requested by
the Participant (which requested amount must be not less than $10,000 or
the Participant's entire Distributable Amount if less than $10,000);
provided, however, that the maximum amount payable to a Participant in
connection with an Early Distribution shall be 90% of the Distributable
Amount as of the end of the calendar month in which the Early Distribution
request is received by the Committee.
(iii) The amount described in paragraph (ii) above shall be paid in a
single lump sum by the end of the calendar month next following the
calendar month in which the Early Distribution request is received by the
Committee. A distribution pursuant to this Section 6.3 of less than the
Participant's entire interest in the Plan will be made pro rata from his or
her Investment Fund Subaccounts according to the balances in such
Subaccounts.
(iv) If a Participant receives an Early Distribution, the remaining
portion of the requested or approved amount, as applicable, in excess of
the amount payable under paragraph (ii) above (i.e., 10% of such amount),
----
shall be permanently forfeited and the Company shall have no obligation to
the Participant or his or her Beneficiary with respect to such forfeited
amount.
(v) If a Participant receives an Early Distribution, the Participant
shall be ineligible to participate in the Plan for the balance of the Plan
Year in which the Early Distribution occurs and for the immediately
following Plan Year.
(vi) A Participant shall be limited to a maximum of two Early
Distributions during all of his or her periods of Plan participation.
11
<PAGE>
6.4 Scheduled Early Distributions. Participants may elect to have benefit
-----------------------------
payments in respect of Compensation deferred during a given Plan Year be made on
a future date while still employed, provided the payment date is at least 2
years after the date such Plan Year commences. This election shall apply to the
Compensation deferred for the Plan Year specified by the Participant on his or
her election form and the earnings credited thereto until the payment date. A
Participant may elect a different payment date for the Compensation deferred for
each Plan Year. In addition, payment dates elected pursuant to this Section 6.4
may be deferred by at least one year, by filing with the Committee written
notice at least 12 months prior to the payment date to be deferred. A
distribution pursuant to this Section 6.4 of less than the Participant's entire
interest in the Plan shall be made pro rata from his or her Investment Fund
Subaccounts according to the balances in such Subaccounts. Notwithstanding the
foregoing, if a Participant terminates employment with the Company for any
reason prior to the date on which a payment is scheduled to be made pursuant to
this Section 6.4, the Participant's entire Distributable Amount will be paid
pursuant to the provisions of Section 6.1.
6.5 Change in Control Withdrawals. At any time up to one year after a Change
-----------------------------
in Control of the Company, a Participant may elect in writing to receive a
payment of his or her entire Account balance without penalty and without regard
to whether the Participant has terminated employment with the Company or whether
installment payments have commenced. The requested payment will be made as soon
as practicable following the receipt by the Committee of the Participant's
election and will be made in a lump sum payment or in quarterly installments
over 5, 10, 15 or 20 years, as elected by the Participant. A Participant's
election pursuant to this Section 6.5 will supersede any prior payment election.
A Participant who elects to receive payment under this Section 6.5 will, upon
receipt of the Participant's election by the Committee, cease to participate in
the Plan for the balance of the Plan Year in which such receipt occurs.
6.6 Financial Hardship Withdrawals. The Committee may, pursuant to rules or
------------------------------
policies from time to time adopted by it and applied in a consistent manner,
accelerate the date of distribution of all or any portion of a Participant's
Account balance because of a financial hardship. A financial hardship means an
unforeseeable, severe financial emergency resulting from (a) a sudden and
unexpected illness or accident of the Participant or his or her dependents (as
defined in Section 152(a) of the Code); (b) loss of the Participant's property
due to casualty; or (c) other similar extraordinary and unforeseeable
circumstances arising out of events beyond the control of the Participant, which
may not be relieved through other available resources of the Participant, as
determined by the Committee in accordance with such rules and policies. A
distribution pursuant to this Section 6.6 of less than the Participant's entire
interest in the Plan shall be made pro rata from his or her Investment Fund
Subaccounts according to the balances in such Subaccounts. Subject to the
foregoing, payment of any amount with respect to which a Participant has filed a
request under this Section 6.6 shall be made as soon as practicable after
approval of such request by the Committee. Distributions made pursuant to this
Section 6.6 shall be without penalty.
12
<PAGE>
6.7 Inability To Locate Participant.
-------------------------------
(a) Forfeiture of Account. In the event that the Committee is unable to
---------------------
locate a Participant or, with respect to a Participant who has died, any
Beneficiary within two years following the date on which any payment of the
Participant's Distributable Amount is scheduled to be made or begin, the amount
allocated to the Participant's Account shall be forfeited. Following the date of
forfeiture, the Participant's Account which is forfeited shall be invested in
the Fund offering the least risk of loss of principal or conservative money
market funds. If, after such forfeiture and prior to the escheat of the
Participant's Account as provided in Section 6.7(b), the Participant or
Beneficiary later claims such benefit and establishes to the reasonable
satisfaction of the Committee such Participant's or Beneficiary's right to
receive same, such Account shall be reinstated at its balance at the date of
forfeiture without additional interest, earnings, gains or losses from the date
of forfeiture through the date of reinstatement. The Participant's restored
Account balance will be invested in the manner that the Participant or
Beneficiary elects pursuant to Section 3.2 and will be distributed to the
Participant or Beneficiary in accordance with the Participant's payment
elections made pursuant to this Article VI. In addition, any installment
payments that were scheduled to have been made during the period in which the
Participant or Beneficiary could not be located will be made to the Participant
or Beneficiary in a lump sum catch-up payment as soon as administratively
practicable.
(b) Escheat of Account. The Committee, in its discretion, may escheat,
------------------
or may cause the Trustee to escheat, to the state of Texas (or such other state
as the Committee, in its discretion, determines is appropriate) any
Participant's Account which was forfeited if either (i) the Committee has been
unable to locate the Participant or Beneficiary for a period of five years
following the date on which any payment of the Participant's Distributable
Amount is scheduled to be made or begin or (ii) the Plan is terminated and the
Committee has been unable to locate the Participant or Beneficiary for a period
of two years following the date on which any payment of the Participant's
Distributable Amount is scheduled to be made or begin. Upon the escheat of the
Participant's Account, the Participant or Beneficiary shall have no further
right to any benefits or payments under the Plan, and neither the Company, the
Committee nor the Trustee shall have any liability to such Participant or
Beneficiary for the amount of the Participant's Account.
6.8 Directors and Consultants. For purposes of the preceding sections of this
-------------------------
Article VI, a Participant who is a member of the Board or a consultant, but who
is not an employee of the Company, will be deemed to be employed by the Company
as long as he or she is a director or is engaged as a consultant and will be
deemed to have terminated employment when he or she is no longer a director or
is no longer engaged as a consultant and is not then an employee of the Company.
13
<PAGE>
6.9 Claims Procedure.
----------------
(a) Claim for Benefits. If a Participant or Beneficiary does not receive
------------------
the benefits which the Participant or Beneficiary believes he or she is entitled
to receive under the Plan, the Participant or Beneficiary may file a claim for
benefits with the Committee. All claims shall be made in writing and shall be
signed by the claimant. If the claimant does not furnish sufficient information
to enable the Committee to process the claim, the Committee will indicate to the
claimant any additional information which is required.
(b) Notification by the Committee. Each claim will be approved or
-----------------------------
disapproved by the Committee within 90 days following the receipt of the
information necessary to process the claim. In the event the Committee denies a
claim for benefits in whole or in part, the Committee will notify the claimant
in writing of the denial of the claim. Such notice by the Committee will also
set forth, in a manner calculated to be understood by the claimant, the specific
reason for such denial, the specific Plan provisions on which the denial is
based, a description of any additional material or information necessary for the
claim to be approved, if possible, with an explanation of why such material or
information is necessary, and an explanation of the Plan's claim review
procedure as set forth in subsection (c). If no action is taken by the Committee
on a claim within such 90 day period, the claim will be deemed to be denied for
purposes of the review procedure.
(c) Review Procedure. A claimant may appeal a denial of his or her claim
----------------
by requesting a review of the decision by the Committee or a person designated
by the Committee. An appeal must be submitted in writing within 60 days after
receipt by the claimant of written notification of the denial and must (i)
request a review of the claim for benefits under the Plan, (ii) set forth all of
the grounds upon which the claimant's request for review is based and any facts
in support thereof, and (iii) set forth any issues or comments which the
claimant deems pertinent to the appeal. The Committee or the person designated
by the Committee will make a full and fair review of each appeal and any written
materials submitted in connection with the appeal. The Committee or the person
designated by the Committee will act upon each appeal within 60 days after
receipt thereof unless special circumstances require an extension of the time
for processing, in which case a decision will be rendered as soon as possible
but not later than 120 days after the appeal is received. The claimant will be
given the opportunity to review documents or materials directly pertinent to the
appeal upon submission of a reasonable written request to the Committee or
person designated by the Committee, provided the Committee or person designated
by the Committee in its reasonable judgment finds the requested documents or
materials are directly pertinent to the appeal. On the basis of its review, the
Committee or person designated by the Committee will make an independent
determination of the claimant's eligibility for benefits under the Plan. The
decision of the Committee or person designated by the Committee on any claim for
benefits will be final and conclusive upon all parties thereto. In the event the
Committee or person designated by the Committee denies an appeal in whole or in
part, it will give written notice of the decision to the claimant, which notice
will set forth in a manner calculated to be understood by the claimant the
specific reasons for such denial and which will make specific reference to the
pertinent Plan provisions on which the decision was based.
14
<PAGE>
ARTICLE VII.
ADMINISTRATION
7.1 Committee.
---------
The Committee for the Plan shall be appointed by, and serve at the pleasure
of, the Board. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member with or without cause
by delivering a certified copy of its resolution of removal to such member.
Vacancies in the membership of the Committee shall be filled as soon as
practicable by the Board.
7.2 Committee Action.
----------------
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. Any two members of the Committee may execute any
certificate or other written direction on behalf of the Committee.
7.3 Powers and Duties of the Committee.
----------------------------------
The Committee shall administer the Plan in accordance with its terms and
shall have all powers, authority and discretion necessary to accomplish its
purposes, including, but not by way of limitation, the authority and discretion
to:
(i) select the Funds and change the Funds from time to time pursuant
to Section 3.2;
(ii) appoint a plan administrator or any other agent, and delegate to
them such powers and duties in connection with the administration of the
Plan as the Committee may from time to time prescribe;
(iii) resolve all questions relating to the eligibility of employees,
directors and consultants to be or become Eligible Individuals or
Participants;
(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;
15
<PAGE>
(v) determine the amount of benefits payable to Participants or their
Beneficiaries under this Plan, and determine the time and manner in which
such benefits are to be paid;
(vi) authorize and direct all disbursements by the Trustee from the
Trust;
(vii) engage any administrative, legal, accounting, clerical, or other
services it deems appropriate in administering the Plan or the Trust
Agreement;
(viii) construe and interpret this Plan and the Trust Agreement, supply
omissions from, correct deficiencies in, and resolve ambiguities in the
language of this Plan and the Trust Agreement, and adopt rules for the
administration of this Plan and the Trust Agreement that are not
inconsistent with the terms of such documents;
(ix) compile and maintain all records it determines to be necessary,
appropriate or convenient in connection with the administration of this
Plan and of benefit payments hereunder;
(x) determine the disposition of assets in the Trust in the event
this Plan is terminated;
(xi) review the performance of the Trustee with respect to the
Trustee's administrative duties, responsibilities and obligations under
this Plan and the Trust Agreement, report to the Board regarding such
administrative performance of the Trustee, and recommend to the Board, if
necessary, the removal of the Trustee and the appointment of a successor
Trustee; and
(xii) resolve all questions relating to any matter for which it has
administrative responsibility.
7.4 Construction and Interpretation.
-------------------------------
The Committee shall have full authority and discretion to construe and
interpret the terms and provisions of this Plan, which interpretation or
construction shall be final and binding on all parties, including but not
limited to the Company and any Eligible Individual, Participant or Beneficiary.
The Committee shall administer the Plan in a consistent and nondiscriminatory
manner and in full accordance with any and all laws applicable to the Plan.
7.5 Information.
-----------
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other cause of termination, and
such other pertinent facts as the Committee may reasonably require.
16
<PAGE>
7.6 Compensation, Expenses and Indemnity.
------------------------------------
(a) Expenses. The members of the Committee shall serve without
--------
compensation for their services hereunder. All expenses and fees incurred in
connection with the administration of the Plan and the Trust shall be paid by
the Company.
(b) Indemnification. To the fullest extent permitted by applicable law,
---------------
the Company shall indemnify and save harmless the Committee and each member
thereof, the Board and any delegate of the Committee who is an employee of the
Company against any and all expenses, liabilities and claims, including legal
fees to defend against such liabilities and claims, arising out of their
discharge in good faith of responsibilities under or incident to the Plan, other
than expenses and liabilities arising out of willful misconduct. Without
limiting the generality of the foregoing, the Company shall, promptly upon
request, advance funds to persons entitled to indemnification hereunder to the
extent necessary to defray legal and other expenses incurred in the defense of
such liabilities and claims, as and when incurred. This indemnity shall not
preclude such further indemnities as may be available under insurance purchased
by the Company or provided by the Company under any bylaw, agreement or
otherwise.
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor.
--------------------------
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interests in any Matching
Investments or in any other property or assets of the Company or the Trust. No
assets of the Company shall be held as collateral security for the obligations
of the Company under this Plan. Any and all assets of the Trust shall be and
shall remain unpledged and unencumbered. The Company's obligation under the
Plan shall be merely that of an unfunded and unsecured promise of the Company to
pay money in the future, and the rights of the Participants and Beneficiaries
shall be no greater than those of unsecured general creditors. The Company
shall maintain the Trust at all times during the term of the Plan. All assets
of the Company and the Trust shall be subject to the claims of the Company's
creditors.
17
<PAGE>
8.2 Restriction Against Assignment.
------------------------------
The Company or the Trustee shall pay all amounts payable hereunder only to
the person or persons designated pursuant to the Plan and not to any other
person or entity. No part of a Participant's Account shall be liable for the
debts, contracts, or engagements of any Participant, his or her Beneficiary, or
successors in interest, nor shall a Participant's Account be subject to
execution by levy, attachment, or garnishment or by any other legal or equitable
proceeding, nor shall any such person have any right to alienate, anticipate,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever, without the prior written consent of the Committee, which may
be withheld in its sole discretion. If any Participant, Beneficiary or successor
in interest is adjudicated bankrupt or purports to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any distribution or payment from
the Plan, voluntarily or involuntarily, the Committee, in its discretion, may
cancel such distribution or payment (or any part thereof) to or for the benefit
of such Participant, Beneficiary or successor in interest in such manner as the
Committee shall direct.
8.3 Withholding.
-----------
There shall be deducted from each payment made under the Plan all taxes
which are required to be withheld by the Company in respect to such payment.
8.4 Amendment, Modification, Suspension or Termination.
--------------------------------------------------
(a) The Committee may amend, modify, suspend or terminate the Plan in
whole or in part, provided that (i) no amendment, modification, suspension or
termination shall have any retroactive effect that would directly or indirectly
reduce any amounts allocated to a Participant's Account or otherwise deprive any
Participant of any benefits already vested under the Plan; (ii) any amendment,
modification, suspension or termination of the Plan that will significantly
increase costs to the Company shall be approved by the Board; (iii) no
amendment, modification, suspension or termination of the Plan shall have the
effect of causing any Participant's Account to be distributed earlier than the
time contemplated by the Plan and the Participant's elections without the prior
written consent of the Participant; (iv) no amendment or modification shall
materially and adversely affect the interests of Participants without the prior
written consent of at least 75% of the Participants (such percentage to be
determined by the number of Participants and not by their percentage interest in
all Account balances); and (v) for a period of two years following a Change in
Control, the Plan may not be amended, modified, suspended or terminated without
the prior written consent of at least 75% of the Participants (such percentage
to be determined by the number of Participants and not by their percentage
interest in all Account balances).
(b) Without limiting the generality of Section 8.4(a)(iv) above, any
amendment or modification which directly or indirectly has any of the following
effects shall be deemed to materially and adversely affect the interests of
Participants: (i) any amendment or modification to the defined term "Change in
Control" or any amendment or modification of the consequences under the Plan
resulting from a Change in Control; (ii) any amendment or modification that
would eliminate or reduce the Company's obligations under Sections 3.2 or 3.3;
(iii) any amendment or
18
<PAGE>
modification that would adversely affect the timing or circumstances under which
Participants may receive vested benefits under the Plan; or (iv) any amendment
or modification of this Section 8.4.
(c) Notwithstanding clauses (iii) and (iv) of Section 8.4(a) above, the
Company shall have the right (i) to unilaterally amend, modify or suspend the
Plan in the event that the Company determines in good faith that such action is
required in order to maintain or qualify the Trust as a grantor trust under
Section 671 of the Code or to maintain or qualify the Plan as an unfunded plan
maintained primarily to provide deferred compensation for a select group of
management or highly compensated employees as described in Section 201(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), provided,
however, that the Company shall amend, modify or suspend the Plan in such manner
as will have the least onerous overall effect on the vested interests of the
Participants; and (ii) to unilaterally terminate the Plan in the event that the
Company determines in good faith that continued compliance with the Code and
ERISA, as generally contemplated in clause (i) above, is not practicable or, if
practicable, would have a material adverse effect on the Participants.
(d) Notwithstanding anything to the contrary in this Section 8.4, the
Company may unilaterally amend the Plan at any time to cause the cessation of
deferrals of Compensation by the Participants in any future Plan Year or to
change the manner or terms of future deferrals in any such future Plan Year;
provided, however, that no such amendment under this Section 8.4(d) may be
effected for a period of two years following any Change in Control.
(e) As a condition precedent to the effectiveness of any amendment,
modification, suspension or termination of this Plan, the Trustee and the
Committee shall have received a written opinion of counsel (which counsel and
which opinion shall be satisfactory to each) to the effect that such action is
being validly and properly effected in accordance with the requirements of this
Section 8.4.
(f) In the event that this Plan is terminated in accordance with this
Section 8.4, the balance of each Participant's Account shall be distributed to
the Participant (or, in the event of the death of the Participant, to the
Participant's Beneficiary) in a lump sum payment as soon as administratively
feasible and in any event within 90 days of such termination.
8.5 GOVERNING LAW.
-------------
THE PLAN WILL BE CONSTRUED AND GOVERNED IN ALL RESPECTS IN ACCORDANCE WITH
APPLICABLE FEDERAL LAW AND, TO THE EXTENT NOT PREEMPTED BY SUCH FEDERAL LAW, IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, INCLUDING WITHOUT LIMITATION,
THE TEXAS STATUTE OF LIMITATIONS, BUT WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICTS OF LAWS OF SUCH STATE.
19
<PAGE>
8.6 Receipt or Release.
------------------
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company with respect to
the amount paid. The Committee may require such Participant or Beneficiary, as
a condition precedent to such payment, to execute a receipt and release to such
effect.
8.7 Payments on Behalf of Persons Under Incapacity.
----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgment of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefor, the Committee
may direct that such payment be made to any person found by the Committee, in
its sole judgment, to have assumed the care of such person. Any payment made
pursuant to such determination shall, to the extent thereof, constitute a full
release and discharge of the Committee and the Company with respect to the
amount paid.
8.8 Successors and Assigns.
----------------------
The Company may not assign its obligations under this Plan, whether by
contract, merger, operation of law or otherwise, unless the assignment is to an
assignee or successor entity (in either case, hereafter called a "Successor")
that has stockholders' equity or the closest equivalent thereto (as measured by
the most recent audited financial statements of such Successor) equal to or
greater than the stockholders' equity of the Company (as measured immediately
prior to the event that causes such entity to become a Successor to the
Company). The provisions of this Section 8.8 shall be binding upon each and
every Successor to the Company.
8.9 No Employment Rights.
--------------------
Participation in this Plan shall not confer upon any person any right to be
employed by the Company nor any other right not expressly provided hereunder.
8.10 Headings, etc. Not Part of Agreement.
------------------------------------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
20
<PAGE>
IN WITNESS WHEREOF, the Company has caused this document to be executed by its
duly authorized officer as of the 21st day of November, 1997.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
------------------------------------
Name: Don J. McDermett, Jr.
Title: Senior Vice President and General
Counsel
21
<PAGE>
EXHIBIT A
Fidelity VIP Equity Income Portfolio
Janus Aspen Aggressive Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Growth Portfolio
Aetna Variable Encore Fund
Janus Aspen Worldwide Growth Portfolio
Maverick Fund USA, Ltd.
22
<PAGE>
EXHIBIT 10.11
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY99
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. (the "COO").
EFFECTIVE PERIOD
- - ----------------
The Plan is in effect beginning October 1, 1998 through September 30, 1999,
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, 1999, 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.
The existence of a disability shall be determined by the COO in his sole
discretion.
-2-
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between Sterling
Software, Inc. ("Sterling Software") and Jeannette P. Meier ("Meier"), is
entered into effective as of September 30, 1998.
WHEREAS, Meier's current position as Executive Vice President, Finance and
Administration of Sterling Software is being terminated by Sterling Software as
of the date hereof;
WHEREAS, Meier has served as an officer and employee of Sterling Software
for many years rendering long and valuable service to Sterling Software, and
Sterling Software desires to continue to employ Meier and provide certain
benefits to Meier more specifically provided below;
WHEREAS, Sterling Software considers Meier's knowledge of Sterling
Software, its history, operations and business and the software industry to be
of great strategic value to Sterling Software;
WHEREAS, Meier is entitled to be offered continued employment at Sterling
Software at significantly increased compensation on the date hereof pursuant to
Section 10 of that certain Severance Agreement, between Meier and Sterling
Software, dated as of February 12, 1996, as amended as of December 1, 1996 and
as of August 15, 1997 (the "Severance Agreement") and as further amended by that
certain Standstill Agreement, between Meier and Sterling Software, dated as of
May 31, 1998 (the "Standstill Agreement");
WHEREAS, upon termination of employment, Meier is entitled to certain
valuable severance payment rights and benefits pursuant to other provisions of
the Severance Agreement;
WHEREAS, Meier is also entitled to certain valuable severance payment
rights under that certain Change in Control Severance Agreement, by and between
Sterling Software and Meier, dated as of February 12, 1996, as amended as of
June 18, 1996 and as of December 1, 1996 (the "Change in Control Severance
Agreement");
WHEREAS, Sterling Software wishes to retain Meier as a Special Assistant to
the President and Chief Executive Officer of Sterling Software, and Meier is
willing to accept such retention in accordance with the terms and conditions of
this Agreement;
WHEREAS, Sterling Software wishes to impose upon Meier certain obligations
with respect to confidential information of Sterling Software and obtain from
Meier certain non-competition and related covenants; and
WHEREAS, in consideration of such retention and the other provisions of
this Agreement, Meier and Sterling Software now wish to terminate the Severance
Agreement, the Standstill Agreement and the Change in Control Severance
Agreement and enter into this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing, the premises and
covenants contained herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, and in recognition of Meier's long
and valuable service to Sterling Software, the parties hereto agree as follows:
1. TERMINATION AS OFFICER. Effective as of the close of business on
----------------------
September 30, 1998, Meier's position with Sterling Software as Executive Vice
President, Finance and Administration shall cease, and Meier shall resign such
office and shall resign from all other positions or offices she then holds with
Sterling Software and any of its subsidiaries (the execution and delivery of
this Agreement being deemed to be such resignation); provided, however, that
--------
Meier shall continue to be employed by Sterling Software as provided in this
Agreement.
2. EMPLOYMENT. Meier is hereby appointed a Special Assistant to Sterling
----------
L. Williams, the President and Chief Executive Officer of Sterling Software
("Williams"). Meier accepts such appointment, and Sterling Software agrees to
utilize the services of Meier on the terms and conditions contained herein.
3. DUTIES. Meier shall consult with and advise Williams with respect to
------
strategic and financial matters and shall act as a goodwill ambassador for
Sterling Software at Williams' request, upon reasonable notice, at such time and
times and for such duration as shall be mutually agreed upon in any instance.
It is expressly agreed that neither Williams' failure to request such services,
including a failure by reason of Williams' disability, death or resignation or
termination as President and Chief Executive Officer of Sterling Software, nor
any failure or refusal by Meier to agree to such time and times and duration
shall constitute a breach of this Agreement, whether such failures or refusals
be in a particular instance or series of instances; provided, that Meier agrees
--------
to provide not less than an aggregate of 500 hours of such services during the
term of this Agreement at Williams' request so long as Williams is President and
Chief Executive Officer of Sterling Software. It is also expressly agreed that
Williams has no right under this Agreement to require Meier to report to or
spend any time at Sterling Software's offices or other facilities. In the event
Meier becomes disabled during the term of this Agreement and as a result of such
disability is unable to perform the services provided for in this Section 3, the
payments and other benefits provided for in Sections 5 and 6 hereof shall
nonetheless continue and all other terms and conditions of this Agreement shall
remain in full force and effect. In the event of a Change in Control (as
defined in Section 8 of this Agreement), Meier shall have no further obligation
to provide services under this Section 3, this Agreement shall immediately and
automatically, without further action by any person, become a retirement
agreement, and the payments and benefits provided for in Sections 5 and 6 hereof
shall nevertheless continue and all other terms and conditions of this Agreement
shall remain in full force and effect.
4. TERM AND TERMINATION. This Agreement shall commence on October 1,
--------------------
1998 and shall continue in effect so long as Meier shall live or until
terminated by Meier in writing. This Agreement shall terminate upon Meier's
death or upon her commencement of full time salaried employment with a third
party. Sterling Software acknowledges that it is aware Meier is a consultant to
Sterling Commerce, Inc. and hereby consents to, and agrees that the preceding
sentence shall not apply to, such consultancy. Any payments paid or payable on
or prior to the
2
<PAGE>
termination of this Agreement shall be deemed to have been earned, amounts
payable shall be paid to Meier or her estate and permitted assigns or
transferees, and there shall be no repayment of sums paid or payable prior to
termination of this Agreement. It is expressly agreed that, in view of the
termination of the Severance Agreement, the Standstill Agreement and the Change
in Control Severance Agreement in Section 14 hereof and the other provisions
hereof, Sterling Software shall not have the power to terminate this Agreement
during Meier's life.
5. COMPENSATION. As consideration for Meier's entering into this
------------
Agreement, her prior service to Sterling Software and the services to be
rendered hereunder, during the term of this Agreement, Meier shall be paid
$200,000 per year, payable in equal twice-monthly installments in accordance
with Sterling Software's standard payroll payment dates, in arrears commencing
October 1, 1998, which amount may be increased from time to time as mutually
agreed. Sterling Software may, in its sole and complete discretion, pay annual
bonuses to Meier during the term of this Agreement. Meier shall also be
reimbursed for all other authorized expenses (not covered by Section 6 hereof)
incurred at the direction of Sterling Software in providing services under this
Agreement. In addition, Meier shall be entitled to the benefits and payments
provided for in Section 6 hereof.
6. BENEFITS. During the term of this Agreement, Meier shall be entitled
--------
to the benefits and payments set forth in this Section 6.
(a) General Benefits. Except as otherwise specifically expressed in
----------------
this Agreement, Meier shall continue to be eligible to participate in all
employee benefits and perquisites currently made available to the executive
officers of Sterling Software (to the extent permitted by law and the terms of
such benefits), including but not limited to those set forth among the benefits
and perquisites in the following subsection 6(b); provided, however, that if
--------
Sterling Software modifies such benefits and perquisites with respect to all
executive officers of Sterling Software, Meier's benefits and perquisites shall
be similarly modified (other than those expressly listed in subsections 6(b)(ii)
and 6(b)(v) and in subsections 6(c) and 6(d), which shall not be modified).
Sterling Software shall have no obligation to offer any benefits or perquisites
to Meier which are in addition to those available to the executive officers of
Sterling Software as of the date hereof ("Additional Benefits"). Meier's
eligibility to participate in any such Additional Benefits during the term of
this Agreement shall be at the sole and complete discretion of Sterling
Software.
(b) Listed Benefits and Perquisites. Meier shall be entitled to the
-------------------------------
following specific benefits and perquisites:
(i) participation in the Sterling Software, Inc. Deferred
Compensation Plan and the Sterling Software medical and dental plans,
including the 4% reimbursement for medical and dental expenses not covered
by such plans, in accordance with the terms and conditions of the Sterling
Software, Inc. Employee Health Benefit Plan, each as amended from time to
time;
3
<PAGE>
(ii) reimbursement for all costs and expenses of annual
physical examinations of Meier and her spouse or "significant other" at the
Mayo Clinic or a comparable medical facility located in the United States
and selected by Meier ;
(iii) company paid life insurance on Meier's life in the face
amount of the lesser of (x) seven times Meier's base annual pay in effect
from time to time under this Agreement (currently a face amount of $1.4
million) and (y) the cap amount in effect from time to time for life
insurance provided to Sterling Software's employees (currently a face
amount of $1.5 million);
(iv) reimbursement of up to $10,000 per year for personal
legal, financial and tax planning assistance and services;
(v) provision at Meier's principal residence of a personal
computer, printer, modem, other peripheral equipment, and all necessary
software, and a fax capability, all of which shall be periodically updated
and maintained by Sterling Software, a business telephone line and an ISDN
line, so that Meier remains at all times integrally connected to Sterling
Software's computer, e-mail and related communication network;
(vi) Meier shall be entitled to continued use of a car
("company car") provided by Sterling Software on the following terms and
conditions: Meier shall be entitled to a new company car every three years,
such car to have the same general level of luxury as the company car
currently provided to Meier. For purposes of measuring the time for Meier's
next entitlement to a new car, the parties acknowledge she has commenced
use of a new company car in September, 1998. Sterling Software shall
provide insurance and shall pay all expenses associated with Meier's
company cars as currently provided and paid by Sterling Software for
company cars, including all repairs and maintenance, gas, oil, etc. At the
end of each three-year period applicable to a given company car, Meier
shall have the right to purchase such car from Sterling Software at a price
equal to the then current book value of such car, it being understood that
"book value" in this context shall be net of all applicable depreciation.
Upon any such purchase of a company car by Meier, Meier shall be
responsible for the insurance and all expenses incurred after the effective
date of such purchase; and
(vii) provision of, or reimbursement for, all other out-of-
pocket costs, including first class airfare, related to requirements to
travel on Sterling Software business or to fulfill Sterling Software
responsibilities pursuant to Section 3 of this Agreement.
(c) Country Club Membership. Sterling Software shall reimburse Meier
-----------------------
for the cost of her initial membership at the country club of her choice, which
country club shall be designated by Meier not later than October 15, 1998. In
addition, during the term of this Agreement, Sterling Software shall pay, or
reimburse Meier for the payment of, monthly dues and assessments at such country
club and all expenses incurred by Meier during the use of such country club for
Sterling Software-related business use. Meier shall be responsible, and shall
reimburse Sterling Software, for all non-business related expenses she incurs at
such club (e.g., non-business meals, clothing and equipment purchases, etc.).
4
<PAGE>
(d) Perquisite Tax Gross Up. In April of each year during the term of
-----------------------
this Agreement (and in April of the year following termination of this
Agreement), Sterling Software shall pay to Meier (or her estate) an amount
calculated to "gross up" or reimburse Meier for all federal and other income
taxes incurred by her in the prior year and during the term of this Agreement
(i) as a result of the perquisites provided for under Section 6 (other than
participation in the Sterling Software, Inc. Deferred Compensation Plan) and
(ii) as a result of such annual "gross up" payment.
7. STOCK OPTIONS. Awards, if any, of Sterling Software stock options to
-------------
Meier during the term of this Agreement shall be at the sole and complete
discretion of Sterling Software. All Sterling Software stock options heretofore
granted by Sterling Software to Meier shall continue to be effective in
accordance with their terms, including vesting provisions, except as set forth
in the next sentence, and nothing in this Agreement shall terminate such
options, notwithstanding any terms thereof. In the event of a Change in Control
(as defined in Section 8 hereof), in order to preserve certain existing rights
Meier holds under agreements being terminated hereby, all outstanding unvested
Sterling Software stock options granted to Meier prior to the date of the Change
in Control shall immediately and automatically, without further action by any
person, become and remain immediately vested and exercisable throughout the
remaining stated term thereof. In the event of such a Change in Control,
Sterling Software shall promptly notify Meier in writing of such Change in
Control.
8. DEFINITION OF CHANGE IN CONTROL. "Change in Control" means the
------------------------------- -----------------
occurrence of any of the following events:
(i) Sterling Software is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than two thirds of the combined voting
power of the then-outstanding securities entitled to vote generally in the
election of directors ("Voting Stock") of such corporation or person immediately
after such transactions are held in the aggregate by the holders of Voting Stock
of Sterling Software immediately prior to such transaction;
(ii) Sterling Software sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal person,
and as a result of such sale or transfer less than two-thirds of the combined
voting power of the then-outstanding Voting Stock of such corporation or person
immediately after such sale or transfer is held in the aggregate by the holders
of Voting Stock of Sterling Software immediately prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing
that any person (as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding Voting Stock of
Sterling Software;
5
<PAGE>
(iv) Sterling Software files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of Sterling Software has occurred or
will occur in the future pursuant to any then-existing contract or transaction;
or
(v) If, during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Directors of Sterling
Software cease for any reason to constitute at least a majority thereof;
provided, however, that for purposes of this clause (v) each Director who is
first elected, or first nominated for election by Sterling Software's
stockholders, by a vote of at least two-thirds of the Directors of Sterling
Software (or a committee thereof) then still in office who were Directors of
Sterling Software at the beginning of any such period will be deemed to have
been a Director of Sterling Software at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 8(iii) or 8(iv),
unless otherwise determined in a specific case by majority vote of the Board of
Directors of Sterling Software, a "Change in Control" shall not be deemed to
have occurred for purposes of Section 8(iii) or 8(iv) solely because (A)
Sterling Software, (B) an entity in which Sterling Software directly or
indirectly beneficially owns 50% or more of the outstanding Voting Stock (a
"Subsidiary"), or (C) any employee stock ownership plan sponsored by Sterling
Software or any other employee benefit plan of Sterling Software or any
Subsidiary, either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock
of Sterling Software, whether in excess of 20% or otherwise, or because Sterling
Software reports that a change in control of Sterling Software has occurred or
will occur in the future by reason of such beneficial ownership or any increase
or decrease thereof.
9. CERTAIN ADDITIONAL PAYMENTS BY STERLING SOFTWARE. In order to
------------------------------------------------
preserve certain existing rights held by Meier under agreements otherwise being
terminated hereby, the parties hereto agree that:
(a) In the event that it shall be determined (as hereafter provided)
that all or any portion of any payment or distribution by Sterling Software or
any of its affiliates to or for the benefit of Meier pursuant to the terms of
this Agreement or otherwise, including under any stock option or other
agreement, plan, policy, program or arrangement (a "Payment"), would be subject
to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of Sterling
Software, within the meaning of Section 280G of the Code (or any successor
provision thereto), or to any similar tax imposed by state or local law, or any
interest or penalties with respect to such tax (such tax or taxes, together with
any such interest and penalties, being hereafter collectively referred to as the
"Excise Tax"), then Meier shall be entitled to receive an additional payment or
payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in
an amount such that, after payment by Meier of all taxes (including any interest
or penalties imposed with respect to such taxes), including any
6
<PAGE>
Excise Tax imposed upon the Gross-Up Payment, Meier retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 9(f), all determinations
required to be made under this Section 9, including whether an Excise Tax is
payable by Meier and the amount of such Excise Tax and whether a Gross-Up
Payment is required to be paid by Sterling Software to Meier and the amount of
such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by Meier in her sole
discretion. Meier shall direct the Accounting Firm to submit its determination
and detailed supporting calculations to both Sterling Software and Meier within
30 calendar days after Meier is notified of a Change in Control (as defined in
Section 8 hereof), as required by Section 7 hereof, and any such other time or
times as may be requested by Sterling Software or Meier. If the Accounting Firm
determines that any Excise Tax is payable by Meier, Sterling Software shall pay
the required Gross-Up Payment to Meier within five business days after receipt
of such determination and calculations with respect to any Gross-Up Payment to
Meier. If the Accounting Firm determines that no Excise Tax is payable by
Meier, it shall, at the same time as it makes such determination, furnish
Sterling Software and Meier a written opinion to the effect that Meier has
substantial authority not to report any Excise Tax on her federal, state or
local income or other tax return. As a result of the uncertainty in the
application of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or local tax
law at the time of any determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by Sterling
Software should have been made (an "Underpayment"), consistent with the
calculations required to be made hereunder. In the event that Sterling Software
exhausts or fails to pursue its remedies pursuant to Section 9(f) and Meier
thereafter is required to make a payment of any Excise Tax, Meier shall direct
the Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting calculations to
both Sterling Software and Meier as promptly as possible. Any such Underpayment
shall be promptly paid by Sterling Software to, or for the benefit of, Meier
within five business days after receipt of such determination and calculations.
(c) Sterling Software and Meier shall each provide the Accounting Firm
access to and copies of any books, records and documents in the possession of
Sterling Software or Meier, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by Section 9(b). Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon Sterling Software and
Meier.
(d) The federal, state and local income or other tax returns filed by
Meier shall be prepared and filed on a consistent basis with the determination
of the Accounting Firm with respect to the Excise Tax payable by Meier. Meier
shall make proper payment of the amount of any Excise Payment, and at the
request of Sterling Software, provide to Sterling Software true and correct
copies (with any amendments) of her federal income tax return as filed with the
Internal Revenue Service and corresponding state and local tax returns, if
relevant, as filed with the applicable taxing authority, and such other
documents as are reasonably requested by Sterling Software, evidencing such
payment. If prior to the filing of Meier's federal income tax return, or
7
<PAGE>
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, Meier
shall within five business days pay to Sterling Software the amount of such
reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by Section 9(b)
shall be borne by Sterling Software. If such fees and expenses are initially
paid by Meier, Sterling Software shall reimburse Meier the full amount of such
fees and expenses within five business days after receipt from Meier of a
statement therefor and reasonable evidence of her payment thereof.
(f) Meier shall notify Sterling Software in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by Sterling Software of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after Meier actually receives notice of such claim and Meier shall
further apprise Sterling Software of the nature of such claim and the date on
which such claim is requested to be paid (in each case, to the extent known by
Meier). Meier shall not pay such claim prior to the earlier of (i) the
expiration of the 30-calendar-day period following the date on which she gives
such notice to Sterling Software and (ii) the date that any payment of amount
with respect to such claim is due. If Sterling Software notifies Meier in
writing prior to the expiration of such period that it desires to contest such
claim, Meier, subject to the provisions of Section 9(h) of this Agreement,
shall:
i. provide Sterling Software with any written records or documents
in her possession relating to such claim reasonably requested by Sterling
Software;
ii. take such action in connection with contesting such claim as
Sterling Software shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by Sterling Software;
iii. cooperate with Sterling Software in good faith in order
effectively to contest such claim; and
iv. permit Sterling Software to participate in any proceedings
relating to such claim;
provided, however, that Sterling Software shall bear and pay directly all costs
- - -------- -------
and expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless Meier, on an after-tax basis, for
and against any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of costs
and expenses. Without limiting the foregoing provisions of this Section 9(f),
Sterling Software shall control all proceedings taken in connection with the
contest of any claim contemplated by this Section 9(f) and, at its sole option,
may pursue or forego any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim (provided,
however, that Meier may participate therein at her own cost and expense) and
may, at its option, either direct Meier to pay the tax claimed and sue for a
refund or
8
<PAGE>
contest the claim in any permissible manner, and Meier agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as Sterling Software
shall determine; provided further, however, that if Sterling Software directs
---------------- -------
Meier to pay the tax claimed and sue for a refund, Sterling Software shall
advance the amount of such payment to Meier on an interest-free basis and shall
indemnify and hold Meier harmless, on an after-tax basis, from any Excise Tax or
income or other tax, including interest or penalties with respect thereto,
imposed with respect to such advance; and provided further, however, that any
---------------- -------
extension of the statute of limitations relating to payment of taxes for the
taxable year of Meier with respect to which the contested amount is claimed to
be due is limited solely to such contested amount. Furthermore, Sterling
Software's control of any such contested claim shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and Meier shall
be entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.
(g) If, after the receipt by Meier of an amount advanced by Sterling
Software pursuant to Section 9(f), Meier receives any refund with respect to
such claim, Meier shall (subject to Sterling Software's complying with the
requirements of Section 9(f)) promptly pay to Sterling Software the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by Meier of an amount advanced by
Sterling Software pursuant to Section 9(f), a determination is made that Meier
shall not be entitled to any refund with respect to such claim and Sterling
Software does not notify Meier in writing of its intent to contest such denial
or refund prior to the expiration of 30 calendar days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of any such advance shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid by Sterling Software to Meier pursuant
to this Section 9.
(h) Any information provided by Meier to Sterling Software under this
Section 9 shall be treated confidentially by Sterling Software and will not be
provided by Sterling Software to any other person than Sterling Software's
professional advisors without Meier's prior written consent except as required
by law.
10. CONFIDENTIAL INFORMATION/NON-COMPETE. Sterling Software designs and
------------------------------------
sells computer software and provides related services on a world-wide basis. As
a senior executive officer of Sterling Software, Meier has obtained information,
not publicly known, about Sterling Software's methods, procedures, techniques,
marketing, pricing, products, business strategies, customers and potential
customers ("Confidential Information") and Sterling Software agrees to continue
to provide and afford Meier access to such Confidential Information. Any and
all Confidential Information shall be treated as confidential by Meier and shall
not be communicated to or discussed with any party who is not an officer or
director of Sterling Software, unless Meier is specifically authorized to do so
by Sterling Software. Meier shall not use any Confidential Information for her
personal gain, nor shall Meier act as a consultant or advisor to any other
person, partnership, corporation or other business association in the computer
software industry during the term of this Agreement without the prior written
consent of Sterling Software, such consent not to be unreasonably withheld.
Meier shall not on her own behalf or that of any other individual or entity
except Sterling Software solicit, sell, lease or otherwise provide products or
services competitive to Sterling Software's products or services and shall not
participate, directly
9
<PAGE>
or indirectly, in the business of a competitor during the term of this
Agreement. These restrictions shall apply worldwide. Sterling Software
acknowledges that it is aware Meier is a consultant to Sterling Commerce, Inc.
and hereby consents to, and agrees that this Section 10 shall not apply to, such
consultancy. Nothing contained in this Section 10 shall prohibit Meier from
purchasing and holding as an investment not more than ten percent (10%) of any
class of the issued, outstanding and publicly traded (on a recognized national
or regional securities exchange or in the over-the-counter market) capital stock
of any company which conducts a business in competition with the business of
Sterling Software.
11. LEGAL FEES AND EXPENSES. It is the intent of Sterling Software that
-----------------------
Meier not be required to incur legal fees and the related expenses associated
with the interpretation, enforcement or defense of Meier's rights under this
Agreement by litigation or otherwise, because the cost and expense thereof would
substantially detract from the benefits intended to be extended to Meier
hereunder. Accordingly, if it should appear to Meier that Sterling Software has
failed to comply with any of its obligations under this Agreement or in the
event that Sterling Software or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
Meier the benefits provided or intended to be provided to Meier hereunder,
Sterling Software irrevocably authorizes Meier from time to time to retain
counsel of Meier's choice, at the expense of Sterling Software as hereafter
provided, to advise and represent Meier in connection with any such
interpretation, enforcement or defense, including without limitation the
initiation or defense of any litigation or other legal action, whether by or
against Sterling Software or any Director, officer, stockholder or other person
affiliated with Sterling Software, in any jurisdiction. Notwithstanding any
existing or prior attorney-client relationship between Sterling Software and
such counsel, Sterling Software irrevocably consents to Meier's entering into an
attorney-client relationship with such counsel, and in that connection Sterling
Software and Meier agree that a confidential relationship shall exist between
Meier and such counsel. Without respect to whether Meier prevails, in whole or
in part, in connection with any of the foregoing, Sterling Software will pay and
be solely financially responsible for any and all attorneys' and related fees
and expenses incurred by Meier in connection with any of the foregoing at the
time such fees and expenses are incurred.
12. DEFAULT INTEREST. Without limiting the rights of Meier at law or in
----------------
equity, if Sterling Software fails to make any payment or provide any benefit
required to be made or provided under this Agreement on a timely basis, Sterling
Software will pay interest on the amount or value thereof at an annualized rate
of interest equal to the so-called composite "prime rate" as quoted from time to
time during the relevant period in the Southwest Edition of The Wall Street
---------------
Journal or another equivalent financial publication. Such interest will be
- - -------
payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
13. NO EFFECT ON PRIOR EMPLOYMENT COMPENSATION. Nothing herein shall be
------------------------------------------
construed to affect in any way compensation amounts paid or payable to Meier,
including bonus amounts, with respect to her employment by Sterling Software
prior to the date hereof; provided, that, Meier shall receive her Fiscal Year
--------
1998 cash incentive bonus of $150,000, payable in accordance with Sterling
Software's usual bonus procedures in October 1998.
10
<PAGE>
14. TERMINATION OF CERTAIN PRIOR AGREEMENTS. Meier and Sterling Software
---------------------------------------
hereby agree that the Severance Agreement, the Standstill Agreement and the
Change in Control Severance Agreement shall be deemed to be terminated and of no
further effect upon the execution and delivery of this Agreement.
15. INDEMNIFICATION BY STERLING SOFTWARE. In consideration of Meier
------------------------------------
entering into this Agreement, Sterling Software has agreed to indemnify Meier to
the extent and in accordance with the terms and conditions of a separate
Indemnity Agreement dated the date hereof and attached as Exhibit A hereto.
16. SURVIVAL OF CERTAIN PROVISIONS. Sections 4 (third sentence), 6(d), 7,
------------------------------
8, 9, 11, 12, 13, 14, 15, 16, 17, 18 and 19 of this Agreement and the provisions
of Section 10 of this Agreement relating to treatment, communication, discussion
and use of Confidential Information by Meier shall survive the termination of
this Agreement.
17. SUCCESSORS AND BINDING AGREEMENT:
--------------------------------
(a) Sterling Software shall require any successor (whether direct or
indirect, by stock or assets purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of Sterling
Software, by agreement in form and substance satisfactory to Meier, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent Sterling Software would be required to perform if no such succession had
taken place. Whether or not any such successor enters into the agreement
provided for in the preceding sentence, this Agreement will be binding upon and
inure to the benefit of Sterling Software and any such successor to Sterling
Software, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of Sterling
Software whether by stock or assets purchase, merger, consolidation,
reorganization or otherwise, but will not otherwise be assignable, transferable
or delegable by Sterling Software.
(b) This Agreement will inure to the benefit of and be enforceable by
Meier's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 17(a) and 17(b). Without limiting the generality or effect
of the foregoing, Meier's right to receive payments hereunder shall not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Meier's will or by the laws
of descent and distribution and, in the event of any attempted assignment or
transfer contrary to this Section 17(c), Sterling Software shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated, except to Meier, her personal or legal representative, executors,
administrators, successors, heirs, distributees and legatees.
11
<PAGE>
18. NOTICES: For all purposes of this Agreement, all communications,
-------
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder will be in writing and will be deemed to have
been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or ten business days after
having been mailed by United States registered or certified mail, return receipt
requested, postage prepaid, or five business days after having been sent by a
nationally recognized overnight courier service such as Federal Express, UPS, or
Purolator, addressed to Sterling Software at Sterling Software, Inc., 300
Crescent Court, Suite 1200, Dallas, Texas 75201 (to the attention of the Senior
Vice President and General Counsel of Sterling Software) and to Meier at 5000
St. Johns Drive, Dallas, Texas 75205 or to such other address as either party
may have furnished to the other in writing and in accordance herewith, except
that notices of changes of address shall be effective only upon receipt.
19. GOVERNING LAW. The substantive laws of the State of Texas shall
-------------
govern the validity, construction, enforcement and interpretation of the
provisions of this Agreement.
Executed by the parties hereto as of the date first set forth above.
/s/ Jeannette P. Meier
---------------------------------------
Jeannette P. Meier
STERLING SOFTWARE, INC.
By /s/ Sterling L. Williams
-------------------------------------
Sterling L. Williams
President and Chief Executive Officer
12
<PAGE>
EXHIBIT A
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is made as of the 30th day of
September, 1998, by and between Sterling Software, Inc., a Delaware corporation
(the "Corporation"), and Jeannette P. Meier (the "Indemnitee").
WHEREAS, Indemnitee is a former executive officer of the Corporation, and
is knowledgeable about certain strategic, business, personnel, legal and other
matters involving the Corporation;
WHEREAS, Indemnitee has agreed to become a Special Assistant to the
Corporation's President and Chief Executive Officer;
WHEREAS, in her capacity as an officer of the Corporation, the Indemnitee
had certain rights to indemnification by the Corporation under the General
Corporation Law of the State of Delaware, the Corporation's Restated Certificate
of Incorporation and Restated Bylaws and further has rights to indemnification
by the Corporation pursuant to the Indemnity Agreement, dated as of January 5,
1987, between the Corporation and the Indemnitee;
WHEREAS, Indemnitee is willing to act as a Special Assistant to the
Corporation's President and Chief Executive Officer, in order to make her
knowledge about strategic and financial matters available to the Corporation;
provided that the Corporation agrees to indemnify her on substantially the same
terms as to which she was entitled to be indemnified while she was an officer of
the Corporation; and
WHEREAS, the Corporation has concluded it is in the best interests of the
Corporation for Indemnitee to be a Special Assistant to the Corporation's
President and Chief Executive Officer and, consequently, now desires to
indemnify Indemnitee as set forth herein in order to assure that Indemnitee will
enter into that certain Employment Agreement dated the date hereof, NOW
THEREFORE:
WITNESSETH:
The Corporation and Indemnitee do hereby agree as follows:
1. The Corporation will indemnify Indemnitee in accordance with the
following terms:
2. Definitions. As used in this Agreement:
-----------
(a) The term "Proceeding" shall include any threatened, pending or
completed investigation, claim, action, suit or proceeding, whether of a
civil, criminal, administrative or investigative nature (including without
limitation any action, suit or proceeding by or in the right of the
corporation to procure a judgment in its favor), in which Indemnitee may
<PAGE>
be or may have been or may be threatened to be made to become involved in
any manner (including without limitation as a party or a witness) by reason
of the fact that Indemnitee has advised the Corporation with respect to any
matter, or by reason of anything actually or allegedly done or not done by
Indemnitee in any such capacity.
(b) The term "Expenses" includes, without limitation, attorneys' fees
and disbursements and all other costs, expenses and obligations actually
and reasonably incurred by Indemnitee in connection with (i) investigating,
defending, being a witness in or otherwise participating in, or preparing
to defend, be a witness in or participate in, any Proceeding, or (ii)
establishing a right to indemnification under Paragraph 6 of this
Agreement, but shall not include the amount of any judgments, fines or
penalties entered or assessed against Indemnitee or any amounts paid or
payable in settlement by Indemnitee.
3. Scope of Indemnification. Subject to Paragraph 7 of this Agreement,
------------------------
the Corporation shall indemnify Indemnitee in accordance with the provisions of
this Paragraph 3 if Indemnitee is or was or is threatened to be made to become
involved in any manner, including without limitation as a party or witness, in
any Proceeding (including a Proceeding by or in the right of the Corporation to
procure a judgment in its favor) against any and all Expenses and any and all
judgments, fines and penalties entered or assessed against Indemnitee, and any
and all amounts reasonably paid or payable in settlement by Indemnitee, in
connection with such Proceeding, but only if Indemnitee acted in good faith and
without gross negligence. THIS AGREEMENT EXPRESSLY INDEMNIFIES INDEMNITEE
AGAINST HER OWN NEGLIGENCE.
4. Indemnification of Expenses of Successful Party; No Adverse
-----------------------------------------------------------
Presumption. Notwithstanding any other provisions of this Agreement, to the
- - -----------
extent that Indemnitee has been successful on the merits or otherwise in defense
of any Proceeding or in defense of any claim, issue or matter therein, including
the dismissal of an action without prejudice, Indemnitee shall be indemnified
against all Expenses incurred in connection therewith. The termination of any
Proceeding by judgment, order of court, settlement or conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a presumption
for purposes of any provision of this Agreement that Indemnitee did not act in
good faith or with gross negligence.
5. Advances of Expenses. The Expenses incurred by Indemnitee in any
--------------------
Proceeding shall be paid by the Corporation in advance, promptly upon the
written request of the Indemnitee, if Indemnitee shall undertake to repay such
amount to the extent that it is ultimately determined that Indemnitee is not
entitled to indemnification. No security for the performance of any such
undertaking shall be required and any such undertaking shall be accepted by the
Corporation without regard to the financial capacity of Indemnitee to perform
its obligations thereunder.
6. Right of Indemnitee to Indemnification Upon Application; Procedure
------------------------------------------------------------------
Upon Application. Without limiting the obligation of the Corporation to
- - ----------------
promptly make payments in respect of Expenses in accordance with Paragraph 5,
any indemnification under Paragraph 3 shall be made no later than 45 days after
receipt by the Corporation of the written request of Indemnitee, unless a
determination is made within said 45-day period by (1) the Board of
2
<PAGE>
Directors of the Corporation by a majority vote of a quorum consisting of
Directors who are not and were not parties to the relevant Proceeding, or (2)
independent legal counsel in a written opinion (which counsel shall be appointed
if such a quorum is not obtainable) that the Indemnitee has not met the relevant
standards for indemnification set forth in Paragraph 3.
The right to indemnification or advances as provided by this Agreement
shall be enforceable by Indemnitee in any court of competent jurisdiction. The
burden of proving that indemnification is not appropriate shall be on the
Corporation. Indemnitee's Expenses reasonably incurred in connection with
successfully establishing her right to indemnification, in whole or in part, in
any such Proceeding shall also be indemnified by the Corporation.
7. Indemnification Hereunder Not Exclusive; Construction. The
-----------------------------------------------------
indemnification provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may be entitled under the General Corporation
Law of the State of Delaware, the Restated Certificate of Incorporation and/or
Restated Bylaws of the Corporation, any other agreement, any vote of
stockholders or disinterested Directors, or otherwise, either as to action in
her official capacity on or prior to the date hereof or as to action in any
other capacity. At any time during the term of this Agreement whether or not
Indemnitee is entitled to indemnification under the General Corporation Law of
the State of Delaware, the Restated Certificate of Incorporation and/or Restated
Bylaws of the Corporation, this Agreement shall be construed to indemnify
Indemnitee not less favorably than indemnification provided for the officers and
directors of the Corporation under the General Corporation Law of the State of
Delaware, the Restated Certificate of Incorporation and/or Restated Bylaws of
the Corporation as if Indemnitee were an officer or director of the Corporation.
8. Partial Indemnification. In the event that Indemnitee is entitled
-----------------------
under any provision of this Agreement to indemnification by the Corporation for
a portion but less than the entire amount of any Expenses, judgments, fines,
penalties and/or amounts paid or payable in settlement, the Corporation shall
fully indemnify Indemnitee in accordance with the applicable provisions of this
Agreement for such portion of such Expenses, judgments, fines, penalties and/or
amounts paid in settlement.
9. Subrogation. In the event that the Corporation provides any
-----------
indemnification or makes any payment to Indemnitee in respect of any matter in
respect of which indemnification or the advancement of expenses is provided for
herein, the Corporation shall be subrogated to the extent of such
indemnification or other payment to all of the related rights of recovery of
Indemnitee against other persons or entities. Indemnitee shall execute all
papers reasonably required and shall do everything that may be reasonably
necessary to secure such rights and enable the Corporation effectively to bring
suit to enforce such rights (with all of Indemnitee's reasonable costs and
expenses, including attorneys' fees and disbursements, to be reimbursed by or,
at the option of Indemnitee, advanced by the Corporation).
10. No Duplication of Payments. The Corporation shall not be obligated
--------------------------
under this Agreement to provide any indemnification or make any payment to which
Indemnitee is otherwise entitled hereunder to the extent, but only to the
extent, that such indemnification or payment hereunder would be duplicative of
any amount actually received by Indemnitee pursuant to any
3
<PAGE>
insurance policy, the General Corporation Law of the State of Delaware, the
Restated Certificate of Incorporation and/or the Restated Bylaws of the
Corporation or otherwise.
11. Prior Indemnity Agreement. Nothing in this Agreement shall be deemed
-------------------------
to amend or terminate that certain Indemnity Agreement, dated as of January 5,
1987, between the Corporation and the Indemnitee, which Indemnity Agreement is
hereby expressly ratified and confirmed.
12. Saving Clause. If any provision of this Agreement or the application
-------------
of any provision hereof to any circumstance is held illegal, invalid or
otherwise unenforceable, the remainder of this Agreement and the application of
such provision to any other circumstance shall not be affected, and the
provision so held to be illegal, invalid or otherwise unenforceable shall be
reformed to the extent (but only to the extent) necessary to make it legal,
valid and enforceable.
13. Notice. Indemnitee shall give to the Corporation notice in writing as
------
soon as practicable of any claim made against her for which indemnification will
or could be sought under this Agreement, provided, however, that any failure to
give such notice to the Corporation will relieve the Corporation from its
obligations hereunder only if, and to the extent that, such failure results in
the forfeiture of substantial rights and defenses. Notice to the Corporation
shall be directed to the Corporation (to the attention of the President, with a
copy to the General Counsel) at its principal executive office or such other
address as the Corporation shall designate in writing to Indemnitee. Notice
shall be deemed received when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or three
calendar days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or one business day after
having been sent for next-day delivery by a nationally recognized overnight
courier. In addition, Indemnitee shall give the Corporation such information
and cooperation as it may reasonably require and shall be within Indemnitee's
power.
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute one and the same instrument.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
16. Successors. This Agreement shall be binding upon the Corporation and
----------
its successors, including without limitation any person acquiring directly or
indirectly all or substantially all of the business or assets of the Corporation
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor will thereafter be deemed the "Corporation" for purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable by
the Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Corporation, to assume
and agree in writing to perform this Agreement, expressly for the benefit of
Indemnitee, in the same manner and to the same extent the Corporation would be
required to perform if no such succession had taken place.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
STERLING SOFTWARE, INC.
By:
-------------------------------------
Sterling L. Williams
President and Chief Executive Officer
----------------------------------------
Jeannette P. Meier
5
<PAGE>
EXHIBIT 10.15
AMENDMENT TO CEO AGREEMENT
This Amendment to CEO Agreement is entered into by and between Sterling
Software, Inc., a Delaware corporation (the "Company"), and Sterling L.
Williams, an individual ("Williams"), as of this 31st day of May, 1998.
WHEREAS, the Company and Williams are parties to that certain CEO Agreement
(the "CEO Agreement"), dated as of February 12, 1996.
WHEREAS, Section 7 of the CEO Agreement provides for an offer by the
Company to Williams of increased compensation for full employment by the Company
in the event Williams' employment at Sterling Commerce is terminated;
WHEREAS, Williams' employment at Sterling Commerce has been terminated on
the date hereof, and Williams has agreed with Sterling Commerce to enter into a
consulting arrangement with Sterling Commerce on the date hereof; and
WHEREAS, Williams and the Company agree that Williams' acceptance of the
consulting arrangement with Sterling Commerce will be in lieu of Williams
accepting the offer referred to under Section 7 of the CEO Agreement and that
the CEO Agreement should be amended in recognition of the foregoing to eliminate
Section 7 of the CEO Agreement and to eliminate the second sentence of Section 4
of the CEO Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the Company and Williams hereby agree that the CEO
Agreement is amended on the date hereof by striking out Section 7 thereof in its
entirety and by striking out the second sentence of Section 4 thereof in its
entirety.
STERLING SOFTWARE, INC.
By: /s/ Don J.McDermett, Jr.
-----------------------------
Don J. McDermett, Jr.
Senior Vice President and
General Counsel
/s/ Sterling L. Williams
----------------------------------
Sterling L. Williams
<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
Cayenne Software Limited....................... United Kingdom
Cayenne Software S.L........................... Spain
Sterling Software (Australia) II Pty Limited... Australia
Sterling Software (Australia) III Pty Limited.. Australia
Sterling Software Beratungs und Vertriebs
GmbH.......................................... Austria
Sterling Software (Canada) II, Inc./Logiciel
Sterling (Canada) II, Inc..................... Canada
Sterling Software IV GmbH...................... Germany
Sterling Software (Hong Kong) Limited.......... Hong Kong
Sterling Software (Italia) IV Srl.............. Italy
Sterling Software Applications KK.............. Japan
Sterling Software (Korea) Limited.............. Korea
Sterling Software (Malaysia) Sdn. Bhd.......... Malaysia
Sterling Software (Netherlands) V BV........... Netherlands
Sterling Software (Singapore) II Pte Ltd....... Singapore
Sterling Software (Espana) II S.L.............. Spain
Sterling Software (UK) III Limited............. United Kingdom
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 Weather, Inc................. Delaware
Sterling Software (U.S.A.), Inc.................. California
Sterling Software (U.S. of America), Inc......... Delaware
Synon, Inc....................................... Illinois
Southwest Beta Services, Inc..................... Delaware
Sterling Software (Pacific) Pty Limited.......... Australia
Sterling Software (Australia) Pty Limited...... Australia
Sterling Software (Australia) Pty Limited.... New Zealand
Systems Center Handelgesellschaft 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- - ---- -----------------------------
<S> <C>
Sterling Software (France) SA.................... France
Sterling Software GmbH........................... Germany
KnowledgeWare GmbH............................. 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
Sterling Software International Marketing II..... Cayman Islands
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
Condessa Gestao E Invetmentos Lda................ Portugal
Sterling Software (Singapore) PTE Ltd............ Singapore
Systems Center Limited......................... Hong Kong
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.......... 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. 333-66341, No. 333-60473, No. 333-37653, 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. 333-66167, No. 333-60475, No. 333-58825, No. 333-42721, 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 6, 1998,
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, 1998.
/s/ Ernst & Young LLP
Dallas, Texas
November 17, 1998
<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, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 397,312
<SECURITIES> 310,537
<RECEIVABLES> 200,428
<ALLOWANCES> 17,123
<INVENTORY> 0
<CURRENT-ASSETS> 940,530
<PP&E> 66,726
<DEPRECIATION> 49,832
<TOTAL-ASSETS> 1,197,599
<CURRENT-LIABILITIES> 267,299
<BONDS> 0
0
0
<COMMON> 8,485
<OTHER-SE> 853,073
<TOTAL-LIABILITY-AND-EQUITY> 1,197,599
<SALES> 719,943
<TOTAL-REVENUES> 719,943
<CGS> 287,666
<TOTAL-COSTS> 633,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> 76,044
<INCOME-TAX> 43,793
<INCOME-CONTINUING> 76,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,044
<EPS-PRIMARY> .94
<EPS-DILUTED> .89
</TABLE>
