<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
COMMISSION FILE NO. 1-8465
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of February 9, 1998
----------------------------- -----------------------------------------
Common Stock, $0.10 par value 38,652,143
<PAGE>
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.............................................. 3
Sterling Software, Inc. Consolidated Balance Sheets at December 31, 1997
and September 30, 1997............................................. 3
Sterling Software, Inc. Consolidated Statements of Operations for the
Three Months Ended December 31, 1997 and 1996...................... 4
Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for
the Three Months Ended December 31, 1997........................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1997 and 1996...................... 6
Sterling Software, Inc. Notes to Consolidated Financial Statements........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 10
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 14
</TABLE>
2
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1997 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 428,105 $ 435,726
Marketable securities................................ 208,738 206,965
Accounts and notes receivable, net................... 137,850 149,422
Income tax receivable................................ 4,550 9,941
Current deferred income taxes........................ 1,460
Prepaid expenses and other current assets............ 22,603 24,847
---------- ----------
Total current assets................................ 803,306 826,901
Property and equipment, net of accumulated
depreciation of $44,649 at December 31, 1997 and
$42,430 at September 30, 1997........................ 50,344 48,598
Computer software, net of accumulated amortization of
$91,692 at December 31, 1997 and $87,258 at September
30, 1997............................................. 75,230 70,422
Excess cost over net assets acquired, net of
accumulated amortization of $22,480 at December 31,
1997 and $20,650 at September 30, 1997............... 82,043 84,701
Noncurrent deferred income taxes...................... 17,220 22,130
Other assets.......................................... 11,829 12,906
---------- ----------
$1,039,972 $1,065,658
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 132,803 $ 172,700
Deferred revenue..................................... 87,649 95,455
---------- ----------
Total current liabilities........................... 220,452 268,155
Noncurrent deferred revenue........................... 22,004 20,432
Other noncurrent liabilities.......................... 31,197 28,817
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized, no shares issued or outstanding.........
Common stock, $.10 par value; 75,000,000 shares
authorized; 39,948,000 and 39,904,000 shares issued
at December 31, 1997 and September 30, 1997,
respectively........................................ 3,995 3,990
Additional paid-in capital........................... 807,095 806,021
Retained earnings (deficit).......................... 12,858 (3,506)
Less treasury stock, at cost; 1,337,000 and 1,352,000
shares at December 31, 1997 and September 30, 1997,
respectively........................................ (57,629) (58,251)
---------- ----------
Total stockholders' equity.......................... 766,319 748,254
---------- ----------
$1,039,972 $1,065,658
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Products................................................... $ 57,151 $ 36,556
Product support............................................ 40,619 30,336
Services................................................... 51,059 30,249
-------- --------
148,829 97,141
Costs and expenses:
Cost of sales:
Products and product support.............................. 15,495 16,554
Services.................................................. 44,322 26,308
-------- --------
59,817 42,862
Product development and enhancement........................ 8,853 4,806
Selling, general and administrative........................ 58,535 40,732
-------- --------
127,205 88,400
-------- --------
Income before other income (expense) and income taxes....... 21,624 8,741
Other income (expense):
Interest expense........................................... (31) (147)
Investment income.......................................... 8,247 10,773
Other...................................................... (2) 233
-------- --------
8,214 10,859
-------- --------
Income before income taxes.................................. 29,838 19,600
Provision for income taxes.................................. 10,145 6,860
-------- --------
Net income.................................................. $ 19,693 $ 12,740
======== ========
Income per common share:
Net income:
Basic..................................................... $ .51 $ .33
======== ========
Diluted................................................... $ .49 $ .33
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<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,
1997................... 39,904 $3,990 $806,021 $(3,506) 1,352 $(58,251) $748,254
Net income............. 19,693 19,693
Issuance of common
stock pursuant to
stock options......... 44 5 1,242 1,247
Issuance of common
stock to retirement
plan.................. (168) (15) 622 454
Other.................. (3,329) (3,329)
------ ------ -------- ------- ----- -------- --------
Balance at December 31,
1997................... 39,948 $3,995 $807,095 $12,858 1,337 $(57,629) $766,319
====== ====== ======== ======= ===== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31
------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income................................................ $ 19,693 $ 12,740
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 9,923 8,292
Provision for losses on accounts receivable.............. 2,331 669
Provision for deferred income taxes...................... 8,841 4,458
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Decrease in accounts and notes receivable............... 10,295 22,325
Decrease in prepaid expenses and other assets........... 2,383 350
Decrease in accounts payable and accrued liabilities and
amounts due to Sterling Commerce, Inc.................. (39,521) (53,138)
(Decrease) increase in deferred revenue................. (8,348) 8,620
Other................................................... 3,272 (1,782)
-------- --------
Net cash provided by operating activities.............. 8,869 2,534
Investing activities:
Purchases of property and equipment....................... (4,655) (9,352)
Purchases and capitalized cost of development of computer
software................................................. (5,179) (4,300)
Business acquisitions, net of cash acquired............... (3,626)
Purchases of investments.................................. (36,571) (41,790)
Proceeds from sales of investments........................ 36,070 68,645
Others.................................................... 718 184
-------- --------
Net cash (used) provided by investing activities....... (13,243) 13,387
Financing activities:
Retirement and redemption of debt and capital lease
obligations.............................................. (1,080) (1,144)
Proceeds from issuance of debt............................ 196 2,350
Proceeds from issuance of common stock pursuant to
exercise of stock options................................ 1,247 65
Other..................................................... (2,016) 1,000
-------- --------
Net cash (used) provided by financing activities....... (1,653) 2,271
Effect of foreign currency exchange rate changes on cash... (1,594) (705)
-------- --------
(Decrease) increase in cash and cash equivalents........... (7,621) 17,487
Cash and cash equivalents at beginning of period........... 435,726 524,237
-------- --------
Cash and cash equivalents at end of period................. $428,105 $541,724
======== ========
Supplemental cash flow information:
Income taxes paid......................................... $ 834 $ 1,089
======== ========
Income tax refunds........................................ $ 207 $ 186
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sterling Software, Inc. ("Sterling Software" or the "Company") was founded
in 1981 and became a publicly owned corporation in 1983. Sterling Software is
a recognized worldwide supplier of software products and services within three
major markets: applications management, systems management and federal
systems. Consistent with Sterling Software's decentralized operating
structure, major markets are served by independently operated business groups
which consist of divisions and business units that focus on specific business
niches within those markets. Sterling Software believes that its decentralized
organizational structure promotes operating flexibility, improves
responsiveness to customer requirements and focuses management on achieving
revenue and operating profit objectives. Sterling Software has historically
expanded its operations through internal growth and by business and product
acquisitions.
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software after elimination of all significant intercompany balances and
transactions. The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and the disclosure of contingencies at December 31, 1997 and
September 30, 1997 and the results of operations for the three months ended
December 31, 1997 and 1996. While management has based their assumptions and
estimates on the facts and circumstances currently known, final amounts may
differ from such estimates.
Revenue
Revenue from license fees, including leasing transactions, for standard
software products is recognized when the software is delivered, provided no
significant future vendor obligations exist and collection is probable.
Service revenue and revenue from products involving installation or other
services are recognized as the services are performed.
Product support contracts allow customers to receive updated versions of
Sterling Software's products when and if they become available, as well as bug
fixing, and Internet and telephone access to the Company's technical
personnel. Revenue from product support contracts, including product support
included in initial license fees, is recognized ratably over the contract
period. All significant costs and expenses associated with product support
contracts are expensed ratably over the contract period.
If software product transactions include the right to receive future
products, a portion of the software product revenue is deferred and recognized
as products are delivered. Contract accounting is applied for sales of
software products requiring significant modification or customization, such
that revenue is recognized only when the modification or customization is
complete.
When products, product support and services are billed prior to the time the
related revenue is recognized, deferred revenue is recorded and related costs
paid in advance are deferred.
Revenue from specialized information technology ("IT") services provided to
the federal government under multi-year contracts is recognized as the
services are performed. Revenue for services 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.
7
<PAGE>
Cash Equivalents, Marketable Securities and Other Investments
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.
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 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.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share". FAS
128 sets forth new rules for computing earnings per share which replace
previously reported "primary" and "fully diluted" earnings per share with
"basic" and "diluted" earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The Company adopted FAS
128 in the first quarter of 1998. Earnings per share amounts for all prior
periods presented herein have been restated to conform with FAS 128
requirements.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31
---------------
1997 1996
------- -------
<S> <C> <C>
Basic:
Earnings applicable to common stockholders.................. $19,693 $12,740
======= =======
Weighted average shares..................................... 38,591 38,439
======= =======
Basic earnings per share.................................... $ .51 $ .33
======= =======
Diluted:
Earnings applicable to common stockholders.................. $19,693 $12,740
======= =======
Weighted average shares..................................... 38,591 38,439
Effect of dilutive employee stock options................... 1,427 643
------- -------
40,018 39,082
======= =======
Diluted earnings per share.................................. $ .49 $ .33
======= =======
</TABLE>
2.UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is unaudited
but, in the opinion of management, includes all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
financial position and results of operations for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire fiscal year. The
information included in this report should be read in conjunction with the
information presented under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997.
8
<PAGE>
3.COMMITMENTS AND CONTINGENCIES
The Company is subject to certain legal proceedings and claims that arise in
the normal course of its business. In the opinion of management, the amount of
the liability, if any, ultimately incurred by Sterling Software with respect
to any existing proceedings and claims, net of applicable reserves and
available insurance, will not materially affect the financial condition or
results of operations of the Company.
4.SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in three major markets: applications
management, systems management and federal systems. Major markets are
represented through independently operated business segments. The applications
management business segment provides application development products and
services for business modeling through code generation, as well as products
and services that enable customers to extend the life and usefulness of legacy
applications and to facilitate enterprise information access. The systems
management business segment provides products that enable customers to ensure
the quality of service of IT applications across enterprise networked
computing environments. The federal systems business segment provides
specialized IT services to the federal government under numerous multi-year
contracts primarily in support of two major customers, the National
Aeronautics and Space Administration ("NASA") and the Department of Defense.
Through June 30, 1997, the Company's international operations sold, marketed
and provided first-level support outside of the United States and Canada for
the interchange and communications software products of Sterling Commerce,
Inc. ("Sterling Commerce"), the results of which are included in the business
segment information under "Corporate and other".
Financial information concerning the Company's operations, by business
segment, for the three months ended December 31, 1997 and 1996, is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31
-------------------
1997 1996
--------- --------
<S> <C> <C>
Revenue:
Applications Management................................. $ 72,475 $ 21,952
Systems Management...................................... 42,061 36,950
Federal Systems......................................... 33,665 27,858
Corporate and other..................................... 628 10,381
--------- --------
Consolidated totals.................................... $ 148,829 $ 97,141
========= ========
Operating Profit (Loss):
Applications Management................................. $ 13,346 $ 2,224
Systems Management...................................... 13,838 12,889
Federal Systems......................................... 2,239 2,395
Corporate and other..................................... (7,799) (8,767)
--------- --------
Consolidated totals.................................... $ 21,624 $ 8,741
========= ========
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
inter-segment eliminations, the results of operations of the Company's retail
software division and, for the three months ended December 31, 1996, the
results of operations relating to the international distribution of Sterling
Commerce's interchange and communications software products.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS COMBINATIONS AND DIVESTITURES
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the
"Acquisition") of certain assets (including the capital stock of certain
foreign subsidiaries) of Texas Instruments Incorporated ("Texas Instruments")
for approximately $214,774,000, including costs directly related to the
Acquisition of approximately $49,774,000. Such assets constitute substantially
all of the assets used by Texas Instruments' Software Division ("TI Software")
in its business of developing, marketing, licensing, supporting and
maintaining application development software and providing related consulting
services. The results of operations of TI Software are included in the
Company's results of operations from the date of the Acquisition.
Termination of International Distributor Agreement
Effective as of June 30, 1997, Sterling Software and 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 the International Distributor Agreement dated March 4,
1996 (the "International Distributor Agreement"), 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 of these products outside
of the United States and Canada for the first quarter of 1997 are included in
the business segment information presented herein under "Corporate and other".
RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 and 1996
Total revenue increased $51,688,000, or 53%, in the first quarter of 1998
over the same period of 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 the International Distributor
Agreement in the third quarter of 1997. Revenue from the applications
management, systems management and federal systems business segments increased
230%, 14% and 21%, respectively, in the first quarter of 1998 over the same
period in 1997. The significant increase in revenue from the applications
management business segment as well as the increase in revenue from the
federal systems business segment are primarily attributable to revenue from
the domestic and international operations acquired by Sterling Software in the
Acquisition.
Total revenue generated from the Company's international operations was
$58,715,000 and $35,388,000 in the first quarter of 1998 and 1997,
respectively, representing an increase of $23,327,000, or 66%, primarily due
to increases in the applications management business segment (up 462%) and in
the systems management business segment (up 9%). The increase in international
revenue from Sterling Software's products and services was partially offset by
a decline in revenue from sales of Sterling Commerce's interchange and
communications software products and services due to the termination of the
International Distributor Agreement in the third quarter of 1997. In addition,
international operating results in the first quarter of 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 same period of the previous year, international revenue would have
been higher in the first quarter of 1998 by approximately $5,000,000. Revenue
from the Company's international operations represented 39% and 36% of total
revenue in the first quarter of 1998 and 1997, respectively.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years, fixed-term
product lease and rental agreements generally having terms ranging from month-
to-month to year-to-year, and federal contracts generally having terms ranging
from one to
10
<PAGE>
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 50% of total revenue in the first
quarter of 1998 compared to 60% in the same period of 1997, primarily due to
the significant increase in products and services revenue from the
applications management business segment. The increase in services revenue
resulted primarily from generally higher levels of consulting services
associated with product sales in this segment. The Company currently expects
that revenue from services will continue to constitute a larger percentage of
the Company's total revenue in future reporting periods than was the case
prior to the Acquisition.
Revenue from the applications management business segment increased
$50,523,000, or 230%, in the first quarter of 1998 over the same period of
1997 due to a 223% increase in products revenue, a 135% increase in product
support revenue and a 669% increase in services revenue. The significant
increase in revenue from the applications management business segment is
primarily attributable to revenue from the Applications Development and
Applications International divisions, which include the non-federal domestic
and international operations, respectively, acquired in the Acquisition.
Approximately 52% of the applications management business segment's total
revenue in the first quarter of 1998 was derived from the Company's
international operations, compared to 31% in the same period of 1997.
Revenue from the systems management business segment increased $5,111,000,
or 14%, in the first quarter of 1998 over the same period of 1997 primarily
due to a 30% increase in products revenue partially offset by a 5% 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 and
international product sales in the operations management and storage
management product lines. Approximately 49% of the systems management business
segment's total revenue in the first quarter of 1998 was derived from the
Company's international operations, compared to 52% in the same period of
1997.
Revenue from the federal systems business segment increased $5,807,000, or
21%, in the first quarter of 1998 over the same period of 1997 due primarily
to a contract with the intelligence community added to the Company's federal
systems business segment as a result of the Acquisition and, to a lesser
extent, to higher contract billings in both the Information Technology
Division and the Scientific Systems Division. In June 1997, NASA announced
that the Scientific Systems Division was not selected for continuation of a
contract with NASA's Ames Research Center; however, the selection of another
bidder was later rescinded. Although the final outcome of this procurement
remains uncertain, the Company continues to perform services for NASA's Ames
Research Center under an extension of the existing contract.
Total costs and expenses increased $38,805,000, or 44%, in the first quarter
of 1998 compared to the same period of 1997, and represented 85% and 91% of
total revenue in the first quarter of 1998 and 1997, respectively.
Total cost of sales increased $16,955,000, or 40%, in the first quarter of
1998 compared to the same period of 1997, and represented 40% and 44% of total
revenue in the first quarter of 1998 and 1997, respectively. The decrease in
cost of sales as a percentage of revenue from period to period is primarily
attributable to the cost structure implemented by the Company as a result of
the Acquisition and the related reorganization in the third quarter of 1997.
Product development expense for the first quarter of 1998 was $8,853,000,
net of $5,125,000 of capitalized software costs, as compared with product
development expense in the first quarter of 1997 of $4,806,000, net of
$4,280,000 of capitalized software costs. Gross product development expense
was 12% of non-federal revenue in the first quarter of 1998 compared with 13%
for the same period of 1997. Capitalized development costs represented 37% of
gross development costs in the first quarter of 1998 compared with 47% of
gross development costs for the same period of 1997. 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.
11
<PAGE>
Selling, general and administrative expenses increased $17,803,000, or 44%,
in the first quarter of 1998 compared to the same period of 1997, and
represented 39% and 42% of total revenue in the first quarter of 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 as a result of the Acquisition, the
related reorganization in the third quarter of 1997 and cost savings resulting
from the termination of the Company's International Distributor Agreement with
Sterling Commerce.
Investment income decreased $2,526,000 in the first quarter of 1998 compared
to the same period of 1997 as a result of lower average cash and cash
equivalents balances primarily due to the use of cash in connection with the
Acquisition and the related reorganization in the third quarter of 1997.
Income before income taxes in the first quarter of 1998 was $29,838,000
compared to $19,600,000 for the same period of 1997. The increase of
$10,238,000, or 52%, in the first quarter of 1998 over the same period of 1997
in income before income taxes is attributable to higher profits in the
applications management and systems management business segments partially
offset by a decline in investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$582,854,000 of working capital at December 31, 1997, which includes
$428,105,000 of cash and cash equivalents and $208,738,000 of marketable
securities. Net cash flows from operations were $8,869,000 in the first
quarter of 1998 as compared to $2,534,000 in the first quarter of 1997. First
quarter 1997 operating cash flows were reduced by payments made to Sterling
Commerce during the quarter of approximately $32,000,000. First quarter 1998
operating cash flows were reduced by payments made during the quarter of
approximately $13,212,000 directly related to the Acquisition and the related
reorganization that occurred in the third quarter of 1997. Cash flows from
operations, together with other available cash, were used to fund additions to
property and equipment and capitalized software.
Effective July 1, 1997, the Company entered into an amended Revolving Credit
Agreement ("Credit Agreement") with an unsecured borrowing capacity of
$35,000,000 and a stated maturity of June 30, 2000. The Credit Agreement
requires that the Company maintain certain financial ratios. Borrowings under
the Credit Agreement 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 the first quarter of 1998.
At December 31, 1997, the Company's existing capital commitments consisted
primarily of commitments under lease arrangements for office space and
equipment. The Company intends to meet such obligations primarily from cash
flow from operations. The Company believes available cash balances, cash
equivalents and short-term investments combined with cash flows from
operations and amounts available under existing credit agreements are
sufficient to meet the Company's cash requirements for the foreseeable future.
OTHER MATTERS
Demand for many of the Company's products tends to increase with increases
in the rate of inflation as customers strive to improve employee productivity
and reduce costs. However, the effect of inflation on the Company's relatively
labor intensive cost structure could adversely affect its results of
operations to the extent the Company is unable to recover increased operating
costs through increased prices for, or increased sales of, its products and
services.
The assets and liabilities of the Company's non-U.S. operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency
exposure through decentralized sales, marketing and support operations and
through international development
12
<PAGE>
facilities, in which substantially all costs are local-currency based. In the
past, the Company has entered, and may in the future enter into, hedging
transactions in an effort to reduce its exposure to currency exchange risks.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed in part to the Company's growth in revenue and operating profit
before reorganization and purchased research and development costs. The impact
of future acquisitions on continued growth in revenue and operating profit can
not presently be determined.
FORWARD-LOOKING INFORMATION
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain, certain forward-looking statements and
information that are based on the beliefs of, and information currently
available to, the Company's management, as well as estimates and assumptions
made by the Company's management. When used in SEC Filings, words such as
"anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and
similar expressions, as they relate to Sterling Software or Sterling
Software's management, identify forward-looking statements. Such statements
reflect the current views of Sterling Software with respect to future events
and are subject to certain risks, uncertainties and assumptions relating to
Sterling Software's operations and results of operations, competitive factors
and pricing pressures, shifts in market demand, the performance and needs of
the industries served by Sterling Software, the costs of product development
and other risks and uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements, uncertainties
with respect to changes or developments in social, economic, business,
industry, market, legal and regulatory circumstances and conditions and
actions taken or omitted to be taken by third parties, including the Company's
stockholders, customers, suppliers, business partners, competitors and
legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying estimates or assumptions prove incorrect, actual results
or outcomes may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by and
between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (2)
3.1 Certificate of Incorporation of the Company, as amended (3)
3.2 Restated Bylaws of the Company (4)
27.1 Financial Data Schedule (5)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference. In accordance with Item 601 of Regulation S-K, this copy of
the Asset Purchase Agreement does not include the schedules or exhibits
thereto, which schedules and exhibits are listed in the table of contents
to the Asset Purchase Agreement. The Company agrees to furnish
supplementary to the Securities and Exchange Commission a copy of such
schedules and exhibits upon request.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1997, as amended, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 and incorporated herein by reference.
(5) Filed herewith.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the three
month period ended December 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING SOFTWARE, INC.
Date: February 12, 1998 By: /s/ Sterling L. Williams
-----------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: February 12, 1998 /s/ R. Logan Wray
-----------------------------------
R. Logan Wray
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (2)
3.1 Certificate of Incorporation of the Company, as amended (3)
3.2 Restated Bylaws of the Company (4)
27.1 Financial Data Schedule (5)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference. In accordance with Item 601 of Regulation S-K, this copy of
the Asset Purchase Agreement does not include the schedules or exhibits
thereto, which schedules and exhibits are listed in the table of contents
to the Asset Purchase Agreement. The Company agrees to furnish
supplementary to the Securities and Exchange Commission a copy of such
schedules and exhibits upon request.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1997, as amended, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement No.
33-47131 and incorporated herein by reference.
(5) Filed herewith.
16
<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.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 428,105
<SECURITIES> 208,738
<RECEIVABLES> 137,850
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 803,306
<PP&E> 50,344
<DEPRECIATION> 44,649
<TOTAL-ASSETS> 1,039,972
<CURRENT-LIABILITIES> 273,653
<BONDS> 0
0
0
<COMMON> 3,995
<OTHER-SE> 762,324
<TOTAL-LIABILITY-AND-EQUITY> 1,039,972
<SALES> 148,829
<TOTAL-REVENUES> 148,829
<CGS> 59,817
<TOTAL-COSTS> 127,205
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 29,838
<INCOME-TAX> 10,145
<INCOME-CONTINUING> 19,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,693
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
</TABLE>
