-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGpkdjSpe2E1CHLc9CLTRyCzs3ylNfXFnIz2fpK+9w3daqHc/VskNl3cZAwTnFtc jSoebRzUaSpw/kr9IMGP5w== 0000899243-96-001532.txt : 19961202 0000899243-96-001532.hdr.sgml : 19961202 ACCESSION NUMBER: 0000899243-96-001532 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961030 FILED AS OF DATE: 19961126 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING SOFTWARE INC CENTRAL INDEX KEY: 0000716714 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 751873956 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 96672084 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-8465 ---------------- STERLING SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 75-1873956 (I.R.S. EMPLOYER IDENTIFICATION NO.) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100 DALLAS, TEXAS 75206 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 891-8600 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Common Stock, $0.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of November 15, 1996, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $1,209,554,936 based on the closing sales price of $33 1/8 of the Registrant's Common Stock on the New York Stock Exchange. As of November 15, 1996, 38,429,849 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the Annual Meeting of Stockholders of Registrant to be held during 1997 are incorporated by reference in Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- STERLING SOFTWARE, INC. TABLE OF CONTENTS
FORM 10-K ITEM PAGE -------------- ---- PART I. Item 1. Business................................................ 1 Item 2. Properties.............................................. 13 Item 3. Legal Proceedings....................................... 14 Item 4. Submission of Matters to a Vote of Security Holders..... 14 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 14 Item 6. Selected Financial Data................................. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 16 Item 8. Financial Statements and Supplementary Data............. 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 48 PART III. Item 10. Directors and Executive Officers of the Registrant...... 48 Item 11. Executive Compensation.................................. 48 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 48 Item 13. Certain Relationships and Related Transactions.......... 48 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 49
PART I ITEM 1. BUSINESS. GENERAL Sterling Software, Inc. ("Sterling Software" or the "Company") was founded in 198l and became a publicly owned corporation in 1983. Sterling Software is a recognized worldwide supplier of software products and services within three major markets classified as systems management, applications management and federal systems. Sterling Software's international operations are responsible for sales, marketing and first-level support of the Company's products outside the United States and Canada. Consistent with Sterling Software's decentralized operating structure, major markets are served by independently operated business groups which consist of divisions that focus on specific business niches within those markets. Sterling Software believes that its decentralized organizational structure promotes operating flexibility, improves responsiveness to customer requirements and focuses management on achieving revenue and operating profit objectives. Sterling Software has historically expanded its operations through internal growth and by business and product acquisitions. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce, Inc. ("Sterling Commerce"), which owns and operates the businesses formerly conducted by Sterling Software's electronic commerce business segment (see "Sterling Commerce Initial Public Offering and Spin-Off" below). As used in this Part I, the terms "Sterling Software" and the "Company" do not include the business operations of Sterling Commerce. Further, to give effect to the spin-off, Sterling Software has reclassified the results of Sterling Commerce as discontinued operations in the accompanying Consolidated Financial Statements. As of September 30, 1996, Sterling Software's continuing business segments were: . the systems management business segment, which provides enterprise-wide systems management software products for large computing environments. The software products of this business segment specialize in storage management, operations management and VM systems management. Sterling Software addresses the needs of corporations as they move to client/server computing environments, offering products that operate on a variety of computer platforms and operating systems; . the applications management business segment, which provides products for developing new applications, revitalizing, integrating and extending existing applications and facilitating enterprise information access. These software tools allow customers to quickly develop and implement new client/server applications, to integrate and improve existing applications at the desktop and to transform data into information that is useful for effective decision-making. Consulting and education services are also offered to ensure customers are successful in using the products; and . the federal systems business segment, which provides highly technical professional services to the federal government under several multi-year contracts. Major customers of this business segment are the U.S. Department of Defense ("DoD") and the National Aeronautics and Space Administration ("NASA"). Federal Systems' personnel also serve as a source of technical expertise for other divisions of Sterling Software and provide technical services for non-governmental customers, as well. Worldwide revenue from the Company's systems management, applications management and federal systems business segments represented 39%, 25% and 26%, respectively, of the Company's total revenue during 1996. See Notes 5 and 6 of Notes to Consolidated Financial Statements. In addition to the three business segments described above, Sterling Software has international operations that sell and support the Company's products through 30 offices in 17 countries and through agents and distributors in 51 additional countries. International operating results therefrom are included, as applicable, in the operating results of the systems management and applications management business segments contained herein. The Company's international operations also sell, market and provide first-level support for certain of 1 Sterling Commerce's electronic commerce products, the results of which are included in the "Corporate and other" business segment. See "Shared Management and Other Relationships with Sterling Commerce" below. Revenue from the Company's international operations represented 38% of the Company's revenue during 1996. A large percentage of Sterling Software's business is recurring business through annual and multi-year product support agreements, generally having terms ranging from one to three years, fixed term product lease and rental agreements, generally having terms ranging from month-to-month to year-to-year and multi-year federal contracts generally having terms ranging from one to five years. Recurring revenue represented 54% and 55% of the Company's total revenue in 1996 and 1995, respectively. Sterling Software's customer base includes 95 of the 100 largest and 410 of the 500 largest U.S. industrial and service corporations, as ranked by 1995 revenues reported in Fortune. SYSTEMS MANAGEMENT The systems management business segment is conducted by Sterling Software's Systems Management Group ("SMG"), with headquarters near Washington, D.C. SMG provides enterprise-wide systems management software for large computing environments. SMG's three divisions specialize in storage management, VM systems management and operations management software. As of September 30, 1996, SMG employed approximately 450 people. Under the SAMS family name, the Storage Management Division provides software that manages, monitors, and automates data storage in both distributed and centralized environments. These products provide enterprise-wide storage management capabilities and include solutions for a variety of platforms, including MVS, UNIX, Windows NT and NetWare. The key elements of the division's enterprise storage management architecture remain consistent across multiple platforms and allow organizations to: manage enterprise data storage in a uniform manner; implement consistent storage management policies and standards; provide centralized management of distributed data; and enforce the protection of critical data, regardless of where it resides. SAMS:Vantage is a client/server system that provides comprehensive automation, interactive reporting, analysis and predictive modeling capabilities along with centralized allocation control for all MVS data. SAMS:Expert delivers centralized management of distributed storage across multiple platforms through on-line, interactive reporting and automation of storage subsystems in UNIX, Windows NT and NetWare environments. The division also offers additional products, including SAMS:Allocate, a centralized allocation control system to make volume pooling easier and SAMS:Disk, a data storage management system. SAMS:Select is a high-performance backup accelerator for MVS data and SAMS:Compress is a data compression tool available for MVS, IMS and DB2 data. SMG's VM Software Division is the leading provider of comprehensive, integrated systems management software for IBM's VM operating system. The division has three product lines. The VM:Manager product family provides solutions for automated operations, storage management, service-level management, security and disaster recovery. VM:Manager enables VM sites to control costs, improve performance and increase user productivity. In 1996, the division introduced VM:Vantage, a client/server system for managing VM data storage from a Windows-based desktop. VM:Vantage provides comprehensive automation, reporting and analysis capabilities for VM data. In addition, cross-platform managers can manage both VM and MVS storage with the shared client technology of VM:Vantage and the Storage Management Division's SAMS:Vantage. VM:Webserver, also introduced in 1996, is a World Wide Web server for VM, which allows customers to exploit user-friendly web browsers to deliver mainframe-based information to end-users on any platform. VM:Webserver acts as a repository for home pages and documents created using Hypertext Markup Language ("HTML") and also stores, retrieves, and processes information in various formats, including text, graphics, sound, image, video and Java applets. SMG's networked systems management products are marketed by the Operations Management Division under the SOLVE family name. This division provides software for managing networked systems from a 2 business service perspective. SOLVE products allow information systems to tie operations and service objectives to the organization's business processes through a methodology called service-driven operations. SOLVE:Netmaster automates Systems Network Architecture ("SNA") and other network management operations across a variety of enterprise platforms and SOLVE:Netmaster for TCP/IP (Transmission Control Protocol/Internet Protocol), introduced during 1996, provides end-to-end management and monitoring of combined SNA and TCP/IP networks from one console. SOLVE:Operations for MVS and SOLVE:Operations for SNA provide desired-state, code-free, service-based automation of MVS systems and SNA networks, respectively. Automated actions are mapped to service-level obligations and business priorities, enabling customers to monitor and manage resources as elements of a service commitment. SOLVE:Operations for OpenView and SOLVE:Operations for NetView/AIX (formerly named SOLVE:Commander), are UNIX-based products that enable customers to manage mainframe (MVS and SNA) and distributed (Simple Network Management Protocol ("SNMP") and non-SNMP) systems resources from a service-driven perspective in which resources are seen in terms of the services, or business functions, they support. SOLVE:Central, an integrated suite of products to record problem, change, configuration and asset data in a single data repository, is comprised of: SOLVE:Problem for problem tracking and resolution; SOLVE:Change for managing the systems change process; SOLVE:Configuration for tracking software and hardware configuration changes; SOLVE:Asset for business management of computer assets and the services they deliver; and SOLVE:Viewpoint, a Windows- based interface to the SOLVE:Central suite that brings administrative control to the desktop. Worldwide revenue from the Company's systems management business segment represented 39% of the Company's revenue during both 1996 and 1995 and 43% of the Company's revenue during 1994. APPLICATIONS MANAGEMENT The applications management business segment is conducted by Sterling Software's Applications Management Group ("AMG"), with headquarters in Atlanta, Georgia, and Sterling Software's Information Management Group ("IMG"), with headquarters near Los Angeles, California. IMG was formed on October 1, 1996 to align two businesses focused on the business intelligence market and is composed of two former AMG divisions, the Information Management Division and the Data Access Division. IMG's two divisions develop software products that facilitate enterprise information access and transform data into information that is useful for effective decision-making. AMG's two divisions, the Applications Development Division and the Desktop Integration Division, focus exclusively on the client/server applications development market with software tools for creating new client/server applications and tools for integrating desktop, server and host applications. As of September 30, 1996, AMG and IMG collectively employed approximately 350 people. AMG's Applications Development Division markets PC-based products and services under the KEY family name for business and systems modeling and predictably developing new applications systems. The products combine business and applications modeling with state-of-the-art rapid prototyping and visual client/server development to produce applications for Windows, UNIX, OS/2, OS/400 and MVS environments. A systematic approach to modeling, delivering and managing applications throughout the development process is provided. KEY:Workgroup is a Windows-based application development environment based on an underlying object-oriented architecture that combines the strengths of business and systems modeling with the capabilities of visual development. The KEY:Workgroup family of products integrates workflow modeling, business process reengineering, data analysis and visual development, allowing developers to reuse objects and application components for development of client/server applications. The Key:Workgroup components are: KEY:Advise, KEY:Model, KEY:Empower and KEY:Assemble. KEY:Enterprise is an OS/2-based suite of second generation client/server development and support products for enterprise-class business applications. This product suite facilitates the development of multi-tier, client/server applications, assisting users in multiple development phases: planning, analysis, prototyping, design, code generation, system documentation and maintenance. The KEY:Enterprise components are: KEY:Advise, KEY:Analyze, KEY:Coordinate, KEY:Construct, KEY:Design, KEY:Document, KEY:Guide, KEY:Plan and KEY:Team. 3 AMG's Desktop Integration Division provides software products and services under the STAR family name that assist organizations in their delivery of client/server applications that integrate host, server and desktop systems throughout the enterprise. The division's flagship product, STAR:Flashpoint, is a Windows-based tool that, using visual development techniques, allows users to incorporate and integrate information at the desktop as well as to create graphical user interfaces for host-based applications. This division is also developing a new product for expected release in December 1996, STAR:View, that will provide end-users with intelligent access to host-based applications via web browsers. STAR:View, which runs on a Windows NT server, provides intelligent access to host applications via standard web browsers. It translates the host data stream into HTML pages and then translates the HTML pages back into the host datastream to return information to the host application. IMG's Information Management Division markets products and services under the VISION family name that enable customers to extract value from their existing corporate data and maximize the return on their information technology investment by extending the life and usefulness of their legacy applications. By improving existing applications, customers can reconcile their legacy and new development strategies, ensuring they have the resources to implement required new systems. VISION:Results is an information management and report generation system for IBM enterprise servers and a dynamic complement to COBOL. VISION:Builder and VISION:Transact are applications development tools for batch and on-line environments, respectively, that operate on major IBM enterprise server platforms. The VISION:Legacy suite of tools addresses the functions required to assess the quality and maintainability of applications, restructure old COBOL programs, redocument the flow of control through legacy systems and graphically represent the architecture and flow of existing systems. The VISION:Legacy suite of products, including VISION:Inspect, VISION:Assess, VISION:Recode and VISION:Redocument, helps address the "Year 2000" effort with system-wide analysis capabilities and reports to help identify and modify date and date- related fields. The division's consultants, assisted by the software products, offer customized approaches to address the "Year 2000" issue. IMG's Data Access Division markets managed data access products and services under the CLEAR family name that enable business users to access corporate data in an organized, efficient manner. CLEAR:Access and CLEAR:Manage are the cornerstones of the product line and run on Windows, Windows NT, Windows 95 and Macintosh platforms. CLEAR:Access facilitates end-user access as a query and reporting tool, allowing both novice and experienced users to easily obtain, manipulate and view multi-dimensional data from more than 70 databases, ranging from relational databases to data warehouses and legacy systems. CLEAR:Manage allows database managers to monitor and control database access in a client/server environment. Worldwide revenue from the Company's applications management business segment represented 25%, 27% and 15% of the Company's revenue during 1996, 1995 and 1994, respectively. FEDERAL SYSTEMS The federal systems business segment is conducted by Sterling Software's Federal Systems Group ("FSG"), with headquarters near Washington, D.C. FSG's two divisions provide highly specialized technical professional services to sectors of the federal government, generally under multi-year contracts. In 1996, Sterling Software began its 30th year of service to both NASA and the DoD, FSG's major customers. In 1996, FSG was performing work under 107 contracts, many of which are for multi-year terms. As of September 30, 1996, FSG employed approximately 1,200 people. FSG's Information Technology Division provides highly technical professional services, generally requiring top secret security clearances, to military command and control, intelligence and weather agencies. The division specializes in data handling, secure communications, networking, systems integration and application development in support of varied technical projects ranging from satellite data collection to counter-terrorism. In 1996, this division expanded its work in weather and intelligence applications and in network security through competitively awarded and follow-on contracts. The division's computing resources include data processing 4 facilities approved for classified operations and substantial hardware and software configurations to support software life cycle activities in a distributed processing environment. FSG's Scientific Systems Division is a provider of scientific software support and highly technical professional services to civil sectors of the federal government, particularly in scientific and engineering areas, and a provider of specialty software products in advanced visualization and virtual reality. The division's contracts include projects for spacecraft imagery, supercomputing outsourcing, systems administration and network security, and applications such as aerodynamics, aerospace testing and transportation safety. Under contract to NASA, the division's engineers designed and now operate the NASA Science Internet and developed the prototypes of new knowledge-based air traffic management software which was successfully field- tested by the Federal Aviation Administration at airports in Denver and Dallas/Fort Worth. The division's customers include the Jet Propulsion Laboratory, the NASA Ames, Lewis and Marshall Centers and the Executive Office of the President. In 1996, the division and its staff received various recognition awards and honors from its customers, including the NASA Quality Award. Revenue from the federal systems business segment represented 26% of the Company's revenue during both 1996 and 1995 and 33% of the Company's revenue during 1994. INTERNATIONAL OPERATIONS Sterling Software's International Group ("IG") and Asia Pacific Group ("APG") are the exclusive channels to international markets for Sterling Software's products, with responsibility for sales, marketing and first-level support of all Sterling Software products and services outside of the United States and Canada. The groups also operate under a three-year exclusive marketing and services agreement with Sterling Commerce for the sales, marketing and first-level support of Sterling Commerce's CONNECT and GENTRAN families of products sold in markets outside of the U.S. and Canada. CONNECT products enable customers to send and retrieve data electronically and GENTRAN products convert data into and out of standard electronic commerce formats. See "Shared Management and Other Relationships with Sterling Commerce" below. IG operates through four regional divisions representing France and Northern, Central and Southern Europe, and the Distributor Division, which represents Sterling Software's agents and distributors in Europe, the Middle East, South Africa, Israel and Latin America. APG was formed on October 1, 1996 from IG's former Pacific Division. APG operates through two regional divisions representing Japan and Australia, and a business unit, Distributor Operations, which represents Sterling Software's agents and distributors in the Pacific Rim. The France Division, with an office in Paris, France, has responsibility for direct sales in France and French- speaking Switzerland. The Northern Europe Division, headquartered in London, England, has responsibility for direct sales in the United Kingdom, Denmark, Finland, Belgium, The Netherlands and Scandinavia, and has offices in eight European cities. The Central Europe Division, headquartered in Dusseldorf, Germany, has responsibility for direct sales in Germany, German-speaking Switzerland and Austria, and has offices in five European cities. The Southern Europe Division, headquartered in Rome, Italy, has responsibility for all sales in Italy and direct sales in Spain and Portugal. The division has offices in five European cities. IG's Distributor Division, headquartered in London, England, manages agents and distributors in 41 countries, including South Africa, Israel, Spain, Portugal and Mexico, and countries in areas that include the Middle East, Eastern Europe and Central and South America. APG's Japan Division, headquartered in Tokyo, Japan with an office in Osaka, has responsibility for direct and certain indirect sales in Japan. The Australia Division, headquartered in Sydney, Australia, has responsibility for direct sales in Australia and New Zealand and has offices in three cities. APG's Distributor Operations, headquartered in Singapore, manages agents and distributors in territories that include China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, Thailand and Singapore. As of September 30, 1996, IG and APG collectively employed approximately 500 people. Revenue from the Company's international operations represented 38% of the Company's revenue during both 1996 and 1995 5 and 32% of the Company's revenue during 1994. As noted above, Sterling Software's international operating results are included, as applicable, in the operating results of the systems management and applications management business segments. The results of the Company's international operations related to selling, marketing and providing first-level support for certain of Sterling Commerce's electronic commerce products are included in the "Corporate and other" business segment. STERLING COMMERCE INITIAL PUBLIC OFFERING AND SPIN-OFF On March 13, 1996, Sterling Software completed an initial public offering (the "Offering") of 13.8 million shares, or 18.4%, of Sterling Commerce, a subsidiary formed to operate the business of Sterling Software's former Electronic Commerce Group. Sterling Software sold to the public 12 million shares of Sterling Commerce common stock, par value $.01 per share ("Commerce Stock"), then owned by it and Sterling Commerce sold 1.8 million previously unissued shares of Commerce Stock. Net proceeds, after deducting underwriting discounts and commissions and other Offering expenses, were approximately $265,458,000 to Sterling Software. Sterling Software incorporated Sterling Commerce as a wholly owned subsidiary in December 1995 and (i) caused to be transferred to Sterling Commerce all of the subsidiaries previously comprising Sterling Software's Electronic Commerce Group and certain assets relating to operations of the Electronic Commerce Group previously conducted by Sterling Software's International Group and Federal Systems Group, and (ii) entered into contractual arrangements with Sterling Commerce related to, among other things, tax matters, international marketing, indemnification, space sharing and certain services. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce with the pro rata distribution (the "Distribution") of its remaining 81.6% ownership in Sterling Commerce to Sterling Software stockholders by means of a tax-free dividend. To give effect to the spin-off, Sterling Software has reclassified the results of Sterling Commerce as discontinued operations in the accompanying Consolidated Financial Statements. SHARED MANAGEMENT AND OTHER RELATIONSHIPS WITH STERLING COMMERCE Management The Board of Directors of Sterling Software (the "Board") currently has ten members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are directors of Sterling Software and are also directors of Sterling Commerce. Mr. Sterling L. Williams is President, Chief Executive Officer and a member of the Board and is also Chairman of the Board of Directors of Sterling Commerce. In addition, Jeannette P. Meier serves as Executive Vice President, Chief Financial Officer, General Counsel and Secretary of both companies and Phillip A. Moore serves as an Executive Vice President of both companies. Neither the length of service for any particular individual nor the capacity or capacities in which he or she may serve either Sterling Software or Sterling Commerce (or both) has been determined as of the date of this report. Sterling Software and Sterling Commerce have significant contractual and other ongoing relationships as discussed below under "Intercompany Agreements." Conflicts of interest may arise between Sterling Software and Sterling Commerce in a number of areas relating to such ongoing relationships, including potential competitive business activities, international marketing functions, tax and employee benefit matters, indemnity arrangements, and the continued service of certain directors and executive officers of each of Sterling Software and Sterling Commerce as directors and executive officers of the other company. The Board will utilize such procedures in evaluating the terms and provisions of any material transactions between Sterling Software and Sterling Commerce and their respective affiliates as the Board may deem appropriate in light of its fiduciary duties under state law. 6 Intercompany Agreements In anticipation of the Offering, Sterling Software and Sterling Commerce entered into a number of agreements (the "Intercompany Agreements") for the purpose of defining certain relationships between them. Certain of the more significant Intercompany Agreements are summarized below. As a result of Sterling Software's ownership interest in Sterling Commerce, the terms of such agreements were not the result of arm's-length negotiation. Copies of certain of the Intercompany Agreements, including those described below, have been filed as exhibits to this report. Tax Allocation Agreement. Sterling Software and Sterling Commerce have entered into a tax allocation agreement (the "Tax Allocation Agreement") to provide for (i) the allocation of payments of taxes for periods during which Sterling Software (or any of its affiliates other than Sterling Commerce and its subsidiaries) and Sterling Commerce or any of its subsidiaries are included in the same consolidated group for federal income tax purposes or the same consolidated, combined or unitary returns for state, local or foreign tax purposes, (ii) the allocation of responsibility for the filing of tax returns, (iii) the conducting of tax audits and the handling of tax controversies, and (iv) various related matters. For periods during which Sterling Commerce and/or its subsidiaries are included in Sterling Software's consolidated federal income tax returns or consolidated, combined or unitary state tax returns (which periods include the period between the Offering and the Distribution), Sterling Commerce is required to pay to or is entitled to receive from Sterling Software its allocable portion of the consolidated federal and state income tax liability or refunds, respectively. Sterling Commerce is directly responsible for separate state, local and foreign tax returns and related liabilities for itself and its subsidiaries for all periods. International Marketing Agreement. A subsidiary of each of Sterling Software and Sterling Commerce have entered into a marketing services agreement (the "International Marketing Agreement") pursuant to which Sterling Software acts as the exclusive distributor (directly and through subdistributors) of Sterling Commerce's GENTRAN and CONNECT families of products in markets outside the United States and Canada and is responsible for sales, marketing and first-level support of such products in those markets. The International Marketing Agreement, which expires in March 1999, provides for the payment to Sterling Commerce of royalties equal to 50% of the net revenue that Sterling Software derives from licenses of Sterling Commerce's GENTRAN and CONNECT families of products and related product support services, with the balance of such net revenue to be retained by Sterling Software as payment for the services provided by it under the International Marketing Agreement. The International Marketing Agreement obligates Sterling Software to use efforts in the marketing of Sterling Commerce's software products and the provision of related services comparable to those used by Sterling Software in connection with the marketing of its own products and services. Although it is not anticipated that products and services offered by Sterling Software will be directly competitive with the products and services offered by it on behalf of Sterling Commerce, the International Marketing Agreement does not expressly prohibit Sterling Software from offering such products and services (subject to the obligations described in the preceding sentence). Indemnification Agreement. Sterling Software and Sterling Commerce have entered into an indemnification agreement (the "Indemnification Agreement"). Under the Indemnification Agreement, subject to limited exceptions, Sterling Commerce is required to indemnify Sterling Software and its directors, officers, employees, agents and representatives for liabilities under federal or state securities laws as a result of the Offering or the Distribution. The Indemnification Agreement also provides that each party thereto (the "Indemnifying Party") will indemnify the other party thereto and its directors, officers, employees, agents and representatives (each, an "Indemnified Party") for liabilities that may be incurred by an Indemnified Party relating to, resulting from or arising out of (i) the businesses, operations or assets conducted or owned or formerly conducted or owned by the Indemnifying Party and its subsidiaries (except, in the case where Sterling Software is the Indemnifying Party, the businesses, operations and assets of Sterling Commerce and its subsidiaries) or (ii) the failure by the Indemnifying Party to comply with any other agreements executed in connection with the Offering. In addition, the Indemnification Agreement and a subsequent agreement between Sterling Software and Sterling Commerce provide that Sterling Commerce will indemnify Sterling Software and its directors, officers, employees, agents and representatives for any liabilities resulting from or arising out of 7 certain acts, failures to act or the provision of incorrect factual information by Sterling Commerce in connection with the Internal Revenue Service ("IRS") ruling request that cause the Distribution to be taxable to Sterling Software or its stockholders. The Indemnification Agreement also provides that each party thereto (the "Obligor Party") (i) will use reasonable efforts to obtain the release of the other party thereto (the "Guarantor Party") from its obligation under or in respect of all material guarantees, surety and performance bonds, letters of credit and other arrangements guaranteeing or securing any liability or obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for any liabilities incurred under such guarantees, bonds, letters of credit and other arrangements, and (iii) will reimburse the Guarantor Party for its direct costs (or, in certain circumstances, the Obligor Party's pro rata share of such direct costs) of maintaining such guarantees, bonds, letters of credit and other arrangements pending the release of the Guarantor Party thereunder. PRODUCT LICENSES Sterling Software's software products are generally licensed for perpetual use or for a fixed term. Sterling Software typically does not sell or otherwise transfer title to its software products. The Company's license agreements generally restrict the use of the product to designated sites or central processing units and prohibit reproduction, transfer or disclosure of the product; however, some license agreements may cover multiple sites or multiple central processing units at one site. In 1996, 1995 and 1994, 44%, 42% and 37%, respectively, of the Company's revenue consisted of products revenue. During both 1996 and 1995, 36% of total software revenue, and during 1994, 15% of total software revenue, was derived from platforms other than stand-alone mainframes. PRODUCT SUPPORT Product support is available to Sterling Software customers, typically through annual contracts generally priced from 12% to 22% of the then-current license fee. Sterling Software's product support contracts allow customers to receive updated versions of Sterling Software's software products when and if they become available, as well as telephone access to Sterling Software's technical personnel. In 1996, 28%, and in both 1995 and 1994, 29% of the Company's revenue consisted of product support revenue. SERVICES Sterling Software's services primarily include technical professional services in support of federal government contracts provided through Sterling Software's Federal Systems Group. Sterling Software provides training and education in support of its products generally in the form of customer training seminars, videos and instruction materials. Sterling Software also offers product-specific consulting and education services within the Applications Management Group and Information Management Group to ensure customers are successful in using those groups' products. In 1996, 1995 and 1994, 28%, 29% and 33%, respectively, of the Company's revenue consisted of services revenue. PRODUCT DEVELOPMENT Each division within Sterling Software's Systems Management Group, Applications Management Group and Information Management Group has its own development function. Sterling Software's product development programs in each of these businesses include the enhancement of existing products and introduction of new products based upon current and anticipated customer needs. Each development lab operates as a profit center with revenues derived from intercompany royalties earned on products sold in the domestic and international markets. The Company believes that this organizational structure facilitates development cost control and focuses the development function on the customer's needs. Approximately 250 of Sterling Software's employees were engaged in product development at September 30, 1996. Gross product development costs in 1996, 1995 and 1994 were $36,448,000, $39,359,000 and $28,566,000, respectively, of which the Company capitalized $15,527,000, $11,657,000 and $8,061,000, respectively, as the cost of developing and testing new or significantly enhanced software products. 8 SALES AND MARKETING Consistent with its decentralized operating structure, Sterling Software conducts its sales and marketing activities in multiple software divisions focused on specific product markets. Sterling Software sells its products and services through a combination of direct sales and telesales organizations, and in certain foreign countries, through independent agents and distributors. The use of telesales has proven effective in reaching customers at a minimal cost. Each division within the Systems Management Group, Applications Management Group and Information Management Group has its own United States sales and marketing organization. In addition, the Company's International Group and Asia Pacific Group have their own sales functions to focus specifically on the international marketplace for each of Sterling Software's product lines and Sterling Commerce's CONNECT and GENTRAN families of products. At September 30, 1996, Sterling Software employed approximately 350 sales representatives. CUSTOMERS Sterling Software's customers include 95 of the 100 largest and 410 of the 500 largest U.S. industrial and service corporations, as ranked by 1995 revenues in Fortune. In the year ended September 30, 1996, agencies, branches, and departments of the federal government accounted for approximately 26% of the Company's consolidated revenue. COMPETITION The computer software and services industry is highly competitive. Sterling Software competes with both large companies with substantially greater resources and small specialized companies that compete in a particular geographic region or market niche. Sterling Software also competes with internal programming staffs of corporations and, increasingly, with hardware manufacturers. Some internal programming staffs of corporations are capable of developing products similar to those offered by the Company. In general, however, the Company believes that the time and costs associated with custom software development significantly exceed the time and costs required to license and install the comparable Sterling Software product. Also, competition within the Company's federal business is increasing because of continued federal budget constraints and cutbacks. Sterling Software believes that its products will continue to be chosen by customers due to superior product functionality, reliability and technical support, ease of product installation and use, close integration between the products and customer business applications and, finally, the Company's history of success and reputation for providing quality products. EMPLOYEES Sterling Software's business is dependent upon its ability to attract and retain qualified personnel, who are in limited supply. The Company's operations could be adversely affected if it were to lose the services of a significant number of qualified employees or if it were unable to obtain additional qualified employees when needed. To attract and retain qualified personnel, the Company strives to maintain excellent employee relations, attractive office facilities and challenging working environments, and offers competitive compensation and benefits packages. At September 30, 1996, the Company employed approximately 2,600 people. PATENTS, TRADEMARKS AND COPYRIGHTS The Company has numerous trademarks that are registered in the United States and various foreign countries and certain copyrights that are registered with the United States Copyright Office. Additionally, the Company is actively pursuing patents on certain key technologies. In general, however, management believes that the competitive position of the Company depends primarily on the skill, knowledge and experience of Sterling Software's personnel and their ability to develop, market and support software products, and that its 9 business is not materially dependent on copyright protection, trademarks or patents. The Company believes that all of its products are of a proprietary nature and its licensing agreements generally prohibit program disclosure. It is possible, however, for product users or competitors to copy portions of the Company's products without its consent. Licenses for a number of software products have been granted to the Company for its own use or for remarketing to its customers. In the aggregate, these licenses are material to the business of the Company, but the Company believes that the loss of any one of these licenses would not materially affect the Company's results of operations or financial position. The SAMS, VM, SOLVE, KEY, STAR, VISION and CLEAR families of product names used herein are registered or unregistered trademarks owned by the Company. BACKLOG Sterling Software's backlog relates principally to the uncompleted portion of multi-year professional services contracts with agencies of the federal government, including renewal options with government agencies, a portion of which is restricted by law to a term ending on the last day of the government agencies' then current fiscal year. Determination of the Company's backlog involves estimation, particularly with respect to customer requirements contracts and multi-year contracts of a cost-reimbursement or incentive nature. A large portion of the Company's federal government contracts is funded for one year or less and is subject to contract award, extension or expiration at different times during the year, and all of the Company's federal government contracts are subject to termination by the government. Based upon past practices, the Company believes that the contract renewal options included in existing contracts will be exercised for the full period designated in such contracts, but no assurance can be given that such contracts will be renewed. Total backlog, including federal government contract renewal options not yet exercised and multi-year product support contracts at September 30, 1996 and 1995, was $170,912,000 and $223,581,000, respectively. Of these amounts, 97% and 98%, respectively, related to federal government sources, primarily in the Company's Federal Systems Group. The dollar value of federal government renewal options not yet exercised or funded included in the Company's total backlog at September 30, 1996 and 1995, was $65,951,000 and $57,846,000, respectively. Approximately $66,162,000 of the total September 30, 1996 backlog is expected to be realized in the year ending September 30, 1997. 10 EXECUTIVE OFFICERS The following information regarding the executive officers of Sterling Software is as of November 25, 1996.
NAME AGE POSITION ---------------------- --- ------------------------------------------------ Sam Wyly 62 Chairman of the Board and Director Charles J. Wyly, Jr. 63 Vice Chairman of the Board and Director Sterling L. Williams 53 President, Chief Executive Officer and Director Geno P. Tolari 53 Executive Vice President and Chief Operating Officer Werner L. Frank 67 Executive Vice President M. Gene Konopik 53 Executive Vice President and Group President Jeannette P. Meier 49 Executive Vice President, Chief Financial Officer, General Counsel and Secretary Phillip A. Moore 54 Executive Vice President and Director Clive A. Smith 42 Executive Vice President and Group President B. Carole Morton 51 Senior Vice President and Group President Donald E. Annala 48 Vice President, Business Development Richard Connelly 45 Vice President, Treasurer Pamela L. Isbell 37 Vice President, Financial Planning James E. Jenkins, Jr. 43 Vice President, Finance James R. Johnson 49 Vice President and Group President Julie G. Kupp 33 Vice President, Investor Relations Don J. McDermett, Jr. 38 Vice President, Legal Evan A. Wyly 35 Vice President and Director Laura Appling 34 Controller
Sam Wyly co-founded Sterling Software in 1981 and since such time has served as Chairman of the Board and a director. Mr. Wyly has served as a director of Sterling Commerce since December 1995. In 1963, Mr. Wyly founded University Computing Company, a computer software and services company ("University"), and served as President or Chairman from 1963 until 1979. University created a computer utility network, one of the earliest and most successful marriages of computing and telecommunications. University was one of the original participants in the software products industry in the late 1960s when the then market-dominant IBM unbundled computer hardware and software. In 1968, Mr. Wyly founded Datran, Inc., which was envisioned as the nation's first all- digital switched "telephone company for computers" and contributed to the break up of AT&T's telephone monopoly and the resulting benefits of increased competition in the telecommunications industry. These Wyly-founded companies are among the forerunners of today's electronic commerce industry. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver mining company, and served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and his brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse chain in 1967. It grew to approximately 600 restaurants by 1989, during which time he served as Chairman. Mr. Wyly currently serves as Chairman of Michaels Stores, Inc. ("Michaels Stores"), a specialty retail chain (which has grown from 70 to 525 stores in 12 years of Wyly control), and as President of Maverick Capital, Ltd., an investment fund management company. Sam Wyly is the father of Evan A. Wyly. Sam Wyly is the Chairman of the Executive Committee and the 1996 Stock Option Committee of the Sterling Software Board. Charles J. Wyly, Jr. co-founded Sterling Software in 1981 and since such time has served as a director and as Vice Chairman since 1984. Mr. Wyly has served as a director of Sterling Commerce since December 1995. Mr. Wyly served as an officer and director of University Computing Company from 1964 to 1975, including President from 1969 to 1973. Mr. Wyly and Sam Wyly founded Earth Resources Company and Charles J. Wyly, Jr. served as Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse chain from 1967 to 1989. Mr. Wyly currently serves as Vice Chairman of Michaels Stores. Charles J. Wyly, Jr. is the father-in-law of Donald R. Miller, Jr., a director of Sterling Software. Mr. Wyly is a member of the Executive Committee and the 1996 Stock Option Committee of the Sterling Software Board. 11 Sterling L. Williams co-founded Sterling Software in 1981 and since such time has served as President, Chief Executive Officer and a director of Sterling Software. Mr. Williams has served as Chairman of the Board and a director of Sterling Commerce since December 1995 and also currently serves as a director of INPUT, an information technology market research company. Mr. Williams is a member of the Executive Committee and the 1996 Stock Option Committee of the Sterling Software Board. Geno P. Tolari has served as an Executive Vice President of Sterling Software since March 1990 and as Chief Operating Officer since April 1996. From November 1986 to March 1990 he served as a Senior Vice President of Sterling Software. Mr. Tolari has also served as President of Sterling Software's Systems Management Group since December 1, 1994 and he served as President of the Federal Systems Group from October 1985 until December 1994. Werner L. Frank has served as an Executive Vice President of Sterling Software since April 1996. He served as Executive Vice President, Business Development from December 1994 to April 1996. From October 1984 until December 1994 Mr. Frank served as an Executive Vice President of Sterling Software. From July 1993 until December 1994 Mr. Frank served as President of Sterling Software's former Enterprise Software Group. From 1985 until July 1993 Mr. Frank served as President of Sterling Software's former Systems Software Group. M. Gene Konopik has served as an Executive Vice President of Sterling Software and President of Sterling Software's Federal Systems Group since December 1994. From July 1993 until December 1994 Mr. Konopik served as the President of Sterling Software's Information Technology Division. Prior to July 1993 he served as the President of the former Intelligence and Military Division of Sterling Software. Jeannette P. Meier has served as Executive Vice President (since July 1993), as Chief Financial Officer (since June 1996) and as General Counsel and Secretary (since 1985) of Sterling Software. Prior to July 1993, Ms. Meier served as Senior Vice President of Sterling Software. Ms. Meier has served as Executive Vice President, Secretary and General Counsel of Sterling Commerce since December 1995 and as Chief Financial Officer of Sterling Commerce since June 1996. Phillip A. Moore co-founded Sterling Software in 1981 and since such time has served as a director of Sterling Software. He has served as Executive Vice President since April 1996. From October 1995 to April 1996 he served as Executive Vice President and Chief Technology Officer of Sterling Software. From July 1993 until October 1995 Mr. Moore served as Executive Vice President, Technology of Sterling Software. Prior to July 1993, Mr. Moore served as Senior Vice President, Technology of Sterling Software. Mr. Moore has served as Executive Vice President of Sterling Commerce since December 1995. Clive A. Smith has served as an Executive Vice President of Sterling Software since December 1994 and President of its International Group since October 1994. From July 1993 until October 1994 Mr. Smith served as the President of the former Europe Division and from September 1990 until July 1993 he served as the President of the former International Division. B. Carole Morton has served as a Senior Vice President of Sterling Software and President of Sterling Software's Information Management Group since October 1996. She has also served as President of the Information Management Division since October 1995. Ms. Morton served as President of Sterling Software's former Applications Engineering Division from December 1994 until October 1995 and President of the former Applications Management Division from July 1993 through November 1994. Prior to July 1993, she served as President of the former Dylakor Division. Donald E. Annala has served as a Vice President, Business Development of Sterling Software since October 1996. Mr. Annala served as President of the VM Software Division from October 1995 until September 1996 and Vice President, Finance for Sterling Commerce's Network Services Group from July 1993 until September 1995. Prior to July 1993, Mr. Annala served as Vice President, Finance of the Federal Systems Group, Vice President, Business Development of the former Systems Software Group, President of the former Answer System Division, and Vice President, Finance of the former Systems Software Group. 12 Richard Connelly has served as Vice President of Sterling Software since July 1993 and as Treasurer of Sterling Software since April 1996. He also has served as Vice President, Finance and Administration for Sterling Software's System Management Group since October 1996. From October 1992 until April 1996 Mr. Connelly also served as the Controller of Sterling Software and from June 1987 until October 1992 he served as Director of Accounting of Sterling Software. Pamela L. Isbell has served as Vice President, Financial Planning of Sterling Software since April 1996. From April 1988 until April 1996 Ms. Isbell served as a Financial Analyst of Sterling Software. James E. Jenkins, Jr. has served as Vice President, Finance of Sterling Software since April 1996. From May 1994 to April 1996 Mr. Jenkins served as Vice President, Tax and from May 1986 until May 1994 he served as Director of Tax of Sterling Software. James R. Johnson has served as a Vice President of Sterling Software and President of Sterling Software's Asia Pacific Group since October 1996. From July 1993 to October 1996 he served as President of the former Pacific Division. Mr. Johnson served as Vice President, Business Development, of the former Systems Software Group from July 1992 to July 1993. Prior to July 1992, he was President of the former Software Labs Division. Julie G. Kupp has served as Vice President, Investor Relations of Sterling Software since April 1996. From September 1995 to April 1996 Ms. Kupp served as Director, Investor Relations and from April 1995 to September 1995 she served as Senior Financial Analyst of Sterling Software. From December 1993 to April 1995 Ms. Kupp served as Director of Accounting. Prior to December 1993, Ms. Kupp was employed by Ernst & Young LLP, most recently as Audit Senior Manager. Don J. McDermett, Jr. has served as Vice President, Legal of Sterling Software since July 1996. Prior to that time he was employed for twelve years by Thompson & Knight, P.C., a Dallas-based law firm, having been a senior shareholder in that firm's corporate practice group since 1993. Evan A. Wyly has served as a director of Sterling Software since July 1992 and as a Vice President of Sterling Software since December 1994. Mr. Wyly has been a Partner of Maverick Capital, Ltd. since 1991. In 1988, he founded Premier Partners Incorporated, a private investment firm, and served as President prior to joining Maverick Capital. Mr. Wyly also serves as a director of Sterling Commerce and as a director and officer of Michaels Stores. Laura Appling has served as Controller of Sterling Software since April 1996. From July 1993 to April 1996 Ms. Appling served as Vice President, Finance for Sterling Commerce's Banking Systems Group. From October 1992 to July 1993 Ms. Appling served as Senior Financial Analyst for Sterling Software and from August 1991 to October 1992 Ms. Appling served as Accounting Director for the international operations of Sterling Software. Prior to August 1991, Ms. Appling served as Director of Accounting for Sterling Software and as Director of Accounting for Sterling Commerce's Banking Systems Group. ITEM 2. PROPERTIES. The Company leases offices and facilities in or near more than 60 cities in the United States, Canada, and worldwide. Major U.S. facilities are located in the following metropolitan areas: Los Angeles, Palo Alto, San Francisco, Sacramento and San Bernardino, California; Atlanta, Georgia; Cleveland, Ohio; Omaha, Nebraska; Rome, New York; Washington, D.C.; and Dallas, Texas. The Company's major international facilities are located in London and Reading, England; Paris, France; Toronto, Canada; Dusseldorf, Stuttgart, Munich and Frankfurt, Germany; Zurich, Switzerland; Brussels, Belgium; Utrecht, The Netherlands; Stavanger and Oslo, Norway; Danderyd, Sweden; Tokyo, Japan; Sydney and Melbourne, Australia; Madrid, Spain; Lisbon, Portugal; Rome, Milan and Turin, Italy; Tefen, Israel; and Singapore. The Company believes that its facilities are adequate for its immediate needs and that additional or substitute space is available if needed to accommodate expansion. 13 ITEM 3. LEGAL PROCEEDINGS. On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc. ("KnowledgeWare"), in a stock-for-stock acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Merger with KnowledgeWare, Inc." On March 14, 1995, the Securities and Exchange Commission (the "Commission") entered an Order Directing Private Investigation and Designating Officers to take Testimony titled "In the Matter of KnowledgeWare, Inc. (NY-6231)." The investigation generally relates to (i) trading in KnowledgeWare securities from July 1, 1992 through the time of the stock-for-stock transaction by which Sterling Software acquired KnowledgeWare, (ii) KnowledgeWare's compliance with its Commission filing and reporting obligations and (iii) the adequacy and/or accuracy of KnowledgeWare's public disclosures, recordkeeping and accounting controls. In addition to potential successor liability of the wholly-owned subsidiary that was merged into KnowledgeWare, Sterling Software may have an indemnity obligation with respect to certain individuals who may be subject to the Commission's investigation. Sterling Software's management believes that, after giving effect to applicable reserves, the ultimate resolution of the Commission's investigation will not materially affect the financial condition or results of operations of Sterling Software. The Company is also subject to certain legal proceedings and claims that arise in the ordinary conduct of its business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, net of applicable reserves and available insurance, will not materially affect the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's $0.10 par value common stock (the "Software Stock"), has been traded on the New York Stock Exchange since March 28, 1990, under the symbol "SSW". Prior to that time, the Software Stock was traded on the American Stock Exchange since May 4, 1983. The high and low sales prices for the Software Stock for the periods indicated are set forth below.
PRICE RANGE --------------- HIGH LOW ------- ------- Year Ended September 30, 1996: Quarter Ended: December 31, 1995.......................................... $62 3/8 $40 March 31, 1996............................................. $72 5/8 $48 3/4 June 30, 1996.............................................. $81 3/8 $70 3/8 September 30, 1996......................................... $77 1/2 $62 7/8 Year Ended September 30, 1995: Quarter Ended: December 31, 1994.......................................... $36 7/8 $28 5/8 March 31, 1995............................................. $38 3/8 $34 1/4 June 30, 1995.............................................. $39 5/8 $32 7/8 September 30, 1995......................................... $47 7/8 $38 1/4
At November 15, 1996, the Company had approximately 1,151 holders of record of Software Stock. With the exception of the distribution of shares of Commerce Stock on September 30, 1996, the Company did not pay dividends on the Software Stock during the three years ended September 30, 1996. Under the terms of the Company's existing credit agreement, the Company is generally prohibited from making distributions on the Software Stock. 14 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.
YEARS ENDED SEPTEMBER 30 ------------------------------------------------ 1996 1995 (2) 1994 1993 1992 ---------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Operating data (1): Revenue..................... $ 439,171 $396,311 $325,903 $303,207 $293,958 Cost of sales............... 182,239 160,735 143,889 149,454 146,487 Product development and enhancement................ 20,921 27,702 20,505 20,919 15,748 Selling, general and administrative............. 175,237 147,552 112,380 115,403 123,603 Income from continuing operations before restructuring charge, purchased research and development, other income (expense), income taxes, extraordinary item and cumulative effect of a change in accounting principle.................. 60,774 60,322 49,129 17,431 8,120 Restructuring charge (3).... 19,512 87,622 11,515 Purchased research and development................ 62,000 Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of a change in accounting principle.................. 84,886 (18,656) 46,346 (73,153) (9,586) Income (loss) from continu- ing operations before extraordinary item and cu- mulative effect of a change in accounting principle.... 60,598 (33,656) 30,586 (48,041) (14,165) Income from discontinued operations, net of taxes... 51,187 42,930 27,753 15,194 8,983 Gain on the initial public offering of subsidiary, net of taxes................... 126,103 Income (loss) applicable to common stockholders........ 237,888 9,129 58,143 (38,106) (6,656) Average common shares outstanding................ 32,316 23,649 19,812 17,507 15,496 Per common share data: Income (loss) from continu- ing operations before extraordinary item and cu- mulative effect of a change in accounting principle: Primary.................... 1.78 (1.43) 1.33 (2.80) (1.01) Fully diluted.............. 1.73 (1.43) 1.29 (2.80) (1.01) Income (loss) before extraordinary item and cumulative effect of a change in accounting principle: Primary.................... 6.98 .39 2.54 (1.93) (.43) Fully diluted.............. 6.65 .39 2.31 (1.93) (.43) Income (loss) before cumulative effect of a change in accounting principle: Primary.................... 6.98 .39 2.54 (2.02) (.43) Fully diluted.............. 6.65 .39 2.31 (2.02) (.43) Net income (loss): Primary.................... 6.98 .39 2.54 (2.18) (.43) Fully diluted.............. 6.65 .39 2.31 (2.18) (.43) Balance sheet data (1): Working capital............. $ 732,918 $218,713 $122,961 $ 57,106 $ 35,308 Total assets................ 1,097,613 657,711 444,661 364,087 317,677 Long-term debt.............. 116,668 115,932 117,532 80,743 Other noncurrent liabilities................ 36,397 21,845 18,867 18,331 9,781 Stockholders' equity........ 879,491 348,338 175,804 97,697 117,565
- -------- (1) Restated to reflect the results of operations and net assets of Sterling Commerce as a discontinued operation. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce. See Note 2 of Notes to Consolidated Financial Statements. 15 (2) On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock- for-stock acquisition accounted for as a purchase. Accordingly, the operating results of KnowledgeWare are included in the Company's results of operations from the date of the acquisition. The results of operations include $62,000,000 of purchased research and development costs, which is the portion of the purchase price attributable to in-process research and development and which was charged to expense in accordance with purchase accounting guidelines. The 1995 results of operations also include a charge for restructure costs of $19,512,000 to integrate KnowledgeWare's business into the Company's operations. The restructure charge includes employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed and other out of pocket costs related to the reorganization. Cash costs and expenses directly related to the acquisition of KnowledgeWare and unrelated to the restructuring of the Company were accounted for as a cost of the acquisition. See Note 3 of Notes to Consolidated Financial Statements. (3) The 1993 restructuring charges reflect the cost of combination of Sterling Software and Systems Center, Inc. ("Systems Center") including transaction costs and charges relating to the elimination of duplicate facilities and equipment, severance costs, and the write-off of costs related to certain software products not actively marketed by the Company. The 1992 restructuring charges include severance and other costs related to System Center's reduction in workforce, elimination of duplicate facilities, and the sale of certain AS/400 and UNIX utility products. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SUBSIDIARY INITIAL PUBLIC OFFERING AND SPIN-OFF Sterling Commerce, previously a wholly owned subsidiary of Sterling Software, completed the Offering of 13,800,000 shares of Commerce Stock on March 13, 1996. Pursuant to the Offering, Sterling Software sold to the public 12,000,000 of its 73,200,000 shares of Commerce Stock and Sterling Commerce sold 1,800,000 of previously unissued shares of Commerce Stock. The Offering price was $24 per share of Commerce Stock, resulting in net proceeds to Sterling Software of approximately $265,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. Sterling Software recorded a gain of approximately $126,103,000, net of tax, from the sale of Commerce Stock in the Offering. In connection with the Offering, Sterling Software accelerated the vesting of substantially all outstanding options granted under Sterling Software's stock option plans in existence at the time of the Offering. Sterling Software received proceeds of approximately $276,637,000 from the exercise of approximately 9,224,000 employee stock options and warrants during 1996. Under the terms of Sterling Software's existing stock option plans, options that were unexercised with respect to 81,681 shares of Software Stock at the close of business on September 30, 1996 were adjusted to thereafter be exerciseable with respect to 207,950 shares of Software Stock at exercise prices ranging from $3.36 to $32.40, to preserve the economic value of such options. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce with the distribution of its remaining 81.6% ownership in Sterling Commerce to Sterling Software stockholders by means of a tax-free dividend. Holders of record of Software Stock as of the close of business on September 30, 1996 received 1.59260 shares of Commerce Stock for each share of Software Stock owned on such date. The distribution resulted in the reduction of Sterling Software's stockholders' equity in the amount of $113,549,000, representing the book value of net assets distributed. MERGER WITH KNOWLEDGEWARE, INC. On November 30, 1994, Sterling Software acquired KnowledgeWare, a Georgia corporation based in Atlanta, Georgia which was a leading provider of applications development software and services, for approximately $106 million, in a stock-for-stock acquisition (the "Merger"). In connection with the Merger, the Company issued approximately 2,421,000 shares of Software Stock valued at approximately $74,443,000 and reserved approximately 340,000 additional shares of Software Stock for issuance upon exercise of KnowledgeWare's options and warrants. In addition, the Company incurred cash costs directly related to the 16 Merger of approximately $31,672,000. The Merger, which was accounted for as a purchase, was completed pursuant to the terms of an Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994, as amended (the "Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation and a recently organized wholly owned subsidiary of the Company ("Merger Sub"), and KnowledgeWare. Of the 2,421,000 shares of Software Stock issued, approximately 484,800 shares were placed in escrow (the "Escrowed Shares") to cover certain losses and claims with respect to which the Company was entitled to indemnification pursuant to the terms of the Merger Agreement. In October 1995, approximately 278,000 of the Escrowed Shares were released in connection with the settlement of certain securities litigation brought against KnowledgeWare and in January 1996, Sterling Software, acting under its indemnification rights, received the remaining Escrowed Shares to reimburse it for a portion of the amounts paid in the settlement of certain other litigation brought against KnowledgeWare and for costs and expenses related to these and other claims for which Sterling Software was entitled to indemnification. See Note 3 of Notes to Consolidated Financial Statements. Cash costs of approximately $31,672,000 related to the Merger are included in the aggregate cost of the Merger and consisted of employee termination costs, transaction costs, costs associated with the elimination of duplicate facilities, and other direct costs of the acquisition. Substantially all of these costs had been paid at September 30, 1996. A restructuring charge of approximately $19,512,000 related to combining KnowledgeWare and the Company is included in the results of operations for 1995. The restructuring charge includes employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed and other out of pocket costs related to the reorganization. Cash costs and expenses directly related to the acquisition of KnowledgeWare and unrelated to the restructuring of the Company were accounted for as a cost of the acquisition. Of the total restructuring charge of $19,512,000, approximately $8,377,000 was a non-cash charge and the remaining $11,135,000 required cash outlays, substantially all of which had been paid at September 30, 1996. RESULTS OF OPERATIONS The results of Sterling Software's international operations are included in the systems management and applications management business segments for management's discussion and analysis of financial condition and results of operations. Sterling Software's results of operations reflect the reclassification of Sterling Commerce as a discontinued operation, giving effect to the spin-off of Sterling Commerce on September 30, 1996. The results of the Company's international operations related to selling, marketing and providing first-level support for certain of Sterling Commerce's electronic commerce products are included in the "Corporate and other" business segment. 1996 Compared to 1995 Total revenue increased $42,860,000, or 11%, in 1996 over 1995 due to increases in all three of the Company's business segments as well as increases in sales of certain electronic commerce products internationally. A subsidiary of each of Sterling Software and Sterling Commerce have entered into an International Marketing Agreement (see Note 2 to the Consolidated Financial Statements) pursuant to which Sterling Software acts as the exclusive distributor (directly and through subdistributors) of Sterling Commerce's GENTRAN and CONNECT families of products in markets outside of the United States and Canada and is responsible for sales, marketing and first-level support of such products in those markets. The International Marketing Agreement, which expires in March 1999, provides for the payment to Sterling Commerce of royalties equal to 50% of the net revenue that Sterling Software derives from licenses of Sterling Commerce's GENTRAN and CONNECT families of products and related product support services, with the balance of such net revenue to be retained by Sterling Software as payment for the services provided under the International Marketing Agreement. Total revenue generated from Sterling Software's international operations was $167,845,000 in 1996 and $152,026,000 in 1995, representing an increase of $15,819,000, or 10%, over 1995. Revenue from the Company's international operations represented 38% of total revenue in both 1996 and 1995. The Company expects revenue from its international operations to continue to constitute a significant percentage of its revenue. The net negative impact of foreign currency exchange rates on revenue resulting from a stronger U.S. dollar was approximately $2,000,000 in 1996. 17 The Company's recurring revenue includes revenue from annual and multi-year product support agreements generally having terms ranging from one to three years, fixed term product lease and rental agreements generally having terms ranging from month-to-month to year-to-year, and multi-year federal contracts generally having terms ranging from one to five years. Like most federal contracts, Sterling Software's federal contracts permit termination by the government for convenience or for failure to obtain funding. Recurring revenue increased $17,535,000, or 8%, in 1996 over 1995, primarily due to a $9,649,000 increase in revenue from product support agreements and an $11,012,000 increase in revenue from multi-year federal contracts partially offset by a decrease in revenue from fixed term product lease and rental agreements. Recurring revenue represented 54% of total revenue in 1996 compared to 55% of total revenue in 1995. During both 1996 and 1995, 36% of total software revenue was derived from platforms other than stand-alone mainframes. Revenue from the systems management business segment increased $16,147,000, or 10%, in 1996 over 1995 primarily due to an increase of 16% in products revenue. Products revenue increased across all product lines. Product support revenue increased 1% primarily due to increases in the storage management and operations management product lines partially offset by declines in the VM product line due to the continuing trend of consolidation and downsizing by customers using the VM operating system. Approximately 51% of the systems management business segment's 1996 revenue was derived from the Company's international operations, compared to 54% in 1995. Revenue from the applications management business segment increased $2,595,000, or 2%, in 1996 over 1995 primarily due to an increase in products revenue in the information management product line partially offset by products and product support revenue declines of approximately $9,200,000 related to products no longer actively marketed and product marketing rights no longer owned in 1996 versus 1995. The increase in the applications management business segment revenue was also partially offset by a decline in consulting services revenue due to the elimination of the Consulting Services Division as part of the restructure of the applications management business segment in the first quarter of 1996. In addition, the applications management business segment revenue increase was partially offset by decreases in products and product support revenue in the applications development product line. The Company expects the market for Computer Aided Software Engineering ("CASE") development tools to continue to decline. The Company believes 1997 will also be impacted by the transfer in the fourth quarter of 1996 of two products to a third party and a decision to discontinue active marketing of a third product in 1997; revenue from these three products was approximately $4,600,000 in 1996. Approximately 35% of the applications management business segment's 1996 revenue was derived from the Company's international operations, compared to 39% in 1995. Federal systems revenue increased $10,486,000, or 10%, in 1996 over 1995 primarily due to higher contract billings in the Information Technology Division, offset in part by lower contract billings in the Scientific Systems Division due to the completion of certain contracts at NASA. Total costs and expenses decreased $39,104,000, or 9%, in 1996 compared to 1995. In 1995, total costs and expenses included restructuring costs of $19,512,000 for the restructuring resulting from the acquisition of KnowledgeWare and the write-off of $62,000,000 of purchased research and development costs resulting from the application of purchase accounting guidelines in recording the Merger. The restructure costs included employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed and other out-of-pocket costs related to the reorganization. Excluding the restructure costs and the write-off of purchased research and development costs in 1995, total costs and expenses increased $42,408,000, or 13%, in 1996 over 1995. Total cost of sales increased $21,504,000, or 13%, commensurate with the increase in total revenue. Cost of sales represented 41% of revenue in both 1996 and 1995. Product development expense for 1996 of $20,921,000, net of $15,527,000 of amounts capitalized pursuant to Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be 18 Sold, Leased or Otherwise Marketed" ("FAS 86"), decreased $6,781,000 from 1995 primarily due to a reduction of gross development costs in the applications management business segment due to the restructuring of that segment in the first quarter of 1996. Capitalized development costs represented 43% and 30% of gross development costs for 1996 and 1995, respectively. The higher capitalization rate is due to a greater number of development projects having reached technological feasibility in 1996 compared to 1995. The capitalization rate fluctuates from period to period depending in part upon the number and status of software development projects which are in process. Selling, general and administrative expense increased $27,685,000, or 19%, in 1996 over 1995 primarily due to increased sales, marketing and customer support activities supporting revenue growth in the Company's international operations, offset by declines in the applications management business segment due to the restructuring of that segment in the first quarter of 1996. Interest expense decreased $5,221,000 in 1996 compared to 1995 primarily due to the redemption in the second quarter of 1996 of the Company's 5 3/4% Convertible Subordinated Debentures (the "Debentures") (see Note 10 to the Consolidated Financial Statements). Investment income in 1996 increased $17,857,000 over 1995 as a result of higher average cash and cash equivalents and marketable securities balances resulting from the net proceeds from the Offering of approximately $265,458,000 and the proceeds from the exercise of stock options and warrants of approximately $276,637,000. Income from continuing operations before income taxes in 1996 was $84,886,000 compared to a loss from continuing operations before income taxes in 1995 of $18,656,000. The loss from continuing operations before income taxes in 1995 can be attributed to the Merger restructure costs of $19,512,000 and the write-off of $62,000,000 of purchased research and development costs pursuant to the application of purchase accounting guidelines. Excluding the restructure costs and the write-off of purchased research and development costs in 1995, income (loss) from continuing operations before income taxes increased $22,030,000, or 35%, over 1995, primarily due to higher profits in the systems management and federal systems business segments partially offset by lower profits in the applications management business segment. The net impact on operating profit from foreign currency exchange rate fluctuations was not significant in 1996. The Company's income from continuing operations was positively affected by a lower effective tax rate in 1996 versus 1995. The Company does not believe that the effective tax rate for 1996 is reflective of what Sterling Software's effective tax rate will be in future filing periods. The Company believes that the effective rate in future filing periods will be higher than in 1996. 1995 Compared to 1994 Total revenue increased $70,408,000, or 22%, in 1995 over 1994. Revenue generated from Sterling Software's international operations was $152,026,000 in 1995 and $103,824,000 in 1994, representing an increase of $48,202,000, or 46%, over 1994. Revenue from the Company's international operations represented 38% and 32% of total revenue in 1995 and 1994, respectively. The net positive impact of changes in foreign currency exchange rates on revenue resulting from a weaker U.S. dollar was approximately $11,000,000 in 1995. The Company's recurring revenue includes revenue recurring through annual and multi-year product support agreements generally having terms ranging from one to three years, fixed term product lease and rental agreements generally having terms ranging from month-to-month to year-to-year, and multi-year federal contracts generally having terms from one to five years. Recurring revenue increased $11,372,000, or 6%, in 1995 over 1994 and represented 55% of total revenue in 1995 compared to 63% of total revenue in 1994. This decrease in the percentage of recurring revenue to total revenue is primarily due to a lower relative percentage of revenue from annual product support contracts acquired in the acquisition of KnowledgeWare and the impact of purchase accounting guidelines on the revenue recognized from such contracts and a general decrease in revenue from multi-year federal contracts. 19 For 1995, 36% of total software revenue was derived from platforms other than stand-alone mainframes. This compares to 15% for the previous year. Revenue from the systems management business segment increased $13,004,000, or 9%, in 1995 over 1994 primarily due to an increase of 18% in product revenue. Revenue from products and product support increased in storage management and operations management product lines and was partially offset by a decrease in VM product support revenue. The VM product support revenue decrease was primarily due to consolidation and downsizing by customers using the VM operating system. Approximately 54% of the systems management business segment's 1995 revenue was derived from the Company's international operations. This compares to 53% in 1994. Revenue from the applications management business segment increased $57,275,000, or 115%, in 1995 over 1994 primarily due to the businesses acquired from KnowledgeWare in November 1994. As a direct result of this acquisition, all the components of revenue increased in 1995 over 1994. Products revenue increased 117%, product support revenue increased 73%, and services revenue, primarily consulting services, increased significantly. Product support revenue in 1995 was negatively impacted by approximately $13,655,000 due to the application of purchase price accounting guidelines which prohibit the post-acquisition recognition of deferred revenue acquired in an acquisition. Consulting and training services revenue, previously an immaterial component of the applications management business segment revenue, represented 12% of total applications management revenue in the 1995 period. In 1995, approximately 39% of applications management revenue was derived from the Company's international operations. This compares to 22% in 1994. The increase was primarily attributable to the KnowledgeWare acquisition. Federal systems business segment revenue decreased $5,271,000, or 5%, in 1995 compared to 1994 primarily due to lower contract billings at NASA Ames resulting from lower billable costs and fewer federal contracts than in 1994. Total costs and expenses increased $140,727,000, or 51%, in 1995 over 1994. In 1995, total costs and expenses included restructuring expenses of $19,512,000 for the restructuring resulting from the acquisition of KnowledgeWare and the write-off of $62,000,000 of purchased research and development costs resulting from the application of purchase accounting guidelines in recording the Merger. The restructure charge included employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed and other out-of-pocket costs related to the reorganization. Cash costs and expenses directly related to the acquisition of KnowledgeWare and related to the restructuring of the Company were accounted for as a cost of the acquisition. Of the total restructuring charge of $19,512,000, approximately $8,377,000 was a non-cash charge and the remaining $11,135,000 required cash outlays, substantially all of which had been paid at September 30, 1996. Total cost of sales increased $16,846,000, or 12%, in 1995 over 1994 primarily due to increased consulting services and product support costs of businesses acquired in the KnowledgeWare acquisition partially offset by lower contract costs associated with lower billings in the federal systems business segment. In addition, approximately $13,493,000 of product support costs related to customer support contracts acquired in the KnowledgeWare acquisition were offset against a liability for product support costs accrued at the Merger date in accordance with purchase accounting guidelines. Cost of sales includes $20,221,000 and $14,133,000 of depreciation and amortization in 1995 and 1994, respectively. Product development expense for 1995 of $27,702,000, net of $11,657,000 of amounts capitalized pursuant to FAS 86 increased $7,197,000, or 35%, compared to 1994 product development expense of $20,505,000, net of $8,061,000 of amounts capitalized pursuant to FAS 86. The increase is primarily due to the increased gross product development expense relating to products acquired in the Merger as well as the decrease in the capitalization of software development costs. Development costs capitalized represented 30% and 28% of gross development costs for 1995 and 1994, respectively. 20 Selling, general and administrative expense increased $35,172,000, or 31%, in 1995 over 1994 primarily due to increased sales, marketing, and administrative support personnel in the applications management business segment and in Sterling Software's international operations due to businesses acquired in the Merger and increased international sales personnel to support continuing revenue growth. Interest expense increased in 1995 over 1994 due to higher average international borrowings to manage foreign currency risks and to maintain increased working capital requirements after the Merger. Investment income was also higher due to the higher average cash balances available for investment, as well as higher interest rates in 1995 versus 1994. The net positive impact on operating profit from the foreign currency exchange rates effect of the weaker U.S. dollar was approximately $4,000,000. The loss from continuing operations before income taxes was $18,656,000 in 1995 as compared to income from continuing operations before income taxes of $46,346,000 in 1994. The loss from continuing operations before income taxes in 1995 can be attributed to the Merger restructure costs of $19,512,000 and the write-off of $62,000,000 of purchased research and development costs pursuant to the application of purchase accounting guidelines in recording the Merger. Excluding the restructure charges and write-off of purchased research and development costs, income from continuing operations before income taxes was $62,856,000, an increase of $16,510,000, or 36%, over 1994, primarily due to higher profits in the systems management business segment, up 13%, and in the applications management business segment, up 88%. LIQUIDITY AND CAPITAL RESOURCES The Company maintained a strong liquidity and financial position with $732,918,000 of working capital at September 30, 1996, which includes $524,237,000 of cash and equivalents and $231,919,000 of marketable securities. For the year, net cash flows from operations were $61,161,000. Days sales outstanding at September 30, 1996, measured on a quarterly basis, was 95 days versus 107 days at September 30, 1995. Cash flows from operations and the proceeds from the exercise of stock options and warrants during 1996 were used to increase working capital, to fund capital expenditures and software additions and to make approximately $92,000,000 of income tax payments. Sterling Software received net proceeds from the Offering of approximately $265,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. In connection with the Offering, Sterling Software accelerated the vesting of substantially all outstanding options granted under Sterling Software's existing stock option plans. Sterling Software received proceeds of approximately $276,637,000 in 1996 and $63,597,000 in 1995 from the exercise of the Company's stock options and warrants. Capitalized software expenditures of $15,852,000, the majority of which were costs capitalized pursuant to FAS 86, were made during 1996, compared to $12,287,000 in 1995. The systems management business segment capitalized $10,666,000 of software expenditures during 1996, primarily for the development of systems management and storage management products and enhancements. Capitalized software expenditures in the applications management business segment were $5,186,000 for software enhancements of that segment's products. On October 2, 1995, the Company renewed a share repurchase program authorizing the repurchase of shares of Software Stock from time to time through open market transactions. From October 2, 1995 to March 31, 1996, approximately 1,336,000 shares of Software Stock were repurchased under the program for an aggregate purchase price of approximately $59,372,000. No shares of Software Stock have been repurchased subsequent to March 31, 1996, and it is the Company's present intention not to resume the repurchase of Software Stock. On August 24, 1995, the Company entered into an amended Revolving Credit and Term Loan Agreement ("Loan Agreement") with a borrowing capacity of $35,000,000. The Loan Agreement is unsecured and contains various restrictions on the Company, including limitations on additional borrowings, repurchase of subordinated debt, payment of dividends, acquisitions, and capital expenditures. The Loan Agreement also requires that certain 21 financial ratios be maintained. Borrowings under the Loan Agreement bear interest at the higher of the bank's prime rate or the Federal Funds Effective Rate plus one-half percent. Borrowings, if any, outstanding on August 24, 1998 will be due in four equal installments at the end of each subsequent quarter. There were no amounts borrowed during 1996 or outstanding under the Loan Agreement at September 30, 1996. At September 30, 1996, after the utilization of approximately $1,788,000 for standby letters of credit, approximately $33,212,000 was available for borrowing under the Loan Agreement. Certain of the Company's foreign subsidiaries have separate lines of credit totaling $21,295,000 available for foreign exchange exposure management and working capital requirements. These lines of credit are guaranteed by Sterling Software, Inc. At September 30, 1996, $251,000 was outstanding pursuant to foreign lines of credit. On December 20, 1995, the Company gave notice of the redemption of all of the $114,922,000 then outstanding principal amount of the Debentures. The effective date of the redemption was February 12, 1996. The Debentures were convertible into shares of Software Stock. Approximately $114,912,000 principal amount of the Debentures was presented for conversion. In addition, approximately $78,000 principal amount of the Debentures had been converted prior to the announcement of the redemption. Approximately 4,056,000 shares of Software Stock were issued upon conversion of the Debentures. Approximately $10,000 principal amount of the Debentures was redeemed for cash on February 12, 1996. If the conversion had taken place at October 1, 1995, supplemental primary net earnings per share would have been $6.65 for the year ended September 30, 1996. At September 30, 1996, the Company's capital resource commitments consisted of commitments under lease arrangements for office space and equipment. The Company intends to meet such obligations primarily from cash flow from operations. The Company believes available cash balances, cash equivalents and short-term investments combined with cash flows from operations and amounts available under existing loan agreements are sufficient to meet the Company's cash requirements for the foreseeable future. OTHER MATTERS Demand for many of the Company's products tends to increase with increases in the rate of inflation as customers strive to improve employee productivity and reduce costs. However, the effect of inflation on the Company's relatively labor intensive cost structure could adversely affect its results of operations to the extent the Company is unable to recover increased operating costs through increased prices for products and services. The assets and liabilities of the Companys non-U.S. operations are translated into U.S. dollars at exchange rates in effect as of the respective balance sheet dates, and revenue and expense accounts of these operations are translated at average exchange rates during the month the transactions occur. Unrealized translation gains and losses are included as an adjustment to retained earnings. The Company has mitigated a portion of its currency exposure through decentralized sales, marketing and support operations and through international development facilities, in which all costs are local- currency based. The Company has, and may in the future, enter into hedging transactions in an effort to reduce its exposure to currency exchange risks. The Company maintains a strategy of seeking to acquire businesses and products to fill strategic market niches. This acquisition strategy has contributed in part to the Company's growth in revenue and operating profit before restructuring charges. The impact of future acquisitions on continued growth in revenue and operating profit cannot presently be determined. FORWARD-LOOKING INFORMATION This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain certain forward-looking statements and information that are based on the beliefs of the Companys management as well as estimates and assumptions made by, and information currently available to, the Companys management. When used in SEC Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar 22 expressions, as they relate to Sterling Software or Sterling Software's management, identify forward-looking statements. Such statements reflect the current views of Sterling Software with respect to future events and are subject to certain risks, uncertainties and assumptions relating to Sterling Software's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by Sterling Software, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners and competitors, legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. STERLING SOFTWARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors............................................ 25 Consolidated Financial Statements: Consolidated Balance Sheets at September 30, 1996 and 1995.............. 26 Consolidated Statements of Operations for the Years Ended September 30, 1996, 1995 and 1994.................................................... 27 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1996, 1995 and 1994...................................... 28 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994.................................................... 29 Notes to Consolidated Financial Statements.............................. 30
24 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Sterling Software, Inc. We have audited the accompanying consolidated balance sheets of Sterling Software, Inc. (the "Company") as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. Our audit also included the financial statement schedule listed under Item 14(a) of the Company's Annual Report on Form 10-K for the year ended September 30, 1996. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sterling Software, Inc. at September 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Dallas, Texas November 20, 1996 25 STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
1996 1995 ---------- -------- ASSETS Current assets: Cash and cash equivalents.............................. $ 524,237 $178,910 Marketable securities (Note 7)......................... 231,919 61,341 Accounts and notes receivable, net (Note 8)............ 133,383 134,579 Income tax receivable.................................. 8,000 Prepaid expenses and other current assets.............. 17,104 14,743 ---------- -------- Total current assets................................. 914,643 389,573 Property and equipment, net (Note 9)..................... 39,330 42,574 Computer software, net of accumulated amortization of $84,099 in 1996 and $70,701 in 1995 (Note 1)............ 57,488 48,703 Excess cost over net assets acquired, net of accumulated amortization of $26,128 in 1996 and $20,275 in 1995..... 69,504 75,644 Noncurrent deferred income taxes (Note 12)............... 2,986 35,709 Net assets of discontinued operations (Note 2)........... 53,187 Other assets (Notes 1 and 7)............................. 13,662 12,321 ---------- -------- $1,097,613 $657,711 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 10)............ $ 388 $ 5,871 Income taxes payable................................... 4,679 Accounts payable and accrued liabilities (Note 11)..... 77,349 94,522 Amounts due to Sterling Commerce....................... 35,134 Deferred revenue....................................... 68,854 65,788 ---------- -------- Total current liabilities............................ 181,725 170,860 Long-term debt (Note 10)................................. 116,668 Noncurrent deferred revenue.............................. 15,778 11,134 Other noncurrent liabilities............................. 20,619 10,711 Contingencies and commitments (Notes 4, 13 and 17) Stockholders' equity (Notes 14 and 15): Preferred stock, $.10 par value; 10,000,000 shares authorized; no shares issued or outstanding Common stock, $.10 par value; 75,000,000 shares authorized; 39,807,000 and 26,529,000 shares issued in 1996 and 1995, respectively........................... 3,981 2,653 Additional paid-in capital............................. 804,451 336,752 Retained earnings...................................... 130,156 9,515 Less treasury stock, at cost; 1,372,000 and 56,000 shares in 1996 and 1995, respectively................. (59,097) (582) ---------- -------- Total stockholders' equity........................... 879,491 348,338 ---------- -------- $1,097,613 $657,711 ========== ========
See accompanying notes. 26 STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1996 1995 1994 -------- -------- -------- Revenue: Products...................................... $192,464 $168,300 $121,942 Product support............................... 123,401 113,752 95,799 Services...................................... 123,306 114,259 108,162 -------- -------- -------- 439,171 396,311 325,903 Costs and expenses: Cost of sales: Products and product support................. 72,201 57,726 48,549 Services..................................... 110,038 103,009 95,340 -------- -------- -------- 182,239 160,735 143,889 Product development and enhancement........... 20,921 27,702 20,505 Selling, general and administrative........... 175,237 147,552 112,380 Restructuring charges (Note 3)................ 19,512 Purchased research and development............ 62,000 -------- -------- -------- 378,397 417,501 276,774 -------- -------- -------- Income (loss) from continuing operations before other income (expense) and income taxes........ 60,774 (21,190) 49,129 Other income (expense): Interest expense.............................. (3,361) (8,582) (6,598) Investment income............................. 26,854 8,997 1,490 Other......................................... 619 2,119 2,325 -------- -------- -------- 24,112 2,534 (2,783) -------- -------- -------- Income (loss) from continuing operations before income taxes................................... 84,886 (18,656) 46,346 Provision for income taxes (Note 12)............ 24,288 15,000 15,760 -------- -------- -------- Income (loss) from continuing operations........ 60,598 (33,656) 30,586 Discontinued operations, net of applicable income taxes (Note 2): Income from discontinued operations, net...... 51,187 42,930 27,753 Gain on the initial public offering of subsidiary, net.............................. 126,103 -------- -------- -------- 177,290 42,930 27,753 -------- -------- -------- Net income...................................... 237,888 9,274 58,339 Preferred stock dividends....................... 145 196 -------- -------- -------- Income applicable to common stockholders........ $237,888 $ 9,129 $ 58,143 ======== ======== ======== Income (loss) per common share: Income (loss) from continuing operations Primary...................................... $ 1.78 $ (1.43) $ 1.33 ======== ======== ======== Fully diluted................................ $ 1.73 $ (1.43) $ 1.29 ======== ======== ======== Net income Primary...................................... $ 6.98 $ .39 $ 2.54 ======== ======== ======== Fully diluted................................ $ 6.65 $ .39 $ 2.31 ======== ======== ========
See accompanying notes. 27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ------------------ ------------- ---------------- NUMBER NUMBER ADDITIONAL RETAINED NUMBER TOTAL OF PAR OF PAR PAID-IN EARNINGS OF STOCKHOLDERS' SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) SHARES COST EQUITY -------- ------- ------ ------ ---------- --------- ------ -------- ------------- Balance at September 30, 1993..... 200 $ 20 19,917 $1,992 $169,825 $(54,582) 1,837 $(19,558) $ 97,697 Net income....................... 58,339 58,339 Preferred stock dividends........ (196) (196) Issuance of common stock pursuant to stock options and warrants (Note 15)....................... 2,461 246 21,660 21,906 Issuance of common stock to retirement plan (Note 16)....... 544 (41) 434 978 Other............................ 35 (2,989) (3) 34 (2,920) -------- ------- ------ ------ -------- -------- ------ -------- -------- Balance at September 30, 1994..... 200 20 22,378 2,238 192,064 572 1,793 (19,090) 175,804 Net income....................... 9,274 9,274 Preferred stock dividends........ (145) (145) Issuance of common stock and treasury stock for acquisition, net of issuance costs........... 720 72 55,515 (1,701) 18,111 73,698 Issuance of common stock pursuant to stock options and warrants including tax benefit of $25,251 (Note 15)....................... 3,431 343 88,505 88,848 Issuance of common stock to retirement plan (Note 16)....... 607 (28) 304 911 Other............................ (200) (20) 61 (186) (8) 93 (52) -------- ------- ------ ------ -------- -------- ------ -------- -------- Balance at September 30, 1995..... 26,529 2,653 336,752 9,515 56 (582) 348,338 Net income....................... 237,888 237,888 Acquisition of common stock for treasury........................ 1,336 (59,372) (59,372) Issuance of common stock pursuant to stock options and warrants including tax benefit of $47,112 (Note 15)....................... 9,222 922 322,827 323,749 Issuance of common stock pursuant to conversion of 5 3/4% Debentures...................... 4,056 406 111,970 112,376 Proceeds from subsidiary initial public offering, net of minority interest of $7,382.............. 32,736 32,736 Distribution of subsidiary....... (113,549) (113,549) Issuance of common stock to retirement plan (Note 16)....... 127 (20) 857 984 Adjustment to unrealized gains (losses) on available-for-sale securities, net of tax (Note 1).. (1,178) (1,178) Other............................ 39 (2,520) (2,481) ------ ------ -------- -------- ------ -------- -------- Balance at September 30, 1996.... 39,807 $3,981 $804,451 $130,156 1,372 $(59,097) $879,491 ====== ====== ======== ======== ====== ======== ========
See accompanying notes. 28 STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 --------- --------- -------- Operating activities: Net income................................... $ 237,888 $ 9,274 $ 58,339 Less: Income from discontinued operations.... (177,290) (42,930) (27,753) --------- --------- -------- Income (loss) from continuing operations..... 60,598 (33,656) 30,586 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization.............. 31,599 27,916 19,805 Provision for losses on accounts receivable................................ 4,857 4,351 3,559 Provision for deferred income taxes........ 11,411 11,124 17,971 Purchased research and development......... 62,000 Write-down of property and equipment and other assets.............................. 2,479 Write-down of purchased and capitalized computer software costs................... 6,446 Changes in operating assets and liabilities, net of effects of business acquisitions: Increase in accounts and notes receivable............................... (3,153) (25,757) (15,236) Increase in amounts due to Sterling Commerce................................. 35,134 Increase in prepaid expenses and other assets................................... (16,109) (4,973) (2,511) Decrease in accounts payable, accrued liabilities and income taxes payable..... (61,541) (4,852) (3,267) Increase in deferred revenue.............. 546 9,088 7,491 Other..................................... (2,181) (1,127) (2,800) --------- --------- -------- Net cash provided by operating activities.............................. 61,161 53,039 55,598 Investing activities: Purchases of property and equipment.......... (11,991) (22,467) (6,098) Purchases and capitalized cost of development of computer software........................ (15,852) (12,287) (11,768) Business acquisitions net of cash acquired... (7,001) (15,090) (425) Purchases of investments..................... (576,299) (143,827) (95,940) Proceeds from sales of investments........... 406,072 129,749 102,518 Other........................................ 379 (88) 2,450 --------- --------- -------- Net cash used in investing activities.... (204,692) (64,010) (9,263) Financing activities: Purchases of treasury stock.................. (59,372) Preferred stock dividends.................... (145) (196) Retirement and redemption of debt and capital lease obligations........................... (13,222) (73,128) (24,535) Proceeds from issuance of debt, net of issuance costs.............................. 6,014 68,832 26,172 Acquisition of KnowledgeWare, Inc. loan from IBM Credit Corporation and advances to KnowledgeWare, Inc.......................... (4,435) (18,133) Net proceeds from subsidiary public offering.................................... 265,458 Proceeds from issuance of common stock pursuant to the exercise of stock options and warrants................................ 276,637 63,597 21,906 Other........................................ (4,162) 1,165 (2,743) --------- --------- -------- Net cash provided by financing activities.............................. 471,353 55,886 2,471 Cash flows provided by discontinued operations.................................... 17,819 32,354 22,534 Effect of foreign currency exchange rate changes on cash............................... (314) 127 435 --------- --------- -------- Increase in cash and equivalents............... 345,327 77,396 71,775 Cash and cash equivalents at beginning of year.......................................... 178,910 101,514 29,739 --------- --------- -------- Cash and cash equivalents at end of year....... $ 524,237 $ 178,910 $101,514 ========= ========= ======== Supplemental cash flow information: Interest paid................................ $ 4,453 $ 7,968 $ 7,286 ========= ========= ======== Income taxes paid............................ $ 91,902 $ 10,243 $ 2,974 ========= ========= ========
See accompanying notes. 29 STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Sterling Software, Inc. ("Sterling Software" or the "Company") was founded in 198l and became a publicly owned corporation in 1983. Sterling Software is a recognized worldwide supplier of software products and services within three major markets classified as systems management, applications management and federal systems. Sterling Software's international operations are responsible for sales, marketing and first-level support of the Company's products outside the United States and Canada. Consistent with Sterling Software's decentralized operating structure, major markets are served by independently operated business groups which consist of divisions that focus on specific business niches within those markets. See Notes 5 and 6. Sterling Software believes that its decentralized organizational structure promotes operating flexibility, improves responsiveness to customer requirements and focuses management on achieving revenue and operating profit objectives. Sterling Software has historically expanded its operations through internal growth and by business and product acquisitions. Basis of Presentation The consolidated financial statements include the accounts of Sterling Software (See Notes 2 and 3) after elimination of all significant intercompany balances and transactions. Certain amounts for periods ended prior to September 30, 1996, have been reclassified to conform to the current year presentation, including restatements to reflect the discontinuation of Sterling Software's former Electronic Commerce Group. The financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingencies at September 30, 1996 and 1995 and the results of operations for the years ended September 30, 1996, 1995 and 1994. While management has based their assumptions and estimates on the facts and circumstances known at September 30, 1996, final amounts may differ from such estimates. Revenue Revenue from license fees, including leasing transactions, for standard software products is recognized when the software is delivered, provided no significant future vendor obligations exist and collection is probable. Service revenue and revenue from products involving installation or other services are recognized as the services are performed. Product support contracts entitle the customer to telephone support, bug fixing and the right to receive software updates as they are released. Revenue from product support contracts, including product support included in initial license fees, is recognized ratably over the contract period. All significant costs and expenses associated with product support contracts are expensed ratably over the contract period. If software product transactions include the right to receive future products, a portion of the software product revenue is deferred and recognized as products are delivered. Contract accounting is applied for sales of software products requiring significant modification or customization, such that revenue is recognized only when the modification or customization is complete. When products, product support, and services are billed prior to the time the related revenue is recognized, deferred revenue is recorded and related costs paid in advance are deferred. Revenue from professional services provided to the federal government under multi-year contracts is recognized as the services are performed. Revenue for services under other long-term contracts is recognized 30 using the percentage-of-completion method of accounting. Losses on long-term contracts are recognized when the current estimate of total contract costs indicates a loss on a contract is probable. Software Development Costs The Company capitalizes the costs of developing and testing new or significantly enhanced software products in accordance with the provisions of Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Unamortized software development costs of $36,242,000 and $28,562,000 are included in "Computer software, net" at September 30, 1996 and 1995, respectively. Depreciation and Amortization Property and equipment are recorded at cost and depreciated using the straight-line method over average useful lives of three to twenty years. Computer software costs are amortized on a product-by-product basis using the greater of the amount computed by taking the ratio of current year net revenue to estimated future net revenue or the amount computed by the straight-line method over periods ranging from three to seven years. Excess costs over the net assets of businesses acquired are amortized on a straight-line basis over periods of seven to forty years. Other intangible assets are amortized on a straight-line basis over periods of three to ten years. Depreciation and amortization consists of the following for the years ended September 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 ------- ------- ------- Property and equipment............................. $11,463 $ 9,922 $ 6,271 Purchased computer software........................ 5,926 4,203 1,194 Capitalized computer software development costs.... 7,871 8,505 10,012 Excess costs over net assets of businesses acquired.......................................... 5,839 4,894 2,124 Intangible assets.................................. 500 392 204 ------- ------- ------- $31,599 $27,916 $19,805 ======= ======= =======
Income Taxes The Company's income taxes are presented in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). The Company intends to continue applying the existing accounting requirements for stock options and stock-based awards as contained in APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company will provide pro forma disclosures as required under FAS 123. Earnings Per Common Share Primary earnings per common share data is computed using the weighted average number of common shares and common share equivalents represented by stock options and warrants, if such stock options and warrants have a dilutive effect in the aggregate. For purposes of this computation, income applicable to common 31 stockholders is adjusted to reflect use of net cash proceeds on the assumed exercise of stock options and warrants to purchase outstanding long-term debt or government securities, if such stock options and warrants have a dilutive effect. Fully diluted earnings per common share computations assume, in addition, the conversion of the Company's 5 3/4% Convertible Subordinated Debentures (the "Debentures") in the 1996 and 1994 computations, if such conversions have a dilutive effect. Upon assumed conversion of the Debentures, income applicable to common stockholders is adjusted to reflect the elimination of after tax interest expense related to the Debentures. For purposes of this computation, income applicable to common stockholders is also adjusted to reflect use of net cash proceeds on the assumed exercise of stock options and warrants to purchase outstanding long-term debt or government securities, if such stock options and warrants have a dilutive effect. For the year ended September 30, 1995, neither the common share equivalents nor the assumed conversion of the Debentures had a dilutive effect on the loss per share calculations. Accordingly, the net loss per common share calculations for such period is based on the weighted average number of common shares outstanding during the year. The numbers of shares used in the computations of primary and fully diluted income per common share for the year ended September 30, 1996 were 34,071,000 and 36,045,000, respectively. The number of shares used in the computations of net income per common share for the year ended September 30, 1995 was 23,649,000. The numbers of shares used in the computations of primary and fully diluted income per common share for the year ended September 30, 1994, were 22,923,000 and 26,979,000, respectively. Foreign Currency Translation The assets and liabilities of consolidated wholly owned non-U.S. operations are translated into U.S. dollars at exchange rates in effect as of the respective balance sheet dates. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the period the transactions occur. Unrealized translation gains and losses are included as an adjustment to retained earnings. Cash and Equivalents Cash equivalents consist primarily of highly liquid investments in repurchase agreements backed by U.S. Treasury securities and investment-grade commercial paper of various issuers, with maturities of three months or less when purchased. Cash equivalents are recorded at fair value. Marketable Securities and Other Investments The Company invests excess cash in a diversified portfolio consisting of a variety of securities, including commercial paper, medium term notes, U.S. government obligations, investment fund partnerships and certificates of deposit, which may include both investment grade and non-investment grade securities. The fair values for marketable securities are based on quoted market prices. All marketable securities and long-term investments are classified as available-for-sale securities. Unrealized holding gains and losses on securities available-for-sale are recorded as a component of stockholders' equity, net of any related tax effect. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in values judged to be other-than- temporary, if any, on available-for-sale securities are included in investment income. Other Assets Included in "other assets" in the consolidated balance sheet are noncurrent marketable securities (see Note 7), debt issuance costs related to the issuance of the Debentures (see Note 10), long-term deposits, certain intangibles and other noncurrent assets. 32 2. DISCONTINUED OPERATIONS Sterling Commerce, Inc. ("Sterling Commerce") previously a wholly owned subsidiary of Sterling Software, completed its initial public offering (the "Offering") of 13,800,000 shares of common stock, par value $.01 per share ("Commerce Stock") on March 13, 1996. Pursuant to the Offering, Sterling Software sold to the public 12,000,000 of its 73,200,000 shares of Commerce Stock and Sterling Commerce sold 1,800,000 of previously unissued shares of Commerce Stock. The Offering price was $24 per share of Commerce Stock resulting in net proceeds to Sterling Software of approximately $265,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. Sterling Software recorded a gain of approximately $126,103,000, net of tax, from the sale of Commerce Stock in the Offering. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce with the pro rata distribution (the "Distribution") of its remaining 81.6% ownership in Sterling Commerce to Sterling Software's shareholders by means of a tax-free dividend. Holders of record of the Company's $0.10 par value common stock ("Software Stock") as of the close of business on September 30, 1996 received 1.59260 shares of Commerce Stock for each share of Software Stock owned on such date. The Distribution resulted in the reduction of Sterling Software stockholder's equity in the amount of $113,549,000, representing the book value of net assets distributed. Prior year's financial statements have been restated to reflect the discontinuation of the Sterling Software electronic commerce business segment. The income from discontinued operations reflected in the table below is inclusive of minority interest held by stockholders outside of Sterling Software. Summary operating results of discontinued operations, excluding the above gain, are as follows (in thousands):
1996 1995 1994 -------- -------- -------- Revenue........................................ $267,773 $203,578 $155,916 Total costs and expenses....................... $172,568 $131,550 $109,511 Income before income taxes..................... $ 96,422 $ 71,550 $ 46,255 Income taxes................................... $ 38,030 $ 28,620 $ 18,502 Income from discontinued operations, net....... $ 58,392 $ 42,930 $ 27,753
Due to the spin-off of Sterling Commerce, the Sterling Commerce net assets at September 30, 1996 are not included in Sterling Software's September 30, 1996 Consolidated Balance Sheet. The net assets of Sterling Commerce have been segregated in the September 30, 1995 Consolidated Balance Sheet and are summarized below (in thousands): Current assets................................................ $ 56,054 Property and equipment, net................................... 25,838 Computer software, net........................................ 32,263 Excess cost over net assets acquired, net..................... 10,259 Other assets.................................................. 4,564 Current liabilities........................................... (52,362) Deferred income taxes......................................... (17,749) Other noncurrent liabilities.................................. (5,680) -------- Net assets.................................................... $ 53,187 ========
In anticipation of the Offering, Sterling Software and Sterling Commerce entered into a number of agreements (the "Intercompany Agreements") for the purpose of defining certain relationships between them. As a result of Sterling Software's ownership interest in Sterling Commerce, the terms of such agreements were not the result of arm's-length negotiation. The Intercompany Agreements include a tax allocation agreement, an international marketing agreement, a space sharing agreement and a services agreement. The tax allocation agreement states that for periods during which Sterling Commerce and/or its subsidiaries are included in Sterling Software's consolidated federal income tax returns or consolidated, combined or unitary state tax returns (which 33 periods include the period between the Offering and the Distribution), Sterling Commerce is required to pay to or is entitled to receive from Sterling Software its allocable portion of the consolidated federal and state income tax liability or refunds, respectively. Additionally, the tax allocation agreement contains provisions for the handling of tax controversies. The international marketing agreement defines the terms pursuant to which Sterling Software acts as the exclusive distributor through March 1999 of certain of Sterling Commerce's products in markets outside the United States and Canada. The international marketing agreement provides for the payment to Sterling Commerce of royalties equal to 50% of the net revenue that Sterling Software derives from licenses of Sterling Commerce's interchange and communications software products and related product support services. The space sharing agreement defines the terms pursuant to which Sterling Commerce and Sterling Software are allowed to utilize a portion of each other's office facilities. The services agreement, which terminated effective as of the Distribution, included provisions related to central cash management whereby Sterling Commerce advanced to Sterling Software, on a daily basis, all cash generated by Sterling Commerce which was not needed to meet daily cash requirements. As a result of various transactions between the Company and Sterling Commerce, including royalties due to Sterling Commerce as a result of the Company acting as an international distributor, tax and other expenses charged to Sterling Commerce and Sterling Commerce's participation in the Company's central cash management program (which participation terminated upon completion of the Distribution on September 30, 1996), amounts payable to and receivable from Sterling Commerce arose from time to time. At September 30, 1996 the Company held amounts due to Sterling Commerce of approximately $35,134,000, which were remitted to Sterling Commerce subsequent to September 30, 1996. Sterling Software remains the guarantor of certain office lease and other obligations of Sterling Commerce incurred pursuant to instruments executed prior to the Distribution. The aggregate liability of Sterling Software with respect to its guaranty of such obligations is approximately $40,000,000. Sterling Commerce is obligated to indemnify Sterling Software for any liabilities incurred by Sterling Software as guarantor of such obligations, and Sterling Commerce has agreed to use reasonable efforts to obtain Sterling Software's release from its obligations under the related guarantees. Additionally, certain executive officers of Sterling Software are also executive officers of Sterling Commerce and will continue to serve in such dual capacities for some period following the Distribution. 3. BUSINESS COMBINATIONS On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc. ("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a leading provider of applications development software and services, for approximately $106 million, in a stock-for-stock acquisition (the "Merger"). In connection with the Merger, the Company issued approximately 2,421,000 shares of Software Stock valued at approximately $74,443,000 and reserved approximately 340,000 shares of Software Stock for issuance upon exercise of KnowledgeWare's options and warrants. In addition, the Company incurred cash costs directly related to the Merger of approximately $31,672,000. The Merger, which was accounted for as a purchase, was completed pursuant to the terms of an agreement (the "Merger Agreement"), among the Company, SSI Corporation, a Georgia corporation and a wholly owned subsidiary of the Company, and KnowledgeWare. Of the 2,421,000 shares of Software Stock issued, approximately 484,800 shares were placed in escrow to cover certain losses and claims with respect to which the Company was entitled to indemnification pursuant to the terms of the Merger Agreement. Since the Merger, all such escrowed shares have been released from escrow and used to satisfy certain losses and claims. The operating results of KnowledgeWare are included in the Company's results of operations from November 30, 1994, the date of the Merger. In addition, the results of operations for the first quarter of 1995 include $62,000,000 of purchased research and development costs, the portion of the purchase price attributed to in-process research and development, which was charged to expense in accordance with purchase accounting guidelines. The $62,000,000 charge has no related tax benefit. The results of operations for the first quarter of 1995 also include a charge for restructure costs of $19,512,000 to integrate KnowledgeWare's business into the 34 Company's operations. The restructure charge includes employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed and other out-of-pocket costs related to the reorganization. Cash costs and expenses directly related to the acquisition of KnowledgeWare and unrelated to the restructuring of the Company are accounted for as a cost of the acquisition. Of the total restructuring charge of $19,512,000, approximately $8,377,000 was a non-cash charge and the remaining $11,135,000 were required cash outlays, substantially all of which had been paid as of September 30, 1996. 4. LEGAL PROCEEDINGS AND CLAIMS On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock- for-stock acquisition. On March 14, 1995, the Securities and Exchange Commission (the "Commission") entered an Order Directing Private Investigation and Designating Officers to take Testimony titled "In the Matter of KnowledgeWare, Inc. (NY-6231)." The investigation generally relates to (i) trading in KnowledgeWare securities from July 1, 1992 through the time of the stock-for-stock transaction by which Sterling Software acquired KnowledgeWare, (ii) KnowledgeWare's compliance with the Commission's filing and reporting obligations and (iii) the adequacy and/or accuracy of KnowledgeWare's public disclosures, recordkeeping and accounting controls. In addition to the potential successor liability of the wholly-owned subsidiary that was merged into KnowledgeWare, Sterling Software may have an indemnity obligation with respect to certain individuals who may be subject to the SEC investigation. Sterling Software's management believes that, after giving effect to applicable reserves, the ultimate resolution of the Commission's investigation will not materially affect the financial condition or results of operations of Sterling Software. The Company is also subject to certain legal proceedings and claims that arise in the ordinary conduct of its business. In the opinion of management, the amount of ultimate liability with respect to these actions, net of applicable reserves and available insurance, will not materially affect the financial condition or results of operations of the Company. 5. SEGMENT INFORMATION The Company acquires, develops, markets and supports a broad range of computer software products and services in three major markets classified as systems management, applications management and federal systems. Major markets are represented through independently operated business segments. The systems management business segment provides enterprise-wide systems management software for large computing environments. The applications management business segment provides products for developing new applications, revitalizing, integrating and extending existing applications and facilitating enterprise information access. The federal systems business segment provides highly technical professional services to the federal government under several multi-year contracts primarily in support of two major customers, the National Aeronautics and Space Administration and the Department of Defense. The Company's international operations are responsible for sales, marketing and first-level support of the Company's products outside of the United States and Canada. These international operating results are included, as applicable, in the Company's systems management and applications management segments in the business segment tables contained herein. The Company's international operations also sell, market and provide first-level support outside of the United States and Canada for certain electronic commerce products, the results of which are included in "Corporate and other." International operating results allocated to these business segments included revenue of $167,845,000, $152,026,000 and $103,824,000 and international operating profit (exclusive of intercompany royalties) of $74,105,000, $72,684,000 and $48,892,000 for 1996, 1995 and 1994, respectively. 35 Financial information concerning the Company's operations, by business segment, for the years ended September 30, 1996, 1995 and 1994, is summarized as follows (in thousands):
INDUSTRY SEGMENTS 1996 1995 1994 ----------------- ---------- --------- -------- Revenue: Systems Management...................... $ 170,804 $ 154,657 $141,653 Federal Systems......................... 112,188 101,702 106,973 Applications Management................. 109,804 107,209 49,934 Corporate and other..................... 46,375 32,743 27,343 ---------- --------- -------- Consolidated totals................... $ 439,171 $ 396,311 $325,903 ========== ========= ======== Operating Profit (Loss): Systems Management...................... $ 65,858 $ 55,471 $ 49,015 Federal Systems......................... 7,982 6,648 7,260 Applications Management................. 16,408 21,320 11,314 Restructuring charge.................... (19,512) Purchased research and development...... (62,000) Corporate and other..................... (29,474) (23,117) (18,460) ---------- --------- -------- Consolidated totals................... $ 60,774 $ (21,190) $ 49,129 ========== ========= ======== Identifiable Assets: Systems Management...................... $ 135,845 $ 115,729 $ 95,318 Federal Systems......................... 68,809 56,737 56,476 Applications Management................. 107,713 125,410 35,153 Corporate and other..................... 785,246 306,648 214,663 Discontinued operations................. 53,187 43,051 ---------- --------- -------- Consolidated totals................... $1,097,613 $ 657,711 $444,661 ========== ========= ======== Capital Expenditures (including additions to computer software): Systems Management...................... $ 14,597 $ 11,808 $ 10,699 Federal Systems......................... 1,255 1,518 1,225 Applications Management................. 6,603 7,753 4,156 Corporate and other..................... 5,388 13,675 1,786 ---------- --------- -------- Consolidated totals................... $ 27,843 $ 34,754 $ 17,866 ========== ========= ======== Depreciation and Amortization: Systems Management...................... $ 12,230 $ 10,612 $ 9,456 Federal Systems......................... 2,290 2,196 2,099 Applications Management................. 12,926 11,390 5,082 Corporate and other..................... 4,153 3,718 3,168 ---------- --------- -------- Consolidated totals................... $ 31,599 $ 27,916 $ 19,805 ========== ========= ======== Revenue from the U.S. Government: Systems Management...................... $ 3,521 $ 3,250 $ 2,460 Federal Systems......................... 104,052 97,650 103,580 Applications Management................. 5,169 2,930 576 ---------- --------- -------- Consolidated totals................... $ 112,742 $ 103,830 $106,616 ========== ========= ========
The amounts presented for "Corporate and other" include corporate expense, intersegment eliminations, cash balances, marketable securities, long-term investments, deferred income tax balances, other assets, the results of operations and assets of the Company's retail software division, and the results of operations for the international distribution of certain electronic commerce products. 36 6. OPERATIONS BY GEOGRAPHIC AREA The Company's operations in the United States and international markets at September 30, 1996, 1995 and 1994 and for the years then ended are summarized as follows (in thousands):
GEOGRAPHICAL SEGMENT INFORMATION 1996 1995 1994 -------------------------------- ---------- -------- -------- Revenue: United States................................ $ 252,181 $225,923 $204,342 Europe....................................... 88,611 89,659 57,834 Canada and Latin America..................... 15,099 12,801 12,151 Pacific...................................... 36,905 35,185 24,233 Corporate and other.......................... 46,375 32,743 27,343 ---------- -------- -------- $ 439,171 $396,311 $325,903 ========== ======== ======== Operating Profit (Loss): United States................................ $ 72,824 $ 54,940 $ 53,761 Europe....................................... 9,773 16,925 7,682 Canada and Latin America..................... 3,681 4,332 3,632 Pacific...................................... 3,970 7,242 2,514 Restructuring charges........................ (19,512) Purchased research and development........... (62,000) Corporate and other.......................... (29,474) (23,117) (18,460) ---------- -------- -------- $ 60,774 $(21,190) $ 49,129 ========== ======== ======== Identifiable Assets: United States................................ $ 217,021 $200,527 $125,890 Europe....................................... 82,537 77,856 40,005 Canada and Latin America..................... 3,573 4,438 9,672 Pacific...................................... 9,236 15,055 11,380 Corporate and other.......................... 785,246 306,648 214,663 Discontinued operations...................... 53,187 43,051 ---------- -------- -------- $1,097,613 $657,711 $444,661 ========== ======== ========
The amounts presented for "Corporate and other" include corporate expense, intersegment eliminations, cash balances, marketable securities, long-term investments, deferred income tax balances, other assets, the results of operations and assets of the Company's retail software division, and the results of operations for the international distribution of certain electronic commerce products. 7. MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS At September 30, 1996 and 1995, all of the Company's marketable securities and other long-term investments were classified as available-for-sale and consist of the following (in thousands):
GROSS UNREALIZED ------------------- AGGREGATE AMORTIZED HOLDING HOLDING FAIR VALUE COST BASIS GAINS LOSSES ---------- ---------- -------- --------- September 30, 1996 Current: Commercial paper................... $ 33,468 $ 33,468 U.S. corporate notes............... 76,115 76,577 $ 25 $ 487 U.S. government obligations........ 76,062 76,265 89 292 Municipal obligations.............. 25,507 25,501 6 Other.............................. 20,767 21,889 28 1,150 -------- -------- ------- --------- $231,919 $233,700 $ 148 $ 1,929 ======== ======== ======= ========= Noncurrent........................... $ 1,000 $ 1,000 ======== ========
37
GROSS UNREALIZED ------------------- AGGREGATE AMORTIZED HOLDING HOLDING FAIR VALUE COST BASIS GAINS LOSSES ---------- ---------- -------- -------- September 30, 1995 Current: Commercial paper................. $ 3,978 $ 3,978 U.S. corporate notes............. 46,746 46,741 $ 42 $ 37 U.S. government obligations...... 1,195 1,203 8 Municipal obligations............ 7,500 7,500 Other............................ 1,922 1,922 ------- ------- -------- -------- $61,341 $61,344 $ 42 $ 45 ======= ======= ======== ======== Noncurrent......................... $ 1,000 $ 1,000 ======= =======
At September 30, 1996, scheduled maturities of investments in debt securities are: $143,184,000 within one year and $82,273,000 between one and five years. 8. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following at September 30 (in thousands):
1996 1995 -------- -------- Trade................................................... $115,427 $117,445 Unbilled................................................ 24,032 24,310 -------- -------- 139,459 141,755 Less: Allowance for doubtful accounts................... 6,076 7,176 -------- -------- $133,383 $134,579 ======== ========
At September 30, 1996 and 1995, accounts receivable include $35,975,000 and $33,020,000, respectively, due under contracts with the federal government and related agencies. The remainder of the Company's receivables are due principally from corporations in diverse industries located in North America and Europe. 9. PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30 (in thousands):
1996 1995 ------- ------- Computer and peripheral equipment......................... $38,663 $39,844 Furniture, fixtures and other equipment................... 33,067 35,514 Leasehold improvements.................................... 9,629 7,989 ------- ------- 81,359 83,347 Less accumulated depreciation............................. 42,029 40,773 ------- ------- $39,330 $42,574 ======= =======
38 10. LONG-TERM DEBT Long-term debt consists of the following at September 30 (in thousands):
1996 1995 ---- -------- Debentures.................................................. $ $114,987 Capital leases and other debt............................... 388 7,552 ---- -------- 388 122,539 Less amounts due within one year............................ 388 5,871 ---- -------- $ $116,668 ==== ========
On December 20, 1995, the Company gave notice of the redemption of all of the $114,922,000 then outstanding principal amount of its Debentures. The effective date of the redemption was February 12, 1996. The Debentures were convertible into shares of Software Stock. Approximately $114,912,000 principal amount of the Debentures was presented for conversion. In addition, approximately $78,000 principal amount of the Debentures had been converted prior to the announcement of the redemption. Approximately 4,056,000 shares of Software Stock were issued upon conversion of the Debentures. Approximately $10,000 principal amount of Debentures was redeemed for cash on February 12, 1996. If the conversion had taken place at October 1, 1995, supplemental primary net earnings per share would have been $6.65 for the year ended September 30, 1996. On August 24, 1995, the Company entered into an amended loan agreement ("Loan Agreement") with a borrowing capacity of $35,000,000. The Loan Agreement is unsecured and contains various restrictions on the Company, including limitations on additional borrowings, repurchase of subordinated debt, payment of dividends, acquisitions and capital expenditures. The Loan Agreement also requires that certain financial ratios be maintained. Borrowings under the Loan Agreement bear interest at the higher of the bank's prime rate or the Federal Funds Effective Rate plus one-half percent. Borrowings, if any, outstanding on August 24, 1998 will become due in four equal installments at the end of each subsequent quarter. There were no amounts borrowed during 1996 and 1995 or outstanding under the Loan Agreement at September 30, 1996. At September 30, 1996, after the utilization of approximately $1,788,000 for standby letters of credit, approximately $33,212,000 was available for borrowing under the Loan Agreement. Certain of the Company's foreign subsidiaries have $21,295,000 of available borrowing capacity under separate lines of credit for foreign exchange exposure management and working capital requirements. These lines of credit are guaranteed by Sterling Software, Inc. At September 30, 1996, $251,000 was outstanding pursuant to foreign lines of credit. 11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following at September 30 (in thousands):
1996 1995 ------- ------- Trade accounts payable.................................... $16,712 $22,041 Accrued compensation...................................... 37,242 30,386 Accrued restructuring and acquisition costs............... 4,017 18,624 Other accrued liabilities................................. 19,378 23,471 ------- ------- $77,349 $94,522 ======= =======
Accrued restructuring and acquisition costs are primarily due to the Company's restructuring as a result of the acquisition of KnowledgeWare (see Note 3) and are primarily for the remaining commitments pursuant to operating leases of duplicate facilities. 39 12. INCOME TAXES The provision for income taxes on income (loss) from continuing operations is composed of the following (in thousands):
YEARS ENDED SEPTEMBER 30 --------------------------- 1996 1995 1994 -------- -------- -------- Current: Federal..................................... $ 10,055 $ 4,449 $ (3,653) State....................................... Foreign..................................... 2,822 700 2,585 Deferred: Federal..................................... 10,551 9,087 13,646 State....................................... 2,970 764 1,003 Foreign..................................... (2,110) 2,179 -------- -------- -------- $ 24,288 $ 15,000 $ 15,760 ======== ======== ========
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):
YEARS ENDED SEPTEMBER 30 ---------------------------- 1996 1995 1994 -------- -------- -------- Tax expense (benefit) at U.S. federal statutory rate............................. $ 29,703 $ (6,530) $ 16,221 Increases (reductions) in tax expense (benefit) resulting from: Purchased research and development for which no federal income tax benefit was recognized............................... 21,700 Recognition of previously unrecognized deferred income tax asset................ (7,853) (1,197) (728) Amortization of excess cost over net assets................................... 1,680 1,761 885 Foreign sales corporation................. (1,568) (2,163) State income taxes, net of federal benefit.................................. 2,970 764 (158) Other..................................... (644) 665 (460) -------- -------- -------- $ 24,288 $ 15,000 $ 15,760 ======== ======== ========
Income (loss) before income taxes includes foreign pretax earnings (losses) of $3,525,000, $(4,300,000) and $12,104,000 for the years ended September 30, 1996, 1995 and 1994, respectively. 40 Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset as of September 30 are as follows (in thousands):
1996 1995 -------- -------- Deferred income tax assets: Net operating loss carryforwards..................... $ 44,167 $ 66,812 General business and alternative minimum tax credit carryforwards....................................... 5,073 7,304 Foreign tax credit carryforwards..................... 6,583 8,188 Foreign taxes creditable on undistributed foreign source income....................................... 5,397 5,397 Reserves and restructuring accruals.................. 12,640 10,331 -------- -------- Deferred income tax assets......................... 73,860 98,032 -------- -------- Deferred income tax liabilities: Capitalized software costs........................... 11,292 18,654 Depreciation and amortization........................ 2,110 (3,249) Other future income tax liabilities.................. 13,626 6,571 -------- -------- Deferred income tax liabilities.................... 27,028 21,976 -------- -------- Deferred income tax asset net of deferred income tax liability........................................... 46,832 76,056 Less valuation allowance............................. (43,846) (41,920) -------- -------- Net deferred income tax asset...................... $ 2,986 $ 34,136 ======== ========
The valuation allowance relates principally to certain net operating loss and credit carryforwards. Although realization is not assured, management believes that future taxable income based on expected future earnings of the Company will more likely than not utilize a portion of the net operating loss carryforwards, tax credit carryforwards and other future tax deductions in existence at September 30, 1996, equivalent to the net deferred income tax asset. As there can be no assurances on amounts in excess of the net deferred income tax asset, the aforementioned valuation allowance has been recorded and may change as estimates during the carryforward periods change. At September 30, 1996, the Company had net operating loss and tax credit carryforwards for federal income tax purposes of approximately $87,500,000 and $11,656,000 respectively. These carryforwards will expire at various times between 1997 and 2009, with approximately $87,500,000 of the net operating loss carryforwards expiring between 2007 and 2009. The usage of substantially all of these carryforwards is restricted to future taxable income of certain of the Company's wholly owned subsidiaries and limited by Section 382 of the Internal Revenue Code. Thus, the Company's usage of these carryforwards cannot be assured. 13. COMMITMENTS The Company leases certain facilities and equipment under operating leases. Total rent expense for the years ended September 30, 1996, 1995 and 1994 was $19,366,000, $26,359,000 and $21,235,000, respectively. At September 30, 1996, minimum future rental payments due under all operating leases, net of future sublease income, are as follows (in thousands): 1997............................................................ $18,594 1998............................................................ 16,916 1999............................................................ 13,365 2000............................................................ 8,472 2001............................................................ 7,198 Thereafter...................................................... 12,820 ------- $77,365 =======
41 14. PREFERRED STOCK The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.10 per share ("Preferred Stock"), of which 200,000 shares designated as Series B Junior Preferred Stock ("Junior Preferred Stock") were issued and outstanding at September 30, 1994. The 200,000 shares of the Company's Junior Preferred Stock outstanding at September 30, 1994 were exchanged on June 27, 1995 for warrants to purchase 269,380 shares of the Company's Common Stock. The warrants became fully exercisable on September 25, 1995 at an exercise price of $36.50 per share and were subsequently exercised. The Board of Directors of the Company is authorized, without action by the stockholders, to issue Preferred Stock and fix for each series the number of shares, designation, dividend rights, voting rights, redemption rights, and other rights. 15. STOCK OPTIONS AND WARRANTS In April 1996, Sterling Software's Board of Directors adopted and in May 1996 Sterling Software's stockholders approved the 1996 Stock Option Plan. In September 1996, the 1996 Stock Option Plan was amended to conform to certain modifications to Rule 16b-3 under the Securities Exchange Act of 1934. At September 30, 1996, 7,750,000 shares were reserved for future grants of options under the 1996 Stock Option Plan. Subsequent to September 30, 1996, options to acquire 7,124,500 shares of Software Stock were granted under the 1996 Stock Option Plan. Options granted pursuant to the 1996 Stock Option Plan become exerciseable generally within 90 days of the date of grant or at a rate of 25% per year and expire either five or ten years from the date of grant. A tax benefit of $47,112,000 associated with the exercise of options and warrants is credited to paid in capital in 1996. As a result of the approval of the 1996 Stock Option Plan, Sterling Software's Board of Directors will not issue any of the remaining 1,293,000 options available for grant under Sterling Software's other stock option plans. Stock option transactions are summarized below for the three years ended September 30, 1996:
AGGREGATE NUMBER EXERCISE EXERCISE OF SHARES PRICE PRICE ----------- ---------------- ------------- Outstanding at September 30, 1993 (3,797,865 shares exercisable)... 7,189,326 $ 2.10 - $ 39.23 $ 126,177,497 Granted during the year......... 520,800 24.00 - 34.50 15,901,475 Terminated and cancelled during the year....................... (117,804) 2.12 - 39.23 (2,110,416) Exercised during the year....... (1,131,559) 2.10 - 26.10 (15,034,772) ----------- ------------- Outstanding at September 30, 1994 (3,893,745 shares exercisable)... 6,460,763 2.12 - 36.92 124,933,784 Options associated with KWI acquisition.................... 166,173 13.80 - 149.73 8,314,254 Granted during the year......... 4,886,547 29.00 - 45.88 161,278,929 Terminated and cancelled during the year....................... (184,972) 7.63 - 101.34 (5,601,581) Exercised during the year....... (3,242,780) 2.12 - 36.92 (59,610,840) ----------- ------------- Outstanding at September 30, 1995 (3,781,222 shares exercisable)... 8,085,731 229,314,546 Granted during the year......... 1,147,675 41.75 - 56.88 48,640,094 Terminated and cancelled during the year....................... (239,512) 13.38 - 149.73 (8,289,942) Exercised during the year....... (8,912,213) 2.12 - 76.38 (265,902,230) ----------- ------------- Outstanding at September 30, 1996 (81,681 shares exercisable)...... 81,681 8.55 - 82.46 $ 3,762,468 =========== =============
In connection with the Offering, Sterling Software accelerated the vesting of substantially all outstanding options granted under Sterling Software's stock option plans in existence at the time of the Offering. Under the terms of Sterling Software's stock option plans, options that were unexercised with respect to 81,681 shares of 42 Software Stock at the close of business on September 30, 1996 were adjusted to thereafter be exerciseable with respect to 207,950 shares at exercise prices ranging from $3.36 to $32.40 to preserve the economic value of such options. During 1996, 1995 and 1994, 310,097, 189,300, and 1,329,035 warrants with an aggregate exercise price of $10,734,659, $4,012,704 and $8,336,473, respectively, were exercised for shares of Software Stock. Also, in 1996, 82,650 warrants with an aggregate exercise price of $8,750,155 were cancelled. At September 30, 1996, no warrants were outstanding. 16. POSTRETIREMENT BENEFITS The Company has a plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code for full time employees and for part-time employees who have completed a specified term of service. Pursuant to this plan, eligible participants may elect to contribute a percentage of their annual gross compensation and the Company will contribute additional amounts, as provided by the plan. Benefits under the plan are limited to the assets of the plan. Company contributions charged to expense during 1996, 1995 and 1994 were $2,315,000 $2,474,000 and $2,034,000, respectively. One-half of the Company's contributions are invested in Software Stock. Effective October 1, 1996, the portion of the plan consisting of the Company's contributions was designated as an employee stock ownership plan. During 1996, 1995 and 1994, the investment of the Company's contributions included 19,665, 28,597 and 40,700 shares of Software Stock, respectively. These share contributions include those with respect to Sterling Commerce employees through September 30, 1996, the date of the spin-off. See Note 2. Certain of the Company's subsidiaries also provide healthcare benefits to eligible retired employees. These benefits are subject to deductibles, copayment provisions and other limitations including retiree premium contributions. The Company's policy is to fund the cost of the postretirement healthcare coverage in amounts determined at the discretion of management. A plan amendment was adopted in October 1994 that reduced the number of employees eligible for participation in the postretirement benefit plan and reduced the Company's future costs for certain eligible participants. The impact of the amendment in 1995 was a curtailment gain of approximately $1,400,000. The Company and its subsidiaries may amend or change the plan periodically, or may terminate the plan. The following table sets forth the computation of accrued postretirement healthcare benefit costs at September 30 (in thousands):
1996 1995 ------ ------ Accumulated postretirement benefit obligation: Retirees................................................... $ 775 $ 785 Fully eligible active plan participants.................... 977 1,010 Other active plan participants............................. 1,259 1,116 ------ ------ 3,011 2,911 Assets at fair market value................................ 1,766 1,648 ------ ------ Projected benefit obligation in excess of assets at fair market value................................................ 1,245 1,263 Unrecognized net gain (loss)................................. 1,768 2,001 ------ ------ Accrued postretirement benefit cost........................ $3,013 $3,264 ====== ======
43 The following table presents net periodic postretirement healthcare benefit costs for the years ended September 30, 1996, 1995 and 1994 (in thousands):
YEARS ENDED SEPTEMBER 30 -------------------------- 1996 1995 1994 -------- -------- -------- Service cost...................................... $ 98 $ 108 $ 633 Interest cost..................................... 205 241 366 Actual asset return............................... (112) (90) (8) Net amortization and deferral..................... (233) (208) 57 ------- ------- -------- Net periodic postretirement benefit cost........ $ (42) $ 51 $ 1,048 ======= ======= ========
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at September 30, 1996. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (healthcare cost trend rate) is 9.5% for 1997 and is assumed to decrease gradually to 5% after 9 years and remain at that level thereafter. At September 30, 1995, the weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The weighted average healthcare cost trend rate was 10% for 1996 and was assumed to decrease gradually to 5% after 10 years and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of September 30, 1996 by $336,600 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1996 by $26,300. 17. CHANGE-IN-CONTROL AND SEVERANCE ARRANGEMENTS As of September 30, 1996, the Company had change-in-control agreements with fourteen officers that grant the right to receive payments based on the individual officer's respective salary, bonus and benefits if there has been a change in control (as defined) in the Company and termination of employment has occurred. At September 30, 1996, the maximum liability for salaries, bonuses and benefits under these agreements was approximately $44,000,000. As of September 30, 1996, the Company had entered into severance agreements with ten officers of the Company providing for payments based on the individual officer's respective salary and bonus and continuation of benefits if the Company terminates the officer's employment. In addition, the Company has entered into a CEO agreement that provides for an annual base salary plus agreed-upon bonuses or benefits and converts to a consulting agreement upon the occurrence of certain events. The Company has also entered into a consulting agreement with one of its directors that provides for severance payments based on the director's consulting fee upon the occurrence of certain events. At September 30, 1996, the aggregate commitment for future salaries, fees, bonuses and benefits under these agreements was approximately $15,000,000. 44 18. QUARTERLY FINANCIAL RESULTS (UNAUDITED) The Company's consolidated operating results for each quarter of 1996 and 1995 are summarized as follows (in thousands, except per share data):
THREE MONTHS ENDED ------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Year ended September 30, 1996 (1): Revenue Products........................ $ 34,972 $ 45,932 $ 50,027 $ 61,533 Product support................. 31,194 31,121 30,397 30,689 Services........................ 29,819 29,544 30,122 33,821 -------- -------- -------- -------- 95,985 106,597 110,546 126,043 Cost of sales Products and product support.... 15,154 18,062 17,665 21,320 Services........................ 26,076 26,520 26,767 30,675 -------- -------- -------- -------- 41,230 44,582 44,432 51,995 Product development and enhancement...................... 6,072 5,197 4,618 5,034 Selling, general and administrative................... 38,677 42,606 45,115 48,839 Income from continuing operations....................... 9,018 12,776 17,358 21,446 Income applicable to common stockholders..................... 21,307 152,018 29,394 35,169 Average common shares outstanding...................... 26,630 29,450 35,758 37,432 Income per common share: Income from continuing operations: Primary......................... $ .31 $ .40 $ .47 $ .57 Fully diluted................... .30 .39 .47 .57 Net income: Primary......................... $ .72 $ 4.74 $ .80 $ .93 Fully diluted................... .66 4.42 .80 .93 Year ended September 30, 1995 (1) (2): Revenue Products........................ $ 34,232 $ 37,458 $ 44,651 $ 51,959 Product support................. 24,205 27,941 29,699 31,907 Services........................ 25,159 28,730 28,430 31,940 -------- -------- -------- -------- 83,596 94,129 102,780 115,806 Cost of sales Products and product support.... 12,430 13,349 14,309 17,638 Services........................ 22,762 23,009 27,851 29,387 -------- -------- -------- -------- 35,192 36,358 42,160 47,025 Product development and enhancement...................... 5,847 7,324 7,955 6,576 Selling, general and administrative................... 31,712 35,381 37,168 43,291 Restructuring charges............. 19,512 Purchased research and development...................... 62,000 Income (loss) from continuing operations....................... (70,381) 10,591 11,343 14,791 Income (loss) applicable to common stockholders..................... (61,704) 20,110 22,240 28,483 Average common shares outstanding...................... 21,476 23,526 24,118 25,469 Income per common share: Income (loss) from continuing operations: Primary......................... $ (3.28) $ .38 $ .41 $ .52 Fully diluted................... (3.28) .37 .39 .49 Income (loss) per common share: Net income (loss): Primary........................ $ (2.87) $ .72 $ .79 $ 1.00 Fully diluted.................. (2.87) .67 .73 .90
45 - -------- (1) Restated to reflect the results of operations of Sterling Commerce as a discontinued operation. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce. See Note 2. (2) On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock- for-stock acquisition accounted for as a purchase. Accordingly, the operating results of KnowledgeWare are included in the Company's results of operations from the date of the acquisition. The results of operations include $62,000,000 of purchased research and development costs, which is the portion of the purchase price attributable to in- process research and development and which was charged to expense in accordance with purchase accounting guidelines. The 1995 results of operations also include a charge for restructure costs of $19,512,000 to integrate KnowledgeWare's business into the Company's operations. The restructure charge includes employee termination costs, costs related to the elimination of duplicate facilities, the write-off of costs related to certain software products which were not actively marketed, and other out of pocket costs related to the reorganization. Legal costs and expenses directly related to the acquisition of KnowledgeWare and unrelated to the restructuring are accounted for as a cost of the acquisition. See Note 3. Information concerning the Company's operations by business segment for each quarter of 1996, 1995 and 1994 is summarized as follows (in thousands):
THREE MONTHS ENDED -------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Year ended September 30, 1996: Revenue: Systems Management............ $ 35,210 $ 40,969 $ 42,558 $ 52,067 Federal Systems............... 26,262 26,815 27,553 31,558 Applications Management....... 26,459 28,228 28,244 26,873 Corporate and other........... 8,054 10,585 12,191 15,545 -------- -------- -------- -------- Consolidated totals......... $ 95,985 $106,597 $110,546 $126,043 ======== ======== ======== ======== Operating Profit (Loss): Systems Management............ $ 11,625 $ 15,535 $ 16,389 $ 22,309 Federal Systems............... 2,300 1,816 2,038 1,828 Applications Management....... 3,859 4,630 6,155 1,764 Corporate and other........... (7,778) (7,769) (8,201) (5,726) -------- -------- -------- -------- Consolidated totals......... $ 10,006 $ 14,212 $ 16,381 $ 20,175 ======== ======== ======== ======== Year ended September 30, 1995: Revenue: Systems Management............ $ 33,374 $ 37,287 $ 37,821 $ 46,175 Federal Systems............... 23,665 24,590 25,372 28,075 Applications Management....... 20,010 25,347 29,548 32,304 Corporate and other........... 6,547 6,905 10,039 9,252 -------- -------- -------- -------- Consolidated totals......... $ 83,596 $ 94,129 $102,780 $115,806 ======== ======== ======== ======== Operating Profit (Loss): Systems Management............ $ 11,136 $ 13,460 $ 14,154 $ 16,721 Federal Systems............... 1,526 1,867 1,953 1,302 Applications Management....... 4,491 5,125 5,284 6,420 Restructuring charge.......... (19,512) Purchased research and development.................. (62,000) Corporate and other........... (6,308) (5,386) (5,894) (5,529) -------- -------- -------- -------- Consolidated totals......... $(70,667) $ 15,066 $ 15,497 $ 18,914 ======== ======== ======== ========
46
THREE MONTHS ENDED ------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- ------- ------------ Year ended September 30, 1994: Revenue: Systems Management............. $35,442 $34,046 $32,539 $39,626 Federal Systems................ 24,718 26,945 27,296 28,014 Applications Management........ 11,893 11,972 12,212 13,857 Corporate and other............ 5,263 7,311 7,657 7,112 ------- ------- ------- ------- Consolidated totals.......... $77,316 $80,274 $79,704 $88,609 ======= ======= ======= ======= Operating Profit (Loss): Systems Management............. $12,936 $12,129 $10,723 $13,227 Federal Systems................ 1,614 1,694 2,391 1,561 Applications Management........ 2,604 1,367 3,181 4,162 Corporate and other............ (5,731) (4,157) (4,485) (4,087) ------- ------- ------- ------- Consolidated totals.......... $11,423 $11,033 $11,810 $14,863 ======= ======= ======= =======
47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning the directors of the Company is set forth in the Proxy Statement to be provided to stockholders in connection with the Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement") under the heading "Election of Directors," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading "Executive Officers" in Part I of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information concerning executive compensation is set forth in the Proxy Statement under the heading "Management Compensation," which information is incorporated herein by reference. Information contained in the Proxy Statement under the caption "Management Compensation--Report of the Executive and Stock Option Committees on Executive Compensation" and "--Stock Performance Chart" is not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Management and Certain Stockholders," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information concerning certain relationships and related transactions is set forth in the Proxy Statement under the headings "Management Compensation-- Executive and Stock Option Committee Interlocks and Insider Participation" and "Certain Transactions," which information is incorporated herein by reference. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this Annual Report on Form 10-K. 1. Consolidated Financial Statements: See Index to Consolidated Financial Statements at Item 8. 2. Consolidated Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for the Years Ended September 30, 1996, 1995 and 1994. 3. Exhibits: 3.1 Certificate of Incorporation of the Company (1) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company (2) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company (3) 3.4 Certificate of Amendment of Certificate of Incorporation of the Company (4) 3.5 Restated Bylaws of the Company (5) 4.1 Form of Common Stock Certificate (6) 10.1 Supplemental Executive Retirement Plan II of Informatics General Corporation ("SERP II") (2), (16) 10.2 Amendment to SERP II (2), (16) 10.3 KnowledgeWare, Inc. 1988 Stock Incentive Plan (7), (16) 10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan (8), (16) 10.5 1996 Executive Compensation Plan for Group Presidents (9), (16) 10.6 1997 Executive Compensation Plan for Group Presidents (16), (17) 10.7 Employment Agreement with Werner L. Frank (10) (16) 10.8 Consultation Agreement dated December 1, 1994 between the Company and Francis A. Tarkenton (10), (16) 10.9 Consulting Agreement dated October 1, 1996 between the Company and Michael C. French (16), (17) 10.10 CEO Agreement dated February 12, 1996 between the Company and Sterling L. Williams (11), (16) 10.11 Form of Change-in-Control Severance Agreement dated as of February 12, 1996 between the Company and each of Sam Wyly, Charles J. Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain other executive officers and directors of the Company (11), (16) 10.12 Form of Amendment to Change-in-Control Severance Agreement dated as of June 18, 1996, between the Company and each of Sam Wyly, Charles J. Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain other executive officers and directors of the Company (12), (16) 10.13 Form of Severance Agreement dated as of February 12, 1996 between the Company and each of Jeannette P. Meier and certain other executive officers and directors of the Company (other than Sterling L. Williams) (11), (16) 10.14 Form of Change-in-Control Severance Agreement between the Company and certain officers of the Company (16), (17)
49 10.15 Form of Severance Agreement between the Company and certain officers of the Company (16), (17) 10.16 Form of Indemnity Agreement between the Company and each of its directors and officers(2) 10.17 Second Amended and Restated Revolving Credit and Term Loan Agreement dated August 24, 1995 by and among the Company and The First National Bank of Boston, as Agent, and the Banks listed on Schedule 1.1 thereto(13) 10.18 First Amendment and Modification Agreement dated January 31, 1996 by and between the Company, The First National Bank of Boston, Bank One, Texas, National Association and Bank of America National Trust and Savings Association and The First National Bank of Boston, as Agent(11) 10.19 Second Amendment and Modification Agreement dated November 20, 1996 by and between the Company, The First National Bank of Boston, BankOne, Texas, National Association and Bank of America National Trust and Savings Association and The First National Bank of Boston, as Agent(17) 10.20 Space Sharing Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc.(14) 10.21 Data Processing Agreement dated as of March 13, 1996 between the Company and Sterling Commerce, Inc.(14) 10.22 Tax Allocation Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc.(14) 10.23 Indemnification Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc.(15) 10.24 International Marketing Agreement dated as of March 4, 1996 between Sterling Software International, Inc. and Sterling Commerce International, Inc.(15) 10.25 Master Software License Agreement dated as of March 4, 1996 by and among the Company, Sterling Commerce, Inc. and their respective subsidiaries parties thereto(15) 10.26 Agreement dated as of September 19, 1996 by Sterling Commerce, Inc. for the benefit of the Company(17) 11.1 Computation of Earnings Per Share, Year Ended September 30, 1996(17) 11.2 Computation of Earnings Per Share, Year Ended September 30, 1994(17) 21.1 Subsidiaries of the Company(17) 23.1 Consent of Ernst & Young LLP(17) 27.1 Financial Data Schedule(17)
(b). Reports on Form 8-K. During the three-month period ended September 30, 1996, the Company filed two Current Reports on Form 8-K. The reports, dated September 23, 1996 and September 30, 1996, included information under Item 5--Other Events. - -------- (1) Previously filed as an exhibit to the Company's Registration Statement No. 2-82506 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10- K for the fiscal year ended September 30, 1993 and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement No. 33-69926 and incorporated herein by reference. 50 (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Registration Statement No. 2-86825 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement No. 33-56681 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Registration Statement No. 333-13303 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Annual Report on Form 10- K for the fiscal year ended September 30, 1995 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Annual Report on Form 10- K for the fiscal year ended September 30, 1994 and incorporated herein by reference. (11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference. (12) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. (13) Previously filed as an exhibit to the Company's Registration Statement No. 33-62401 and incorporated herein by reference. (14) Previously filed as an exhibit to Registration Statement No. 33-80595 filed by Sterling Commerce, Inc. and incorporated herein by reference. (15) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 filed by Sterling Commerce, Inc. and incorporated herein by reference. (16) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of the form. (17) Filed herewith. 51 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. STERLING SOFTWARE, INC. Date: November 25, 1996 /s/ Sterling L. Williams By __________________________________ Sterling L. Williams President, Chief Executive Officer and Director (Principal Executive Officer) Date: November 25, 1996 /s/ Jeannette P. Meier By __________________________________ Jeannette P. Meier Executive Vice President, Chief Financial Officer, General Counsel and Secretary (Principal Financial and Accounting Officer) 52 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: November 25, 1996 /s/ Robert J. Donachie By __________________________________ Robert J. Donachie Chairman of the Audit Committee and Director Date: November 25, 1996 /s/ Michael C. French By __________________________________ Michael C. French Director Date: November 25, 1996 /s/ Phillip A. Moore By __________________________________ Phillip A. Moore Executive Vice President and Director Date: November 25, 1996 /s/ Charles J. Wyly, Jr. By __________________________________ Charles J. Wyly, Jr. Vice Chairman of the Board and Director Date: November 25, 1996 /s/ Evan A. Wyly By __________________________________ Evan A. Wyly Vice President and Director Date: November 25, 1996 /s/ Donald R. Miller, Jr. By __________________________________ Donald R. Miller, Jr. Director Date: November 25, 1996 /s/ Francis A. Tarkenton By __________________________________ Francis A. Tarkenton Director Date: November 25, 1996 /s/ B. Joseph White By __________________________________ B. Joseph White Director Date: November 25, 1996 /s/ Sterling L. Williams By __________________________________ Sterling L. Williams President, Chief Executive Officer and Director Date: November 25, 1996 /s/ Sam Wyly By __________________________________ Sam Wyly Chairman of the Board and Director 53 INDEX TO EXHIBITS 3.1 Certificate of Incorporation of the Company (1) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company (2) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company (3) 3.4 Certificate of Amendment of Certificate of Incorporation of the Company (4) 3.5 Restated Bylaws of the Company (5) 4.1 Form of Common Stock Certificate (6) 10.1 Supplemental Executive Retirement Plan II of Informatics General Corporation ("SERP II") (2), (16) 10.2 Amendment to SERP II Agreement (2), (16) 10.3 KnowledgeWare, Inc. 1988 Stock Incentive Plan (7) 10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan (8), (16) 10.5 1996 Executive Compensation Plan for Group Presidents (9), (16) 10.6 1997 Executive Compensation Plan for Group Presidents (16), (17) 10.7 Employment Agreement with Werner L. Frank (10), (16) 10.8 Consultation Agreement dated December 1, 1994 between the Company and Francis A. Tarkenton (10), (16) 10.9 Consulting Agreement dated October 1, 1996 between the Company and Michael C. French (16), (17) 10.10 CEO Agreement dated February 12, 1996 between the Company and Sterling L. Williams (11), (16) 10.11 Form of Change-in-Control Severance Agreement dated as of February 12, 1996 between the Company and each of Sam Wyly, Charles J. Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain other executive officers and directors of the Company (11), (16) 10.12 Form of Amendment to Change-in-Control Severance Agreement dated as of June 18, 1996, between the Company and each of Sam Wyly, Charles J. Wyly, Jr., Sterling L. Williams, Jeannette P. Meier, and certain other executive officers and directors of the Company (12), (16) 10.13 Form of Severance Agreement dated as of February 12, 1996 between the Company and each of Jeannette P. Meier and certain other executive officers and directors of the Company (other than Sterling L. Williams) (11), (16) 10.14 Form of Change-in-Control Severance Agreement between the Company and certain officers of the Company (16), (17) 10.15 Form of Severance Agreement between the Company and certain officers of the Company (16), (17) 10.16 Form of Indemnity Agreement between the Company and each of its directors and officers (2) 10.17 Second Amended and Restated Revolving Credit and Term Loan Agreement dated August 24, 1995 by and among the Company and The First National Bank of Boston, as Agent, and the Banks listed on Schedule 1.1 thereto (13) 10.18 First Amendment and Modification Agreement dated January 31, 1996 by and between the Company, The First National Bank of Boston, Bank One, Texas, National Association and Bank of America National Trust and Savings Association and The First National Bank of Boston, as Agent (11) 10.19 Second Amendment and Modification Agreement dated November 20, 1996 by and between the Company, The First National Bank of Boston, BankOne, Texas, National Association and Bank of America National Trust and Savings Association and The First National Bank of Boston, as Agent (17)
10.20 Space Sharing Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc. (14) 10.21 Data Processing Agreement dated as of March 13, 1996 between the Company and Sterling Commerce, Inc. (14) 10.22 Tax Allocation Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc. (14) 10.23 Indemnification Agreement dated as of March 4, 1996 between the Company and Sterling Commerce, Inc. (15) 10.24 International Marketing Agreement dated as of March 4, 1996 between Sterling Software International, Inc. and Sterling Commerce International, Inc. (15) 10.25 Master Software License Agreement dated as of March 4, 1996 by and among the Company, Sterling Commerce, Inc. and their respective subsidiaries parties thereto (15) 10.26 Agreement dated as of September 19, 1996 by Sterling Commerce, Inc. for the benefit of the Company (17) 11.1 Computation of Earnings Per Share, Year Ended September 30, 1996 (17) 11.2 Computation of Earnings Per Share, Year Ended September 30, 1994 (17) 21.1 Subsidiaries of the Company (17) 23.1 Consent of Ernst & Young LLP (17) 27.1 Financial Data Schedule (17)
- -------- (1) Previously filed as an exhibit to the Company's Registration Statement No. 2-82506 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement No. 33-69926 and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Registration Statement No. 2-86825 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement No. 33-56681 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Registration Statement No. 333-13303 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Annual Report on Form 10- K for the fiscal year ended September 30, 1994 and incorporated herein by reference. (11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference. (12) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. (13) Previously filed as an exhibit to the Company's Registration Statement No. 33-62401 and incorporated herein by reference. (14) Previously filed as an exhibit to Registration Statement No. 33-80595 filed by Sterling Commerce, Inc. and incorporated herein by reference. (15) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 filed by Sterling Commerce, Inc. and incorporated herein by reference. (16) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of the form. (17) Filed herewith. SCHEDULE II STERLING SOFTWARE, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
ADDITIONS ---------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ---------- ---------- ----------- ------------ ---------- Allowance for doubtful accounts at September 30, 1994.............. $6,245,000 $3,559,000 $ (257,000)(1) $(3,015,000)(2) $6,532,000 ========== ========== =========== =========== ========== Allowance for doubtful accounts at September 30, 1995.............. $6,532,000 $4,351,000 $(1,563,000)(1) $(2,144,000)(2) $7,176,000 ========== ========== =========== =========== ========== Allowance for doubtful accounts at September 30, 1996.............. $7,176,000 $4,857,000 $(1,998,000)(1) $(3,959,000)(2) $6,076,000 ========== ========== =========== =========== ==========
- -------- (1) Offsets to deferred revenue. (2) Accounts written off. EX-10.6 2 EXECUTIVE COMPENSATION PLAN EXHIBIT 10.6 EXECUTIVE COMPENSATION PLAN Sterling Software, Inc. Group Presidents FY97 PURPOSE - ------- The purpose of the Executive Compensation Plan ("Plan") is to provide rewards for Group Presidents based on their ability to achieve and exceed specific Group objectives. ELIGIBILITY - ----------- All Group Presidents ("Participants") are eligible to participate in the Plan. Eligibility of certain persons to participate in the Plan may be changed at any time at the sole discretion of the Chief Operating Officer of Sterling Software, Inc. ("COO"). EFFECTIVE PERIOD - ---------------- The Plan is in effect beginning October 1, 1996 through September 30, 1997, subject to change at any time at the sole discretion of the COO. The Plan does not constitute an employment agreement and the COO reserves the right to terminate the employment of the Participants without cause at any time. GROUP OBJECTIVES - ---------------- Certain Plan compensation will be based on the achievement of specific Group Operating Profit Objectives. Each Participant in the Plan agrees to provide a detailed action plan to achieve his assigned Group Objectives against which his performance will subsequently be measured. Group Objectives, their achievement and the methods of measuring achievement will be determined by the COO for the purposes of this Plan. Objectives are subject to change at any time at the sole discretion of the COO in the exercise of his reasonable business judgment. COMPENSATION TERMS - ------------------ The amounts and types of compensation to be received under the Plan will be determined by each Participant's Executive Compensation Agreement ("Agreement"). PAYMENTS - -------- Salaries provided for under the Agreement are payable bi-weekly from the effective date of the Agreement. Contingent compensation provided for under the Agreement is payable (i) no later than sixty days after the applicable quarter end with respect to compensation based upon quarterly objectives and (ii) no later than ninety-five days after the fiscal year end with respect to compensation based upon annual objectives. No payment of contingent compensation will be EXECUTIVE COMPENSATION PLAN Page Two made unless a Participant is a full-time employee of Sterling Software, Inc. acting in the capacity of a Group President at quarter end, with respect to any quarterly objective, or at September 30, 1997, with respect to an annual objective; provided however that in the event of termination of a Participant's employment as a result of the death or disability of a Participant while acting in the capacity of a Group President, Sterling Software, Inc. shall pay to such Participant a prorated portion of the contingent compensation provided for herein provided that at least 90% of the Group Operating Profit had been attained on a prorata basis as of the Participant's termination of employment. -2- EX-10.9 3 CONSULTING AGMT. EXHIBIT 10.9 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is made and entered into as of the 1st day of October, 1996, by and between Sterling Software, Inc., a Delaware corporation (the "Company"), and Michael C. French, an individual (the "Consultant"). RECITALS: A. The Company has obtained and is desirous of continuing to obtain certain legal, financial and other strategic consulting services from the Consultant, and the Consultant has provided and wishes to continue to provide such services to the Company, all upon the terms and conditions set forth in this Agreement. B. Therefore, in consideration of the mutual convenants and agreements herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Consultant hereby agree as follows: AGREEMENT: Section 1. Consulting Services. The Consultant shall provide such ------------------- legal, financial and other strategic consulting services for the Company as the Chairman of the Board of Directors or the Chief Executive Officer of the Company may from time to time reasonably request. The Consultant acknowledges and agrees that he also may be asked to provide such services to certain subsidiaries and affiliates of the Company and that he shall do so on the same basis as he is to provide services to the Company. All references to the Company in this Agreement shall also include any such subsidiary or affiliate, unless otherwise clearly required by the context. In providing services to the Company under this Agreement, the Consultant shall be at all times under and subject to the direction and supervision of the Chairman of the Board of Directors and the Chief Executive Officer of the Company. Section 2. Consulting Fees; Expenses. As consideration for providing ------------------------- services to the Company under this Agreement, the Consultant shall be entitled to a fee, payable by the Company on a monthly basis (or on any other periodic basis hereafter agreed to by the Company and the Consultant), of $17,500 per month. In addition to the fees provided for above, the Consultant shall be entitled to reimbursement from the Company of any direct, out-of-pocket expenses incurred by the Consultant during the course of providing services to the Company under this Agreement. Section 3. Termination. This Agreement shall continue from and after ----------- the date hereof until terminated in accordance with the following subsections: (a) Either party may terminate this Agreement for any reason by giving the other party 30 days prior written notice of such termination. If the Consultant terminates this Agreement pursuant to this Section 3(a) or if the Company terminates this Agreement because of gross misconduct on the part of the Consultant (which finding of gross misconduct must be made by a majority of the Company's directors and memorialized in a resolution duly adopted thereby), the Company shall be obligated to pay the Consultant the monthly consulting fee specified above for the month in which such termination occurs, but thereafter shall have no obligation to pay any consulting fees hereunder. If the Company terminates this Agreement for any other reason (other than the death or Total Disability (as defined below) of the Consultant, which circumstances are governed by subsections (b) and (c) below), the Consultant shall be entitled to receive from the Company the monthly consulting fee specified above for a period of 36 months from and after the month in which such termination occurs, provided that the Consultant executes and delivers to the Company a release and confidentiality agreement reasonably satisfactory to the Company. (b) This Agreement shall terminate automatically upon the death of the Consultant. In such event, the Company shall be obligated to pay the estate of the Consultant the monthly consulting fee specified above for a period of 36 months from and after the month in which such death occurs. (c) This Agreement may be terminated by the Company upon the Total Disability of the Executive. As used herein, the term "Total Disability" shall mean the Executive's inability to render any services under this Agreement for a period of six consecutive calendar months. In order to terminate this Agreement as a result of the Consultant's Total Disability, the Company shall notify the Executive (or an appropriate representative thereof) of such termination in writing. If the Company terminates this Agreement pursuant to this Section 3(c), the Consultant shall be entitled to receive from the Company the monthly consulting fee specified above for a period of 36 months from and after the month in which such termination occurs, provided that the Consultant (or an appropriate representative thereof) executes and delivers to the Company a release and confidentiality agreement reasonably satisfactory to the Company. Section 4. Confidentiality; Related Matters. The Consultant shall -------------------------------- not use, for his personal gain or benefit or the personal gain or benefit of any member of his family, any confidential or proprietary information of the Company which is obtained by or provided to the Consultant consistent with the purposes and intent of this Agreement. During the term of this Agreement and for so long as he receives consulting fees hereunder, the Consultant shall not act as a legal or financial consultant or advisor to any other person or entity in the computer software, hardware or services industry without the prior written consent of the Company's Chief Executive Officer or the Chairman of its Board of Directors. During the term of this Agreement and for so long as he receives consulting fees hereunder, the Consultant shall not, on his own behalf or on behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, any person employed by the Company. Section 5. Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the Company (and its subsidiaries) and the Consultant with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the Company (and its subsidiaries) and the Consultant with respect to such subject matter. -2- Section 6. Binding Effect; Assignment. This Agreement shall be -------------------------- binding upon and inure to the benefit of only the Company (and its subsidiaries) and the Consultant and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any person other than the Company (and its subsidiaries) and the Consultant, and their respective successors and permitted assigns, any rights, benefits or remedies of any nature whatsoever. Section 7. Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the laws of the State of Texas. Section 8. Descriptive Headings. The descriptive headings herein are -------------------- inserted for convenience of reference only, do not constitute a part of this Agreement and shall not affect in any manner the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the Company and the Consultant have executed and delivered this Agreement as of the date first above written. STERLING SOFTWARE, INC. By: /s/ Sterling L. Williams ------------------------ Sterling L. Williams, President and Chief Executive Officer /s/ Michael C. French --------------------- Michael C. French -3- EX-10.14 4 CHANGE IN CONTROL SEVERANCE AGMT. EXHIBIT 10.14 [Form of Agreement for Executives with Severance Agreement] CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of _________ __, 199_, by and between Sterling Software, Inc., a Delaware corporation (the "Company"), and ______________________________ (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive of the Company and is expected to make major contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case of most companies, the possibility of a Change in Control exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives, including the Executive, applicable in the event of a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere --------------------- herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for the Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a committee thereof. (b) "Change in Control" means the occurrence during the Term of any of the following events: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than two-thirds of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than two-thirds of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred or will occur in the future pursuant to any then-existing contract or transaction; or (v) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (v) each Director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two- thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company, (B) an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock (a "Subsidiary"), or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock of the Company, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership or any increase or decrease thereof. -2- (c) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, 401(k), employee stock ownership (ESOP), supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement, executive automobile, tax and financial planning, club memberships, incentive travel, tax reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. (d) "Incentive Pay" means (i) if calculated at any time commencing one year after the date first set forth above, an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years (or such lesser number of calendar years as this Agreement shall have been in effect) immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company or any successor thereto, providing benefits at least as great as the benefits payable thereunder prior to a Change in Control and (ii) if calculated at any time prior to one year after the date first set forth above, an amount equal to 100% of the aggregate of the budgeted annual bonus, incentive or other budgeted payments of cash compensation, in addition to Base Pay, at plan for such Executive. (e) "Severance Period" means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earliest of (i) the _____ anniversary of the occurrence of the Change in Control, or (ii) the Executive's death; provided, however, that commencing on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (f) "Term" means the period commencing as of the date first set forth above and expiring as of the later of (i) the close of business on December 31, 200_, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on January 1, 199_ and each January 1 thereafter, the Term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended and (B) subject to the last sentence of Section 8, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the -3- Company or any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. 2. Operation of Agreement: This Agreement will be effective and ---------------------- binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement shall become immediately operative. 3. Termination Following a Change in Control: (a) In the event of ----------------------------------------- the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period. If, during the Severance Period, the Executive's employment is terminated by the Company or any Subsidiary other than as a result of the Executive's death, the Executive will be entitled to the benefits provided by Section 4 hereof. (a) In the event of the occurrence of a Change in Control, the Executive may terminate his or her employment with the Company during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office of the Company which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate amount of the Executive's Base Pay and Incentive Pay, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof, any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (iii) A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided it has been made in good faith and in all events will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following a Change in Control, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the Change in Control, which has rendered the Executive substantially unable to carry out, has substantially hindered Executive's performance of, or has caused Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in Control, which situation is not remedied within -4- 10 calendar days after written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 10(a); (v) The Company relocates its principal executive offices, or requires the Executive to have his principal location of work changed, to any location which is in excess of 25 miles from the location thereof immediately prior to the Change in Control, or requires the Executive to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change in Control without, in either case, his prior written consent; or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. (b) A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) will not affect any rights which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. The Company and the Executive are parties to a Severance Agreement, dated as of __________ __, 199_ (as such agreement may be amended from time to time, the "Severance Agreement"). Notwithstanding anything contained in this Agreement to the contrary, in the event the Executive's employment with the Company is terminated under circumstances in which the Executive would otherwise be entitled to receive payments and benefits under both this Agreement and the Severance Agreement, the Executive shall have the right to elect to receive payments and benefits under either this Agreement or the Severance Agreement, but not both (except that the Executive may in all events receive all payments and benefits to which he or she is entitled under the Severance Agreement during the period between the Termination Date and the Election Date (as such terms are defined below)). Within five business days following the date of the termination of the Executive's employment with the Company under the circumstances described in the preceding sentence (the "Termination Date"), which shall be the effective date of such termination if the termination is pursuant to Section 3(a) or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b), the Company shall provide the Executive, in writing, a reasonably detailed determination of the payments and other benefits under each of this Agreement and the Severance Agreement. Executive shall make the election provided for in this Section 3(c) by providing the Company written notice thereof within 30 days after the Executive's receipt of the written determination referred to in the preceding sentence; provided, however, that if such election is not so made within such 30-day period, the Executive shall be irrevocably deemed to have elected to -5- receive payments and benefits under this Agreement (the date on which such election is so made or deemed to have been made being the "Election Date"). 4. Severance Compensation: (a) If, following the occurrence of a ---------------------- Change in Control, the Company terminates the Executive's employment during the Severance Period pursuant to Section 3(a) (other than as a result of the Executive's death), or if the Executive terminates his employment during the Severance Period pursuant to Section 3(b), the Company will: (i) pay to the Executive, within five business days after the Termination Date (or, in the event that the circumstance described in Section 3(c) hereof is applicable, within five business days after the Election Date), a lump sum payment (the "Severance Payment") in an amount equal to _____ times the sum of (A) Base Pay (at the highest rate in effect for any period prior to the Termination Date), plus (B) Incentive Pay (determined in accordance with the standard set forth in Section 1(d)); provided however, that Severance Payment shall be reduced by the aggregate amount of all cash payments, if any, previously received by the Executive pursuant to his or her Severance Agreement prior to the Election Date. (ii) (A) for _____ months following the Termination Date (the "Continuation Period"), arrange at its sole expense, to provide the Executive with Employee Benefits that are benefits under welfare plans (as that term is used in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) substantially similar to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, and (B) such Continuation Period will be considered service with the Company for the purpose of determining service credits and benefits due and payable to the Executive under the Company's retirement income, supplemental executive retirement and other benefit plans of the Company applicable to the Executive, his dependents or his beneficiaries immediately prior to the Termination Date. If and to the extent that any benefit described in subsection (A) or (B) of this Section 4(a)(ii) is not or cannot be paid or provided under ERISA or any other applicable law or regulation or under any policy, plan, program or arrangement of the Company, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purposes or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to subsection (A) of this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive's Termination Date, and any such benefits actually received by the Executive shall be reported by the Executive to the Company. Notwithstanding the preceding sentence, in the event that the Executive is required to pay any amounts in connection with the receipt of such welfare benefits, the Company will be obligated to promptly reimburse the Executive for the amounts paid by the Executive to receive such benefits. (b) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant -6- period in the Southwest Edition of The Wall Street Journal. Such interest will ----------------------- be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (c) Notwithstanding any other provision of this Agreement to the contrary, the parties' respective rights and obligations under this Section 4 and under Sections 5 and 7 will survive any termination or expiration of this Agreement or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. Certain Additional Payments by the Company: (a) Anything in ------------------------------------------ this Agreement to the contrary notwithstanding, in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that all or any portion of any payment or distribution by the Company or any of its affiliates to or for the benefit of the Executive pursuant to the terms of this Agreement or otherwise, including under any stock option or other agreement, plan, policy, program or arrangement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto), by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); provided, however, that no Gross- Up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with an ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (a) Subject to the provisions of Section 5(f), all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within five business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive a written opinion to the effect that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable -7- state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within five business days after receipt of such determination and calculations. (b) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 5. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (c) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within five business days pay to the Company the amount of such reduction. (d) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 5 shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within five business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (e) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such -8- period that it desires to contest such claim, the Executive, subject to the provisions of Section 5(h) of this Agreement, shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (f) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), a determination is made that the Executive shall not be entitled to any refund -9- with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 5. (h) Any information provided by Executive to the Company under this Section 5 shall be treated confidentially by the Company and will not be provided by the Company to any other person than the Company's professional advisors without Executive's prior written consent except as required by law. 6. No Mitigation Obligation: The Company hereby acknowledges that it ------------------------ will be difficult and may be impossible for the Executive to find reasonably comparable employment within a reasonable time period following the Termination Date. In addition, the Company acknowledges that its severance pay plans and policies applicable in general to its salaried employees typically do not provide for mitigation, offset or reduction of any severance payments received thereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the last two sentences of Section 4(a)(ii). 7. Legal Fees and Expenses: It is the intent of the Company that the ----------------------- Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. -10- 8. Employment Rights: Nothing expressed or implied in this Agreement ----------------- will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any event or occurrence described in Section 3(b)(i), (ii), (v) or (vi) hereof following the commencement of a discussion with a third person that ultimately results in a Change in Control shall be deemed to have occurred after a Change in Control for the purposes of this Agreement. 9. Withholding of Taxes: The Company may withhold from any amounts -------------------- payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 10. Successors and Binding Agreement: (a) The Company will require any -------------------------------- successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (a) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (b) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices: For all purposes of this Agreement (except as otherwise ------- expressly provided in this Agreement with respect to notice periods), all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or ten business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or five business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company at 8080 North Central Expressway, Suite -11- 1100, Dallas, Texas 75206 (to the attention of the President of the Company) and to the Executive at the Company's address, with a copy to the Executive at his or her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 12. Governing Law: The validity, interpretation, construction and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 13. Validity: If any provision of this Agreement or the application of -------- any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Miscellaneous: No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 15. Counterparts: This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 16. Termination of Prior Agreements. The [title of agreement] between ------------------------------- Executive and Sterling Software, dated _______________, as amended to the date hereof (the "Prior Agreement"), shall terminate automatically and shall thereafter be of no further force or effect; provided, however, that if this Agreement is held wholly invalid, unenforceable or otherwise illegal, the preceding clause shall have no effect and the Prior Agreement shall be deemed to have continued at all times in force and effect. Subject to the foregoing proviso, this Agreement supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. -12- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. STERLING SOFTWARE, INC. By ----------------------------------- Sterling L. Williams President & Chief Executive Officer ----------------------------------- [Executive] -13- EX-10.15 5 SEVERANCE AGMT. EXHIBIT 10.15 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the ____ day of __________, 199 by and between Sterling Software, Inc., a Delaware corporation ("Sterling Software"), and ____________________, an individual ("Executive"). RECITALS: WHEREAS, Sterling Software acquires, develops, markets and supports a broad range of products and services; and WHEREAS, Sterling Software desires to retain Executive as its ____________________; and WHEREAS, Executive is willing to accept such responsibilities; NOW, THEREFORE, in consideration of the premises and covenants contained herein and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENTS: 1. Employment. Executive agrees to render such managerial services as ---------- are customarily required of the ____________________, and Sterling Software agrees to utilize such services on the terms and conditions contained herein. 2. Term. This Agreement shall commence on the date first set forth above ---- and shall continue in effect for _____ (__) months after the "Notice Date" as defined in Section 3 hereof. 3. Termination of Employment. The parties acknowledge that Executive is ------------------------- employed "at will" and may be terminated by Sterling Software at any time with or without cause. The Executive shall be entitled to termination pay calculated in accordance with Section 4 hereof upon termination of Executive's employment by Sterling Software, with or without cause. The date on which a notice of termination is given to Executive by Sterling Software shall be deemed the "Notice Date" with the termination to be effective _____ (__) months following the Notice Date. On the Notice Date, Executive shall be deemed to have been assigned "no duties," shall vacate his or her office and shall resign as an officer of Sterling Software and its subsidiaries. Since Executive will be assigned "no duties" with Sterling Software, Executive shall be free to pursue other employment or consulting opportunities during the _____ month period in which Executive receives termination pay. 4. Termination Pay. For purposes of this Agreement, if Executive's --------------- employment is terminated (or deemed to be terminated) pursuant to Section 3, upon receipt from Executive (or Executive's estate or personal representative) of a fully executed release in form reasonably acceptable to counsel for Sterling Software, Sterling Software shall pay, or cause one of its subsidiaries to pay, to Executive as termination pay: (a) an amount equal to _____ hundred percent of Executive's aggregate monthly salary for the twelve (12) months immediately preceding the Notice Date (or, if Executive shall not have been employed for such twelve month period, an amount equal to _______ hundred percent of Executive's annual salary rate in effect immediately prior to the Notice Date); and (b) an amount equivalent to the product of _____ times: (i) if Executive shall have completed at least twelve months employment with Sterling Software prior to the Notice Date, the amount of Executive's aggregate bonuses during the twelve months immediately prior to the Notice Date (the "Last Bonus"), after deducting from such product one hundred percent (100%) of the accrued but unpaid bonus amount Executive is entitled to receive on the Notice Date, pursuant to any bonus or incentive compensation plan of Sterling Software, for periods of service after the period for which Executive received or was entitled to receive the Last Bonus or (ii) if Executive shall not have completed at least twelve months employment with Sterling Software prior to the Notice Date, an amount equal to the greater of (x) the amount of the Last Bonus, if any or (y) 100% of the aggregate of the budgeted annual bonus, incentive or other budgeted payments of cash compensation, in addition to the Executive's annual base salary, at plan for such Executive in effect immediately prior to the Notice Date, after deducting from such product under this clause (ii) one hundred percent (100%) of the accrued but unpaid bonus amount Executive is entitled to receive on the Notice Date, pursuant to any bonus or incentive plan of Sterling Software, for periods of service after the period for which Executive received or was entitled to receive the Last Bonus, if any. -2- In the event of Executive's death or disability following the Notice Date, Executive, Executive's estate or Executive's personal representative, as the case may be, shall continue to receive the termination payments provided for in this Section 4. 5. Disbursement of Termination Pay. The aggregate amount of all ------------------------------- termination payments that are payable to Executive as provided in Section 4 hereof shall be determined in good faith by Sterling Software within 15 days following the Notice Date, and such termination payments shall be distributed by Sterling Software to Executive in _____ (__) equal bi-monthly installments beginning thirty (30) days following the Notice Date and continuing bi-monthly thereafter. 6. Continuation of Medical and Health Benefits. For a period of _____ ------------------------------------------- (__) months following the Notice Date, Sterling Software shall arrange to provide Executive, at no additional charge to Executive, with life, medical, dental, health, accident and disability insurance benefits substantially similar to those that Executive is receiving or is entitled to receive immediately prior to the Notice Date, which benefits shall in no event be less than those benefits in effect immediately prior to the Notice Date. 7. Continued Participation in Employee Plans. For a period of _____ (__) ----------------------------------------- months following the Notice Date, Executive shall continue to participate in Sterling Software's Employee Stock Ownership Plan and/or 401(k) Plan and any other such plans as may be adopted in the future for the benefit and retention of Sterling Software's executive officers. In no event will Sterling Software be required to make any new grants of options to such Executive under Sterling Software's Stock Option Plans after the Notice Date. 8. Change-in-Control. Sterling Software and the Executive are parties to ----------------- a Change-in-Control Severance Agreement, dated as of ________ __, 199 (as such agreement may be amended from time to time, the "Change-in- Control Agreement"). Notwithstanding anything contained in this Agreement to the contrary, in the event the Notice Date occurs under circumstances in which the Executive would otherwise be entitled to receive payments and benefits under both this Agreement and the Change-in-Control Agreement, the Executive shall have the right to elect to receive payments and benefits under either this Agreement or the Change-in-Control Agreement, but not both. Within five business days following the Notice Date under circumstances in which this Section 8 would apply, Sterling Software shall provide the Executive, in writing, a reasonably detailed determination of the payments and other benefits under each of this Agreement and the Change-in-Control Agreement. The Executive shall make the election provided for in this Section 8 within thirty calendar days after Executive's receipt of the written determination referred to in the preceding sentence; provided, however, that if such election is not so made within such 30-day period, -3- the Executive shall be irrevocably deemed to have elected to receive payments and benefits under the Change-in-Control Agreement. Prior to the date on which Executive makes or is deemed to have made the election referred to above, he shall receive all benefits under Sections 4, 5, 6 and 7 of this Agreement as if the Executive had made the election to receive benefits and payments under this Agreement. 9. Miscellaneous. ------------- (i) Notices, demands, payments, reports and correspondence shall be addressed to the parties hereto at the address for such party set forth below or such other places as may from time to time be designated in writing to the other party. Notices hereunder shall be deemed to be given on the date such notices are actually received. If to Sterling Software, to: 8080 N. Central Expressway, Suite 1100 Dallas, Texas 75206 Attention: President If to Executive, to: (ii) This Agreement shall be binding upon Sterling Software and Executive and their respective successors, assigns, heirs and personal representatives. (iii) The substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of the provisions of this Agreement. (iv) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and Sterling Software. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. -4- 10. Termination of Prior Agreements. The [title of agreement] between ------------------------------- Executive and Sterling Software, dated _______________, as amended to the date hereof (the "Prior Agreement"), shall terminate automatically and shall thereafter be of no further force or effect; provided, however, that if this Agreement is held wholly invalid, unenforceable or otherwise illegal, the preceding clause shall have no effect and the Prior Agreement shall be deemed to have continued at all times in force and effect. Subject to the foregoing proviso, this Agreement supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. Executed by the parties hereto as of the date first set forth above. EXECUTIVE --------------------------------- Name: ---------------------------- STERLING SOFTWARE, INC. By: ------------------------------ Sterling L. Williams President and Chief Executive Officer -5- EX-10.19 6 SECOND AMEND. AND MODIFICATION AGMT. EXHIBIT 10.19 SECOND AMENDMENT AND MODIFICATION AGREEMENT SECOND AMENDMENT AND MODIFICATION AGREEMENT dated as of November 20, 1996 (this "Amendment") by and among STERLING SOFTWARE, INC., a Delaware corporation (the "Company"); the direct and indirect subsidiaries of the Company listed on the signature pages hereto (collectively, the "Sterling Subsidiaries"); THE FIRST NATIONAL BANK OF BOSTON, BANK ONE, TEXAS, NATIONAL ASSOCIATION, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (collectively, the "Banks"); and THE FIRST NATIONAL BANK OF BOSTON, as Agent (the "Agent") for the Banks, amending certain provisions of the Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of August 24, 1995 (as heretofore amended, the "Agreement") among the Company, the Banks and the Agent and the other Loan Documents (as defined in the Agreement). Terms not otherwise defined herein which are defined in the Agreement shall have the respective meanings assigned to such terms in the Agreement. WHEREAS, the Company has requested that the Agent and the Banks amend certain provisions of the Agreement; WHEREAS, upon the terms and subject to the conditions contained herein, the Agent and the Banks are willing to amend such provisions of the Credit Agreement; NOW, THEREFORE, in consideration of the mutual agreements contained in the Agreement, the other Loan Documents and this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: (S)1. Amendment of (S)9.9 of the Agreement. Section 9.9(e) of the ------------------------------------ Agreement is hereby deleted in its entirety, and the following new subsection (e) is hereby substituted in lieu thereof: "(e) Sales of Sterling Accounts Receivable pursuant to the Sterling Accounts Receivable Agreements (i) with respect to sales of such Sterling Accounts Receivable pursuant to or in connection with which the Company or any of its Subsidiaries incurs Indebtedness, in an aggregate amount outstanding at any time not to exceed $35,000,000, and (ii) with respect to all other sales of any Sterling Accounts Receivable, in an aggregate amount outstanding at any time not to exceed $75,000,000;" (S)2. Amendment of (S)10.2 of the Agreement. Section 10.2 of the ------------------------------------- Agreement is hereby amended by deleting the period (".") at the end thereof and substituting in lieu thereof the following text: "; provided, however, that for purposes of calculating the ratio of -------- ------- Operating Cash Flow to Interest Charges for the fiscal quarter of the Company ending September 30, 1996, cash taxes paid by the Company during such fiscal -2- quarter in an amount not to exceed $43,500,000 shall not be deducted from the calculation of Operating Cash Flow." (S)3. Replacement of Schedules 1.3, 1.6, 5.2 and 5.6 to the Agreement. --------------------------------------------------------------- Schedules 1.3, 1.6, 5.2, and 5.6 to the Agreement are hereby deleted in their - ------------- --- --- --- entirety, and Schedules 1.3, 1.6, 5.2, and 5.6 attached hereto are respectively ------------- --- --- --- substituted in lieu thereof. (S)4. Conditions To Effectiveness. This Amendment shall be deemed to be --------------------------- effective as of September 30, 1996 (the "Effective Date") upon the Agent's receipt on or before November 20, 1996, of facsimile copies of original counterparts (to be followed promptly by original counterparts) or original counterparts of this Amendment, duly executed by each of the Company, the Sterling Subsidiaries, the Agent and the Banks. (S)5. Representations and Warranties; No Default; Authorization. Each of --------------------------------------------------------- the Company and the Sterling Subsidiaries hereby represents and warrants to each of the Agent and the Banks as follows: (a) Each of the representations and warranties of the Company and the Sterling Subsidiaries contained in the Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Agreement, the other Loan Documents or this Amendment was true as of the date as of which it was made, and no Default or Event of Default has occurred and is continuing as of the date of this Amendment; and (b) This Amendment has been duly authorized, executed and delivered by the Company and each of the Sterling Subsidiaries, and shall be in full force and effect upon the satisfaction of the conditions set forth in (S)4 hereof, and the agreements of the Company and each of the Sterling Subsidiaries, contained herein, in the Agreement, as herein or heretofore amended, or in the other Loan Documents, as heretofore amended, respectively constitute the legal, valid and binding obligations of the Company and each of the Sterling Subsidiaries, party hereto or thereto, enforceable against the Company or such Sterling Subsidiary, in accordance with their respective terms; and (c) Sterling Software (United States of America), Inc. has previously been merged into the Company, with the Company as the surviving entity, and accordingly is no longer a guarantor under the Guaranty or a Sterling Subsidiary. (S)6. Ratification, Etc. Except as expressly amended hereby, the ----------------- Agreement, the other Loan Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. All references in the Agreement or such other Loan Documents or in any related agreement or instrument to the Agreement or such other Loan Documents shall hereafter refer to such agreements as amended hereby, pursuant to the provisions of the Agreement. -3- (S)7. No Implied Waiver, Etc. Except as expressly provided herein, ---------------------- nothing contained herein shall constitute a waiver of, impair or otherwise affect any of the Obligations, any other obligations of the Company or any of the Sterling Subsidiaries or any right of the Agent or the Banks consequent thereon. The waivers and consents provided herein are limited strictly to their terms. Neither the Agent nor any of the Banks shall have any obligation to issue any further waiver or consent with respect to the subject matter hereof or any other matter. (S)8. Counterparts. This Amendment may be executed in one or more ------------ counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. (S)9. Governing Law. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED BY ------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CHOICE OR CONFLICTS OF LAWS). -4- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. THE FIRST NATIONAL BANK OF BOSTON, individually and as Agent By: ------------------------------- Title: BANK ONE, TEXAS, NATIONAL ASSOCIATION By: ------------------------------- Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------- Title: STERLING SOFTWARE, INC. By: ------------------------------- Title: -5- Each of the undersigned hereby acknowledges the foregoing Amendment as of the Effective Date and agrees that its obligations under the Guaranty will extend to the Agreement, as so amended, and the other Loan Documents, as so amended. STERLING SOFTWARE (U.S.), INC. By: ------------------------------- Title: STERLING SOFTWARE (SOUTHERN), INC. By: ------------------------------- Title: STERLING SOFTWARE (U.S.A.), INC. By: ------------------------------- Title: STERLING SOFTWARE INTERNATIONAL, INC. By: ------------------------------- Title: STERLING SOFTWARE LEASING COMPANY By: ------------------------------- Title: -6- STERLING SOFTWARE (U.S. OF AMERICA), INC. By: ------------------------------- Title: -7- Schedule 1.3 to the Agreement ----------------------------- Non-Guarantor Subsidiaries --------------------------
State of Company Incorporation Chief Executive Office - ------ ------------- ---------------------- Sterling Software (Midwest), Inc. Delaware Ohio Southwest Beta Services Delaware Texas Sterling ZeroOne, Inc. Delaware California ZeroOne Systems, Inc. Delaware Texas Systems Center, Inc. Wyoming Texas Data Management Information Delaware Virginia NetMaster, Inc. Delaware Virginia Matesys Corporation California Texas IWK Corporation Delaware Texas Sterling Software International (Australia) Limited Delaware Texas Sterling Software (Eastern), Inc. Delaware Texas
-8- Schedule 1.6 to the Agreement ----------------------------- Sterling Subsidiaries ---------------------
State of Location of Chief Company Incorporation Executive Office ------- ------------- ---------------- Sterling Software (U.S.), Inc. Delaware Virginia Sterling Software (Southern), Inc. Georgia Georgia Sterling Software International, Inc. Delaware Texas Sterling Software Leasing Company Delaware Texas Sterling Software (U.S. of America), Delaware Virginia Inc. Sterling Software (U.S.A.), Inc. California California
-9- Schedule 5.2 to the Agreement ----------------------------- Subsidiaries of the Sterling Companies --------------------------------------
Domestic Subsidiaries - --------------------- 1. Owned by the Company. -------------------- Authorized Issued Subsidiary Capital (Class) Shares - ---------- -------------- ------ Sterling Software 50,000 (Common) 1,000 (Midwest), Inc. Sterling Software (U.S.), 1,000 (Common) 1,000 Inc. Systems Center, Inc. 1,000 (Common) 1,000 (Wyoming) Sterling Software 50,000 (Common) 1,000 International, Inc. Sterling Software Leasing 10,000 (Common) 1,000 Company Sterling ZeroOne, Inc. 50,000 (Common) 1,000 Sterling Software 25,000 (Common) 995 (U.S.A.), Inc. ZeroOne Systems, Inc. 50,000 (Common) 1,000 Sterling Software 10,000 (Common) 1,000 (Southern), Inc. 1,000 (Preferred) 0 Sterling Software 1,000 (Common) 0 (Southwest), Inc. Southwest Beta Services, 1,000 (Common) 1,000 Inc. Sterling Software (U.S. of 5,000 (Common) 1,000 America), Inc. Sterling Software 10,000 (Common) 1,000 (Eastern), Inc. 1,000 (Preferred) 0 Sterling Software 50,000 (Common) 1,000 International (Australia) Limited 2. Owned by Sterling Software (Southern), Inc. ------------------------------------------ Authorized Issued Subsidiary Capital (Class) Shares - ---------- -------------- ------ IWK Corporation 1,000 (Common) 0
-10- 3. Owned by Matesys Mathematics Systems, S.A. ------------------------------------------
Authorized Issued Subsidiary Capital (Class) Shares - ---------- --------------- ------ Matesys Corp. 1,000,000 65,000
4. Foreign Subsidiaries* -------------------- Place of Incorporation ------------- Sterling Software (Pacific) Pty Limited Australia Sterling Software (Australia) Pty Limited Australia Systems Center Pty Limited Australia Systems Center Handelgesellschaft M.B.H. Austria KnowledgeWare G.M.B.H. Austria Sterling Software (Benelux) NV Belgium Sterling Software (Benelux) BVBA Belgium Systems Center BVBA Belgium Sterling Software do Brasil Ltda.** Brazil Sterling Software do Brasil Participacoes Ltda. Brazil Sterling Software (Canada), Inc. Canada Sterling International Finance, Inc. British W. Indies Sterling Software Denmark (Branch Office of Denmark Sterling Software, Sweden AB) KnowledgeWare AB, filial i Finland (Branch Office of Finland Sterling Software AB) Matesys Mathematics Systems S.A. France Sterling Software France II France Sterling Software International (France) SARL France Sterling Software (France) SA France VM Software SARL France Sterling Software GMBH Germany
* All such subsidiaries are directly or indirectly 100% owned by Sterling Software, Inc., except for certain de minimis shares held by employees or local residents as nominee shareholders or as otherwise provided below. ** 49% ownership by Sterling Software do Brasil Participacoes Ltda. -11-
Systems Center Limited Hong Kong KnowledgeWare (Far East) Limited Hong Kong Sterling Software (Israel), Ltd. Israel KnowledgeWare SRL Italy Sterling Software (Italia) SRL Italy Sterling Software (Japan) Ltd. Japan Sterling Software (Netherlands) B.V. Netherlands SCI Systems Center Netherlands/ Sterling Software (Netherlands) (Branch of Netherlands Sterling Software (Benelux) NV) Sterling Software (Australia) PTY Limited New Zealand (New Zealand Branch) Sterling Software (New Zealand) Limited New Zealand Sterling Software (Scandinavia) AS Norway Systems Center AS Norway KnowledgeWare (Norway) Norway Condessa Gestao E Investimentos Lda Portugal Sterling Software (Portugal) - Informatica, Lda Portugal Sterling Software (Singapore) PTE Ltd. Singapore Sterling Aplicaciones Informaticas (Espana), S.A. Spain KnowledgeWare AB Sweden Sterling Software AB Sweden Sterling Software (Switzerland) AG Switzerland Sterling Software International (U.K.) Limited United Kingdom Sterling Software (U.K.) Holdings, Ltd. United Kingdom Sterling Software (U.K.) Limited United Kingdom Sterling Software (U.K.) II Limited United Kingdom VM Software (UK) Limited United Kingdom Systems Center Limited United Kingdom Sterling Software (Virgin Islands), Inc. Virgin Islands
-12- Schedule 5.6 to the Agreement ----------------------------- Mailing Addresses of the Company and each of the Sterling Subsidiaries ---------------------------------------------------------------------- Sterling Software, Inc. 8080 N. Central Expressway, Suite 1100 Dallas, Texas 75206 Sterling Software (U.S.), Inc. 1650 Tysons Blvd., Suite 800 McLean, Virginia 22102-3915 Sterling Software (Southern), Inc. 3340 Peachtree Road, N.E., Suite 1100 Atlanta, Georgia 30326 Sterling Software International, Inc. 8080 N. Central Expressway, Suite 1100 Dallas, Texas 75206 Sterling Software Leasing Company 8080 N. Central Expressway, Suite 1100 Dallas, Texas 75206 Sterling Software (U.S. of America), Inc. 1800 Alexander Bell Drive Reston, Virginia 22091 Sterling Software (U.S.A.), Inc. 11050 White Rock Road, Suite 100 Rancho Cordova, California 95670 EX-10.26 7 AGMT. CONCERNING REVENUE RULING EXHIBIT 10.26 AGREEMENT CONCERNING REVENUE RULING This Agreement Concerning Revenue Ruling (this "Agreement") is made and entered into as of the 19th day of September 1996, by Sterling Commerce, Inc., a Delaware corporation ("Commerce"), for the benefit of Sterling Software, Inc., a Delaware corporation ("Software"), and the other parties herein specified. A. Subject to the receipt of the Revenue Ruling (as defined below) and authorization by its Board of Directors, Software intends to distribute to the holders of its Common Stock, par value $.10 per share, all of the shares of Common Stock, par value $.01 per share, of Commerce ("Commerce Stock") held by Software (the "Distribution"). B. Software has applied to the Internal Revenue Service (the "IRS") for a revenue ruling (the "Revenue Ruling") as to the tax free nature of the Distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). C. As a condition to the issuance of the Revenue Ruling, Software has made representations to the IRS regarding various matters, some of which involve facts and circumstances after the Distribution over which Commerce will have sole control and discretion. NOW, THEREFORE, in consideration of the benefit to Commerce resulting from the Distribution, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Commerce hereby agrees as follows: 1. Options. Without the prior written consent of Software, Commerce ------- will not amend or take any other action that would have the effect of accelerating prior to the "Target Date" (as defined below) the time at which any options to purchase Commerce Stock heretofore granted may be exercised. As used herein, the term "Target Date" shall mean the second business day following the first anniversary of the record date for the Distribution. Further, without the prior written consent of Software, Commerce will not hereafter grant any options, warrants or other securities evidencing the right to purchase, or convertible into, shares of Commerce Stock that could be exercised or converted prior to the Target Date. In addition, without the prior written consent of Software, Commerce will not enter into any amendment to the Sterling Commerce, Inc. Savings and Security Plan (the "Commerce Plan") which would have the effect of increasing the amount of Commerce Stock transferred to the Commerce Plan within twelve months following the Distribution. 2. Representations. Commerce represents and warrants to Software as --------------- follows: (a) to the best of the knowledge and belief of the management of Commerce, there is no plan or intention by the shareholders of Commerce to sell, exchange or -1- otherwise dispose of any of their stock in, or securities of, Software or Commerce subsequent to the Distribution; (b) there is no plan or intention to liquidate Commerce, to merge Commerce with any other corporation, or to sell, exchange, or otherwise dispose of Commerce's assets or those of any of its subsidiaries subsequent to the Distribution, except in the ordinary course of business; (c) the representations with respect to Commerce set forth in the submission from Software's outside counsel and accountants to the IRS dated March 12, 1996 are true and correct in all material respects; (d) except for those transactions described in Software's submissions to the IRS requesting the Revenue Ruling, there have not been and are not expected to be consummated by Commerce any other transactions in connection with the Distribution; (e) Commerce has not been and is not currently engaged in negotiations with any party concerning any transaction involving the acquisition by Commerce of assets or stock in consideration for the issuance of stock by Commerce; (f) following the Distribution, Commerce will continue the active conduct of its business independently and, subject to the sharing of the services of certain executive officers of Software and subject to Software and its subsidiaries continuing to market software products of Commerce in international markets, all as previously disclosed to the IRS, with Commerce's separate employees; (g) payments made in connection with all continuing transactions entered into by Commerce with Software will be for fair market value and based on arm's length terms and conditions; and (h) except for inter-company payables incurred in the ordinary course of business, Commerce will not incur indebtedness to Software and will not extend credit to Software. None of the indebtedness owed by Commerce to Software after the Distribution will constitute stock or securities within the meaning of Section 355 of the Code. Each representation set forth above shall be deemed to have been made by Commerce effective as of the first time such representation was made to the IRS in connection with Software's pursuit of the Revenue Ruling and effective as of the date the IRS issues the Revenue Ruling. 3. Indemnification. Commerce agrees to indemnify and hold Software --------------- and its directors, officers, employees, agents and representatives harmless from and against any and all losses, claims, damages, costs, expenses, penalties, taxes and the like to the extent resulting directly or indirectly from Commerce's breach of any provision of this Agreement. -2- 4. Effectiveness of Agreement. This Agreement shall become effective -------------------------- immediately upon Software's receipt of the Revenue Ruling and shall continue thereafter without contractual limitation until the later to occur of (i) the expiration of the period of limitations for the assessment of tax with respect to the taxable year of Software or any of its stockholders in which the Distribution occurs, and (ii) the final resolution of any claims asserted prior to the expiration of the limitations period described in clause (i) above against Commerce under this Agreement. 5. Miscellaneous. This Agreement (a) shall be governed by and ------------- interpreted in accordance with the laws of the State of Texas, (b) constitutes the entire agreement and understanding of Commerce concerning the subject matter hereof and supersedes all prior agreements and understandings with respect thereto; provided, however that the Indemnification Agreement dated as of March 4, 1996 (the "Indemnification Agreement"), and the Tax Allocation Agreement dated as of March 4, 1996 (collectively, the "Prior Agreements"), both by and between Software and Commerce, are not intended to be superseded by this Agreement; provided further, however, that to the extent of any conflict between the Prior Agreements and this Agreement, this Agreement shall control with respect to such conflict, and (c) may be amended only by virtue of a writing duly executed by Software and Commerce. Except for Software and the parties entitled to indemnification pursuant to Section 3 hereof (Software and each of such parties being each hereinafter called an "Indemnitee"), each of whom is an intended third party beneficiary hereunder, nothing expressed or implied in this Agreement shall be construed to give any person or entity other than such Indemnitees any legal or equitable right hereunder. If an Indemnitee receives notice of the assertion of any claim or the commencement of any action or proceeding by any person or entity (a "Third Party Claim"), which claim or action reasonably could be expected to form the basis for a claim of indemnification under this Agreement, the procedures set forth in Section 5 of the Indemnification Agreement shall apply to such Third Party Claim, and are incorporated herein. For purposes of applying Section 5 of the Indemnification Agreement, as used therein the term "Agreement" shall mean and refer to this Agreement, the term "Third Party Claim" shall have the meaning set forth above, and the term "Indemnifying Party" shall mean and refer to Commerce. [Remainder of page intentionally left blank.] -3- IN WITNESS WHEREOF, Commerce has executed and delivered this Agreement as of the date first above written. STERLING COMMERCE, INC. By: /s/ Steven P. Shiflet --------------------- Steven P. Shiflet, Vice President, Finance -4- EX-11.1 8 COMPUTATION OF EARNINGS YEAR END SEPT. 30, 1996 EXHIBIT 11.1 STERLING SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE YEAR ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FULLY PRIMARY DILUTED -------- -------- Earnings: Earnings applicable to common stockholders................ $237,888 $237,888 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes) through date of conversion................................. 1,685 -------- -------- $237,888 $239,573 ======== ======== Shares: Weighted average shares outstanding....................... 32,316 32,316 Add common shares issued on assumed exercise of options and warrants............................................. 4,904 4,930 Less common shares assumed repurchased.................... (3,149) (2,696) -------- -------- 34,071 34,550 ======== Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures through date of conversion................................................ 1,495 -------- 36,045 ======== Earnings per common share: Primary................................................... $ 6.98 ======== Fully diluted............................................. $ 6.65 ========
EX-11.2 9 COMPUTATION OF EARNINGS YEAR END SEPT. 30, 1994 EXHIBIT 11.2 STERLING SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE YEAR ENDED SEPTEMBER 30, 1994 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FULLY PRIMARY DILUTED ------- ------- Earnings: Earnings applicable to common stockholders.................. $58,143 $58,143 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)............................. 133 4,224 Interest income on investment of proceeds from assumed conversion of options and warrants (net of applicable income taxes)........................................... 70 ------- ------- $58,276 $62,437 ======= ======= Shares: Weighted average shares outstanding......................... 19,812 19,812 Add common shares issued on assumed exercise of options and warrants................................................... 7,228 7,228 Less common shares assumed repurchased...................... (4,117) (4,117) ------- ------- 22,923 22,923 ======= Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures......................... 4,056 ------- 26,979 ======= Earnings per common share: Primary..................................................... $ 2.54 ======= Fully diluted............................................... $2.31 =======
EX-21.1 10 LIST OF SUBSIDIARIES EXHIBIT 21.1 STERLING SOFTWARE, INC. LIST OF SUBSIDIARIES Name Jurisdiction of Incorporation - --------------------------- ----------------------------- Sterling Software (Midwest), Inc. Delaware Sterling Software (U.S.), Inc. Delaware Sterling Software (U.S.A.), Inc. California Condessa Gestao E Investimentos Lda Portugal Sterling Software AB Sweden Sterling Software GmbH Germany Sterling Software International (U.K.) Limited United Kingdom Sterling Software (Pacific) Pty Limited Australia Sterling Software (Australia) Pty Limited Australia Sterling Software (New Zealand) Limited New Zealand Sterling Software (Benelux) NV Belgium Sterling Software (Benelux) BVBA Belgium Sterling Software (Netherlands) B.V. Netherlands Sterling Software (France) SA France Sterling Software France II France Sterling Software (Japan) Ltd. Japan Sterling Software (Singapore) PTE Ltd. Singapore Sterling Software (U.S. of America), Inc. Delaware Sterling Software (U.K.) Holdings Ltd. United Kingdom Sterling Software (U.K.) Limited United Kingdom Sterling Software (Switzerland) AG Switzerland Sterling Software (Italia) SRL Italy KnowledgeWare SRL Italy Systems Center AS Norway Sterling Software (Portugal) - Informatica, LDA Portugal Sterling Aplicaciones Informaticas (Espana), S.A. Spain KnowledgeWare AB Sweden Sterling Software (U.K.) II Limited. United Kingdom Sterling Software Do Brasil Participacoes Ltda. Brazil Sterling Software Do Brasil Ltda. (Owned 49%) Brazil Systems Center Handelsgesellschaft M.B.H. Austria Systems Center Pty Limited Australia Systems Center Limited Hong Kong Sterling Software (Virgin Islands), Inc. U.S. Virgin Islands Sterling Software (Canada) Inc. Canada Sterling Software International, Inc. Delaware Sterling Software International SARL France Sterling Software International (Australia), Limited Delaware Sterling Software (Israel), Ltd. Israel Sterling Software Leasing Company Delaware Sterling Software (Scandinavia) AS Norway Sterling Software (Southern), Inc. Georgia KnowledgeWare GmbH Austria KnowledgeWare (Far East) Limited Hong Kong Matesys Mathematics Systems S.A. France Matesys Corp. California Southwest Beta Services, Inc. Delaware Sterling International Finance, Inc. British West Indies 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. EX-23.1 11 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-13303, No. 33-71706, No. 33-54961, No. 33-56685, No. 33-56677, No. 33-32699, 33-56683, 33-62057 and No. 33-64073), and in the Registration Statements on Form S-8 (File No. 33-65402, No. 33-69926, No. 33- 56681, No. 33-53833 and No. 33-62059) of Sterling Software, Inc., and in the related Prospectuses of our report dated November 20, 1996, with respect to the consolidated financial statements and schedule of Sterling Software, Inc. included in this Annual Report on Form 10-K for the year ended September 30, 1996. Ernst & Young LLP Dallas, Texas November 20, 1996 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE STERLING SOFTWARE, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 524,237 231,919 133,383 0 0 914,643 81,359 42,029 1,097,613 181,725 0 0 0 3,981 875,510 1,097,613 439,171 439,171 182,239 378,397 0 0 (3,361) 84,886 24,288 60,598 177,290 0 0 237,888 6.98 6.65
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