-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, CmPUK7YLxFYvvndiT7fTgJIvw8dSqdBDvpiITiBezXWgNL+7d3Nl/WkUGwHvgeEO YrhVInSmQoRoCpUSc8hcUw== 0000912057-94-001737.txt : 19940518 0000912057-94-001737.hdr.sgml : 19940518 ACCESSION NUMBER: 0000912057-94-001737 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING SOFTWARE INC CENTRAL INDEX KEY: 0000716714 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 751873956 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 94528571 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 10-Q/A 1 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1994 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ COMMISSION FILE NO. 1-8465 STERLING SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1873956 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100 DALLAS, TEXAS 75206 (Address of principal executive offices) (214) 891-8600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title Shares Outstanding as of April 30, 1994 ------------------------------ ----------------------------------------- Common Stock, $.10 par value 20,160,902 -1- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MERGER WITH SYSTEMS CENTER, INC. On July 1, 1993, Sterling Software, Inc. ("Sterling Software") acquired Systems Center, Inc. ("Systems Center"), a Delaware corporation based in Reston, Virginia which developed, marketed and supported systems software products, in a merger (the "Merger") accounted for as a pooling of interests, resulting in the combined company, hereafter defined as the "Company" or "Sterling." The merger of the equity interests has been given retroactive effect and the Company's financial statements for periods prior to the Merger represent the combined financial statements of the previously separate entities adjusted to conform Systems Center's fiscal years and accounting policies to those used by Sterling Software. In connection with the Merger, the Company eliminated duplicate facilities and equipment, reduced its workforce and wrote off certain software products which would not be actively marketed by the Company. There were no restructuring charges incurred in the first six months of 1994 in excess of the restructuring charges accrued in the fourth quarter of 1993. Since September 30, 1993, there has been no significant increase in operating expenses as a result of the restructuring of the Company and the Company does not expect there to be any material increase in costs and expenses in the second half of 1994 as a result of the Merger. In addition, future operating results are expected to continue to benefit from the reduction in workforce and elimination of duplicate facilities and equipment. Approximately $19,200,000 of cash was expended in the first six months of 1994 relating to restructuring charges accrued in the fourth quarter of 1993. Future cash expenditures related to the restructuring are anticipated to be made from cash generated from operations. THREE MONTHS ENDED MARCH 31, 1994 AND 1993 Effective with the Merger, Sterling Software changed Systems Center's fiscal year-end from December 31 to September 30, affecting the timing of sales incentives and changing the revenue pattern for products previously marketed by Systems Center. Accordingly, the Company believes that the revenue for the three months ended March 31, 1994, which is the Company's second quarter of its fiscal year, is not directly comparable to revenue for the three months ended March 31, 1993. While the change in revenue patterns did not materially impact revenues for Electronic Commerce Group ("ECG") or the Federal Systems Group ("FSG"), this change was relevant with respect to Enterprise Software Group ("ESG") revenues because the majority of the products previously marketed by Systems Center are now marketed by ESG. Revenue increased $16,062,000, or 16%, in the second quarter of 1994 over the same period of 1993 due to increases in all three of the Company's markets. Foreign revenue, which represented approximately 23% and 26% of the Company's total revenue in the second quarter of 1994 and 1993, respectively, was negatively impacted approximately $535,000 by changes in exchange rates during the second quarter of 1994, as compared to the same period of 1993. ESG revenue increased $2,118,000, or 5%, due to increased product revenue. ECG revenue increased $10,365,000, or 39%, on the strength of a $3,501,000, or 40%, increase in -2- network services revenue, a $4,307,000, or 44%, increase in product revenue and a $2,557,000, or 32%, increase in product support revenue. The increased network services revenue was due to an increase in the network services customer base, primarily in the hardlines, retail and grocery vertical markets, and increases in the network processing volume for existing customers. ECG product revenue increased primarily as a result of increased software sales of communications software and interchange software products. ECG product support revenue increased primarily as a result of an increase in the installed customer base and price increases for some products. FSG revenue increased $2,140,000 or 9%, due to higher contract billings in the Information Technology, Scientific Systems and NASA Ames divisions. Total costs and expenses increased $3,636,000, or 4%. Total cost of sales increased $2,009,000, or 5%, primarily due to a $1,202,000, or 5%, increase in federal contract costs, commensurate with the increase in FSG revenue; a $1,951,000, or 29%, increase in ECG's cost of sales due to increased amortization of capitalized software and due to increased costs, commensurate with the increase in ECG revenue; offset by a $1,907,000, or 18%, decrease in ESG's cost of sales, the majority of which is due to decreased amortization of capitalized software as a result of write-off in the fourth quarter of 1993 of certain software products which will not be actively marketed by the Company as a result of the Merger. Product development expense for the second quarter of 1994 of $7,588,000, net of $4,916,000 of costs capitalized pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS No. 86"), increased $941,000, or 14%, compared to the second quarter of 1993 product development expense of $6,647,000, net of $6,061,000 of costs capitalized pursuant to FAS No. 86. The increase is due to the decrease in capitalization of software development costs. Product development expense may fluctuate from period to period depending in part upon the number and status of software development projects. Selling, general and administrative expense increased $686,000, or 2%. Income before extraordinary item and cumulative effect of an accounting change increased $8,453,000, or 172%, primarily due to higher operating profits in ECG, up 142%, and ESG, up 45%, over the same period of 1993, partially offset by an increase in federal income tax expense due to higher pretax profit. Also contributing to this increase was a decrease of $431,000 in interest expense primarily for interest accrued in the second quarter of 1993 on the unpaid and previously outstanding Systems Center Series A 9% Convertible Redeemable Preferred Stock ("Systems Center Preferred Stock") dividends. Other income and expense includes foreign currency exchange gains of approximately $700,000 in the second quarter of 1994 versus foreign currency exchange losses of approximately $115,000 in the second quarter of 1993. SIX MONTHS ENDED MARCH 31, 1994 AND 1993 Effective with the Merger, Sterling Software changed Systems Center's fiscal year-end from December 31 to September 30, affecting the timing of sales incentives and changing the revenue pattern for products previously marketed by Systems Center. Accordingly, the Company believes that the revenue for the six months ended March 31, 1994 is not directly comparable to revenue for the six months ended March 31, 1993. While the change in revenue patterns did not materially impact revenues for ECG or FSG, this change was relevant with respect to ESG revenues because the majority of the products previously marketed by Systems Center are now marketed by ESG. -3- Revenue increased $26,174,000, or 13%, in the first six months of 1994 over the same period of 1993 due to increases in all three of the Company's markets. Foreign revenue, which represented approximately 25% and 28% of the Company's total revenue in the first six months of 1994 and 1993, respectively, was negatively impacted approximately $3,000,000 by changes in exchange rates during the first six months of 1994, as compared to the same period of 1993. ESG revenue increased $2,544,000, or 3%, due to increases in product and product support revenue. ECG revenue increased $19,301,000, or 37%, on the strength of a $7,196,000, or 42%, increase in network services revenue, a $6,937,000, or 36%, increase in product revenue and a $5,168,000, or 34%, increase in product support revenue. The increase in network services revenue was due to an increase in the network services customer base, primarily in the hardlines, retail and grocery vertical markets, and increases in the network processing volume for existing customers. ECG product revenue increased primarily as a result of increased software sales of communications software, interchange software and banking systems products. ECG product support revenue increased primarily as a result of an increase in the installed customer base and price increases for some products. FSG revenue increased $3,111,000, or 6%, primarily due to higher contract billings in the Information Technology and NASA Ames divisions. Total costs and expenses increased $3,275,000, or 2%. Total cost of sales increased $2,756,000, or 3%, primarily due to a $1,925,000, or 4%, increase in federal contract costs, commensurate with the increase in FSG revenue; a $4,228,000, or 63%, increase in ECG's cost of sales due to increased amortization of capitalized software and due to increased costs, commensurate with the increase in ECG revenue; offset by a $3,715,000, or 36%, decrease in ESG's cost of sales, the majority of which is due to decreased amortization of capitalized software as a result of the write-off in the fourth quarter of 1993 of certain software products which will not be actively marketed by the Company as a result of the Merger. Product development expense for the first six months of 1994 of $14,608,000, net of $9,316,000 of costs capitalized pursuant to FAS No. 86, increased $2,044,000, or 16%, compared to the first six months of 1993 product development expense of $12,564,000, net of $12,275,000 of costs capitalized pursuant to FAS No. 86. The increase is due to the decrease in capitalization of software development costs. Product development expense may fluctuate from period to period depending in part upon the number and status of software development projects. Selling, general and administrative expense decreased $1,525,000, or 2%, reflecting reduced costs after the Company's fourth quarter 1993 restructuring due to the Merger, which eliminated duplicate corporate overhead functions and streamlined the sales and marketing functions, resulting in a reduced workforce, and eliminated duplicate facilities. Income before extraordinary item and cumulative effect of an accounting change increased $14,447,000, or 145%, primarily due to higher operating profits in ECG, up 142%, and ESG, up 50%, over the same period of 1993, partially offset by an increase in federal income tax expense due to higher pretax profit. Also contributing to this increase was a decrease in interest expense of $722,000 primarily for interest accrued in the first six months of 1993 on the unpaid and previously outstanding Systems Center Preferred Stock dividends. Other income and expense includes foreign currency exchange gains of approximately $345,000 in the first six months of 1994 versus foreign currency exchange losses of approximately $83,000 in the first six months of 1993. Other income and expense includes approximately $127,000 of loss on assets in the first -4- six months of 1994 compared to approximately $71,000 of loss on assets in the first six months of 1993. The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS No. 106") as of October 1, 1992 and recorded a charge of $2,774,000, net of related income tax benefit of $1,813,000. This charge is shown as the cumulative effect of a change in accounting principle. See Note 5 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company maintained a strong liquidity and financial position with $80,903,000 of working capital at March 31, 1994, which includes $62,601,000 of cash and equivalents and $29,148,000 of marketable securities. Net cash flows from operations increased $2,316,000, or 9%, in the first six months of 1994 as compared to the first six months of 1993 primarily due to higher operating profits before noncash charges. Cash flows from operations and available cash balances were used to fund operations, investment purchases and capital expenditures, including software additions. Cash and cash equivalents consist primarily of highly liquid investments in investment-grade commercial paper of various issuers, with maturities of three months or less when purchased. The Company invests excess cash in a diversified portfolio consisting of a variety of securities of both domestic and foreign issuers including 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. Certain of these investments are managed by Maverick Capital, Ltd. ("Maverick"), including a $15 million investment in an investment fund partnership managed by Maverick. Maverick is owned and managed by a group of individuals, five of whom are directors of the Company. Subsequent to March 31, 1994, Sterling withdrew as a limited partner of Maverick and pursuant to the terms of the withdrawal agreement, funds will be distributed on or before July 1, 1994. All marketable securities and long-term investments are classified as available-for-sale securities. Securities totaling $35,496,000 that the Company intends to hold for more than one year are included in "Other Assets." During the first six months of 1994, software expenditures, the majority of which were costs capitalized pursuant to FAS No. 86, were $10,119,000 compared to $12,325,000 in the first six months of 1993. ECG represented $6,055,000 of the total software expenditures during the first six months of 1994, primarily for enhancements of communications software products, interchange software products and costs to add new network services features. ESG represented $4,064,000 of the total software expenditures during the first six months of 1994, primarily for the development of systems management, storage management and applications management products and product enhancements. Property and equipment purchases of $8,709,000 in the first six months of 1994 include purchases made in ECG for equipment upgrades for network processing systems and computer equipment purchases to support the continuing growth in ECG. ESG's and FSG's property and equipment additions were primarily computer equipment purchases. Property and equipment purchases were $4,884,000 in the first six months of 1993. Net purchases of $5,974,000 in marketable securities and long- term investments in the first six months of 1994 were generally from the net cash provided by operating activities and proceeds from issuances of common stock pursuant to the exercise of stock options and warrants. -5- At March 31, 1994, after the utilization of $2 million for letters of credit, $33 million was available for borrowing on the Company's $35 million revolving credit and term loan agreement ("Loan Agreement.") Borrowings, if any, outstanding on December 31, 1994 will be payable in eight equal quarterly payments. There were no amounts borrowed or outstanding on the Loan Agreement during the six months ended March 31, 1994, however, the Company's international operations borrowed $10,485,000 during the first six months of 1994 on separate lines of credit, primarily for foreign exchange exposure management and working capital requirements. Payments of $6,417,000 were made during the first six months of 1994 on these lines of credit. Other debt payments related to capital leases. Proceeds from the exercise of stock options and warrants were $19,264,000 during the first six months of 1994, compared to $2,805,000 during the first six months of 1993. At March 31, 1994, 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 internally generated funds. No significant commitments exist for future capital expenditures. The Company believes available balances of cash, cash equivalents and marketable securities combined with cash flows from operations and amounts available under credit and term loan agreements are sufficient to meet the Company's cash requirements for the foreseeable future. OTHER MATTERS In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS No. 112"), which requires employers to recognize the cost of postemployment benefits on an accrual basis, if certain defined conditions are met. Postemployment benefits are all types of benefits provided to former or inactive employees, their beneficiaries, and covered dependents. The Company will be subject to the provisions of FAS No. 112 beginning in the fiscal year ending September 30, 1995. However, the Company does not believe the provisions of FAS No. 112 will have a significant impact on the Company's financial position and results of operations in the year of adoption, as the majority of the postemployment benefits are a result of certain employment contracts. Payments under these contracts are contingent upon future events, the occurrence of which is not presently contemplated. -6- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned hereunto duly authorized. STERLING SOFTWARE, INC. Date: May 16, 1994 By /s/ George H. Ellis ---------------------------------------- George H. Ellis Executive Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) - 7 - -----END PRIVACY-ENHANCED MESSAGE-----