-----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, KOfdIlrjxZ+t+gF1sv6Hqm/THhZVBoItC41Qo+shandrYGshpIdwxg7SAVU4yKsh a1ntSlmaQ0JbVXktWenCcg== 0000930661-96-000386.txt : 19960514 0000930661-96-000386.hdr.sgml : 19960514 ACCESSION NUMBER: 0000930661-96-000386 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960513 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 96560921 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996 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) (Zip Code) (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 May 3, 1996 - ----------------------------- ------------------------------------ Common Stock, $0.10 par value 34,895,103 -1- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Index to Financial Statements Page ---- Sterling Software, Inc. Consolidated Balance Sheets at March 31, 1996 and September 30, 1995................................................... 3 Sterling Software, Inc. Consolidated Statements of Operations for the Three and Six Months Ended March 31, 1996 and 1995....................... 4 Sterling Software, Inc. Consolidated Statements of Stockholders' Equity for the Six Months Ended March 31, 1996 and 1995......................... 5 Sterling Software, Inc. Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1996 and 1995................................. 6 Sterling Software, Inc. Notes to Consolidated Financial Statements......... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 5. OTHER INFORMATION Pro Forma Financial Data................................................... 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27 -2- STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) A S S E T S
MARCH 31 SEPTEMBER 30 1996 1995 -------------- -------------- (UNAUDITED) Current assets: Cash and cash equivalents............................... $ 508,826 $179,305 Marketable securities................................... 153,255 61,341 Accounts and notes receivable, net...................... 169,221 183,734 Deferred income taxes................................... 1,890 Prepaid expenses and other current assets............... 22,253 17,784 ---------- -------- Total current assets................................. 853,555 444,054 Property and equipment, net of accumulated depreciation of $64,868 at March 31, 1996 and $59,716 at September 30, 1995...................................... 71,454 68,412 Computer software, net of accumulated amortization of $115,851 at March 31, 1996 and $104,813 at September 30, 1995...................................... 88,705 80,966 Excess cost over net assets acquired, net of accumulated amortization of $26,453 at March 31, 1996 and $23,362 at September 30, 1995........................... 82,538 85,903 Noncurrent deferred income taxes.......................... 17,960 Other assets.............................................. 8,348 16,885 ---------- -------- $1,104,600 $714,180 ========== ======== L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y Current liabilities: Current portion of long-term debt......................... $ 4,462 $ 5,871 Income taxes payable...................................... 49,600 4,679 Accounts payable and accrued liabilities.................. 98,807 114,391 Deferred revenue.......................................... 100,091 96,708 ---------- -------- Total current liabilities.............................. 252,960 221,649 Long-term debt.............................................. 1,446 116,668 Deferred income taxes....................................... 34,921 Other noncurrent liabilities................................ 29,879 27,525 Commitments and contingencies (Note 5)...................... Minority interest........................................... 18,586 Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized.............................................. Common stock, $.10 par value; 75,000,000 shares authorized; 35,715,000 and 26,529,000 shares issued at March 31, 1996 and September 30, 1995, respectively.. 3,572 2,653 Additional paid-in capital................................ 640,370 336,752 Retained earnings......................................... 182,354 9,515 Less treasury stock, at cost: 1,381,000 and 56,000 shares at March 31, 1996 and September 30, 1995, respectively.. (59,488) (582) ---------- -------- Total stockholders' equity............................. 766,808 348,338 ---------- -------- $1,104,600 $714,180 ========== ========
See accompanying notes. -3- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED MARCH 31 ENDED MARCH 31 ----------------- ------------------ 1996 1995 1996 1995 ------ ------- ------ -------- Revenue: Products............................. $ 66,440 $ 52,505 $118,815 $102,056 Product support...................... 44,905 39,308 89,576 73,979 Services............................. 52,644 46,394 104,250 88,590 -------- -------- -------- -------- 163,989 138,207 312,641 264,625 Costs and expenses: Cost of sales: Products and product support....... 21,216 17,061 40,108 33,072 Services........................... 32,018 26,748 62,789 53,247 -------- -------- -------- -------- 53,234 43,809 102,897 86,319 Product development and enhancement......................... 8,974 11,356 18,334 20,802 Selling, general and administrative.. 65,510 51,916 124,442 100,931 Restructuring charge................. 19,512 Purchased research and development... 62,000 -------- -------- -------- -------- 127,718 107,081 245,673 289,564 -------- -------- -------- -------- Income (loss) before other income (expense), gain on subsidiary public offering, minority interest and income taxes........................ 36,271 31,126 66,968 (24,939) Other income (expense): Interest expense..................... (946) (2,210) (2,797) (4,200) Investment income.................... 4,344 2,239 7,465 3,127 Other................................ 135 399 452 264 -------- -------- -------- -------- 3,533 428 5,120 (809) -------- -------- -------- -------- Income before gain on subsidiary public offering, minority interest and income taxes........................ 39,804 31,554 72,088 (25,748) Gain on subsidiary public offering 239,936 239,936 Minority interest (1,157) (1,157) -------- -------- -------- -------- Income (loss) before income taxes............................... 278,583 31,554 310,867 (25,748) Provision for income taxes............ 126,565 11,395 137,542 15,747 -------- -------- -------- -------- Net income (loss)..................... 152,018 20,159 173,325 (41,495) Preferred stock dividends............. 49 98 -------- -------- -------- -------- Income (loss) applicable to common stockholders................. $152,018 $ 20,110 $173,325 $(41,593) ======== ======== ======== ======== Income (loss) per common share: Net income (loss): Primary............................ $4.74 $.72 $5.72 $(1.85) ======== ======== ======== ======== Fully diluted...................... $4.42 $.67 $5.09 $(1.85) ======== ======== ======== ======== Average common shares outstanding. 29,450 23,526 28,032 22,490 ======== ======== ======== ========
See accompanying notes. -4- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (IN THOUSANDS) (UNAUDITED)
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, 200 $20 22,378 $2,238 $192,064 $ 572 1,793 $(19,090) $175,804 1994...................... Net loss................. (41,495) (41,495) Preferred stock dividends (98) (98) Issuance of common stock and treasury stock for acquisition (Note 3).... 720 72 56,260 (1,701) 18,111 74,443 Common stock issuance costs................... (788) (788) Issuance of common stock pursuant to stock options and warrants............ 813 81 13,920 14,001 Issuance of common stock to retirement plan...... 130 (8) 85 215 Other.................... 99 622 (8) 92 813 ----- ------ ------ ------ -------- -------- ------ -------- -------- Balance at March 31, 1995.. 200 $20 23,911 $2,391 $261,685 $(40,399) 76 $ (802) $222,895 ==== ===== ====== ====== ======== ======== ====== ======== ======== Balance at September 30, 26,529 $2,653 $336,752 $ 9,515 56 $ (582) $348,338 1995...................... Net income............... 173,325 173,325 Acquisition of common stock for treasury............ 1,336 (59,372) (59,372) Issuance of common stock pursuant to stock options and warrants, including a tax benefit of $30,284 5,130 513 158,928 159,441 Issuance of common stock pursuant to conversion of 5.75% Debentures......... 4,056 406 111,970 112,376 Proceeds from subsidiary initial public offering, net of minority interest of $7,382................ 32,736 32,736 Issuance of common stock to retirement plan....... (55) (11) 466 411 Other..................... 39 (486) (447) ------- ------ -------- -------- ----- -------- -------- Balance at March 31, 1996... 35,715 $3,572 $640,370 $182,354 1,381 $(59,488) $766,808 ======= ====== ======== ======== ===== ======== ========
See accompanying notes. -5- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31 --------------------- 1996 1995 --------- ---------- Operating activities: Net income (loss).................................................................... $ 173,325 $(41,495) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on subsidiary public offering............................................... (239,936) Minority interest................................................................ 1,157 Depreciation and amortization.................................................... 26,061 22,356 Provision for losses on accounts receivable...................................... 1,823 279 Provision for deferred income taxes.............................................. 57,571 3,403 Purchased research and development............................................... 62,000 Write-down of property and equipment and other assets............................ 2,462 Write-down of purchased and capitalized computer software costs.................. 6,215 Changes in operating assets and liabilities, net of effects of business acquisitions: Increase in accounts and notes receivable.................................... (236) (9,770) Decrease (increase) in prepaids and other assets............................. (3,732) 293 Increase in accounts payable, accrued liabilities and income taxes........... payable.................................................................... 52,254 1,319 Increase in deferred revenue................................................. 3,787 5,218 Other........................................................................ (3,362) (257) --------- -------- Net cash provided by operating activities.................................. 68,712 52,023 Investing activities: Purchases of property and equipment.................................................. (14,632) (21,847) Purchases and capitalized cost of development of computer software................... (13,213) (9,504) Business acquisitions, net of cash acquired.......................................... (7,186) (16,270) Purchases of investments............................................................. (281,498) (62,672) Proceeds from sales of investments................................................... 189,274 26,847 Other................................................................................ 660 317 --------- -------- Net cash used in investing activities...................................... (126,595) (83,129) Financing activities: Purchases of treasury stock.......................................................... (59,372) Retirement and redemption of debt and capital lease obligations...................... (8,735) (14,280) Proceeds from issuance of debt....................................................... 4,066 17,561 Proceeds from sales of installment and lease contracts receivable.................... 13,292 3,798 Preacquisition advances to business acquired......................................... (4,435) Net proceeds from subsidiary public offering......................................... 307,576 Proceeds from issuance of common stock pursuant to stock options and warrants.......................................................................... 129,157 14,001 Other................................................................................ 1,594 192 --------- -------- Net cash provided by financing activities.................................. 387,578 16,837 Effect of foreign currency exchange rate changes on cash............................... (174) 245 --------- -------- Increase (decrease) in cash and cash equivalents....................................... 329,521 (14,024) Cash and cash equivalents at beginning of period....................................... 179,305 101,893 --------- -------- Cash and cash equivalents at end of period............................................. $ 508,826 $ 87,869 ========= ======== Supplemental cash flow information: Interest paid........................................................................ $ 4,176 $ 3,633 ========= ======== Income taxes paid.................................................................... $ 3,186 $ 4,490 ========= ======== Income tax refunds................................................................... $ 474 $ 470 ========= ========
See accompanying notes. -6- STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Sterling Software, Inc. and its wholly owned subsidiaries, including but not limited to Sterling Commerce, Inc., (collectively, "Sterling Software", "Sterling" or the "Company") after elimination of all significant intercompany balances and transactions. Certain amounts for periods ended prior to March 31, 1996 have been reclassified to conform to the current year presentation. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingencies at March 31, 1996 and September 30, 1995 and the results of operations for the three and six months ended March 31, 1996 and 1995, respectively. While management has based its assumptions and estimates on the facts and circumstances known at March 31, 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 certain 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 long-term contracts is recognized using the percentage-of- completion method of accounting. Losses on long-term contracts are recognized when the current estimate of total contract costs indicates a loss on a contract is probable. -7- Cash Equivalents, Marketable Securities and Other Investments 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. The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates its fair value. The Company invests excess cash in a diversified portfolio consisting of a variety of securities including commercial paper, corporate notes and U.S. government obligations, 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. 2. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim consolidated financial information contained herein is unaudited but, in the opinion of management, includes all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position and results of operations for the periods presented. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. 3. SUBSIDIARY INITIAL PUBLIC OFFERING AND PROPOSED DISTRIBUTION Sterling Commerce, Inc. ("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 the 73,200,000 shares of Commerce Stock then owned by it and Commerce sold 1,800,000 previously unissued shares of Commerce Stock. Sterling Software currently owns 61,200,000 shares of Commerce Stock, constituting 81.6% of the total number of outstanding shares of Commerce Stock. The Offering price was $24 per share of Commerce Stock resulting in net proceeds to Sterling Software of approximately $267,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. The Offering resulted in net proceeds to Commerce of approximately $40,118,000 after deducting underwriting discounts and commissions and Commerce's pro rata share of Offering expenses. Sterling Software recorded a gain of approximately $127,164,000, net of tax, from the sale of Commerce Stock in the Offering. Sterling Software incorporated Commerce as a wholly owned subsidiary in December 1995. In contemplation of the Offering, among other things, (i) Sterling Software caused to be transferred to or merged into Commerce all of the subsidiaries previously comprising Sterling Software's Electronic Commerce Group, (ii) Sterling Software caused to be transferred to Commerce certain assets relating to the electronic commerce business previously conducted by Sterling Software's International Group and certain assets relating to the electronic commerce -8- business conducted by Sterling Software's Federal Systems Group, and (iii) Sterling Software entered into contractual arrangements with Commerce related to, among other things, space sharing, tax allocations, international marketing and certain services. Sterling Software presently intends to distribute pro rata to its stockholders as a dividend all or substantially all of its remaining shares of Commerce Stock by means of a tax-free distribution (the "Distribution"). The Sterling Software Board has conditioned the Distribution upon, among other things, (i) the approval of both the Distribution and the Company's 1996 Stock Option Plan by Sterling Software's stockholders, and (ii) the declaration by Sterling Software's Board of Directors of a dividend of the shares of Commerce Stock then owned by Sterling Software. The declaration of the dividend by the Sterling Software Board to effect the Distribution is conditioned upon, among other things, the receipt of a favorable ruling from the Internal Revenue Service ("IRS") as to the tax-free nature of the Distribution and the absence of any change in market conditions or other circumstances that would cause the Board of Directors of Sterling Software to conclude that the Distribution is not in the best interests of the stockholders of Sterling Software. Sterling Software has applied to the IRS for a ruling as to the tax-free nature of the Distribution. Sterling Software presently anticipates that the Distribution will occur prior to September 30, 1996. Sterling Software has not determined what action, if any, it would take if it were not to receive the favorable tax ruling or the applicable stockholder approvals. No assurance can be given that the favorable tax ruling or applicable stockholder approvals will be obtained or that, in any event, the Distribution will occur, or that, if it does not receive the favorable tax ruling or applicable stockholder approvals, Sterling Software will not sell its shares of Commerce Stock to reduce its investment in Commerce. The stockholder meeting for the purpose of considering and acting upon the Distribution and adoption of the Company's 1996 Stock Option Plan will be held on May 29, 1996. The actual number of shares of Commerce Stock to be distributed with respect to each outstanding share of Sterling Software common stock ("Software Stock") will depend upon the number of shares of Software Stock outstanding on the record date established by the Sterling Software Board (the "Distribution Record Date"), the number of shares of Commerce Stock owned by Sterling Software on such date and the number of shares of Commerce Stock, if any, which may be required to be retained by Sterling Software to honor certain warrant obligations, if such warrants are not exercised prior to the Record Date. In any event, in excess of 99% of the shares of Commerce Stock owned by Sterling Software will be included in the Distribution. 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 $109,180,000 from the exercise of approximately 4,242,000 warrants and employee stock options for the period from January 1, 1996 to March 31, 1996. If all remaining outstanding options and warrants to purchase Software Stock at March 31, 1996 were exercised, approximately 4,214,000 additional shares of Software Stock would be issued and outstanding, resulting in additional proceeds to Sterling Software of $152,154,000. There can be no assurance, however, as to whether or when any of such options or warrants will be exercised. -9- The Company has included pro forma financial statements in Part II, Item 5 of this Form 10-Q to illustrate the effects of the proposed Distribution and the redemption and conversion of the Company's 5.75% Convertible Subordinated Debentures. See Note 7. 4. BUSINESS COMBINATION On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc. ("KnowledgeWare"), a Georgia corporation based in Atlanta, Georgia which was a 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 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 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 (the "Escrowed Shares") to cover certain losses that may result in connection with any pending or threatened litigation, action, claim, proceeding, dispute or investigation ("Actions") (including amounts paid in settlement) to which the Company is entitled to indemnification pursuant to the terms of the Merger Agreement. The Company has entered into settlement agreements for all pending private civil actions and all of the Escrowed Shares have been utilized pursuant to the indemnification provisions of the Merger Agreement. See Note 5. The operating results of KnowledgeWare are included in the Company's results of operations from 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, which is the portion of the purchase price attributed to in-process research and development and which is charged to expense in accordance with purchase accounting. The $62,000,000 charge has no related tax benefit. The results of operations also include a charge for restructure costs of $19,512,000 to integrate KnowledgeWare's business into the Company's operations. 5. COMMITMENTS AND CONTINGENCIES The Company is 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, will not materially affect the financial condition or results of operations of the Company. KnowledgeWare, which was acquired on November 30, 1994, has been subject to certain legal proceedings and claims in connection with KnowledgeWare's restatement of its financial results for the first three quarters of its 1994 fiscal year and its financial results for its full 1994 -10- fiscal year involving, among other claims, allegations of federal and state securities fraud, breach of contract, breach of fiduciary duty by former officers and directors of KnowledgeWare, common law fraud and RICO violations under Federal and State law. All such private civil actions against KnowledgeWare have been settled on the terms described in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995. The Securities and Exchange Commission ("Commission") continues its formal investigation previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The Company's management believes that, in view of its indemnification from the Escrowed Shares and after giving effect to applicable reserves, the settlements of the private civil actions and the ultimate resolution of the Commission's investigation will not materially affect the financial condition or results of operations of Sterling Software. 6. BUSINESS SEGMENT INFORMATION The Company acquires, develops, markets and supports a broad range of computer software products and services in four major markets classified as Electronic Commerce, Systems Management, Federal Systems and Applications Management. The Electronic Commerce business segment provides software and services to facilitate electronic commerce, defined by the Company as the worldwide electronic interchange of business information, including electronic data interchange software and services, data communications software and electronic payments software for financial institutions. The Systems Management business segment provides enterprise-wide systems management software for large computing environments. The Federal Systems business segment provides highly technical services to the federal government under several multi-year contracts primarily in support of National Aeronautics and Space Administration ("NASA") aerospace research projects and secure communications systems for the Department of Defense. The Applications Management business segment focuses exclusively on the applications management market. The business segment provides products for developing new applications and revitalizing existing applications and consulting services to ensure that customers are successful using the applications management products. The Company's international operations are responsible for sales and first level support of substantially all of the Company's products outside the United States and Canada. The international operating results are included, as applicable, in the Company's Electronic Commerce, Systems Management and Applications Management business segments in the tables contained herein. The international revenue of $41,786,000 and $35,586,000 and operating profit, exclusive of intercompany royalties, of $18,783,000 and $19,676,000 for the three months ended March 31, 1996 and 1995, respectively, have been allocated to the business segments. The international revenue of $79,976,000 and $67,620,000 and operating profit, exclusive of intercompany royalties, of $36,575,000 and $36,069,000 for the six months ended March 31, 1996 and 1995, respectively, have been allocated to these business segments. -11- Financial information concerning the Company's operations, by business segment, for the three and six months ended March 31, 1996 and 1995, restated to conform to the current year presentation, is summarized as follows (in thousands):
Three Months Six Months Ended March 31 Ended March 31 ------------------ ----------------- 1996 1995 1996 1995 ------ ------- ------- -------- Revenue: Electronic Commerce............. $ 66,876 $ 48,810 $126,829 $ 96,715 Systems Management.............. 40,969 37,287 76,179 70,661 Federal Systems................. 26,815 24,590 53,077 48,255 Applications Management......... 28,228 25,347 54,687 45,357 Corporate and other............. 1,101 2,173 1,869 3,637 -------- -------- -------- -------- Consolidated totals............. $163,989 $138,207 $312,641 $264,625 ======== ======== ======== ======== Operating Profit (Loss): Electronic Commerce............. $ 21,491 $ 16,452 $ 42,024 $ 29,204 Systems Management.............. 15,535 13,460 27,160 24,596 Federal Systems................. 1,816 1,867 4,116 3,393 Applications Management......... 4,630 5,125 8,489 9,616 Restructuring charge............ (19,512) Purchased research and (62,000) development.................... Corporate and other............. (7,201) (5,778) (14,821) (10,236) -------- -------- -------- -------- Consolidated totals........... $ 36,271 $ 31,126 $ 66,968 $(24,939) ======== ======== ======== ========
The amounts presented for "Corporate and other" include corporate expense, inter-segment eliminations and the results of operations of the Company's retail software division. The Electronic Commerce business segment financial information presented above is not presented on the same basis as the financial information presented in the Commerce Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 primarily due to the allocations of the results of operations of Sterling Software's international operations to the applicable business segments, including Sterling's Electronic Commerce segment and the allocation of corporate expense. 7. REDEMPTION AND CONVERSION OF 5.75% CONVERTIBLE SUBORDINATED DEBENTURES On December 20, 1995, the Company gave notice of the redemption of all of the $114,922,000 then outstanding principal amount of its 5.75% Convertible Subordinated Debentures due February 1, 2003 (the "Debentures"). The effective date of the redemption was February 12, 1996 (the "Redemption Date"). 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 earnings per share would have been $5.21 for the six months ended March 31, 1996. -12- 8. SHARE REPURCHASE PROGRAM On October 2, 1995, the Company renewed a share repurchase program pursuant to which it may repurchase shares of Software Stock from time to time through open market transactions. Through March 31, 1996, approximately 1,336,000 shares of Software Stock were repurchased at an aggregate amount of approximately $59,372,000. Any further purchases of Software Stock pursuant to this program will be made solely at the Company's discretion and may be discontinued at any time without prior notice. -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUBSIDIARY INITIAL PUBLIC OFFERING AND PROPOSED DISTRIBUTION 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 the 73,200,000 shares of Commerce Stock then owned by it and Commerce sold 1,800,000 previously unissued shares of Commerce Stock. Sterling Software currently owns 61,200,000 shares of Commerce Stock, constituting 81.6% of the total number of outstanding shares of Commerce Stock. The Offering price was $24 per share of Commerce Stock resulting in net proceeds to Sterling Software of approximately $267,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. The Offering resulted in net proceeds to Commerce of approximately $40,118,000 after deducting underwriting discounts and commissions and Commerce's pro rata share of Offering expenses. Sterling Software recorded a gain of approximately $127,164,000, 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 existing stock option plans. Sterling Software received proceeds of approximately $109,180,000 from the exercise of approximately 4,242,000 warrants and employee stock options for the period from January 1, 1996 to March 31, 1996. If all remaining outstanding options and warrants to purchase Software Stock at March 31, 1996 were exercised, approximately 4,214,000 additional shares of Software Stock would be issued and outstanding, resulting in additional proceeds to Sterling Software of approximately $152,154,000. There can be no assurance, however, as to whether or when any of such options or warrants will be exercised. The Company has included pro forma financial statements in Part II, Item 5 of this Form 10-Q to illustrate the effects of the proposed Distribution and the redemption and conversion of the Company's 5.75% Convertible Subordinated Debentures (the "Debentures"). THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Revenue increased $25,782,000, or 19%, in the second quarter of 1996 over the same period of 1995. The Electronic Commerce business segment ("EC") revenue increased $18,066,000, or 37%, on the strength of a 54% increase in product revenue, a 22% increase in product support revenue and a 30% increase in network services revenue. The increase in EC products revenue is the result of increased revenue in the communications and interchange software product lines. EC product support revenue increased primarily as a result of an increase in the installed customer base across all three product lines. The increased network services revenue was due to an increase in the network services customer base, primarily in the grocery, hardlines and retail vertical markets, and increases in the network processing volume for existing customers. The Systems Management business segment ("SM") revenue increased $3,682,000, or 10%. Products revenue increased in the storage management and VM software product lines primarily due to higher volume and products acquired in the first quarter of 1996. The -14- Applications Management business segment ("AM") revenue increased $2,881,000, or 11%. AM's products and product support revenue increased 19% in the second quarter of 1996 over the second quarter of 1995. The Federal Systems business segment ("FS") revenue increased $2,225,000, or 9%, due to higher contract billings in the Information Technology Division offset in part by lower contract billings due to the completion of certain contracts at NASA. Revenue from outside the United States and Canada represented approximately 26% of the Company's revenue in both the second quarter of 1996 and the second quarter of 1995. Approximately 39% of the Company's total products revenue was generated from non-mainframe products. This compares with 35% in the second quarter of 1995. Total costs and expenses increased $20,637,000, or 19%. Total cost of sales increased $9,425,000, or 22%, on a 19% increase in revenue is in part due to an increase of $2,056,000, or 25%, in depreciation and amortization resulting from a corresponding increase in property and equipment purchases and new products and enhancements released from development. In addition, cost of sales increased commensurate with higher levels of products, product support and services revenue. Product development and enhancement expense for the second quarter of 1996 was $8,974,000, net of $6,847,000 of capitalized software costs as compared to second quarter of 1995 product development and enhancement expense of $11,356,000, net of $5,326,000 of capitalized software costs. The decrease in gross product development and enhancement expense is primarily due to a reduction of costs in the AM business segment due to the restructuring of that segment. Development costs capitalized during the second quarter of 1996 and 1995 represented 43% and 32%, respectively, of the gross product development and enhancement expense of the same respective quarters. The higher capitalized rate is due to a higher number of development projects reaching technological feasibility. Product development and enhancement expense and the capitalization rate may fluctuate from period to period depending in part upon the number and status of software development projects which are in process. Software amortization expense was $6,257,000 and $5,632,000 for the second quarter of 1996 and 1995, respectively. Selling, general and administrative expense increased $13,594,000, or 26%, primarily due to an increase in sales, marketing and customer support activities supporting the revenue growth in EC and International. Investment income increased $2,105,000 as a result of higher average balances of investments in cash equivalents and marketable securities resulting from the net proceeds from the Offering of approximately $307,576,000 and the proceeds from the exercise of stock options of approximately $109,180,000 during the second quarter of 1996. Income before other income (expense), gain on the Offering, minority interest and income taxes was $36,721,000 in the second quarter of 1996 as compared to income before other income (expense), gain on the Offering, minority interest and income taxes of $31,126,000 in the second quarter of 1995. Income before other income (expense), gain on the Offering, minority interest and income taxes increased $5,145,000, or 17%, primarily due to higher operating profits in EC, up 31% and SM, up 15%, lower interest expense due to the redemption and conversion of the Debentures, down 57%, and higher investment income, up 94% on higher average investment balances of cash equivalents and marketable securities. -15- SIX MONTHS ENDED MARCH 31, 1996 AND 1995 Revenue increased $48,016,000, or 18%, in the first six months of 1996 over the same period of 1995. Total EC revenue increased $30,114,000, or 31%, in the first half of 1996 over the first half of 1995 Products revenue increased $13,537,000, or 36%, related to sales growth of the communications and interchange software product lines. Product support revenue increased primarily as a result of an increase in the installed customer base across all three product lines. Network services revenue increased $10,548,000 on the growth in existing customer volume and the addition of new customers to the network primarily in the grocery, retail and hardlines vertical markets SM revenue increased $5,518,000, or 8%, primarily due to products and product support revenue increases across all product lines and products acquired in the first quarter of 1996. AM revenue grew $9,330,000, or 21%. Products and product support revenue in the first six months of 1996 increased $8,600,000, or 22%, over the first six months of 1995. Second quarter products revenue growth offset products revenue declines reported in the first quarter of 1996 versus the first quarter of 1995. In the first quarter of 1995, the operations outside the United States and Canada closed several large contracts which were not repeated in the first quarter of 1996 and subsequent to the Merger there was a reduced marketing and sales emphasis on certain products which became non-strategic after the Merger. FS revenue increased $4,822,000, or 10%, in the first six months of 1996 primarily due to higher contract billings in the Information Technology Division offset in part by lower contract billings due to the completion of certain contracts at NASA. Revenue in the first six months of 1996 from outside the United States and Canada grew $12,356,000, or 18%, over the first six months of 1995. This revenue represented 26% of the Company's total revenue in both the first half of 1996 and 1995. For the six months ended March 31, 1996, 41% of the Company's products revenue was for products that run on hardware platforms other than mainframe hardware. This compares to 35% for the same period in 1995. Total costs and expenses decreased $43,891,000 primarily due to a $62,000,000 charge in the first quarter of 1995 for the portion of the purchase price of KnowledgeWare attributed to in-process research and development and to a $19,512,000 charge for restructuring in the first quarter of 1995 resulting from the Merger. Total cost of sales increased $16,578,000, or 19%, in part due to an increase of $2,396,000, or 14%, in depreciation and amortization resulting from a corresponding increase in property and equipment purchases and new products and enhancements released from development. In addition, cost of sales increased commensurate with higher levels of products, product support and services revenue. Product development and enhancement expense for the first six months of 1996 of $18,334,000 is net of $12,913,000 of capitalized software development costs. This compares to product development and enhancement expense of $20,802,000 for the first six months of 1995, which is net of $9,472,000 of capitalized costs for the same period. The decrease in gross product development and enhancement expense is primarily due to a reduction of costs in the AM business segment due to the restructuring of that segment. Development costs capitalized during the first six months of 1996 and 1995 represented 41% and 31%, respectively, of the gross product development and enhancement expense incurred in the same respective periods. The higher capitalized rate is due to a higher number of development projects reaching technological feasibility. Software amortization expense was $11,777,000 and $11,529,000 in the first six months of 1996 and 1995, respectively. Selling, general and administrative expense increased $23,511,000, or 23%, -16- primarily due to an increase in sales, marketing and customer support activities supporting the revenue growth in EC and International. Interest expense in the first six months of 1996 decreased $1,403,000 from the first six months of 1995 primarily due to the redemption and conversion of the Debentures. Investment income in the first six months of 1996 increased $4,338,000 over the first six months of 1995 as a result of higher average balances of cash equivalents and marketable securities resulting from the net proceeds from the Offering of approximately $307,576,000 and the proceeds from the exercise of stock options of approximately $129,157,000. Income before other income (expense), gain on the Offering, minority interest and income taxes was $66,968,000 in the first six months of 1996 as compared to loss before other income (expense), gain on the Offering, minority interest and incomes taxes of $24,939,000 in the first six months of 1995. Excluding the $62,000,000 non-recurring charge for purchased research and development and the $19,512,000 non-recurring charge for restructuring in the first six months of 1995, income before other income (expense), gain on the Offering, minority interest and income taxes increased $10,395,000, or 29%, in part due to higher operating profits in EC, up 44%, and SM, up 10%, partially offset by lower AM operating profits, down 12%. In addition, interest expense declined and investment income increased for the reasons noted above. LIQUIDITY AND CAPITAL RESOURCES The Company maintained a strong liquidity and financial position with $600,595,000 of working capital at March 31, 1996, which includes $508,826,000 of cash and cash equivalents and $153,255,000 of marketable securities. Net cash flows from operations was $68,712,000 in the first six months of 1996 as compared to $52,023,000 in the first six months of 1995. Days sales outstanding at March 31, 1996 measured on a quarterly basis was 93 versus 107 at December 31, 1995 and 96 at September 30, 1995. Cash flows from operations, proceeds from the Offering and the exercise of stock options, and available cash balances were used to fund operations, purchases of cash equivalents, marketable securities and capital expenditures, including software additions. Sterling Software received net proceeds from the Offering of approximately $267,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of offering expenses. The Offering resulted in net proceeds to Commerce of approximately $40,118,000 after deducting underwriting discounts and commissions and Commerce'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 $109,180,000 from the exercise of approximately 4,242,000 warrants and employee stock options for the period from January 1, 1996 to March 31, 1996. At March 31, 1996 approximately 4,214,000 additional shares of Sterling Software common stock would be issued and outstanding if all remaining outstanding options and warrants were exercised and would result in additional proceeds of approximately $152,154,000. -17- 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 "Redemption Date"). 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. The conversion of the Debentures will reduce the Company's interest charges by approximately $1,700,000 per quarter. At March 31, 1996, after the utilization of $1,130,000 for standby letters of credit, $33,870,000 was available for borrowing on the Company's $35 million revolving credit and term loan agreement. Certain of the Company's foreign subsidiaries have separate lines of credit available for foreign exchange exposure management and working capital requirements. These lines of credit are guaranteed by Sterling Software. At March 31, 1996, $3,394,000 was outstanding pursuant to foreign lines of credit and $19,356,000 was available for borrowing thereunder. On October 2, 1995, the Company renewed a share repurchase program pursuant to which it may repurchase shares of Software Stock from time to time through open market transactions. Through March 31, 1996, approximately 1,336,000 shares of Software Stock were repurchased at an aggregate amount of approximately $59,372,000. At March 31, 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 existing cash balances and internally generated funds. No significant commitments exist for future capital expenditures. The Company believes available balances of cash, cash equivalents and investments in 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 Demand for many of the Company's products tends to improve with increased inflation as customers strive to increase 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 might not be able to recover increased operating costs through increased product licensing and prices. The assets and liabilities of 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 -18- facilities, in which all costs are local currency based. When necessary, the Company may also enter into hedge transactions in an effort to reduce its exposure to currency exchange risks. The Company maintains a strategy of acquiring businesses and products that fill strategic market niches. This acquisition strategy contributes in part of 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. 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 information available to the Company's management and various estimates, assumptions and predictions made by the Company's management. When used in SEC Filings, the words "anticipate," "contemplate," "estimate," "expect," "future," "intend," "plan" and similar expressions are intended to identify forward-looking statements. Such statements are subject to inherent 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, and legislative, regulatory, judicial and other governmental authorities and officials. Consequently, actual events, circumstances, consequences, effects and results may vary significantly from those described in or contemplated by such forward looking statements or information. -19- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 30, 1994, Sterling Software, Inc. ("Sterling", "Sterling Software" or the "Company") acquired KnowledgeWare, Inc. ("KnowledgeWare"), in a stock-for-stock acquisition described in more detail in Note 4 under "Notes to Consolidated Financial Statements" in Part I of this Report. In connection with that transaction, Sterling Software placed 484,800 shares of its common stock in escrow (the "Escrowed Shares") to cover certain losses that may result in connection with any pending or threatened litigation, action, claim, proceeding, dispute or investigation (including amounts paid in settlement) to which Sterling Software is entitled to indemnification pursuant to the terms of the merger agreement providing for the acquisition. A number of lawsuits were filed against KnowledgeWare and certain of its former officers and directors alleging violations of securities laws and related laws. All such pending private civil actions against KnowledgeWare have been settled on the terms described in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 and all of the Escrowed Shares have been utilized pursuant to the indemnification provisions of the Merger Agreement. See Note 5. The Commission continues its formal investigation previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. Sterling Software's management believes that, in view of Sterling Software's indemnification from the Escrowed Shares and after giving effect to applicable reserves, the settlements of the private civil actions and the ultimate resolution of the Commission's investigation will not materially affect the financial condition or results of operations of Sterling Software. -20- ITEM 5. OTHER INFORMATION PRO FORMA FINANCIAL DATA The following unaudited financial data illustrate the effects on Sterling Software of the conversion and redemption of the Debentures and the Distribution (as such terms are defined in Note 3 to Notes to Consolidated Financial Statements included in Part I of this report). The pro forma balance sheet is based on the March 31, 1996 balance sheet of Sterling Software and assumes the Distribution was consummated on that date. The pro forma statements of operations data are based on the statements of operations data of Sterling Software for the six months ended March 31, 1996 and 1995 and assumes that the Distribution and the conversion and redemption of the Debentures were consummated at the beginning of the fiscal periods presented. The pro forma financial data of Sterling Software do not purport to represent what the financial position or results of operations of Sterling Software would have been if the transactions had in fact been consummated on such date or at the beginning of the period indicated or to project the financial position or results of operations for any future date or period. The pro forma adjustments are estimates based upon currently available information and upon certain assumptions that Sterling Software's management believes are reasonable in the circumstances. Actual results may vary from these estimates. -21- STERLING SOFTWARE, INC. PRO FORMA CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 (IN THOUSANDS)
PRO FORMA HISTORICAL ADJUSTMENTS STERLING STERLING FOR THE SOFTWARE AS SOFTWARE AT DISTRIBUTION ADJUSTED AT MARCH 31, 1996 OF COMMERCE(1) MARCH 31, 1996 --------------- --------------- ---------------- Current assets: Cash and cash equivalents............. $ 508,826 $ (41,485) $467,341 Marketable securities................. 153,255 153,255 Accounts and notes receivable, net.... 169,221 (51,147) 118,074 Prepaid expenses and other current assets............................. 22,253 (10,125) 12,128 ---------- --------- -------- Total current assets............. 853,555 (102,757) 750,798 Property and equipment, net............. 71,454 (33,907) 37,547 Computer software, net.................. 88,705 (32,859) 55,846 Excess cost over net assets acquired, net........................... 82,538 (10,044) 72,494 Other assets............................ 8,348 (4,223) 4,125 ---------- --------- -------- Total assets..................... $1,104,600 $(183,790) 920,810 ========== ========= ======== Current liabilities..................... $ 252,960 $ (56,946) $196,014 Long-term debt.......................... 1,446 1,446 Deferred income taxes................... 34,921 34,921 Other noncurrent liabilities............ 29,879 (25,834) 4,045 Minority interest....................... 18,586 (18,586) Stockholders' equity:(2) Common stock.......................... 3,572 3,572 Additional paid in capital............ 640,370 (32,736) 607,634 Retained earnings..................... 182,354 (49,688) 132,666 Less: treasury stock................. (59,488) (59,488) ---------- --------- -------- Total stockholders' equity....... 766,808 (82,424) 684,384 ---------- --------- -------- Total liabilities & stockholders' equity.......................... $1,104,600 $(183,790) $920,810 ========== ========= ========
See accompanying notes. -22- NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (1) Adjusted to give effect to the proposed Distribution. (2) In connection with the Offering (as defined in Note 3 to Notes to Consolidated Financial Statements included in Part I of this report), 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 $109,180,000 from the exercise of 4,242,000 warrants and employee stock options for the period from January 1, 1996 to March 31, 1996. If all remaining options and warrants to purchase Software Stock at March 31, 1996 were exercised, an additional 4,214,000 shares of Software Stock would be issued and outstanding, with resulting proceeds to the Company of approximately $152,154,000. The impact of the potential exercise of Sterling Software's remaining options and warrants has not been reflected in the accompanying Pro Forma Consolidated Balance Sheet. -23- STERLING SOFTWARE, INC. PRO FORMA STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
PRO FORMA HISTORICAL ADJUSTMENTS FOR PRO FORMA STERLING STERLING THE DEBENTURE ADJUSTMENTS FOR SOFTWARE AS SOFTWARE AT REDEMPTION AND THE DISTRIBUTION ADJUSTED AT MARCH 31, 1996 CONVERSION OF COMMERCE(2) MARCH 31, 1996 ----------------- --------------- ---------------- ---------------- Revenue: Products............................ $118,815 $ (37,911) $ 80,904 Product support..................... 89,576 (27,261) 62,315 Services............................ 104,250 (44,887) 59,363 Royalties from affiliated companies. (8,167) 8,167 (4) -------- ------- --------- -------- Total revenue...................... 312,641 (110,059) 202,582 Cost and expenses: Cost of sales: Products and product support........ 40,108 (15,059) 33,216 8,167 (4) Services............................ 62,789 (10,193) 52,596 -------- ------- --------- -------- 102,897 (17,085) 85,812 Product development and enhancement.. 18,334 (7,065) 11,269 Selling, general and administrative.. 124,442 (43,159) 83,033 1,750 (3) -------- ------- --------- -------- Total costs and expenses........... 245,673 (65,559) 180,114 -------- ------- --------- -------- Income from operations............... 66,968 (44,500) 22,468 Interest expens..................... (2,797) 2,581 (1) 78 (138) Investment income................... 7,465 (140) 7,325 Other............................... 452 272 724 -------- ------- --------- -------- 5,120 2,581 210 7,911 -------- ------- --------- -------- Income before gain on subsidiary public offering, minority interest and income taxes............. 72,088 2,581 (44,290) 30,379 Gain on subsidiary public offering.. 239,936 (239,936) (5) Minority interest................... (1,157) 1,157 (5) -------- ------- --------- -------- Income before income taxes.............. 310,867 2,581 (283,069) 30,379 Provision for income taxes.............. 137,542 877 (17,016) 8,631 (112,772) (5) -------- ------- --------- -------- Income from continuing operations....... $173,325 $1,704 $(153,281) $ 21,748 ======== ======= ========= ======== Pro forma income from continuing operations per share.................................. $5.09 $.63 ======== ========
-24- STERLING SOFTWARE, INC. PRO FORMA STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
PRO FORMA HISTORICAL ADJUSTMENTS FOR PRO FORMA STERLING STERLING THE DEBENTURE ADJUSTMENTS FOR SOFTWARE AS SOFTWARE AT REDEMPTION AND THE DISTRIBUTION ADJUSTED AT MARCH 31, 1995 CONVERSION OF COMMERCE(2) MARCH 31, 1995 -------------- ---------------- ----------------- -------------- Revenue: Products.............................. $102,056 $(30,366) $ 71,690 Product support....................... 73,979 (21,833) 52,146 Services.............................. 88,590 (34,701) 53,889 Royalties from affiliated companies... (4,471) 4,471 (4) -------- -------- -------- -------- Total revenue....................... 264,625 (86,900) 177,725 Cost and expenses: Cost of sales: Products and product support.......... 33,072 (11,764) 25,779 4,471 (4) Services.............................. 53,247 (7,476) 45,771 -------- -------- -------- -------- 86,319 (14,769) 71,550 Product, development and enhancement.. 20,802 (7,631) 13,171 Selling, general and administrative... 100,931 (33,838) 68,843 1,750 (3) Restructuring charges.................. 19,512 19,512 Purchased research and development..... 62,000 62,000 -------- -------- -------- -------- Total costs and expenses............. 289,564 (54,488) 235,076 -------- -------- -------- -------- Income (loss) from operations......... (24,939) (32,412) (57,351) Interest expense...................... (4,200) 3,482 (1) 26 (692) Investment income..................... 3,127 3,127 Other income.......................... 264 146 410 -------- -------- -------- -------- (809) 3,482 172 2,845 -------- -------- -------- -------- Income (loss) before income taxes......... (25,748) 3,482 (32,240) (54,506) Provision (benefit) for income taxes...... 15,747 1,393 (12,196) 4,944 -------- -------- -------- -------- Income (loss) from continuing operations.. $(41,495) $2,089 $(20,044) $(59,450) ======== ======== ======== ======== Pro forma income (loss) from continuing operations per share.......... $(1.85) $(2.24) ======== ========
-25- NOTES TO PRO FORMA STATEMENTS OF OPERATIONS (1) Adjusted to give effect to the interest savings associated with the conversion of the outstanding Debentures into Software Stock. (2) Adjusted to give effect to the Distribution. (3) Administrative charges incurred by Sterling Software allocated to Commerce were approximately $875,000 and $1,750,000 in the three and six months ended March 31, 1996 and 1995, respectively. This adjustment reflects the addition of those costs to Sterling Software as if Commerce had been historically distributed to stockholders. (4) As owner of software products distributed by Sterling Software's international operations, Commerce includes royalties received from Sterling Software as revenue. Such revenues are eliminated in the pro forma adjustment and are an expense to Sterling Software. (5) This adjustment is to reflect the reclassification of the gain on the Offering and minority interest to discontinued operations, which is expected to occur if the Sterling Software Board approves the Distribution. -26- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q: 2(a) - Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994, among the Company, KnowledgeWare, Inc. and SSI Corporation ("KWI Agreement and Plan of Merger") (1) 2(b) - Agreement dated October 11, 1994 among the Company, KnowledgeWare, Inc. and SSI Corporation (1) 2(c) - First Amendment to KWI Agreement and Plan of Merger (1) 3(a) - Certificate of Incorporation of the Company (2) 3(b) - Certificate of Amendment of Certificate of Incorporation of the Company (3) 3(c) - Certificate of Amendment of Certificate of Incorporation of the Company (4) 3(d) - Certificate of Amendment of Certificate of Incorporation of the Company (5) 3(e) - Restated Bylaws of the Company (6) 4(a) - Indenture dated February 2, 1993 between the Company and Bank of America Texas, National Association, as Trustee, including the form of 5.75% Convertible Subordinated Debenture attached as Exhibit A thereto (7) 4(b) - Warrant Agreement dated June 9, 1994 between KnowledgeWare, Inc. and Trust Company Bank (8) 4(c) - Supplemental Warrant Agreement dated as of November 30, 1994 between KnowledgeWare, Inc. and Trust Company Bank (8) 10(a) - First Amendment and Modification Agreement dated January 31, 1996 by and between Sterling Software, Inc., 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(b) - Form of CEO Agreement dated February 12, 1996 between the Company and Sterling L. Williams (11) 10(c) - Form of Change-in-Control Severance Agreement dated as of February 12, 1996 between the Company and each of its executive officers (11) -27- 10(d) - Forms of Severance Agreements dated as of February 12, 1996 between the Company and each of its executive officers (other than Sterling L. Williams) (11) 10(e) - Space Sharing Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(f) - Data Processing Agreement dated as of March 13, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(g) - Tax Allocation Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(h) - Indemnification Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (10) 10(i) - International Marketing Agreement dated as of March 4, 1996 by and between Sterling Software International, Inc. and Sterling Commerce International, Inc. (10) 10(j) - Master Software License Agreement dated as of March 4, 1996 by and among the Company, Sterling Commerce, Inc. and their respective subsidiaries parties thereto (10) 11(a) - Computation of Earnings Per Share, Three Months Ended March 31, 1996 (11) 11(b) - Computation of Earnings Per Share, Three Months Ended March 31, 1995 (11) 11(c) - Computation of Earnings Per Share, Six Months Ended March 31, 1996 (11) 27 - Financial Data Schedule (11) - ----------------- (1) Previously filed as an exhibit to the Company's Registration Statement No. 33-56185 on Form S-4 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement No. 2-82506 on Form S-1 and incorporated herein by reference. (3) 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. (4) Previously filed as an exhibit to the Company's Registration Statement No. 33-69926 on Form S-8 and incorporated herein by reference. (5) 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. (6) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 on Form S-8 and incorporated herein by reference. -28- (7) 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. (8) Previously filed as an exhibit to the Company's Registration Statement No. 33-56679 on Form S-3 and incorporated herein by reference. (9) Previously filed as an exhibit to Registration Statement No. 33-80595 on Form S-1 filed by Sterling Commerce, Inc. and incorporated herein by reference. (10) 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. (11) Filed herewith. (b) Reports on Form 8-K. During the three months ended March 31, 1996, the Company filed (i) a Current Report on Form 8-K dated January 4, 1996 under Item 5 and (ii) a Current Report on Form 8-K dated March 7, 1996 under Item 5. -29- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STERLING SOFTWARE, INC. Date: May 9, 1996 /s/ Sterling L. Williams ------------------------------------ Sterling L. Williams President, Chief Executive Officer and Director (Principal Executive Officer) Date: May 9, 1996 /s/ George H. Ellis ------------------------------------ George H. Ellis Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -30- EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- --------------------------------------------- 2(a) - Amended and Restated Agreement and Plan of Merger dated as of August 31, 1994, among the Company, KnowledgeWare, Inc. and SSI Corporation ("KWI Agreement and Plan of Merger") (1) 2(b) - Agreement dated October 11, 1994 among the Company, KnowledgeWare, Inc. and SSI Corporation (1) 2(c) - First Amendment to KWI Agreement and Plan of Merger (1) 3(a) - Certificate of Incorporation of the Company (2) 3(b) - Certificate of Amendment of Certificate of Incorporation of the Company (3) 3(c) - Certificate of Amendment of Certificate of Incorporation of the Company (4) 3(d) - Certificate of Amendment of Certificate of Incorporation of the Company (5) 3(e) - Restated Bylaws of the Company (6) 4(a) - Indenture dated February 2, 1993 between the Company and Bank of America Texas, National Association, as Trustee, including the form of 5.75% Convertible Subordinated Debenture attached as Exhibit A thereto (7) 4(b) - Warrant Agreement dated June 9, 1994 between KnowledgeWare, Inc. and Trust Company Bank (8) 4(c) - Supplemental Warrant Agreement dated as of November 30, 1994 between KnowledgeWare, Inc. and Trust Company Bank (8) 10(a) - First Amendment and Modification Agreement dated January 31, 1996 by and between Sterling Software, Inc., 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(b) - Form of CEO Agreement dated February 12, 1996 between the Company and Sterling L. Williams (11) 10(c) - Form of Change-in-Control Severance Agreement dated as of February 12, 1996 between the Company and each of its executive officers (11) 10(d) - Forms of Severance Agreements dated as of February 12, 1996 between the Company and each of its executive officers (other than Sterling L. Williams) (11) 10(e) - Space Sharing Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(f) - Data Processing Agreement dated as of March 13, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(g) - Tax Allocation Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (9) 10(h) - Indemnification Agreement dated as of March 4, 1996 by and between the Company and Sterling Commerce, Inc. (10) 10(i) - International Marketing Agreement dated as of March 4, 1996 by and between Sterling Software International, Inc. and Sterling Commerce International, Inc. (10) 10(j) - Master Software License Agreement dated as of March 4, 1996 by and among the Company, Sterling Commerce, Inc. and their respective subsidiaries parties thereto (10) 11(a) - Computation of Earnings Per Share, Three Months Ended March 31, 1996 (11) 11(b) - Computation of Earnings Per Share, Three Months Ended March 31, 1995 (11) 11(c) - Computation of Earnings Per Share, Six Months Ended March 31, 1996 (11) 27 - Financial Data Schedule (11) - -------------- (1) Previously filed as an exhibit to the Company's Registration Statement No. 33-56185 on Form S-4 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement No. 2-82506 on Form S-1 and incorporated herein by reference. (3) 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. (4) Previously filed as an exhibit to the Company's Registration Statement No. 33-69926 on Form S-8 and incorporated herein by reference. (5) 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. (6) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 on Form S-8 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Registration Statement No. 33-56679 on Form S-3 and incorporated herein by reference. (9) Previously filed as an exhibit to Registration Statement No. 33-80595 on Form S-1 filed by Sterling Commerce, Inc. and incorporated herein by reference. (10) 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. (11) Filed herewith. EX-10.A 2 FIRST AMENDMENT AND MODIFICATION AGREEMENT EXHIBIT 10(a) FIRST AMENDMENT AND MODIFICATION AGREEMENT FIRST AMENDMENT AND MODIFICATION AGREEMENT dated as of January 31, 1996 (the "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 (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 created a new, wholly owned subsidiary, Sterling Commerce, Inc., a Delaware corporation ("SCI"), and intends to transfer certain assets, including the capital stock of certain of the Sterling Subsidiaries, to SCI; WHEREAS, the Company intends to offer to the public a portion of the common stock of SCI and to distribute the remaining common stock of SCI to the Company's shareholders by means of a tax-free distribution; WHEREAS, the Company has given irrevocable notice for the redemption of its outstanding Subordinated Debentures to the registered holders thereof; WHEREAS, in connection with the foregoing and certain related transactions, the Company has requested that the Agent and the Banks agree to issue certain consents and amend certain provisions of the Agreement and the other Loan Documents; WHEREAS, upon the terms and subject to the conditions contained herein, the Agent and the Banks are willing to issue such consents and amend such provisions; 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)1.1 OF THE AGREEMENT. Section 1.1 of the ------------------------------------ Agreement is hereby amended by: (a) deleting the definition of "Sterling Companies" in its entirety and substituting in lieu thereof the following definition: -2- "Sterling Companies. Collectively, the Company, the Sterling -------- --------- Subsidiaries and the Non-Guarantor Subsidiaries."; (b) deleting the definition of "Sterling Subsidiaries" in its entirety and substituting in lieu thereof the following definition: "Sterling Subsidiaries. Collectively, those Subsidiaries of the -------- ------------ Company or any of the Company's Subsidiaries listed on Schedule 1.6 -------- --- hereto, and any other Subsidiary of the Company or any of its Subsidiaries which (i) is acquired or created subsequent to the date hereof, (ii) is organized under the laws of the District of Columbia or any state of the United States, (iii) has its principal place of business in the United States, (iv) does not do business exclusively outside the United States and (v) is a party to and guarantor under the Guaranty."; and (c) inserting, in the places required by alphabetical order, the following new definitions: "Indemnification Agreement. The Indemnification Agreement --------------- --------- to be entered into by the Company and/or any of its Subsidiaries (other than SCI and its Subsidiaries), on the one hand, and SCI and/or any of its Subsidiaries, on the other hand, each substantially in the form delivered by the Company to the Agent in connection with the First Amendment and Modification Agreement dated as of January 31, 1996 among the Company, the Sterling Subsidiaries listed on the signature pages thereto, the Agent and the Banks." "SCI. Sterling Commerce, Inc., a Delaware corporation." --- "Tax Allocation Agreement. The Tax Allocation Agreement to --- ---------- --------- be entered into by the Company and/or any of its Subsidiaries (other than SCI and its Subsidiaries), on the one hand, and SCI and/or any of its Subsidiaries, on the other hand, each substantially in the form delivered by the Company to the Agent in connection with the First Amendment and Modification Agreement dated as of January 31, 1996 among the Company, the Sterling Subsidiaries listed on the signature pages thereto, the Agent and the Banks." (S)2. REPLACEMENT OF SCHEDULES 1.3 AND 1.6 TO THE AGREEMENT. Schedules ----------------------------------------------------- --------- 1.3 and 1.6 to the Agreement are hereby deleted in their entirety, and Schedules - --- --- --- --------- 1.3 and 1.6 attached hereto are hereby respectively substituted in lieu thereof. - --- --- --- (S)3. REPLACEMENT OF SCHEDULE 5.2 TO THE AGREEMENT. Schedule 5.2 to the -------------------------------------------- -------- --- Agreement is hereby deleted in its entirety, and Schedule 5.2 attached hereto is -------- --- hereby substituted in lieu thereof. (S)4. REPLACEMENT OF SCHEDULE 5.6 OF THE AGREEMENT. Schedule 5.6 to the -------------------------------------------- -------- --- Agreement is hereby deleted in its entirety, and Schedule 5.6 attached hereto is -------- --- hereby substituted in lieu thereof. -3- (S)5. AMENDMENT OF (S)9.1 OF THE AGREEMENT. Section 9.1 of the ------------------------------------ Agreement is hereby amended by: (a) inserting the word "and" at the end of subsection (o) thereof; and (b) inserting, immediately after subsection (o) thereof and immediately before the last sentence of (S)9.1, the following new subsection (p) with the following text: "(p) Indebtedness under the Tax Allocation Agreement and (S)2 and (S)3 of the Indemnification Agreement." (S)6. AMENDMENT OF (S)9.5 OF THE AGREEMENT. Section 9.5 of the ------------- -------------------- Agreement is hereby amended by deleting, from subparagraph (a)(i)(B) thereof, the dollar amount "$20,000,000" and substituting in lieu thereof the dollar amount "$60,000,000". (S)7. AMENDMENT OF (S)9.7 OF THE AGREEMENT. Section 9.7 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 the Company may redeem all or any portion of -------- -------- the Subordinated Debentures (up to a maximum of $100,000), pursuant to the notice of redemption given to holders of the Subordinated Debentures on January 5, 1996." (S)8. AMENDMENT OF FINANCIAL COVENANTS. -------------------------------- (a) Amendment of (S)10.3 of the Agreement. Section 10.3 of the ------------------------------------- Agreement is hereby amended by deleting the text "(a) from June 30, 1995 through June 30, 1997 to be less than 1.0:1.0, and (b) from July 1, 1997 through Final Maturity, to be less than 1.25:1.0" and substituting in lieu thereof the following text: "to be less than 1.25:1". (b) Amendment of (S)10.5 of the Agreement. Section 10.5 of the ------------- --------------------- Agreement is hereby deleted in its entirety, and the following new (S)10.5 is hereby substituted in lieu thereof: "(S)10.5. Liabilities to Net Worth Ratio. The Company shall not ------------------------------ cause or permit the ratio of Consolidated Total Liabilities to Consolidated Net Worth at the end of any fiscal quarter of the Company ending at any time from the Closing Date through Final Maturity to equal or exceed 1.5:1.0." (S)9. CONSENT TO CERTAIN TRANSACTIONS WITH RESPECT TO STERLING COMMERCE, ------------------------------------------------------------------ INC. The Company has informed the Agent and the Banks of the creation in - ---- December, 1995 of SCI. The Company has also informed the Agent and the Banks that it has effected or intends to effect the transactions described on Schedule -------- 9(a) hereto (collectively, the "Proposed Entity Formation Transactions"). The - ---- Company has further informed the Agent and the Banks of its intention to: -4- (a) transfer to SCI or one of its wholly owned Subsidiaries (i) all of the issued and outstanding shares of capital stock of the Subsidiaries of the Company previously comprising the Company's Electronic Commerce Group and described on Schedule 9(a)(i) hereto, (ii) -------- ------- certain assets relating to the electronic commerce business previously conducted by the Company's International Group and described on Schedule -------- 9(a)(ii) hereto, and (iii) certain assets relating to the electronic -------- commerce business conducted by the Company's Federal Systems Group and listed on Schedule 9(a)(iii) hereto (collectively, the "Proposed -------- --------- Transfers"); (b) offer or cause SCI to offer for sale to the public, on or before January 31, 1997, an aggregate number of shares of the common stock of SCI not to exceed twenty percent (20%) of the total number of outstanding shares of the common stock of SCI (the "Proposed Public Offering"); and (c) following the completion of the Proposed Public Offering, distribute, on or before January 31, 1997, on a tax-free basis (upon the Company's receipt of a favorable ruling from the Internal Revenue Service as to the tax-free nature thereof), pro rata to its stockholders as a --------- dividend, the Company's remaining shares of the common stock of SCI (constituting that portion of the common stock of SCI not sold to the public pursuant to the Proposed Public Offering) (the "Proposed Distribution"). The Company has further informed the Agent and the Banks that the Proposed Entity Formation Transactions, the Proposed Transfers, the issuance by SCI of shares of its common stock to be offered as part of the Proposed Public Offering (in an aggregate amount not to exceed twenty percent (20%) of the total number of outstanding shares of the outstanding capital stock of SCI)(the "Proposed Issuance"), the Proposed Public Offering and the Proposed Distribution require the consent of the Agent and the Banks pursuant to (S)8.10, (S)8.14, (S)8.16(b)(iv), (S)8.19, (S)9.9, (S)9.12, (S)9.16 and (S)11(r) of the Agreement. The Company has requested that, to the extent required by the Agreement, the Agent and the Banks consent to the Proposed Entity Formation Transactions, the Proposed Transfers, the Proposed Issuance, the Proposed Public Offering and the Proposed Distribution (collectively, the "Contemplated Transactions"). Subject to the terms and conditions contained herein, and provided that any one or more variances in the final terms of the Contemplated Transactions from the terms described herein or in the S-1 Registration Statement filed by SCI with the Securities and Exchange Commission on December 20, 1995 would not, in the aggregate, (a) have a material adverse effect on the Company and its Subsidiaries taken as a whole, (b) have a material adverse effect on the ability of the Company or any of the Sterling Subsidiaries to comply with its payment obligations under the Loan Documents or (c) cause the Company to violate any of its covenants contained in (S)(S)9.8, 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6 of the Agreement, each of the Agent and the Banks hereby consents to the Contemplated Transactions, solely to the extent that any of the Contemplated Transactions would otherwise violate (S)8.10, (S)8.14, (S)8.16(b)(iv), (S)8.19 (with the consent provided with respect to (S)8.19 limited to the -5- extent necessary to ensure that Sterling Commerce, Inc., a Wyoming corporation, need not become a party to the Guaranty for so long as its sole business is the holding of the Sterling Commerce, Inc. corporate name and for so long as the conditions set forth in (S)8.17(b) and (c) of the Agreement are not otherwise met), (S)9.9, (S)9.12, (S)9.16 and (S)11(r) of the Agreement. Notwithstanding anything to the contrary herein contained, the consents provided in this (S)9 (i) shall not apply to any of the Contemplated Transactions occurring on or after January 31, 1997, (ii) shall not apply to any public offering or other transfer (other than the Proposed Distribution) pursuant to which the aggregate number of shares so offered or transferred exceeds twenty percent (20%) of the total number of outstanding shares of capital stock of SCI, (iii) shall not apply to the extent that, prior to the occurrence of the Proposed Distribution, the Company owns less than eighty percent (80%) of the issued and outstanding capital stock of SCI, (iv) shall not apply to the Proposed Public Offering to the extent that the proceeds thereof to SCI and the Company (net of brokerage fees, minimums, transaction costs and other costs and expenses related to the Proposed Public Offering) are less than $135,000,000 (with a minimum of $100,000,000 of such proceeds to the Company), (v) shall not apply to any distribution of capital stock of SCI as a dividend to the Company's shareholders with respect to which the Company has not previously received the favorable ruling of the Internal Revenue Service as to the tax-free nature thereof, and (vi) shall not apply to any of the Contemplated Transactions in the event that at the time of occurrence of any such Contemplated Transaction, any Default or Event of Default shall have occurred and be continuing. (S)10. AMENDMENT OF GUARANTY. --------------------- (a) (i) Each of Sterling Software (Northern America), Inc., Sterling Software (America), Inc., and Sterling Software (Mid America), Inc. (collectively, the "Electronic Commerce Subsidiaries") are currently parties to, and guarantors under, the Guaranty. The Company has informed the Agent and the Banks that, following the transfer of the capital stock referred to in (S)9(a)(i) above, (i) each of the Electronic Commerce Subsidiaries will become a wholly owned Subsidiary of SCI and an indirect Subsidiary of the Company; (ii) Sterling Software (Northern America), Inc. will change its name to Sterling Commerce (Northern America), Inc.; (iii) Sterling Software (America), Inc. will change its name to Sterling Commerce (America), Inc.; and (iv) Sterling Software (Mid America), Inc. will change its name to Sterling Commerce (Mid America), Inc. Notwithstanding any such change in corporate structure or names, each of the Electronic Commerce Subsidiaries hereby confirms that it is, and following such name change will remain, a Sterling Subsidiary for all purposes of the Agreement and the other Loan Documents and a Guarantor (as defined in the Guaranty) under the Guaranty for all purposes thereof, bound by all terms and conditions thereof, and each of the Electronic Commerce Subsidiaries further ratifies and confirms the Guaranty and its obligations as a Guarantor thereunder in all respects. (ii) (SS) North America is currently party to, and guarantor under, the Guaranty. The Company has informed the Agent and the Banks that promptly following the effective Date (as hereinafter defined) of this Amendment, (SS) North America will merge into SCI, with SCI as the -6- surviving entity. Until the completion of such merges, (SS) North America hereby confirms that it is and shall remain a Sterling Subsidiary for all purposes of the Agreement and the other Loan Documents, and a Guarantor under the Guaranty for all purposes thereof, bound by all terms and conditions thereof, and (SS) North America further ratifies and confirms the Guarantor and its obligations as a Guarantor thereunder in all respects. (b) Pursuant to 8.19 of the Agreement, the Company shall cause each of SCI, Sterling Commerce International, Inc. ("SC International") and Sterling Commerce Leasing, Inc. ("SC Leasing") (SCI, SC International and SC Leasing, collectively, the "New Guarantors") to become a Sterling Subsidiary, as defined in the Agreement, and a party to, and a Guarantor under, the Guaranty. Each of the Agent, the Banks, the Company, the New Guarantors and the other Guarantors hereby agrees that, from and after the Effective Date (as hereinafter defined), each of the New Guarantors shall be a party to and bound by all terms and conditions of the Guaranty and shall be a Guarantor for all purposes thereof and shall be a Sterling Subsidiary for all purposes of the Agreement and the other Loan Documents. Pursuant to the terms of the Guaranty, each of the New Guarantors, together with each of the other Guarantors, hereby jointly and severally unconditionally guarantees to the Agent and each of the Banks that the Company will duly and punctually pay or perform, at the time and place specified therefor, all of the Obligations, and agrees to be bound by and to comply with all of the terms and conditions of, and to perform all of the obligations of a Guarantor under, the Guaranty. Each of the New Guarantors and the other Guarantors further agrees that the address for notice for each of the New Guarantors referred to in (S)15 of the Guaranty shall be the address set forth beneath such New Guarantor's initial signature hereto. (c) Each of the Agent and the Banks hereby agrees that upon the occurrence of the Proposed Distribution upon the terms consented to by the Agent and the Banks and set forth in (S)9 hereof and provided that no -------- Default or Event of Default shall have occurred and be continuing at the time of the occurrence of the Proposed Distribution and that the Electronic Commerce Subsidiaries, SC International and SC Leasing remain Subsidiaries of SCI, each of the Electronic Commerce Subsidiaries, SC International, SC Leasing and SCI shall, effective at the time of the occurrence of the Proposed Distribution, be automatically released from its obligations under, and shall cease to be a party to, the Guaranty, it being expressly understood that such release shall apply to any and all Obligations, regardless of nature or amount, incurred by the Company or the other Sterling Subsidiaries, whether before or after the effective date, if any, of the Proposed Distribution, and (ii) each of SCI, the Electronic Commerce Subsidiaries, SC International, SC Leasing and any other Subsidiary of SCI set forth on Schedule 5.6 hereto or formed -------- --- following the date hereof shall cease to be a Guarantor or Non-Guarantor Subsidiary for purposes of the Agreement and the other Loan Documents. (S)11. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to --------------------------- be effective as of January 31, 1996 (the "Effective Date") (provided, however, -------- ------- that the amendments to (S)(S)9.5, 10.3, 10.4 and 10.5 of the Agreement set forth in (S)(S)6 and -7- 8 of this Amendment shall only become effective upon the occurrence of the Proposed Public Offering) upon the Agent's receipt of the following, each in form and substance satisfactory to the Agent and the Banks: (a) 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, including the New Guarantors, the Agent and the Banks; (b) authorizing resolutions and incumbency certificates of each of the Electronic Commerce Subsidiaries and the New Guarantors, authorizing such company's execution and delivery of, and the performance of its obligations under, this Amendment, certified by the Secretary or Assistant Secretary of such Electronic Commerce Subsidiary or such New Guarantor, as the case may be; (c) copies of the charter documents and by-laws of each of the Electronic Commerce Subsidiaries and the New Guarantors, certified by the Secretary or Assistant Secretary of such Electronic Commerce Subsidiary or, as the case may be, such New Guarantor; (d) recent good standing certificates for each of the Electronic Commerce Subsidiaries and the New Guarantors from the jurisdiction of its incorporation and from each jurisdiction in which it has qualified to do business as a foreign corporation; and (e) an opinion of Jones, Day, Reavis & Pogue, counsel to the Company and each of the New Guarantors, in form and substance satisfactory to the Agent and the Banks. (S)12. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each --------------------------------------------------------- of the Company and the Sterling Subsidiaries, including each of the New Guarantors, 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, including each of the New Guarantors, and shall be in full force and effect upon the satisfaction of the conditions set forth in (S)11 hereof, and the agreements of the Company and each of the Sterling Subsidiaries, including each of the New Guarantors, contained herein, in the Agreement, as amended, or in the other Loan Documents, as amended, respectively constitute the legal, valid and binding obligations of the Company and each of the Sterling -8- Subsidiaries, including each of the New Guarantors, party hereto or thereto, enforceable against the Company or such Sterling Subsidiary, including each of the New Guarantors, in accordance with their respective terms; and (c) Sterling Software (United States), Inc. has previously been merged into Sterling Software (Southern), Inc. ("SS (Southern)"), with SS (Southern) as the surviving entity, and as of September 30, 1995, no longer constituted a Sterling Subsidiary or a Guarantor for purposes of the Agreement and the other Loan Documents. (S)13. 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. (S)14. 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)15. 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)16. 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 CONFLICTS OF LAWS). -9- 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:/s/ Debra E. Del Vecchio ------------------------- Title: Vice President BANK ONE, TEXAS, NATIONAL ASSOCIATION By:/s/ William R. Little ------------------------- Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By:/s/ Michael J. Dasher ------------------------- Title: Managing Director STERLING SOFTWARE, INC. By:/s/ Richard Connelly ------------------------- Title: Vice President, Controller and Assistant Treasurer -10- STERLING COMMERCE, INC. By:/s/ Albert K. Hoover ------------------------------------ Title: Vice President, Legal and Assistant Secretary Address: 8080 North Central Expressway Suite 1100 Dallas, Texas 75206-1895 Telecopier: (214) 369-6463 STERLING COMMERCE INTERNATIONAL, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Vice President, Secretary and Assistant Treasurer Address: 8080 North Central Expressway Suite 1100 Dallas, Texas 75206-1895 Telecopier: (214) 369-6463 STERLING COMMERCE LEASING, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Vice President, Secretary and Assistant Treasurer Address: 8080 North Central Expressway Suite 1100 Dallas, Texas 75206-1895 Telecopier: (214) 369-6463 -11- 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:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (SOUTHERN), INC. By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (U.S.A.), INC. By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING SOFTWARE INTERNATIONAL, INC. By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING SOFTWARE LEASING COMPANY By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer -12- STERLING SOFTWARE (UNITED STATES OF AMERICA), INC. By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING SOFTWARE (U.S. OF AMERICA), INC. By:/s/ Richard Connelly ----------------------------------- Title: Assistant Treasurer STERLING COMMERCE, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Vice President, Legal and Assistant Secretary STERLING SOFTWARE (NORTHERN AMERICA), INC., TO BE RENAMED STERLING COMMERCE (NORTHERN AMERICA), INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Assistant Secretary STERLING SOFTWARE (AMERICA), INC., TO BE RENAMED STERLING COMMERCE (AMERICA), INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Assistant Secretary -13- STERLING SOFTWARE (NORTH AMERICA), INC., TO BE MERGED INTO STERLING COMMERCE, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Assistant Secretary STERLING SOFTWARE (MID AMERICA), INC., TO BE RENAMED STERLING COMMERCE (MID AMERICA), INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Assistant Secretary STERLING COMMERCE INTERNATIONAL, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Vice President, Secretary and Assistant Treasurer STERLING COMMERCE LEASING, INC. By:/s/ Albert K. Hoover ----------------------------------- Title: Vice President, Secretary and Assistant Treasurer -14- 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 Virginia ZeroOne Systems, Inc. Delaware Texas Systems Center, Inc. Wyoming Texas Data Management Information Delaware Virginia NetMaster, Inc. Delaware Virginia Matesys Corporation California Texas KnowledgeWare International, Inc. Georgia Texas IWK Corporation Delaware Texas Sterling Commerce, Inc. Wyoming Texas Sterling Software International (Australia) Limited Delaware Texas Sterling Commerce (U.S.), Inc. Delaware Texas Sterling Software (Eastern), Inc. (to be renamed Sterling Software (United States of America), Inc.) Delaware Virginia
-15- SCHEDULE 1.6 TO THE AGREEMENT ----------------------------- STERLING SUBSIDIARIES ---------------------
Location of State 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), Inc. Delaware Virginia Sterling Software (U.S.A.), Inc. California California Sterling Commerce, Inc. Delaware Texas Sterling Software (Northern America), Inc. Delaware Texas (to be renamed Sterling Commerce (Northern America), Inc.) Sterling Software (America), Inc. Delaware Ohio (to be renamed Sterling Commerce (America), Inc.) Sterling Software (North America), Inc. Delaware Texas (Until its merger into Sterling Commerce, Inc., with Sterling Commerce, Inc. as the surviving entity) Sterling Software (Mid America), Inc. Michigan Ohio (to be renamed Sterling Commerce (Mid America), Inc.) Sterling Commerce International, Inc. Delaware Texas Sterling Commerce Leasing, Inc. Delaware Texas Sterling Software (United States of Delaware Texas America), Inc. (to be merged into the Company, with the Company as the surviving entity)
-16- 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 (Midwest), Inc. 50,000 (Common) 1,000 Sterling Software (U.S.), Inc. 1,000 (Common) 1,000 Systems Center, Inc. (Wyoming) 1,000 (Common) 1,000 Sterling Software International, Inc. 50,000 (Common) 1,000 Sterling Software Leasing Company 10,000 (Common) 1,000 Sterling ZeroOne, Inc. 50,000 (Common) 1,000 Sterling Software (U.S.A.), Inc. 25,000 (Common) 995 ZeroOne Systems, Inc. 50,000 (Common) 1,000 Sterling Software (Southern), Inc. 10,000 (Common) 1,000 1,000 (Preferred) 0 Sterling Software (Southwest), Inc. 1,000 (Common) 0 Southwest Beta Services, Inc. 1,000 (Common) 1,000 Sterling Commerce, Inc. 100 (Common)/1/ 100/2/ 100 (Preferred) 0 Sterling Software (U.S. of America), 5,000 (Common) 1,000 Inc. Sterling Software (Eastern), Inc./3/ 10,000 (Common) 1,000 1,000 (Preferred) 0 Sterling Software International 50,000 (Common) 1,000 (Australia) Limited Sterling Software (United States of 10,000 (Common) 1,000 America), Inc./4/ 1,000 (Preferred) 478 Sterling Software (North America), Inc./5/ 5,000 (Common) 1,000
___________________________ /1/ To be increased to 150,000,000 shares of common stock and 50,000,000 shares of preferred stock prior to the SCI Public Offering. /2/ Will increase as a result of, among other things, (i) a reverse stock split to be effected prior to the SCI Public Offering and (ii) the SCI Public Offering. /3/ To be renamed Sterling Software (United States of America), Inc. following the merger of the existing Sterling Software (United States of America), Inc. into the Company, with the Company as the surviving entity. /4/ To be merged into the Company, with the Company as the surviving entity. /5/ To be merged into Sterling Commerce, Inc., with Sterling Commerce, Inc. as the surviving entity. -17- 2. To Be Owned by Sterling Commerce, Inc. -- -- ----- -- -------- --------- ----
Subsidiary Authorized Issued - ---------- ---------- Capital (Class) Shares --------------- ------ Sterling Software (Northern America), 50,000 (Common)/6/ 10,000/7/ Inc. (to be renamed Sterling Commerce (Northern America), Inc.) Sterling Software (America), Inc. 50,000 (Common)/6/ 1,000 (to be renamed Sterling Commerce (America), Inc.) Sterling Commerce (U.S.), Inc. 1,000 (Common) 1,000 Sterling Commerce Leasing, Inc. 1,000 (Common) 1,000 Sterling Commerce International, Inc. 1,000 (Common) 1,000 Sterling Commerce, Inc., a Wyoming 1,000 (Common) 1,000 corporation
3. Owned by Sterling Software (America), Inc., to be renamed Sterling ----- -- -------- -------- ---------- ----- -- -- ------- -------- Commerce (America), Inc. -------- ---------- ----
Authorized Issued Subsidiary Capital (Class) Shares - ---------- --------------- ------ Sterling Software (Mid America), Inc. 60,000 (Common)/6/ 1,000 (to be renamed Sterling Commerce 60,000 (Preferred) 0 (Mid America), Inc.
4. Owned by Sterling Software (Southern), Inc. ----- -- -------- -------- ----------- ----
Authorized Issued Subsidiary Capital (Class) Shares - ---------- --------------- ------ KnowledgeWare International, Inc. 1,000 (Common) 500 IWK Corporation 1,000 (Common) 0
_____________________ /6/ Will be decreased to 1,000 shares of common stock by means of a charter amendment promptly following the Proposed Transfers (as defined in the First Amendment and Modification Agreement dated as of January 31, 1996 among the Company, the Sterling Subsidiaries, the Agent and the Banks.) /7/ Will be decreased to 1,000 shares promptly following the Proposed Transfers. -18- 5. Owned by Matesys Mathematics Systems, S.A. ----- -- ------- ----------- -------- ----
Authorized Issued ---------- Subsidiary Capital (Class) Shares - ---------- --------------- ------ Matesys Corp. 1,000,000 (Common) 65,000
6. 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 Benelux 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 Finland Sterling Consulting S.A. France 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 Ltd. -19- 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 Rellum Amsterdam B.V. Netherlands Sterling Software (Netherlands) B.V. Netherlands SCI Systems Center Netherlands/ Sterling Software (Netherlands) Netherlands Sterling Software (Australia) PTY Limited New Zealand 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 KnowledgeWare AG Switzerland Sterling Software S.A. (In Liquidation) 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 KnowledgeWare Export, Inc. Virgin Islands Sterling Electronic Commerce (Canada), Inc. Canada Sterling Commerce (France), SARL France Sterling Commerce GmbH Germany Sterling Commerce (UK) Limited United Kingdom
-20- 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 Sterling Software (United States of America), Inc. (to be merged into the Company, with the Company as the surviving entity) 1800 Alexander Bell Drive Reston, Virginia 22091 Sterling Commerce, Inc. 4600 Lakehurst Court Dublin, Ohio 43017-0760 Sterling Software (Northern America), Inc. (to be renamed Sterling Commerce (Northern America), Inc.) 15301 Dallas Parkway, Suite 400 LB 23 Dallas, Texas 75248 -21- Sterling Software (America), Inc. (to be renamed Sterling Commerce (America), Inc.) 4600 Lakehurst Court Dublin, Ohio 43017-0760 Sterling Software (North America), Inc. (to be merged into Sterling Commerce, Inc., with Sterling Commerce, Inc. as the surviving entity) 5215 North O'Connor Blvd., Suite 1500 Irving, Texas 75039-3771 Sterling Software (Mid America), Inc. (to be renamed Sterling Commerce (Mid America), Inc.) 4600 Lakehurst Court Dublin, Ohio 43017-0760 Sterling Commerce International, Inc. 4600 Lakehurst Court Dublin, Ohio 43017-0760 Sterling Commerce Leasing, Inc. 4600 Lakehurst Court Dublin, Ohio 43017-0760 -22- SCHEDULE 9(A) ------------- TO -- FIRST AMENDMENT AND MODIFICATION AGREEMENT ------------------------------------------ PROPOSED ENTITY FORMATION TRANSACTIONS -------------------------------------- 1. Distribution of all shares of preferred stock of Sterling Software (United States of America), Inc. owned by Sterling Software (U.S.A.), Inc. to the Company. 2. Merger of Sterling Software (United States of America), Inc. into the Company (the "Merger"). 3. Formation of Sterling Software (Eastern), Inc., a new wholly owned Delaware Subsidiary of Sterling Software, Inc., to be renamed Sterling Software (United States of America), Inc. ("SS (United States of America)"). SS (United States of America) will be capitalized with 11,000 shares, consisting of 10,000 shares of common stock and 1,000 shares of preferred stock. 4. Merger of Sterling Software (North America), Inc. into SCI. 5. Formation of Sterling Commerce (U.S.), Inc., a new wholly owned Delaware Subsidiary of SCI. 6. Formation of Sterling Commerce Leasing, Inc., a new wholly owned Delaware Subsidiary of SCI. 7. Formation of Sterling Commerce International, Inc., a new wholly owned Delaware Subsidiary of SCI. 8. Formation of Sterling Commerce, Inc., a new wholly owned Wyoming Subsidiary of SCI. 9. Formation of Sterling Electronic Commerce (Canada), Inc., a new Canadian Subsidiary of SCI.* 10.Formation of Sterling Commerce (France), SARL, a new French Subsidiary of SCI.* 11.Formation of Sterling Commerce GmbH, a new German Subsidiary of SCI.* 12.Formation of Sterling Commerce (UK) Limited, a new United Kingdom Subsidiary of SCI.* ____________________________ * To be wholly owned by SCI except for certain de minimis shares to be held -- ------- by employees or local residents as nominee shareholders as required by applicable law. -23- SCHEDULE 9(A)(I) ---------------- TO -- FIRST AMENDMENT AND MODIFICATION AGREEMENT ------------------------------------------ ELECTRONIC COMMERCE GROUP SUBSIDIARIES -------------------------------------- Sterling Software (Northern America), Inc., to be renamed Sterling Commerce (Northern America), Inc. Sterling Software (America), Inc., to be renamed Sterling Commerce (America), Inc. Sterling Software (Mid America), Inc., to be renamed Sterling Commerce (Mid America), Inc. -24- SCHEDULE 9(A)(II) ----------------- TO -- FIRST AMENDMENT AND MODIFICATION AGREEMENT ------------------------------------------ Description of Transferred Assets Relating to The Electronic Commerce Business Previously Conducted by the International Group Accounts receivable, furniture, fixtures, computers and other equipment and other miscellaneous personal property, with an aggregate value for all such assets, together with the assets listed on Schedule 9(a)(iii), not to -------- --------- exceed $5,000,000. -25- SCHEDULE 9(A)(III) ------------------ TO -- FIRST AMENDMENT AND MODIFICATION AGREEMENT ------------------------------------------ Description of Transferred Assets Relating to The Electronic Commerce Business Previously Conducted by the Federal Systems Group Accounts receivable, prepaid expenses, employee loans, computers and other equipment, prepaid advertising expenses, furniture, fixtures and other miscellaneous personal property with an aggregate value for all such assets, together with the assets listed on Schedule 9(a)(ii), not to exceed -------- -------- $5,000,000. EX-10.B 3 CEO AGREEMENT EXHIBIT 10(b) CEO AGREEMENT THIS CEO AGREEMENT ("Agreement") is made and entered into as of the 12th day of February, 1996 by and between Sterling Software, Inc., a Delaware corporation ("Sterling Software"), and Sterling L. Williams, an individual ("Williams"). RECITALS: WHEREAS, Sterling Software acquires, develops, markets and supports a broad range of products and services; and WHEREAS, Sterling Software desires to continue to retain Williams as its President and Chief Executive Officer; and WHEREAS, Williams is willing to continue 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. Williams agrees to render such managerial services as are ---------- customarily required of the President and Chief Executive Officer, and Sterling Software agrees to utilize such services on the terms and conditions contained herein. Sterling Software acknowledges that Williams is also employed as President and Chief Executive Officer at Sterling Commerce, Inc. ("Sterling Commerce"). Sterling Software agrees that such employment is not inconsistent with this Agreement, the level of Executive's compensation at Sterling Software having been determined by Sterling Software with knowledge of Williams' employment by Sterling Commerce and the demands on Williams' time and attention required by such employment. 2. Compensation. As consideration for Williams' agreement to enter into ------------ this Agreement and the services to be performed hereunder, Williams shall be paid an annual salary of $500,000, plus such annual increases as shall be mutually agreeable. Williams shall also be entitled to earn additional compensation in the nature of bonuses, deferred compensation and other incentive compensation as mutually agreed. Williams shall be entitled to such personal benefits as may be mutually agreed. In addition, Mr. Williams shall be entitled to participate in Sterling Software's Stock Option Plan, Employee Stock Ownership Plan and/or 401(k) Plan, and, as mutually agreed, such other plans as are currently, or from time to time made, available to Sterling Software's executive officers. 3. Term. This Agreement shall commence on the date on which the purchase ---- and sale of shares of common stock of Sterling Commerce pursuant to its initial public offering of common stock first occurs and shall continue in effect until such time as this Agreement is automatically converted into a consulting agreement pursuant to subparagraph 5(i) hereof; thereafter, the consulting agreement shall continue for a period of five years. 4. Termination of Employment. The parties acknowledge that Williams is ------------------------- employed "at will" and may be terminated by Sterling Software at any time with or without cause. Notwithstanding anything in this Agreement to the contrary, in the event Williams is terminated, with or without cause, or Williams terminates his employment pursuant to Section 5(i)(b) of this Agreement and Sterling Commerce offers to Williams, and Williams accepts, an increase in compensation and benefits as President and Chief Executive Officer of Sterling Commerce such that Williams' compensation and benefits at Sterling Commerce following such termination are reasonably equivalent to the combined compensation and benefits Williams was entitled to at both Sterling Commerce and Sterling Software prior to such termination, this Agreement shall not be converted into a consulting agreement pursuant to Section 5(i) of this Agreement and Williams shall not be entitled to the consideration provided for in Section 5(v) of this Agreement. 5. Consulting Agreement. -------------------- (i) This Agreement shall be automatically converted into a consulting agreement in the event that (a) Sterling Software terminates Williams' employment with or without cause or (b) Williams terminates his employment as a result of a reduction in Williams' salary, other compensation or perquisites below the level in effect for the immediately preceding twelve month period; or as a result of Williams' determination, in his sole judgment, that there has been a significant reduction in the nature or scope of Williams' authorities or duties. (ii) The consulting agreement may be terminated by Williams in writing at any time, but any compensation which has been paid as of the date of termination shall be deemed to have been earned and there shall be no repayment of any sums previously paid. In addition, Williams shall have the right to terminate the consulting agreement in accordance with paragraph 6 hereof. Sterling Software may terminate the consulting agreement upon Williams' death. -2- (iii) During the term of the consulting agreement, Williams shall serve in an advisory capacity to the Executive Committee of the Board of Directors of Sterling Software, reporting directly to the Executive Committee for the purpose of making operational, strategic and financial recommendations affecting the general welfare of Sterling Software. Williams shall make himself available for a reasonable amount of such consulting and advisory services during normal business hours and upon reasonable notice, at such times and places as shall be mutually agreed upon. In no event shall Williams expend in excess of thirty (30) days per year performing such services for Sterling Software. (iv) Any and all confidential information of Sterling Software to which Williams may become privy in the performance of his consulting services shall be treated as confidential by him and shall not be communicated to or discussed with any party who is not an officer or director of Sterling Software, unless Williams is specifically authorized to do so by the Executive Committee of the Board of Sterling Software. Williams shall not use any information delivered to him by Sterling Software for his personal gain, nor shall Williams act as a financial consultant or advisor to any other person, partnership, corporation or other business association in the computer industry (software, hardware or services) during the term of the consulting agreement without the prior written consent of Sterling Software, such consent not to be unreasonably withheld. (v) As consideration for his advisory and consulting services, Williams shall be entitled to receive all amounts and to participate in all programs (or the cash equivalent thereof) described in paragraph 2 hereof; provided, however, that in no -------- ------- event will Sterling Software be required to make any new grants of options to Williams under Sterling Software's Option Plan after conversion of this Agreement into a consulting agreement. In the event Williams terminates his employment pursuant to subsection (i)(b) hereof, the level of his compensation shall be the greater of the compensation and benefits of the type described in paragraph 2 hereof in effect on the date of his termination or the compensation and benefits of the type described in paragraph 2 hereof in effect twelve (12) months prior to the date of termination. This compensation shall be paid during the term of the consulting agreement without regard to whether Sterling Software utilizes the services of Williams for the maximum thirty (30) days per year specified in subsection (iii) hereof, or does not avail itself of his services at any time during the term hereof. In addition, Williams shall be reimbursed for all other authorized expenses such as food and first class travel and lodging which are incurred at the direction of Sterling Software consistent with the -3- terms hereof. Sterling Software shall make available to Williams all office facilities of Sterling Software, including secretarial, telephone and office space, or reimburse Williams for the cost of obtaining comparable facilities from third parties. 6. Change-in-Control. Sterling Software and Williams are parties to a ----------------- Change-in-Control Severance Agreement, dated the date hereof (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 William's employment with Sterling Software is terminated under circumstances in which this Agreement would automatically be converted into a consulting agreement and Williams would otherwise be entitled to receive payments and benefits under both this Agreement and the Change-in-Control Agreement, Williams shall have the right to elect to have this Agreement converted into a consulting agreement pursuant to the terms hereof or to receive payments and benefits under the Change-in-Control Agreement, but not both. Within five business days following the termination of William's employment with Sterling Software under circumstances in which this Section 6 would apply, Sterling Software shall provide Williams, in writing, a reasonably detailed determination of the payments and other benefits under each of such consulting agreement and the Change-in-Control Agreement. Williams shall make the election provided for in this paragraph of this Section 6 within thirty calendar days after William'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, Williams shall be irrevocably deemed to have elected to receive payments and benefits under the Change-in-Control Agreement. Prior to the date on which Williams makes or is deemed to have made the election referred to above, he shall receive all benefits provided for in Section 5(v) of this Agreement as if it had been converted to a consulting agreement. In the event of a Change-in-Control following the conversion of this Agreement into a consulting agreement, Williams shall have the option of terminating the consulting agreement in writing at any time following such Change-in-Control. Upon such termination of the consulting agreement, Williams shall be entitled to receive in one lump sum the aggregate of all unpaid amounts pursuant to paragraph 5(v) through the unexpired portion of the five (5) year consulting agreement. Such lump sum shall be payable within ninety (90) days following Williams' notice of termination of the consulting agreement. Upon such termination by Williams, Williams shall have no further obligations pursuant to paragraph 5(iii). 7. Full-time Employment. Sterling Software agrees that, if Williams' -------------------- employment at Sterling Commerce is terminated, with or without cause (including but not limited to a termination by Williams pursuant to (i) -4- Section 3(b) of that certain Change-in-Control Severance Agreement between Sterling Commerce and Williams, dated the date hereof, or (ii) pursuant to Section 5(i)(b) of that certain CEO Agreement between Williams and Sterling Commerce, dated the date hereof) and Williams is willing and able to devote his full-time efforts to Sterling Software, Sterling Software shall promptly offer to increase Williams' compensation and benefits under this Agreement to a level reasonably equivalent to the combined compensation and benefits Williams was entitled to at both Sterling Commerce and Sterling Software immediately prior to such termination. 8. Termination of Prior Agreements. Upon the effectiveness of this ------------------------------- Agreement pursuant to Section 3 of this Agreement, the Employment Agreement between Williams and Sterling Software, dated January 1, 1993, as amended to the date hereof, shall terminate automatically and shall thereafter be of no further force or effect. This Agreement, upon its effectiveness pursuant to such Section 3, supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. 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 Williams, to: Sterling Software, Inc. 8080 N. Central Expressway Suite 1100 Dallas, Texas 75206 Attention: Mr. Sterling L. Williams (ii) This Agreement shall be binding upon Sterling Software and Williams 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. -5- Executed by the parties hereto as of the date first set forth above. /s/ STERLING L. WILLIAMS _________________________________________________ Sterling L. Williams STERLING SOFTWARE, INC. By: /s/ JEANNETTE P. MEIER ____________________________________________ Name: Jeannette P. Meier _______________________________________ Title: Executive Vice President ______________________________________ -6- EX-10.C 4 CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10(c) SSW MODEL DUAL EMPLOYEE ------------- (Williams, Ellis, Moore & Meier) CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of February __, 1996, 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 has made and is expected to continue 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 continue 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"), (C) any Company-Sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary, or (D) Sterling Software, Inc. or any of its wholly owned subsidiaries (collectively, "SSW") 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 -2- 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; provided however, that the exception contained in clause (D) above with respect to the beneficial ownership of Voting Stock of the Company by SSW shall expire, without further action, effective as of the date on which SSW no longer beneficially owns more than 10% of the outstanding Voting Stock of the Company. (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 effectiveness of this Agreement pursuant to Section 1(f) below, 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 effective pursuant to Section 1(f), below) 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 effectiveness of this Agreement pursuant to Section 1(f) below, 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 -3- 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 on which the purchase and sale of shares of common stock of Sterling Commerce, Inc. pursuant to its initial public offering of common stock first occurs and expiring as of the later of (i) the close of business on December 31, 2000, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on January 1, 1997 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 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. (b) 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 -4- 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 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. (c) 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 the date hereof (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 -5- 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 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 -6- 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 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 -7- 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. (b) 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 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. (c) 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 Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) 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 -8- 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. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) 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. (f) 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 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 -9- 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. (g) 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 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 -10- 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. 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 -11- 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. (b) 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. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 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 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, -12- unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Termination of Prior Agreements. Upon the effectiveness of this ------------------------------- Agreement pursuant to Section 1(f) of this Agreement, the Employment Agreement between Executive and Sterling Software, dated ____________, as amended to the date hereof (the "Employment 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 Employment Agreement shall be deemed to have continued at all times in force and effect. Subject to the foregoing proviso, this Agreement, upon its effectiveness pursuant to such Section 2, supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. 15. 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. 16. 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. 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- SSW MODEL NON-DUAL EMPLOYEE ----------------- CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of February __, 1996, 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 has made and is expected to continue 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 continue 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"), (C) any Company-Sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary, or (D) Sterling Software, Inc. or any of its wholly owned subsidiaries (collectively, "SSW") 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 -2- 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; provided however, that the exception contained in clause (D) above with respect to the beneficial ownership of Voting Stock of the Company by SSW shall expire, without further action, effective as of the date on which SSW no longer beneficially owns more than 10% of the outstanding Voting Stock of the Company. (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 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 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. (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 on which the purchase and sale of shares of common stock of Sterling Commerce, Inc. pursuant -3- to its initial public offering of common stock first occurs and expiring as of the later of (i) the close of business on December 31, 2000, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on January 1, 1997 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 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. (b) 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 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. (c) 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 the date hereof (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 -5- 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 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, -6- 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 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. -7- (b) 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 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. (c) 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 Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) 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 -8- should be reduced, the Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) 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. (f) 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 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 -9- 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. (g) 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 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 -10- 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. 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 -11- 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. (b) 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. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 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 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. -12- 14. Termination of Prior Agreements. Upon the effectiveness of this ------------------------------- Agreement pursuant to Section 1(f) of this Agreement, the Employment Agreement between Executive and Sterling Software, dated ____________, as amended to the date hereof (the "Employment 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 Employment Agreement shall be deemed to have continued at all times in force and effect. Subject to the foregoing proviso, this Agreement, upon its effectiveness pursuant to such Section 2, supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. 15. 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. 16. 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. 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.D 5 SEVERANCE AGREEMENT EXHIBIT 10(d) FORM: SSW DUAL EMPLOYEE (Ellis, Moore & Meier) ----------------- 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 continue to retain Executive as its ____________________; and WHEREAS, Executive is willing to continue 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. Sterling Software acknowledges that Executive is also employed as a senior executive at Sterling Commerce, Inc. ("Sterling Commerce"). Sterling Software agrees that such employment is not inconsistent with this Agreement, the level of Executive's compensation at Sterling Software having been determined by Sterling Software with knowledge of Executive's employment by Sterling Commerce and the demands on Executive's time and attention required by such employment. 2. Term. This Agreement shall commence on the date on which the purchase ---- and sale of shares of common stock of Sterling Commerce pursuant to its initial public offering of common stock first occurs and shall continue in effect for _____ (__) months after the "Notice Date" as defined in paragraph 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 to Executive as termination pay: (a) an amount equal to _____ hundred percent of (i) Executive's aggregate monthly salary for the twelve (12) months immediately preceding the Notice Date if the Notice Date is a date on or after the first anniversary of the effectiveness of this Agreement pursuant to Section 2 of this Agreement (the "Anniversary Date"); or (ii) Executive's salary at the annual rate in effect immediately preceding the Notice Date if the Notice Date precedes the Anniversary Date; and (b) an amount equivalent to the product of _____ times: (i) if the Notice Date shall occur on or after the Anniversary 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 the Notice Date shall occur prior to the Anniversary Date, an amount equal to the lesser of -2- (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 Base Pay, 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. 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, the 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 Plan after the Notice Date. -3- 8. Change-in-Control. Sterling Software and the Executive are parties to ----------------- a Change-in-Control Severance Agreement, dated the date hereof (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, 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. Termination of Employment Under Certain Circumstances. In the event ----------------------------------------------------- the Notice Date occurs and Sterling Commerce offers to Executive, and Executive accepts, an increase in compensation and benefits as a senior executive of Sterling Commerce such that Executive's compensation and benefits at Sterling Commerce following the Notice Date are reasonably equivalent to the combined compensation and benefits Executive was entitled to at both Sterling Software and Sterling Commerce prior to the Notice Date, Executive shall not be entitled to the benefits provided for in Sections 4, 5, 6 and 7 of this Agreement, notwithstanding anything in this Agreement to the contrary. 10. Full-time Employment. Sterling Software agrees that, if Executive's -------------------- employment at Sterling Commerce is terminated, with or without cause (including but not limited to a termination by the Executive pursuant to Section 3(b) of that certain Change-in-Control Severance Agreement between Sterling Commerce and Executive, dated the date hereof) or Executive has received from Sterling Commerce the notice of termination contemplated in Section 3 of that certain Severance Agreement between Executive and Sterling Commerce, dated the date hereof, and in either event Executive is willing and able to devote his or her full-time efforts to Sterling Software, Sterling Software shall promptly offer to increase Executive's compensation and benefits under this Agreement to a level -4- reasonably equivalent to the combined compensation and benefits Executive was entitled to at both Sterling Software and Sterling Commerce immediately prior to such termination or notice of termination, as the case may be. 11. Termination of Prior Agreements. Upon the effectiveness of this ------------------------------- Agreement pursuant to Section 2 of this Agreement, the Employment Agreement between Executive and Sterling Software, dated January 1, 1993, as amended to the date hereof, shall terminate automatically and shall thereafter be of no further force or effect. This Agreement, upon its effectiveness pursuant to such Section 2, supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. 12. 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. -5- Executed by the parties hereto on the date first set forth above. EXECUTIVE --------------------------------------- Name: ---------------------------------- STERLING SOFTWARE, INC. By: ------------------------------------ Sterling L. Williams President and Chief Executive Officer -6- FORM: SSW NON-DUAL EMPLOYEE --------------------- 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 continue to retain Executive as its ____________________; and WHEREAS, Executive is willing to continue 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 on which the purchase ---- and sale of shares of common stock of Sterling Commerce, Inc. pursuant to its initial public offering of common stock first occurs and shall continue in effect for _____ (__) months after the "Notice Date" as defined in paragraph 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 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; and (b) an amount equivalent to the product of _____ times 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. 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 -2- 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, the 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 Plan after the Notice Date. 8. Change-in-Control. Sterling Software and the Executive are parties to ----------------- a Change-in-Control Severance Agreement, dated the date hereof (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, 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. Termination of Prior Agreements. Upon the effectiveness of this ------------------------------- Agreement pursuant to Section 2 of this Agreement, the Employment Agreement between Executive and Sterling Software, dated _______, as amended to the date hereof, shall terminate automatically and shall thereafter be of no further force or effect. This Agreement, upon its effectiveness pursuant to such Section 2, supersedes all prior agreements, arrangements and understandings with respect to the subject matter hereof. -3- 10. 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. Executed by the parties hereto on the date first set forth above. EXECUTIVE ------------------------------------ Name: ------------------------------- STERLING SOFTWARE, INC. By: --------------------------------- Sterling L. Williams President and Chief Executive Officer -4- EX-11.A 6 COMPUTATIONS OF EARNINGS PER SHARE EXHIBIT 11(a) STERLING SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FULLY PRIMARY DILUTED -------- -------- Earnings: Earnings applicable to common stockholders.............................. $152,018 $152,018 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)............................ 542 -------- -------- $152,018 $152,560 ======== ======== Shares: Weighted average of shares 29,450 29,450 outstanding.............................. Add common shares issued on assumed 7,299 7,316 exercise of options and warrants Less common shares assumed repurchased.... (4,710) (4,171) -------- -------- 32,039 32,595 ======== Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures.................... 1,915 -------- 34,510 ======== Earnings per common share: Primary................................... $4.74 ======== Fully diluted............................. $4.42 ========
EX-11.B 7 COMPUTATION OF EARNINGS PER SHARE, ENDED 3/31/95 EXHIBIT 11(b) STERLING SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FULLY PRIMARY DILUTED -------- -------- Earnings: Earnings applicable to common stockholders............................ $20,110 $20,110 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes).... 439 1,042 Interest income on investment of proceeds from assumed conversion of options and warrants (net of applicable income taxes)........... 605 -------- -------- $20,549 $21,757 ======== ======== Shares: Weighted average of shares outstanding.... 23,526 23,526 Add common shares issued on assumed exercise of options and warrants......... (4,769) (4,769) Less common shares assumed repurchased.... 9,877 9,877 -------- -------- 28,634 28,634 ======== Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures................................. 4,056 -------- 32,690 ======== Earnings per common share: Primary................................... $.72 ======== Fully diluted............................. $.67 ========
EX-11.C 8 COMPUTATION OF EARNINGS, SIX MONTHS ENDED 3/31/96 EXHIBIT 11(c) STERLING SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE SIX MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FULLY PRIMARY DILUTED -------- -------- Earnings: Earnings applicable to common stockholders............................. $173,325 $173,325 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)............................ 1,703 -------- -------- $173,325 $175,028 ======== ======== Shares: Weighted average of shares outstanding.............................. 28,032 28,032 Add common shares issued on assumed exercise of options and warrants......... 7,875 7,920 Less common shares assumed repurchased.... (5,608) (4,544) -------- -------- 30,299 31,408 ======== Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures................................. 2,990 -------- 34,398 ======== Earnings per common share: Primary................................... $5.72 ======== Fully diluted............................. $5.09 ========
EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-30-1996 MAR-31-1996 508,826 153,255 169,221 0 0 853,555 136,322 64,868 1,104,600 252,960 0 0 0 3,572 763,236 1,104,600 312,641 312,641 102,897 245,673 0 0 2,797 310,867 137,542 173,325 0 0 0 173,325 5.72 5.09
-----END PRIVACY-ENHANCED MESSAGE-----