-----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, I6I9eHL3IESShOk3ccrkFAjWIO5VgwRkTH1P1/6v2WzILpD2uY1s3IRUW7GFUubt YrN040WCRP3SI+jX33+Fhg== 0000950109-95-005322.txt : 19951221 0000950109-95-005322.hdr.sgml : 19951221 ACCESSION NUMBER: 0000950109-95-005322 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951220 ITEM INFORMATION: Other events FILED AS OF DATE: 19951220 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 95602826 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 8-K 1 FORM 8-K DATED DECEMBER 20, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 Date of Report (Date of Earliest Event Reported) DECEMBER 20, 1995 STERLING SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 1-8465 75-1873956 (STATE OF (COMMISSION (IRS EMPLOYER INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100, DALLAS, TEXAS 75206 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (214) 891-8600 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 5. OTHER EVENTS PROPOSED SUBSIDIARY INITIAL PUBLIC OFFERING On December 20, 1995, Sterling Commerce, Inc. ("SCI"), a wholly owned subsidiary of Sterling Software, Inc. ("Sterling Software"), filed a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission"), for the purpose of effecting an initial public offering (the "Offering") of up to 13,800,000 shares (the "Shares") of common stock, par value $.01 per share of SCI ("SCI Common Stock"). In the Registration Statement, SCI has preliminarily estimated that the initial public offering price will be between $20.00 and $22.00 per Share. In the Offering, up to 11,200,000 Shares are to be sold by Sterling Software and 1,800,000 Shares are to be sold by SCI. Following completion of the Offering as presently contemplated, Sterling Software would own approximately 84.0% of the outstanding SCI Common Stock (approximately 81.6% if the over-allotment options to be granted by Sterling Software to the underwriters are exercised in full). The Offering is expected to be completed in the second quarter of fiscal 1996. FORMATION TRANSACTIONS Sterling Software incorporated SCI as a Delaware corporation in December 1995. In contemplation of the Offering, among other things, (i) Sterling Software presently intends to cause to be transferred to SCI (a) all of the issued and outstanding shares of capital stock of the subsidiaries comprising Sterling Software's Electronic Commerce Group, (b) certain assets relating to the electronic commerce business currently conducted by Sterling Software's International Group and (c) certain assets relating to the electronic commerce business currently conducted by Sterling Software's Federal Systems Group, and (ii) Sterling Software and SCI will enter into the contractual arrangements described below in this report. PROPOSED DISTRIBUTION Sterling Software presently intends, following the completion of the Offering, to distribute pro rata to its stockholders as a dividend the remaining shares of SCI Common Stock then owned by it by means of a tax-free distribution (the "Distribution"). The Distribution will be subject to certain conditions, including (i) approval by Sterling Software's stockholders of both the Distribution and a new Sterling Software stock option plan under which the total number of shares of common stock, par value $.10 per share, of Sterling Software ("Sterling Common Stock") available for issuance will be not less than 20% of the total number of such shares then outstanding and (ii) the declaration by Sterling Software's Board of Directors of a dividend of the shares of SCI Common Stock then owned by Sterling Software. Such declaration will be conditioned upon the receipt of a favorable ruling from the Internal Revenue Service (the "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 intends to apply 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. CONTRACTUAL ARRANGEMENTS WITH STERLING SOFTWARE In anticipation of the Offering, and in view of Sterling Software's intention to undertake the Distribution, Sterling Software presently intends to enter into a number of agreements with SCI for the purpose of defining certain relationships between them following the Offering. These include (i) a Services Agreement, pursuant to which (a) Sterling Software will continue on an interim basis to provide to SCI, upon request by SCI, various services, including accounting and audit, finance and treasury, strategic planning and budgeting, cash management, insurance and risk management, tax, legal, human resources and similar administrative and management services that Sterling Software has historically provided to its subsidiaries (including SCI) and (b) Sterling Software will permit employees of SCI and its subsidiaries to continue on an interim basis to participate in certain benefit plans and programs sponsored by Sterling Software; (ii) a Space Sharing Agreement pursuant to which SCI and Sterling Software will share certain office facilities; (iii) a Data Processing Agreement, pursuant to which SCI will provide certain data processing services to Sterling Software; (iv) a Tax Allocation Agreement, which will provide for the allocation of payments of taxes for 2 periods during which Sterling Software and SCI are included in the same consolidated group for federal income tax purposes or the same consolidated, combined or unitary returns for state tax purposes, the allocation of responsibility for the filing of tax returns and certain other related matters; (v) an Indemnification Agreement, pursuant to which (a) each of Sterling Software and SCI will agree to indemnify the other and its directors, officers, employees, agents and representatives for certain liabilities relating to (1) violations of federal or state securities laws in connection with the Offering or the Distribution and (2) the business operations conducted or formerly conducted by each company, (b) SCI will agree to indemnify Sterling Software with respect to certain financial obligations of SCI that, after the Offering, will continue to be guaranteed or secured by Sterling Software, and (c) SCI will agree to indemnify Sterling Software and its directors, officers, employees, agents and representatives for any liabilities resulting from certain acts, failures to act or the provision of incorrect factual information by SCI in connection with the IRS ruling request that cause the Distribution to be taxable to Sterling Software or its stockholders; (vi) an International Marketing Agreement, pursuant to which Sterling Software's International Group will act as the exclusive distributor (directly and through subdistributors) of SCI's interchange and communications software products in markets outside the United States and Canada and will be responsible for sales, marketing and first level support of those products in those markets; and (vii) a Stock Registration and Option Agreement, pursuant to which (a) Sterling Software may request, subject to certain limitations, that SCI register for sale under the Securities Act of 1933, as amended, and applicable state securities laws the SCI Common Stock owned by Sterling Software and (b) Sterling Software will have, after the completion of the Offering but prior to the completion of the Distribution, an option to purchase from SCI at then-current market prices such number of shares of Common Stock as Sterling Software may determine to be necessary for Sterling Software to continue to include SCI in Sterling Software's consolidated federal income tax return or to ensure the tax-free nature of the Distribution. REDEMPTION OF 5.75% CONVERTIBLE SUBORDINATED DEBENTURES On December 20, 1995, Sterling Software gave notice of the redemption of all of the outstanding principal amount of its 5.75% Convertible Subordinated Debentures due February 1, 2003 (the "Debentures") issued pursuant to the Indenture, dated as of February 2, 1993, between Sterling Software and Bank of America Texas, National Association, as trustee (the "Trustee"). The effective date of the redemption will be February 12, 1996 (the "Redemption Date"). In accordance with the terms of the Indenture, holders of Debentures on the Redemption Date will be entitled to receive $1,040.25 per $1,000.00 principal amount of Debentures, together will accrued and unpaid interest from February 1, 1996 to the Redemption Date of $1.756944, for a total of $1,042.006944 (the "Redemption Price") for each $1,000.00 principal amount of Debentures. Interest on the Debentures will cease to accrue on and after the Redemption Date. The Debentures are presently convertible into shares of Sterling Common Stock. In accordance with the Indenture, the number of shares of Sterling Common Stock issuable upon the conversion of Debentures is determined by dividing the principal amount of the Debentures to be converted by $28.35, the conversion price. Based on the foregoing formula, each $1,000.00 in principal amount of Debentures is convertible into approximately 35.27 shares of Sterling Common Stock. Debentures are convertible in whole or in part in any integral multiple of $1,000.00. No fractional shares of Sterling Common Stock will be issued upon conversion. Instead, a cash payment for each fractional share will be made on the basis of the closing sale price of Sterling Common Stock on the New York Stock Exchange--Composite Tape on the trading day immediately preceding the date of conversion. No payment or adjustment in respect of accrued interest on the Debentures will be made upon conversion of the Debentures. Pursuant to the Indenture, the Debenture holders' right to convert the Debentures into shares of Sterling Common Stock expires at the close of business on February 5, 1996, the fifth business day immediately preceding the Redemption Date. Accordingly, all Debentures not converted into Sterling Common Stock prior to the close of business on February 5, 1996 will be redeemed at the Redemption Price. If all $114,922,000 aggregate principal amount of outstanding Debentures were converted, an additional 4,053,686 shares of Sterling Common Stock would be issued and outstanding. 3 Record holders of Debentures on January 15, 1996 (the "Record Date") will be entitled to receive the regular semi-annual interest payment on February 1, 1996 (the "Payment Date") of $28.75 for each $1,000.00 principal amount of Debentures. Accordingly, holders of Debentures who convert their Debentures into Sterling Common Stock on or prior to January 15, 1996 will not receive such interest payment. If any holder surrenders a Debenture for conversion after the close of business on the Record Date and before the close of business on the Payment Date, then, notwithstanding such conversion, the interest payable on such Payment Date will be paid to the holder on the Record Date. However, in the event that a holder surrenders a Debenture for conversion after the close of business on the Record Date and before the close of business on the Payment Date, such Debenture, when surrendered for conversion, must be accompanied by delivery of a check or draft payable in an amount equal to the interest payable on such Payment Date ($28.75 for each $1,000 principal amount of Debentures) on the portion of the Debenture so converted. If such payment does not accompany such Debenture, the Debenture will not be converted. If Sterling Software defaults in the payment of interest payable on the Payment Date, the Trustee will repay such funds to the holder. PROPOSED ACCELERATION OF EMPLOYEE STOCK OPTIONS In connection with the proposed Offering, management of Sterling Software presently intends to recommend that the applicable Board Committees that administer its existing stock option plans (the "Committees") take action to approve the acceleration of substantially all outstanding options granted under such plans, effective as of the completion of the Offering. As of the date of this report, the Committees have not taken action to approve such acceleration. If all options to purchase Sterling Common Stock outstanding at November 30, 1995 were exercised, an additional 8,715,145 shares of Sterling Common Stock would be issued and outstanding. OTHER As of the date hereof, no assurance can be given that (i) the Offering will be completed or, if completed, will be completed on the terms, including the assumed public offering price of the SCI Common Stock, described in this report or (ii) each of the conditions to the Distribution will be satisfied, including (i) approval by Sterling Software's stockholders of both the Distribution and a new Sterling Software stock option plan under which the total number of shares of Sterling Common Stock available for issuance will be not less than 20% of the total number of such shares then outstanding and (ii) the declaration by Sterling Software's Board of Directors of a dividend of the shares of SCI Common Stock then owned by Sterling Software. As described above, such declaration will be conditioned upon the receipt of a favorable ruling from the Internal Revenue Service (the "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. PRO FORMA FINANCIAL DATA The selected historical and pro forma financial data set forth below should be read in conjunction with Sterling Software's consolidated financial statements and the notes thereto, included in Sterling Software's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The pro forma financial data for Sterling Software include balance sheet information at September 30, 1995 and the results of operations for the years ended September 30, 1995 and 1994. This two-year presentation has been included to illustrate the effects of unusual events included in Sterling Software's results of operations, including restructuring charges and the write-off of purchased research and development resulting from acquisitions. The selected pro forma unaudited consolidated financial data for SCI include balance sheet information at September 30, 1995 and 1994 and the results of operations for the years ended September 30, 1995 and 1994. 4 STERLING SOFTWARE, INC. PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (IN THOUSANDS)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS STERLING STERLING FOR THE ADJUSTMENTS FOR FOR THE SOFTWARE AS SOFTWARE DEBENTURE ISSUANCE OF SCI DISTRIBUTION ADJUSTED AT 9-30-95 CONVERSION(1) COMMON STOCK(2) OF SCI(3) AT 9-30-95 ---------- ------------- --------------- ------------ ----------- Current assets: Cash and cash equivalents.......... $179,305 $ $200,640 $ (395) $379,550 Marketable securities. 61,341 61,341 Accounts and notes receivable, net...... 183,734 (49,155) 134,579 Other current assets.. 19,674 (4,931) 14,743 -------- --------- -------- --------- -------- Total current assets............. 444,054 200,640 (54,481) 590,213 Property and equipment, net....... 68,412 (25,838) 42,574 Computer software, net.................. 80,966 (32,263) 48,703 Excess cost over net assets acquired...... 85,903 (10,259) 75,644 Other noncurrent assets............... 34,845 (6,137) 28,708 -------- --------- -------- --------- -------- Total assets........ $714,180 $ $200,640 $(128,978) $785,842 ======== ========= ======== ========= ======== Current liabilities..... $221,649 $101,744 $ (52,362) $271,031 Long-term debt.......... 116,668 (114,987) (320) 1,361 Other noncurrent liabilities............ 27,525 (21,415) 6,110 Minority interest....... 8,781 (8,781) Stockholders' equity:(4) Common stock.......... 2,653 406 3,059 Additional paid in capital.............. 336,752 114,581 451,333 Retained earnings..... 9,515 90,115 (46,100) 53,530 Less: treasury stock.. (582) (582) -------- --------- -------- --------- -------- Total stockholders' equity............. 348,338 114,987 90,115 (46,100) 507,340 -------- --------- -------- --------- -------- Total liabilities and stockholders' equity............. $714,180 $ $200,640 $(128,978) $785,842 ======== ========= ======== ========= ========
5 NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (1) Adjusted to give effect to the assumed conversion of the outstanding Debentures which are convertible into Sterling Common Stock at a conversion price of $28.35. (2) Adjusted to reflect the assumed issuance of 10,200,000 shares of SCI Common Stock by Sterling Software for $21 per share (the midpoint of the preliminarily estimated initial public offering price as stated in the Registration Statement), net of underwriters' discount and expenses of $13,560,000 associated with the Offering. Additionally, the gain reflected herein related to the sale by Sterling Software of shares of SCI Common Stock in the Offering is net of related tax expense and other charges aggregating to $101,744,000. The 10,200,000 shares of SCI Common Stock excludes 1,800,000 shares related to the underwriters' overallotment options. (3) Adjusted to give effect to the assumed Distribution to Sterling Software's shareholders. (4) In connection with the Offering, management currently plans to recommend to the applicable committees of the Board of Directors of Sterling Software that substantially all outstanding stock options of Sterling Software become fully vested effective upon completion of the Offering. The impact of the potential exercise of Sterling Software's options and warrants has not been reflected in the accompanying Pro Forma Balance Sheet. 6 STERLING SOFTWARE, INC. PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PROFORMA ADJUSTMENTS ADJUSTMENTS HISTORICAL FOR THE FOR STERLING SOFTWARE STERLING SOFTWARE DEBENTURE DISTRIBUTION AS ADJUSTED 9-30-95 CONVERSION OF SCI(2) 9-30-95 ----------------- ----------- ------------ ----------------- Revenue: Products.............. $239,903 $ $(71,603) $168,300 Product support....... 159,942 (46,190) 113,752 Services.............. 188,322 (74,063) 114,259 Royalties from affiliated companies. (11,722) 11,722 (5) -------- --------- -------- -------- Total revenue....... 588,167 (191,856) 396,311 Cost and expenses: Cost of sales: Products and product support.............. 71,883 (25,879) 57,726 11,722 (5) Services.............. 118,680 (15,671) 103,009 -------- --------- -------- -------- 190,563 (29,828) 160,735 -------- --------- -------- -------- Product research, development and enhancement.......... 42,509 (14,807) 27,702 Selling, marketing, general and administrative....... 222,745 (75,193) 151,052 3,500 (3) Restructuring charges. 19,512 19,512 Purchased research and development.......... 62,000 62,000 -------- --------- -------- -------- Total costs and expenses........... 537,329 (116,328) 421,001 Income (loss) from operations........... 50,838 (75,528) (24,690) Interest expense...... (8,625) 6,612(1) 43 (1,970) Investment and interest income...... 9,044 (47) 8,997 Other income.......... 1,637 482 2,119 -------- --------- -------- -------- 2,056 6,612 478 9,146 Income (loss) before income taxes........... 52,894 6,612 (75,050) (15,544) Provision for income taxes.................. 43,620 2,645 (30,020) 16,245 -------- --------- -------- -------- Income (loss) from continuing operations.. $ 9,274 $ 3,967 $(45,030) $(31,789) ======== ========= ======== ======== Income (loss) from continuing operations per share.............. $ .39 $ (1.15) ======== ========
7 STERLING SOFTWARE, INC. PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1994 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PROFORMA STERLING HISTORICAL ADJUSTMENTS ADJUSTMENTS SOFTWARE STERLING FOR THE FOR AS SOFTWARE DEBENTURE DISTRIBUTION ADJUSTED 9-30-94 CONVERSION OF SCI(2) 9-30-94 ---------- ----------- ------------ -------- Revenue: Products..................... $178,233 $ $(56,291) $121,942 Product support.............. 133,752 (37,953) 95,799 Services..................... 161,408 (53,246) 108,162 Royalties from affiliated companies................... (8,426) 8,426 (5) -------- ------ -------- -------- Total revenue.............. 473,393 (147,490) 325,903 Cost and expenses: Cost of sales: Products and product support. 64,123 (24,000) 48,549 8,426 (5) Services..................... 107,622 (12,282) 95,340 -------- ------ -------- -------- 171,745 (27,856) 143,889 -------- ------ -------- -------- Product research, development and enhancement............. 33,002 (12,497) 20,505 Selling, marketing, general and administrative.......... 173,112 (60,732) 115,880 3,500 (3) Restructuring charges........ Purchased research and development................. -------- ------ -------- -------- Total costs and expenses... 377,859 (97,585) 280,274 Income (loss) from operations.................. 95,534 (49,905) 45,629 Interest expense............. (6,658) 6,612 (1) 60 14 Investment and interest income...................... 1,519 (29) 1,490 Other income................. 2,206 119 2,325 -------- ------ -------- -------- (2,933) 6,612 150 3,829 Income before income taxes..... 92,601 6,612 (49,755) 49,458 Provision for income taxes..... 34,262 2,645 (19,902) 17,005 -------- ------ -------- -------- Income (loss) from continuing operations..................... $ 58,339 $3,967 $(29,853) $ 32,453 ======== ====== ======== ========
8 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 Sterling Common Stock. (2) Adjusted to give effect to the assumed Distribution to Sterling Software's shareholders. (3) Administrative charges incurred by Sterling Software allocated to SCI were $3,500,000 in 1995 and 1994. This adjustment reflects the addition of those costs to Sterling Software as if SCI had been historically distributed to shareholders. (4) On a pro forma quarterly basis, the revenue and income from continuing operations of Sterling Software for 1995 and 1994, after giving effect to the adjustments described above, would be:
THREE MONTHS ENDED ------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ (IN THOUSANDS) Year Ended September 30, 1995: Revenue........................ $83,596 $94,129 $102,780 $115,806 Income (loss) from continuing operations.................... (69,914) 11,058 11,810 15,257 Year Ended September 30, 1994: Revenue........................ $77,316 $80,274 $ 79,704 $ 88,609 Income from continuing operations.................... 6,518 7,647 8,303 9,985
Included in the three months ended December 31, 1994 is a restructuring charge of $19,512,000 and $62,000,000 of purchased research and development relating to Sterling Software's acquisition of KnowledgeWare, Inc. during December 1994. (5) As owner of software products distributed by Sterling Software's international operations, SCI includes royalties received from Sterling Software as revenue. Such revenues are eliminated in the pro-forma adjustment and are an expense to Sterling Software. 9 STERLING COMMERCE, INC. PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1994 AND 1995 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
1995 1994 1995 (AS ADJUSTED) -------- -------- ------------- (NOTE 1) ASSETS Current assets: Cash......................................... $ 379 $ 395 $ 35,395 Accounts and notes receivable, net (Note 6).. 33,642 49,155 49,155 Deferred income taxes benefit (Note 9)....... 3,726 3,463 3,463 Prepaid expenses and other current assets.... 2,412 3,041 3,041 -------- -------- -------- Total current assets....................... 40,159 56,054 91,054 Property and equipment, net (Note 7)........... 17,047 25,838 25,838 Computer software, net of accumulated amortization of $24,974 in 1994 and $34,112 in 1995 (Note 1)................................. 27,208 32,263 32,263 Excess cost over net assets acquired, net of accumulated amortization of $2,661 in 1994 and $3,087 in 1995................................ 10,685 10,259 10,259 Other assets (Note 6).......................... 5,539 4,564 4,564 -------- -------- -------- $100,638 $128,978 $163,978 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities (Note 8).................................... $ 15,213 $ 21,442 $ 21,442 Deferred revenue............................. 22,748 30,920 30,920 -------- -------- -------- Total current liabilities.................. 37,961 52,362 52,362 Deferred income taxes (Note 9)................. 13,475 17,749 17,749 Other noncurrent liabilities................... 4,208 3,986 3,986 Contingencies and commitments (Notes 10 and 12) Stockholders' equity: Preferred stock $.01 par value, 50,000,000 shares authorized........................... Common stock $.01 par value, 150,000,000 shares authorized; 75,000,000 shares issued and outstanding............................. 750 Additional paid-in capital................... 89,131 Stockholder's net investment................. 44,994 54,881 -------- Total stockholders' equity................. 89,881 -------- -------- -------- $100,638 $128,978 $163,978 ======== ======== ========
See accompanying notes. 10 STERLING COMMERCE, INC. PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1994 AND 1995 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
1994 1995 ---------- ---------- Revenue: Products............................................... $ 56,291 $ 71,603 Product support........................................ 37,953 46,190 Services............................................... 53,246 74,063 Royalties from affiliated companies.................... 8,426 11,722 ---------- ---------- 155,916 203,578 Costs and expenses: Cost of sales: Products and product support......................... 24,000 25,879 Services............................................. 12,282 15,671 ---------- ---------- 36,282 41,550 Product development and enhancement.................... 12,497 14,807 Selling, general and administrative.................... 60,732 75,193 Restructuring charges.................................. ---------- ---------- 109,511 131,550 ---------- ---------- Income before other expense and income taxes............. 46,405 72,028 Other expense............................................ 150 478 ---------- ---------- Income before income taxes............................... 46,255 71,550 Provision for income taxes (Note 9)...................... 18,502 28,620 ---------- ---------- Net income............................................... $ 27,753 $ 42,930 ========== ========== Earnings per common share data: Earnings per common share.............................. $ 0.38 $ 0.59 ========== ========== Average common shares outstanding...................... 73,200,000 73,200,000 ========== ==========
See accompanying notes. 11 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Sterling Software, Inc. ("Sterling Software") organized Sterling Commerce, Inc. ("SCI") as a wholly owned subsidiary in December 1995. In contemplation of an initial public offering (the "Offering") by Sterling Software and SCI of shares of common stock of SCI ("SCI Common Stock"), Sterling Software intends to transfer to SCI the direct and indirect subsidiaries through which Sterling Software has historically conducted its electronic commerce business. In addition, immediately prior to the completion of the Offering, SCI will effect a 732,000-for-one stock split. Upon the completion of the Offering, Sterling Software will own approximately 84% of the outstanding shares of SCI Common Stock (or approximately 81.6% if certain options granted to underwriters in connection with the Offering are exercised in full). The pro forma unaudited balance sheet reflects the formation of SCI as described above, as well as the receipt of approximately $35,000,000 of net proceeds from SCI's anticipated sale of 1,800,000 shares of SCI Common Stock pursuant to the Offering. It is anticipated that Sterling Software will simultaneously sell 10,200,000 shares of SCI Common Stock pursuant to the Offering, and that Sterling Software will thereafter own 63,000,000 of the 75,000,000 shares of SCI Common Stock outstanding. Sterling Software has announced that, following the completion of the Offering, Sterling Software intends to distribute pro rata to its stockholders as a dividend its remaining shares of SCI Common Stock by means of a tax-free distribution. The distribution will be subject to certain conditions, including approval by Sterling Software stockholders of both the distribution and a new Sterling Software stock option plan and the declaration by Sterling Software's Board of Directors of a dividend of the shares of Common Stock then owned by Sterling Software. Such declaration is expected to be conditioned upon the receipt of a favorable ruling from the IRS as to the tax-free nature of the distribution and the absence of any change in market conditions or other circumstances that 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 advised SCI that it presently anticipates that the distribution will occur prior to September 30, 1996. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Pro Forma Unaudited Consolidated Financial Statements have been prepared using Sterling Software's historical basis in the assets and liabilities of the Electronic Commerce Group, including goodwill and other intangible assets recognized by Sterling Software in the original acquisition of certain businesses conducted by SCI. All significant intercompany accounts among SCI and its consolidated subsidiaries have been eliminated. The Pro Forma Unaudited Consolidated Financial Statements reflect the results of operations, financial condition and cash flows of SCI as a component of Sterling Software and may not be indicative of actual results of operations and financial position of SCI under other ownership. Management believes that the consolidated income statements include a reasonable allocation of administrative costs incurred by Sterling Software which benefit SCI. These allocations of corporate expenses were approximately $3,500,000 in 1994 and 1995. Sterling Software's international operations will act as a distributor of SCI's products outside the United States and Canada for the foreseeable future and will pay a royalty to SCI. Management believes that the royalties as reflected herein have been determined on an arm's-length basis. 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 12 STERLING COMMERCE, INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) collection is probable. 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. Services revenue and revenue from products involving installation or other services are recognized as the services are performed. Product support contracts entitle the customer to telephone support, bug fixing and the right to receive software updates as they are released. Revenue from product support contracts, including product support included in initial license fees, is recognized ratably over the contract period. All significant costs and expenses associated with product support contracts are expensed as incurred, which approximates ratable expenses over the contract period. When products, product support and services are billed prior to the time the related revenue is recognized, deferred revenue is recorded and related costs paid in advance are deferred. Software Development Costs SCI capitalizes the costs of developing and testing new or significantly enhanced software products in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Unamortized software development costs of $24,928,000 and $27,555,000 included in "Computer software, net" at September 30, 1994 and 1995, respectively. Depreciation and Amortization Property and equipment are recorded at cost and depreciated using the straight-line method over average useful lives of three to fifteen years. Computer software costs are amortized on a product-by-product basis using the greater of the amount computed by taking the ratio of current year net revenue to estimated future net revenue or the amount computed by the straight-line method over periods ranging from three to five years. Leasehold improvements are amortized over the term of the lease. Excess costs over the net assets of businesses acquired are amortized on a straight-line basis over periods of ten to forty years. Other intangible assets are amortized on a straight-line basis over periods of three to ten years. Depreciation and amortization consists of the following for the years ended September 30, 1994 and 1995 (in thousands):
1994 1995 ------- ------- Property and equipment...................................... $ 4,579 $ 7,084 Purchased computer software................................. 1,385 1,405 Capitalized computer software development costs............. 7,353 7,772 Excess costs over net assets of businesses acquired......... 407 426 Intangible assets........................................... 773 830 ------- ------- $14,497 $17,517 ======= =======
Income Taxes SCI plans to enter into a tax sharing agreement with Sterling Software covering the period of time SCI will be included in Sterling Software's consolidated tax returns. SCI's operations have historically been included in consolidated income tax returns filed by Sterling Software. Income tax expense in the accompanying financial statements has been computed assuming SCI filed separate income tax returns. Deferred taxes result primarily from the use of accelerated depreciation for tax purposes, expensing of development costs and from the timing of deductions for expenses under certain employee benefit plans and accrued expenses. Earnings Per Share The earnings per share calculation is based on shares outstanding after the organization of SCI and before the Offering. The shares have been reflected as outstanding for all years presented. 13 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. TRANSACTIONS WITH AFFILIATED COMPANIES Amounts payable and receivable from Sterling Software arise as a result of various transactions between SCI and Sterling Software, including SCI's participation in Sterling Software's central cash management program, royalties paid to SCI as a result of Sterling Software acting as an international distributor, tax expense charged to SCI and other expenses incurred on behalf of SCI as described below. At the end of each year, net available cash flow after consideration of the charges as described above, is distributed to Sterling Software. Certain costs and expenses (other than the expense allocations discussed in Note 2) are initially incurred by Sterling Software on behalf of SCI, and charged to SCI. An analysis of significant items follows (in thousands):
YEAR ENDED SEPTEMBER 30 ----------------------- 1994 1995 ----------- ----------- Summary of Expenses: Legal, accounting and professional fees......... $1,376 $ 600 Payroll related................................. 739 1,403 Occupancy....................................... 694 661 Miscellaneous................................... 349 374 ----------- ----------- $ 3,158 $ 3,038 =========== ===========
The international operations of Sterling Software act as a distributor of certain of SCI's products. 4. BUSINESS COMBINATIONS In August 1994, Sterling Software acquired all of the outstanding common stock of American Business Computer Company ("ABC"), a Michigan corporation based near Detroit, Michigan, which developed, marketed and supported UNIX- based electronic data interchange products, including products that provide sophisticated electronic commerce gateway functionality, in a stock-for-stock acquisition (the "ABC Merger") accounted for as a pooling of interests. The business formerly conducted by ABC is included in the results of operations of SCI. SCI's financial statements for periods prior to the ABC Merger represent the combined financial statements of the previously separate entities adjusted to conform ABC's fiscal years and accounting policies to those used by SCI. In March 1995, Sterling Software acquired for cash all of the outstanding common stock of MAXXUS, Inc. ("MAXXUS"), a San Francisco-based leading provider of Financial Electronic Data Interchange software. MAXXUS's business is included in the results of operations of SCI from the date of acquisition. 5. LEGAL PROCEEDINGS AND CLAIMS SCI is subject to certain legal proceedings and claims which arise in the conduct of its business. In the opinion of management, the amount of any liability with respect to these actions will not have a material affect on the financial condition or results of operations of SCI. 14 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following at September 30 (in thousands):
1994 1995 ------- ------- Trade..................................................... $26,794 $39,851 Unbilled.................................................. 7,692 9,490 Other..................................................... 1,986 1,814 ------- ------- 36,472 51,155 Less: Allowance for doubtful accounts..................... 2,830 2,000 ------- ------- $33,642 $49,155 ======= =======
At September 30, 1994 and 1995, accounts receivable include $1,154,000 and $1,290,000, respectively, due under contracts with the federal government and related agencies. The remainder of SCI's receivables are due principally from corporations in diverse industries located in the United States and Canada. 7. PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30 (in thousands):
1994 1995 ------- ------- Computer and peripheral equipment......................... $23,700 $36,634 Furniture, fixtures and other equipment................... 3,989 5,016 Building and improvements................................. 2,072 3,131 ------- ------- 29,761 44,781 Less accumulated depreciation............................. 12,714 18,943 ------- ------- $17,047 $25,838 ======= =======
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following at September 30 (in thousands):
1994 1995 ------- ------- Trade accounts payable.................................... $ 5,178 $ 7,204 Accrued compensation...................................... 7,906 11,113 Other accrued liabilities................................. 2,129 3,125 ------- ------- $15,213 $21,442 ======= =======
15 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES The provision for income taxes is composed of the following (in thousands):
YEARS ENDED SEPTEMBER 30 -------------------------- 1994 1995 ------------ ------------ Current: Federal....................................... $ 16,608 $ 21,073 State......................................... 2,372 3,010 Deferred: Federal....................................... (418) 3,970 State......................................... (60) 567 ------------ ------------ $ 18,502 $ 28,620 ============ ============
The effective income tax rate on income before taxes differed from the federal income tax statutory rate for the following reasons (in thousands):
YEARS ENDED SEPTEMBER 30 ------------------------- 1994 1995 ------------ ------------ Tax expense at U.S. federal statutory rate...... $ 16,189 $ 25,043 State income taxes, net of federal benefit...... 2,313 3,577 ------------ ------------ $ 18,502 $ 28,620 ============ ============
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of SCI's net deferred tax asset as of September 30 are as follows (in thousands):
1994 1995 ------- ------- Deferred income tax assets: Deferred revenue.......................................... $ 1,254 $ 843 Reserves and restructuring accruals....................... 2,472 2,620 ------- ------- Deferred income tax assets.............................. 3,726 3,463 ------- ------- Deferred income tax liabilities: Capitalized software costs................................ 11,240 11,361 Depreciation and amortization............................. 2,235 6,388 ------- ------- Deferred income tax liabilities......................... 13,475 17,749 ------- ------- Deferred income tax liability net of deferred income tax assets................................................. $ 9,749 $14,286 ======= =======
16 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. COMMITMENTS SCI leases certain facilities and equipment under operating leases. Total rent expense for the years ended September 30, 1994 and 1995 was $6,071,000 and $7,537,000, respectively. At September 30, 1995, minimum future rental payments due under all operating leases, net of future sublease income, are as follows (in thousands): 1996............................................................ $ 7,562 1997............................................................ 6,820 1998............................................................ 5,990 1999............................................................ 4,857 2000............................................................ 2,289 Thereafter...................................................... 11,333 ------- $38,851 =======
11. STOCK OPTIONS SCI expects to adopt a stock option plan for the granting of options to certain of SCI's officers, directors, employees, advisors, consultants and non-employee directors. The total number of shares of Common Stock available for issuance under the option plan initially is expected to be 15,000,000. 12. POSTRETIREMENT BENEFITS SCI participates in Sterling Software's plan that provides retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code for all domestic employees who have completed a specified term of service. Pursuant to this plan, eligible participants may elect to contribute a percentage of their annual gross compensation and SCI will contribute additional amounts, as provided by the plan. Benefits under the plan are limited to the assets of the plan. SCI contributions charged to expense during 1994 and 1995 were $861,000 and $930,000, respectively. A portion of SCI's contributions are invested in Sterling Common Stock. During 1994 and 1995, SCI's contributions included 12,088 and 7,807 shares of Sterling Common Stock, respectively. Of the 1995 contribution, 2,789 shares of Sterling Common Stock were transferred to the plan in October 1995. SCI does not provide other significant postemployment benefits. 17 STERLING COMMERCE, INC. NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. QUARTERLY FINANCIAL RESULTS SCI's consolidated operating results for each quarter of 1994 and 1995 are summarized as follows (in thousands, except share information):
THREE MONTHS ENDED ---------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- ---------- ---------- ------------ Year ended September 30, 1994: Revenue..................... $ 34,393 $ 36,778 $ 39,171 $ 45,574 Cost of sales............... 8,704 8,359 8,907 10,312 Product development and en- hancement.................. 2,470 3,594 3,045 3,388 Selling, general and admin- istrative.................. 15,218 14,168 15,270 16,076 Income before other expense and income taxes............... 8,001 10,657 11,949 15,798 Net income.................. 4,772 6,375 7,139 9,467 Earning per common share.... $ 0.06 $ 0.09 $ 0.10 $ 0.13 Average common shares out- standing................... 73,200,000 73,200,000 73,200,000 73,200,000 Year ended September 30, 1995: Revenue..................... $ 45,096 $ 46,275 $ 51,637 $ 60,570 Cost of sales............... 9,592 9,648 10,233 12,077 Product development and en- hancement.................. 3,599 4,032 3,706 3,470 Selling, general and admin- istrative.................. 17,303 16,535 19,284 22,071 Income before other expense and income taxes............... 14,602 16,060 18,414 22,952 Net income.................. 8,726 9,568 10,946 13,690 Earnings per common share... $ 0.12 $ 0.13 $ 0.15 $ 0.19 Average common shares out- standing................... 73,200,000 73,200,000 73,200,000 73,200,000
18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. STERLING SOFTWARE, INC. By /s/ Jeannette P. Meier ----------------------------------- Jeannette P. Meier Executive Vice President, Secretary and General Counsel Date: December 20, 1995 19 -----END PRIVACY-ENHANCED MESSAGE-----