<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 1-8465
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS 75201
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (214) 981-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of July 27, 1998
----------------------------- --------------------------------------
Common Stock, $0.10 par value 79,497,388
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PART I - FINANCIAL INFORMATION
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Page
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)............................................. 3
Sterling Software, Inc. Consolidated Balance Sheets at June 30, 1998 and
September 30, 1997.................................................................. 3
Sterling Software, Inc. Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 1998 and 1997................................................. 4
Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for the Nine
Months Ended June 30, 1998.......................................................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1998 and 1997........................................................ 6
Sterling Software, Inc. Notes to Consolidated Financial Statements.................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................ 13
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PART II - OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 5. OTHER INFORMATION............................................................ 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 25
</TABLE>
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STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
A S S E T S
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1998 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 441,619 $ 435,726
Marketable securities....................................................... 252,441 206,965
Accounts and notes receivable, net.......................................... 154,522 149,422
Income tax receivable....................................................... 4,250 9,941
Prepaid expenses and other current assets................................... 24,328 24,847
-------------- --------------
Total current assets....................................................... 877,160 826,901
Property and equipment, net of accumulated depreciation of $45,278 at
June 30, 1998 and $42,430 at September 30, 1997.............................. 58,434 48,598
Computer software, net of accumulated amortization of $98,644 at
June 30, 1998 and $87,258 at September 30, 1997.............................. 78,032 70,422
Excess cost over net assets acquired, net of accumulated amortization of
$25,429 at June 30, 1998 and $20,650 at September 30, 1997.................. 77,654 84,701
Noncurrent deferred income taxes............................................. 22,130
Other assets................................................................. 18,921 12,906
-------------- --------------
$1,110,201 $1,065,658
============== ==============
</TABLE>
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
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 130,136 $ 172,700
Deferred revenue............................................................ 83,627 95,455
-------------- --------------
Total current liabilities................................................. 213,763 268,155
Noncurrent deferred revenue.................................................. 25,305 20,432
Other noncurrent liabilities................................................. 37,936 28,817
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares authorized, no shares
issued or outstanding......................................................
Common stock, $.10 par value; 125,000,000 and 75,000,000 shares
authorized at June 30, 1998 and September 30, 1997, respectively;
80,917,000 and 79,808,000 shares issued at June 30, 1998 and
September 30, 1997, respectively........................................... 8,093 7,981
Additional paid-in capital.................................................. 816,879 802,030
Retained earnings (deficit)................................................. 64,739 (3,506)
Less treasury stock, at cost; 2,622,000 and 2,704,000 shares at June 30,
1998 and September 30, 1997, respectively.................................. (56,514) (58,251)
-------------- --------------
Total stockholders' equity................................................ 833,197 748,254
-------------- --------------
$1,110,201 $1,065,658
============== ==============
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Products................................. $ 67,144 $ 52,234 $189,595 $ 136,369
Product support.......................... 40,787 29,106 121,603 88,621
Services................................. 53,614 32,904 158,573 93,139
---------- ----------- ----------- -----------
161,545 114,244 469,771 318,129
Costs and expenses:
Cost of sales:
Products and product support............ 14,554 17,668 44,496 53,188
Services................................ 47,268 29,350 138,299 81,714
---------- ----------- ----------- -----------
61,822 47,018 182,795 134,902
Product development and enhancement...... 6,456 4,532 23,121 14,349
Selling, general and administrative...... 56,272 45,288 173,420 129,580
Reorganization costs..................... 106,037 106,037
Purchased research and development....... 137,849 137,849
---------- ----------- ----------- -----------
124,550 340,724 379,336 522,717
---------- ----------- ----------- -----------
Income (loss) before other income
(expense) and income taxes............... 36,995 (226,480) 90,435 (204,588)
Other income (expense):
Interest expense......................... (78) (96) (139) (363)
Investment income........................ 8,652 10,142 25,263 31,159
Other.................................... (507) 26 (811) 380
---------- ----------- ----------- -----------
8,067 10,072 24,313 31,176
---------- ----------- ----------- -----------
Income (loss) before income taxes......... 45,062 (216,408) 114,748 (173,412)
Provision (benefit) for income taxes...... 15,320 (30,945) 39,014 (16,013)
---------- ----------- ----------- -----------
Net income (loss)......................... $ 29,742 $(185,463) $ 75,734 $(157,399)
========== =========== =========== ===========
Income (loss) per common share:
Net income (loss):
Basic................................... $.38 $(2.41) $.98 $(2.05)
========== =========== =========== ===========
Diluted................................. $.36 $(2.41) $.92 $(2.05)
========== =========== =========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ---------------------
NUMBER ADDITIONAL RETAINED NUMBER TOTAL
OF PAR PAID-IN EARNINGS OF STOCKHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) SHARES COST EQUITY
------- -------- --------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997........... 79,808 $7,981 $802,030 $(3,506) 2,704 $(58,251) $748,254
Net income............................. 75,734 75,734
Issuance of common stock pursuant to
stock options......................... 1,109 112 15,214 15,326
Issuance of common stock to retirement
plan.................................. (365) (82) 1,737 1,372
Other.................................. (7,489) (7,489)
------- -------- --------- --------- -------- --------- ------------
Balance at June 30, 1998................ 80,917 $8,093 $816,879 $64,739 2,622 $(56,514) $833,197
======= ======== ========= ========= ======== ========= ============
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30
---------------------------
1998 1997
---------- ---------
<S> <C> <C>
Operating activities:
Net income (loss)........................................................... $ 75,734 $(157,399)
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization............................................. 30,044 24,642
Provision for losses on accounts receivable............................... 2,810 1,672
Provision (benefit) for deferred income taxes............................. 31,614 (27,399)
Purchased research and development........................................ 137,849
Reorganization costs...................................................... 63,726
Changes in operating assets and liabilities, net of effects of business
acquisitions:
(Increase) decrease in accounts and notes receivable................... (8,715) 25,354
Increase in prepaid expenses and other assets.......................... (2,760) (5,466)
Decrease in accounts payable, accrued liabilities and amounts due to
Sterling Commerce, Inc................................................ (43,768) (13,311)
Decrease in deferred revenue........................................... (12,370) (865)
Other.................................................................. 9,505 11,845
---------- ---------
Net cash provided by operating activities............................. 82,094 60,648
Investing activities:
Purchases of property and equipment......................................... (21,451) (22,703)
Purchases and capitalized cost of development of computer software.......... (17,767) (13,553)
Business acquisitions, net of cash acquired................................. (3,626) (167,995)
Purchases of investments.................................................... (189,944) (198,177)
Proceeds from sales of investments.......................................... 145,720 254,429
Other....................................................................... 1,798 700
---------- ---------
Net cash used in investing activities................................. (85,270) (147,299)
Financing activities:
Retirement and redemption of debt and capital lease obligations............. (1,080) (7,457)
Proceeds from issuance of debt.............................................. 990 7,522
Proceeds from issuance of common stock pursuant to exercise of stock
options................................................................... 15,326 1,399
Other....................................................................... (3,986) 44
---------- ---------
Net cash provided by financing activities............................. 11,250 1,508
Effect of foreign currency exchange rate changes on cash..................... (2,181) (1,774)
---------- ---------
Increase (decrease) in cash and cash equivalents............................. 5,893 (86,917)
Cash and cash equivalents at beginning of period............................. 435,726 524,237
---------- ---------
Cash and cash equivalents at end of period................................... $ 441,619 $ 437,320
========== =========
Supplemental cash flow information:
Income taxes paid........................................................... $ 2,891 $ 6,407
========== =========
Income tax refunds.......................................................... $ 328 $ 186
========== =========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sterling Software, Inc. ("Sterling Software" or the "Company") was founded
in 1981 and became a publicly owned corporation in 1983. Sterling Software is a
recognized worldwide supplier of software products and services within three
major markets: applications management, systems management and federal systems.
Consistent with Sterling Software's decentralized operating structure, major
markets are served by independently operated business groups which consist of
divisions and business units that focus on specific business niches within those
markets. Sterling Software believes that its decentralized organizational
structure promotes operating flexibility, improves responsiveness to customer
requirements and focuses management on achieving revenue and operating profit
objectives. Sterling Software has historically expanded its operations through
internal growth and by business and product acquisitions.
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Software after elimination of all significant intercompany balances and
transactions. The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies at June 30, 1998 and September 30,
1997 and the results of operations for the three and nine months ended June 30,
1998 and 1997. While management has based its estimates and assumptions on facts
and circumstances known to it as of the date of this report, actual amounts may
differ from such estimates and assumptions.
Revenue
Revenue from license fees for standard software products is recognized when
the software is delivered, provided no significant future vendor obligations
exist and collection is probable. Service revenue and revenue from products
involving installation or other services are recognized as the services are
performed.
Product support contracts allow customers to receive updated versions of
Sterling Software's products when and if they become available, as well as bug
fixing, and Internet and telephone access to the Company's technical personnel.
Revenue from product support contracts, including product support included in
initial license fees, is recognized ratably over the contract period. All
significant costs and expenses associated with product support contracts are
expensed ratably over the contract period.
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If software product transactions include the right to receive future
products, a portion of the software product revenue is deferred and recognized
as products are delivered. Contract accounting is applied for sales of software
products requiring significant modification or customization, such that revenue
is recognized only when the modification or customization is complete.
When products, product support and services are billed prior to the time the
related revenue is recognized, deferred revenue is recorded and related costs
paid in advance are deferred.
Revenue from specialized information technology ("IT") services provided to
the federal government under multi-year contracts is recognized as the services
are performed. Revenue for services under other long-term contracts is
recognized using the percentage-of-completion method of accounting. Losses on
long-term contracts are recognized when the current estimate of total contract
costs indicates a loss on a contract is probable.
Returns and allowances and other similar adjustments to revenue involving
software products historically have not been material to the Company's results
of operations.
Cash Equivalents, Marketable Securities and Other Investments
Cash equivalents consist primarily of highly liquid investments in
investment-grade commercial paper of various issuers and repurchase agreements
backed by U.S. Treasury securities, with maturities of three months or less when
purchased. Cash equivalents are recorded at fair value.
The Company currently invests excess cash in a diversified portfolio of
marketable securities consisting of a variety of investment-grade securities,
including commercial paper, medium-term notes, U.S. government obligations,
municipal obligations and certificates of deposit. The fair values for
marketable securities are based on quoted market prices. All marketable
securities and long-term investments are classified as available-for-sale
securities.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 sets forth new rules for computing earnings per share which replace
previously reported "primary" and "fully diluted" earnings per share with
"basic" and "diluted" earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The Company adopted FAS
128 in the first quarter of 1998.
On March 11, 1998, the Sterling Software Board of Directors authorized a 2-
for-1 stock split that was effected by means of a dividend consisting of one
share of the Company's common stock, par value $.10 per share ("Common Stock"),
for each share of Common Stock outstanding (the "Stock Split Dividend"). The
Stock Split Dividend was paid April 3, 1998 to holders of
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<PAGE>
record on March 20, 1998. Earnings per share amounts for all prior periods
presented herein have been restated to conform with FAS 128 and to reflect the
Stock Split Dividend.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Basic:
Earnings applicable to common
stockholders............................. $29,742 $(185,463) $75,734 $(157,399)
============= ============= ============= ============
Weighted average shares................... 78,047 77,065 77,547 76,952
============= ============= ============= ============
Basic earnings per share.................. $ .38 $ (2.41) $ .98 $ (2.05)
============= ============= ============= ============
Diluted:
Earnings applicable to common
stockholders............................. $29,742 $(185,463) $75,734 $(157,399)
============= ============= ============= ============
Weighted average shares................... 78,047 77,065 77,547 76,952
Effect of dilutive employee
stock options............................ 5,574 4,574
------------- ------------- ------------- ------------
83,621 77,065 82,121 76,952
============= ============= ============= ============
Diluted earnings per share................ $ .36 $ (2.41) $ .92 $ (2.05)
============= ============= ============= ============
</TABLE>
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the United
States are generally prepared using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated into U.S.
dollars at exchange rates in effect as of the applicable balance sheet date and
any resulting translation adjustments are included as an adjustment to retained
earnings. Revenue and expense items of these subsidiaries are translated at
average exchange rates during the month the transactions occur. Gains and losses
from foreign currency transactions are included in net earnings. Foreign
currency transaction gains and losses historically have not been material to the
Company's results of operations.
2. BUSINESS ACQUISITIONS, DIVESTITURES AND REORGANIZATIONS
On June 30, 1997, Sterling Software completed the acquisition (the
"Acquisition") of certain assets (including the capital stock of certain foreign
subsidiaries) of Texas Instruments Incorporated ("Texas Instruments") for
approximately $214,774,000, including costs directly related to the Acquisition
of approximately $49,774,000. Such assets constituted substantially all of the
assets used by Texas Instruments' Software Division ("TI Software") in its
business of developing, marketing, licensing, supporting and maintaining
application development software and providing related consulting services. The
portion of the cost of the Acquisition that was allocable to purchased research
and development costs was charged to expense in 1997 in accordance with
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the purchase method of accounting. The results of operations of TI Software are
included in the Company's results of operations from the date of the
Acquisition.
Effective as of June 30, 1997, Sterling Software and Sterling Commerce, Inc.
("Sterling Commerce"), formerly a wholly owned subsidiary of Sterling Software
formed to operate the business of Sterling Software's former Electronic Commerce
Group, completed an agreement terminating the International Distributor
Agreement dated March 4, 1996 (the "International Distributor Agreement"),
pursuant to which Sterling Software acted as the exclusive distributor of
Sterling Commerce's interchange and communications software products in markets
outside the United States and Canada. The results of the Company's international
operations related to selling, marketing and providing first level support of
these products outside the United States and Canada for the three and nine
months ended June 30, 1997 are included in the business segment information
presented herein under "Corporate and other".
The Company's 1997 results of operations included costs of $106,037,000
primarily related to the reorganization of the Company's operations in
connection with the Acquisition and the termination of the International
Distributor Agreement with Sterling Commerce in the third quarter of 1997. These
reorganization costs also include the write-down of certain excess cost over net
assets acquired related to the Company's federal systems business.
3. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is unaudited
but, in the opinion of management, includes all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
financial position and results of operations for the periods presented. Results
of operations for the periods presented herein are not necessarily indicative of
results of operations for the entire fiscal year. The information included in
this report should be read in conjunction with the information presented under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
4. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain legal proceedings and claims that arise in
the normal course of its business. In the opinion of management, the amount of
the liability, if any, ultimately incurred by Sterling Software with respect to
any existing proceedings and claims, net of applicable reserves and available
insurance, will not materially affect the financial condition or results of
operations of the Company.
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5. SEGMENT INFORMATION
The Company acquires, develops, markets and supports a broad range of
computer software products and services in three major markets: applications
management, systems management and federal systems. The Company addresses these
major markets through independently operated business segments. The applications
management business segment provides application development products and
services for business modeling through code generation, as well as products and
services that enable customers to extend the life and usefulness of legacy
applications and to facilitate enterprise information access. The systems
management business segment provides products that enable customers to ensure
the quality of service of IT applications across enterprise networked computing
environments. The federal systems business segment provides specialized IT
services under numerous multi-year contracts in support of various customers in
the Department of Defense and civil agencies of the federal government. Through
June 30, 1997, the Company's international operations sold, marketed and
provided first-level support outside of the United States and Canada for the
interchange and communications software products of Sterling Commerce, the
results of which are included in the business segment information under
"Corporate and other".
Financial information concerning the Company's operations, by business
segment, for the three and nine months ended June 30, 1998 and 1997, is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Applications Management................... $ 74,403 $ 22,015 $220,056 $ 65,801
Systems Management........................ 49,983 46,045 142,358 126,911
Federal Systems........................... 37,159 30,919 106,729 86,731
Corporate and other....................... 15,265 628 38,686
------------- ------------- ------------- ------------
Consolidated totals...................... $161,545 $ 114,244 $469,771 $ 318,129
============= ============= ============= ============
Operating Profit (Loss):
Applications Management................... $ 22,834 $ 3,378 $ 54,910 $ 8,426
Systems Management........................ 19,524 18,530 52,042 48,518
Federal Systems........................... 2,412 1,826 7,119 6,524
Reorganization costs...................... (106,037) (106,037)
Purchased research and development........ (137,849) (137,849)
Corporate and other....................... (7,775) (6,328) (23,636) (24,170)
------------- ------------- ------------- ------------
Consolidated totals...................... $ 36,995 $(226,480) $ 90,435 $(204,588)
============= ============= ============= ============
</TABLE>
The amounts presented for "Corporate and other" include corporate expense,
inter-segment eliminations, the results of operations of the Company's retail
software division and, for the three and nine months ended June 30, 1997, the
results of operations relating to the international distribution of Sterling
Commerce's interchange and communications software products.
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6. INCREASE IN AUTHORIZED COMMON STOCK
On March 11, 1998, the Sterling Software stockholders approved an amendment
to the Company's Certificate of Incorporation increasing the number of
authorized shares of Common Stock from 75,000,000 shares to 125,000,000 shares.
7. SUBSEQUENT EVENTS
Effective July 9, 1998, Sterling Software acquired Mystech Associates, Inc.
("Mystech") in a stock-for-stock merger transaction to be accounted for as a
pooling of interests. Mystech became a wholly owned subsidiary of the Company
and each issued and outstanding share of Mystech common stock was converted into
the right to receive 5.49313 shares of Common Stock. In addition, the Company
agreed to assume all outstanding stock options granted under the stock option
plans maintained by Mystech. As a result of the transaction, Sterling Software
is in the process of issuing approximately 769,000 shares of Common Stock in
exchange for the previously outstanding shares of Mystech common stock and has
reserved approximately 174,000 shares of the Company's Common Stock for issuance
upon exercise of the assumed Mystech options.
Effective July 31, 1998, Sterling Software acquired Synon Corporation
("Synon") in a stock-for-stock merger transaction to be accounted for as a
pooling of interests. Synon was merged into a wholly owned subsidiary of the
Company and each issued and outstanding share of Synon common stock, Synon
Series A Preferred Stock and Synon Series E Preferred Stock was converted into
the right to receive .14357 shares of Common Stock, and each issued and
outstanding share of Synon Series D Preferred Stock was converted into the right
to receive .27149 shares of Common Stock. In addition, the Company agreed to
assume all outstanding stock options granted under the stock option plans
maintained by Synon. As a result of the transaction, Sterling Software is in
the process of issuing approximately 2,603,000 shares of Common Stock in
exchange for the previously outstanding shares of Synon capital stock and has
reserved approximately 375,000 shares of the Company's Common Stock for issuance
upon exercise of the assumed Synon options.
The Company expects to incur a non-recurring charge to operations in the
fourth quarter of 1998 currently estimated to be between $40 million and $50
million to reflect the combination of the Company with Synon, and to a lesser
extent, the combination of the Company with Mystech. These charges relate to
employee termination costs, transaction costs, costs associated with the
elimination of duplicate facilities, the write down of capitalized software and
other direct costs.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS COMBINATIONS AND DIVESTITURES
Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the
"Acquisition") of certain assets (including the capital stock of certain foreign
subsidiaries) of Texas Instruments Incorporated ("Texas Instruments") for
approximately $214,774,000, including costs directly related to the Acquisition
of approximately $49,774,000. Such assets constituted substantially all of the
assets used by Texas Instruments' Software Division ("TI Software") in its
business of developing, marketing, licensing, supporting and maintaining
application development software and providing related consulting services. The
portion of the cost of the Acquisition that was allocable to purchased research
and development costs was charged to expense in 1997 in accordance with the
purchase method of accounting. The results of operations of TI Software are
included in the Company's results of operations from the date of the
Acquisition.
Termination of International Distributor Agreement
Effective as of June 30, 1997, Sterling Software and Sterling Commerce, Inc.
("Sterling Commerce"), formerly a wholly owned subsidiary of Sterling Software
formed to operate the business of Sterling Software's former Electronic Commerce
Group, completed an agreement terminating the International Distributor
Agreement dated March 4, 1996 (the "International Distributor Agreement"),
pursuant to which Sterling Software acted as the exclusive distributor of
Sterling Commerce's interchange and communications software products in markets
outside the United States and Canada. The results of the Company's international
operations related to selling, marketing and providing first level support of
these products outside of the United States and Canada for the three and nine
months ended June 30, 1997 are included in the business segment information
presented herein under "Corporate and other".
Reorganization Costs
The Company's results of operations for 1997 include reorganization costs of
$106,037,000 primarily related to the reorganization of the Company's operations
in connection with the Acquisition and the termination of the Company's
International Distributor Agreement with Sterling Commerce in the third quarter
of 1997. These reorganization costs also include the write-down of certain
excess cost over net assets acquired related to the Company's federal systems
business. The Company does not expect to incur costs related to this
reorganization in excess of the amount charged to operations in 1997.
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<PAGE>
BUSINESS COMBINATIONS SUBSEQUENT TO JUNE 30, 1998
Acquisition of Mystech Associates, Inc.
Effective July 9, 1998, Sterling Software acquired Mystech Associates, Inc.
("Mystech") in a stock-for-stock merger transaction to be accounted for as a
pooling of interests. Mystech became a wholly owned subsidiary of the Company
and each issued and outstanding share of Mystech common stock was converted into
the right to receive 5.49313 shares of Common Stock. In addition, the Company
agreed to assume all outstanding stock options granted under the stock option
plans maintained by Mystech. As a result of the transaction, Sterling Software
is in the process of issuing approximately 769,000 shares of Common Stock in
exchange for the previously outstanding shares of Mystech common stock and has
reserved approximately 174,000 shares of the Company's Common Stock for issuance
upon exercise of the assumed Mystech options. Mytech's information technology
services business and substantially all of its approximately 300 employees
became part of the newly created Tactical Systems Division within the Federal
Systems Group.
Acquisition of Synon Corporation
Effective July 31, 1998, Sterling Software acquired Synon Corporation
("Synon") in a stock-for-stock merger transaction to be accounted for as a
pooling of interests. Synon was merged into a wholly owned subsidiary of the
Company and each issued and outstanding share of Synon common stock, Synon
Series A Preferred Stock and Synon Series E Preferred Stock was converted into
the right to receive .14357 shares of Common Stock, and each issued and
outstanding share of Synon Series D Preferred Stock was converted into the right
to receive .27149 shares of Common Stock. In addition, the Company agreed to
assume all outstanding stock options granted under the stock option plans
maintained by Synon. As a result of the transaction, Sterling Software is in
the process of issuing approximately 2,603,000 shares of Common Stock in
exchange for the previously outstanding shares of Synon capital stock and has
reserved approximately 375,000 shares of the Company's Common Stock for issuance
upon exercise of the assumed Synon options. Of Synon's approximately 500
worldwide employees, approximately 250 were added to the Applications
Management Group.
Reorganization Costs
The Company expects to incur a non-recurring charge to operations in the
fourth quarter of 1998 currently estimated to be between $40 million and $50
million to reflect the combination of the Company with Synon, and to a lesser
extent, the combination of the Company with Mystech. These charges relate to
employee termination costs, transaction costs, costs associated with the
elimination of duplicate facilities, the write down of capitalized software and
other direct costs.
- 14 -
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Total revenue increased $47,301,000, or 41%, in the third quarter of 1998
over the same period of 1997 due to revenue increases in all three of the
Company's business segments, partially offset by a decline in corporate and
other revenue due to the termination of the International Distributor Agreement
with Sterling Commerce in the third quarter of 1997. Revenue from the
applications management, systems management and federal systems business
segments increased 238%, 9% and 20%, respectively, in the third quarter of 1998
over the same period in 1997. Both the applications management business segment
and the federal systems business segment benefited substantially from the
domestic and international operations acquired by Sterling Software in the
Acquisition.
Total revenue generated from the Company's international operations was
$60,650,000 and $45,858,000 in the third quarter of 1998 and 1997, respectively,
representing an increase of $14,792,000, or 32%, primarily due to an increase in
international revenue generated by the applications management business segment
(up 472%). The overall increase in international revenue was partially offset
by a decline in revenue from sales of Sterling Commerce's interchange and
communications software products and services due to the termination of the
International Distributor Agreement in the third quarter of 1997. In addition,
international operating results in the third quarter of 1998 were adversely
impacted by foreign currency exchange rate fluctuations as a result of a
stronger U.S. dollar. Had foreign currency exchange rates remained consistent
with the same period of the previous year, international revenue would have been
higher in the third quarter of 1998 by approximately $3,000,000. Revenue from
the Company's international operations represented 38% and 40% of total revenue
in the third quarter of 1998 and 1997, respectively.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years and federal
contracts generally having terms ranging from one to five years. Like most
federal contracts, Sterling Software's federal contracts permit termination by
the government for convenience or for failure to obtain funding. Recurring
revenue decreased to 47% of total revenue in the third quarter of 1998 compared
to 50% in the same period of 1997, primarily due to the significant increase in
products and services revenue from the applications management business segment.
Overall, services revenue increased from 29% of total revenue in the third
quarter of 1997 to 33% of total revenue for the same period of 1998. This
increase resulted primarily from generally higher levels of consulting services
associated with product sales in the applications management segment. The
Company currently expects that revenue from services will continue to constitute
a larger percentage of the Company's total revenue in future reporting periods
than was the case prior to the Acquisition.
Revenue from the applications management business segment increased
$52,388,000, or 238%, in the third quarter of 1998 over the same period of 1997
due to a 202% increase in products revenue, a 171% increase in product support
revenue and a 780% increase in services revenue. The significant increase in
revenue from the applications management business segment is primarily
attributable to revenue from the Applications Development and
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<PAGE>
Applications International divisions, which include the non-federal domestic and
international operations, respectively, acquired in the Acquisition.
Approximately 49% of the applications management business segment's total
revenue in the third quarter of 1998 was derived from the Company's
international operations, compared to 29% in the same period of 1997.
Revenue from the systems management business segment increased $3,938,000,
or 9%, in the third quarter of 1998 over the same period of 1997 primarily due
to an 11% increase in products revenue attributable to increased domestic
product sales across all three product lines and increased international product
sales in the storage management and operations management product lines.
Product support revenue in the third quarter of 1998 was consistent with product
support revenue in the same period of 1997 due to the adverse impact of foreign
currency exchange rate fluctuations as a result of a stronger U.S. dollar.
Approximately 48% of the systems management business segment's total revenue in
the third quarter of 1998 was derived from the Company's international
operations, compared to 54% in the same period of 1997.
Revenue from the federal systems business segment increased $6,240,000, or
20%, in the third quarter of 1998 over the same period of 1997 due primarily to
a contract added to the Company's federal systems business segment as a result
of the Acquisition and, to a lesser extent, to higher contract billings in both
the Information Technology and the Scientific Systems divisions. As previously
reported, while the Company was not selected for continuation of a contract with
NASA's Ames Research Center, the Company continued to provide services under the
pre-existing contract through June 30, 1998, at which time such services ceased.
Total costs and expenses decreased $216,174,000, or 63%, in the third
quarter of 1998 compared to the same period of 1997. However, excluding the
Acquisition-related reorganization costs of $106,037,000 and the write-off of
purchased research and development costs of $137,849,000 in the third quarter of
1997, total costs and expenses increased $27,712,000, or 29%, in the third
quarter of 1998 compared to the same period of 1997.
Total cost of sales increased $14,804,000, or 31%, in the third quarter of
1998 compared to the same period of 1997 and represented 38% and 41% of total
revenue in the third quarter of 1998 and 1997, respectively. Cost of sales for
products and product support decreased $3,114,000, or 18%, in the third quarter
of 1998 compared to the same period of 1997 and represented 13% and 22% of
products and product support revenue in the third quarter of 1998 and 1997,
respectively. The decrease in cost of sales for products and product support is
primarily attributable to the decrease in royalties payable to Sterling Commerce
due to the termination of the International Distributor Agreement, as well as a
decrease in royalties payable to other third parties related to products no
longer marketed by the Company. Cost of sales for services increased
$17,918,000, or 61%, in the third quarter of 1998 compared to the same period of
1997 and represented 88% and 89% of services revenue in the third quarter of
1998 and 1997, respectively. The significant increase in cost of sales for
services is primarily attributable to the increase in services revenue from the
applications management business segment.
Product development expense for the third quarter of 1998 was $6,456,000,
net of $6,063,000 of capitalized software costs, as compared with product
development expense in the same period of 1997 of $4,532,000, net of $4,371,000
of capitalized software costs. Gross
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<PAGE>
product development expense was 10% of non-federal revenue in the third quarter
of 1998 compared with 11% for the same period of 1997. Capitalized development
costs represented 48% of gross development costs in the third quarter of 1998
compared with 49% of gross development costs for the same period of 1997.
Product development expenses and the capitalization rate historically have
fluctuated, and may in the future continue to fluctuate, from period to period
depending in part upon the number and status of software development projects
that are in process.
Selling, general and administrative expenses increased $10,984,000, or 24%,
in the third quarter of 1998 compared to the same period of 1997, and
represented 35% and 40% of total revenue in the third quarter of 1998 and 1997,
respectively. The decrease in selling, general and administrative expenses as a
percentage of total revenue is primarily attributable to the cost structure
implemented by the Company as a result of the Acquisition, the related
reorganization in the third quarter of 1997 and cost savings resulting from the
termination of the Company's International Distributor Agreement with Sterling
Commerce.
Investment income decreased $1,490,000 in the third quarter of 1998
compared to the same period of 1997 as a result of lower average cash and cash
equivalents balances primarily due to the use of cash in connection with the
Acquisition and the related reorganization in the third quarter of 1997.
Income before income taxes in the third quarter of 1998 was $45,062,000
compared to a loss before income taxes of $216,408,000 for the same period of
1997. Excluding the Acquisition-related reorganization costs of $106,037,000 and
the write-off of purchased research and development costs of $137,849,000 in the
third quarter of 1997, income before income taxes increased $17,584,000, or 64%,
primarily due to higher profits in the applications management business segment
partially offset by a decline in investment income.
Nine Months Ended June 30, 1998 and 1997
Total revenue increased $151,642,000, or 48%, in the first nine months of
1998 over the same period of 1997 due to revenue increases in all three of the
Company's business segments, partially offset by a decline in corporate and
other revenue due to the termination of the International Distributor Agreement
with Sterling Commerce in the third quarter of 1997. Revenue from the
applications management, systems management and federal systems business
segments increased 234%, 12% and 23%, respectively, in the first nine months of
1998 over the same period in 1997. Both the applications management business
segment and the federal systems business segment benefited substantially from
the domestic and international operations acquired by Sterling Software in the
Acquisition.
Total revenue generated from the Company's international operations was
$179,541,000 and $120,817,000 in the first nine months of 1998 and 1997,
respectively, representing an increase of $58,724,000, or 49%, due to increases
in international revenue generated by the applications management business
segment (up 490%) and the systems management business segment (up 4%). The
overall increase in international revenue was partially offset by a decline in
revenue from sales of Sterling Commerce's interchange and communications
software
- 17 -
<PAGE>
products and services due to the termination of the International Distributor
Agreement in the third quarter of 1997. In addition, international operating
results in the first nine months of 1998 were adversely impacted by foreign
currency exchange rate fluctuations as a result of a stronger U.S. dollar. Had
foreign currency exchange rates remained consistent with the same period of the
previous year, international revenue would have been higher in the first nine
months of 1998 by approximately $12,000,000. Revenue from the Company's
international operations represented 38% of total revenue in both the first nine
months of 1998 and 1997.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years and federal
contracts generally having terms ranging from one to five years. Like most
federal contracts, Sterling Software's federal contracts permit termination by
the government for convenience or for failure to obtain funding. Recurring
revenue decreased to 48% of total revenue in the first nine months of 1998
compared to 54% in the same period of 1997, primarily due to the significant
increase in products and services revenue from the applications management
business segment. Overall, services revenue increased from 29% of total revenue
in the first nine months of 1997 to 34% of total revenue for the same period of
1998. This increase resulted primarily from generally higher levels of
consulting services associated with product sales in the applications management
segment. The Company currently expects that revenue from services will continue
to constitute a larger percentage of the Company's total revenue in future
reporting periods than was the case prior to the Acquisition.
Revenue from the applications management business segment increased
$154,255,000, or 234%, in the first nine months of 1998 over the same period of
1997 due to a 206% increase in products revenue, a 151% increase in product
support revenue and an 800% increase in services revenue. The significant
increase in revenue from the applications management business segment is
primarily attributable to revenue from the Applications Development and
Applications International divisions, which include the non-federal domestic and
international operations, respectively, acquired in the Acquisition.
Approximately 51% of the applications management business segment's total
revenue in the first nine months of 1998 was derived from the Company's
international operations, compared to 29% in the same period of 1997.
Revenue from the systems management business segment increased $15,447,000,
or 12%, in the first nine months of 1998 over the same period of 1997 primarily
due to a 21% increase in products revenue partially offset by a 1% decline in
product support revenue due in part to the adverse impact of foreign currency
exchange rate fluctuations as a result of a stronger U.S. dollar. The increase
in products revenue was mainly attributable to strong domestic and international
product sales in the operations management and storage management product lines.
Approximately 48% of the systems management business segment's total revenue in
the first nine months of 1998 was derived from the Company's international
operations, compared to 51% in the same period of 1997.
Revenue from the federal systems business segment increased $19,998,000, or
23%, in the first nine months of 1998 over the same period of 1997 due primarily
to a contract added to the Company's federal systems business segment as a
result of the Acquisition and, to a lesser
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<PAGE>
extent, to higher contract billings in both the Information Technology and the
Scientific Systems divisions.
Total costs and expenses decreased $143,381,000, or 27%, in the first nine
months of 1998 compared to the same period of 1997. However, excluding the
Acquisition-related reorganization costs of $106,037,000 and the write-off of
purchased research and development costs of $137,849,000 in the third quarter of
1997, total costs and expenses increased $100,505,000, or 36%, in the first nine
months of 1998 compared to the same period of 1997.
Total cost of sales increased $47,893,000, or 36%, in the first nine months
of 1998 compared to the same period of 1997 and represented 39% and 42% of total
revenue in the first nine months of 1998 and 1997, respectively. Cost of sales
for products and product support decreased $8,692,000, or 16%, in the first nine
months of 1998 compared to the same period of 1997 and represented 14% and 24%
of products and product support revenue in the first nine months of 1998 and
1997, respectively. The decrease in cost of sales for products and product
support is primarily attributable to the decrease in royalties payable to
Sterling Commerce due to the termination of the International Distributor
Agreement, as well as a decrease in royalties payable to other third parties
related to products no longer marketed by the Company. Cost of sales for
services increased $56,585,000, or 69%, in the first nine months of 1998
compared to the same period of 1997 and represented 87% and 88% of revenue in
the first nine months of 1998 and 1997, respectively. The significant increase
in cost of sales for services is primarily attributable to the increase in
services revenue from the applications management business segment.
Product development expense for the first nine months of 1998 was
$23,121,000, net of $17,533,000 of capitalized software costs, as compared with
product development expense in the first nine months of 1997 of $14,349,000, net
of $13,380,000 of capitalized software costs. Gross product development expense
was 11% of non-federal revenue in the first nine months of 1998 compared with
12% for the same period of 1997. Capitalized development costs represented 43%
of gross development costs in the first nine months of 1998 compared with 48% of
gross development costs for the same period of 1997. Product development
expenses and the capitalization rate historically have fluctuated, and may in
the future continue to fluctuate, from period to period depending in part upon
the number and status of software development projects that are in process.
Selling, general and administrative expenses increased $43,840,000, or 34%,
in the first nine months of 1998 compared to the same period of 1997, and
represented 37% and 41% of total revenue in the first nine months of 1998 and
1997, respectively. The decrease in selling, general and administrative
expenses as a percentage of total revenue is primarily attributable to the cost
structure implemented by the Company as a result of the Acquisition, the related
reorganization in the third quarter of 1997 and cost savings resulting from the
termination of the Company's International Distributor Agreement with Sterling
Commerce.
Investment income decreased $5,896,000 in the first nine months of 1998
compared to the same period of 1997 as a result of lower average cash and cash
equivalents balances
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<PAGE>
primarily due to the use of cash in connection with the Acquisition and the
related reorganization in the third quarter of 1997.
Income before income taxes in the first nine months of 1998 was
$114,748,000, compared to a loss before income taxes of $173,412,000 for the
same period of 1997. Excluding the Acquisition-related reorganization costs of
$106,037,000 and the write-off of purchased research and development costs of
$137,849,000 in the third quarter of 1997, income before income taxes increased
$44,274,000, or 63%, primarily due to higher profits in the applications
management and systems management business segments partially offset by a
decline in investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a strong liquidity and financial position with
$663,397,000 of working capital at June 30, 1998, which includes $441,619,000 of
cash and cash equivalents and $252,441,000 of marketable securities. Net cash
provided by operating activities was $82,094,000 in the first nine months of
1998 compared to $60,648,000 for the same period of 1997. Net cash provided by
operating activities in the first nine months of 1998 was reduced by payments
made during the period of approximately $25,227,000 directly related to the
Acquisition and the related reorganization that occurred in the third quarter of
1997. Operating cash flows in the first nine months of 1997 were negatively
impacted by payments of approximately $32,000,000 made to Sterling Commerce
during the period.
Investing activities used $85,270,000 in cash during the first nine months
of 1998 compared to $147,299,000 for the same period of 1997. Net cash used in
investing activities in the first nine months of 1997 included the $165,000,000
payment to Texas Instruments on June 30, 1997 in connection with the
Acquisition. Capital expenditures for the first nine months of 1998 were
$21,451,000 compared to $22,703,000 for the same period of 1997. Purchases and
capitalized costs of computer software were $17,767,000 and $13,553,000 for the
first nine months of 1998 and 1997, respectively. Cash provided by operating
activities, together with other available cash, were used to fund capital
expenditures and additions to computer software.
Financing activities provided $11,250,000 in cash during the first nine
months of 1998 compared to $1,508,000 for the same period of 1997.
Effective July 1, 1997, the Company entered into an amended Revolving
Credit Agreement ("Credit Agreement") with an unsecured borrowing capacity of
$35,000,000 and a stated maturity of June 30, 2000. The Credit Agreement
requires that the Company maintain certain financial ratios. Borrowings under
the Credit Agreement bear interest at the lower of the lender's base rate or a
Eurodollar lending rate plus one-half percent. No amounts were borrowed under
the Credit Agreement during the first nine months of 1998 or 1997.
At June 30, 1998, in addition to commitments related to the Mystech and
Synon acquisitions discussed above, the Company's short and long-term cash
commitments, including remaining costs related to the Acquisition and the
related reorganization in the third quarter of
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<PAGE>
1997, consisted primarily of commitments under lease arrangements for office
space and equipment. The Company intends to meet such obligations primarily from
cash provided by operating activities.
The Company believes available cash balances, cash equivalents and short-
term investments combined with cash provided by operating activities and amounts
available under existing credit agreements are sufficient to meet the Company's
cash requirements for the foreseeable future.
OTHER MATTERS
Demand for many of the Company's products tends to increase with increases
in the rate of inflation as customers strive to improve employee productivity
and reduce costs. However, the effect of inflation on the Company's relatively
labor intensive cost structure could adversely affect its results of operations
to the extent the Company is unable to recover increased operating costs through
increased prices for, or increased sales of, its products and services.
The assets and liabilities of the Company's non-U.S. operations are
translated into U.S. dollars at exchange rates in effect as of the applicable
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency exposure
through decentralized sales, marketing and support operations and through
international development facilities, in which substantially all costs are
local-currency based. In the past, the Company has entered, and may in the
future enter, into hedging transactions in an effort to reduce its exposure to
currency exchange risks.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed in part to the Company's growth in revenue and operating profit
before reorganization and purchased research and development costs. The impact
of future acquisitions on continued growth in revenue and operating profit
cannot presently be determined.
FORWARD-LOOKING INFORMATION
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to, the
Company's management. The following statements are or may constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995: (i) statements preceded by, followed by or that include the
words "may", "will", "could", "should", "believe", "expect", "future",
"potential", "anticipate", "intend", "plan", "estimate" or "continue" or the
negative or other variations thereof and (ii) other statements regarding matters
that are not historical facts. Such forward-looking statements are subject to
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<PAGE>
various risks and uncertainties, including (i) risks and uncertainties relating
to the possible invalidity of the underlying beliefs and assumptions, (ii)
possible changes or developments in social, economic, business, industry,
market, legal and regulatory circumstances and conditions, and (iii) actions
taken or omitted to be taken by third parties, including customers, suppliers,
business partners, competitors and legislative, regulatory, judicial and other
governmental authorities and officials. In addition to any risks and
uncertainties specifically identified in the text surrounding such forward-
looking statements, the statements in the immediately preceding sentence and the
statements under captions such as "Risk Factors" and "Special Considerations" in
the SEC Filings constitute cautionary statements identifying important factors
that could cause actual amounts, results, events and circumstances to differ
materially from those reflected in such forward-looking statements.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER MATTERS.
The following information is provided to stockholders of the Company in
light of recent amendments to certain rules promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and to certain provisions
of the Company's Bylaws (the "Bylaws").
Stockholders of Sterling Software may submit proposals on matters
appropriate for stockholder action at meetings of the Company's stockholders in
accordance with Rule 14a-8 promulgated under the Exchange Act ("Rule 14a-8").
For such proposals to be included in the Company's proxy materials relating to
its 1999 Annual Meeting of Stockholders (the "1999 Annual Meeting"), all
applicable requirements of Rule 14a-8 must be satisfied and such proposals must
be received by the Company no later than October 5, 1998.
Except in the case of proposals made in accordance with Rule 14a-8, the
Bylaws require that stockholders desiring to bring any business before an annual
meeting of stockholders deliver written notice thereof to the Company not less
than 60 days prior to the meeting. However, in the event that less than 67
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received by
the Company not later than the close of business on the seventh day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made. The Bylaws further require, among other things,
that the notice by the stockholder set forth a description of the business to be
brought before the meeting and certain information concerning the stockholder
proposing such business, including such stockholder's name and address, the
class and number of shares of the Company's capital stock that are owned
beneficially by such stockholder and any material interest of such stockholder
in the business proposed to be brought before the meeting.
The Bylaws require that stockholders desiring to nominate one or more
persons as directors of the Company deliver written notice thereof to the
Company not later than (i) with respect to an election to be held at an annual
meeting, 90 days prior to the anniversary date of the immediately preceding
annual meeting, and (ii) with respect to an election to be held at a special
meeting, the seventh day following the date on which notice of such special
meeting is first given to stockholders. The Bylaws further require, among other
things, that any such notice set forth the name and address of the stockholder
and the person or persons to be nominated, a representation that the stockholder
is a holder of record of stock in the Company entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice, a description of all arrangements or
undertakings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder, such other information regarding
each nominee proposed by such stockholder as would be required to be included in
a proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission and the consent of each nominee to serve as a director of
the Company if so elected.
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<PAGE>
Any stockholder proposal or nomination intended to be submitted in
accordance with Rule 14a-8 or the provisions of the Bylaws described above
should be directed to Sterling Software, Inc., Attention: Secretary, at 300
Crescent Court, Suite 1200, Dallas, Texas 75201.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1), (2)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (3)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (4)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(5)
3.1 Certificate of Incorporation, as amended, of the Company (6)
3.2 Bylaws, as amended, of the Company (7)
10.1 Mystech Associates, Inc. Stock Option Plan (as amended and restated
as of July 9, 1998) (8)
10.2 Synon Corporation 1990 Stock Option Plan (as amended and restated as
of July 31, 1998) (8)
10.3 Synon Corporation Executive Share Option Scheme (as amended and
restated as of July 30, 1998) (8)
27 Financial Data Schedule (8)
_____________
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference.
(2) In accordance with Item 601 of Regulation S-K, the schedules and exhibits
relating to the agreement have been omitted. The Company will furnish
supplementally to the Securities and Exchange Commission such schedules or
exhibits upon request.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1997, as amended, and incorporated herein by reference.
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<PAGE>
(4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming a
part of the Company's Registration Statement on Form S-4 (No. 333-53747) and
incorporated herein by reference.
(5) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated June 21, 1998 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1998 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A/A filed on May 27, 1998 and incorporated herein by reference.
(8) Filed herewith.
(b) Reports on Form 8-K.
With respect to the three-month period ended June 30, 1998, the
Company filed one Current Report on Form 8-K dated June 21, 1998,
which included information reported under Item 5 (Other Events).
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING SOFTWARE, INC.
Date: August 3, 1998 By: /s/Sterling L. Williams
---------------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
Date: August 3, 1998 /s/ R. Logan Wray
---------------------------------------------
R. Logan Wray
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (1), (2)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (3)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (4)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(5)
3.1 Certificate of Incorporation, as amended, of the Company (6)
3.2 Bylaws, as amended, of the Company (7)
10.1 Mystech Associates, Inc. Stock Option Plan (as amended and restated as
of July 9, 1998) (8)
10.2 Synon Corporation 1990 Stock Option Plan (as amended and restated as
of July 31, 1998) (8)
10.3 Synon Corporation Executive Share Option Scheme (as amended and
restated as of July 30, 1998) (8)
27 Financial Data Schedule (8)
_____________
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference.
(2) In accordance with Item 601 of Regulation S-K, the schedules and exhibits
relating to the agreement have been omitted. The Company will furnish
supplementally to the Securities and Exchange Commission such schedules or
exhibits upon request.
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(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1997, as amended, and incorporated herein by reference.
(4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming a
part of the Company's Registration Statement on Form S-4 (No. 333-53747)
and incorporated herein by reference.
(5) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated June 21, 1998 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A/A filed on May 27, 1998 and incorporated herein by reference.
(8) Filed herewith.
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EXHIBIT 10.1
MYSTECH ASSOCIATES, INC.
STOCK OPTION PLAN
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This Plan, as adopted by the Board of Directors of the Corporation on October
14, 1994, at the Annual Meeting of the Board of Directors, sets forth the
authority and the terms and conditions under which Options could be issued by
the Board of Directors of the Corporation. This Plan, as amended and restated
on July 9, 1998 in connection with the merger (the "Merger") of the Corporation
with a wholly owned subsidiary of Sterling Software, Inc. ("Sterling Software"),
is being maintained by the Corporation for the sole purpose of permitting the
exercise of Options that were outstanding immediately prior to the effective
time of the Merger (the "Effective Time").
1.0 AUTHORITY
The Mystech Stock Ownership Agreement, dated October 14, 1994, authorized and
charged the Board of Directors of the Corporation to develop and implement a
stock option plan intended to reward and provide incentive to technical, support
and management employees.
2.0 DEFINITIONS
The following terms as used herein have the meanings hereinafter set forth
unless the context clearly indicates to the contrary:
2.1 "Board" shall mean the Board of Directors of the Corporation.
2.2 "Corporation" shall mean Sterling Software (Connecticut), Inc. (formerly
known as Mystech Associates, Inc. (sometimes herein called "Mystech")), and the
surviving corporation in any merger to which Sterling Software (Connecticut),
Inc. may be a party.
2.3 "Committee" shall mean the 1996 Stock Option Committee of the Board of
Directors of Sterling Software and any other committee of such Board of
Directors that may succeed to the authority presently vested in such 1996 Stock
Option Committee in relation to this Plan.
2.4 "Fair Market Value" of the Shares shall be as determined by the Committee.
2.5 "Incentive Stock Options" shall mean those Options granted hereunder as
Incentive Stock Options as defined in, and which by their terms comply with the
requirements of such options set out in, Section 422 of the Internal Revenue
Code of 1986 and Treasury Regulations issued with respect thereto.
2.6 "Insider" shall mean any officer or director of the Corporation.
2.7 "Non-Qualified Stock Option" shall mean those stock options granted
hereunder which do not qualify as Incentive Stock Options as described in
Section 2.5.
2.8 "Option" shall mean an option to purchase Shares granted pursuant to the
provisions of this Plan prior to the Effective Time.
2.9 "Optionee" shall mean a person to whom an Option has been granted under
this Plan.
2.10 "Plan" shall mean this Mystech Associates, Inc. Stock Option Plan, as
amended or amended and restated from time to time.
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2.11 "Shares" shall mean, from and after the Effective Time, and subject to the
provisions of Section 14.2, shares of Common Stock, par value $0.10 per share,
of Sterling Software.
2.12 "Stock Option Certificate," when used in reference to an Option, shall
mean the document which defines the specific terms and conditions of the Option.
2.13 "Subsidiary" shall mean any corporation which is controlled by Sterling
Software.
3.0 PURPOSE OF PLAN
Prior to the Merger, the Plan was intended by Mystech to reward those Mystech
employees who contributed to Mystech's success and to benefit those Mystech
employees interested in a long-term investment in Mystech. The Plan is being
maintained by the Corporation for the sole purpose of permitting the exercise of
Options pursuant to the terms of the Plan, after giving effect to the
adjustments to the terms of the Options described in Section 14.1.
4.0 EFFECTIVE DATE
The effective date of this Plan is October 14, 1994.
5.0 SHARES RESERVED FOR PLAN
5.1 Sterling Software has reserved for issuance a sufficient number of Shares
to permit the exercise in full of all Options that were outstanding immediately
prior to the Effective Time.
5.2 The Shares subject to outstanding Options shall consist of authorized but
unissued Shares or previously issued Shares acquired and held in the treasury of
Sterling Software, or a combination of the foregoing.
6.0 ADMINISTRATION
6.1 The Plan shall be administered by the Committee.
6.2 Subject to the terms of this Plan, the Committee shall have complete
authority to interpret this Plan, to prescribe, amend, and rescind rules and
regulations relating to it, to determine the details and provisions of each
Stock Option Certificate, and to make all other determinations necessary or
desirable in the administration of this Plan or of any Option.
7.0 ELIGIBILITY
[Intentionally omitted.]
8.0 TYPES OF OPTIONS
All of the Options that were outstanding immediately prior to the Effective Time
are Non-Qualified Stock Options.
9.0 NO FURTHER GRANTS
No options of any kind will be granted under this Plan after the Effective Time.
10.0 TERM OF OPTION
10.1 Each Option commenced on the date as of which the Stock Option Certificate
relating thereto became effective and shall terminate at such time as is
provided in such Stock Option Certificate or, if earlier, the date that is six
(6) years and one (1) day after the date of the grant. If an Optionee shall
cease to be an employee of the Corporation, Sterling Software or any of Sterling
Software's other Subsidiaries, for any reason other than termination for cause
or a termination by reason of death, any unexercised portion of any Option held
by such Optionee shall terminate sixty (60) days after the date of termination
of employment, or upon the expiration of such Option, whichever comes first.
10.2 In the event that the Optionee's employment is terminated for cause, the
unexercised portion of any Option held by such Optionee shall terminate
immediately upon the giving of notice of such termination. Nothing in this Plan
or in any Option
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granted pursuant to this Plan shall confer on any Optionee the right to continue
in the employ or other service of the Corporation, Sterling Software or any of
its other Subsidiaries, or interfere in any way with the right of the
Corporation, Sterling Software or any of its other Subsidiaries to terminate the
Optionee's employment or other service at any time.
10.3 In the event of the death of the Optionee, the Optionee's estate may
exercise the unexercised portion of any Option held by such Optionee on the date
of his or her death, to the extent that the Optionee was entitled to exercise
the same on the date of his or her death, until the earlier of (a) ninety (90)
days after the death of the Optionee and (b) the expiration of the Option.
11.0 EXERCISE OF THE OPTION
11.1 An Option may be exercised in whole or in part at any time during the term
of the Option by signing the Stock Option Certificate and giving written notice
delivered to the Corporation. Such notice shall state the number of Shares with
respect to which the Option is being exercised and shall be accompanied by
payment in full of the purchase price of such Shares. Payment shall be made to
the Corporation either (a) in cash (including certified check, bank draft, or
money order), (b) by delivering Shares already owned by the Optionee which shall
be valued at Fair Market Value on the day on which notice of exercise is
received by the Corporation, or (c) a combination of such Shares and cash;
provided, however, that no payment in the form of Shares shall be permitted at
any time at which the Corporation is prohibited from purchasing or acquiring
such Shares. Delivery of Shares pursuant to alternative (b) or (c) above shall
be accomplished by the Optionee's delivery of one or more certificates
representing at least the number of Shares to be used to pay the portion of the
purchase price to be paid in the form of Shares, duly endorsed for transfer or
accompanied by one or more properly executed stock powers, together with written
instructions as to the number of Shares to be applied to the payment of the
purchase price. Should the Optionee exercise only a portion of an Option, a new
Stock Option Certificate for the unexercised portion of the surrendered Option
will be issued to such Optionee.
11.2 Sterling Software may in its sole and absolute discretion provide for
deferred payment of the exercise price for Shares purchased upon the exercise of
an Option from the proceeds of sale through a bank or broker of some or all of
the Shares to which such exercise relates. Any such deferred payment of the
exercise price shall be on such terms and subject to such conditions, consistent
with the terms of the Plan and the Options, including without limitation
execution and delivery by the Optionee of such documents, and compliance by the
Optionee with such other procedures, as the Committee may establish.
12.0 OPTION PRICE
[Intentionally omitted.]
13.0 NON-ASSIGNABILITY OF THE OPTION
Options are not transferable by the Optionee and may be exercised, during the
Optionee's lifetime, only by the Optionee.
14.0 ADJUSTMENTS UPON FUNDAMENTAL CORPORATE CHANGE
14.1 Pursuant to the provisions of this Plan that were in effect immediately
prior to the Effective Time, at the Effective Time, the terms of each then-
outstanding Option were adjusted so that each Option immediately thereafter
constituted an option to purchase, on substantially the same terms and subject
to substantially the same conditions as were previously applicable thereto, a
number of Shares (rounded down to the nearest whole share) determined by
multiplying (i) the number of shares of common stock of the Corporation
("Mystech Common Stock") subject to such Option immediately prior to the
Effective Time by (ii) 5.49313 (the "Option Conversion Factor"), at an exercise
price per Share (increased to the nearest whole cent) equal to (i) the exercise
price per share of Mystech Common Stock subject to such Option divided by (ii)
the Option Conversion Factor.
14.2 Notwithstanding any other provision of this Plan, the Committee may make
or provide for
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such adjustments in the number of Shares covered by outstanding Options, in the
purchase price per share of Shares covered by outstanding Options, and/or in the
kind of shares covered thereby (including shares of another issuer), as the
Committee, in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of Optionees
that otherwise would result from any stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of Sterling
Software, merger, consolidation, spin-off, reorganization, liquidation, issuance
of rights or warrants to purchase securities or any other corporate transaction
or event having an effect similar to any of the foregoing.
15.0 COMPLIANCE WITH LAWS
15.1 Notwithstanding any contrary provisions of this Plan, the Options shall
not be exercisable by the Optionee or the Optionee's legal representative during
a time period in which such exercise would adversely affect the Corporation or
Sterling Software under applicable state and federal securities laws. The
Corporation shall, however, provide Optionees with an opportunity to elect to
exercise the Options, within the limits specified in this Plan, at a minimum of
approximately once a year and, if not sooner terminated, immediately prior to
the expiration of the term of such Options. If an Option is terminated early
pursuant to Section 10.1 or 10.3 of this Plan, and if the Optionee attempts to
exercise the Option within the period specified in Section 10.1 or 10.3, as
applicable, and if the Corporation determines that it should defer the exercise
for the securities laws compliance reasons previously referenced in this
Section, then the Corporation may extend the period of time during which an
Optionee may exercise the Option. Any such extension shall last only until the
next time the Corporation provides the Optionees with an opportunity to exercise
Options granted under the Plan.
15.2 The Corporation shall have the right to require the payment (through
withholding from the participant's salary, or otherwise as the Corporation shall
determine) of any federal and state taxes required to be withheld from any
transfer of Shares hereunder (including a transfer of Shares on the exercise of
an Option granted hereunder).
16.0 NO RIGHTS IN OPTION STOCK
No Optionee shall have any rights as a shareholder with respect to Shares as to
which an Option shall not have been exercised and payment made as herein
provided, and shall have no rights with respect to such Shares not expressly
conferred by this Plan.
17.0 EFFECT ON CHANGE IN CAPITAL STRUCTURE
The existence of the Options shall not affect in any way the right or power of
Sterling Software or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations, or other changes in Sterling
Software's capital structure or business, or any merger or consolidation of
Sterling Software, or any issue of bonds, debentures, preferred or preference
stocks senior to or affecting the Shares or the rights appurtenant thereto, or
dissolution or liquidation of Sterling Software, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or
proceedings, whether of a similar character or otherwise.
18.0 SUCCESSORS
This Plan shall be binding upon any successors of the Corporation.
19.0 AMENDMENT AND TERMINATION
Unless this Plan shall theretofore have been terminated as herein provided, it
shall terminate at the earliest time at which all of the Options shall have been
exercised or shall have expired. This Plan may be terminated, modified, or
amended by the shareholders of the Corporation. The Committee may terminate
this Plan or make such modifications or amendments thereof as it shall deem
advisable, or in order to conform to any change in any law or regulation
applicable thereto; provided, however, that the Committee may not, without
approval by the shareholders of the
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Corporation (a) increase the periods during which Options may be granted or
exercised, except as provided in Section 15 of the Plan or (b) provide for the
administration of this Plan otherwise than by the Committee. No termination,
modification, or amendment of this Plan may, without the consent of the Optionee
to whom any Option shall theretofore have been granted, adversely affect the
rights of such Optionee under such Option.
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EXHIBIT 10.2
SYNON CORPORATION
1990 STOCK OPTION PLAN
(AS AMENDED AND RESTATED AS OF JULY 31, 1998)
1. PURPOSES OF THE PLAN. Prior to the merger of Synon with and into the
Company, the purposes of the Plan were to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to Employees of Synon and its Subsidiaries and to promote the success
of Synon's business. The Plan, as amended and restated as of July 31, 1998 in
connection with the Merger, is being maintained for the sole purpose of
permitting the exercise of Options pursuant to the provisions of the Plan and
the applicable Option Agreements, after giving effect to the adjustments to the
terms of the Options pursuant to Section 11 of the Plan and Section 2.2 of the
Merger Agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Committee.
(b) "Board" means the Board of Directors of Parent.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the 1996 Stock Option Committee of the Board or
any other committee of the Board appointed by the Board in accordance with
Section 4(a).
(e) "Common Stock" means the Common Stock of Parent.
(f) "Company" means Sterling Software (Southern), Inc., a Georgia
corporation and a wholly owned subsidiary of Parent.
(g) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship between an Optionee
and Parent, the Company or any other Subsidiary of Parent. Continuous Status
as an Employee shall not be considered interrupted in the case of: (i) sick
leave; (ii) military leave; (iii) any other leave of absence approved by the
Committee, provided that such leave is for a period of not more than ninety (90)
days, unless reemployment upon the expiration of such leave is guaranteed by
contract or statute, or unless provided otherwise pursuant to any Parent policy
adopted from time to time; or (iv) in the case of transfers between locations of
Parent, the Company or any other Subsidiary of Parent.
(h) "Effective Time" means the effective time of the Merger.
<PAGE>
(i) "Employee" means any person, including officers and directors,
employed by Parent, the Company or any other Subsidiary of Parent and once
employed by Synon or any Subsidiary of Synon.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported, as quoted
on such system or exchange for the last market trading day prior to the time of
determination) as reported in The Wall Street Journal or such other source as
-----------------------
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high and low asked prices for the Common Stock; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422A of the Code.
(m) "Merger" means the merger of Synon with and into the Company,
which merger occurred on July 31, 1998.
(n) "Merger Agreement" means the Agreement and Plan of Merger, dated
as of June 20, 1998, among Parent, the Company and Synon.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Option" means a stock option granted pursuant to the Plan which
was outstanding as of the Effective Time.
(q) "Option Agreement" means the written agreement evidencing an
Option.
(r) "Optioned Stock" means the Common Stock subject to an Option.
(s) "Optionee" means a person who held an Option as of the Effective
Time.
(t) "Parent" means Sterling Software, Inc., a Delaware corporation.
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(u) "Plan" means this 1990 Stock Option Plan, as amended or amended
and restated from time to time.
(v) "Share" means a share of Common Stock, as adjusted in accordance
with Section 11 of the Plan.
(w) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 425(f) of the Code.
(x) "Synon" means Synon Corporation, a Delaware corporation which was
merged with and into the Company at the Effective Time.
3. STOCK SUBJECT TO THE PLAN. Immediately following the Effective Time,
after giving effect to the adjustments to the terms of the Options pursuant to
Section 11 of the Plan and Section 2.2 of the Merger Agreement, there were
370,653 Shares subject to Options. Shares issued upon the exercise of Options
may be authorized but unissued Shares, previously issued Shares acquired and
held in the treasury of Parent or a Subsidiary of Parent or a combination of the
foregoing.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE. The Plan shall be administered by a committee of the
Board designated by the Board, which committee shall be constituted in such a
manner as to satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable state corporate and
securities laws and of the Code (the "Applicable Laws"). Once appointed, such
committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, and fill
vacancies, however caused, all to the extent permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, the Administrator shall have the authority, in its discretion:
(i) to make any determination or take any action that is
necessary or advisable in connection with the administration of the Plan and the
Options, and to interpret and construe any provision of the Plan or any Option
Agreement;
(ii) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(iii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock; and
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(iv) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. STATUS OF OPTIONS. Neither the Plan nor any Option Agreement shall
confer upon any Optionee any right with respect to continuance of employment or
other service with Parent, the Company or any other Subsidiary of Parent, nor
shall the Plan or any Option Agreement interfere in any way with any right
Parent, the Company or any other Subsidiary of Parent would otherwise have to
terminate such Optionee's employment or other service at any time.
6. TERM OF PLAN. Unless this Plan shall theretofore have been terminated
as herein provided, it shall terminate at the earliest time at which all of the
Options shall have been exercised or shall have expired.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the applicable Option Agreement; provided, however, that in the case of an
Incentive Stock Option, the term shall be no more than ten (10) years from the
date of grant thereof or such shorter term as may have been provided in the
Option Agreement; and provided further that in the case of an Option granted to
an Optionee who, at the time the Option was granted owned (10%) of the voting
power of all classes of stock of Synon, the term of the Option shall be no more
than five (5) years from the date of grant thereof or such shorter term as have
been provided in the applicable Option Agreement.
8. OPTION CONSIDERATION. The consideration to be paid for the Shares to
be issued upon exercise of an Option may consist entirely of cash, check or, at
the discretion of the Administrator, a promissory note or such other
consideration for the issuance of Shares to the extent permitted under the
Applicable Laws. The method of payment shall be determined by the
Administrator.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable in accordance with the terms of the Plan
and the applicable Option Agreement. An Option may not be exercised for a
fraction of a Share. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section 8 of
the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of Parent or of a duly authorized transfer agent of Parent) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the
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exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan. Exercise of an Option in any manner shall result in a decrease in the
number of Shares subject to such Option equal to the number of Shares as to
which the Option is exercised. Parent may in its sole and absolute discretion
provide for (i) the deferred payment of the exercise price for Shares purchased
upon the exercise of an Option from the proceeds of sale through a bank or
broker of some or all of the Shares to which such exercise relates or (ii) the
payment of the exercise price for Shares purchased upon the exercise of an
Option by the transfer to Parent of shares of Common Stock owned by the Optionee
having an aggregate Fair Market Value per share at the date of exercise equal to
the aggregate exercise price or by withholding a number of Shares otherwise
issuable to the Optionee having an aggregate Fair Market Value per share at the
date of exercise equal to the aggregate exercise price or (iii) by a combination
of such methods of payment or deferred payment. Any such payment or deferred
payment of the exercise price shall be on such terms and subject to such
conditions, consistent with the terms of the Plan and the Options, including
without limitation execution and delivery by the Optionee of such documents, and
compliance by the Optionee with such other procedures, as the Administrator may
establish.
(b) TERMINATION OF EMPLOYMENT. In the event of termination of an
Optionee's Continuous Status as an Employee, such Optionee may, but only within
ninety (90) days (or such other period of time as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
having been made at the time of grant of the Option and not exceeding ninety
(90) days) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the applicable Option
Agreement), exercise his Option to the extent that such Optionee was entitled to
exercise it at the date of such termination. The preceding sentence shall not
apply to Options that were substituted for options to acquire ordinary shares of
Synon Limited granted under the Synon Limited Employee Incentive Share Option
Plan ("Substituted Options"). Instead, an Optionee's Substituted Option shall,
subject to Sections 7, 9(c) and 9(d) herein, expire upon the termination of the
Optionee's Continuous Status as an Employee; provided, however, that the
Administrator may, in its sole discretion, by written notice given to an ex-
Employee, permit the ex-Employee to exercise Substituted Options during a period
following his or her termination of employment, which period shall not extend
beyond the expiration date contained in the Option Agreement evidencing such
Substituted Option. To the extent that an Optionee was not entitled to exercise
the Option (including a Substituted Option, as the case may be) at the date of
such termination, or if an Optionee does not exercise such Option to the extent
so entitled within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee as a result of his total and permanent disability (as
defined in Section 22(e) (3) of the Code), the Optionee may, but only within
twelve (12) months from the date of such termination (but in no event later than
the expiration date of the term of such Option as set forth in the applicable
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that an Optionee was
not entitled to exercise the Option at the date of
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termination, or if an Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent that the Optionee was entitled to exercise
the Option at the date of death. To the extent that an Optionee was not
entitled to exercise the Option at the date of death, or if an Optionee's estate
or a person who acquired the right to exercise the Option by bequest or
inheritance does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the stockholders of Parent, the number of shares of Common
Stock covered by each outstanding Option, and the price per share of Common
Stock covered by each such outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by Parent; provided, however, that conversion of any convertible
securities of Parent shall not be deemed to have been "effected without receipt
of consideration." Such adjustment shall be made by the Administrator, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by Parent of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option. In the event of
the proposed dissolution or liquidation of Parent, the Administrator shall
notify the Optionee at least thirty (30) days prior to such proposed action. To
the extent it has not theretofore expired or been exercised, the Option will
terminate immediately prior to the consummation of such proposed action. In the
event of a merger of Parent with or into another corporation, the Option shall
be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. In the
event that such successor corporation does not agree to assume the Option or to
substitute an equivalent option, the Administrator shall, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. If the Administrator makes
6
<PAGE>
an Option fully exercisable in lieu of assumption or substitution in the event
of a merger, the Administrator shall notify the Optionee that the Option shall
be fully exercisable for a period of thirty (30) days from the date of such
notice, and the Option will terminate upon the expiration of such period.
12. [INTENTIONALLY OMITTED.]
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Administrator may at any time
amend, suspend or terminate the Plan, but no amendment, suspension or
termination shall be made which would impair the rights of any Optionee under
any grant theretofore made, without his or her consent. In addition, to the
extent necessary and desirable to comply with Section 422A of the Code (or any
other applicable law or regulation, including the requirements of the NASD or an
established stock exchange), Parent shall obtain stockholder approval of any
Plan amendment in such a manner and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Company, which agreement must be in writing and signed by the Optionee and the
Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for
Parent with respect to such compliance.
As a condition to the exercise of an Option, Parent may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for Parent, such a representation is required by any of the
aforementioned relevant provisions of law.
In addition, Parent may withhold, or cause to be withheld, from the
Optionee's salary, wages or other cash compensation any federal, state, local or
foreign taxes required to be withheld in connection with the exercise of an
Option, and to the extent that such amounts are insufficient for such
withholding, Parent may also require, as a condition to the exercise of the
Option, that the Optionee make such arrangements for the payment of the balance
of any such taxes as Parent in its discretion determines to be satisfactory,
including, if elected by the Optionee, the satisfaction of any tax withholding
obligation in Shares otherwise issuable to the Optionee.
7
<PAGE>
15. RESERVATION OF SHARES. Parent has reserved for issuance a sufficient
number of Shares to permit the exercise in full of all Options. The inability
of Parent to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by Parent's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve Parent of any liability
in respect of the failure to issue or sell such Shares as to which such
requisite authority shall not have been obtained.
16. OPTION AGREEMENTS. Options shall be evidenced by Option Agreements in
such form as the Administrator shall approve from time to time.
17. [INTENTIONALLY OMITTED.]
18. INFORMATION TO OPTIONEES. Parent shall provide to each Optionee upon
request therefor, during the period for which such Optionee has one or more
Options outstanding, copies of all annual reports and other information which
are provided to all stockholders of Parent.
8
<PAGE>
EXHIBIT 10.3
RULES OF
THE EXECUTIVE SHARE OPTION SCHEME
OF
SYNON CORPORATION
Amended pursuant to Rule 9(A)
30 July 1998
<PAGE>
SYNON CORPORATION
1. Definitions
In these Rules, unless the context otherwise requires, the following words
and expressions shall have the following meanings:-
(a) "Act": the Income and Corporation Taxes Act 1988.
(b) "Auditors": the Auditors of the Corporation for the time being and from
time to time.
(c) "Corporation": SYNON CORPORATION (otherwise than as provided in Rule 6(J).
(d) "Date of Commencement": the date on which the scheme is approved by the
Corporation in general meeting.
(e) "Directors": the Board of Directors of the Corporation for the time being
and from time to time or a duly authorised committee thereof.
(f) "Executive": a full-time director of any member of the Group who is
required under the terms of his contract of employment to work for such member
or members of the Group for the whole or substantially the whole of his working
time and in any event for at least 25 hours per week in aggregate (excluding
meal breaks) or an employee of any member of the Group (other than an employee
who is a director of any member of the Group) who is required under the terms of
his contract of employment to work for a member or members of the Group for the
whole or substantially the whole of his working time and in any event for at
least 20 hours per week in aggregate (excluding meal breaks). Provided that such
director or employee is not at the date of offer of an Option within two years
of his normal retirement date or of such other date of retirement as may have
been already determined and excluding any director or employee who is precluded
from participation by paragraph 8 of Schedule 9 to the Act or who owns Ordinary
Shares comprising more than ten per cent of the total combined voting power of
all classes of stock of the Corporation or any corporation in the Group.
(g) "Group": the Corporation and any corporation or corporations for the time
being under the control of the Corporation ("control" having the meaning given
to the expression in Section 840 of the Act).
(h) "Option": a right to subscribe for or acquire Ordinary Shares pursuant to
the Scheme.
(i) "Option Holder": an Executive to whom an Option has been granted in
accordance with the Scheme and in whom rights under the Scheme are still vested
or (where the context so requires) the legal personal representatives of such a
person.
(j) "Option Price": the price at which an Option Holder may subscribe for or
acquire an Ordinary Share as determined pursuant to Clause 4 hereof.
<PAGE>
(k) "Ordinary Shares": shares of common stock of $0.001 par value in the
capital of the Corporation which satisfy the conditions of paragraphs 10 to 14
of Schedule 9 to the Act. "Ordinary Shareholder" shall be construed accordingly.
(l) "Relevant Emoluments": such of the Executive's emoluments in respect of his
office or employment with the Group as are liable to be paid under deduction of
tax pursuant to Section 203 of the Act after deducting from them amounts
included by virtue of Chapter II Part V of the Act.
(m) "Relevant Limit": the Relevant Emoluments for the current or preceding Year
of Assessment (whichever shall be the greater) or where there were no Relevant
Emoluments for the preceding Year of Assessment the amount of the Relevant
Emoluments for the period of twelve months beginning with the first day during
the current Year of Assessment in respect of which there are Relevant
Emoluments.
(n) "Redundancy": dismissal or redundancy within the meaning of the Employment
Protection (Consolidation) Act 1978.
(o) "Rules": the rules for the administration of the Scheme contained herein or
which are laid down by the Directors and which may be amended by them in
accordance with the provisions of Clause 9 hereof.
(p) "Scheme": the Executive Share Option Scheme set out herein.
(q) "Year of Assessment": the meaning ascribed to it by Section 832 of the Act.
(r) "Subsisting Option": an Option that has not lapsed, been renounced or
exercised.
Any reference to a statutory provision shall be deemed to include that
provision as the same may from time to time be amended or re-enacted, any
reference to a Corporation share option scheme includes that scheme as the same
may be varied from time to time in accordance with its terms, and wherever the
context so admits or requires the singular shall include the plural and vice
versa and the masculine shall include the feminine.
2. Commencement
The Scheme shall commence on the Date of Commencement.
3. Offer and Grant of Options
(A) The Directors may, subject to the Rules, in their absolute discretion
offer Options to Executives.
(B) Options may be granted hereunder at any time following the date that
the Board of Inland Revenue approve the Scheme.
3
<PAGE>
(C) Subject to the limitations hereinafter set out, Options may be granted
to such Executives in such amounts as the Directors shall in their
absolute discretion from time to time determine. No person shall be
entitled as of right to participate in the Scheme.
(D) If the Directors determine to offer participation in the Scheme to an
Executive they shall give him notice in writing of such offer
specifying the number of Ordinary Shares over which he may take up an
Option and the Option price thereof. Any such offer shall be personal
to the Executive to whom it is made and shall remain open for
acceptance for a period of 25 days from the date it is made. An offer
not accepted within such 25 day period shall be deemed to have been
declined and shall thereupon lapse. If accepted within the due period
the Option shall be granted on the last day of such period.
(E) Acceptance of an offer of an Option by an Executive shall be in such
manner as the Directors may require and upon and by such acceptance
the Executive shall be bound by the Rules. An offer may be accepted
in part. The consideration payable by an Executive for the grant of
an Option to him shall be the sum of $1 payable upon acceptance
(regardless of the number of Ordinary Shares subject thereto) unless
the option is granted under seal or as a Deed.
(F) An Option shall be personal to the Option Holder and accordingly, save
in the specific situations described in the Rules where the Option may
be exercised by personal representatives, shall not be capable of
being transferred, assigned, charged or otherwise encumbered by the
Option Holder. Any breach of this provision shall entitle the
Directors to cancel the Option.
4. The Option Price
The Option Price shall be determined by the Directors but shall in no event
be less than the greater of:-
(a) the nominal value of an Ordinary Share; or
(b) a price equal to the market value (as the same is defined in Section 187 of
the Act) of an Ordinary Share on the day prior to the day on which the
offer is made as determined by agreement between the Corporation and the
Shares Valuation Division of the Board of Inland Revenue on or before that
day PROVIDED THAT if the Ordinary Shares have been admitted to the Official
List of the Stock Exchange the price falling to be determined within this
paragraph (b) shall be a price equal to the average of the middle market
quotations for an Ordinary Share on The Stock Exchange on the three dealing
days immediately prior to the day on which the offer is made as derived
from The Stock Exchange Daily Official List and if the Ordinary Shares have
been admitted to the New York Stock Exchange the price falling to be
determined within this paragraph (b) shall be the closing sales price of
such Ordinary Share (or the closing bid, if no sales were reported, as
quoted on such exchange) as reported
4
<PAGE>
in the Wall Street Journal on the day prior to the date such Option is
granted. The Option price shall be subject to variation pursuant to Rule 8.
5. Limitations of the Scheme
(A) No Executive shall obtain rights under the Scheme which will, at the
time they are obtained, cause the aggregate market value of the
Ordinary Shares which he may acquire in pursuance of rights obtained
under the Scheme or under any other share option or share incentive
scheme approved under Schedule 9 to the Act (as amended from time to
time), and any other executive share option scheme established for any
directors or employees of members of the Group or any associated
corporation of the Corporation (as the same is defined in Section 416
of the Act) and whether exercised or not, to exceed four times the
Executive's Relevant Limit or Pound 100,000 which ever is the greater.
Provided that no account shall be taken of subscription or acquisition
moneys for shares comprised in such options granted more than ten
years prior to the date of the proposed grant of such Option, whether
exercised or not.
(B) Subject to paragraph 5(C) below the total number of Ordinary Shares
over which Options may be granted at any date under the Scheme shall
not exceed five million (except to the extent that such options have
lapsed (or been renounced).
(C) The total number of Ordinary Shares over which Options may be granted
under the Scheme at any date, when aggregated with the total number of
Ordinary Shares in respect of which rights of subscription have been
granted in the previous ten years under the Scheme and any other share
option or share incentive scheme established for any directors or
employees of members of the Group (except to the extent to which they
have lapsed or been renounced or released), shall not exceed twenty
per cent of the aggregate of the issued Ordinary Shares and "A"
Preferred Stock and Ordinary Shares already put under option (and
which have not lapsed or been renounced or been exercised) from time
to time.
(D) No Option may be granted under the Scheme more than ten years after
the Date of Commencement.
6. Exercise, Lapse and Renunciation of Options
(A) Subject to the following provisions of Rule 6(A) a subsisting Option
may only be exercised in whole or in part by an Option Holder during
the seven years following the expiration of a period of three years
from the grant thereof. Notwithstanding the foregoing but subject to
Rule 6(B) below a subsisting Option may nevertheless be exercised
within such three year period if:-
(i) The Option Holder ceases to be in the full time employment of a
member of the Group by reason of his injury, disability,
retirement, dismissal by reason of redundancy or because the
corporation employing him ceases to be a member of the Group
(unless the Option Holder is immediately employed by
5
<PAGE>
another member of the Group), in any of which events the Option
Holder shall have the right to exercise the Option during the
period of three months from the date of such cessation; or
(ii) the Option Holder dies whilst in the full time employment of a
member of the Group in which event his legal personal
representatives shall have the right to exercise the Option
during the period of six months from the date of his death; or
(iii) the Option Holder dies within three months of ceasing to be in
the full time employment of a member of the Group for one of the
reasons described in (A)(i) above, in which event his legal
personal representatives shall have the right to exercise the
Option during the period of six months from the date of such
cessation; or
(iv) a general offer is made to all the holders of Ordinary Shares
(or all such holders other than the offeror and/or any person
controlled by the offerer and/or any person acting in
association or concert with the offeror) and such offer becomes
or is declared unconditional in which event the Option Holder
may at any time within three months after the date on which such
offer is made exercise without restriction all or any part of
his Option; or
(v) notice of a meeting to consider a resolution for the voluntary
winding up of the Corporation is given, in which event the
Option Holder shall have the right to exercise the Option at any
time before the resolution is duly passed or defeated or the
meeting concluded or adjourned sine die.
(B) Notwithstanding the terms of Rule 6(A) above an Option shall lapse
automatically insofar as it is capable of exercise if it has not been
exercised by the earlier of:-
(i) the expiration of ten years from the date of grant thereof;
(ii) the expiration of three months from the date on which an Option
Holder ceases to be in the full-time employment of a member of
the Group for the reasons described in (A)(i) or above;
(iii) the expiration of six months from the date of the death of the
Option Holder whilst in the full-time employment of a member of
the Group;
(iv) where the Option Holder dies within three months of ceasing to
be in the full-time employment of a member of the Group for the
reasons described in 6(A)(i) above, the expiration of six months
from the date of such cessation;
(v) the date on which an Option Holder is dismissed or leaves the
employment of a member of the Group for any reason other than
for those reasons or in the circumstances described in 6(A)(i)
or 6(A)(ii) above;
6
<PAGE>
(vi) providing that a subsisting Option is not released for a new
Option pursuant to Rule 6(F), three months after the date of
any offer in writing given to the holders of Ordinary Shares
pursuant to Rule 6A(iv);
(vii) the date of commencement of a winding up of the Corporation;
(viii) the date the Option Holder is adjudicated bankrupt;
(ix) upon cancellation of the Option by the Directors pursuant to
Clause 3(F) hereof.
(C) It shall be a condition of the Scheme that in the event of the
termination of an Option Holder's full time employment with a member
of the Group (for whatever reason) he shall not be entitled to any
compensation whatsoever by reason of any alteration or determination
thereon of his rights or expectations under the Scheme.
(D) An Option Holder may at any time renounce his Option by serving notice
in writing on the Corporation of his intention to so renounce. The
renunciation shall be effective from the date of receipt of such
notice of the Corporation, upon which date the Option Holder's Option
shall be deemed to have lapsed.
(E) No Option may be exercised by an Option Holder at any time when he is
precluded by paragraph 8 of Schedule 9 to the Act from participating
in the Scheme.
(F) If any corporation (in this Rule 6(F) referred to as the acquiring
corporation) makes an offer to all the holders of ordinary shares as
referred to in Rule 6(A)(iv) the Directors shall before such offer
becomes or is declared unconditional seek the agreement of the
acquiring corporation for Option Holders to release subsisting Options
to the acquiring Corporation in consideration of the acquiring
Corporation granting new Options which relate to shares in the
acquiring Corporation or any other corporation falling within
Paragraph 10 of Schedule 9 to the act. If such agreement is obtained
every Option Holder shall, after such time as the offer becomes or is
declared unconditional and the acquiring corporation has obtained
control of the Corporation, be entitled to release every subsisting
Option held by him in consideration of the grant of new Option which
satisfies the following conditions and providing that such transfer is
within the appropriate period as set out in Rule 6(G):-
(i) is over shares in the acquiring corporation or a corporation
controlling the acquiring corporation which satisfy the
conditions specified in paragraphs 10 to 14 inclusive of
Schedule 9 to the Act (and the term "Ordinary Shares" in these
Rules shall thereafter be construed accordingly)
(ii) is a right to acquire such number of such common stock as has
on acquisition of the new Option an aggregate market value
equal to the aggregate market value of the Ordinary Shares
subject to the old Option on its disposal
7
<PAGE>
(iii) has an Option Price per Ordinary share such that the aggregate
price payable on complete exercise of the Option equals the
aggregate price that would have been payable on complete
exercise of the old Option; and
(iv) is otherwise identical in terms to the old Option.
The new Option shall, for all other purposes of these Rules, be treated as
having been acquired at the same time as the old Option for which it is
released.
(G) The "appropriate period" referred to in Rule 6(F) above means the
period of three months beginning when the offeror has obtained control
of the Corporation and any conditions subject to which the offer is
made are satisfied.
(H) Rules 6(F) and 6(G) above apply to all Options granted on or after the
Date of Commencement.
(I) The exercise of an Option pursuant to the preceding provisions of this
Rule 6 shall be subject to the provisions of Rule 7 below.
(J) Following the release of subsisting Options and the grant of new
Options the term:
i. "Corporation" shall for the purposes only of Rules 6(A), 6(B)
(ii), (iii), (iv), (v), (vii), 6(C), 6(D), 6(F), 6(G), 7, 8, 9
(except 9(D)), 10, 11, and 13 mean in relation to the new
Options, the corporation the share capital of which includes
shares over which new Options have been granted and for the
purposes of Rule 9(D) shall mean Synon Corporation and the
acquiring corporation (as defined in 6(F)) and the term "Group"
and "Executive" shall for the purposes of such Rules be construed
accordingly;
ii. "Directors" in Rules 6, 7, 8, 9, 10 and 11 shall mean in
relation to the new options the directors of the acquiring
corporation (as defined in 6(F).
(K) Where in accordance with Rule 6(F) subsisting Options are released and
new Options granted the new Options shall not be exercisable in
accordance with Rule 6(A) (iv) by virtue of the event on which new
Options were granted.
7. Manner of Exercise of Options
(A) An Option may be exercised in whole or part by the Option Holder
giving notice in writing to the Corporation stating that the Option is
thereby exercised and the number of Ordinary Shares in respect of
which it is exercised. With such notice the Option Holder shall
forward to the Corporation in a form acceptable to the Directors the
consideration for the Ordinary Shares in respect of which the Option
is exercised calculated by reference to the Option Price. An Option
(or part thereof) shall be deemed to have been exercised when the said
notice together with the said
8
<PAGE>
consideration is received by the Corporation. If the consideration is
paid other than in cash, such consideration shall be deemed to have
been received by the Corporation upon the bank of the Corporation
confirming that such cash consideration has been credited to the bank
account of the Corporation or to such other account as the Corporation
shall direct. As soon as practicable and in any event within 30 days
of receipt of the said notice and consideration the Corporation will
send or cause to be sent to the Option Holder or his legal personal
representatives (as the case may be) a definitive share certificate
for the Ordinary Shares in respect of which the Option is exercised.
(B) any Ordinary Shares allotted on the exercise of an Option shall rank
pari passu in all respects with the Ordinary Shares in issue at the
date of exercise of such Option and shall participate in all dividends
or other distributions which may be declared, made or paid by
reference to a record date after such date.
(C) Any partial exercise of an Option (other than such partial exercise as
completes the exercise of the said Option) shall be in respect of ten
Ordinary Shares or an integral multiple thereof.
8. Issue or Reorganisation
In the event of any capitalisation issue or rights issue or any subdivision
or consolidation of the Ordinary Shares or any reduction of the Ordinary Share
capital of the Corporation then the number of Ordinary Shares comprised in any
Option, the number of Ordinary Shares which may be issued or made available
pursuant to rights granted under the Scheme and the Option Price thereof may be
adjusted by the Directors (subject to obtaining prior Board of Inland Revenue
approval to such adjustment) in such manner and with effect from such date as
they may in their absolute discretion determine to be appropriate. Provided that
the auditors shall have confirmed in writing that in their opinion such
adjustments are fair and reasonable. Any such adjustments shall be made on the
basis that the total moneys originally payable by an Option Holder on full
exercise of his option rights shall remain unchanged.
9. Administration and Amendment
(A) The Scheme shall in all respects be administered by the Directors who
may at any time and from time to time be resolution (and without other
formality) amend or augment the Scheme in any respect Provided that:-
(i) no amendment shall operate to affect adversely any rights already
acquired by an Option Holder under the Scheme;
(ii) no amendment may be made except by the Corporation in general
meeting to nullify or override any of the provisions of Clauses
1(f), 1(k), 1(l), 1(m), 3(A), 3(B), 3(D), 3(E), 3(F), 4, 5, 6,
7(B), 8 and this Clause.
9
<PAGE>
Notwithstanding anything to the contrary contained herein the
Directors may at any time amend the Scheme in any way to the
extent necessary either to secure the approval of the Scheme by
the Board of Inland Revenue or to ensure that such approval is
not withdrawn pursuant to any statutory modifications to the Act.
(B) No amendment or alteration to the Scheme made after it has been
approved under the provisions of Schedule 9 to the Act shall have
effect unless such amendment or alteration has been approved by the
Board of Inland Revenue.
(C) The Corporation shall bear the costs of setting up and administering
the Scheme.
(D) The Corporation shall maintain all necessary books of account and
records relating to the Scheme.
(E) The Directors shall be entitled to authorise any person to execute on
behalf of an Option Holder, at the request of the Option Holder, any
document relating to the Scheme insofar as such document is required
to be executed pursuant hereto.
10. Availability of Shares
Subject to the provisions of this Clause the Corporation shall have
available at all times sufficient authorised but unissued Ordinary Shares
necessary to satisfy Options which have been granted but not exercised.
On the exercise of an Option the Directors may satisfy the requirement for
Ordinary Shares by allotment of Ordinary Shares, by purchasing Ordinary Shares
or by such other means as they may determine.
11. Admission to the Official List
If at any time prior to exercise of a Subsisting Option the Ordinary Share
capital of the Corporation shall be admitted to the Official List of The Stock
Exchange or if such shares shall be listed for trading on the New York Stock
Exchange the Corporation shall within one month after the date of exercise of an
Option apply to the Council of either above referenced Stock Exchanges for
permission for the Ordinary Shares the subject of such exercise to be admitted
to the Official List or to the New York market as the case may be.
12. Termination
The Directors may at any time resolve not to grant further Options under
the Scheme but the subsisting right of Option Holders under the Scheme shall
remain in force.
13. Notices
10
<PAGE>
(A) Option Holders shall be entitled while they have subsisting rights
under the Scheme to receive copies of all notices and other documents
sent by the Corporation to its Ordinary Shareholders.
(B) Any notice or other communication between the Corporation and an
Option Holder shall be given by sending the same by post or by
personal delivery to, in the case of the Corporation, its principal
place of business in the United Kingdom and in the case of the Option
Holder, his address as notified to the Corporation from time to time.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE STERLING SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> APR-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 441,619 441,619
<SECURITIES> 252,441 252,441
<RECEIVABLES> 154,522 154,522
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 877,160 877,160
<PP&E> 58,434 58,434
<DEPRECIATION> 45,278 45,278
<TOTAL-ASSETS> 1,110,201 1,110,201
<CURRENT-LIABILITIES> 213,763 213,763
<BONDS> 0 0
0 0
0 0
<COMMON> 8,093 8,093
<OTHER-SE> 825,104 825,104
<TOTAL-LIABILITY-AND-EQUITY> 1,110,201 1,110,201
<SALES> 161,545 469,771
<TOTAL-REVENUES> 161,545 469,771
<CGS> 61,822 182,795
<TOTAL-COSTS> 124,550 379,336
<OTHER-EXPENSES> 507 811
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 78 139
<INCOME-PRETAX> 45,062 114,748
<INCOME-TAX> 15,320 39,014
<INCOME-CONTINUING> 29,742 75,734
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 29,742 75,734
<EPS-PRIMARY> .38 .98
<EPS-DILUTED> .36 .92
</TABLE>
