<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 December 31, 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 February 5, 1999
- ----------------------------- -----------------------------------------
Common Stock, $0.10 par value 83,170,618
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements......................................................... 3
Sterling Software, Inc. Consolidated Balance Sheets at December 31, 1998 and
September 30, 1998.................................................................. 3
Sterling Software, Inc. Consolidated Statements of Operations for the Three
Months Ended December 31, 1998 and 1997............................................. 4
Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for the Three
Months Ended December 31, 1998...................................................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 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........................................................ 15
</TABLE>
PART II- OTHER INFORMATION
<TABLE>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K............................................. 22
</TABLE>
-2-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
A S S E T S
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 398,639 $ 397,312
Marketable securities....................................................... 296,093 310,537
Accounts and notes receivable, net.......................................... 201,096 200,428
Prepaid expenses and other current assets................................... 33,901 32,253
----------- -----------
Total current assets...................................................... 929,729 940,530
Property and equipment, net of accumulated depreciation of $53,014 at
December 31, 1998 and $49,832 at September 30, 1998......................... 69,915 66,726
Computer software, net of accumulated amortization of $109,815 at
December 31, 1998 and $112,734 at September 30, 1998........................ 87,961 81,606
Excess cost over net assets of businesses acquired, net of accumulated
amortization of $29,714 at December 31, 1998 and $27,316 at September 30,
1998........................................................................ 92,567 76,086
Noncurrent deferred income taxes............................................. 3,524 4,378
Other assets................................................................. 31,068 28,273
---------- ----------
$1,214,764 $1,197,599
========== ==========
</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>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 174,378 $ 164,349
Deferred revenue............................................................ 93,421 102,880
---------- ----------
Total current liabilities................................................. 267,799 267,229
Noncurrent deferred revenue.................................................. 31,434 27,649
Other noncurrent liabilities................................................. 46,606 41,163
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 shares authorized; 85,387,000 and
84,845,000 shares issued at December 31, 1998 and
September 30, 1998, respectively........................................... 8,539 8,485
Additional paid-in capital.................................................. 866,126 858,615
Retained earnings........................................................... 49,750 50,462
Less treasury stock, at cost; 2,576,000 and 2,599,000 shares at
December 31, 1998 and September 30, 1998, respectively..................... (55,490) (56,004)
---------- ----------
Total stockholders' equity................................................ 868,925 861,558
---------- --------
$1,214,764 $1,197,599
========== ==========
</TABLE>
See accompanying notes.
-3-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Products.................................................................... $ 64,313 $ 64,979
Product support............................................................. 51,541 45,910
Services.................................................................... 58,605 57,990
-------- --------
174,459 168,879
Costs and expenses:
Cost of sales:
Products and product support............................................... 17,948 18,072
Services................................................................... 53,160 51,108
-------- --------
71,108 69,180
Product development and enhancement......................................... 9,355 10,608
Selling, general and administrative......................................... 61,609 69,004
Reorganization costs........................................................ 19,655
Purchased research and development.......................................... 9,623
-------- --------
171,350 148,792
-------- --------
Income before other income (expense) and income taxes........................ 3,109 20,087
Other income (expense):
Interest expense............................................................ (130) (78)
Investment income........................................................... 8,762 8,247
Other....................................................................... 172 (96)
-------- --------
8,804 8,073
-------- --------
Income before income taxes................................................... 11,913 28,160
Provision for income taxes................................................... 7,707 10,838
-------- --------
Net income................................................................... $ 4,206 $ 17,322
======== ========
Income per common share:
Net income:
Basic...................................................................... $.05 $.22
======== ========
Diluted.................................................................... $.05 $.21
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended December 31, 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, 1998.. 84,845 $8,485 $858,615 $50,462 2,599 $(56,004) $861,558
Net income.................... 4,206 4,206
Issuance of common stock
pursuant to stock options.... 542 54 7,535 7,589
Issuance of common stock to
401(k) plan.................. (24) (23) 514 490
Other......................... (4,918) (4,918)
------ ------ -------- ------- ----- -------- --------
Balance at December 31, 1998... 85,387 $8,539 $866,126 $49,750 2,576 $(55,490) $868,925
====== ====== ======== ======= ===== ======== ========
</TABLE>
See accompanying notes.
-5-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income.................................................................. $ 4,206 $ 17,322
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 11,837 10,962
(Benefit) provision for losses on accounts receivable..................... (1,428) 2,331
(Benefit) provision for deferred income taxes............................. (746) 8,782
Reorganization costs...................................................... 8,007
Purchased research and development........................................ 9,623
Changes in operating assets and liabilities, net of effects of business
acquisitions:
Decrease in accounts and notes receivable.............................. 7,204 8,499
(Increase) decrease in prepaid expenses and other assets............... (1,844) 3,474
Decrease in accounts payable and accrued liabilities................... (30,217) (36,495)
Decrease in deferred revenue........................................... (9,459) (6,721)
Other.................................................................. 8,523 3,312
-------- --------
Net cash provided by operating activities............................. 5,706 11,466
Investing activities:
Purchases of property and equipment......................................... (8,403) (5,401)
Purchases and capitalized cost of development of computer software.......... (7,402) (6,031)
Business acquisitions, net of cash acquired................................. (7,891) (3,626)
Purchases of investments.................................................... (86,170) (36,571)
Proceeds from sales of investments.......................................... 98,647 36,070
Other....................................................................... 586 718
-------- --------
Net cash used in investing activities................................. (10,633) (14,841)
Financing activities:
Proceeds from issuance of common stock pursuant to exercise of
stock options.............................................................. 7,589 1,247
Other....................................................................... (1,734) (2,960)
-------- --------
Net cash provided by (used in) financing activities................... 5,855 (1,713)
Effect of foreign currency exchange rate changes on cash..................... 399 (1,594)
-------- --------
Increase (decrease) in cash and cash equivalents............................. 1,327 (6,682)
Cash and cash equivalents at beginning of period............................. 397,312 436,955
-------- --------
Cash and cash equivalents at end of period................................... $398,639 $430,273
======== ========
Supplemental cash flow information:
Income taxes paid, net of refunds received.................................. $ 5,424 $ 627
======== ========
</TABLE>
See accompanying notes.
-6-
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 worldwide developer and supplier of application development,
information management and systems management software products and services, as
well as a supplier of specialized information technology ("IT") services for
sectors of the federal government.
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 December 31, 1998 and September
30, 1998 and the results of operations for the three months ended December 31,
1998 and 1997. While management has based its estimates and assumptions on the
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 software products is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable. Services revenue and
revenue from products involving installation or other services are recognized as
the services are performed.
If software product transactions include multiple elements, each element of
the software sale is separately identified and accounted for based on the
relative fair value of such element. Revenue is not recognized on any element
of the sale arrangement if undelivered elements are essential to the
functionality of the delivered elements.
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.
-7-
<PAGE>
When products, product support and services are billed prior to the
time the related revenue is recognized, deferred revenue is recorded and any
material related costs paid in advance are deferred.
Revenue from specialized IT services provided to the federal government
under multi-year contracts is recognized as the services are performed. Revenue
for services provided 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 and Equivalents
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.
Marketable Securities and Other Investments
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. Unrealized holding gains and losses on
securities available-for-sale are recorded as a component of stockholders'
equity, net of any related tax effect. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in values judged to be other-than-
temporary, if any, on available-for-sale securities are included in investment
income.
Common Stock and Earnings Per Common Share
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 of one share of the
Company's common stock, par value $0.10 per share ("Common Stock"), for each
share of Common Stock outstanding (the "Stock Split Dividend"). The Stock Split
Dividend was paid on April 3, 1998 to holders of record on March 20, 1998.
Common share and per share amounts for all periods have been restated to reflect
the Stock Split Dividend.
-8-
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended
December 31
------------------
1998 1997
-------- --------
Basic:
Net income.............................................. $ 4,206 $17,322
======= =======
Weighted average common shares outstanding.............. 82,536 79,785
======= =======
Net income per common share............................. $ .05 $ .22
======= =======
Diluted:
Net income.............................................. $ 4,206 $17,322
======= =======
Weighted average common shares outstanding.............. 82,536 79,785
Effect of dilutive employee stock options............... 5,190 2,948
------- -------
Adjusted weighted average common shares and assumed
conversions............................................ 87,726 82,733
======= =======
Net income per common share............................. $ .05 $ .21
======= =======
Recent Developments
Effective October 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-4 "Deferral of the Effective Date of Certain Provisions of SOP 97-2." SOP
97-2 requires each element of a software sale arrangement to be separately
identified and accounted for based on the relative fair value of such element.
Revenue cannot be recognized on any element of the sale arrangement if
undelivered elements are essential to the functionality of the delivered
elements. Adoption of SOP 97-2, as amended, did not significantly affect the
Company's results of operations for the three months ended December 31, 1998,
nor is it expected to have a significant impact on results for the remainder of
the year since the Company's revenue recognition policies have historically been
substantially in compliance with the practices required by SOP 97-2.
In December 1998, the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants (AICPA) released
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence ("VSOE") of the fair values of all of the undelivered
elements that are not accounted for by means of long-term contract accounting,
(2) VSOE of fair value does not exist for one or more of the delivered elements,
and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement
for VSOE of the fair value of each delivered element) are satisfied.
-9-
<PAGE>
The provisions of SOP 98-9 that extend the deferral of certain passages of
SOP 97-2 became effective December 15, 1998. All other provisions of SOP 98-9
will be effective for the Company's fiscal year beginning October 1, 1999.
Retroactive application is prohibited. The Company is evaluating the
requirements of SOP 98-9 and the effects, if any, on the Company's current
revenue recognition policies.
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards 130, "Reporting Comprehensive Income" ("FAS 130"). FAS
130 requires the presentation of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company's comprehensive
income consists of net income, foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities; however, the
adoption of FAS 130 had no impact on the Company's net income. Information
concerning the Company's comprehensive income for the three months ended
December 31, 1998 and 1997, respectively, is set forth below (in thousands):
Three Months Ended
December 31
-------------------
1998 1997
------ ------
Net income.......................................... $ 4,206 $17,322
Foreign currency translation adjustments............ (3,271) (3,776)
Unrealized gains (losses) on available-for-sale
securities, net of taxes.......................... (1,647) 478
------- -------
Comprehensive income (loss)......................... $ (712) $14,024
======= =======
2. Unaudited Interim Financial Statements
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments which are
of a normal recurring nature and are necessary for a fair presentation of the
financial position and results of operations for the periods presented. Certain
amounts for periods ended prior to December 31, 1998 have been reclassified to
conform to the current period presentation. 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,
1998.
-10-
<PAGE>
3. Business Acquisitions and Reorganizations
Acquisition of Cayenne Software, Inc.
On October 26, 1998, Sterling Software acquired Cayenne Software, Inc.
("Cayenne"), a global supplier of analysis and design solutions for application
and database development, in an $11,400,000 cash-for-stock merger transaction
(the "Cayenne Acquisition"). The total cost of the Cayenne Acquisition was
approximately $33,184,000, including costs directly related to the acquisition
of approximately $21,784,000, consisting of employee termination costs,
transaction costs, costs associated with the elimination of duplicate facilities
and other direct costs. The Cayenne Acquisition was accounted for in accordance
with the purchase method of accounting and, accordingly, the results of
operations of Cayenne were included in the Company's results of operations from
the date of the acquisition as part of the Company's application management
business segment. Results of operations for the first quarter of 1999 include
$9,623,000 of purchased research and development costs, which is the portion of
the purchase price attributed to in-process research and development, and which
was charged to expense in accordance with the purchase method of accounting.
The components of the aggregate cost of the Cayenne Acquisition were as follows
(in thousands):
Cash merger consideration....................................... $11,400
Cayenne employee severance and benefits......................... 11,912
Elimination of duplicate facilities and leases of Cayenne....... 5,510
Transaction costs............................................... 2,773
Other costs..................................................... 1,589
-------
$33,184
=======
The aggregate cost of the Cayenne Acquisition was allocated to the assets
and liabilities acquired, with the remainder recorded as excess cost over net
assets acquired, based on estimates of fair values (in thousands):
Working capital (deficit)...................................... $(3,921)
Property and equipment......................................... 383
Developed software and core technology......................... 11,434
Purchased research and development costs
charged to expense........................................... 9,623
Other assets and liabilities (net)............................. (89)
Excess cost over net assets acquired........................... 15,754
-------
$33,184
=======
The estimates of fair value were determined by the Company's management
based on information furnished by management of Cayenne and a preliminary
independent valuation of developed software, core technology and purchased
research and development. Amounts allocated to purchased research and
development were expensed at the time of the Cayenne Acquisition as the Company
determined that the purchased research and development had not reached
technological feasibility based on the status of design and development
activities that required further refinement and testing.
-11-
<PAGE>
The Company is using the purchased research and development to create new
products that are expected to become part of the products offered by the
applications management business segment. The Company expects that products
developed from the purchased research and development will generally be released
during 1999. The development activities required to complete the purchased
research and development technologies include additional coding, cross-platform
porting and validation, quality assurance procedures and beta testing. It is
management's expectation that the purchased research and development will be
successfully developed however, there can be no assurance that commercial
viability or timely release of these products will be achieved.
The value of the purchased research and development was determined by
discounting the estimated projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon release of the products. The projected net cash flows
from such products were based on estimates of revenues and operating profits
related to such products.
Acquisition of Synon Corporation
On July 31, 1998, Sterling Software acquired Synon Corporation ("Synon"), a
provider of application development software and services, in a stock-for-stock
merger transaction (the "Synon Merger") accounted for as a pooling of interests.
As a result of the transaction, Sterling Software issued approximately 2,603,000
shares of Common Stock in exchange for the previously outstanding shares of
Synon capital stock and reserved approximately 375,000 shares of Common Stock
for issuance upon exercise of assumed Synon stock options. The Company's
financial statements for periods prior to the Synon Merger, including the
results of the application management business segment, have been restated to
represent the combined financial statements of the previously separate entities.
Reorganization Costs
The Company's results of operations for the first quarter of 1999 include
reorganization costs of $19,655,000 related to the reorganization of the
Company's operations in connection with the Cayenne Acquisition. Of the total
reorganization costs, approximately $8,007,000 consisted of non-cash costs and
the remaining $11,648,000 required cash outlays, of which $3,388,000 had been
paid through December 31, 1998. The Company does not expect to incur costs
related to this reorganization in excess of the amounts charged to operations in
the first quarter of 1999. The components of the reorganization costs
associated with the Cayenne Acquisition were as follows (in thousands):
Employee termination costs............................... $ 6,952
Write-down of software products which will
not be actively marketed.............................. 6,857
Elimination of duplicate facilities, equipment
and other assets...................................... 2,597
Out of pocket costs related to the reorganization........ 3,249
-------
$19,655
=======
-12-
<PAGE>
The Company's results of operations for 1998 include reorganization costs
of $45,162,000 primarily related to the reorganization of the Company's
operations in the fourth quarter of 1998 in connection with the Synon
Merger. Of the total reorganization costs, approximately $9,552,000 consisted
of non-cash costs and the remaining $35,610,000 required cash outlays. At
December 31, 1998, the remaining balance to be paid was $12,662,000, which
consists primarily of employee termination costs and commitments under lease
arrangements for office space and equipment. The Company does not expect to
incur costs related to this reorganization in excess of the amounts charged to
operations in the fourth quarter of 1998.
In 1997, the Company's results of operations included reorganization costs
of $106,037,000 primarily related to the acquisition of substantially all of the
assets of the Software Division of Texas Instruments Incorporated. At December
31, 1998, the balance of these costs remaining to be paid was $7,502,000, which
consists primarily of commitments under lease arrangements for office space and
equipment.
4. Legal Proceedings and Claims
The Company is subject to various legal proceedings and claims that arise
in the normal course of its business. While many of these matters involve
inherent uncertainty, the Company's management believes that the amount of the
liability, if any, ultimately incurred by Sterling Software with respect to any
such existing proceedings and claims, net of applicable reserves and available
insurance, will not materially affect the business, financial condition or
results of operations of the Company.
5. Segment Information
Sterling Software is a worldwide developer and supplier of application
development, information management and systems management software products and
services, as well as a supplier of specialized IT services for sectors of the
federal government. The Company addresses these major markets through three
business segments. The application management business segment provides
solutions for both enterprise-scale application development and information
management. Application development solutions include products and services for
business modeling through code generation. Information management solutions
include products and services that enable customers to facilitate enterprise
information access and to extend the life and usefulness of legacy applications.
The systems management business segment provides solutions that enable customers
to simplify the use of multiple computing environments and to increase the
productivity of information systems, ultimately ensuring that the systems meet
the business needs of the organization. The federal systems business segment
provides specialized IT services for sectors of the federal government, as well
as state and local governments.
-13-
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the three months ended December 31, 1998 and 1997, is summarized as
follows (in thousands):
Three Months
Ended December 31
-------------------
1998 1997
------ -----
Revenue:
Application Management....................... $ 87,598 $ 92,525
Systems Management........................... 48,241 42,061
Federal Systems.............................. 38,620 33,665
Corporate and other.......................... 628
-------- --------
Consolidated totals......................... $174,459 $168,879
======== ========
Operating Profit (Loss):
Application Management....................... $ 22,028 $ 11,809
Systems Management........................... 15,616 13,838
Federal Systems.............................. 2,810 2,239
Reorganization costs......................... (19,655)
Purchased research and development........... (9,623)
Corporate and other.......................... (8,067) (7,799)
-------- --------
Consolidated totals......................... $ 3,109 $ 20,087
======== ========
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Combinations and Reorganizations
Acquisition of Cayenne Software, Inc.
On October 26, 1998, Sterling Software acquired Cayenne Software, Inc.
("Cayenne"), a global supplier of analysis and design solutions for application
and database development, in an $11,400,000 cash-for-stock merger transaction
(the "Cayenne Acquisition"). The total cost of the Cayenne Acquisition was
approximately $33,184,000, including costs directly related to the acquisition
of approximately $21,784,000, consisting of employee termination costs,
transaction costs, costs associated with the elimination of duplicate facilities
and other direct costs. The Cayenne Acquisition was accounted for in accordance
with the purchase method of accounting and, accordingly, the results of
operations of Cayenne were included in the Company's results of operations from
the date of the acquisition as part of the Company's application management
business segment. Results of operations for the first quarter of 1999 include
$9,623,000 of purchased research and development costs, which is the portion of
the purchase price attributed to in-process research and development, and which
was charged to expense in accordance with the purchase method of accounting.
Acquisition of Synon Corporation
On July 31, 1998, Sterling Software acquired Synon Corporation ("Synon"), a
provider of application development software and services, in a stock-for-stock
merger transaction (the "Synon Merger") accounted for as a pooling of interests.
As a result of the transaction, Sterling Software issued approximately 2,603,000
shares of the Company's common stock, par value $0.10 per share ("Common Stock")
in exchange for the previously outstanding shares of Synon capital stock and
reserved approximately 375,000 shares of Common Stock for issuance upon exercise
of assumed Synon stock options. The Company's financial statements for periods
prior to the Synon Merger, including the results of the application management
business segment, have been restated to represent the combined financial
statements of the previously separate entities.
Reorganization Costs
The Company's results of operations for the first quarter of 1999 include
reorganization costs of $19,655,000 related to the reorganization of the
Company's operations in connection with the Cayenne Acquisition. Of the total
reorganization costs, approximately $8,007,000 consisted of non-cash costs and
the remaining $11,648,000 required cash outlays, of which $3,388,000 had been
paid through December 31, 1998. The Company does not expect to incur costs
related to this reorganization in excess of the amount charged to operations in
the first quarter of 1999.
-15-
<PAGE>
The Company's results of operations for 1998 include reorganization costs
of $45,162,000 primarily related to the reorganization of the Company's
operations in the fourth quarter of 1998 in connection with the Synon Merger. Of
the total reorganization costs, approximately $9,552,000 consisted of non-cash
costs and the remaining $35,610,000 required cash outlays. At December 31, 1998,
the remaining balance to be paid was $12,662,000, which consists primarily of
employee termination costs and commitments under lease arrangements for office
space and equipment. The Company does not expect to incur costs related to these
reorganizations in excess of the amounts charged to operations in the fourth
quarter of 1998.
Results of Operations
Three Months Ended December 31, 1998 and 1997
Total revenue increased $5,580,000, or 3%, in the first quarter of 1999
over the same period of 1998 due to revenue increases in the Company's systems
management and federal systems business segments. Revenue from both the systems
management and federal systems business segments increased by 15% in the first
quarter of 1999 over the same period in 1998. Revenue increases in the systems
management and federal systems business segments were partially offset by a 5%
decline in total revenue from the application management business segment for
the same period. Without the effect of the restatement of the Company's
financial statements to include Synon's results of operations for the first
quarter of 1998, total application management revenue would have increased 21%
and total revenue would have increased 17% in the first quarter of 1999 over the
same period of 1998.
Revenue generated from the Company's international operations was
$71,364,000 and $70,010,000 in the first quarter of 1999 and 1998, respectively,
representing an increase of $1,354,000, or 2%, due to an increase in
international revenue generated by the systems management business segment (up
27%), partially offset by a decline in international revenue generated by the
application management business segment (down 9%) for the same period. Revenue
from the Company's international operations represented 41% of total revenue in
both the first quarter of 1999 and 1998. Without the effect of the Synon
restatement, revenue from the Company's international operations would have
increased 22% in the first quarter of 1999 over the same period of 1998.
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 increased to 51% of total revenue in the first quarter of 1999 compared
to 47% in the same period of 1998.
Revenue from the application management business segment declined
$4,927,000, or 5%, in the first quarter of 1999 compared to the same period of
1998 due to a 20% decline in services revenue and an 11% decline in products
revenue, partially offset by a 16% increase in product support revenue. Without
the effect of the Synon restatement, total application management revenue would
have increased 21% in the first quarter of 1999 over the same period of 1998
with 11%, 42% and 11% increases in products, product support and services
revenue, respectively. The reported decline in services revenue is due primarily
to the Company's execution of its strategy of transitioning consulting services
opportunities to partners and third-party consulting firms in order to focus the
Company's efforts on more profitable software product sales.
-16-
<PAGE>
The decline in products revenue is due primarily to the Company's decision to
discontinue sales of a non-strategic product acquired in the Synon Merger and
the continuing decline in revenue from an older product acquired in the Synon
Merger. Approximately 51% of the application management business segment's total
revenue in the first quarter of 1999 was derived from the Company's
international operations, compared to 53% in the same period of 1998.
Revenue from the systems management business segment increased $6,180,000,
or 15%, in the first quarter of 1999 over the same period of 1998 primarily due
to an 18% increase in products revenue and an 8% increase in product support
revenue. The increase in products revenue was mainly attributable to strong
domestic and international product sales in the network management and storage
management product lines. Approximately 55% of the systems management business
segment's total revenue in the first quarter of 1999 was derived from the
Company's international operations, compared to 49% in the same period of 1998.
Revenue from the federal systems business segment increased $5,420,000, or
15%, in the first quarter of 1999 over the same period of 1998 primarily due to
higher contract billings in the segment's defense business as well as revenue
added as a result of the Company's acquisition of Mystech Associates, Inc. in
the fourth quarter of 1998 (the "Mystech Merger").
Total costs and expenses increased $22,558,000, or 15%, in the first
quarter of 1999 over the same period of 1998. However, excluding the Cayenne-
related reorganization costs of $19,655,000 and the write-off of purchased
research and development costs of $9,623,000 in the first quarter of 1999, total
costs and expenses decreased $6,720,000, or 5%. This period-to-period decrease
in operating costs occurred primarily due to a 19% decrease in expenses in the
application management business segment as a result of the Company's lower cost
structure in that business segment, compared to the cost structure of the former
Synon operation.
Total cost of sales increased $1,928,000, or 3%, in the first quarter of
1999 compared to the same period of 1998, and represented 41% of total revenue
in both the first quarter of 1999 and 1998.
Product development expense for the first quarter of 1999 was $9,355,000,
net of $6,152,000 of capitalized software costs, as compared to product
development expense in the first quarter of 1998 of $10,608,000, net of
$5,976,000 of capitalized software costs. Without the effect of the
restatement, net product development expense would have increased 6% in the
first quarter of 1999 over the same period of 1998. Gross product development
expense was 11% of
-17-
<PAGE>
non-federal revenue in the first quarter of 1999 compared with 12% for the same
period of 1998. Capitalized development costs represented 40% of gross
development costs in the first quarter of 1999 compared with 36% of gross
development costs for the same period of 1998. 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 decreased $7,395,000, or 11%,
in the first quarter of 1999 compared to the same period of 1998, primarily due
to a decrease in selling, general and administrative expenses in the application
management business segment in the first quarter of 1999 compared to the same
period of 1998 as a result of the Company's lower cost structure in that
business segment, compared to the cost structure of the former Synon operation.
Selling, general and administrative expenses represented 35% and 41% of total
revenue in the first quarter of 1999 and 1998, respectively.
Income before income taxes in the first quarter of 1999 was $11,913,000
compared to $28,160,000 for the same period of 1998. However, excluding the
Cayenne-related reorganization costs of $19,655,000 and the write-off of
purchased research and development costs of $9,623,000 in the first quarter of
1999, income before income taxes increased $13,031,000, or 46%, primarily due to
higher profits in all three of the Company's business segments.
The Company's effective tax rate for the first quarter of 1999 was 65%
compared to 38% for the same period of 1998. The effective tax rate for the
first quarter of 1999 was adversely impacted by the write-off of purchased
research and development costs related to the Cayenne Acquisition that will not
provide a tax benefit to the Company. Before the net tax benefit related to the
Cayenne-related reorganization costs and the write-off of purchased research and
development costs, the Company's effective tax rate for the first quarter of
1999 was 34%. The effective tax rate for the first quarter of 1998 was
adversely impacted by unbenefited losses incurred by Synon prior to the Synon
Merger.
Liquidity and Capital Resources
The Company maintained a strong liquidity and financial position with
$661,930,000 of working capital at December 31, 1998, which included
$398,639,000 of cash and cash equivalents and $296,093,000 of marketable
securities. Net cash provided by operating activities was $5,706,000 in the
first quarter of 1999 as compared to $11,466,000 in the first quarter of 1998.
Net cash provided by operating activities in the first quarter of 1999 was
reduced by payments made during the period of approximately $9,934,000 primarily
related to the Synon Merger and acquisition-related reorganizations that
occurred in the fourth quarter of 1998. Also, net cash provided by operating
activities in the first quarter of 1999 and
-18-
<PAGE>
the first quarter of 1998 was reduced by payments of approximately $2,747,000
and $13,212,000, respectively, related to the acquisition of substantially all
of the assets of the Software Division of Texas Instruments Incorporated (the
"TI Software Acquisition") and the related reorganizations that occurred in the
third quarter of 1997.
Investing activities used $10,633,000 of cash in the first quarter of 1999
compared to $14,841,000 in the first quarter of 1998. Capital expenditures in
the first quarter of 1999 were $8,403,000 compared to $5,401,000 in the first
quarter of 1998. Purchases and capitalized costs of computer software were
$7,402,000 and $6,031,000 in the first quarter of 1999 and 1998, respectively.
Cash provided by operating activities, together with other available cash, was
used to fund capital expenditures and additions to computer software, as well as
the Cayenne Acquisition.
The total cost of the Cayenne Acquisition was approximately $33,184,000,
including costs directly related to the acquisition of approximately
$21,784,000. The Company's results of operations for the first quarter of 1999
include reorganization costs of $19,655,000 primarily related to the
reorganization of the Company's operations in connection with the Cayenne
Acquisition. Of the total reorganization costs, approximately $8,007,000
consisted of non-cash costs and the remaining $11,648,000 required cash outlays.
Of the aggregate $33,432,000 of costs directly related to the Cayenne
Acquisition and related reorganization costs requiring cash outlays,
approximately $18,334,000 had been paid through December 31, 1998, including the
$11,400,000 cash purchase price.
Financing activities provided $5,855,000 of cash in the first quarter of
1999 and used $1,713,000 in the first quarter of 1998. The Company received
proceeds of approximately $7,589,000 and $1,247,000 from the exercise of
employee stock options in the first quarter of 1999 and 1998, respectively.
The Company is party to a bank credit agreement (the "Credit Agreement")
which provides for unsecured revolving credit loans of up to $35,000,000.
Borrowings under the Credit Agreement, which expires on June 30, 2000, 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 quarter of 1999 or 1998.
At December 31, 1998, the Company's short- and long-term cash commitments,
including remaining costs related to the Cayenne Acquisition, the Synon Merger,
the Mystech Merger and the TI Software Acquisition and the related
reorganizations, consisted primarily of commitments under lease arrangements for
office space and equipment, as well as commitments with respect to employee
severance obligations that arose in connection with the Cayenne Acquisition and
related reorganization and the Synon Merger and the Mystech Merger. The Company
intends to meet such obligations primarily from cash provided by operating
activities.
The Company believes that 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.
-19-
<PAGE>
Other Matters
Foreign Currency Matters
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 exposure to
foreign currency exchange rate fluctuations 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.
Acquisition Strategy
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed significantly 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. The Company expects to finance future
acquisitions, if any, through a combination of cash on hand and cash from
operations and the possible issuance of equity or debt securities.
Year 2000 Issues
The following discussion regarding year 2000 matters constitutes a "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
Like most companies in the IT industry, the Company has been and is
continuing to address the impact of the so-called "year 2000" issue. A more
detailed discussion of certain risks associated with the year 2000 issue and the
Company's actions and plans to address this issue is set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
Among other risks associated with the year 2000 issue, some commentators
have predicted that it may affect historical purchasing patterns and trends in
the software industry. For example, certain industry analysts have indicated
that many large enterprises intend to make no changes to their existing
computing environments during the latter part of calendar 1999 and the early
part of 2000. To date, the Company has not experienced any discernable trend
indicating a recent or impending material reduction in demand for the Company's
products. Because of the general uncertainty that surrounds the year 2000
issue, however, there can be no assurance that it will not affect future
customer purchasing patterns or negatively affect demand for the Company's
products in future periods.
-20-
<PAGE>
Forward-Looking Information
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain, certain forward-looking statements. 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 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",
"Certain Considerations Relative to the Company" 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.
-21-
<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 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (1),
(2)
2.2 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(2), (3)
3.1 Certificate of Incorporation, as amended, of the Company (4)
3.2 Bylaws, as amended, of the Company (5)
10.1 Sterling Software Inc. Deferred Compensation Plan (restated effective
December 21, 1998) (6)
27 Financial Data Schedule (6)
- ----------
(1) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated June 21, 1998 and incorporated herein by reference (SEC File No.
98652676).
(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 Current Report on Form 8-K dated
August 27, 1998 filed by Cayenne Software, Inc. and incorporated herein by
reference (File ID #000-19682, SEC File No. 98700698).
(4) 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 (SEC File No. 98602908).
(5) 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 (SEC
File No. 98632257).
(6) Filed herewith.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the three
month period ended December 31, 1998.
-22-
<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: February 11, 1999 By: /s/Sterling L. Williams
--------------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: February 11, 1999 /s/ R. Logan Wray
--------------------------------------------
R. Logan Wray
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (1),
(2)
2.2 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(2), (3)
3.1 Certificate of Incorporation, as amended, of the Company (4)
3.2 Bylaws, as amended, of the Company (5)
10.1 Sterling Software Inc. Deferred Compensation Plan (restated effective
December 21, 1998) (6)
27 Financial Data Schedule (6)
- ---------------
(1) Previously filed as an Exhibit to the Company's Current Report on Form 8-
K dated June 21, 1998 and incorporated herein by reference (SEC File No.
98652676).
(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 Current Report on Form 8-K dated
August 27, 1998 filed by Cayenne Software, Inc. and incorporated herein
by reference (File ID #000-19682, SEC File No. 98700698).
(4) 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 (SEC File No. 98602908).
(5) 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
(SEC File No. 98632257).
(6) Filed herewith.
<PAGE>
EXHIBIT 10.1
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
(Restated Effective December 21, 1998)
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title............................................. 2
1.2 Definitions....................................... 2
ARTICLE II.
PARTICIPATION
2.1 Participation..................................... 5
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation................... 6
3.2 Investment Elections.............................. 7
3.3 Match Funding..................................... 8
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts.............................. 8
4.2 Quarterly Statements.............................. 9
ARTICLE V.
VESTING
5.1 Account........................................... 9
ARTICLE VI.
DISTRIBUTIONS
6.1 Form and Time of Payment.......................... 9
6.2 Death Benefits.................................... 11
6.3 Unscheduled Early Distributions................... 11
6.4 Scheduled Early Distributions..................... 12
(i)
<PAGE>
6.5 Change in Control Withdrawals..................... 12
6.6 Financial Hardship Withdrawals.................... 13
6.7 Inability To Locate Participant................... 13
6.8 Directors and Consultants......................... 14
6.9 Claims Procedure.................................. 14
ARTICLE VII.
ADMINISTRATION
7.1 Committee......................................... 15
7.2 Committee Action.................................. 15
7.3 Powers and Duties of the Committee................ 15
7.4 Construction and Interpretation................... 17
7.5 Information....................................... 17
7.6 Compensation, Expenses and Indemnity.............. 17
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor........................ 18
8.2 Restriction Against Assignment.................... 18
8.3 Withholding....................................... 18
8.4 Amendment, Modification, Suspension or Termination 19
8.5 Governing Law..................................... 20
8.6 Receipt or Release................................ 20
8.7 Payments on Behalf of Persons Under Incapacity.... 20
8.8 Successors and Assigns............................ 21
8.9 No Employment Rights.............................. 21
8.10 Headings, etc. Not Part of Agreement.............. 21
(ii)
<PAGE>
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
Sterling Software, Inc., a Delaware corporation (the "Company") acting on
behalf of itself and its designated subsidiaries, hereby adopts the provisions
of this restated plan document to govern the operation and administration of the
Sterling Software, Inc. Deferred Compensation Plan (the "Plan"), effective as of
December 21, 1998.
RECITALS
1. Effective as of February 1, 1997, the Plan was adopted and established by
the Company, acting on behalf of itself and its designated subsidiaries, as an
unfunded supplemental retirement plan for the benefit of selected highly
compensated employees, directors and consultants and their respective
beneficiaries. Benefits under the Plan are to paid by the Company from its
general assets or from the assets of the trust hereinafter described.
2. Concurrently with the adoption and establishment of the Plan, the Company
entered into a trust agreement with First American Trust Company, as trustee,
and established a trust (the "Trust") to hold and manage certain assets
contributed by the Company in connection with the Plan. The Trust is intended
to qualify as a "grantor trust" under the Internal Revenue Code of 1986, as
amended, with the principal and income of the Trust to be treated as assets and
income of the Company for federal and state income tax purposes.
3. The assets of the Plan held in the Trust will at all times be subject to
the claims of the general creditors of the Company.
4. Effective as of October 27, 1997, the Plan was amended in certain respects
by the First Amendment thereto dated such date (the "First Amendment").
Effective as of December 21, 1998, the Plan was further amended in certain
respects by the Second Amendment thereto dated such date (the "Second
Amendment").
5. Solely for purposes of restating the Plan document to incorporate therein
the amendments to the Plan effected by the First Amendment and the Second
Amendment, the Company has executed and delivered this restated Plan document
effective as of December 21, 1998.
1
<PAGE>
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title.
-----
This Plan shall be known as the Sterling Software, Inc. Deferred
Compensation Plan.
1.2 Definitions.
-----------
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
(a) "Account" means for each Participant the bookkeeping account
-------
maintained by the Committee on the books of the Company that is credited with
amounts equal to (i) the portion of the Participant's Compensation that he or
she elects to defer, and (ii) the deemed earnings on such deferred Compensation
that are credited pursuant to Section 4.1(ii).
(b) "Beneficiary" or "Beneficiaries" means the beneficiary or
----------- -------------
beneficiaries last designated in writing by a Participant, in accordance with
procedures established by the Committee, to receive benefits under the Plan in
the event of the Participant's death. No beneficiary designation shall become
effective unless and until it is filed with the Committee during the
Participant's lifetime.
(c) "Board of Directors" or "Board" means the Board of Directors of
------------------ -----
Sterling Software, Inc. Any determination or other action specified in this Plan
to be made, taken or effectuated by the Board may be made, taken or effectuated
by the Executive Committee of the Board.
(d) "Change in Control" means the occurrence of any of the following
-----------------
events:
(i) the Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than two-thirds of the combined voting
power of the then-outstanding securities entitled to vote generally in the
election of directors ("Voting Stock") of such corporation or person
immediately after such transaction are held in the aggregate by the holders
of Voting Stock of the Company immediately prior to such transaction;
(ii) the Company sells or otherwise transfers all or substantially
all of its assets to another corporation or other legal person, and as a
result of such sale or transfer less than two-thirds of the combined voting
power of the then-outstanding Voting Stock of such corporation or person
immediately after such sale or transfer is held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such sale or
transfer;
(iii) there is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to
the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that
any person (as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become
2
<PAGE>
the beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange
Act) of securities representing 20% or more of the combined voting power of
the then-outstanding Voting Stock of the Company;
(iv) the Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in response
to Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) that a change in control of the Company has occurred or will
occur in the future pursuant to any then-existing contract or transaction;
or
(v) if, during any period of two consecutive years, individuals who
at the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority thereof; provided,
however, that for purposes of this clause (v) each director who is first
elected, or first nominated for election by the Company's stockholders, by
a vote of at least two-thirds of the directors of the Company (or a
committee thereof) then still in office who were directors of the Company
at the beginning of any such period will be deemed to have been a director
of the Company at the beginning of such period.
Notwithstanding the foregoing provisions of clauses (iii) or (iv) above, unless
otherwise determined in a specific case by majority vote of the Board, a "Change
in Control" will not be deemed to have occurred for purposes of clause (iii) or
clause (iv) above solely because (A) the Company, (B) an entity in which the
Company directly or indirectly beneficially owns 50% or more of the outstanding
Voting Stock (a "Subsidiary"), or (C) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock
of the Company, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has occurred or will occur in
the future by reason of such beneficial ownership or any increase or decrease
thereof.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Administrative Committee appointed to
---------
administer the Plan in accordance with Article VII.
(g) "Company" means Sterling Software, Inc., a Delaware corporation, any
-------
successor corporation to Sterling Software, Inc. satisfying the requirements of
Section 8.8 and any entity that is directly or indirectly controlled by Sterling
Software, Inc. or in which Sterling Software, Inc. has a significant equity or
investment interest, as determined by the Board.
(h) "Compensation" means the following items of remuneration payable to an
------------
Eligible Individual for services rendered to the Company during a calendar year:
Salary, Incentive Bonus, annual retainer and meeting fees payable to members of
the Board and fees payable to consultants. An Eligible Individual's Compensation
shall be computed before giving effect to the
3
<PAGE>
Eligible Individual's salary reduction elections under Code Sections 125 or
401(k) and the Eligible Individual's deferral election under Section 3.1 of this
Plan.
(i) "Distributable Amount" means the balance of a Participant's Account
--------------------
at any given time.
(j) "Effective Date" means February 1, 1997.
--------------
(k) "Eligible Individual" for a Plan Year means (i) a common law
-------------------
employee of the Company whose Compensation is paid on a United States payroll in
United States dollars and (A) whose Compensation equaled or exceeded the
Threshold Amount in the prior calendar year (or, in the case of an employee
employed only during a portion of such prior calendar year, whose annualized
Compensation would have equaled or exceeded the Threshold Amount), or (B) who
satisfied any alternative eligibility criteria established by the Committee
pursuant to Section 7.3(iv) of the Plan; (ii) a member of the Board of Directors
who is not a common law employee of the Company; or (iii) a consultant who is
not a common law employee of the Company and who is designated by the Committee
as eligible to participate in the Plan. An individual's status as an Eligible
Individual for a Plan Year shall be determined prior to the first day of such
Plan Year. Notwithstanding the foregoing, the Committee may in its discretion
(I) determine in writing that an otherwise Eligible Individual may not
participate in this Plan for one or more Plan Years, and (II) determine to admit
a newly hired employee (whether hired through an acquisition or otherwise) into
the Plan on a date other than the first day of a Plan Year and to establish
criteria for the admission of such newly hired employees in addition to or in
lieu of those set forth above, provided that such criteria are consistent with
the purpose of the Plan to provide benefits for a select group of management or
highly compensated employees. An individual who is classified by the Company as
an independent contractor whose compensation for services is reported by the
Company on a form other than Form W-2 or any successor form for reporting wages
paid to employees will not be an Eligible Individual, unless the Committee
specifically designates such individual by name as an Eligible Individual
pursuant to clause (iii) above.
(l) "Fund" or "Funds" means one or more of the investment funds or
---- -----
contracts selected by the Committee pursuant to Section 7.3(i).
(m) "Incentive Bonus" means any cash incentive compensation payable to a
---------------
Participant in addition to the Participant's Salary.
(n) "Initial Election Period" for an Eligible Individual means the 30-day
-----------------------
period ending January 31, 1997.
(o) "Interest Rate" means, for any Fund and for any month, an amount
-------------
expressed as a percentage equal to the net rate of gain or loss on the assets of
such Fund during such month.
(p) "Participant" means any Eligible Individual who elects to defer
-----------
Compensation in accordance with Section 3.1.
(q) "Plan" means the Sterling Software, Inc. Deferred Compensation Plan
----
set forth herein, as amended from time to time in accordance with Section 8.4.
4
<PAGE>
(r) "Plan Year" means the 12-consecutive month period beginning January 1
---------
and ending December 31 of each year, provided that the first Plan Year shall be
a short year beginning February 1, 1997 and ending December 31, 1997.
(s) "Salary" means for any calendar year (i) in the case of an employee of
------
the Company whose compensation from the Company does not include commission
income, the employee's base salary during the calendar year and (ii) in the case
of an employee of the Company whose compensation from the Company includes
commission income, the total of the employee's base salary plus commissions
during the calendar year. Salary excludes any other form of compensation such as
Incentive Bonuses, restricted stock, income from stock options or stock
appreciation rights, severance payments, moving expenses, car or other special
allowances, reimbursements for taxes or any other remuneration for personal
services included in an Eligible Individual's taxable income.
(t) "Threshold Amount" means, for the first Plan Year, the sum of $120,000
----------------
and, for any subsequent Plan Year, such other amount as may be determined by the
Committee pursuant to Section 7.3.
(u) "Trust" means the trust established by the Trust Agreement.
-----
(v) "Trust Agreement" means the Sterling Software, Inc. Deferred
---------------
Compensation Plan Trust Agreement dated as of February 1, 1997, by and between
the Company and First American Trust Company, as Trustee.
(w) "Trustee" means First American Trust Company or any successor trustee
-------
appointed pursuant to the Trust Agreement.
ARTICLE II.
PARTICIPATION
2.1 Participation.
-------------
An Eligible Individual shall become a Participant in the Plan for a Plan
Year by electing to defer all or a portion of his or her Compensation for such
Plan Year in accordance with Section 3.1, by completing all required
applications for life insurance (as determined by the Committee in its
discretion), and by complying with any applicable medical underwriting
requirements of the issuer of any policy of insurance on the life of the
Eligible Individual.
5
<PAGE>
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation.
-------------------------------
(a) Elections. For the first Plan Year, each Eligible Individual may elect
---------
to defer Compensation by filing with the Committee an election that conforms to
the requirements of this Section 3.1, on a form provided by the Committee (an
"Election Form"), no later than the last day of the Initial Election Period. For
each subsequent Plan Year, an Eligible Individual may make an election to defer
Compensation by filing an Election Form with the Committee on or before the
December 31 preceding the Plan Year for which the election is to be effective
or, in the case of a newly hired employee who is admitted into the Plan on a
date other than the first day of a Plan Year, on or before the date such
employee receives his first payroll distribution from the Company. An Eligible
Individual who does not elect to defer Compensation for a Plan Year may become a
Participant with respect to a subsequent Plan Year by filing an Election Form
with the Committee on or before the December 31 preceding the Plan Year for
which the election is to be effective.
(b) General Rule. Subject to the limitations set forth in subsection (c)
------------
below, an Eligible Individual may elect to defer any whole percentage of his or
her Compensation up to 100%; provided, however, that if an Eligible Individual's
deferral election would reduce the Compensation paid to the Eligible Individual
to an amount that is less than (i) the amount necessary to satisfy the Eligible
Individual's portion of applicable employment taxes for the Plan Year, (ii)
amounts necessary to satisfy any other benefit plan elections or loan repayments
for the Plan Year under any other plan sponsored by the Company and (iii) any
income taxes payable with respect to taxable compensation that is not eligible
for deferral, then the Participant must remit to the Company, at the time or
times requested by the Company, any amounts necessary to permit the Company to
satisfy its obligation to withhold such taxes, implement such benefit plan
elections or deduct such loan repayments. In addition, a deferral election made
by an Eligible Individual will not be effective unless and until the Eligible
Individual completes all required applications for life insurance (as determined
by the Committee in its discretion).
(c) Minimum Deferrals. For each Plan Year during which an Eligible
-----------------
Individual is a Participant, the minimum dollar amount of Compensation that may
be deferred by the Eligible Individual under the Plan is $5,000. To the extent
that a Participant's actual deferrals in a Plan Year are less than $5,000, such
deferrals, together with earnings or loss thereon through the last day of such
Plan Year, will be refunded as promptly as practicable after the end of such
Plan Year.
(d) Effect of Deferral Election. An election to defer Compensation shall
---------------------------
be first effective with respect to Salary or director or consultant fees earned
during the first pay period beginning after the end of the Initial Election
Period or, for Plan Years beginning after 1997, the pay period beginning on the
first day of the Plan Year, and with respect to the Incentive Bonus payable for
the Company's fiscal year ending within the Plan Year (or for any fiscal
quarters within such fiscal year) for which the election is made.
6
<PAGE>
(e) Duration of Compensation Deferral Election. Any deferral election made
------------------------------------------
under this Section 3.1 shall be irrevocable and shall apply only to the
Compensation payable with respect to services performed during the Plan Year for
which the election is made.
3.2 Investment Elections.
--------------------
(a) The Committee shall provide each Participant with a list of multiple
Funds available for hypothetical investment and each Participant may designate,
on a form provided by the Committee, one or more of such Funds in which his or
her Account will be deemed to be invested for purposes of determining the amount
of earnings to be credited to such Account. The list shall consist of at least
five Funds, collectively offering a wide range of investment options (domestic
and international) with a spectrum of risk and return potential (from
conservative, low risk/low return potential to aggressive, high risk/high return
potential), comparable as a whole to the initial list of Funds attached hereto
as Exhibit A. The Committee may in its discretion change from time to time the
Funds available for hypothetical investment, provided Participants are given at
least 90 days' prior written notice of the effective date of the deletion of any
Fund (including, without limitation, the deletion of a Fund in connection with
the substitution of a new Fund in its place); it being understood, however, that
where the deletion of a Fund is beyond the control of the Committee (e.g., where
the provider of a Matching Investment unilaterally effects such a deletion), the
Committee's obligation shall be to give Participants written notice of the
effective date of such deletion as promptly as practicable after the Committee
obtains knowledge thereof. The Committee may in its discretion add new Funds at
any time and Participants shall be given written notice of such additions as
promptly as practicable after the Committee decides to add a new Fund.
(b) In making the investment designation pursuant to this Section 3.2, the
Participant may specify that all, or any whole percentage, of his or her Account
will be deemed to be invested in one or more of the Funds designated by the
Committee (with a minimum of 5% of the Account balance deemed to be invested in
any one Fund and all such designations in the aggregate not to exceed 100% of
the Participant's Account balance). Effective as of the beginning of any
calendar month, a Participant may change the Fund designations made under this
Section 3.2 by filing a new designation, on a form provided by the Committee, at
least 15 days prior to the end of the immediately preceding calendar month.
(c) If a Participant fails to elect a Fund under this Section 3.2, or if
the Participant's investment designation is less than 100% of his or her Account
balance, for any portion of the Account balance for which no investment
designation has been made he or she shall be deemed to have designated the Fund
that the Committee determines in its sole judgment to have the least risk of
loss of principal.
7
<PAGE>
3.3 Match Funding.
-------------
To the extent authorized by the Committee in its discretion, and in such
case to the fullest extent practicable, the Company shall match fund (in terms
of both timing and amount) all of its obligations to Participants under the Plan
by acquiring and contributing to the Trust, or by causing the Trustee to acquire
or maintain on behalf of the Trust, life insurance investments ("Matching
Investments") corresponding as closely as possible to amounts from time to time
allocated to the Investment Fund Subaccounts (as hereinafter defined) of all
Participants. To the extent that the Company wishes to prefund Matching
Investments for a given Plan Year, such Matching Investments shall be maintained
in the Fund offering the least risk of loss of principal, or a conservative
money market fund, until such Matching Investments are periodically allocated to
investment options corresponding to the periodic deferral amounts of the
Participants. Notwithstanding the foregoing, the Company and the Trustee may
maintain cash reserves in an amount reasonably necessary to pay benefits under
and administer this Plan.
While the Plan is in existence the Company shall at all times comply with
its duties and obligations under the Trust Agreement, and all Participants and
their beneficiaries are expressly acknowledged by the Company to be bona fide
third party beneficiaries under the Trust Agreement.
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts.
--------------------
The Committee shall establish and maintain an Account for each Participant
under the Plan. Each Participant's Account shall be further divided into
separate subaccounts ("Investment Fund Subaccounts"), each of which corresponds
to a Fund elected by the Participant pursuant to Section 3.2. A Participant's
Account shall be debited and credited as follows:
(i) As of the last day of each month, the Committee shall credit the
Investment Fund Subaccounts of the Participant's Account with an amount
equal to any Compensation deferred by the Participant during all pay
periods ending in that month in accordance with the Participant's election;
that is, the portion of the Participant's deferred Compensation that the
Participant has elected to be deferred and deemed to be invested in a
certain Fund shall be credited to the Investment Fund Subaccount
corresponding to that Fund.
(ii) As of the last day of each month, each Investment Fund
Subaccount of a Participant's Account shall be credited with earnings in an
amount determined by multiplying the balance credited to such Investment
Fund Subaccount as of the last day of the preceding month by the Interest
Rate for the corresponding Fund for the then current month. To the extent
any such Interest Rate is negative in any month (due to a net loss in the
applicable Fund), the applicable Investment Fund Subaccount will be debited
in the same manner.
8
<PAGE>
(iii) As of the first day of each calendar quarter, each Investment
Fund Subaccount will be debited or credited to appropriately reflect any
change in Fund designations made by Participants pursuant to Section 3.2.
4.2 Quarterly Statements.
--------------------
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Account on a quarterly basis.
ARTICLE V.
VESTING
5.1 Account.
-------
A Participant's interest in his or her Account shall be 100% vested at all
times.
ARTICLE VI.
DISTRIBUTIONS
6.1 Form and Time of Payment.
------------------------
(a) Forms of Payment. A Participant's Distributable Amount will be paid
----------------
either in quarterly installments over a period of 5, 10, 15 or 20 years, as the
Participant shall elect, or in a lump sum payment. All Participants will be
required to elect a form of payment; however, a Participant electing to have
that portion of the Distributable Amount attributable to any Plan Year paid in
quarterly installments will be so paid with respect to such portion only if the
Participant terminates employment with the Company (i) at or after attaining age
55; (ii) after having completed at least ten years of service; (iii) as a result
of a long-term disability, as defined in the Company's then-existing long-term
disability plan in which the Participant is eligible to participate; or (iv) as
a result of the Participant's death. The Distributable Amount payable to
Participants in all other circumstances will be paid in a lump sum payment,
unless the Participant requests in writing within 30 days after such termination
that the Committee permit the payment of his or her Distributable Amount in
quarterly installments over a period of 5, 10, 15 or 20 years. The Committee
shall have the full discretion and authority to grant or deny any such request.
(b) Payment Election. Each Participant shall elect, at the time of his or
----------------
her election to defer Compensation under the Plan for a Plan Year, to have that
portion of his or her Distributable Amount attributable to such Plan Year paid
in installments as described in subsection (a) above or in a lump sum payment. A
Participant's installment payment election will be honored only if the
Participant is eligible for installment payments at his or her termination of
employment or as permitted by the Committee, all as provided in subsection (a)
above. In the event a Participant fails to make a payment election with respect
to a Plan Year as provided in this subsection (b) and is otherwise eligible for
installment payments at termination of employment, the Participant's
Distributable Amount attributable to such Plan Year will be paid to the
9
<PAGE>
Participant (or the Participant's Beneficiary, if the Participant terminates
employment by reason of death) in quarterly installments payable over a period
of 10 years.
(c) Payment Commencement Date. Unless a Participant receives an early
-------------------------
distribution with respect to the Distributable Amount for a Plan Year pursuant
to Section 6.3, Section 6.4, Section 6.5 or Section 6.6, such Distributable
Amount (or remaining portion thereof) will be paid after the Participant
terminates employment with the Company. Lump sum payments will be paid as soon
as practicable following the Participant's termination of employment but in no
event later than 90 days after the date of such termination. Quarterly
installment payments will begin on the first business day of the second month of
the calendar quarter following the calendar quarter in which the Participant
terminates employment and will continue to be made on the second business day of
each subsequent calendar quarter until the applicable portion of the
Distributable Amount has been fully distributed. Each quarterly installment
payment will be made pro rata from the Participant's Investment Fund Subaccounts
according to the balances in such Subaccounts. During the period in which
quarterly installment payments are being made, the Participant's Account will
continue to be credited monthly with earnings pursuant to Section 4.1(ii) of the
Plan, the Participant (or his or her Beneficiary) may continue to change Fund
designations pursuant to Section 3.2 of the Plan, and quarterly installment
payments will be adjusted annually to reflect earnings, gains and losses until
all amounts credited to his or her Account under the Plan have been distributed.
To the fullest extent practicable, but subject to such annual adjustments,
quarterly installment payments shall be comparable in amount over the entire
distribution period.
(d) Change in Payment Form. Subject to the limitations and requirements
----------------------
specified below, a Participant who has not terminated employment with the
Company may change his or her form of payment (i.e., lump sum versus quarterly
installment payments) with respect to the portion of the Distributable Amount
attributable to one or more Plan Years to one of the payment forms permitted by
the Plan. A Participant must file a written election with the Committee to
change such payment form at least one year prior to the date that payment of
such portion of his or her Distributable Amount would otherwise be made. If
payment of such portion is to commence (or actually commences because of the
Participant's termination of employment) less than one year prior to the
effective date of such written election, such written election shall be void and
the immediately preceding valid written election shall control. If there is no
previous written election on file, then distributions shall be governed by the
default provisions of Section 6.1(b). A Participant's election concerning form
of payment with respect to a given Plan Year may not be changed after payment of
that portion of the Distributable Amount attributable to such Plan Year has been
made or has begun.
(e) Change in Timing of Distributions. A Participant who has not
---------------------------------
terminated employment with the Company and who initially elected to receive a
distribution upon termination of employment may change his or her form of
payment, as contemplated in Section 6.1(d) above, but may not change his or her
election from receipt of a distribution upon termination of employment to a
scheduled early distribution pursuant to Section 6.4. Subject to the limitations
and requirements specified below, a Participant who has not terminated
employment with the Company and who initially elected to receive a scheduled
early distribution pursuant to Section 6.4 may, however, subsequently change
such election to a distribution upon termination of employment. A Participant
must file a written election with the Committee to effect such a change at least
one year prior to the date that payment of such portion of his or her
Distributable
10
<PAGE>
Amount would otherwise be made. If payment of such portion is to commence (or
actually commences because of the Participant's termination of employment) less
than one year prior to the effective date of such written election, such written
election shall be void and the immediately preceding valid written election
shall control. If there is no previous written election on file, then
distributions shall be governed by the default provisions of Section 6.1(b). A
Participant who initially elects to receive a scheduled early distribution
pursuant to Section 6.4 may defer the scheduled distribution date in accordance
with Section 6.4. A Participant's election concerning timing of distributions
(i.e., upon termination of employment vs. scheduled early distribution) with
respect to a given Plan Year may not be changed after payment of that portion of
the Distributable Amount attributable to such Plan Year has been made or has
begun.
(f) Exception for Small Benefits. Notwithstanding the foregoing provisions
----------------------------
of this Section 6.1 or of Section 6.2, if a Participant's Distributable Amount
does not exceed $25,000, the Distributable Amount shall automatically be
distributed in the form of a lump sum payment.
6.2 Death Benefits. If a Participant dies while employed by the Company, or
--------------
after termination of employment, the Participant's Distributable Amount shall be
paid to the Participant's Beneficiary in the same form and in accordance with
the same payment schedule under which the Distributable Amount was being or
would have been paid to the Participant.
6.3 Unscheduled Early Distributions. Subject to paragraph (vi) below,
-------------------------------
Participants shall be permitted to request to withdraw amounts from their
Accounts at any time ("Early Distributions"). Upon receiving a withdrawal
request, the Committee shall determine, in its sole discretion, whether to
permit any such withdrawal and the amount, if any, to be withdrawn, subject to
the following restrictions:
(i) The election to take an Early Distribution shall be made by
filing a form provided by and filed with the Committee.
(ii) The maximum amount payable to a Participant in connection with
an Early Distribution shall in all cases equal 90% of the amount requested
by the Participant (which requested amount must be not less than $10,000 or
the Participant's entire Distributable Amount if less than $10,000);
provided, however, that the maximum amount payable to a Participant in
connection with an Early Distribution shall be 90% of the Distributable
Amount as of the end of the calendar month in which the Early Distribution
request is received by the Committee.
(iii) The amount described in paragraph (ii) above shall be paid in a
single lump sum by the end of the calendar month next following the
calendar month in which the Early Distribution request is received by the
Committee. A distribution pursuant to this Section 6.3 of less than the
Participant's entire interest in the Plan will be made pro rata from his or
her Investment Fund Subaccounts according to the balances in such
Subaccounts .
(iv) If a Participant receives an Early Distribution, the remaining
portion of the requested or approved amount, as applicable, in excess of
the amount payable under paragraph (ii) above (i.e., 10% of such amount),
----
shall be permanently forfeited and the
11
<PAGE>
Company shall have no obligation to the Participant or his or her
Beneficiary with respect to such forfeited amount.
(v) If a Participant receives an Early Distribution, the Participant
shall be ineligible to participate in the Plan for the balance of the Plan
Year in which the Early Distribution occurs and for the immediately
following Plan Year.
(vi) A Participant shall be limited to a maximum of two Early
Distributions during all of his or her periods of Plan participation.
6.4 Scheduled Early Distributions. Participants may elect to have benefit
-----------------------------
payments in respect of Compensation deferred during a given Plan Year be made on
a future date while still employed, provided the payment date is at least 2
years after the date such Plan Year commences. This election shall apply to the
Compensation deferred for the Plan Year specified by the Participant on his or
her election form and the earnings credited thereto until the payment date. A
Participant may elect a different payment date for the Compensation deferred for
each Plan Year. In addition, payment dates elected pursuant to this Section 6.4
may be deferred by at least one year, by filing with the Committee written
notice at least 12 months prior to the payment date to be deferred. A
distribution pursuant to this Section 6.4 of less than the Participant's entire
interest in the Plan shall be made pro rata from his or her Investment Fund
Subaccounts according to the balances in such Subaccounts. Notwithstanding the
foregoing, if a Participant terminates employment with the Company for any
reason prior to the date on which a payment is scheduled to be made pursuant to
this Section 6.4, the Participant's entire Distributable Amount will be paid
pursuant to the provisions of Section 6.1.
6.5 Change in Control Withdrawals. At any time up to one year after a Change
-----------------------------
in Control of the Company, a Participant may elect in writing to receive a
payment of his or her entire Account balance without penalty and without regard
to whether the Participant has terminated employment with the Company or whether
installment payments have commenced. The requested payment will be made as soon
as practicable following the receipt by the Committee of the Participant's
election and will be made in a lump sum payment or in quarterly installments
over 5, 10, 15 or 20 years, as elected by the Participant. A Participant's
election pursuant to this Section 6.5 will supersede any prior payment election.
A Participant who elects to receive payment under this Section 6.5 will, upon
receipt of the Participant's election by the Committee, cease to participate in
the Plan for the balance of the Plan Year in which such receipt occurs.
12
<PAGE>
6.6 Financial Hardship Withdrawals. The Committee may, pursuant to rules or
------------------------------
policies from time to time adopted by it and applied in a consistent manner,
accelerate the date of distribution of all or any portion of a Participant's
Account balance because of a financial hardship. A financial hardship means an
unforeseeable, severe financial emergency resulting from (a) a sudden and
unexpected illness or accident of the Participant or his or her dependents (as
defined in Section 152(a) of the Code); (b) loss of the Participant's property
due to casualty; or (c) other similar extraordinary and unforeseeable
circumstances arising out of events beyond the control of the Participant, which
may not be relieved through other available resources of the Participant, as
determined by the Committee in accordance with such rules and policies. A
distribution pursuant to this Section 6.6 of less than the Participant's entire
interest in the Plan shall be made pro rata from his or her Investment Fund
Subaccounts according to the balances in such Subaccounts. Subject to the
foregoing, payment of any amount with respect to which a Participant has filed a
request under this Section 6.6 shall be made as soon as practicable after
approval of such request by the Committee. Distributions made pursuant to this
Section 6.6 shall be without penalty.
6.7 Inability To Locate Participant.
-------------------------------
(a) Forfeiture of Account. In the event that the Committee is unable to
---------------------
locate a Participant or, with respect to a Participant who has died, any
Beneficiary within two years following the date on which any payment of the
Participant's Distributable Amount is scheduled to be made or begin, the amount
allocated to the Participant's Account shall be forfeited. Following the date of
forfeiture, the Participant's Account which is forfeited shall be invested in
the Fund offering the least risk of loss of principal or conservative money
market funds. If, after such forfeiture and prior to the escheat of the
Participant's Account as provided in Section 6.7(b), the Participant or
Beneficiary later claims such benefit and establishes to the reasonable
satisfaction of the Committee such Participant's or Beneficiary's right to
receive same, such Account shall be reinstated at its balance at the date of
forfeiture without additional interest, earnings, gains or losses from the date
of forfeiture through the date of reinstatement. The Participant's restored
Account balance will be invested in the manner that the Participant or
Beneficiary elects pursuant to Section 3.2 and will be distributed to the
Participant or Beneficiary in accordance with the Participant's payment
elections made pursuant to this Article VI. In addition, any installment
payments that were scheduled to have been made during the period in which the
Participant or Beneficiary could not be located will be made to the Participant
or Beneficiary in a lump sum catch-up payment as soon as administratively
practicable.
(b) Escheat of Account. The Committee, in its discretion, may escheat, or
------------------
may cause the Trustee to escheat, to the state of Texas (or such other state as
the Committee, in its discretion, determines is appropriate) any Participant's
Account which was forfeited if either (i) the Committee has been unable to
locate the Participant or Beneficiary for a period of five years following the
date on which any payment of the Participant's Distributable Amount is scheduled
to be made or begin or (ii) the Plan is terminated and the Committee has been
unable to locate the Participant or Beneficiary for a period of two years
following the date on which any payment of the Participant's Distributable
Amount is scheduled to be made or begin. Upon the escheat of the Participant's
Account, the Participant or Beneficiary shall have no further right to any
benefits or payments under the Plan, and neither the Company, the Committee nor
the Trustee shall have any liability to such Participant or Beneficiary for the
amount of the Participant's Account.
13
<PAGE>
6.8 Directors and Consultants. For purposes of the preceding sections of this
-------------------------
Article VI, a Participant who is a member of the Board or a consultant, but who
is not an employee of the Company, will be deemed to be employed by the Company
as long as he or she is a director or is engaged as a consultant and will be
deemed to have terminated employment when he or she is no longer a director or
is no longer engaged as a consultant and is not then an employee of the Company.
6.9 Claims Procedure.
----------------
(a) Claim for Benefits. If a Participant or Beneficiary does not receive
------------------
the benefits which the Participant or Beneficiary believes he or she is entitled
to receive under the Plan, the Participant or Beneficiary may file a claim for
benefits with the Committee. All claims shall be made in writing and shall be
signed by the claimant. If the claimant does not furnish sufficient information
to enable the Committee to process the claim, the Committee will indicate to the
claimant any additional information which is required.
(b) Notification by the Committee. Each claim will be approved or
-----------------------------
disapproved by the Committee within 90 days following the receipt of the
information necessary to process the claim. In the event the Committee denies a
claim for benefits in whole or in part, the Committee will notify the claimant
in writing of the denial of the claim. Such notice by the Committee will also
set forth, in a manner calculated to be understood by the claimant, the specific
reason for such denial, the specific Plan provisions on which the denial is
based, a description of any additional material or information necessary for the
claim to be approved, if possible, with an explanation of why such material or
information is necessary, and an explanation of the Plan's claim review
procedure as set forth in subsection (c). If no action is taken by the Committee
on a claim within such 90 day period, the claim will be deemed to be denied for
purposes of the review procedure.
(c) Review Procedure. A claimant may appeal a denial of his or her claim
----------------
by requesting a review of the decision by the Committee or a person designated
by the Committee. An appeal must be submitted in writing within 60 days after
receipt by the claimant of written notification of the denial and must (i)
request a review of the claim for benefits under the Plan, (ii) set forth all of
the grounds upon which the claimant's request for review is based and any facts
in support thereof, and (iii) set forth any issues or comments which the
claimant deems pertinent to the appeal. The Committee or the person designated
by the Committee will make a full and fair review of each appeal and any written
materials submitted in connection with the appeal. The Committee or the person
designated by the Committee will act upon each appeal within 60 days after
receipt thereof unless special circumstances require an extension of the time
for processing, in which case a decision will be rendered as soon as possible
but not later than 120 days after the appeal is received. The claimant will be
given the opportunity to review documents or materials directly pertinent to the
appeal upon submission of a reasonable written request to the Committee or
person designated by the Committee, provided the Committee or person designated
by the Committee in its reasonable judgment finds the requested documents or
materials are directly pertinent to the appeal. On the basis of its review, the
Committee or person designated by the Committee will make an independent
determination of the claimant's eligibility for benefits under the Plan. The
decision of the Committee or person designated by the Committee on any claim for
benefits will be final and conclusive upon all parties thereto. In the event the
Committee or
14
<PAGE>
person designated by the Committee denies an appeal in whole or in part, it will
give written notice of the decision to the claimant, which notice will set forth
in a manner calculated to be understood by the claimant the specific reasons for
such denial and which will make specific reference to the pertinent Plan
provisions on which the decision was based.
ARTICLE VII.
ADMINISTRATION
7.1 Committee.
---------
The Committee for the Plan shall be appointed by, and serve at the pleasure
of, the Board. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member with or without cause
by delivering a certified copy of its resolution of removal to such member.
Vacancies in the membership of the Committee shall be filled as soon as
practicable by the Board.
7.2 Committee Action.
----------------
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. Any two members of the Committee may execute any
certificate or other written direction on behalf of the Committee.
7.3 Powers and Duties of the Committee.
----------------------------------
The Committee shall administer the Plan in accordance with its terms and
shall have all powers, authority and discretion necessary to accomplish its
purposes, including, but not by way of limitation, the authority and discretion
to:
(i) select the Funds and change the Funds from time to time
pursuant to Section 3.2;
(ii) appoint a plan administrator or any other agent, and delegate
to them such powers and duties in connection with the administration of the
Plan as the Committee may from time to time prescribe;
(iii) resolve all questions relating to the eligibility of employees,
directors and consultants to be or become Eligible Individuals or
Participants ;
(iv) determine the Threshold Amount applicable to any Plan Year
after the first Plan Year and establish alternative criteria, consistent
with the purpose of the Plan to provide benefits to a select group of
management or highly compensated employees, for
15
<PAGE>
what shall constitute an employee of the Company an Eligible Individual
with respect to any given Plan Year, in addition to or in lieu of the
eligibility criteria set forth in Section 1.2(k) of the Plan;
(v) determine the amount of benefits payable to Participants or
their Beneficiaries under this Plan, and determine the time and manner in
which such benefits are to be paid;
(vi) authorize and direct all disbursements by the Trustee from the
Trust;
(vii) engage any administrative, legal, accounting, clerical, or
other services it deems appropriate in administering the Plan or the Trust
Agreement;
(viii) construe and interpret this Plan and the Trust Agreement,
supply omissions from, correct deficiencies in, and resolve ambiguities in
the language of this Plan and the Trust Agreement, and adopt rules for the
administration of this Plan and the Trust Agreement that are not
inconsistent with the terms of such documents;
(ix) compile and maintain all records it determines to be necessary,
appropriate or convenient in connection with the administration of this
Plan and of benefit payments hereunder;
(x) determine the disposition of assets in the Trust in the event
this Plan is terminated;
(xi) review the performance of the Trustee with respect to the
Trustee's administrative duties, responsibilities and obligations under
this Plan and the Trust Agreement, report to the Board regarding such
administrative performance of the Trustee, and recommend to the Board, if
necessary, the removal of the Trustee and the appointment of a successor
Trustee; and
(xii) resolve all questions relating to any matter for which it has
administrative responsibility.
7.4 Construction and Interpretation.
-------------------------------
The Committee shall have full authority and discretion to construe and
interpret the terms and provisions of this Plan, which interpretation or
construction shall be final and binding on all parties, including but not
limited to the Company and any Eligible Individual, Participant or Beneficiary.
The Committee shall administer the Plan in a consistent and nondiscriminatory
manner and in full accordance with any and all laws applicable to the Plan.
16
<PAGE>
7.5 Information.
-----------
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other cause of termination, and
such other pertinent facts as the Committee may reasonably require.
7.6 Compensation, Expenses and Indemnity.
------------------------------------
(a) Expenses. The members of the Committee shall serve without
--------
compensation for their services hereunder. All expenses and fees incurred in
connection with the administration of the Plan and the Trust shall be paid by
the Company.
(b) Indemnification. To the fullest extent permitted by applicable law,
---------------
the Company shall indemnify and save harmless the Committee and each member
thereof, the Board and any delegate of the Committee who is an employee of the
Company against any and all expenses, liabilities and claims, including legal
fees to defend against such liabilities and claims, arising out of their
discharge in good faith of responsibilities under or incident to the Plan, other
than expenses and liabilities arising out of willful misconduct. Without
limiting the generality of the foregoing, the Company shall, promptly upon
request, advance funds to persons entitled to indemnification hereunder to the
extent necessary to defray legal and other expenses incurred in the defense of
such liabilities and claims, as and when incurred. This indemnity shall not
preclude such further indemnities as may be available under insurance purchased
by the Company or provided by the Company under any bylaw, agreement or
otherwise.
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor.
--------------------------
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interests in any Matching
Investments or in any other property or assets of the Company or the Trust. No
assets of the Company shall be held as collateral security for the obligations
of the Company under this Plan. Any and all assets of the Trust shall be and
shall remain unpledged and unencumbered. The Company's obligation under the
Plan shall be merely that of an unfunded and unsecured promise of the Company to
pay money in the future, and the rights of the Participants and Beneficiaries
shall be no greater than those of unsecured general creditors. The Company
shall maintain the Trust at all times during the term of the Plan. All assets
of the Company and the Trust shall be subject to the claims of the Company's
creditors.
17
<PAGE>
8.2 Restriction Against Assignment.
------------------------------
The Company or the Trustee shall pay all amounts payable hereunder only to
the person or persons designated pursuant to the Plan and not to any other
person or entity. No part of a Participant's Account shall be liable for the
debts, contracts, or engagements of any Participant, his or her Beneficiary, or
successors in interest, nor shall a Participant's Account be subject to
execution by levy, attachment, or garnishment or by any other legal or equitable
proceeding, nor shall any such person have any right to alienate, anticipate,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever, without the prior written consent of the Committee, which may
be withheld in its sole discretion. If any Participant, Beneficiary or successor
in interest is adjudicated bankrupt or purports to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any distribution or payment from
the Plan, voluntarily or involuntarily, the Committee, in its discretion, may
cancel such distribution or payment (or any part thereof) to or for the benefit
of such Participant, Beneficiary or successor in interest in such manner as the
Committee shall direct.
8.3 Withholding.
-----------
There shall be deducted from each payment made under the Plan all taxes
which are required to be withheld by the Company in respect to such payment.
8.4 Amendment, Modification, Suspension or Termination.
--------------------------------------------------
(a) The Committee may amend, modify, suspend or terminate the Plan in
whole or in part, provided that (i) no amendment, modification, suspension or
termination shall have any retroactive effect that would directly or indirectly
reduce any amounts allocated to a Participant's Account or otherwise deprive any
Participant of any benefits already vested under the Plan; (ii) any amendment,
modification, suspension or termination of the Plan that will significantly
increase costs to the Company shall be approved by the Board; (iii) no
amendment, modification, suspension or termination of the Plan shall have the
effect of causing any Participant's Account to be distributed earlier than the
time contemplated by the Plan and the Participant's elections without the prior
written consent of the Participant; (iv) no amendment or modification shall
materially and adversely affect the interests of Participants without the prior
written consent of at least 75% of the Participants (such percentage to be
determined by the number of Participants and not by their percentage interest in
all Account balances); and (v) for a period of two years following a Change in
Control, the Plan may not be amended, modified, suspended or terminated without
the prior written consent of at least 75% of the Participants (such percentage
to be determined by the number of Participants and not by their percentage
interest in all Account balances).
(b) Without limiting the generality of Section 8.4(a)(iv) above, any
amendment or modification which directly or indirectly has any of the following
effects shall be deemed to materially and adversely affect the interests of
Participants: (i) any amendment or modification to the defined term "Change in
Control" or any amendment or modification of the consequences under the Plan
resulting from a Change in Control; (ii) any amendment or modification that
would eliminate or reduce the Company's obligations under Sections 3.2 or 3.3;
(iii) any amendment or modification that would adversely affect the timing or
circumstances under which Participants
18
<PAGE>
may receive vested benefits under the Plan; or (iv) any amendment or
modification of this Section 8.4.
(c) Notwithstanding clauses (iii) and (iv) of Section 8.4(a) above, the
Company shall have the right (i) to unilaterally amend, modify or suspend the
Plan in the event that the Company determines in good faith that such action is
required in order to maintain or qualify the Trust as a grantor trust under
Section 671 of the Code or to maintain or qualify the Plan as an unfunded plan
maintained primarily to provide deferred compensation for a select group of
management or highly compensated employees as described in Section 201(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), provided,
however, that the Company shall amend, modify or suspend the Plan in such manner
as will have the least onerous overall effect on the vested interests of the
Participants; and (ii) to unilaterally terminate the Plan in the event that the
Company determines in good faith that continued compliance with the Code and
ERISA, as generally contemplated in clause (i) above, is not practicable or, if
practicable, would have a material adverse effect on the Participants.
(d) Notwithstanding anything to the contrary in this Section 8.4, the
Company may unilaterally amend the Plan at any time to cause the cessation of
deferrals of Compensation by the Participants in any future Plan Year or to
change the manner or terms of future deferrals in any such future Plan Year;
provided, however, that no such amendment under this Section 8.4(d) may be
effected for a period of two years following any Change in Control.
(e) As a condition precedent to the effectiveness of any amendment,
modification, suspension or termination of this Plan, the Trustee and the
Committee shall have received a written opinion of counsel (which counsel and
which opinion shall be satisfactory to each) to the effect that such action is
being validly and properly effected in accordance with the requirements of this
Section 8.4.
(f) In the event that this Plan is terminated in accordance with this
Section 8.4, the balance of each Participant's Account shall be distributed to
the Participant (or, in the event of the death of the Participant, to the
Participant's Beneficiary) in a lump sum payment as soon as administratively
feasible and in any event within 90 days of such termination.
8.5 Governing Law.
-------------
The Plan will be construed and governed in all respects in accordance with
applicable federal law and, to the extent not preempted by such federal law, in
accordance with the laws of the State of Texas, including without limitation,
the Texas statute of limitations, but without giving effect to the principles of
conflicts of laws of such State.
8.6 Receipt or Release.
------------------
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company with respect to
the amount paid. The Committee may require such Participant or Beneficiary, as
a condition precedent to such payment, to execute a receipt and release to such
effect.
19
<PAGE>
8.7 Payments on Behalf of Persons Under Incapacity.
----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgment of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefor, the Committee
may direct that such payment be made to any person found by the Committee, in
its sole judgment, to have assumed the care of such person. Any payment made
pursuant to such determination shall, to the extent thereof, constitute a full
release and discharge of the Committee and the Company with respect to the
amount paid.
8.8 Successors and Assigns.
----------------------
The Company may not assign its obligations under this Plan, whether by
contract, merger, operation of law or otherwise, unless the assignment is to an
assignee or successor entity (in either case, hereafter called a "Successor")
that has stockholders' equity or the closest equivalent thereto (as measured by
the most recent audited financial statements of such Successor) equal to or
greater than the stockholders' equity of the Company (as measured immediately
prior to the event that causes such entity to become a Successor to the
Company). The provisions of this Section 8.8 shall be binding upon each and
every Successor to the Company.
8.9 No Employment Rights.
--------------------
Participation in this Plan shall not confer upon any person any right to be
employed by the Company nor any other right not expressly provided hereunder.
8.10 Headings, etc. Not Part of Agreement.
------------------------------------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
IN WITNESS WHEREOF, the Company has caused this document to be executed by
its duly authorized officer as of the 21st day of December, 1998.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
-------------------------------
Name: Don J. McDermett, Jr.
Title: Senior Vice President and General
Counsel
20
<PAGE>
EXHIBIT A
Fidelity VIP Equity Income Portfolio
Janus Aspen Aggressive Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Short-Term Bond Portfolio
Janus Aspen Worldwide Growth Portfolio
Maverick Fund USA, Ltd.
21
<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 DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 398,639
<SECURITIES> 296,093
<RECEIVABLES> 201,096
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 929,729
<PP&E> 69,915
<DEPRECIATION> 53,014
<TOTAL-ASSETS> 1,214,764
<CURRENT-LIABILITIES> 267,799
<BONDS> 0
0
0
<COMMON> 8,539
<OTHER-SE> 860,386
<TOTAL-LIABILITY-AND-EQUITY> 1,214,764
<SALES> 174,459
<TOTAL-REVENUES> 174,459
<CGS> 71,108
<TOTAL-COSTS> 142,072
<OTHER-EXPENSES> 29,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 11,913
<INCOME-TAX> 7,707
<INCOME-CONTINUING> 4,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,206
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
