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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
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
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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 No.)
300 Crescent Court, Suite 1200
Dallas, Texas 75201
(Address of principal executive offices, including zip code)
(214) 981-1000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.10 Par Value New York Stock Exchange
Rights to Purchase Series A Junior Participating New York Stock Exchange
Preferred Stock, $0.10 Par Value
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Securities Registered Pursuant to Section 12(g) of the Act:
None
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 5, 1999, 79,965,918 shares of the Registrant's Common Stock
were outstanding.
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant was $1,717,049,423, based on the $22 3/16 closing
price of the Registrant's Common Stock on the New York Stock Exchange on
November 5, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Meeting of Stockholders of
the Registrant to be held during 2000 are incorporated by reference in Part
III.
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STERLING SOFTWARE, INC.
TABLE OF CONTENTS
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Form 10-K Item Page
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Part I.
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 12
Item 6. Selected Financial Data......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...... 31
Item 8. Financial Statements and Supplementary Data..................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 61
Part III.
Item 10. Directors and Executive Officers of the Registrant............. 61
Item 11. Executive Compensation......................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................................. 61
Item 13. Certain Relationships and Related Transactions................. 61
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K...................................................................... 62
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PART 1
Item 1. Business.
General
Sterling Software, Inc. ("Sterling Software" or the "Company") is a
worldwide developer and supplier of systems management, business intelligence
and application development software products and services, as well as a
supplier of specialized information technology ("IT") services for sectors of
the federal government. Founded in 1981, Sterling Software's customer base
includes 90 of the 100 largest U.S. industrial and service corporations, as
ranked by 1998 revenues in Fortune magazine. Sterling Software's business
segments are as follows:
. 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
Company's systems management solutions help ensure application
availability and performance, including e-business application
availability and performance, and emphasize both breadth of coverage--
monitoring all critical resources, and depth of coverage--mainframes,
servers, desktops and laptops. These solutions include enterprise-level
network management products, enterprise-level storage management
products and comprehensive VM systems management products. The Company's
network management products manage mission-critical networks in e-
business environments, maximizing availability and performance, and
providing tools for network capacity planning. Sterling Software's
storage management products help to maximize the availability and
performance of mission-critical storage systems, and provide the tools
necessary for storage capacity planning. The Company's VM products
provide comprehensive systems management solutions for IBM's VM
operating environment.
. The application management business segment provides solutions for both
business intelligence and application development. The Company's
business intelligence solutions offer a complete range of web-based
business intelligence capabilities centered around corporate portal
technology--from a web-based integrated query, analysis and reporting
product to a tool that enables complex analysis and reporting from
terabyte-sized databases. In addition, Sterling Software's business
intelligence solutions include products that structure and manage data
and application resources, such as creating enterprise data warehouses
and data marts, allowing customers to maximize their investment in
existing assets. The Company's application development solutions include
products and services that enable customers to deliver e-business
applications for today's Internet-based economy. These solutions
leverage existing assets to enhance customer relationships and supply
chain efficiency by exposing today's applications to web services,
aggregating systems to create new e-business processes, as well as
creating new e-business applications based on Internet architectures.
. The federal systems business segment provides specialized IT services
for sectors of the federal government, as well as state and local
governments. Major customers include the U.S. Department of Defense
("DoD"), the military services, U.S. national intelligence agencies, the
Federal Aviation Administration ("FAA") and the National Aeronautics and
Space Administration ("NASA").
Worldwide revenue from the Company's systems management, application
management and federal systems business segments represented 36%, 44% and 20%,
respectively, of the Company's total 1999 revenue. Revenue from the Company's
international operations represented 37% of the Company's total 1999 revenue.
See Note 4 of Notes to Consolidated Financial Statements.
As of September 30, 1999, the Company employed approximately 3,700
employees in 90 offices worldwide. The Company has direct sales offices in 21
countries and distributors and agents in approximately 40 additional
countries.
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A large percentage of Sterling Software's business is recurring through
annual and multi-year contracts. Product support contracts generally have
terms that range from one to three years; fixed-term product lease and rental
contracts generally have terms that range from month-to-month to year-to-year;
and multi-year federal contracts generally have terms that range from one to
five years. Recurring revenue represented 45% and 46% of the Company's total
revenue in 1999 and 1998, respectively.
Consistent with Sterling Software's decentralized operating structure, the
Company's businesses are conducted through independent operating groups.
Within each of these groups are divisions that focus on specific business
niches. In keeping with the Company's decentralized philosophy, the management
team of each group and division is largely autonomous. Sterling Software
believes that its decentralized organizational structure promotes operating
flexibility, improves responsiveness to customer requirements and focuses
management on achieving revenue and operating profit objectives.
The Company believes that several major trends are resulting in increased
investment in both software applications and the software products that enable
and manage the supporting systems infrastructure. These trends include the
growing pervasiveness of the Internet, the rapidly increasing demand for e-
business solutions to address fundamental business needs, and continuing
technological advancements in computer processing capabilities, data storage
capabilities and global communications networks. These trends are also driving
the Company's customers to demand critical end-to-end enterprise storage
management, network management and other systems management solutions;
flexible, scalable and open business intelligence tools; and application
development products that enable customers to rapidly build, deploy and adapt
e-business applications. The Company is addressing these growing demands
through both internal product development efforts and through strategic
business and product acquisitions. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business
Combinations, Reorganizations and Divestitures."
Five acquisitions completed in 1999 expanded the Company's storage
management, network management and application development product offerings,
and significantly expanded the Company's business intelligence offerings.
. In storage management, the Company acquired the Alexandria business of
Spectra Logic Corporation, adding a high-performance backup and
archiving product for very large databases--including Oracle, Informix
and SAP R/3 databases--and for both UNIX databases and file systems, as
well as Windows and Windows NT clients. With this product, now named
SAMS:Alexandria, critical business data, including data used in e-
business applications, can be backed up without interrupting critical
business operations. The acquisition of CoreData, Inc. further extended
the Company's strategy to provide end-to-end storage management with the
addition of a product, now named SAMS:Lifeguard, which enables
centralized storage and protection of critical data that resides on the
rapidly growing number of laptops and remote PC's.
. In network management, the Company enhanced its ability to help
organizations manage the networks in their e-business environments
through the Company's acquisition of Interlink Computer Sciences, Inc.
The Company added a new product, now named SOLVE:TCPaccess, that enables
IBM's System 390 computers to use TCP/IP (Transmission Control
Protocol/Internet Protocol) as a network communications protocol,
enabling System 390 computers to act as enterprise servers in an e-
business environment. In addition, the Company's SOLVE:Netmaster for
TCP/IP product has been enhanced with access control capabilities added
through the acquisition, resulting in the most comprehensive solution
for managing TCP/IP networks connected to System 390 enterprise servers.
. The Company added significant business intelligence capabilities as a
result of its 1999 acquisition of Information Advantage, Inc., the
pioneer of the business intelligence portal. In business intelligence,
the Company's strategy is to offer all the products necessary to fill an
organization's business intelligence needs, integrated into a single,
web-based platform from which information can be personalized for every
user. With the products added through the acquisition and the Company's
introduction of a new web-based integrated query, analysis and reporting
product, Sterling Software now offers EUREKA:Suite, a
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full range of business intelligence solutions centered around corporate
portal technology. Business intelligence tools are a necessity for e-
business, where organizations must leverage the huge repositories of
information residing in their databases--integrating, organizing,
analyzing and personalizing it, and putting it to work for competitive
advantage.
. The Company's application development strategy is to offer tools that
enable customers to build, deploy and adapt e-business applications for
today's Internet-based economy. The Company's acquisition of Cayenne
Software, Inc. added its object-oriented modeling technologies and
tools, which are used in application design and implementation, as well
as new database design tools.
Systems Management
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 Company's systems
management solutions help ensure application availability and performance,
including e-business application availability and performance, and emphasize
both breadth of coverage--monitoring all critical resources, and depth of
coverage--mainframes, servers, desktops, and laptops. Enterprise-level network
management solutions are provided through the SOLVE family of products,
enterprise-level storage management solutions are provided through the SAMS
family of products, and comprehensive systems management solutions for IBM's
VM operating environment are provided through the VM family of products.
Worldwide revenue from the systems management business segment represented
36%, 28% and 32% of the Company's total revenue during 1999, 1998 and 1997,
respectively.
The SOLVE family of products helps customers manage their network
infrastructure and the mission-critical applications that their businesses
depend upon. SOLVE products exploit advancements in current technologies,
including Java and the Web, to deliver easy-to-use management solutions for e-
business environments. The Company's SOLVE:Netmaster products automate network
management operations across large-scale enterprises, providing centralized
command and control, diagnostics, performance management, and alert and status
monitoring of TCP/IP, SNA (Systems Network Architecture) and SNMP (Simple
Network Management Protocol) network events. SOLVE:TCPaccess enables System
390 enterprise servers to use TCP/IP as a network communications protocol,
enabling these computers to act as enterprise servers in an e-business
environment. The Company's SOLVE:Operations products provide and participate
in enterprise-wide systems automation solutions, addressing both mainframe and
distributed systems from a single point. SOLVE:Operations products are
available as stand-alone products within the OS/390 environment and as plug-in
components for three enterprise management platforms: Hewlett-Packard's
"OpenView" and "OpenView IT/Operations" and Tivoli's "Tivoli/TME 10 NetView".
SOLVE:Central is an integrated suite of products for running the enterprise IT
service desk.
The SAMS family of products manages, monitors and automates data storage in
both distributed and centralized environments, helping to maximize the
availability and performance of mission-critical storage systems. The
Company's SAMS:Vantage products deliver a wide array of storage resource
management solutions. Moreover, these products interface with the Company's
data management products, including SAMS:Disk, SAMS:Alexandria,
SAMS:Lifeguard, SAMS:Allocate and SAMS:Vtape, providing a comprehensive
storage management suite. SAMS:Vantage, OS/390 Edition, is a client/server
system that provides comprehensive automation, interactive reporting, analysis
and predictive modeling capabilities for complex OS/390 storage environments.
SAMS:Vantage, Network Edition, delivers consolidated management of distributed
storage across UNIX, Windows NT and NetWare environments and also incorporates
a view of mainframe storage. SAMS:Vantage, ADSM Edition, is a tailored version
of the product that adds value to IBM's Adstar Distributed Storage Manager
(ADSM). From one workstation, the SAMS:Vantage product identifies and manages
critical data defects and solves problems automatically, charts trends and
forecasts storage capacity across platforms. The SAMS:Vantage storage
management approach is designed to remain consistent across multiple platforms
and to allow organizations to: manage enterprise data storage in a uniform
manner, implement
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consistent storage management policies and standards, provide consolidated
management of distributed data and enforce the protection of critical data,
regardless of where it resides. This is particularly important when complex
Storage Area Networks are deployed. The OS/390 Edition includes an automated
tape storage management component that enhances tape management systems and
assists in the management of robotic tape systems and high-capacity tape
devices. SAMS:Alexandria, a high-performance backup and archiving product,
combines both high speed and reliability in backing up very large databases
without interrupting critical business operations. SAMS:Alexandria delivers
these high-performance backup capabilities, low resource consumption and
extreme fault tolerance to the backup of Oracle, Informix and SAP R/3
databases. It also provides complete, automated, client/server backup of both
UNIX and Windows databases and file systems. SAMS:Lifeguard provides remote
and mobile PC users with centralized data management, remote asset discovery
and reporting technology. It enables protection of critical data that resides
on laptops and remote PCs. SAMS:Disk is a centralized mainframe storage
management backup, recovery, HSM and reporting system.
The VM family of products provides systems management software and Web-
enabling software for IBM's VM/ESA operating system. The VM:Manager product
family provides integrated solutions for automated operations, storage
management, service-level management, security, recovery and SFS (Shared File
System) management. VM:Manager is designed to enable VM sites to operate at
maximum availability with minimal systems administration personnel, thereby
controlling costs, improving performance and increasing user productivity.
VM:Webgateway is a web-to-host solution that allows sites to provide virtually
immediate access to legacy applications (VM, VSE and OS/390) via a Web
browser, while leveraging the power of the mainframe. VM:Webgateway acts as a
repository for home pages and documents created using HTML (Hypertext Markup
Language) and also stores, retrieves and processes information in various
formats including text, graphics, sound, images, video and Java applets. VM:DB
is a comprehensive family of DB2/VM management products to help improve
database and application performance and user productivity. VM:DB includes
products designed to address database administration (VM:DBA) and application
development and management (VM:DB/Developer). The Company's VM professional
services group is capable of augmenting the customer's professional mainframe
staff as project demands dictate. The group's offerings include training and
education, software implementation and consulting, and system assessment for
Year 2000 compliance.
As of September 30, 1999, the systems management business segment employed
approximately 1,000 people. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Combinations,
Reorganizations and Divestitures" for a description of recent acquisitions in
this business segment.
Application Management
The application management business segment provides solutions for business
intelligence through its EUREKA and VISION product families, and application
development solutions through its COOL product family. Worldwide revenue from
the application management business segment represented 44%, 51% and 39% of
the Company's total revenue during 1999, 1998 and 1997, respectively.
The EUREKA product family, centered around corporate portal technology,
offers a complete range of web-based business intelligence tools and
capabilities. The five products that comprise EUREKA:Suite offer a full range
of capabilities--from a web-based integrated query, analysis and reporting
product for typical business users, to a high-end, server-based tool that
enables complex analysis and reporting from terabyte-sized databases. All of
the EUREKA products are flexible, scalable and open. EUREKA:Intelligence is a
new 100% Java, web-based tool for integrated query, analysis and reporting.
This product enables users to "slice and dice" and drill into live data via
graphical, interactive views including charts, reports and tables. It also
lets users create multidimensional OLAP (On-Line Analytical Processing)
reports for speedy analysis of complex data. Its zero administration
architecture allows the customer's IT staff to deliver and maintain the
application directly from the server. EUREKA:Strategy delivers high volumes of
calculation-intensive, interactive reports from very large databases, and is
typically used for customer-centered analysis such as the analysis of data
produced by
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e-business applications. It includes an advanced calculation processor, which
enables users to evaluate attributes for trend analysis, customer segmentation
and inventory management. EUREKA:Analyst is an advanced, high-speed
multidimensional analysis tool used for financial forecasting and business
modeling. EUREKA:Reporter generates high volumes of sophisticated, interactive
report documents in multiple formats through multiple publishing media.
Serving as the single point of entry to all of these business intelligence
tools is EUREKA:Portal, which gives users at all levels personalized, secure
access to business information--much like an Internet portal such as Yahoo!TM
delivers access to information available on the Internet. Since the portal
product serves as the common platform for all of the EUREKA products,
organizations can expand their business intelligence capabilities with minimal
effort and cost.
The VISION family of products structure and manage data and application
resources, allowing customers to maximize their investment in existing assets.
These solutions help enterprises address issues related to complex
implementation challenges such as data warehousing, desktop integration and
legacy extension, mainframe reporting, and application management, using
technologies that leverage web-based infrastructures. VISION:Pursuit, an
integrated extraction, transformation and loading (ETL) tool for managing an
enterprise information supply chain, allows organizations to quickly create
enterprise data warehouses and data marts. VISION:Flashpoint provides powerful
integration of disparate back-office systems into a single, customizable user
desktop. This allows customers to extend the life of business critical
applications and systems into new areas, such as e-business. VISION:Results is
an information management and report generation system for IBM enterprise
servers and a dynamic complement to COBOL. VISION:Builder and VISION:Transact
are application development tools for batch and on-line environments,
respectively, that operate on major IBM enterprise server platforms. The
VISION:Legacy and VISION:Renaissance suites of products address the functions
required to assess the quality and maintainability of applications,
restructure old COBOL programs, re-document the flow of control through legacy
systems, and graphically represent the architecture and flow of existing
systems. Both product suites include VISION:Assess, VISION:Recode and
VISION:Redocument, with VISION:Legacy operating on the IBM enterprise server
and VISION:Renaissance providing PC-based operations. VISION:Phaseshift and
VISION:Simulate are products specifically targeted at customers with "Year
2000" compliance issues. VISION:Phaseshift provides an interface to system
resources and data files. It intercepts requests for date and time data and
"windows" the dates back 28 years in an encapsulated environment.
VISION:Simulate is a testing tool that allows for the simulation of dates into
the future to test applications without changing the system date.
The COOL family of products provides customers the ability to deliver e-
business solutions for both enterprise and mid-range environments. Using COOL
products, organizations can pursue a variety of Internet strategies including
web-enablement of existing applications, application integration through a
combination of legacy application wrapping and package connections, and
development of new Java-based applications built on an n-tier Internet
architecture. COOL:Gen is an application integration and development
environment for enterprise e-business applications leveraging MVS and UNIX
servers with COM (Component Object Model) or Java standard web services. With
COOL:Gen, high-level component specifications are driven forward into dynamic,
scalable applications using model-based code generation. COOL:Joe, currently
under a limited availability release, is an e-business development tool for
delivering distributed systems running on an application server using
Enterprise Java Beans (EJBs). COOL:Joe is a second generation Java development
environment that incorporates advanced component modeling and generation
capabilities that enable IS organizations to make the most of their existing
Java expertise, implement EJB technology without having to worry about the
underlying EJB code, and focus instead on delivering business solutions.
COOL:Plex and COOL:2E deliver e-business applications for the mid-range
computing environment, using AS/400 and NT servers. COOL:Plex is a model-based
development environment that leverages pattern technology to rapidly generate
high-quality, adaptable web and client/server applications using HTML, Java
and Domino. COOL:2E is an industry leading AS/400 development environment
supporting model based code generation. COOL:Biz is a comprehensive business
modeling toolset that allows organizations to model different scenarios as
they transform their businesses into e-businesses. The product's methodology
for process mapping and workflow design allows business and IT professionals
to work together to ensure that new e-business applications and new e-business
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processes are in sync. Using COOL:Spex, developers can model the architecture
of component-based applications and define the interaction of existing and new
components. The COOL portfolio also supports the development of real-time and
embedded system software with COOL:Jex and COOL:Teamwork. COOL:Jex is an
object-oriented analysis and design solution supporting the Unified Modeling
Language (UML) industry standard notation. COOL:Jex allows modeling of complex
application requirements, driven directly from business requirements.
COOL:Teamwork is a structured engineering tool for requirements documentation
and systems design.
As of September 30, 1999, the application management business segment
employed approximately 1,500 people. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business
Combinations, Reorganizations and Divestitures" for a description of recent
acquisitions in this business segment.
Federal Systems
The federal systems business segment provides specialized IT services for
sectors of the federal government, as well as state and local governments.
Major customers include the DoD, the military services, U.S. national
intelligence agencies, the FAA and NASA. In 1999, Sterling Software began its
33rd year of service to both NASA and the DoD. In 1999, the Company's federal
systems business was performing work under approximately 253 contracts.
Revenue from the federal systems business segment represented 20%, 21% and 21%
of the Company's total revenue during 1999, 1998 and 1997, respectively.
The segment's Information Technology Division specializes in secure
communications, message and data handling, weather forecast production and
distribution, and systems integration and application development in support
of various projects ranging from satellite data collection to air traffic
control. Division computing resources include facilities approved for
classified operations and substantial hardware and software configurations to
support software lifecycle development activities in distributed processing
environments. The division's software engineering and software development
processes are certified at Software Engineering Institute Capability Maturity
Model (SEI CMM) Level 3 and International Standards Organization (ISO) 9001.
Customers include U.S. Air Force command, control and communications
organizations, the U.S. Air Force Weather Agency, the FAA and NASA.
The segment's Applied Systems Division specializes in tactical military
intelligence systems; command and control systems; advanced database
techniques; modeling, simulation and synthetic training and rehearsal systems;
and specialized studies and analyses and strategic planning systems. Customers
include U.S. Army intelligence and battle command organizations, national
intelligence agencies and the U.S. Air Force.
As of September 30, 1999, the federal systems business segment employed
approximately 1,100 people. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Combinations,
Reorganizations and Divestitures" for a description of recent acquisitions in
this business segment.
Product Licenses
Sterling Software's products are generally licensed under perpetual use,
fixed-term or usage-based license agreements. Sterling Software typically does
not sell or otherwise transfer title to its software products. The Company's
license agreements prohibit reproduction, transfer or disclosure of the
product and generally restrict the use of the product to designated sites or
central processing units. However, some license agreements may cover multiple
sites or multiple central processing units at one site. In 1999, 1998 and
1997, product revenue accounted for 45%, 40% and 41%, respectively, of the
Company's total revenue.
Product Support
Product support is available to Sterling Software customers, typically
through annual contracts generally priced from 12% to 22% of the current
license fee. Sterling Software's product support contracts allow customers
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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
Sterling Software's technical personnel. In 1999, 1998 and 1997, product
support revenue accounted for 26%, 26% and 27%, respectively, of the Company's
total revenue.
Services
Services provided by Sterling Software primarily consist of specialized IT
services in support of federal government contracts provided through the
Company's federal systems business. In addition, Sterling Software provides
training and education in support of its software products in the form of
customer training seminars, videos and instruction materials. Sterling
Software also offers product-specific consulting, implementation and education
services within its application management business to better enable customers
to successfully use its products. In 1999, 1998 and 1997, services revenue
accounted for 29%, 34% and 32%, respectively, of the Company's total revenue.
Product Development
Each domestic division within Sterling Software's systems management,
application management, and federal systems businesses has its own product
development function. Sterling Software's product development programs in each
of these businesses include the enhancement of existing products and
introduction of new products based upon current and anticipated customer
needs. The Company believes that its decentralized organizational structure
facilitates development cost control and focuses the development function on
the customers' needs. Approximately 500 of Sterling Software's employees were
engaged in product development as of September 30, 1999. Gross product
development costs in 1999, 1998 and 1997 were $70,883,000, $63,118,000 and
$51,370,000, respectively, of which the Company capitalized $31,311,000,
$26,956,000 and $21,711,000, respectively, as the cost of developing and
testing new or significantly enhanced software products. Gross product
development costs were 11% of non-federal systems revenue in 1999, 1998 and
1997.
The Company believes that all of its currently offered products are year
2000 compliant. Each of the Company's product divisions has completed a year
2000 assessment of its currently offered products. This assessment included
internal testing of the year 2000 capabilities of these products. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issues".
Sales and Marketing
Consistent with its decentralized operating structure, Sterling Software
conducts its sales and marketing activities in multiple software divisions
focused on specific product markets. Sterling Software sells its products and
services through a combination of direct sales and telesales organizations,
and in certain foreign countries, through independent agents and distributors.
Each domestic division within the systems management and application
management businesses has its own U.S. sales and marketing organization. In
addition, the systems management and application management businesses have
divisions and business units that focus specifically on the international
marketplace for their respective product lines. The federal systems business
has its own sales organization, which focuses specifically on specialized IT
service offerings to the federal IT market. Approximately 780 of Sterling
Software's employees were engaged in sales as of September 30, 1999.
Customers
Sterling Software provides software and services to companies engaged in a
wide range of industries around the world, including banking, insurance,
manufacturing, telecommunications and many others, as well as to various
governmental entities located in the U.S. and abroad. The Company's customers
include 90 of the 100 largest U.S. industrial and service corporations, as
ranked by 1998 revenues in Fortune magazine. In the year ended September 30,
1999, agencies, branches and departments of the U.S. government accounted for
approximately 21% of the Company's total revenue.
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Competition
The computer software and services industry is rapidly evolving and highly
competitive. Sterling Software competes with both large companies with
substantially greater resources and small specialized companies that compete
in a particular geographic region or market niche. Sterling Software also
competes with internal programming staffs of corporations and with hardware
manufacturers. Continuing consolidation among providers of specialized IT
services to the federal government is increasing the size and market presence
of many of the Company's competitors in this market segment.
Sterling Software believes that its products will continue to be selected
by customers due to superior product functionality, reliability and technical
support, ease of product installation and use, close integration between the
products and customer business applications and, finally, the Company's
history of success and reputation for providing quality products.
Employees
Sterling Software's business is dependent upon its ability to attract and
retain qualified personnel, who are in limited supply. The Company's
operations could be adversely affected if it were to lose the services of a
significant number of qualified employees or if it were unable to obtain
additional qualified employees when needed. The market for highly qualified
personnel in the IT industry is extremely competitive, making it difficult for
companies in this industry, including Sterling Software, to attract and retain
qualified employees. The Company strives to maintain excellent employee
relations, attractive office facilities and challenging work environments, and
offers competitive compensation and benefits packages.
At September 30, 1999, the Company employed approximately 3,700 people.
Intellectual Property
Sterling Software's success depends in part on its technology and
intellectual property. The Company relies primarily on a combination of
copyright, patent and trademark laws, confidentiality procedures and
contractual provisions to protect its intellectual property. The Company
routinely enters into nondisclosure and confidentiality agreements with
employees, contractors, consultants, vendors and customers, and its product
license agreements generally prohibit the unauthorized use or disclosure of
the Company's proprietary intellectual property. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent
as the laws of the United States. In general, however, management believes
that the competitive position of the Company depends primarily on the skill,
knowledge, creativity and experience of Sterling Software's personnel and
their ability to develop, market and support software products, and that its
business is not materially dependent on copyright protection, trademarks or
patents.
The Company does not believe that any of its products infringe in any
material respect on the valid proprietary rights of third parties. However, a
large number of patents, trademarks and copyrights have been, and are being,
issued, registered or asserted in the software industry and there can be no
assurance that the Company is aware of all intellectual property rights that
may pose a risk of infringement by the Company's products, especially with
respect to United States patents, which can cover extremely broad concepts and
the applications for which are confidential until the patents are issued.
Licenses for a number of software products have been granted to the Company
for its own use or for remarketing to its customers. In the aggregate, these
licenses are significant to the business of the Company, but the Company
believes that the loss of any one of these licenses would not materially
affect the Company's business, financial condition or results of operations.
8
<PAGE>
The SOLVE, SAMS, VM, EUREKA, VISION and COOL families of product names and
the mark "Sterling Software" used herein are registered or unregistered
trademarks owned by the Company.
Backlog
Sterling Software's backlog relates principally to the uncompleted portion
of multi-year professional services contracts with agencies of the federal
government, including renewal options with government agencies, a portion of
which is restricted by law to a term ending on the last day of the government
agencies' then-current fiscal year.
Determination of the Company's backlog involves estimation, particularly
with respect to customer requirements contracts and multi-year contracts of a
cost-reimbursement or incentive nature. A large portion of the Company's
federal government contracts are funded for one year or less and are subject
to contract award, extension or expiration at different times during the year,
and all of the Company's federal government contracts are subject to
termination by the government on short notice. Based upon past experience, the
Company believes that the contract renewal options included in existing
contracts will be exercised for the full period designated in such contracts,
but no assurance can be given that such contracts will be renewed.
Total backlog, including federal government contract renewal options not
yet exercised and multi-year product support contracts at September 30, 1999
and 1998, was $274,107,000 and $254,123,000, respectively. For both 1999 and
1998, 96% of these amounts related to federal government sources, primarily in
the Company's federal systems business. The dollar value of federal government
renewal options not yet exercised or funded included in the Company's total
backlog at September 30, 1999 and 1998, was $138,899,000 and $159,421,000,
respectively. Approximately $103,715,000 of the September 30, 1999 backlog is
expected to be realized in the year ending September 30, 2000.
Executive Officers
The following information regarding the executive and other officers of
Sterling Software is as of November 9, 1999.
<TABLE>
<CAPTION>
Name Age Position
---------------------------- --- --------------------------------------------
<C> <C> <S>
Sam Wyly 65 Chairman of the Board and Director
Charles J. Wyly, Jr. 66 Vice Chairman of the Board and Director
President, Chief Executive Officer and
Sterling L. Williams 56 Director
Executive Vice President and Chief Operating
Geno P. Tolari 56 Officer
F.L. "Mike" Harvey 61 Senior Vice President and Group President
Senior Vice President, General Counsel and
Don J. McDermett, Jr. 41 Secretary
B. Carole Morton 53 Senior Vice President and Group President
Mark A. Theel 42 Senior Vice President and Group President
Senior Vice President and Chief Financial
R. Logan Wray 40 Officer
Christopher C. Bruton * 41 Vice President, Business Development
Pamela L. Isbell * 40 Vice President, Financial Planning
Julie G. Kupp * 36 Vice President, Investor Relations
Paul M. Baker * 39 Controller
Susan D. Tiholiz * 51 Treasurer
</TABLE>
- --------
* Although Christopher C. Bruton, Pamela L. Isbell, Julie G. Kupp, Paul M.
Baker and Susan D. Tiholiz are officers of the Company, the Company does
not consider such employees to be "executive officers" of the Company, as
that term is defined in regulations promulgated by the Securities and
Exchange Commission.
9
<PAGE>
Sam Wyly has served as Chairman of the Board since co-founding the Company
in 1981. He also serves as Chairman of the Executive and the 1996 and 1999
Stock Option Committees of the Board. Companies founded by Mr. Wyly were among
the forerunners of the computer software and electronic commerce industries
and the Internet. In 1963, he founded University Computing Company, which
became one of the largest computer service and software companies. His data
transmission company, Datran, Inc., was one of the pioneering
telecommunications ventures that broke up the telephone monopoly. Sterling
Commerce, Inc. (a provider of electronic commerce software and network
services), a leader in this industry, was spun off to the Company's
stockholders in 1996 and Mr. Wyly serves as Chairman of its Executive
Committee. Mr. Wyly also serves as Chairman of Michaels Stores, Inc., a
specialty retailer, Chairman of Scottish Annuity & Life Holdings, Ltd., a
variable life insurance and reinsurance company, and Founding Partner of the
General Partner of Maverick Capital, Ltd., an investment fund management
company. Mr. Wyly is the father of Evan Wyly, also a director of the Company.
Charles J. Wyly, Jr. co-founded the Company in 1981 and since that time has
served as a director of the Company, and as Vice Chairman since 1984. He
served as an officer and director of University Computing Company, a computer
software and services company, from 1964 to 1975, including President from
1969 to 1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources
Company, an oil refining and silver mining company, and Charles J. Wyly, Jr.
served as its Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice
Chairman of the Bonanza Steakhouse chain from 1967 to 1989. Mr. Wyly currently
serves as Vice Chairman of Michaels Stores, Inc., as a director of Scottish
Annuity & Life Holdings, Ltd. and as a director of Sterling Commerce, Inc. Mr.
Wyly is a member of the Executive Committee and the 1996 and 1999 Stock Option
Committees of the Board.
Sterling L. Williams co-founded the Company in 1981 and since that time has
served as President, Chief Executive Officer and a director of the Company.
Mr. Williams has served as Chairman of the Board and a director of Sterling
Commerce, Inc. since December 1995. From December 1995 to October 1996,
Mr. Williams also served as Chief Executive Officer of Sterling Commerce, Inc.
Mr. Williams is a member of the Executive Committee and the 1996 and 1999
Stock Option Committees of the Board.
Geno P. Tolari has served as an Executive Vice President of Sterling
Software since March 1990 and as Chief Operating Officer since April 1996.
From November 1986 to March 1990, he served as a Senior Vice President of
Sterling Software. Mr. Tolari served as President of the Systems Management
Group from December 1994 to February 1997 and as President of the Federal
Systems Group from October 1985 to December 1994.
F.L. "Mike" Harvey has served as a Senior Vice President of Sterling
Software since June 1997 and as President of the Systems Management Group
since October 1998. He served as President of the former Applications
Management Group from October 1996 to October 1998. From March 1993 to June
1997, he served as President of Omega Consulting Group Inc., a software
consulting company.
Don J. McDermett, Jr. has served as Senior Vice President and General
Counsel of Sterling Software since May 1997 and as Secretary since October
1998. From July 1996 to May 1997, he served as Vice President, Legal of
Sterling Software. Prior to that time Mr. McDermett was employed by Thompson &
Knight, a Dallas-based law firm, having been a senior partner in that firm's
corporate practice group since 1993.
B. Carole Morton has served as a Senior Vice President of Sterling Software
since October 1996 and as President of Sterling Software's Business
Intelligence Group (formerly the Information Management Group) since October
1998. She served as President of the Information Management Division from
October 1995 to August 1999. From October 1996 to June 1997, she also served
as President of the former Information Management Group. Ms. Morton served as
President of Sterling Software's former Applications Engineering Division from
December 1994 to October 1995 and President of the former Applications
Management Division from July 1993 to November 1994.
10
<PAGE>
Mark A. Theel has served as a Senior Vice President of Sterling Software
since November 1998 and as President of Sterling Software's Application
Development Group since October 1998. From January 1996 to August 1999, Mr.
Theel was President of the former Application Development Division. From
December 1994 to December 1995, Mr. Theel served as Vice President, Labs of
the Application Development Division and from July 1993 to November 1994, he
served as Vice President, Labs of the former Applications Management Division.
R. Logan Wray has served as Senior Vice President and Chief Financial
Officer of the Company since May 1997. Prior to that time he was employed by
Ernst & Young LLP, a national accounting firm, having been a partner in that
firm since 1994.
Christopher C. Bruton has served as Vice President, Business Development of
Sterling Software since July 1999. From June 1997 to June 1999, he served as
Vice President, Finance and Administration, for the Systems Management Group.
Prior to June 1997, Mr. Bruton served as Vice President, Finance and
Administration, for the former Applications Management Group.
Pamela L. Isbell has served as Vice President, Financial Planning of
Sterling Software since April 1996. From April 1988 to April 1996, Ms. Isbell
served as a Financial Analyst of Sterling Software.
Julie G. Kupp has served as Vice President, Investor Relations of Sterling
Software since April 1996. From September 1995 to April 1996, Ms. Kupp served
as Director, Investor Relations and from April 1995 to September 1995, she
served as Senior Financial Analyst of Sterling Software. From December 1993 to
April 1995, Ms. Kupp served as Director of Accounting. Prior to December 1993,
Ms. Kupp was employed by Ernst & Young LLP, most recently as Audit Senior
Manager.
Paul M. Baker has served as Controller of Sterling Software since March
1999. From November 1998 to March 1999, he served as International Finance
Director for the former Application Development Group. Mr. Baker served as
Controller of the former Application International Division from July 1997
until November 1998. Prior to July 1997, he was employed by Ernst & Young,
most recently as Senior Audit Manager.
Susan D. Tiholiz has served as Treasurer of the Company since November
1997. She served as Director of Treasury from June 1996 to November 1997 and
as a consultant to the Company from December 1995 to June 1996. Prior to
joining the Company, Ms. Tiholiz was employed by Atlantic Richfield Company
(ARCO), a global energy company, serving in various capacities within finance,
treasury and human resources.
Item 2. Properties.
With its principal executive office located in Dallas, Texas, the Company
leases offices and facilities in or near more than 85 cities in the United
States and worldwide. Headquarters offices for the Company's groups and
divisions are located in the following cities: Bellevue, Nebraska; London,
England; McLean, Virginia; Minneapolis, Minnesota; Paris, France; Plano,
Texas; Rancho Cordova, California; Reston, Virginia; Sydney, Australia; and
Woodland Hills, California. Other major United States and international
facilities are located in Amsterdam, The Netherlands; Atlanta, Georgia;
Brussels, Belgium; Cologne, Germany; Dusseldorf, Germany; Falls Church,
Virginia; Herndon, Virginia; Madrid, Spain; Milan, Italy; Redwood Shores,
California; Tokyo, Japan; and Wiesbaden, Germany.
Item 3. Legal Proceedings.
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. The foregoing statement
concerning the belief of the
11
<PAGE>
Company's management is a forward-looking statement within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results could vary
and are subject to a number of risks and uncertainties, including the risk of
an adverse outcome in any given legal proceeding or claim and the risk of
potentially increased litigation resulting from the so-called "Year 2000"
issue. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Forward-Looking Information" and "--Year
2000 Issues".
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, par value $0.10 per share ("Common Stock"), is
traded on the New York Stock Exchange under the symbol "SSW". The high and low
sales prices (as adjusted for periods prior to April 6, 1998 to reflect a 2-
for-1 stock split) for the Common Stock for the periods indicated are set
forth below.
<TABLE>
<CAPTION>
Price Range
-------------------
High Low
--------- ---------
<S> <C> <C>
Year Ended September 30, 1999:
Quarter Ended:
December 31, 1998...................................... $30 5/8 $22 1/4
March 31, 1999......................................... $26 5/8 $21 1/4
June 30, 1999.......................................... $26 7/8 $18 9/16
September 30, 1999..................................... $26 7/8 $18 1/8
Year Ended September 30, 1998:
Quarter Ended:
December 31, 1997...................................... $20 27/32 $16 1/4
March 31, 1998......................................... $28 13/16 $17 3/4
June 30, 1998.......................................... $30 1/4 $23 11/16
September 30, 1998..................................... $32 13/16 $20 1/8
</TABLE>
At November 5, 1999, the Company had 995 holders of record of its Common
Stock.
The Company did not pay any cash dividends on its Common Stock during the
two years ended September 30, 1999 and does not expect to pay such dividends
in the foreseeable future.
12
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
the consolidated financial statements of the Company included elsewhere
herein. The Company's financial statements for periods prior to the
acquisition of Synon Corporation ("Synon") represent the combined financial
statements of the previously separate entities. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Combinations, Reorganizations and Divestitures" and Note 2 of Notes
to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Years Ended September 30
-------------------------------------------------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
-------- -------- --------- -------- --------
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenue.................... $807,004 $719,943 $ 569,202 $513,761 $467,093
Cost of sales.............. 293,397 287,666 236,736 217,551 191,776
Product development and
enhancement............... 39,572 36,162 29,659 26,402 32,644
Selling, general and
administrative............ 289,056 264,450 231,185 206,648 181,482
Income from continuing
operations before
reorganization costs,
purchased research and
development, other income
(expense) and income
taxes..................... 184,979 131,665 71,622 63,160 61,191
Reorganization costs........ 99,620 45,162 106,037 19,512
Purchased research and
development................ 83,566 137,849 62,000
Income (loss) from
continuing operations
before income taxes........ 34,467 119,837 (134,556) 86,912 (17,705)
Income (loss) from
continuing operations...... (10,756) 76,044 (131,897) 62,117 (32,942)
Income from discontinued
operations, net of
taxes (4).................. 51,187 42,930
Gain on the initial public
offering of subsidiary, net
of taxes (4)............... 126,103
Income (loss) applicable to
common stockholders........ (10,756) 76,044 (131,897) 239,407 9,843
Weighted average common
shares outstanding......... 82,835 80,638 79,588 67,226 49,889
Per common share data:
Income (loss) from
continuing operations:
Basic..................... $ (.13) $ .94 $ (1.66) $ .92 $ (.66)
Diluted................... (.13) .89 (1.66) .86 (.66)
Net income (loss):
Basic..................... (.13) .94 (1.66) 3.56 .20
Diluted................... (.13) .89 (1.66) 3.26 .20
</TABLE>
<TABLE>
<CAPTION>
September 30
-----------------------------------------------------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
---------- ---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital......... $ 421,836 $ 673,301 $ 556,552 $ 730,107 $ 214,656
Total assets............ 1,230,031 1,188,988 1,100,278 1,130,579 689,082
Long-term debt.......... 117,265
Other noncurrent
liabilities............ 85,961 60,201 49,751 37,020 22,107
Stockholders' equity.... 811,732 861,558 757,491 887,336 354,636
</TABLE>
13
<PAGE>
- --------
(1) Results of operations for 1999 include $83,566,000 of purchased research
and development costs charged to expense in accordance with the purchase
method of accounting in connection with acquisitions completed by the
Company in 1999 (the "1999 Acquisitions"). Results of operations for 1999
also include reorganization costs of $99,620,000 primarily related to the
1999 Acquisitions, including costs associated with the realignment of the
application development business within the application management
business segment. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Combinations,
Reorganizations and Divestitures" and Note 2 of Notes to the Consolidated
Financial Statements.
(2) Results of operations for 1998 include reorganization costs of $45,162,000
primarily related to the reorganization of the Company's operations in
connection with the acquisition of Synon, and to a lesser extent, to the
acquisition of Mystech Associates, Inc. ("Mystech"). See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Business Combinations, Reorganizations and Divestitures "
and Note 2 of Notes to Consolidated Financial Statements.
(3) On June 30, 1997, Sterling Software completed the acquisition of
substantially all of the assets used by the Software Division of Texas
Instruments Incorporated ("TI Software") for approximately $214,774,000.
The acquisition was accounted for in accordance with the purchase method
of accounting. Results of operations for 1997 include $137,849,000 of
purchased research and development costs charged to expense in accordance
with the purchase method of accounting. Results of operations for 1997
also include reorganization costs of $106,037,000 primarily related to the
reorganization of the Company's operations in connection with the
acquisition of TI Software, and to a lesser extent, the termination of the
Company's international distributor arrangement with Sterling Commerce,
Inc. ("Sterling Commerce"). See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business
Combinations, Reorganizations and Divestitures" and Note 2 of Notes to
Consolidated Financial Statements.
(4) On March 13, 1996, Sterling Commerce, a former wholly owned subsidiary of
Sterling Software, completed the initial public offering (the "Offering")
of 13,800,000 shares of its common stock, par value $0.01 per share
("Commerce Stock"). Pursuant to the Offering, Sterling Software sold to
the public 12,000,000 of its 73,200,000 shares of Commerce Stock and
Sterling Commerce sold 1,800,000 previously unissued shares of Commerce
Stock. The Offering resulted in net proceeds to Sterling Software of
approximately $265,458,000 after deducting underwriting discounts and
commissions and Sterling Software's pro rata share of Offering expenses.
On September 30, 1996, Sterling Software completed the spin-off of
Sterling Commerce with the pro rata distribution of its remaining 81.6%
ownership in Sterling Commerce to Sterling Software's stockholders by
means of a tax-free dividend. The distribution resulted in the reduction
of Sterling Software's stockholders' equity in the amount of $113,549,000,
representing the book value of net assets distributed. The results of
operations of Sterling Commerce for 1995 and 1996 have been classified as
discontinued operations. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Combinations,
Reorganizations and Divestitures".
(5) Results of operations for 1995 include $62,000,000 of purchased research
and development costs charged to expense in accordance with the purchase
method of accounting in connection with the merger of the Company with
KnowledgeWare, Inc., as well as $19,512,000 of reorganization costs
primarily related to the reorganization of the Company's operations in
connection with that merger.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Business Combinations, Reorganizations and Divestitures
1999 Acquisitions
The acquisitions listed below were completed during 1999 and were accounted
for in accordance with the purchase method of accounting. Accordingly, the
results of operations of the acquired businesses are included in the Company's
results of operations from the respective dates of the acquisitions.
. On October 26, 1998, Sterling Software acquired Cayenne Software, Inc.
("Cayenne"), a publicly held global supplier of analysis and design
solutions for application and database development, in an $11,400,000
cash merger transaction.
. On April 15, 1999, Sterling Software acquired the distributed systems
storage software business (the "Alexandria Business") of Spectra Logic
Corporation in a cash asset acquisition transaction valued at
approximately $33,000,000.
. On April 30, 1999, Sterling Software completed the acquisition of
Interlink Computer Sciences, Inc. ("Interlink"), a publicly held global
supplier of high-performance solutions for enterprise systems
networking, in an all-cash transaction valued at approximately
$63,907,000.
. On July 26, 1999, Sterling Software acquired CoreData, Inc.
("CoreData"), a privately held developer and supplier of backup software
for remote and mobile PCs, in a cash merger transaction valued at
approximately $14,015,000.
. On August 31, 1999, Sterling Software completed the acquisition of
Information Advantage, Inc. ("Information Advantage"), a publicly held
provider of web-based and enterprise business intelligence software, in
an all-cash transaction valued at approximately $168,357,000.
The operations of Cayenne and Information Advantage have been included in
the Company's operations as part of the Company's application management
business segment since the date of acquisition. The operations of the
Alexandria Business, CoreData and Interlink have been included in the
Company's operations as part of the Company's systems management business
segment since the date of acquisition.
The total cost of the 1999 Acquisitions was approximately $358,062,000,
including direct costs related to the acquisitions of approximately
$67,383,000, consisting of employee termination costs, transaction costs,
costs associated with the elimination of duplicate facilities and other direct
costs. The 1999 Acquisitions were funded from the Company's available cash
balances. At September 30, 1999, the balance of the direct costs incurred in
the 1999 Acquisitions that remained to be paid totaled $35,323,000, related
primarily to employee severance and benefits and the elimination of duplicate
facilities and leases.
Results of operations for 1999 include $83,566,000 of purchased research
and development costs associated with the 1999 Acquisitions. Amounts
attributed to purchased research and development were expensed at the date of
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. The value of the purchased research and development attributable to
each acquisition was determined by an independent valuation expert retained by
the Company. The estimates used by the Company in valuing the purchased
research and development were based upon assumptions regarding future events
and circumstances the Company believes to be reasonable but that are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the assumed results. Any such variance may result in a material adverse
effect on the results of operations of the Company.
The value of the purchased research and development attributable to each
acquisition was determined by discounting the estimated projected net cash
flows related to the applicable products for the next 10 years, including
costs to complete the development of the technology and the future revenues to
be earned upon release of the products. The rate utilized to discount the net
cash flows to their present value, generally 20%, was based
15
<PAGE>
on the Company's weighted average cost of capital adjusted for the risks
associated with the estimated growth, profitability and developmental and
market risks of the acquired development projects. Projected net cash flows
from such products are based on estimates of revenues and operating profits
related to such products.
A summary description of the acquired in-process technology, the amount
expensed and the estimated completion of the purchased research and
development at the time of the relevant acquisition, expressed as a percentage
of the total estimated completion effort, is set forth below:
<TABLE>
<CAPTION>
Estimated
Percentage
Description of Purchased Research and Amount Completion at
Acquisition Development Expensed Acquisition
- ----------- -------------------------------------- ----------- -------------
<S> <C> <C> <C>
Cayenne Technologies for integrating object- $ 9,623,000 80%
oriented technologies with component-
based design and implementation
Alexandria Business Technologies for data movement and $12,325,000 80%
backup capabilities to meet next
generation, centralized, end-to-end
storage management requirements for
large, heterogeneous storage
environments, and designed
specifically to operate optimally in
Storage Area Networks
Interlink Technologies to provide access control $10,143,000 63% - 87%
facilities for OS/390 TCP/IP customers
CoreData Technologies with the unique ability $ 4,431,000 40%
to use multiple devices for more
efficient remote backup and restore
Information Advantage Technologies allowing advanced $47,044,000 62% - 90%
profiling and search, increased report
server capabilities and enhanced user
interfaces for authoring reports and
performing analysis of data
</TABLE>
The Company is using the purchased research and development to create new
products that are expected to become part of the product portfolios offered by
the systems management and application management business segments. The
Company expects that products developed from the purchased research and
development generally will be released during fiscal year 2000. 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. The Company's
management expects that the purchased research and development generally will
be successfully developed into commercially viable products; however, there
can be no assurance that commercial viability or timely release of these
products will be achieved.
The Company planned to integrate technologies acquired in the Cayenne
acquisition with core technologies of both its own and Cayenne's existing
product offerings to produce a new product targeted at providing advanced
object-oriented (OO) modeling technologies and tools for application design
and implementation. But with increasing opportunities in the market for
application development tools for e-business solutions - such as web-
enablement of existing applications, and integration and extension of existing
applications - combined with an increase in the estimated costs of integrating
the acquired technologies with the Company's existing OO technologies, in
September of 1999 the Company decided to discontinue development of the new,
integrated product. Accordingly, the Company wrote off core technology and
goodwill attributable to this product of approximately $7,800,000 in the
fourth quarter of 1999.
See Note 2 of Notes to Consolidated Financial Statements.
16
<PAGE>
1998 Acquisitions
The acquisitions listed below occurred in the fourth quarter of 1998 (the
"1998 Acquisitions") and were both accounted for as poolings of interests:
. On July 9, 1998, Sterling Software acquired Mystech, a privately held
federal information technology services contractor, in a stock-for-stock
merger transaction (the "Mystech Merger"). As a result of the
transaction, Sterling Software issued approximately 769,000 shares of
its Common Stock in exchange for the previously outstanding shares of
Mystech common stock and reserved approximately 174,000 shares of Common
Stock for issuance upon exercise of assumed Mystech stock options. The
Mystech Merger was valued at approximately $28,000,000 and the Mystech
organization was added to the Company's federal systems business
segment. The impact of the pooling of interests accounting on the
Company's historical financial statements was not material; therefore,
the Company's financial statements for periods prior to the Mystech
Merger were not restated for this transaction.
. On July 31, 1998, Sterling Software acquired Synon, a privately held
provider of application development software and services, in a stock-
for-stock merger transaction (the "Synon Merger") valued at
approximately $79,000,000. 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, were restated to
represent the combined financial statements of the previously separate
entities.
1997 Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the "TI
Software Acquisition") of certain assets (including the capital stock of
certain foreign subsidiaries) of Texas Instruments Incorporated ("Texas
Instruments"). Such assets constituted substantially all of the assets used by
TI Software in its business of developing, marketing and supporting
application development software and providing related consulting services.
The results of operations of TI Software are included in the Company's results
of operations, as part of the Company's application management business
segment, from the date of the TI Software Acquisition.
The cash purchase price paid for such assets was $165,000,000. The total
cost of the TI Software Acquisition was approximately $214,774,000, including
costs directly related to the TI Software Acquisition of approximately
$49,774,000, consisting of employee termination costs, transaction costs,
costs associated with the elimination of duplicate facilities and other direct
costs. At September 30, 1999, substantially all of the direct costs incurred
in the TI Software Acquisition had been paid.
Results of operations for 1997 include $137,849,000 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. At the acquisition date, TI
Software was developing several new products for component-based development.
These development activities resulted in the Company's release of three
products. The first product, released in early 1998, has become the primary
component-based application development product, and largest single revenue
source, for the Company's application management business segment. A second
product, for component architecture modeling and interface-based design for
component specifications, was also released in 1998 and has been successfully
marketed. A third product was released for limited availability in 1999 and is
a development environment that incorporates advanced component modeling and
generation capabilities.
Reorganization Costs
The Company's results of operations for the year ended September 30, 1999
include reorganization costs of $99,620,000 primarily related to the 1999
Acquisitions, including costs associated with the realignment of the
application development business within the application management business
segment.
17
<PAGE>
The Company's results of operations for the year ended September 30, 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, and to a lesser extent, the Mystech Merger.
The Company's results of operations for the year ended September 30, 1997
include reorganization costs of $106,037,000 primarily related to the
reorganization of the Company's operations in the third quarter of 1997 in
connection with the TI Software Acquisition, and to a lesser extent, the
termination of the Company's international distributor arrangement with
Sterling Commerce, formerly a wholly owned subsidiary of the Company. These
reorganization costs also include the write-down of certain excess cost over
net assets acquired related to the Company's federal systems business.
The components of the above reorganization costs were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Employee termination costs........................ $29,904 $17,342 $ 18,539
Elimination of duplicate facilities, equipment and
other assets..................................... 25,872 8,295 19,993
Write-down of software products that will no
longer be actively marketed...................... 30,862 6,397 17,591
Write-down of excess cost over net assets
acquired......................................... 996 38,955
Out of pocket costs related to the
reorganization(s)................................ 9,794 9,535 5,109
Other costs....................................... 2,192 3,593 5,850
------- ------- --------
$99,620 $45,162 $106,037
======= ======= ========
Reorganization costs requiring cash outlays....... $57,464 $35,610 $ 42,311
======= ======= ========
Remaining balance to be paid at September 30,
1999............................................. $40,686 $ 7,488 $ 5,245
======= ======= ========
</TABLE>
The remaining balances to be paid consist primarily of commitments under
lease arrangements for office space and equipment for the 1997 and 1998
reorganizations, and employee termination costs and benefits, and commitments
under lease arrangements for office space and equipment for the 1999
reorganizations.
The Company periodically reviews the estimates of remaining costs to be
paid relating to reorganizations. This periodic review has not resulted in any
significant change to aggregate existing accruals, and the Company does not
expect to incur costs related to the above-described reorganizations in excess
of the amounts previously charged to operations.
Termination of International Distributor Arrangement
Effective as of June 30, 1997, Sterling Software and Sterling Commerce
completed an agreement terminating an international distributor arrangement
under which Sterling Software acted as the exclusive distributor of Sterling
Commerce's interchange and communications software products in markets outside
the United States and Canada. The results of the Company's international
operations related to selling, marketing and providing first level support for
these products through June 30, 1997 are included in the business segment
information presented herein under "Corporate and other."
Results of Operations
1999 Compared to 1998
Total revenue increased $87,061,000, or 12%, in 1999 over 1998 due to a 26%
increase in products revenue and a 14% increase in product support revenue,
partially offset by a 6% decline in services revenue. Because the Synon Merger
was accounted for as a pooling of interests, the Company's results of
operations in 1998 and prior years, including the results of the application
management business segment, were restated to include the results
18
<PAGE>
of operations of the previously separate entities. Without the effect of the
Synon restatement, total revenue would have increased 23% in 1999 over 1998.
The increase in products and product support revenue is due to increased
products and product support revenue in both the systems management and
application management business segments. The decline in services revenue is
due to a decline in services revenue in the application management business
segment partially offset by an increase in services revenue in the federal
systems business segment. The decline in the application management business
segment resulted from the execution of a new consulting services strategy in
that business segment following the July 1998 Synon Merger. The Company
reduced its services headcount substantially to effect the new strategy, which
included directing customers to third-party service providers to perform many
of the consulting services previously performed directly by the Company and
Synon. The new strategy enabled the Company to focus its efforts primarily on
project management and mentoring services, and the Company believes that the
execution of this strategy has also enabled it to enhance its relationships
with third party service providers--namely systems integrators and independent
software vendors, who are also buyers of its application development tools.
Without the effect of the Synon restatement, total services revenue would have
increased 6% in 1999 over 1998.
Revenue from the systems management business segment increased $85,597,000,
or 42%, in 1999 over 1998, primarily due to a 54% increase in products revenue
and a 15% increase in product support revenue. The increase in products
revenue was mainly attributable to strong internal growth as well as revenue
added as a result of the Company's acquisitions of the Alexandria Business and
Interlink. Domestic storage management products revenue grew substantially,
and both the storage management and network management product lines produced
strong worldwide product growth, while worldwide VM products revenue remained
flat compared with the prior year. Approximately 44% of the systems management
business segment's total revenue in 1999 was derived from the Company's
international operations, compared to 47% in 1998.
Revenue from the application management business segment declined
$8,168,000, or 2%, in 1999 over 1998 due to a 28% decline in services revenue,
partially offset by a 3% increase in products revenue and a 13% increase in
product support revenue. Without the effect of the Synon restatement, total
application management revenue would have increased 18% in 1999 over 1998 with
16%, 34% and 1% increases in products, product support and services revenue,
respectively. The increase in products revenue was due to growth in products
revenue from the application development products. The increase was offset by
a small decline in products revenue from the Company's historical business
intelligence products due to extraordinary product revenue performance in this
product line in the fourth quarter of 1998. The increase in product support
revenue was due to growth in both the application development and business
intelligence product lines. As noted above, the reported decline in services
revenue is due to the execution of the Company's new consulting services
strategy following the July 1998 Synon Merger. Although the application
development business is now also working closely with its customers and
partners to deliver a complete e-business solution--with particular focus on
project support services, such as project management and mentoring--these
services are not expected to substantially change the revenue mix in the
application management business segment next year. Approximately 48% of the
application management business segment's total revenue in 1999 was derived
from the Company's international operations, compared to 50% in 1998.
Revenue from the federal systems business segment increased $10,260,000, or
7%, in 1999 over 1998 primarily due to higher contract billings in the
segment's defense business as well as revenue added as a result of the Mystech
Merger.
Total revenue generated from the Company's international operations was
$299,530,000 and $277,428,000 in 1999 and 1998, respectively, representing an
increase of $22,102,000, or 8%. This was due to a 32% year over year increase
in international revenue generated by the systems management business segment,
partially offset by a 5% year over year decline in international revenue
generated by the application management business segment. Revenue from the
Company's international operations represented 37% of total revenue for 1999
compared to 39% in 1998. Without the effect of the Synon restatement, revenue
from the Company's international operations would have increased 22% year over
year.
19
<PAGE>
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 was 45% of total revenue in 1999 compared to 46% in 1998.
Total costs and expenses increased $171,771,000, or 27%, in 1999 over 1998.
However, excluding the 1999 reorganization costs and purchased research and
development costs of $99,620,000 and $83,566,000, respectively, and
reorganization costs of $45,162,000 related to the 1998 Acquisitions, total
costs and expenses increased $33,747,000, or 6%. An increase in total costs in
the systems management and federal systems business segments of 38% and 6%,
respectively, was partially offset by a 7% decline in total costs in the
application management business segment. The increase in total costs in the
systems management and federal systems business segments resulted from the
higher revenues generated by these segments, although the cost increases were
not as great as the revenue growth generated in these segments. The decrease
in total costs in the application management business segment is primarily 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 $5,731,000, or 2%, in 1999 over 1998, and
represented 36% and 40% of total revenue in 1999 and 1998, respectively. Cost
of sales for products and product support represented 15% of products and
product support revenue in both 1999 and 1998. Cost of sales for services
represented 89% of services revenue in 1999 compared to 87% in 1998. Improved
services margins in the federal systems business segment were offset by lower
services margins in the application management business segment domestically
due to lower utilization rates.
Product development expense for 1999 was $39,572,000, net of $31,311,000 of
capitalized software development costs, as compared to 1998 product
development expense of $36,162,000, net of $26,956,000 of capitalized software
development costs. Gross product development expense, before capitalization of
software, was 11% of non-federal systems revenue in both 1999 and 1998. In
1999, the Company capitalized $31,311,000 of development costs, a 44%
capitalization rate, and amortized $26,705,000 of software. This compares to
$26,956,000 of capitalized development costs, or a 43% capitalization rate,
and $20,791,000 of software amortization in 1998. The increase in both total
and capitalized software development costs in 1999 over 1998 is attributable
to an increase in product development efforts that were in process both in the
application management and system management business segments. Product
development expenses and the capitalization rate historically have fluctuated,
and may in the future continue to fluctuate from period to period depending in
part upon the number and status of software development projects that are in
process.
Selling, general and administrative expenses increased $24,606,000, or 9%,
in 1999 compared to 1998, and represented 36% and 37% of total revenue in 1999
and 1998, respectively. Lower selling, general and administrative expenses as
a percent of revenue are due to the Company's lower cost structure in the
application management business segment. The systems management business
segment experienced an increase in selling, general and administrative
expenses consistent with the revenue growth generated in that segment.
Investment income decreased $2,518,000 in 1999 compared to 1998, as a
result of lower average cash and cash equivalents balances, primarily due to
the use of cash in connection with the 1999 Acquisitions.
Income from continuing operations before income taxes in 1999 was
$34,467,000 compared to $119,837,000 for 1998. However, excluding the 1999
reorganization costs and purchased research and development costs of
$99,620,000 and $83,566,000, respectively, and reorganization costs of
$45,162,000 related to the 1998 Acquisitions, income before income taxes was
$217,653,000 in 1999, representing an increase of $52,654,000, or 32%,
primarily due to higher profits in all three of the Company's business
segments, partially offset by a decline in investment income.
The Company's effective tax rate for 1999 was 131% compared to 37% for
1998. The effective tax rate for 1999 was adversely impacted by one-time
reorganization costs and purchased research and development costs
20
<PAGE>
totaling $183,186,000. The Company's effective tax rate for 1998 was adversely
impacted by unbenefited losses incurred by Synon prior to the Synon Merger.
1998 Compared to 1997
Total revenue increased $150,741,000, or 26%, in 1998 over 1997 due to
revenue increases in all three of the Company's business segments, partially
offset by a decline in corporate and other revenue due to the termination of
an international distributor arrangement with Sterling Commerce in the third
quarter of 1997. Revenue from the application management, systems management
and federal systems business segments increased 64%, 11% and 22%,
respectively, in 1998 over 1997. During 1998 both the application management
business segment and the federal systems business segment benefited
substantially from the domestic and international operations acquired by
Sterling Software in the 1997 acquisition of TI Software.
Revenue from the application management business segment increased
$142,847,000, or 64%, in 1998 over 1997 due to a 72% increase in products
revenue, a 58% increase in product support revenue and a 61% increase in
services revenue. The significant increase in revenue from the application
management business segment is primarily attributable to revenue from the
application development products and services acquired in the 1997 acquisition
of TI Software. Approximately 50% of the application management business
segment's total revenue in 1998 was derived from the Company's international
operations, compared to 40% in 1997.
Revenue from the systems management business segment increased $19,850,000,
or 11%, in 1998 over 1997 primarily due to a 17% increase in products revenue
partially offset by a 1% decline in product support revenue due in part to the
adverse impact of foreign currency exchange rate fluctuations as a result of a
stronger U.S. dollar. The increase in products revenue was mainly attributable
to strong domestic product sales across all systems management product lines
and strong international product sales in the network management product line.
Approximately 47% of the systems management business segment's total revenue
in 1998 was derived from the Company's international operations, compared to
49% in 1997.
Revenue from the federal systems business segment increased $26,983,000, or
22%, in 1998 over 1997 due primarily to a contract added to the Company's
federal systems business segment as a result of the 1997 acquisition of TI
Software, revenue added as a result of the Mystech Merger in the fourth
quarter of 1998 and, to a lesser extent, to higher contract billings.
Total revenue generated from the Company's international operations was
$277,428,000 and $217,347,000 in 1998 and 1997, respectively, representing an
increase of $60,081,000, or 28%. This was due to a 102% year over year
increase in international revenue generated by the application management
business segment and a 6% year over year increase in international revenue
generated by the systems management business segment. The overall increase in
international revenue was partially offset by a decline in revenue from sales
of Sterling Commerce's software products due to the termination of an
international distributor arrangement in the third quarter of 1997. In
addition, international operating results in 1998 were adversely impacted by
foreign currency exchange rate fluctuations as a result of a stronger U.S.
dollar. Had foreign currency exchange rates remained consistent with the
previous year, international revenue for 1998 would have been approximately
$15,000,000 greater. Revenue from the Company's international operations
represented 39% of total revenue in 1998 compared to 38% of total revenue in
1997.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years and federal
contracts generally having terms ranging from one to five years. Like most
federal contracts, Sterling Software's federal contracts permit termination by
the government for convenience or for failure to obtain funding. Recurring
revenue decreased to 46% of total revenue in 1998 compared to 48% in 1997,
primarily due to the significant increase in products and services revenue
from the application management business segment. Overall, services revenue
increased from 32% of total revenue in 1997 to 34% of total revenue in 1998.
This increase resulted primarily from generally higher levels of consulting
services associated with product sales in the application management segment.
21
<PAGE>
Total costs and expenses decreased $108,026,000, or 15%, in 1998 compared
to 1997. Excluding the reorganization costs of $45,162,000 related to the
Synon Merger and the Mystech Merger in 1998 and reorganization costs of
$106,037,000 and the write-off of purchased research and development costs of
$137,849,000 related to the 1997 acquisition of TI Software, total costs and
expenses increased $90,698,000, or 18%, in 1998 compared to 1997.
Total cost of sales increased $50,930,000, or 22%, in 1998 compared to 1997
and represented 40% and 42% of total revenue in 1998 and 1997, respectively.
Cost of sales for products and product support decreased $8,220,000, or 10%,
in 1998 compared to 1997 and represented 15% and 21% of products and product
support revenue in 1998 and 1997, respectively. The decrease in cost of sales
for products and product support is primarily attributable to the decrease in
royalties payable to Sterling Commerce due to the termination of an
international distributor arrangement, as well as a decrease in royalties
payable to other third parties related to products no longer marketed by the
Company. Cost of sales for services increased $59,150,000, or 38%, in 1998
compared to 1997 and represented 87% and 85% of services revenue in 1998 and
1997, respectively. The increase in cost of sales for services is primarily
attributable to the increase in services revenue from the application
management business segment.
Product development expense for 1998 was $36,162,000, net of $26,956,000 of
capitalized software development costs, as compared to 1997 product
development expense of $29,659,000, net of $21,711,000 of capitalized software
development costs. Gross product development expense was 11% of non-federal
systems revenue in both 1998 and 1997. In 1998, the Company capitalized
$26,956,000 of development costs, a 43% capitalization rate, and amortized
$20,791,000 of software. This compares to $21,711,000 of capitalized
development costs, or a 42% capitalization rate, and $18,282,000 of software
amortization in 1997. The increase in both total and capitalized software
development costs in 1998 over 1997 is attributable to an increase in product
development efforts that were in process. Product development expenses and the
capitalization rate historically have fluctuated, and may in the future
continue to fluctuate, from period to period depending in part upon the number
and status of software development projects that are in process.
Selling, general and administrative expenses increased $33,265,000, or 14%,
in 1998 compared to 1997 and represented 37% and 41% of total revenue in 1998
and 1997, respectively. The decrease in selling, general and administrative
expenses as a percentage of total revenue is primarily attributable to the
cost structure implemented by the Company in connection with the TI Software
Acquisition and related reorganization in the third quarter of 1997 and cost
savings resulting from the termination of the Company's international
distributor arrangement with Sterling Commerce.
Investment income decreased $4,819,000 in 1998 compared to 1997 as a result
of lower average cash and cash equivalents balances primarily due to the use
of cash in connection with the TI Software Acquisition and the related
reorganization in the third quarter of 1997.
Income before income taxes in 1998 was $119,837,000, compared to a loss
before income taxes of $134,556,000 for 1997. However, excluding the
reorganization costs of $45,162,000 related to the Synon Merger and Mystech
Merger in the fourth quarter of 1998 and the reorganization costs of
$106,037,000 and the write-off of purchased research and development costs of
$137,849,000 related to the TI Software Acquisition in the third quarter of
1997, income before taxes increased $55,669,000, or 51%, primarily due to
higher profits in the application management and systems management business
segments partially offset by a decline in investment income.
The Company's effective tax rate for 1998 was 37% compared to an effective
tax rate for 1997 of 2%. The 1998 effective tax rate was adversely impacted by
unbenefitted losses incurred by Synon in 1998 prior to the Synon Merger. The
1997 effective tax rate benefit of 2% varies from the U.S. statutory rate due
primarily to the write-down of excess cost over net assets acquired recorded
in connection with previous acquisitions and the effect of non-U.S. tax rates.
22
<PAGE>
Liquidity and Capital Resources
The Company maintained a strong liquidity and financial position with
$421,836,000 of working capital at September 30, 1999, which includes
$318,748,000 of cash and cash equivalents and $112,285,000 of marketable
securities. Net cash provided by operating activities was $82,938,000 in 1999
compared to $101,685,000 in 1998. Net cash provided by operating activities in
1999 was reduced by payments of approximately $74,003,000 directly related to
the 1999 Acquisitions and reorganizations. Net cash provided by operating
activities in 1998 was reduced by payments made during the period of
approximately $41,585,000 directly related to the Synon Merger, Mystech Merger
and the TI Software Acquisition and the related reorganizations. Net cash
provided by operating activities was $128,611,000 in 1997. Net cash provided
by operating activities in 1997 was reduced by payments of approximately
$40,539,000 directly related to the TI Software acquisition and the related
reorganization that occurred in the third quarter of 1997. Operating cash
flows in 1997 were negatively impacted by royalty and certain other payments
of approximately $32,000,000 made to Sterling Commerce during that year.
Investing activities used $118,566,000 of cash in 1999 compared to
$162,381,000 in 1998 and $216,222,000 in 1997. Net cash used in investing
activities in 1999 included $265,787,000 of payments, net of cash acquired,
related to acquisitions completed during 1999. Net cash used in investing
activities in 1997 included the $165,000,000 payment to Texas Instruments on
June 30, 1997 in connection with the TI Software Acquisition. Capital
expenditures for 1999 were $29,554,000 compared to $33,200,000 for 1998 and
$29,003,000 in 1997. Purchases and capitalized costs of computer software were
$31,495,000, $27,854,000 and $21,860,000 for 1999, 1998 and 1997,
respectively. Cash provided by operating activities, together with other
available cash, was used to fund capital expenditures and additions to
computer software.
Financing activities used $40,916,000 of cash in 1999 compared to
$20,881,000 net cash provided by financing activities in 1998 and $281,000 net
cash provided by financing activities in 1997. Sterling Software received
proceeds of approximately $19,691,000, $17,895,000 and $1,460,000 from the
exercise of employee stock options in 1999, 1998 and 1997, respectively. Also,
the Company received proceeds of $12,750,000 and $5,586,000 from the issuance
of Common Stock pursuant to the Company's employee stock purchase plan in 1999
and 1998, respectively.
On September 3, 1999, the Company announced a share repurchase program
authorizing the repurchase of up to 5,000,000 shares of Common Stock from time
to time. From September 3, 1999 to September 30, 1999 approximately 3,457,000
shares of Common Stock were repurchased under this program for an aggregate
purchase price of approximately $72,413,000.
The Company is party to a bank credit agreement (the "Credit Agreement")
that 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 1999 or 1998. At September 30, 1999, after giving effect to outstanding
standby letters of credit in the aggregate amount of $3,868,000, approximately
$31,132,000 was available for borrowing under the Credit Agreement.
At September 30, 1999, the Company's short and long-term cash commitments,
including remaining costs related to the 1999 Acquisitions, the Synon Merger,
the Mystech Merger, 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 Information
Advantage acquisition and the realignment of the application development
business within the application management business segment. The Company
intends to meet such obligations primarily from cash provided by operating
activities.
The Company believes available cash balances, cash equivalents and short-
term investments combined with cash provided by operating activities and
amounts available under existing credit agreements, are sufficient to meet the
Company's cash requirements for the foreseeable future.
23
<PAGE>
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. See
"Certain Risks and Uncertainties That Could Affect the Company and Future
Operating Results--Growth Through Acquisitions" below.
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.
Identification of the "Y2K Issue"
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. This
issue is the result of computer programs written using two digits rather than
four to define calendar years. These programs may recognize a date using "00"
as the year 1900 rather than the year 2000, potentially resulting in complete
system failures or miscalculations causing significant disruption of normal
business activities. The Company has been and is continuing to assess and
resolve year 2000 issues associated with the Company's products, its material
internal systems and its material third party relationships. These efforts
have been under way for some time and should be completed well before
December 31, 1999. The Company has established a web page
(http://www.sterling.com/y2k/) to update customers on the Year 2000 status of
its software products and to assist them in understanding the Company's Year
2000 strategy.
Compliance of the Company's Products
The Company believes that all of its currently offered products are year
2000 compliant. Each of the Company's product divisions has completed a year
2000 assessment of its currently offered products. This assessment included
internal testing of the year 2000 capabilities of these products. The Company
has not had its products tested by an independent third party. The Company
believes that a small number of customers who receive product support from the
Company may be operating product versions that may not be year 2000 compliant
or products that the Company has replaced with comparable, year 2000 compliant
products. The Company believes that the vast majority of such customers are
migrating and will continue to migrate to compliant versions and products,
which the Company is strongly encouraging. In addition, certain former
customers may be operating non-compliant versions of products in respect of
which the Company's agreed-upon product support and warranty periods have
expired. The Company has not undertaken an assessment of whether these former
customers are taking appropriate steps to address any related year 2000
issues.
The Company does not expect customers who purchase or migrate to year 2000
compliant versions of its products to experience any year 2000 failures caused
by such products. In addition, the Company believes that its product licenses
and other agreements contain customary and appropriate limitations on the
Company's obligations with respect to any year 2000 failures that may be
caused by its current or former products. However, there can be no assurance
that the Company's expectations and beliefs as to these matters will prove to
be accurate. Moreover, the Company's products are used in IT systems comprised
of third-party hardware and software, some of which may not be year 2000
compliant. The failure of any component of these IT systems could involve the
Company in potential litigation even if the Company's products did not cause
or contribute to the failure. Various commentators have predicted that a
significant amount of litigation may arise out of year 2000 compliance issues.
While the Company has not been subject to any year 2000 claims or lawsuits to
date, there can be no assurance that customers or former customers will not
bring claims or lawsuits against the Company seeking compensation for losses
associated with year 2000-related failures. While not anticipated, a material
adverse outcome in a year 2000 claim or lawsuit--as is the case with any claim
or lawsuit--could have a material adverse effect on the Company's business,
financial condition and results of operations.
24
<PAGE>
Compliance of the Company's Internal Systems
The Company has undertaken a project to inventory, assess and, where
necessary, remediate its material internal systems. An inventory of the
Company's material internal systems (including embedded systems) has been
completed and the assessment of the Year 2000 compliance status of such
systems is substantially complete. Due to its predominant use of relatively
current "off-the-shelf" software and systems (as opposed to older legacy or
custom designed systems), the Company expects that any needed remediation of
its internal systems will require only minimal corrective measures, most of
which have already been completed or are currently in process and expected to
be completed before December 31, 1999. Moreover, as a result of the Company's
decentralized operating structure, any non-compliant systems are somewhat
limited in their effect and easier to correct. Consequently, the Company does
not anticipate the internal and external costs of its remediation measures to
be material.
Compliance of Third Party Suppliers
A year 2000 assessment of the Company's material third party supplier
relationships is substantially complete. In most cases, the Company has been
forced to rely on third party representations (made in formal communications
with, and year 2000 information made publicly available by, such suppliers),
without any ability to do independent testing or evaluation. Where possible,
however, the Company has attempted to verify readiness through the testing of
relevant equipment, systems and interfaces. While it is the Company's
intention to obtain adequate readiness and remediation assurances from the
relevant third parties promptly upon discovery of any readiness issues that
are material to the Company, there can be no assurance that the Company will
receive all information necessary to fully evaluate the year 2000 readiness of
all material suppliers. Moreover, the Company relies in various ways, both
domestically and internationally, on governments, utilities, communications
service providers, financial institutions and other third parties to conduct
normal business operations. There can be no assurance that suppliers and other
third parties upon whom the Company is reliant will not suffer business
interruptions caused by year 2000 issues. Such interruptions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Potential Impact on Customer Purchasing Patterns
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 believe that
many customers and potential customers are heavily engaged in testing and
correcting year 2000 problems in their systems, and therefore, may choose to
defer system investments during calendar 1999 and early calendar 2000,
negatively impacting the revenues of enterprise software vendors like the
Company. Other analysts have indicated that many enterprises that have
completed their year 2000 corrective measures intend to make no changes to
their existing computing environments during the latter part of calendar 1999
and the early part of 2000, also resulting in the potential deferral of system
investments. Conversely, greater demand for certain of the Company's products
may have been generated by customers who have been replacing or upgrading
computer systems to address the Year 2000 issue. As a result, demand for some
of these products may diminish as the Year 2000 arrives. Because of the
unprecedented nature of the year 2000 issue and the general uncertainty that
surrounds it, there can be no assurance that it will not affect customer
purchasing patterns, lengthen the Company's sales cycles or otherwise
negatively affect demand for the Company's products.
Contingency Plans
As the turn of the century approaches, the Company is continuing to assess
the need for, implement and refine contingency plans associated with the year
2000 issue. Among other things, the Company's product support and internal MIS
organizations are developing and refining plans to ensure the ready
availability of adequate customer and product support resources, and the
Company's critical business systems, in late December of 1999 and early
January of 2000. The Company intends to continue to evaluate both existing and
newly identified year 2000 risks and to develop and implement such further
responsive measures and contingency plans as it deems appropriate.
25
<PAGE>
No Anticipated Material Financial Impact
The costs of the Company's year 2000-related compliance activities have
been and are being budgeted and funded as necessary and have not had and are
not expected to have a material impact on the Company's results of operations
or financial condition. This expectation assumes that the Company will not be
obligated to incur significant year 2000 related costs on behalf of its
customers and suppliers, and that the Company's critical suppliers will be
able to meet their commitments to the Company. The Company cannot predict,
however, the effects on the Company of year 2000-related difficulties of its
business partners, suppliers and customers.
No Assurance Concerning Year 2000 Readiness Efforts
Although the Company believes that its year 2000 readiness efforts are
designed to appropriately identify and address those year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully
effective. Moreover, year 2000 issues present many risks that are simply
beyond the Company's control, such as the potential effects of year 2000
issues on the economy in general and on the Company's business partners and
customers in particular.
Certain Risks and Uncertainties That Could Affect the Company and Future
Operating Results
Sterling Software and its businesses are subject to a number of risks,
including those enumerated below. Any or all of such risks could have a
material adverse effect on the business, financial condition and results of
operations of the Company and on the market price for the Company's Common
Stock. See also "Forward-Looking Information" below.
Market Risks; Factors Affecting Quarterly Financial Results
The market price of Sterling Software's Common Stock is subject to
fluctuation, and there can be no assurance that the price of the Common Stock
will not decline from time to time. Factors such as actual or anticipated
fluctuations in quarterly financial results, changes in earnings estimates by
securities analysts and announcements of material events by Sterling Software,
its major customers or its competitors, as well as general industry or global
or regional economic conditions, may cause the market price of the Common
Stock to fluctuate, perhaps substantially. The Company's stock price is based
in large part on current expectations of sustained future revenue and earnings
growth rates. Any failure to meet anticipated revenue and earnings levels in a
period or any negative change in perceived long-term growth prospects of the
Company would likely have a significant adverse effect on the Company's stock
price.
Fluctuations in Sterling Software's quarterly financial results could
result from a variety of factors, including changes in the levels of revenue
derived from sales of software products and services, market acceptance of new
and enhanced versions of the products and services of Sterling Software or its
competitors, the size and timing of significant orders, changes in operating
expenses, changes in Sterling Software's strategy, the effect of acquisitions
and general industry and global or regional economic factors. Sterling
Software has limited or no control over many of these factors.
Timing and Size of License Contracts; Effect of Year 2000 Concerns
The Company's revenues and results of operations are difficult to predict
and may fluctuate. The timing and amount of the Company's license revenues are
subject to a number of factors that make estimation of operating results prior
to the end of a quarter extremely uncertain. Except with respect to its
federal systems business segment, the Company generally operates with little
or no sales backlog and, as a result, license revenues in any quarter are
dependent upon contracts entered into or orders booked and shipped in that
quarter. Most of the
26
<PAGE>
Company's sales are closed at the end of each quarter. There has been and
continues to be a trend toward larger enterprise license transactions, which
can have longer sales cycles and require approval by a customer's senior
management. These transactions are typically difficult to manage and predict.
Failure to close an expected individually significant transaction or multiple
expected transactions could cause the Company's revenues and earnings in a
period to fall short of expectations.
In addition, each customer's evaluation of its need to achieve Year 2000
compliance may affect its purchase decision. Many analysts believe that many
customers and potential customers are heavily engaged in testing and
correcting system Year 2000 problems and, therefore, such customers may choose
to defer system investments during calendar 1999, negatively impacting the
Company's revenues. In addition, the Company's sales cycles may lengthen in
1999 and future years due to lessened urgency of customers' system investment
decisions. Because Year 2000 related impacts on customer purchasing decisions
are unprecedented, the Company has a limited ability to forecast accurately
the impact of the Year 2000 issue on its quarter-to-quarter revenues. See
"Year 2000 Issues" above.
High Degree of Operating Leverage
The Company's business model is characterized by a high degree of operating
leverage. A substantial portion of the Company's operating costs and expenses
consist of employee and facility related costs, which are relatively fixed
over the short term. In addition, the Company's expense levels and hiring
plans are based substantially on the Company's projections of future revenue.
If near term demand for the Company's products weakens in a given quarter,
there would likely be a material adverse effect on operating results and a
resultant drop in the Company's stock price.
Demand for Mainframe Processing Capacity
A portion of the Company's products and product support revenues depend
upon customers' continuing need to use the Company's software products on
greater mainframe processing capacity in future periods. If the processing
capacity growth of these customers were to slow and/or if these customers were
to perceive less relative benefit from the Company's current mainframe
products, the Company's revenues could be adversely affected.
Competition
As noted above under Item 1. "Business--Competition", the computer software
and services industry is rapidly evolving and highly competitive. Sterling
Software generally expects competition to remain intense in the future from
both existing competitors and other companies that may enter Sterling
Software's markets. Sterling Software believes that its ability to compete
successfully in its markets depends on numerous factors, including product
performance, functionality and reliability, price and customer service and
support. There can be no assurance that new or established competitors will
not offer products and services that are superior to and/or lower in price
than those of Sterling Software.
Technological Change; Dependence on New and Enhanced Products
The computer software and services industry is characterized by rapid
technological change, frequent new product and service introductions and
evolving industry standards. Sterling Software's future success will depend in
significant part on its ability to anticipate industry standards, continue to
apply advances in software product and service technologies, enhance existing
software products and services and develop, introduce, acquire and support new
software products and services in order to meet changing customer needs on a
timely basis. There can be no assurance that Sterling Software will be
successful in developing, acquiring or marketing new or enhanced products or
services that respond to technological change or evolving industry standards,
that Sterling Software will not experience difficulties that could delay or
prevent the successful development, acquisition or
27
<PAGE>
marketing of such products or services or that its new or enhanced products
and services will adequately meet the requirements of the marketplace or
achieve market acceptance. If the Company fails to keep pace with
technological change in its industry, such failure would have an adverse
effect on its revenues and earnings.
Growth Through Acquisitions
Sterling Software's growth has been significantly enhanced through
acquisitions of other businesses, products and technologies. If Sterling
Software is unable to continue to make appropriate acquisitions on attractive
terms, it may be more difficult for Sterling Software to achieve growth levels
consistent with those historically achieved. There can be no assurance as to
Sterling Software's ability to make attractive acquisitions, the timing
thereof or the ultimate benefits therefrom to Sterling Software.
The integration of operations following any significant acquisition
requires the dedication of management resources, and may be complicated by the
necessity of integrating personnel with disparate business backgrounds and
corporate cultures. In addition, the retention of key employees of any
business acquired by Sterling Software may be critical to ensure continued
advancement, development and support of the acquired business' technology, as
well as on-going sales and marketing efforts. Consequently, there can be no
assurance that Sterling Software's ability to increase or maintain revenue
will not be diminished by management distractions, loss of personnel or other
factors resulting from any significant acquisition.
Dependence on Key Personnel and Ability to Attract Qualified Personnel
Sterling Software's performance depends substantially on the performance of
its executive officers and key employees. Sterling Software's business is also
dependent upon its ability to attract and retain highly qualified managerial,
technical and sales personnel. Competition for such personnel is intense.
There can be no assurance that Sterling Software can retain its key
managerial, technical and sales personnel or that it can attract, assimilate
or retain such personnel in the future.
Risks Associated with International Operations and Euro Currency
Revenue from Sterling Software's international operations represented 37%,
39% and 38% of Sterling Software's fiscal 1999, 1998 and 1997 revenue,
respectively. Sterling Software is currently incurring, and expects to
continue to incur, significant costs in developing and marketing its products
and services through its international operations. Sterling Software's ability
to successfully maintain and expand its software products and related services
business internationally will depend upon, among other things, its ability to
attract and retain talented and qualified managerial, technical and sales
personnel, as well as software product and related services customers outside
the United States.
International operations are subject to certain inherent risks, including
unexpected changes in regulatory requirements, tariffs and other trade
barriers, software piracy, difficulties in staffing foreign operations, longer
payment cycles, increased difficulties in collecting accounts receivable and
potentially adverse tax consequences. To the extent international sales are
denominated in foreign currencies, the conversion to U.S. dollars of amounts
arising from international operations may contribute to fluctuations in
Sterling Software's results of operations. In the past, Sterling Software has
entered into, and may in the future enter into, hedging transactions in an
effort to reduce its exposure to currency exchange risks.
The European Union's adoption of the Euro single currency raises a variety
of issues associated with the Company's European operations. Although the
transition will be phased in over several years, the Euro became Europe's
single currency on January 1, 1999. The Company believes that the hardware and
software systems it uses internally will accommodate this transition and any
required policy or operating changes will not have a material adverse effect
on future results, however, failure of any critical technology components to
operate properly post-Euro may adversely affect business operations or require
the Company to incur unanticipated expenses to remedy any problems.
Furthermore, the Company's foreign exchange exposures to legacy sovereign
28
<PAGE>
currencies of the participating countries in the Euro became foreign exchange
exposures to the Euro upon its introduction. Although the Company is not aware
of any material adverse financial risk consequences of the change from legacy
sovereign currencies to the Euro, conversion may result in problems, which may
have an adverse impact on the Company's business since the Company may be
required to incur unanticipated expenses to remedy these problems.
Risks Associated with Government Contracts
Federal government contracts historically have been a significant part of
Sterling Software's business, representing approximately 21% of Sterling
Software's total revenue during fiscal 1999 and 22% in both fiscal 1998 and
1997. Many of Sterling Software's federal government contracts are funded for
one year or less and are subject to contract award, extension or expiration at
different times during the year, and all of Sterling Software's federal
government contracts are subject to termination by the government for
convenience or for failure to obtain funding. Based upon past experience,
Sterling Software believes that the contract renewal options included in
existing government contracts will be exercised for the full period designated
in such contracts, but no assurance can be given that such contracts will be
renewed. See Item 1. "Business--Backlog" above.
Certain Antitakeover Provisions
Certain provisions of the Delaware General Corporation Law, Sterling
Software's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws and certain agreements to which Sterling Software
is a party (including the Rights Agreement, dated December 18, 1996, between
Sterling Software and BankBoston, N.A., as amended) may have the effect of
delaying, deterring or preventing a change in control of Sterling Software. In
addition, the Certificate of Incorporation authorizes the issuance of up to
250,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock,
par value $0.10 per share ("Preferred Stock"), of Sterling Software. The Board
of Directors of Sterling Software has the power to determine the price and
terms under which any such additional capital stock may be issued and to fix
the terms of such Preferred Stock, and existing stockholders of Sterling
Software will not have preemptive rights with respect thereto.
Other Matters
The Board of Directors has adopted certain amendments to the Company's
Bylaws, including, among others, the following:
The Bylaws provide that for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof. The Bylaws have been amended to require that, in order for a
stockholder's notice to be timely, it must be delivered to or mailed to and
received at the principal executive offices of the Company not later than 90
days prior to the anniversary date of the immediately preceding annual
meeting. The notice must also contain the information required by Article II,
Section 2 of the Bylaws. As a result of this amendment, stockholders desiring
to bring proposals before the Company's 2000 Annual Meeting of Stockholders
must deliver the Company written notice thereof no later than December 31,
1999 (which deadline shall also apply for a proposal to be "timely" within the
meaning of Rule 14a-4(c) under the Securities Exchange Act of 1934).
The Bylaws have been amended to establish formal procedures which regulate
the process by which stockholders owning 20% or more of the Company's
outstanding shares may initiate a request to call a special meeting of the
Company's stockholders and to establish orderly procedures for such
stockholder-initiated meetings. The procedures would include, among other
things, a requirement that such meeting be held not less than 90 days nor more
than 120 days after the receipt and determination of the validity of the
stockholders' request to call a special meeting.
The Bylaws have been amended to conform with Section 141(k) of the Delaware
General Corporation Law, which provides that unless a company's certificate of
incorporation otherwise provides, in the case of a company
29
<PAGE>
with a classified board, stockholders may remove directors only for cause. In
addition, the Bylaws have been amended to provide for mandatory
indemnification of the Company's officers, as well as its directors, to
fullest extent permitted by law, as well as to provide for mandatory
advancement of expenses incurred by an indemnified party in defending or
investigating a threatened or pending action in advance of final disposition
of the action.
In order to permit telephonic and electronic voting, the Bylaws have been
amended to permit stockholders to vote by proxy in any manner permitted or not
prohibited by the Delaware General Corporation Law.
A copy of the restated Bylaws of the Company are filed herewith as Exhibit
3.2 and are incorporated herein by reference. The foregoing description of the
restated Bylaws does not purport to be complete and is qualified in its
entirety by reference to the restated Bylaws filed herewith.
Forward-Looking Information
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain forward-looking statements. Such statements
are based upon the beliefs and assumptions of, and on information available
to, the Company's management. The following statements are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995: (i) statements preceded by, followed by or that
include the words "may", "will", "could", "should", "believe", "expect",
"future", "potential", "anticipate", "intend", "plan", "estimate" or
"continue" or the negative or other variations thereof and (ii) other
statements regarding matters that are not historical facts. Such forward-
looking statements are subject to 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, the
statements under the caption "Certain Risks and Uncertainties That Could
Affect the Company and Future Operating Results" above and the statements
under captions such as "Risk Factors", "Certain Considerations Relative to the
Company" and "Special Considerations" in other 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.
30
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investment portfolio of marketable
securities. The Company does not use derivative financial instruments in its
investment portfolio. The stated objectives of the Company's investment
guidelines are: safety of principal, liquidity, maximization of yield and
diversification of risk. The Company invests in marketable securities of high
credit quality U.S. issuers, principally highly rated corporations and tax-
exempt issuers, and limits the amount of credit exposure to any one issuer.
The Company's marketable securities portfolio includes only those securities
with active secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's marketable securities. A
substantial portion of the interest income earned on municipal obligations is
exempt from federal and state income taxes. At September 30, 1999, the
weighted average maturity of the marketable securities portfolio was less than
180 days. The fair value of the marketable securities portfolio is affected by
changes in short-term U.S. dollar interest rates.
<TABLE>
<CAPTION>
Maturity
---------------------------------- Fair Value at
2000 2001 2002 Thereafter Total September 30, 1999
------ ------ ------ ---------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. corporate notes.... 8,051 28,540 14,982 51,573 51,153
Average interest rate.. 5.62% 5.62% 6.08% 5.75%
Municipal obligations... 50,173 4,203 606 999 55,981 56,679
Average interest rate.. 5.48% 5.59% 5.33% 5.58% 5.49%
Other................... 3,383 3,383 4,453
Total investment
portfolio.............. 61,607 32,743 15,588 999 110,937 112,285
Average interest rate.. 5.2% 5.62% 6.05% 5.58% 5.44%
</TABLE>
Foreign Currency Risk
The Company conducts business in various foreign currencies, primarily in
Canada, Brazil, Europe, Australia, Japan and other Asian countries. As a
result, the Company is exposed to the effect of foreign currency exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated revenues
and expenses. The Company mitigates 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 exposure to foreign currency exchange rate fluctuations. As of
September 30, 1999, the Company was not engaged in a foreign currency hedging
program.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data.
STERLING SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 33
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and 1998............ 34
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997..................................................... 35
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997....................................... 36
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997..................................................... 37
Notes to Consolidated Financial Statements............................... 38
</TABLE>
32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling Software, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Software, Inc. (the "Company") as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed under Item 14(a)
of the Company's Annual Report on Form 10-K for the year ended September 30,
1999. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at September 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Dallas, Texas
October 29, 1999
33
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
(in thousands, except share information)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 318,748 $ 397,312
Marketable securities................................. 112,285 310,537
Accounts and notes receivable, net.................... 294,409 200,428
Prepaid expenses and other current assets............. 28,732 32,253
---------- ----------
Total current assets................................. 754,174 940,530
Property and equipment, net............................ 72,137 66,726
Computer software, net of accumulated amortization of
$114,813 in 1999 and $112,734 in 1998................. 144,367 81,606
Excess cost over net assets of businesses acquired, net
of accumulated amortization of $38,742 in 1999 and
$27,316 in 1998....................................... 231,738 76,086
Other assets........................................... 27,615 24,040
---------- ----------
$1,230,031 $1,188,988
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.............. $ 226,510 $ 161,790
Deferred revenue...................................... 105,828 105,439
---------- ----------
Total current liabilities............................ 332,338 267,229
Noncurrent deferred revenue............................ 45,677 27,649
Other noncurrent liabilities........................... 40,284 32,552
Contingencies and commitments
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued..............................
Common stock, $.10 par value; 250,000,000 and
125,000,000 shares authorized in 1999 and 1998,
respectively; 86,873,000, and 84,845,000 shares
issued in 1999 and 1998, respectively................ 8,687 8,485
Additional paid-in capital............................ 895,391 858,615
Accumulated other comprehensive loss.................. (21,899) (16,044)
Retained earnings..................................... 55,750 66,506
Less treasury stock, at cost; 5,953,000 and 2,599,000
shares in 1999 and 1998, respectively................ (126,197) (56,004)
---------- ----------
Total stockholders' equity........................... 811,732 861,558
---------- ----------
$1,230,031 $1,188,988
========== ==========
</TABLE>
See accompanying notes.
34
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1999, 1998 and 1997
(in thousands, except per share information)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
Products...................................... $363,763 $287,835 $ 234,240
Product support............................... 208,888 183,631 150,886
Services...................................... 234,353 248,477 184,076
-------- -------- ---------
807,004 719,943 569,202
Costs and expenses:
Cost of sales:
Products and product support................. 84,138 71,229 79,449
Services..................................... 209,259 216,437 157,287
-------- -------- ---------
293,397 287,666 236,736
Product development and enhancement........... 39,572 36,162 29,659
Selling, general and administrative........... 289,056 264,450 231,185
Reorganization costs.......................... 99,620 45,162 106,037
Purchased research and development............ 83,566 137,849
-------- -------- ---------
805,211 633,440 741,466
-------- -------- ---------
Income (loss) before other income (expense) and
income taxes.................................. 1,793 86,503 (172,264)
Other income (expense):
Interest expense.............................. (463) (424) (540)
Investment income............................. 31,569 34,087 38,906
Other......................................... 1,568 (329) (658)
-------- -------- ---------
32,674 33,334 37,708
-------- -------- ---------
Income (loss) before income taxes.............. 34,467 119,837 (134,556)
Provision (benefit) for income taxes........... 45,223 43,793 (2,659)
-------- -------- ---------
Net income (loss).............................. $(10,756) $ 76,044 $(131,897)
======== ======== =========
Income (loss) per common share:
Basic........................................ $ (.13) $ .94 $ (1.66)
======== ======== =========
Diluted...................................... $ (.13) $ .89 $ (1.66)
======== ======== =========
</TABLE>
See accompanying notes.
35
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------- ------------------
Accumulated
Number Additional Other Retained Number Total
of Par Paid-in Comprehensive Earnings of Stockholders'
Shares Value Capital Loss (Deficit) Shares Cost Equity
------ ------- ---------- ------------- --------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996................... 82,214 $ 8,221 $ 830,860 $(10,379) $ 117,731 2,744 $ (59,097) $ 887,336
Net loss............... (131,897) (131,897)
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax expense of
$1,277................ 2,381 2,381
Foreign currency
translation
adjustment............ (2,490) (2,490)
Other.................. (520) (520)
---------
Total comprehensive
loss.................. (132,526)
Issuance of common
stock pursuant to
stock options,
including tax benefit
of $450............... 212 21 1,889 1,910
Issuance of common
stock to
401(k) plan........... (295) (40) 845 550
Other.................. (14) (1) 221 1 221
------ ------- --------- -------- --------- ----- ---------- ---------
Balance at September 30,
1997................... 82,412 8,241 832,675 (11,008) (14,166) 2,704 (58,251) 757,491
Net income............. 76,044 76,044
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax benefit of
$224.................. (418) (418)
Foreign currency
translation
adjustment............ (4,388) (4,388)
Other.................. (230) (230)
---------
Total comprehensive
income................ 71,008
Issuance of common
stock pursuant to
stock options,
including tax benefit
of $4,700............. 1,327 133 22,462 22,595
Issuance of common
stock to
401(k) plan........... (303) (102) 2,189 1,886
Issuance of common
stock pursuant to
employee stock
purchase plan......... 337 34 5,494 (3) 58 5,586
Adjustments for pooling
of interests
acquisition of
Mystech............... 769 77 (1,713) 4,628 2,992
------ ------- --------- -------- --------- ----- ---------- ---------
Balance at September 30,
1998................... 84,845 8,485 858,615 (16,044) 66,506 2,599 (56,004) 861,558
Net loss............... (10,756) (10,756)
Adjustment to
unrealized gains
(losses) on available-
for-sale securities,
net of tax benefit of
$38................... 75 75
Foreign currency
translation
adjustment............ (6,022) (6,022)
Other.................. 92 92
---------
Total comprehensive
loss.................. (16,611)
Acquisition of common
stock under stock
repurchase program.... 3,457 (72,413) (72,413)
Issuance of common
stock pursuant to
stock options,
including tax benefit
of $4,584............. 1,463 146 24,129 24,275
Issuance of common
stock to
401(k) plan........... (47) (103) 2,220 2,173
Issuance of common
stock pursuant to
employee stock
purchase plan......... 565 56 12,694 12,750
------ ------- --------- -------- --------- ----- ---------- ---------
Balance at September 30,
1999................... 86,873 $ 8,687 $ 895,391 $(21,899) $ 55,750 5,953 $ (126,197) $ 811,732
====== ======= ========= ======== ========= ===== ========== =========
</TABLE>
See accompanying notes.
36
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................... $ (10,756) $ 76,044 $(131,897)
Adjustments to reconcile income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 58,058 44,693 38,544
Provision for losses on accounts
receivable............................... 2,908 5,157 5,191
Provision (benefit) for deferred income
taxes.................................... 8,883 18,800 (19,125)
Reorganization costs...................... 42,156 9,552 63,726
Purchased research and development........ 83,566 137,849
Changes in operating assets and
liabilities, net of effects of business
acquisitions:
(Increase) decrease in accounts and
notes receivable....................... (71,683) (49,435) 26,298
Decrease in amounts due to Sterling
Commerce, Inc.......................... (35,134)
Decrease (increase) in prepaid expenses
and other assets....................... 12,682 (6,045) (2,495)
(Decrease) increase in accounts payable,
accrued liabilities and income taxes
payable................................ (43,774) (11,989) 40,259
Decrease in deferred revenue............ (12,023) (1,951) (1,339)
Other................................... 12,921 16,859 6,734
--------- --------- ---------
Net cash provided by operating
activities........................... 82,938 101,685 128,611
Investing activities:
Purchases of property and equipment......... (29,554) (33,200) (29,003)
Purchases and capitalized cost of
development of computer software........... (31,495) (27,854) (21,860)
Business acquisitions, net of cash
acquired................................... (265,787) (634) (194,871)
Purchases of investments.................... (314,834) (342,807) (255,888)
Proceeds from sales of investments.......... 523,313 240,495 284,703
Other....................................... (209) 1,619 697
--------- --------- ---------
Net cash used in investing
activities........................... (118,566) (162,381) (216,222)
Financing activities:
Purchases of treasury stock................. (72,413)
Proceeds from issuance of common stock
pursuant to the exercise of stock options.. 19,691 17,895 1,460
Proceeds from issuance of common stock
pursuant to employee stock purchase plan... 12,750 5,586
Other....................................... (944) (2,600) (1,179)
--------- --------- ---------
Net cash (used in) provided by
financing activities................. (40,916) 20,881 281
Effect of foreign currency exchange rate
changes on cash.............................. (2,020) 172 (2,314)
--------- --------- ---------
Decrease in cash and equivalents.............. (78,564) (39,643) (89,644)
Cash and cash equivalents at beginning of
year......................................... 397,312 436,955 526,599
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 318,748 $ 397,312 $ 436,955
========= ========= =========
Supplemental cash flow information:
Income taxes paid, net of refunds received.. $ 23,237 $ 2,400 $ 6,670
========= ========= =========
</TABLE>
See accompanying notes.
37
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
The Company
Sterling Software, Inc. ("Sterling Software" or the "Company") was founded
in 198l and became a publicly owned corporation in 1983. Sterling Software is
a worldwide developer and supplier of systems management, business
intelligence and application development 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. Certain amounts for periods ended prior to September 30, 1999,
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies at September 30, 1999 and 1998 and the results of
operations for the years ended September 30, 1999, 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 a sale 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 sale 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.
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.
38
<PAGE>
Research and Development Costs
Research and development costs incurred for the development and testing of
new or significantly enhanced software products are accounted for in
accordance with the provisions of Statement of Financial Accounting Standard
No. 86 ("FAS 86"), "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed". Pursuant to FAS 86, costs are capitalized when
technological feasibility of the product is established. Technological
feasibility is established either upon the completion of a detailed program
design or the completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require judgment by management with
respect to certain external factors, including, but not limited to,
anticipated future revenues, estimated economic life and changes in software
and hardware technologies. Software development capitalized costs include,
among other things, programmers salaries and benefits, outside contractor
costs, computer time and allocated facilities costs. Unamortized software
development costs of $54,474,000 and $54,382,000 are included in "Computer
software, net", at September 30, 1999 and 1998, respectively.
Purchased research and development determined not to have reached
technological feasibility based on the status of design and development
activities requiring further refinement and testing is expensed at the time of
acquisition. The value of the Company's purchased research and development is
determined by an independent valuation expert, generally by discounting the
estimated projected net cash flows related to the applicable products for the
next 10 years, including costs to complete the development of the technology
and the future revenues to be earned upon release of the products.
Depreciation and Amortization
Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to 15 years. Computer
software costs are amortized on a product-by-product basis using the greater
of the amount computed by taking the ratio of current year net revenue to
estimated future net revenue or the amount computed by the straight-line
method over periods ranging from three to seven years. Excess cost over net
assets of businesses acquired is amortized on a straight-line basis over
periods of seven to 40 years. Other intangible assets are amortized on a
straight-line basis over periods of three to seven years.
Depreciation and amortization consists of the following for the years ended
September 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Property and equipment.......................... $18,789 $16,094 $15,596
Purchased computer software..................... 11,553 7,708 6,731
Capitalized computer software development
costs.......................................... 15,152 13,083 11,551
Excess cost over net assets of businesses
acquired....................................... 12,415 7,570 4,403
Intangible assets............................... 149 238 263
------- ------- -------
$58,058 $44,693 $38,544
======= ======= =======
</TABLE>
Income Taxes
The Company's income taxes are computed using the asset and liability
method of accounting. Under the asset and liability method, a deferred tax
asset or liability is recognized for estimated future tax effects attributable
to temporary differences and carryforwards. The measurement of deferred income
tax assets is adjusted by a valuation allowance, if necessary, to recognize
future tax benefit only to the extent, based on available evidence, it is more
likely than not such benefit will be realized.
39
<PAGE>
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees", in accounting for
its employee stock options and employee stock purchase plan. Generally, under
APB 25, if the exercise price of an employee's stock option equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Common Stock and Earnings Per Common Share
Basic earnings per common share data is computed using the weighted average
number of common shares outstanding for the relevant period. Diluted earnings
per common share data is computed using the weighted average number of common
shares outstanding plus common share equivalents represented by stock options,
if such stock options have a dilutive effect in the aggregate.
The following table sets forth the computation of basic and diluted
earnings per share for the years ended September 30, 1999, 1998 and 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- ---------
<S> <C> <C> <C>
Basic:
Net income (loss)............................ $(10,756) $76,044 $(131,897)
======== ======= =========
Weighted average common shares outstanding... 82,835 80,638 79,588
======== ======= =========
Net income (loss) per common share........... $ (.13) $ .94 $ (1.66)
======== ======= =========
Diluted:
Net income (loss)............................ $(10,756) $76,044 $(131,897)
======== ======= =========
Weighted average common shares outstanding... 82,835 80,638 79,588
Effect of dilutive employee stock options.... 4,869
-------- ------- ---------
Adjusted weighted average common shares...... 82,835 85,507 79,588
======== ======= =========
Net income (loss) per common share........... $ (.13) $ .89 $ (1.66)
======== ======= =========
</TABLE>
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the United
States are generally prepared using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated into
U.S. dollars at exchange rates in effect as of the applicable balance sheet
date and any resulting translation adjustments are included as a component of
comprehensive income. Revenue and expense items of these subsidiaries are
translated at average exchange rates during the month the transactions occur.
Gains and losses from foreign currency transactions are included in net
earnings. Foreign currency transaction gains and losses historically have not
been material to the Company's results of operations.
Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income".
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. At September 30, 1999,
total accumulated other comprehensive loss of $21,899,000 consists primarily
of foreign currency translation adjustments of $(20,949,000) and unrealized
gains and losses on available-for-sale securities of $836,000. The adoption of
40
<PAGE>
FAS 130 had no impact on the Company's net income for the three years ended
September 30, 1999. Prior year financial statements have been reclassified to
conform to the requirements of FAS 130.
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, 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 comprehensive
income, 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.
Excess Cost Over Net Assets of Businesses Acquired
Excess cost over net assets of businesses acquired is amortized on a
straight-line basis over periods of seven to 40 years. The carrying amount of
such costs is reviewed by management if facts and circumstances suggest that
such amount may be impaired. If this review indicates that the costs will not
be recoverable, as determined based on the estimated discounted future cash
flows of the business acquired over the remaining amortization period, the
carrying amount is reduced by the estimated shortfall of cash flows. The
carrying amount of excess cost over net assets of businesses acquired
associated with other assets acquired in a purchase business combination is
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Recent Developments
Effective October 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of Certain Provisions of SOP 97-2" ("SOP 97-
2"). SOP 97-2 requires that each element of a software sale arrangement 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 did not significantly affect the
Company's results of operations for year ended September 30, 1999, nor is it
expected to have a significant impact on future results as the Company's
revenue recognition policies have historically been substantially in
compliance with the practices required by SOP 97-2.
On December 15, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants 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 software product
sale 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.
41
<PAGE>
The provisions of SOP 98-9 that extend the deferral of certain provisions
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 adoption of SOP 98-9 is not
expected to have a material impact on the financial position or results of
operations of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which, as amended, is required to be adopted in fiscal quarters
beginning after June 15, 2000. Because the Company does not currently use
derivatives to a significant extent, management does not anticipate that the
adoption of FAS 133 will have a significant impact on the results of
operations or the financial position of the Company.
2. Business Acquisitions, Reorganizations and Divestitures
1999 Acquisitions
The acquisitions listed below were completed during 1999 (the "1999
Acquisitions") and were accounted for in accordance with the purchase method
of accounting. Accordingly, the results of operations of the acquired
businesses are included in the Company's results of operations from the
respective dates of the acquisitions.
. On October 26, 1998, Sterling Software acquired Cayenne Software, Inc.
("Cayenne"), a publicly held global supplier of analysis and design
solutions for application and database development, in an $11,400,000
cash merger transaction.
. On April 15, 1999, Sterling Software acquired the distributed systems
storage software business (the "Alexandria Business") of Spectra Logic
Corporation in a cash asset acquisition transaction valued at
approximately $33,000,000.
. On April 30, 1999, Sterling Software completed the acquisition of
Interlink Computer Sciences, Inc. ("Interlink"), a publicly held global
supplier of high-performance solutions for enterprise systems
networking, in an all-cash transaction valued at approximately
$63,907,000.
. On July 26, 1999, Sterling Software acquired CoreData, Inc.
("CoreData"), a privately held developer and supplier of backup software
for remote and mobile PCs, in a cash merger transaction valued at
approximately $14,015,000.
. On August 31, 1999, Sterling Software completed the acquisition of
Information Advantage, Inc. ("Information Advantage"), a publicly held
provider of web-based and enterprise business intelligence software, in
an all-cash transaction valued at approximately $168,357,000.
The operations of Cayenne and Information Advantage have been included in
the Company's operations as part of the Company's application management
business segment since the date of acquisition. The operations of the
Alexandria Business, CoreData and Interlink have been included in the
Company's operations as part of the Company's systems management business
segment since the date of acquisition.
The total cost of the 1999 Acquisitions was approximately $358,062,000,
including direct costs related to the acquisitions of approximately
$67,383,000, consisting of employee termination costs, transaction costs,
costs associated with the elimination of duplicate facilities and other direct
costs as follows (in thousands):
<TABLE>
<S> <C>
Cash transaction consideration.................................. $290,679
Employee severance and benefits................................. 31,761
Elimination of duplicate facilities and leases.................. 14,650
Transaction costs............................................... 13,441
Other costs..................................................... 7,531
--------
$358,062
========
</TABLE>
42
<PAGE>
At September 30, 1999, the balance of the direct costs incurred in the 1999
Acquisitions that remained to be paid totaled $35,323,000, related primarily
to employee severance and benefits and the elimination of duplicate facilities
and leases.
The costs of the 1999 Acquisitions have been allocated to the respective
assets and liabilities acquired and to purchased research and development,
with the remainder recorded as excess cost over net assets acquired, based on
preliminary estimates of fair values as follows (in thousands):
<TABLE>
<S> <C>
Working capital................................................ $ 32,126
Property and equipment......................................... 1,368
Developed software and core technology......................... 85,436
Purchased research and development costs charged to expense.... 83,566
Other assets and liabilities (net)............................. (11,035)
Excess cost over net assets acquired........................... 166,601
--------
$358,062
========
</TABLE>
The estimates of fair value were determined by the Company's management
based on information furnished by management of the acquired businesses and
preliminary independent valuations of developed software, core technology and
purchased research and development. Amounts attributed to purchased research
and development were expensed at the date of 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. The value of the
purchased research and development attributable to each acquisition was
determined by an independent valuation expert retained by the Company. The
estimates used by the Company in valuing the purchased research and
development were based upon assumptions regarding future events and
circumstances the Company believes to be reasonable but that are inherently
uncertain and unpredictable. The Company's assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
assumed results. Any such variance may result in a material adverse effect on
the results of operations of the Company.
The value of the purchased research and development attributable to each
acquisition was determined by discounting the estimated projected net cash
flows related to the applicable products for the next 10 years, including
costs to complete the development of the technology and the future revenues to
be earned upon release of the products. The rate utilized to discount the net
cash flows to their present value, generally 20%, was based on the Company's
weighted average cost of capital adjusted for the risks associated with the
estimated growth, profitability and developmental and market risks of the
acquired development projects. Projected net cash flows from such products are
based on estimates of revenues and operating profits related to such products.
The Company is using the purchased research and development to create new
products that are expected to become part of the product portfolios offered by
the systems management and application management business segments. The
Company expects that products developed from the purchased research and
development will generally be released during fiscal year 2000. 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. The Company's
management expects that the purchased research and development generally will
be successfully developed into commercially viable products; however, there
can be no assurance that commercial viability or timely release of these
products will be achieved.
A description of the acquired in-process technology and the estimates made
by the Company for each of the 1999 Acquisitions is set forth below.
. Information Advantage had four new products in active development at the
date of acquisition, to which the Company assigned a value of
approximately $47,044,000. These development efforts were aimed at
43
<PAGE>
incorporating technologies allowing advanced profiling and search,
increasing report server capabilities and enhancing user interfaces for
authoring reports and performing analysis of data. At the acquisition
date, the research and development programs ranged in estimated completion
from 62% to 90%. New product offerings are generally estimated to be
released in the second quarter of fiscal year 2000 at an estimated cost to
complete of approximately $2,000,000. Generally, the Company believes that
the risks associated with the successful completion of the projects are
relatively low. However, certain projects requiring integration of
complementary technologies and the development of complex and unique
intelligence analysis functions do entail significant technical risks.
Significant delays in completion and release of product offerings could
negatively affect the market position of the products. As the Information
Advantage acquisition was completed only one month before the Company's
year end, there have been no significant changes in the estimates of costs
required to complete the development efforts or the product offering
release dates.
. CoreData was developing a new product that would include the unique
ability to use multiple devices for more efficient remote backup and
restore, to which the Company assigned a value of approximately
$4,431,000. Research and development efforts were estimated to be
approximately 40% complete at the date of acquisition, with the release
date of the product estimated for the second quarter of fiscal year 2000
at an estimated cost to complete of approximately $200,000. The Company
believes that the risks associated with successful completion of the
development efforts are relatively low. The Company believes that a
delay of release of up to three months would have little impact on the
estimated market share or revenues of the product. No significant
changes have arisen since the acquisition date in the estimates of costs
to complete the development efforts or the product offering release
date.
. Interlink was developing four new product offerings at the acquisition
date for OS/390 TCP/IP customers, to which the Company assigned a value
of approximately $10,143,000. At the acquisition date research and
development efforts ranged in estimated completion from 63%--87%. The
release date of the new products is generally estimated to occur in the
first quarter of fiscal year 2000 with estimated cost to complete the
product offerings of approximately $830,000. The Company believes that
the risks associated with successful completion of the development
efforts are relatively low. The Company believes that a delay of release
of up to six months would have little impact on the estimated market
share or revenues of the product. No significant changes have arisen
since the acquisition date in the estimates of costs to complete the
development efforts or the product offering release date.
. The Alexandria Business was developing a new product offering for data
movement and backup capabilities designed to meet next generation,
centralized, end-to-end storage management requirements for large,
heterogeneous storage environments. Designed specifically to operate
optimally in Storage Area Networks (SANs), features include the movement
of data on SANs and the management of shared tape libraries attached to
SANs. Both UNIX and NT server versions will have the same
characteristics as the current release, including high performance with
low CPU overhead. Timed to be available before the release of Windows
2000, the Company will have a leading solution for customers deploying
large scale mission-critical applications on this first Windows version
that is capable of hosting commercial applications effectively. The
Company assigned a value of $12,325,000 to these research and
development efforts, which were estimated to be approximately 80%
complete at the date of acquisition, with a product offering estimated
to become generally available in the third quarter of fiscal year 2000
at an estimated cost to complete of approximately $2,000,000. The
research and development efforts necessary to complete the product
offering are technically complex and may affect what functions are
available on differing planned delivery dates. However, the Company
believes that, through its acquisition of the Alexandria Business, it
has a leading position in this marketplace and that any delays should
not significantly reduce market opportunities for the new product
offering. Through September 30, 1999, the Company has expended
approximately $600,000 for further development of this product offering.
No significant changes have arisen since the acquisition date in the
estimates of costs to complete the development efforts or the product
offering release date.
44
<PAGE>
. Cayenne was developing new technologies for integrating object-oriented
technologies with component based design and implementation, to which
the Company assigned a value of $9,623,000. The Company planned to
integrate technologies acquired in the Cayenne acquisition with core
technologies of both its own and Cayenne's existing product offerings to
produce a new product targeted at providing advanced object-oriented
(OO) modeling technologies and tools for application design and
implementation. This was to be a unique capability and entailed a high
degree of complexity and effort to provide full user functionality for
multiple platforms. Research and development efforts were estimated to
be approximately 80% complete at the date of acquisition and the Company
believed that up to an additional 18 months and approximately $1,466,000
would be required to complete the new product offering. But with
increasing opportunities in the market for application development tools
for e-business solutions--such as web-enablement of existing
applications, and integration and extension of existing applications--
combined with an increase in the estimated costs of integrating the
acquired technologies with the Company's existing OO technologies, in
September of 1999 the Company decided to discontinue development of the
new, integrated product. Accordingly, the Company wrote off core
technology and goodwill attributable to this product of approximately
$7,800,000 in the fourth quarter of 1999.
The following unaudited pro forma information presents the Company's
results of operations as if the 1999 Acquisitions had occurred as of October
1, 1997. The pro forma information has been prepared by combining the results
of operations of the Company and the acquired businesses for the years ended
September 30, 1999 and 1998, adjusted for the elimination of fiscal year 1999
charges for purchased research and development costs and reorganization costs,
additional amortization expense and the resulting impact on the provision for
income taxes. This pro forma information does not purport to be indicative of
what would have occurred had these acquisitions and related reorganizations
occurred as of that date, or of results of operations that may occur in the
future (in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended
September 30
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenue............................................... $880,015 $872,004
Income before other income (expense) and income
taxes................................................ $154,506 $ 56,733
Net income............................................ $117,252 $ 48,957
Net income per share:
Basic................................................ $ 1.42 $ .61
Diluted.............................................. $ 1.34 $ .57
</TABLE>
1998 Acquisitions
The following acquisitions occurred in the fourth quarter of 1998 and were
both accounted for as poolings of interests:
. On July 9, 1998, Sterling Software acquired Mystech Associates, Inc.
("Mystech"), a privately held federal information technology services
contractor, in a stock-for-stock merger transaction (the "Mystech
Merger"). As a result of the transaction, Sterling Software issued
approximately 769,000 shares of its common stock, par value $0.10 per
share ("Common Stock"), in exchange for the previously outstanding
shares of Mystech common stock and reserved approximately 174,000 shares
of Common Stock for issuance upon exercise of assumed Mystech stock
options. The Mystech Merger was valued at approximately $28,000,000 and
the Mystech organization was added to the Company's federal systems
business segment. The impact of the pooling of interests accounting on
the Company's historical financial statements was not material;
therefore, the Company's financial statements for periods prior to the
Mystech Merger were not restated for this transaction.
45
<PAGE>
. On July 31, 1998, Sterling Software acquired Synon Corporation
("Synon"), a privately held provider of application development software
and services, in a stock-for-stock merger transaction (the "Synon
Merger") valued at approximately $79,000,000. 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, were
restated to represent the combined financial statements of the
previously separate entities.
Separate and combined results of Sterling Software and Synon are as follows
(in thousands):
<TABLE>
<CAPTION>
Sterling
Software Synon Combined
--------- ------- ---------
<S> <C> <C> <C>
Nine Months Ended June 30, 1998
(unaudited)
Revenue................................ $ 469,771 $57,483 $ 527,254
Net income (loss)...................... $ 75,734 $(7,285) $ 68,449
Year Ended September 30, 1997
Revenue................................ $ 488,978 $80,224 $ 569,202
Net income (loss)...................... $(132,968) $ 1,071 $(131,897)
</TABLE>
1997 Acquisition of TI Software
On June 30, 1997, Sterling Software completed the acquisition (the "TI
Software Acquisition") of certain assets (including the capital stock of
certain foreign subsidiaries) of Texas Instruments Incorporated ("Texas
Instruments"). Such assets constituted substantially all of the assets used by
Texas Instruments' Software Division ("TI Software") in its business of
developing, marketing and supporting application development software and
providing related consulting services. The results of operations of TI
Software are included in the Company's results of operations, as part of the
Company's application management business segment, from the date of the TI
Software Acquisition.
The cash purchase price paid for such assets was $165,000,000. The total
cost of the TI Software Acquisition was approximately $214,774,000, including
costs directly related to the TI Software Acquisition of approximately
$49,774,000, consisting of employee termination costs, transaction costs,
costs associated with the elimination of duplicate facilities and other direct
costs. At September 30, 1999, substantially all of the direct costs incurred
in the TI Software Acquisition had been paid.
Results of operations for 1997 include $137,849,000 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 were as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to Texas Instruments.................................. $165,000
TI Software employee severance and benefits..................... 28,696
Elimination of duplicate facilities and leases of TI Software... 10,578
Transaction costs............................................... 4,904
Other costs..................................................... 5,596
--------
$214,774
========
</TABLE>
The TI Software Acquisition has been accounted for in accordance with the
purchase method of accounting. The aggregate cost was allocated to the assets
and liabilities acquired and to purchased research and
46
<PAGE>
development, with the remainder recorded as excess cost over net assets
acquired, based on estimates of fair values as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficit)...................................... $(10,100)
Property and equipment......................................... 4,530
Developed software and core technology......................... 24,054
Purchased research and development costs charged to expense.... 137,849
Other liabilities.............................................. (32)
Excess cost over net assets acquired........................... 58,473
--------
$214,774
========
</TABLE>
The estimates of fair value were determined by the Company's management
based on information furnished by management of TI Software and an independent
valuation of developed software, core technology and purchased research and
development. Amounts attributed to purchased research and development were
expensed at the date of 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.
At the acquisition date, TI Software was developing several new products
for component-based development, to which the Company assigned a value of
$137,489,000. These development activities resulted in the Company's release
of three products. The first product, released in early 1998, has become the
primary component-based application development product, and largest single
revenue source, for the Company's application management business segment. A
second product, for component architecture modeling and interface-based design
for component specifications, was also released in 1998 and has been
successfully marketed. A third product was released for limited availability
in 1999 and is a development environment that incorporates advanced component
modeling and generation capabilities.
The following unaudited pro forma information presents the Company's
results of operations as if the TI Software Acquisition had occurred at
October 1, 1996. The pro forma information has been prepared by combining the
results of operations of the Company and TI Software for the year ended
September 30, 1997, adjusted for the elimination of charges for purchased
research and development costs and reorganization costs, additional
amortization expense and the resulting impact on the provision for income
taxes. This pro forma information does not purport to be indicative of what
would have occurred had the TI Software Acquisition and related reorganization
occurred as of that date or of results of operations which may occur in the
future (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended
September 30, 1997
------------------
<S> <C>
Revenue.............................................. $733,577
Income before other income (expense) and income
taxes............................................... $ 43,306
Net income........................................... $ 51,840
Net income per share................................. $ .65
</TABLE>
Reorganization Costs
The Company's results of operations for the year ended September 30, 1999
include total reorganization costs of $99,620,000 primarily related to the
1999 Acquisitions, including costs associated with the realignment of the
application development business within the application management business
segment.
The Company's results of operations for the year ended September 30, 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, and to a lesser extent, the Mystech Merger.
47
<PAGE>
The Company's results of operations for the year ended September 30, 1997
include reorganization costs of $106,037,000 primarily related to the
reorganization of the Company's operations in the third quarter of 1997 in
connection with the TI Software Acquisition, and to a lesser extent, the
termination of the Company's international distributor arrangement with
Sterling Commerce, Inc. ("Sterling Commerce"), formally a wholly owned
subsidiary of the Company.
The components of the above reorganization costs were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Employee termination costs..................... $29,904 $17,342 $ 18,539
Elimination of duplicate facilities, equipment
and other assets.............................. 25,872 8,295 19,993
Write-down of software products that will no
longer be actively marketed................... 30,862 6,397 17,591
Write-down of excess cost over net assets
acquired...................................... 996 38,955
Out of pocket costs related to the
reorganization(s)............................. 9,794 9,535 5,109
Other costs.................................... 2,192 3,593 5,850
------- ------- --------
$99,620 $45,162 $106,037
======= ======= ========
Reorganization costs requiring cash outlays.... $57,464 $35,610 $ 42,311
======= ======= ========
Remaining balance to be paid at September 30,
1999.......................................... $40,686 $ 7,488 $ 5,245
======= ======= ========
</TABLE>
The remaining balances to be paid consist primarily of commitments under
lease arrangements for office space and equipment for the 1997 and 1998
reorganizations, and employee termination costs and benefits, and commitments
under lease arrangements for office space and equipment for the 1999
reorganizations.
The Company periodically reviews the estimates of remaining costs to be
paid relating to reorganizations. This periodic review has not resulted in any
significant change to aggregate existing accruals, and the Company does not
expect to incur costs related to the above-described reorganizations in excess
of the amounts previously charged to operations.
Termination of International Distributor Arrangement
Effective as of June 30, 1997, Sterling Software and Sterling Commerce
completed an agreement terminating an international distributor arrangement
under which Sterling Software acted as the exclusive distributor of Sterling
Commerce's interchange and communications software products in markets outside
the United States and Canada. The results of the Company's international
operations related to selling, marketing and providing first level support for
these products through June 30, 1997 are included in the business segment
information presented herein under "Corporate and other."
Contemporaneously with such termination, Sterling Software sold to Sterling
Commerce certain of the assets formerly used by Sterling Software in
connection with the distribution of these products. In consideration of the
termination of the international distributor arrangement and the sale of
assets described above, Sterling Commerce paid to Sterling Software $5,226,000
on June 30, 1997 and subsequently paid to Sterling Software $10,076,000, which
was equal to the net book value of the acquired assets and certain assumed
liabilities of Sterling Software.
3. 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.
48
<PAGE>
4. Segment Information
The Company has adopted Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information" for the
year ended September 30, 1999. Sterling Software is a worldwide developer and
supplier of systems management, business intelligence and application
development 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 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, including e-business application
availability and performance. The application management business segment
provides solutions for both business intelligence and application development.
Business intelligence solutions include a complete range of web-based business
intelligence capabilities centered around corporate portal technology, as well
as products that structure and manage data and application resources.
Application development solutions include products and services that enable
customers to deliver e-business applications for today's Internet-based
economy. The federal systems business segment provides specialized IT services
for sectors of the federal government, as well as state and local governments.
Though June 30, 1997, the Company's international operations sold, marketed
and provided first-level support outside of the United States and Canada for
certain software products of Sterling Commerce, the results of which are
included in the business segment and geographical information under "Corporate
and other."
49
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the years ended September 30, 1999, 1998 and 1997, is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
Business Segment Information 1999 1998 1997
---------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Systems Management................. $ 290,126 $ 204,529 $ 184,679
Application Management............. 357,845 366,013 223,166
Federal Systems.................... 159,033 148,773 121,790
Corporate and other................ 628 39,567
---------- ---------- ----------
Consolidated totals............... $ 807,004 $ 719,943 $ 569,202
========== ========== ==========
Operating Profit (Loss):
Systems Management................. $ 115,089 $ 77,337 $ 70,629
Application Management............. 89,375 75,981 23,747
Federal Systems.................... 12,381 9,911 8,689
Reorganization costs............... (99,620) (45,162) (106,037)
Purchased research and
development....................... (83,566) (137,849)
Corporate and other................ (31,866) (31,564) (31,443)
---------- ---------- ----------
Consolidated totals............... $ 1,793 $ 86,503 $ (172,264)
========== ========== ==========
Assets:
Systems Management................. $ 324,005 $ 187,310 $ 150,549
Application Management............. 441,232 256,737 229,261
Federal Systems.................... 70,658 67,290 58,445
Corporate and other................ 394,136 677,651 662,023
---------- ---------- ----------
Consolidated totals............... $1,230,031 $1,188,988 $1,100,278
========== ========== ==========
Expenditures for Long-Lived Assets
(including additions to computer
software and excluding business
acquisitions):
Systems Management................. $ 21,924 $ 19,745 $ 16,919
Application Management............. 32,716 34,239 13,782
Federal Systems.................... 1,353 1,145 1,284
Corporate and other................ 5,056 5,925 18,878
---------- ---------- ----------
Consolidated totals............... $ 61,049 $ 61,054 $ 50,863
========== ========== ==========
Depreciation and Amortization:
Systems Management................. $ 22,971 $ 16,485 $ 16,014
Application Management............. 27,078 21,084 17,698
Federal Systems.................... 2,777 2,346 2,231
Corporate and other................ 5,232 4,778 2,601
---------- ---------- ----------
Consolidated totals............... $ 58,058 $ 44,693 $ 38,544
========== ========== ==========
Revenue from the U.S. Government:
Systems Management................. $ 5,140 $ 3,364 $ 4,140
Application Management............. 16,154 10,635 7,455
Federal Systems.................... 146,538 140,822 112,802
---------- ---------- ----------
Consolidated totals............... $ 167,832 $ 154,821 $ 124,397
========== ========== ==========
</TABLE>
50
<PAGE>
The Company's revenue in North America and other markets at September 30,
1999, 1998 and 1997 and for the years then ended are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Geographical Information 1999 1998 1997
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
North America and Latin America........ $ 518,381 $ 454,599 $ 353,061
Europe................................. 231,290 213,601 136,311
Asia-Pacific........................... 57,333 51,115 40,263
Corporate and other.................... 628 39,567
---------- ---------- ----------
$ 807,004 $ 719,943 $ 569,202
========== ========== ==========
Assets:
North America and Latin America........ $ 639,515 $ 303,828 $ 253,376
Europe................................. 155,090 176,026 156,401
Asia-Pacific........................... 41,290 31,483 28,478
Corporate and other.................... 394,136 677,651 662,023
---------- ---------- ----------
$1,230,031 $1,188,988 $1,100,278
========== ========== ==========
</TABLE>
Segment profit represents the operating profit (loss) of each reportable
segment excluding reorganization costs and purchased research and development
costs charged to expense. Other income (expense) items are not allocated to
individual business segments. The amounts presented for "Corporate and other"
include corporate expense, cash balances, marketable securities, income tax
balances, other assets, inter-segment eliminations and, through June 30, 1997,
the results of operations relating to the international distribution of
certain Sterling Commerce software products.
The Company's long-lived assets are primarily located in the U.S.
5. Marketable Securities
At September 30, 1999 and 1998, all of the Company's marketable securities
were classified as available-for-sale and consist of the following (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Aggregate Amortized Unrealized Unrealized
Fair Cost Holding Holding
Value Basis Gains Losses
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
September 30, 1999:
U.S. corporate notes................ $ 51,153 $ 51,573 $ 2 $(422)
Municipal obligations............... 56,679 55,981 747 (49)
Other............................... 4,453 3,383 1,076 (6)
-------- -------- ------ -----
$112,285 $110,937 $1,825 $(477)
======== ======== ====== =====
September 30, 1998:
Commercial paper.................... $ 51,734 $ 51,734
U.S. corporate notes................ 90,319 89,601 $ 718
U.S. government obligations......... 20,023 20,001 22
Municipal obligations............... 141,835 141,633 202
Other............................... 6,626 6,333 293
-------- -------- ------
$310,537 $309,302 $1,235
======== ======== ======
</TABLE>
At September 30, 1999, scheduled maturities of investments in debt
securities were: $58,196,578 principal amount within one year and $49,635,539
principal amount between one and five years.
51
<PAGE>
6. Accounts and Notes Receivable
Accounts and notes receivable consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Trade................................................. $ 275,080 $ 181,256
Unbilled.............................................. 45,503 36,295
--------- ---------
320,583 217,551
Less: Allowance for doubtful accounts................. 26,174 17,123
--------- ---------
$ 294,409 $ 200,428
========= =========
</TABLE>
At September 30, 1999 and 1998, accounts receivable include $56,026,000 and
$45,820,000, respectively, due under contracts with the federal government and
related agencies. The remainder of the Company's receivables is due
principally from corporations in diverse industries located in North America,
Europe and Asia-Pacific, which mitigates exposure to concentrations of credit
risk. Trade receivables are generally not collateralized. The Company performs
periodic credit evaluations of its customers' financial conditions.
7. Property and Equipment
Property and equipment consist of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computer and peripheral equipment...................... $ 58,525 $ 45,729
Furniture, fixtures and other equipment................ 50,097 47,158
Leasehold improvements................................. 26,649 23,671
-------- --------
135,271 116,558
Less: Accumulated depreciation......................... 63,134 49,832
-------- --------
$ 72,137 $ 66,726
======== ========
</TABLE>
8. Credit Agreement
Effective July 1, 1997, the Company entered into an amended bank credit
agreement ("Credit Agreement"). The Credit Agreement requires that certain
financial ratios be maintained. Borrowings under the Credit Agreement bear
interest at the lower of the lender's base rate or the Eurodollar lending rate
plus one-half percent and mature on June 30, 2000. No amounts were borrowed
during 1999 or outstanding under the Credit Agreement at September 30, 1999.
At September 30, 1999, after giving effect to outstanding standby letters of
credit in the aggregate amount of approximately $3,868,000, approximately
$31,132,000 was available for borrowing under the Credit Agreement.
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade accounts payable.................................. $ 32,469 $ 31,571
Accrued compensation.................................... 64,323 57,169
Accrued acquisition and reorganization costs............ 79,930 34,276
Other accrued liabilities............................... 49,788 38,774
-------- --------
$226,510 $161,790
======== ========
</TABLE>
Accrued acquisition and reorganization costs at September 30, 1999 are
primarily due to the Information Advantage and Interlink acquisitions and the
realignment of the application development business within the application
management business segment, and are primarily for the remaining commitments
pursuant to employee termination costs and benefits and the elimination of
duplicate facilities and equipment.
52
<PAGE>
10. Income Taxes
The provision (benefit) for income taxes on net income (loss) is composed
of the following (in thousands):
<TABLE>
<CAPTION>
Years ended September 30
-------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $25,719 $17,011 $11,309
State........................................ 2,205 2,928 2,310
Foreign...................................... 8,416 5,054 2,098
Deferred:
Federal...................................... 10,178 16,557 (17,330)
State........................................ 872 1,489 (1,685)
Foreign...................................... (2,167) 754 639
------- ------- --------
$45,223 $43,793 $(2,659)
======= ======= ========
</TABLE>
The effective income tax rate on income (loss) before income taxes differed
from the federal income tax statutory rate for the following reasons (in
thousands):
<TABLE>
<CAPTION>
Years ended September 30
--------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal
statutory rate............................. $12,063 $41,943 $(47,095)
Increases (reductions) in tax expense
(benefit) resulting from:
Purchased research and development for
which no income tax benefit was
recognized............................... 34,030 36,251
Effect of non-U.S. tax rates.............. (4,732) (4,553) (1,182)
Recognition of previously unrecognized
deferred income tax asset................ (3,022)
Nondeductible amortization of excess cost
over net assets acquired................. 2,394 564 14,663
Foreign sales corporation................. (2,337) (1,896) (1,891)
State income taxes, net of federal
benefit.................................. 3,077 4,417 (125)
Unbenefitted losses....................... 3,112
Other..................................... 728 206 (258)
------- ------- --------
$45,223 $43,793 $ (2,659)
======= ======= ========
</TABLE>
Income (loss) before income taxes includes foreign pretax earnings (losses)
of $41,363,000, $11,253,000 and $(7,021,000) for the years ended September 30,
1999, 1998 and 1997, respectively. Earnings of certain non-U.S. subsidiaries
have been indefinitely reinvested and, accordingly, no provision has been made
for taxes due upon remittance of these earnings.
53
<PAGE>
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset as of September
30 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards......................... $ 50,166 $ 37,669
General business and alternative minimum tax credit
carryforwards........................................... 5,381 6,799
Foreign tax credit carryforwards......................... 780 1,232
Reserves and reorganization accruals..................... 92,162 65,692
-------- --------
Deferred income tax assets.............................. 148,489 111,392
-------- --------
Deferred income tax liabilities:
Capitalized software costs............................... 51,206 21,729
Depreciation and amortization............................ 5,065 5,709
Other future income tax liabilities...................... 42,382 35,438
-------- --------
Deferred income tax liabilities......................... 98,653 62,876
-------- --------
Deferred income tax asset net of deferred income tax
liability............................................... 49,836 48,516
Less valuation allowance................................. (41,889) (44,138)
-------- --------
Net deferred income tax asset........................... $ 7,947 $ 4,378
======== ========
</TABLE>
The valuation allowance relates principally to certain net operating loss
and credit carryforwards. Although realization is not assured, management
believes that future taxable income based on expected future earnings of the
Company will more likely than not utilize a portion of the net operating loss
carryforwards, tax credit carryforwards and other future tax deductions in
existence at September 30, 1999, equivalent to the net deferred income tax
asset. As there can be no assurances on amounts in excess of the net deferred
income tax asset, the aforementioned valuation allowance has been recorded and
may change as estimates during the carryforward periods change.
At September 30, 1999, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $117,678,000
and $6,414,000, respectively. These carryforwards will expire at various times
between 2000 and 2018, with approximately $109,200,000 of the net operating
loss carryforwards expiring between 2008 and 2013. The utilization of
substantially all of these carryforwards is restricted to future taxable
income of certain of the Company's wholly owned subsidiaries and limited by
Section 382 of the Internal Revenue Code of 1986, as amended ("the Code").
Thus, the Company's utilization of these carryforwards cannot be assured.
11. Commitments
The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1999, 1998 and 1997 was
$27,649,000, $28,691,000 and $26,435,000, respectively. At September 30, 1999,
minimum future rental payments due under all operating leases, net of
estimated future sublease income, were as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................. $ 29,284
2001............................................................. 27,048
2002............................................................. 20,872
2003............................................................. 17,421
2004............................................................. 15,791
Thereafter....................................................... 48,516
--------
$158,932
========
</TABLE>
54
<PAGE>
12. Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred
stock, par value $0.10 per share ("Preferred Stock"). The Board of Directors
of Sterling Software has authorized the issuance of up to 1,250,000 shares of
Preferred Stock, designated as Series A Junior Participating Preferred Stock
("Series A Junior Preferred Stock"), pursuant to the terms of the Rights
Agreement dated as of December 18, 1996, as amended (the "Rights Plan"). The
Board of Directors of the Company is authorized, without action by the
stockholders, to issue Preferred Stock and fix for each series the number of
shares, designation, dividend rights, voting rights, redemption rights and
other rights.
Increase in Authorized Common Stock
On March 31, 1999, the Sterling Software stockholders approved an amendment
to the Company's Certificate of Incorporation increasing the number of
authorized shares of Common Stock from 125,000,000 shares to 250,000,000
shares.
Rights Plan
On December 18, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Common Stock
outstanding at the close of business on December 31, 1996 (the "Record Date"),
pursuant to the terms of the Rights Plan. The Rights Plan also provides,
subject to specified exceptions and limitations, that shares of Common Stock
issued after the Record Date will be entitled to and accompanied by Rights.
Pursuant to the Rights Plan, one Right to purchase 1/100th of a share of
Series A Junior Preferred Stock (structured so as to be substantially the
equivalent of a share of Common Stock) is attached to each issued and
outstanding share of Common Stock. Subject to certain conditions, each Right
entitles the holder to purchase 1/100th of a share of Series A Junior
Preferred Stock at a price (the "Purchase Price") of $100.00 per 1/100th of a
share of Junior Preferred Stock (subject to adjustment).
In general, the Rights will not become exercisable, or transferable apart
from the shares of Common Stock, unless a person or group of affiliated or
associated persons becomes the beneficial owner of, or commences a tender
offer that would result in beneficial ownership of, 15% or more of the
outstanding shares of Common Stock (any such person or group of persons being
referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under
certain circumstances, each Right (other than any Rights that are or were
beneficially owned by an Acquiring Person, which Rights will be void) could
become exercisable to purchase at the Purchase Price a number of shares of
Common Stock (or, in certain circumstances, the common stock of a company into
which the Company is merged or consolidated or to which the Company sells all
or substantially all of its assets) having a market value equal to two times
the Purchase Price. The Rights will expire on December 31, 2006, unless
earlier redeemed by Sterling Software at a redemption price of $.01 per Right
(subject to adjustment), or otherwise exchanged or amended in accordance with
the terms of the Rights Plan.
Stock Options
In May 1996 Sterling Software's stockholders approved the 1996 Stock Option
Plan (the "1996 Plan"). Options granted pursuant to the 1996 Plan become
exercisable generally at a rate of 25% per year and expire either five or ten
years from the date of grant, although options may be granted with shorter
vesting periods and shorter terms. In March 1999, the Board of Directors of
Sterling Software adopted the 1999 Employee Stock Option Plan (the "1999
Plan"), a broad based stock option plan, participation in which is limited to
employees other than directors and officers. Options granted pursuant to the
1999 Plan become exercisable generally at the rate of 25% per year and expire
five years from the date of the grant, although options may be granted with
alternative vesting periods and terms that comply with local tax laws in
certain countries. Any tax benefit associated with the exercise of options is
credited to paid-in capital.
55
<PAGE>
Stock option transactions for the three years ended September 30, 1999 are
summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 17,740,718 $14.61 18,686,785 $14.19 757,483 $ 9.63
Options assumed in
business acquisitions.. 1,367,339 12.51 174,146 10.49
Options granted......... 4,442,469 25.24 842,482 23.44 19,185,277 14.27
Options exercised....... (1,462,537) 13.47 (1,327,084) 13.48 (212,036) 6.87
Options terminated and
canceled............... (779,128) 26.19 (635,611) 15.24 (1,043,939) 13.84
---------- ---------- ----------
Options outstanding at
end of year............ 21,308,861 16.34 17,740,718 14.61 18,686,785 14.19
========== ========== ==========
Options exercisable at
end of year............ 12,300,332 14.20 10,694,178 14.03 9,399,391 13.93
========== ========== ==========
Options available for
grant under the
Company's 1996 Plan at
the end of the year.... 1,196,867 883,888 971,090
========== ========== ==========
</TABLE>
Information related to options outstanding at September 30, 1999 is
summarized below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Options Life Price Options Price
- --------------- ---------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
$ 2.00--$ 13.63 2,558,404 6 Years $11.83 1,818,909 $11.58
$13.64--$ 14.13 11,985,393 6 Years $14.12 9,451,849 $14.12
$14.14--$ 24.50 5,745,475 5 Years $20.83 948,206 $17.04
$24.51--$503.74 1,019,589 6 Years $28.52 81,368 $49.18
---------- ----------
21,308,861 12,300,332
========== ==========
</TABLE>
Employee Stock Purchase Plan
In February 1998 Sterling Software's stockholders approved the Company's
Employee Stock Purchase Plan (the "ESPP"). Under provisions of the ESPP,
employees can purchase Common Stock at a specified price through payroll
deductions during an offering period, currently established on a semi-annual
basis. During the year ended September 30, 1999, approximately 565,000 shares
were issued to employees under the ESPP. At September 30, 1999, approximately
$2,504,000 had been contributed by employees that will be used to purchase
shares at the end of the offering period in December 1999. At September 30,
1999, the Company could issue up to approximately 147,000 shares under the
ESPP, based on withholdings through September 30, 1999 and the Company's stock
price at September 30, 1999.
56
<PAGE>
Statement of Financial Accounting Standard No. 123 ("FAS 123")
FAS 123 requires disclosure of pro forma net earnings and net earnings per
common share information computed as if the Company had accounted for its
employee stock options and the Company's ESPP under the fair value method set
forth in FAS 123. The fair value of the Company's outstanding stock options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
Years ended September 30
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected option life in years............... 4.0 4.0 4.0
Risk-free interest rate..................... 5.64% 5.59% 6.14%
Volatility factor........................... 0.40 0.40 0.40
</TABLE>
The Company does not have a history of paying cash dividends and none have
been assumed in estimating the fair value of its options or rights under the
ESPP.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because, among other things, changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable measure of
the fair value of its employee stock options or ESPP participation rights. For
purposes of pro forma disclosures, the estimated fair value of the options and
ESPP participation rights is amortized to expense over the options' vesting
periods and the ESPP's semi-annual offering periods.
<TABLE>
<CAPTION>
Years ended September 30
---------------------------
1999 1998 1997
-------- ------- ---------
<S> <C> <C> <C>
Pro forma net income (loss)................ $(28,539) $64,658 $(172,864)
Pro forma net income (loss) per share:
Basic.................................... $ (.34) $ .80 $ (2.17)
Diluted.................................. $ (.34) $ .76 $ (2.17)
Weighted average fair value of options
granted during the year................... $ 9.96 $ 9.24 $ 6.00
</TABLE>
13. Postretirement Benefits
The Company has a plan to provide retirement benefits under the provisions
of Section 401(k) of the Code for full time employees and for part time
employees who have completed a specified term of service. Pursuant to this
plan, eligible participants may elect to contribute a percentage of their
annual gross compensation and the Company will contribute additional amounts,
as provided by the plan. Benefits under the plan are limited to the assets of
the plan. Company contributions charged to expense during 1999, 1998 and 1997
were $5,185,000, $3,908,000 and $2,829,000, respectively. One-half of the
Company's contributions are invested in the Company's Common Stock. Effective
October 1, 1996, the portion of the plan consisting of the Company's
contributions was designated as an employee stock ownership plan. During 1999,
1998 and 1997, the investment of the Company's contributions included 102,953,
102,407 and 39,542 shares of Common Stock of the Company, respectively.
57
<PAGE>
14. Change-in-Control and Employment Arrangements
As of September 30, 1999, the Company had change-in-control agreements with
18 of its current or former officers providing for payments based on the
individual officer's respective cash compensation and benefits if there is a
change in control (as defined) in the Company and actual or constructive
termination of employment occurs. The change-in-control agreements further
provide that the Company will make certain payments to each individual party
thereto to compensate such individual for the economic effect of such
individual's liability to pay excise taxes to the extent that payments received
by such individual, pursuant to the change-in-control agreement, stock option
agreements or otherwise, are considered as "contingent on a change in ownership
or control" under Section 280G of the Code (each, a "Tax Payment"). Based on
certain assumptions, at September 30, 1999, the Company's maximum liability for
cash compensation, benefits and Tax Payments under these agreements was
estimated to be approximately $43,000,000. The Company's actual liability, if
any, under these agreements will depend on a number of factors, including the
level of salaries, bonuses and benefits being received by the then covered
individuals prior to a change in control and the price at which any change-in-
control transaction occurs.
As of September 30, 1999, the Company had entered into severance agreements
with 11 of its officers providing for payments based on the individual
officer's respective cash compensation and continuation of benefits if the
Company terminates the officer's employment. In addition, the Company has
entered into an agreement with one executive officer that provides for an
annual base salary plus agreed-upon bonuses and benefits and converts to a
consulting agreement upon the occurrence of certain events. The Company has
also entered into a consulting agreement with one of its directors that
provides for termination payments, based on the director's consulting
compensation, upon the occurrence of certain events. At September 30, 1999, the
Company's maximum estimated liability for future salaries, fees, bonuses and
benefits under these agreements was approximately $16,000,000.
58
<PAGE>
15. Quarterly Financial Results (Unaudited)
The Company's consolidated operating results for each quarter of 1999 and
1998 are summarized below (in thousands, except per share data). The Company's
financial statement for periods prior to the Synon Merger represent the
combined financial statements of the previously separate entities:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1999:
Revenue
Products........................ $ 64,313 $ 82,868 $ 99,238 $117,344
Product support................. 51,541 50,849 52,163 54,335
Services........................ 58,605 58,669 58,364 58,715
-------- -------- -------- --------
174,459 192,386 209,765 230,394
Cost of sales
Products and product support.... 17,948 19,821 21,034 25,335
Services........................ 53,160 50,724 52,565 52,810
-------- -------- -------- --------
71,108 70,545 73,599 78,145
Product development and
enhancement...................... 9,355 9,524 9,250 11,443
Selling, general and
administrative................... 61,609 67,840 74,618 84,989
Reorganization costs.............. 19,655 14,098 65,867
Purchased research and
development...................... 9,623 22,468 51,475
Net income (loss)................. 4,206 35,160 9,311 (59,433)
Weighted average common shares
outstanding...................... 82,536 83,197 83,536 83,708
Income (loss) per common share:
Basic......................... $ .05 $ .42 $ .11 $ (.71)
Diluted....................... .05 .40 .11 (.71)
Year ended September 30, 1998:
Revenue
Products........................ $ 64,979 $ 69,922 $ 71,266 $ 81,668
Product support................. 45,910 45,656 46,425 45,640
Services........................ 57,990 62,006 63,100 65,381
-------- -------- -------- --------
168,879 177,584 180,791 192,689
Cost of sales
Products and product support.... 18,072 16,991 17,007 19,159
Services........................ 51,108 53,513 54,708 57,108
-------- -------- -------- --------
69,180 70,504 71,715 76,267
Product development and
enhancement...................... 10,608 9,410 8,090 8,054
Selling, general and
administrative................... 69,004 67,993 66,407 61,046
Reorganization costs.............. 45,162
Net income........................ 17,322 23,916 27,211 7,595
Weighted average common shares
outstanding...................... 79,785 80,015 80,650 82,075
Income per common share:
Basic......................... $ .22 $ .30 $ .34 $ .09
Diluted....................... .21 .28 .32 .09
</TABLE>
59
<PAGE>
Information concerning the Company's operations by business segment for each
quarter of 1999, 1998 and 1997 is set forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- --------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1999:
Revenue:
Systems Management............ $ 48,241 $ 60,279 $ 76,120 $105,486
Application Management........ 87,598 93,117 93,106 84,024
Federal Systems............... 38,620 38,990 40,539 40,884
-------- -------- --------- --------
Consolidated totals......... $174,459 $192,386 $ 209,765 $230,394
======== ======== ========= ========
Operating Profit (Loss):
Systems Management............ $ 15,616 $ 23,193 $ 29,479 $ 46,801
Application Management........ 22,028 26,300 27,514 13,533
Federal Systems............... 2,810 3,098 3,136 3,337
Reorganization costs.......... (19,655) (14,098) (65,867)
Purchased research and
development.................. (9,623) (22,468) (51,475)
Corporate and other........... (8,067) (8,114) (7,831) (7,854)
-------- -------- --------- --------
Consolidated totals......... $ 3,109 $ 44,477 $ 15,732 $(61,525)
======== ======== ========= ========
Year ended September 30, 1998:
Revenue:
Systems Management............ $ 42,061 $ 50,314 $ 49,983 $ 62,171
Application Management........ 92,525 91,365 93,649 88,474
Federal Systems............... 33,665 35,905 37,159 42,044
Corporate and other........... 628
-------- -------- --------- --------
Consolidated totals......... $168,879 $177,584 $ 180,791 $192,689
======== ======== ========= ========
Operating Profit (Loss):
Systems Management............ $ 13,838 $ 18,680 $ 19,524 $ 25,295
Application Management........ 11,809 16,591 20,418 27,163
Federal Systems............... 2,239 2,468 2,412 2,792
Reorganization costs.......... (45,162)
Corporate and other........... (7,799) (8,062) (7,775) (7,928)
-------- -------- --------- --------
Consolidated totals......... $ 20,087 $ 29,677 $ 34,579 $ 2,160
======== ======== ========= ========
Year ended September 30, 1997:
Revenue:
Systems Management............ $ 36,950 $ 43,916 $ 46,045 $ 57,768
Application Management........ 44,427 40,310 41,327 97,102
Federal Systems............... 27,858 27,954 30,919 35,059
Corporate and other........... 10,381 13,040 15,265 881
-------- -------- --------- --------
Consolidated totals......... $119,616 $125,220 $ 133,556 $190,810
======== ======== ========= ========
Operating Profit (Loss):
Systems Management............ $ 12,889 $ 17,099 $ 18,530 $ 22,111
Application Management........ 4,408 3,120 3,522 12,697
Federal Systems............... 2,395 2,303 1,826 2,165
Reorganization costs.......... (106,037)
Purchased research and
development.................. (137,849)
Corporate and other........... (8,767) (9,075) (6,328) (7,273)
-------- -------- --------- --------
Consolidated totals......... $ 10,925 $ 13,447 $(226,336) $ 29,700
======== ======== ========= ========
</TABLE>
60
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the Company will be set forth in
the Proxy Statement to be provided to stockholders in connection with the
Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement") under
the heading "Election of Directors", which information is incorporated herein
by reference. Information concerning compliance with Section 16 of the
Securities Exchange Act of 1934, as amended, by persons subject to such
Section will be set forth in the Proxy Statement under the heading "Section
16(a) Beneficial Ownership Reporting Compliance", which information is
incorporated herein by reference. The name, age and position of each executive
officer of the Company is set forth under the heading "Executive Officers" in
Part I of this report, which information is incorporated herein by reference.
Item 11. Executive Compensation.
Information concerning executive compensation will be set forth in the
Proxy Statement under the headings "Management Compensation" and "Election of
Directors", which information is incorporated herein by reference. Information
contained in the Proxy Statement under the caption "Management Compensation--
Report of the Executive and Option Committees on Executive Compensation" and
"--Stock Performance Chart" is not incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning security ownership of certain beneficial owners and
management will be set forth in the Proxy Statement under the heading
"Security Ownership of Management and Certain Stockholders", which information
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions will
be set forth in the Proxy Statement under the headings "Management
Compensation--Executive and Stock Option Committee Interlocks and Insider
Participation" and "Certain Transactions", which information is incorporated
herein by reference.
61
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the Years Ended
September 30, 1999, 1998 and 1997.
3. Exhibits:
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (2), (3)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (4)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (5)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(6)
2.5 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(1), (2)
2.6 Asset Purchase Agreement, dated as of March 6, 1999, between the
Company, Spectra Logic Corporation, Sterling Software (U.S.A.), Inc.,
Nathan C. Thompson and Michael J. Sausa (2), (7)
2.7 Agreement and Plan of Merger, dated as of March 23, 1999, among the
Company, Sterling Software (Southwest), Inc. and Interlink Computer
Sciences, Inc. (2), (8)
2.8 Agreement and Plan of Merger, dated as of July 12, 1999, among the
Company, Sterling Software (Arizona), Inc. and CoreData, Inc. (1), (2)
2.9 Agreement and Plan of Merger, dated as of July 15, 1999, among the
Company, Sterling Software Acquisition Corp. and Information
Advantage, Inc. (2), (15)
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Restated Bylaws of the Company (1)
4.1 Form of Common Stock Certificate (10)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (11)
4.3 First Amendment to Rights Agreement, dated as of March 12, 1998, by
and between the Company and BankBoston, N.A., as Rights Agent (12)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (13), (14)
10.2 Sterling Software, Inc. Amended and Restated Employee Stock Purchase
Plan (effective as of March 20, 1998) (9), (14)
10.3 Sterling Software, Inc. Deferred Compensation Plan (restated effective
December 21, 1998) (14), (19)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(1), (14)
10.5 Form of Stock Option Agreement between the Company and each of Sam
Wyly and Charles J. Wyly, Jr. (14), (16)
10.6 Form of Stock Option Agreement between the Company and Sterling L.
Williams (14), (16)
</TABLE>
62
<PAGE>
<TABLE>
<C> <S>
10.7 Form of Stock Option Agreement between the Company and Geno P. Tolari
(14), (16)
10.8 Form of Stock Option Agreement between the Company and F.L. "Mike"
Harvey (1), (14)
10.9 Form of Amendment to Stock Option Agreement, dated March 20, 1998,
between the Company and each of its executive officers (9), (14)
10.10 Fiscal 1999 Executive Compensation Plan for Group Presidents (14),
(23)
10.11 Fiscal 2000 Executive Compensation Plan for Group Presidents (1),
(14)
10.12 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (14), (17)
10.13 CEO Agreement, dated February 12, 1996, between the Company and
Sterling L. Williams (14), (18)
10.14 Amendment to CEO Agreement, dated May 31, 1998, between the Company
and Sterling L. Williams (14), (23)
10.15 Form of Change-in-Control Severance Agreement, dated October 22,
1999, between the Company and each of Sam Wyly and Charles J. Wyly,
Jr. (1), (14)
10.16 Form of Change-in-Control Severance Agreement, dated October 22,
1999, between the Company and Sterling L. Williams (1), (14)
10.17 Form of Change-in-Control Severance Agreement, dated October 22,
1999, between the Company and each of Geno P. Tolari and F.L. "Mike"
Harvey (1), (14)
10.18 Form of Severance Agreement, dated February 12, 1996, between the
Company and Geno P. Tolari (14), (18)
10.19 Form of Severance Agreement, dated June 30, 1997, between the Company
and F.L. "Mike" Harvey (1), (14)
10.20 Form of Amendment to Severance Agreement, dated August 15, 1997,
between the Company and each of Geno P. Tolari and F.L. "Mike" Harvey
(14), (16)
10.21 Form of Indemnity Agreement between the Company and each of its
directors and officers (1)
10.22 Third Amended and Restated Revolving Credit Agreement, dated July 1,
1997, by and among the Company, BankBoston, N.A. and Bank One, Texas,
National Association and BankBoston, N.A. as agent for itself and
Bank One, Texas, National Association (20)
10.23 Tax Allocation Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (21)
10.24 Indemnification Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (22)
10.25 Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the
benefit of the Company (17)
21.1 Subsidiaries of the Company (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 Financial Data Schedule (1)
</TABLE>
- --------
(1) Filed herewith.
(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
and exhibits upon request.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (SEC File No. 97605952).
(4) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1997, as amended, and incorporated herein by reference (SEC
File No. 97633732).
(5) Previously filed as Appendix A to the Proxy Statement/Prospectus forming a
part of the Company's Registration Statement No. 333-53747, dated May 28,
1999, and incorporated herein by reference (SEC File No. 98632583).
(6) 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).
63
<PAGE>
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (SEC File No. 99617213).
(8) Previously filed as an exhibit to the Company's Tender Offer Statement on
Schedule 14D-1 dated March 30, 1999 and incorporated herein by reference
(SEC File No. 99579124).
(9) 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).
(10) Previously filed as an exhibit to the Company's Registration Statement No.
2-86825 and incorporated herein by reference (SEC File No. S766400).
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 18, 1996 and incorporated herein by reference (SEC File No.
96682898).
(12) Previously filed as an exhibit to the Company's Registration Statement No.
on Form 8-A/A filed April 3, 1998 and incorporated herein by reference
(SEC File No. 98587026).
(13) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference (SEC File No. 93278187).
(14) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(15) Previously filed as an exhibit to the Company's Tender Offer Statement on
Schedule 14D-1 dated July 21, 1999 and incorporated herein by reference
(SEC File No. 99667898).
(16) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 and incorporated herein by
reference (SEC File No. 97724719).
(17) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 and incorporated herein by
reference (SEC File No. 96672084).
(18) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and incorporated herein by
reference (SEC File No. 96560921).
(19) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998 and incorporated herein by
reference (SEC File No. 99531526).
(20) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference (SEC File No. 97660034).
(21) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference
(File/ID #001-14196, SEC File No. 96042701).
(22) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 filed by Sterling Commerce, Inc. and
incorporated herein by reference (File ID #001-14196, SEC
File No. 96560893).
(23) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998 and incorporated herein by
reference (SEC File No. 98755025).
(b) Reports on Form 8-K.
During the three-month period ended September 30, 1999, the Company
filed a Report on Form 8-K dated September 2, 1999. Such report includes
information reported under Item 5--Other Events.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: November 11, 1999 /s/ Sterling L. Williams
By___________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: November 11, 1999 /s/ R. Logan Wray
__________________________________
R. Logan Wray
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
65
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: November 11, 1999 /s/ Robert J. Donachie
_____________________________________
Robert J. Donachie
Director
Date: November 11, 1999 /s/ Michael C. French
_____________________________________
Michael C. French
Director
Date: November 11, 1999 /s/ Phillip A. Moore
_____________________________________
Phillip A. Moore
Director
Date: November 11, 1999 /s/ Charles J. Wyly, Jr.
_____________________________________
Charles J. Wyly, Jr.
Vice Chairman of the Board and
Director
Date: November 11, 1999 /s/ Evan A. Wyly
_____________________________________
Evan A. Wyly
Director
Date: November 11, 1999 /s/ Donald R. Miller, Jr.
_____________________________________
Donald R. Miller, Jr.
Director
Date: November 11, 1999 /s/ Alan W. Steelman
_____________________________________
Alan W. Steelman
Director
Date: November 11, 1999 /s/ Sterling L. Williams
_____________________________________
Sterling L. Williams
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: November 11, 1999 /s/ Sam Wyly
_____________________________________
Sam Wyly
Chairman of the Board and Director
66
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas
Instruments Incorporated and the Company (2), (3)
2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by
and between Texas Instruments Incorporated, the Company and certain
subsidiaries of the Company, and Amendment No. 2 to Asset Purchase
Agreement, dated June 28, 1997, by and between Texas Instruments
Incorporated, the Company and certain subsidiaries of the Company (4)
2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the
Company, Sterling Software (Connecticut), Inc. and Mystech Associates,
Inc. (2), (5)
2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the
Company, Sterling Software (Southern), Inc. and Synon Corporation (2),
(6)
2.5 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(1), (2)
2.6 Asset Purchase Agreement, dated as of March 6, 1999, between the
Company, Spectra Logic Corporation, Sterling Software (U.S.A.), Inc.,
Nathan C. Thompson and Michael J. Sausa (2), (7)
2.7 Agreement and Plan of Merger, dated as of March 23, 1999, among the
Company, Sterling Software (Southwest), Inc. and Interlink Computer
Sciences, Inc. (2), (8)
2.8 Agreement and Plan of Merger, dated as of July 12, 1999, among the
Company, Sterling Software (Arizona), Inc. and CoreData, Inc. (1), (2)
2.9 Agreement and Plan of Merger, dated as of July 15, 1999, among the
Company, Sterling Software Acquisition Corp. and Information
Advantage, Inc. (2), (15)
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Restated Bylaws of the Company (1)
4.1 Form of Common Stock Certificate (10)
4.2 Rights Agreement, dated December 18, 1996, by and between the Company
and The First National Bank of Boston, as Rights Agent (11)
4.3 First Amendment to Rights Agreement, dated as of March 12, 1998, by
and between the Company and BankBoston, N.A., as Rights Agent (12)
10.1 Supplemental Executive Retirement Plan II of Informatics General
Corporation ("SERP II"), as amended by Amendment to SERP II (13), (14)
10.2 Sterling Software, Inc. Amended and Restated Employee Stock Purchase
Plan (effective as of March 20, 1998) (9), (14)
10.3 Sterling Software, Inc. Deferred Compensation Plan (restated effective
December 21, 1998) (14), (19)
10.4 Sterling Software, Inc. Amended and Restated 1996 Stock Option Plan
(1), (14)
10.5 Form of Stock Option Agreement between the Company and each of Sam
Wyly and Charles J. Wyly, Jr. (14), (16)
10.6 Form of Stock Option Agreement between the Company and Sterling L.
Williams (14), (16)
10.7 Form of Stock Option Agreement between the Company and Geno P. Tolari
(14), (16)
10.8 Form of Stock Option Agreement between the Company and F.L. "Mike"
Harvey (1), (14)
10.9 Form of Amendment to Stock Option Agreement, dated March 20, 1998,
between the Company and each of its executive officers (9), (14)
Fiscal 1999 Executive Compensation Plan for Group Presidents (14),
10.10 (23)
10.11 Fiscal 2000 Executive Compensation Plan for Group Presidents (1), (14)
10.12 Consulting Agreement, dated October 1, 1996, between the Company and
Michael C. French (14), (17)
CEO Agreement, dated February 12, 1996, between the Company and
10.13 Sterling L. Williams (14), (18)
10.14 Amendment to CEO Agreement, dated May 31, 1998, between the Company
and Sterling L. Williams (14), (23)
10.15 Form of Change-in-Control Severance Agreement, dated October 22, 1999,
between the Company and each of Sam Wyly and Charles J. Wyly, Jr. (1),
(14)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------
<C> <S>
10.16 Form of Change-in-Control Severance Agreement, dated October 22, 1999,
between the Company and Sterling L. Williams (1), (14)
10.17 Form of Change-in-Control Severance Agreement, dated October 22, 1999,
between the Company and each of Geno P. Tolari and F.L. "Mike" Harvey
(1), (14)
10.18 Form of Severance Agreement, dated February 12, 1996, between the
Company and Geno P. Tolari (14), (18)
10.19 Form of Severance Agreement, dated June 30, 1997, between the Company
and F.L. "Mike" Harvey (1), (14)
10.20 Form of Amendment to Severance Agreement, dated August 15, 1997,
between the Company and each of Geno P. Tolari and F.L. "Mike" Harvey
(14), (16)
Form of Indemnity Agreement between the Company and each of its
10.21 directors and officers (1)
10.22 Third Amended and Restated Revolving Credit Agreement, dated July 1,
1997, by and among the Company, BankBoston, N.A. and Bank One, Texas,
National Association and BankBoston, N.A. as agent for itself and Bank
One, Texas, National Association (20)
10.23 Tax Allocation Agreement, dated March 4, 1996, between the Company and
Sterling Commerce, Inc. (21)
10.24 Indemnification Agreement, dated March 4, 1996, between the Company
and Sterling Commerce, Inc. (22)
Agreement dated September 19, 1996 by Sterling Commerce, Inc. for the
10.25 benefit of the Company (17)
21.1 Subsidiaries of the Company (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 Financial Data Schedule (1)
</TABLE>
- --------
(1) Filed herewith.
(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
and exhibits upon request.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (SEC File No. 97605952).
(4) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated June 30, 1997, as amended, and incorporated herein by reference
(SEC File No. 97633732).
(5) Previously filed as Appendix A to the Proxy Statement/Prospectus forming
a part of the Company's Registration Statement No. 333-53747, dated May
28, 1999, and incorporated herein by reference (SEC File No. 98632583).
(6) 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).
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (SEC File No. 99617213).
(8) Previously filed as an exhibit to the Company's Tender Offer Statement on
Schedule 14D-1 dated March 30, 1999 and incorporated herein by reference
(SEC File No. 99579124).
(9) 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).
(10) Previously filed as an exhibit to the Company's Registration Statement
No. 2-86825 and incorporated herein by reference (SEC File No. S766400).
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-
K dated December 18, 1996 and incorporated herein by reference (SEC File
No. 96682898).
(12) Previously filed as an exhibit to the Company's Registration Statement
No. on Form 8-A/A filed April 3, 1998 and incorporated herein by reference
(SEC File No. 98587026).
(13) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1993 and incorporated herein by
reference (SEC File No. 93278187).
<PAGE>
(14) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(15) Previously filed as an exhibit to the Company's Tender Offer Statement on
Schedule 14D-1 dated July 21, 1999 and incorporated herein by reference
(SEC File No. 99667898).
(16) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997 and incorporated herein by
reference (SEC File No. 97724719).
(17) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1996 and incorporated herein by
reference (SEC File No. 96672084).
(18) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and incorporated herein by
reference (SEC File No. 96560921).
(19) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998 and incorporated herein by
reference (SEC File No. 99531526).
(20) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference (SEC File No. 97660034).
(21) Previously filed as an exhibit to Registration Statement No. 33-80595
filed by Sterling Commerce, Inc. and incorporated herein by reference
(File/ID #001-14196, SEC File No. 96042701).
(22) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 filed by Sterling Commerce, Inc. and
incorporated herein by reference (File ID #001-14196, SEC
File No. 96560893).
(23) Previously filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1998 and incorporated herein by
reference (SEC File No. 98755025).
<PAGE>
Schedule II
STERLING SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
----------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
of Period Expenses Describe Describe Period
----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts at September
30, 1997.............. $ 7,946,000 $5,191,000 $ 4,436,000(3) $(3,387,000)(2) $14,186,000
=========== ========== =========== ============ ===========
Allowance for doubtful
accounts at September
30, 1998.............. $14,186,000 $5,157,000 $ 2,048,000(1) $(4,268,000)(2) $17,123,000
=========== ========== =========== ============ ===========
Allowance for doubtful
accounts at September
30, 1999.............. $17,123,000 $2,908,000 $10,891,000(4) $(4,748,000)(2) $26,174,000
=========== ========== =========== ============ ===========
</TABLE>
- --------
(1) Offsets to deferred revenue.
(2) Accounts written off.
(3) Offsets to deferred revenue and allowances for doubtful accounts acquired
in the acquisition of the Software Division of Texas Instruments
Incorporated.
(4) Offsets to deferred revenue and allowances for doubtful accounts acquired
in the 1999 Acquisitions.
S-1
<PAGE>
Exhibit 2.5
-----------
____________________________________________________________
AGREEMENT AND PLAN OF MERGER
among
STERLING SOFTWARE, INC.
STERLING SOFTWARE (SOUTHERN), INC.
and
CAYENNE SOFTWARE, INC.
dated as of August 27, 1998
____________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
AGREEMENT AND PLAN OF MERGER...................................................1
ARTICLE I - THE MERGER.........................................................1
Section 1.1 The Merger..................................................1
Section 1.2 Closing.....................................................2
Section 1.3 Effective Time..............................................2
Section 1.4 Effects of the Merger.......................................2
Section 1.5 Certificate of Incorporation; Bylaws........................2
Section 1.6 Directors; Officers.........................................2
ARTICLE II - EFFECT OF THE MERGER ON THE CAPITALSTOCK OF THE
CONSTITUENT CORPORATIONS.......................................................3
Section 2.1 Effect on Capital Stock.....................................3
Section 2.2 Stock Options and Warrants..................................4
ARTICLE III - PAYMENT FOR SHARES...............................................5
Section 3.1 Payment for Shares..........................................5
ARTICLE IV - REPRESENTATIONS AND WARRANTIES....................................7
Section 4.1 Representations and Warranties of Company...................7
Section 4.2 Representations and Warranties of Parent and Merger Sub....21
ARTICLE V - CONDUCT OF BUSINESS OF COMPANY....................................22
Section 5.1 Conduct of Business of Company.............................22
ARTICLE VI - ADDITIONAL COVENANTS.............................................24
Section 6.1 Preparation of the Proxy Statement.........................24
Section 6.2 Stockholders Meeting.......................................24
Section 6.3 Access to Information; Confidentiality.....................25
Section 6.4 Reasonable Best Efforts....................................25
Section 6.5 Public Announcements.......................................25
Section 6.6 No Solicitation; Acquisition Proposals.....................26
Section 6.7 Consents, Approvals and Filings............................27
Section 6.8 Board Action Relating to Stock Option Plans................28
Section 6.9 Employee Benefit Matters...................................28
Section 6.10 Indemnification; Directors' and Officers' Insurance........28
Section 6.11 Credit Arrangements........................................29
ARTICLE VII - CONDITIONS PRECEDENT............................................31
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger.....................................................31
Section 7.2 Conditions to Obligations of Parent and Merger Sub.........31
Section 7.3 Conditions to Obligation of Company........................32
(i)
<PAGE>
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER..............................33
Section 8.1 Termination................................................35
Section 8.2 Effect of Termination......................................35
Section 8.3 Amendment..................................................35
Section 8.4 Extension; Waiver..........................................35
Section 8.5 Procedure for Termination, Amendment, Extension or
Waiver.....................................................35
ARTICLE IX - GENERAL PROVISIONS...............................................35
Section 9.1 Nonsurvival of Representations and Warranties..............35
Section 9.2 Fees and Expenses..........................................36
Section 9.3 Definitions................................................36
Section 9.4 Notices....................................................39
Section 9.5 Interpretation.............................................39
Section 9.6 Entire Agreement; Third-Party Beneficiaries................39
Section 9.7 Governing Law..............................................39
Section 9.8 Assignment.................................................39
Section 9.9 Enforcement................................................40
Section 9.10 Severability...............................................40
Section 9.11 Counterparts...............................................40
(ii)
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of August 27, 1998 (this
"Agreement"), is made and entered into among Sterling Software, Inc., a Delaware
corporation ("Parent"), Sterling Software (Southern), Inc., a Georgia
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Cayenne
Software, Inc., a Massachusetts corporation ("Company").
RECITALS:
A. The Executive Committee of the Board of Directors of Parent and the
respective Boards of Directors of Merger Sub and Company have determined that it
would be advisable and in the best interests of their respective stockholders
for Parent to acquire Company, by means of a merger of Company with and into
Merger Sub (the "Merger"), on the terms and subject to the conditions set forth
in this Agreement.
B. Concurrently with the execution and delivery of this Agreement and as
a condition to Parent's and Merger Sub's willingness to enter into this
Agreement, (i) Parent and Company have entered into a Stock Option Agreement,
dated as of the date hereof (the "Stock Option Agreement"), pursuant to which
Company has granted to Parent an option to purchase certain shares of capital
stock of Company under certain circumstances and (ii) Parent has entered into a
Stockholder Agreement, dated as of the date hereof (the "Stockholder
Agreement"), with each of the Preferred Stockholders (as hereinafter defined),
pursuant to which each Preferred Stockholder has (x) agreed, among other things,
to vote all shares of capital stock of Company owned by such Preferred
Stockholder in favor of the approval of this Agreement and (y) granted to Parent
an option to purchase all shares of capital stock of Company owned by such
Preferred Stockholder.
C. Parent, Merger Sub and Company desire to make certain representations,
warranties and covenants in connection with the Merger and to prescribe various
conditions to the consummation of the Merger.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. On the terms and subject to the conditions set
----------
forth in this Agreement, and in accordance with the Massachusetts Business
Corporation Law (the "MBCL") and the Georgia Business Corporation Code (the
"GBCC"), the Merger shall be effected and Company shall be merged with and into
Merger Sub at the Effective Time (as hereinafter defined). At the Effective
Time, the separate existence of Company shall cease and Merger Sub shall
continue as the surviving corporation (sometimes hereinafter referred to as the
"Surviving Corporation").
<PAGE>
Section 1.2 Closing. Unless this Agreement shall have been terminated and
-------
the transactions herein contemplated shall have been abandoned pursuant to
Article VIII, and subject to the satisfaction or waiver of all of the conditions
set forth in Article VII, the closing of the Merger (the "Closing") will take
place as soon as practicable, but in no event later than 10:00 a.m. on the
second business day (the "Closing Date") following satisfaction or waiver of all
of the conditions set forth in Article VII, other than those conditions that by
their nature are to be satisfied at the Closing, but subject to the fulfillment
or waiver of those conditions, at the offices of Jones, Day, Reavis & Pogue,
2300 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas, unless another date,
time or place is agreed to in writing by the parties hereto.
Section 1.3 Effective Time. On the Closing Date (or on such other date as
--------------
Parent and Company may agree), the parties hereto shall file with the Secretary
of State of The Commonwealth of Massachusetts (the "Massachusetts State
Secretary") articles of merger (the "Massachusetts Articles of Merger") and any
other appropriate documents, executed in accordance with the relevant provisions
of the MBCL, shall file with the Secretary of State of the State of Georgia (the
"Georgia State Secretary") a certificate of merger (the "Georgia Certificate of
Merger") and any other appropriate documents, executed in accordance with the
relevant provisions of the GBCC, and shall make all other filings or recordings
required under the MBCL and GBCC in connection with the Merger. The Merger shall
become effective upon the later of the filing of the Massachusetts Articles of
Merger and the filing of the Georgia Certificate of Merger, or at such later
time as may be specified in the Massachusetts Articles of Merger or the Georgia
Certificate of Merger (the "Effective Time").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
---------------------
forth in the applicable provisions of the MBCL and the GBCC. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
property of Company and Merger Sub shall vest in the Surviving Corporation, and
all liabilities of Company and Merger Sub shall become the liabilities of the
Surviving Corporation.
Section 1.5 Certificate of Incorporation; Bylaws At the Effective Time,
------------------------------------
(a) the certificate of incorporation of Merger Sub as in effect at the Effective
Time shall, from and after the Effective Time, be the certificate of
incorporation of the Surviving Corporation until thereafter changed or amended
in accordance with the provisions thereof and applicable law and (b) the bylaws
of Merger Sub as in effect at the Effective Time shall, from and after the
Effective Time, be the bylaws of the Surviving Corporation until thereafter
changed or amended in accordance with the provisions thereof and applicable law.
Section 1.6 Directors; Officers. From and after the Effective Time, (a)
-------------------
the directors of Merger Sub shall be the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be, and (b) the
officers of Merger Sub shall be the officers of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
ARTICLE II
2
<PAGE>
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
Section 2.1 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of shares of
Company's common stock, par value $0.01 per share (the "Common Shares"), or
shares of Company's Series D Convertible Preferred Stock, par value $1.00 per
share (the "Preferred Shares" and, together with the Common Shares, the
"Shares"), or any other capital stock of Company or any shares of capital stock
of Merger Sub:
(a) Common Stock of Merger Sub. Each share of common stock, par
--------------------------
value $0.10 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall remain outstanding and shall not be affected in any way
by the effectiveness of the Merger.
(b) Cancellation of Treasury Shares and Parent-Owned Shares. Each
-------------------------------------------------------
Share issued and outstanding immediately prior to the Effective Time that is
owned by Company or any Subsidiary (as hereinafter defined) of Company or by
Parent, Merger Sub or any other Subsidiary of Parent (other than shares in trust
accounts, managed accounts, custodial accounts and the like that are
beneficially owned by third parties) shall automatically be canceled and retired
and shall cease to exist, and no cash or other consideration shall be delivered
or deliverable in exchange therefor.
(c) Conversion of Shares. Each Share issued and outstanding
--------------------
immediately prior to the Effective Time (other than Shares to be canceled and
retired in accordance with Section 2.1(b) and any Dissenting Shares (as
hereinafter defined)) shall be converted into the right to receive the
applicable amount of cash specified in this Section 2.1(c) (the "Merger
Consideration"), which (i) in the case of each Common Share, is $0.375, and (ii)
in the case of each Preferred Share, is $20.00, upon surrender of the
certificate formerly representing such Share in accordance with this Agreement;
provided, however, that in the event that there shall be outstanding at the
Effective Time any Advances (as hereinafter defined), the Merger Consideration
shall be reduced, in the case of each Common Share, by an amount (rounded to the
nearest one-tenth of a cent) equal to the quotient obtained by dividing (1) the
aggregate amount of such outstanding Advances by (2) 21,333,398.
(d) Dissenting Shares. Notwithstanding anything in this Agreement
-----------------
to the contrary, any Shares issued and outstanding immediately prior to the
Effective Time held by a holder who has the right to demand, and who properly
demands, payment for such Shares ("Dissenting Shares") in accordance with
Sections 85 through 98 of the MBCL (together with any successor provisions, the
"Appraisal Provisions") shall not be converted into a right to receive the
applicable Merger Consideration, unless such holder fails to perfect or
otherwise loses such holder's right to payment in accordance with the Appraisal
Provisions. If, after the Effective Time, such holder fails to perfect or loses
any such right, each such Share of such holder shall be treated as a Share that
had been converted as of the Effective Time into the right to receive the
applicable Merger Consideration in accordance with Section 2.1(c). At the
Effective Time, any holder of Dissenting Shares shall cease to have any rights
with respect thereto, except the rights provided in the Appraisal Provisions and
as provided in the immediately preceding sentence. Company shall give prompt
notice to Parent of any demands received by Company for payment in
3
<PAGE>
accordance with the Appraisal Provisions, and Parent shall have the right to
participate in and direct all negotiations and proceedings with respect to such
demands. Company shall not, except with the prior written consent of Parent,
make any payment with respect to, or settle or offer to settle, any such
demands.
Section 2.2 Stock Options and Warrants.
---------------------------
(a) At the Effective Time, each then-outstanding option to
purchase Common Shares (collectively, the "Options") granted under the Bachman
Information Systems, Inc. Amended and Restated 1986 Incentive and Nonqualified
Stock Option Plan, the Cayenne Software, Inc. Amended 1996 Incentive and
Nonqualified Stock Option Plan, the Cayenne Software, Inc. 1998 Nonqualified
Stock Option Plan, the Cadre Technologies, Inc. 1988 Incentive and Non-Statutory
Stock Option Plan, the Cadre Technologies, Inc. 1989 Non-Statutory Stock Option
Plan and the Stock Option Agreements, dated December 29, 1997, between Company
and each of Massood Zarrabian and Frederick Phillips (collectively, the "Stock
Option Plans"), whether or not then exercisable or fully vested, shall be
assumed by Parent and shall constitute an option (a "Substitute Option") to
acquire, on substantially the same terms and subject to substantially the same
conditions as were applicable under such Option, including without limitation
term, vesting, exercisability, status as an "incentive stock option" under
Section 422 of the Code (if applicable) or as an employee stock purchase plan
option under Section 423 of the Code (if applicable), and termination
provisions, the number of shares of common stock, par value $0.10 per share
("Parent Common Stock"), of Parent, rounded down to the nearest whole share (it
being understood that the portion, if any, of an Option that would otherwise
have resulted in a Substitute Option being exercisable to purchase a fractional
share of Parent Common Stock shall be extinguished as a result of such
rounding), determined by multiplying the number of Common Shares subject to such
Option immediately prior to the Effective Time by the Conversion Factor, at an
exercise price per share of Parent Common Stock (increased to the nearest whole
cent) equal to the exercise price per share of Common Shares subject to such
Option divided by the Conversion Factor; provided, however, that in the case of
any Option to which Section 421 of the Code applies by reason of its
qualification as an incentive stock option under Section 422 of the Code or as
an employee stock purchase plan option under Section 423 of the Code, the
conversion formula shall be adjusted if necessary to comply with Section 424(a)
of the Code.
(b) Company shall use its best efforts to obtain all necessary
waivers, consents or releases from holders of Options granted under the Stock
Option Plans and take any such other action as may be reasonably necessary to
give effect to the transactions contemplated by Section 2.2(a).
(c) Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Parent Common Stock for delivery
upon exercise of Substitute Options pursuant to the terms set forth in Section
2.2(a). At such time (if any) as such action may be required under the
Securities Act (as hereinafter defined), Parent will cause the shares of Parent
Common Stock subject to all then-outstanding Substitute Options to be covered by
an effective registration statement on Form S-8 (or any successor form) or
another appropriate form and Parent shall use its reasonable best efforts to
maintain the effectiveness of such registration statement for so long as such
Substitute Options remain outstanding. In addition, at such time (if any) as
such action may be required under the rules and policies of the NYSE (as
hereinafter
4
<PAGE>
defined) or any other exchange upon which shares of Parent Common Stock may be
listed, Parent shall use all reasonable efforts to cause the shares of Parent
Common Stock subject to all then-outstanding Substitute Options to be listed on
the NYSE or such other exchange, as the case may be.
(d) At the Effective Time, each then-outstanding warrant to
purchase Common Shares (collectively, the "Warrants") issued under or evidenced
by the Warrant Agreement, dated December 20, 1996, between Company and Silicon
Valley Bank, the Convertible Preferred Stock Purchase Agreement, dated January
2, 1997, between Company and Southbrook International Investments, Ltd.
("Southbrook"), the Convertible Preferred Stock Purchase Agreement, dated July
18, 1997, between Company and Southbrook, the Convertible Preferred Stock
Purchase Agreement, dated August 28, 1997, between Company, the Preferred
Stockholders and certain other persons named therein, the Warrant Certificate,
dated November 1995, executed by Cadre Technologies, Inc. ("Cadre Technologies")
in favor of First Portland Corporation (dba First Portland Leasing Corp.), the
Share Purchase Agreement, dated April 13, 1995, between Cadre Technologies and
Stichting Administratiekantoor Cadmount, and the Warrant Certificate, dated
January 1997, executed by Company in favor of Rene de Vleeschauver
(collectively, the "Warrant Documents") shall be canceled and retired and shall
cease to exist, and no cash or other consideration shall be delivered or
deliverable in exchange therefor.
(e) Company shall use its best efforts to obtain all necessary
waivers, consents or releases from holders of Warrants issued under or evidenced
by the Warrant Documents and take such other action as may be reasonably
necessary to give effect to the transactions contemplated by Section 2.2(d).
ARTICLE III
PAYMENT FOR SHARES
Section 3.1 Payment for Shares.
------------------
(a) Payment Fund. Concurrently with the Effective Time, Parent
------------
shall deposit, or shall cause to be deposited, with or for the account of a bank
or trust company designated by Parent, which shall be reasonably satisfactory to
Company (the "Paying Agent"), for the benefit of the holders of Shares, cash in
an amount sufficient to pay the aggregate Merger Consideration payable upon the
conversion of Shares pursuant to Section 2.1(c) (the "Payment Fund").
(b) Letters of Transmittal; Surrender of Certificates. As soon as
-------------------------------------------------
reasonably practicable after the Effective Time, Parent shall instruct the
Exchange Agent to mail to each holder of record (other than Company or any of
its Subsidiaries or Parent, Merger Sub or any other Subsidiary of Parent) of a
certificate or certificates that, immediately prior to the Effective Time,
evidenced outstanding Shares (the "Certificates"), (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the applicable
Merger Consideration. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter
5
<PAGE>
of transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor cash in an amount equal to the product
of (i) the number of Shares theretofore represented by such Certificate and (ii)
the applicable Merger Consideration, and the Certificate so surrendered shall
forthwith be canceled. No interest shall be paid or accrued on any cash payable
upon the surrender of any Certificate. If payment is to be made to a person
other than the person in whose name the surrendered Certificate is registered,
it shall be a condition of payment that the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the surrendered
Certificate or established to the satisfaction of Parent and the Surviving
Corporation that such taxes have been paid or are not applicable.
(c) Cancellation and Retirement of Shares; No Further Rights. As
--------------------------------------------------------
of the Effective Time, all Shares (other than Shares to be canceled in
accordance with Section 2.1(b)) issued and outstanding immediately prior to the
Effective Time shall cease to be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of any such Shares shall
cease to have any rights with respect thereto or arising therefrom (including
without limitation the right to vote), except the right to receive the
applicable Merger Consideration, without interest, upon surrender of such
Certificate in accordance with Section 3.1(b), and until so surrendered, each
such Certificate shall represent for all purposes only the right to receive the
applicable Merger Consideration, without interest. The Merger Consideration paid
upon the surrender for exchange of Certificates in accordance with the terms of
this Article III shall be deemed to have been paid in full satisfaction of all
rights pertaining to the Shares theretofore represented by such Certificates.
(d) Investment of Payment Fund. The Paying Agent shall invest the
--------------------------
Payment Fund, as directed by Parent, in (i) direct obligations of the United
States of America, (ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for the payment of principal and
interest, (iii) commercial paper rated the highest quality by either Moody's
Investors Services, Inc. or Standard & Poor's Corporation, or (iv) certificates
of deposit, bank repurchase agreements or bankers' acceptances of commercial
banks with capital exceeding $500 million. Any net earnings with respect to the
Payment Fund shall be the property of and paid over to Parent as and when
requested by Parent.
(e) Termination of Payment Fund. Any portion of the Payment Fund
---------------------------
which remains undistributed to the holders of Certificates for 180 days after
the Effective Time shall be delivered to Parent, upon demand, and any holders of
Certificates that have not theretofore complied with this Article III shall
thereafter look only to Parent, and only as general creditors thereof, for
payment of their claim for any Merger Consideration.
(f) No Liability. None of Parent, Merger Sub, the Surviving
------------
Corporation or the Paying Agent shall be liable to any person in respect of any
payments or distributions payable from the Payment Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to five years after
the Effective Time (or immediately prior to such earlier date on which any
Merger Consideration in respect of such Certificate would otherwise escheat to
or become the property of any Governmental Entity (as hereinafter defined)), any
amounts payable in respect of such
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Certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
(g) Withholding Rights. Parent shall be entitled to deduct and
------------------
withhold, or cause to be deducted or withheld, from the consideration otherwise
payable pursuant to this Agreement to any holder of Shares, Options or
Certificates such amounts as are required to be deducted and withheld with
respect to the making of such payment under the Code, or any provision of
applicable state, local or foreign tax law. To the extent that amounts are so
deducted and withheld, such deducted and withheld amounts shall be treated for
all purposes of this Agreement as having been paid to such holders in respect of
which such deduction and withholding was made.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Company. Company
------------------------------------------
represents and warrants to Parent and Merger Sub as follows:
(a) Organization, Standing and Corporate Power. Each of Company
------------------------------------------
and each Subsidiary of Company is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and authority to carry on its
business as now being conducted. Each of Company and each Subsidiary of Company
is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect (as hereinafter defined) on Company. Company has delivered to
Parent true, complete and correct copies of the articles of organization and by-
laws or comparable governing documents of Company and each Subsidiary of
Company, in each case as amended to the date of this Agreement. A true, correct
and complete list of all Subsidiaries of Company, together with the jurisdiction
of incorporation of each such Subsidiary and the percentage of each such
Subsidiary's capital stock owned by Company or another Subsidiary, is set forth
in Section 4.1(a) of the Disclosure Schedule (as hereinafter defined).
(b) Authority; Noncontravention. Company has the requisite
---------------------------
corporate power and authority to enter into this Agreement and the Stock Option
Agreement and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the Stock Option Agreement by
Company and the consummation by Company of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
part of Company, subject, in the case of the Merger, to the approval of this
Agreement by its stockholders as contemplated by Section 6.2. Each of this
Agreement and the Stock Option Agreement has been duly executed and delivered by
Company and, assuming that this Agreement or the Stock Option Agreement, as
applicable, constitutes a valid and binding obligation of Parent and Merger Sub,
constitutes a valid and binding obligation of Company, enforceable against
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general principles of
equity. Except as
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specified in Section 4.1(b) of the Disclosure Schedule, the execution and
delivery of this Agreement and the Stock Option Agreement do not, and the
consummation of the transactions contemplated hereby or thereby and compliance
with the provisions hereof or thereof will not, (i) conflict with any of the
provisions of the articles of organization or by-laws of Company or the
comparable governing documents of any Subsidiary of Company, in each case as
amended to the date of this Agreement, (ii) subject to the governmental filings
and other matters referred to in Section 4.1(c), conflict with, result in a
breach of or default (with or without notice or lapse of time, or both) under,
or give rise to a material obligation, a right of termination, cancellation or
acceleration of any obligation or a loss of a material benefit under, or require
the consent of any person under, any indenture or other agreement, permit,
concession, franchise, license or similar instrument or undertaking to which
Company or any of its Subsidiaries is a party or by which Company or any of its
Subsidiaries or any of their respective assets is bound or affected, or (iii)
subject to the governmental filings and other matters referred to in Section
4.1(c), contravene any domestic or foreign law, rule or regulation or any order,
writ, judgment, injunction, decree, determination or award currently in effect,
which, in the case of clauses (ii) and (iii) above could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on Company.
(c) Consents and Approvals. No consent, approval or authorization
----------------------
of, or declaration or filing with, or notice to, any domestic or foreign
governmental agency or regulatory authority (a "Governmental Entity") which has
not been received or made is required by or with respect to Company or any of
its Subsidiaries in connection with the execution and delivery of this Agreement
or the Stock Option Agreement by Company or the consummation by Company of the
transactions contemplated hereby or thereby, except for (i) the filing of
premerger notification and report forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), with respect to the
Merger, (ii) the filing with the Securities and Exchange Commission (the "SEC")
of (A) the Proxy Statement (as hereinafter defined), and (B) such reports under
the Exchange Act (as hereinafter defined) as may be required in connection with
this Agreement or the Stock Option Agreement and the transactions contemplated
hereby or thereby, (iii) the filing of the Massachusetts Articles of Merger with
the Massachusetts State Secretary and the filing of the Georgia Certificate of
Merger with the Georgia State Secretary, and appropriate documents with the
relevant authorities of other states in which Company is qualified to do
business, (iv) such other consents, approvals, authorizations, filings or
notices as are specified in Section 4.1(c) of the Disclosure Schedule, and (v)
any other consents, approvals, authorizations, filings or notices the failure to
make or obtain which could not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Company.
(d) Capital Structure. The authorized capital stock of Company
-----------------
consists solely of 52,400,000 Common Shares and 1,600,000 shares of preferred
stock, par value $1.00 per share, of Company. As of the date hereof: (i)
21,333,398 Common Shares were issued and outstanding; (ii) 170,000 Preferred
Shares were issued and outstanding; (iii) 2,578,762 Common Shares were reserved
for issuance pursuant to outstanding Options granted under the Stock Option
Plans; (iv) 5,200,000 Common Shares were reserved for issuance upon conversion
of Preferred Shares; (v) 1,407,973 Common Shares were reserved for issuance
pursuant to outstanding Warrants issued under or evidenced by the Warrant
Documents; and (vi) no Common Shares were held by Company in its treasury.
Except as set forth in the immediately preceding sentence, as of the date
hereof, no shares of capital stock or other equity securities of Company were
issued, reserved for issuance or outstanding. All outstanding shares of capital
stock of
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Company are duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except as specified above or in Section 4.1(d)
of the Disclosure Schedule, and except for the Stock Option Agreement, neither
Company nor any Subsidiary of Company has or is subject to or bound by or, at or
after the Effective Time will have or be subject to or bound by, any outstanding
option, warrant, call, subscription or other right (including any preemptive
right), agreement or commitment which (i) obligates Company or any Subsidiary of
Company to issue, sell or transfer, or repurchase, redeem or otherwise acquire,
any shares of the capital stock of Company or any Subsidiary of Company, (ii)
restricts the transfer of any shares of capital stock of Company or any of its
Subsidiaries, or (iii) relates to the voting of any shares of capital stock of
Company or any of its Subsidiaries. No bonds, debentures, notes or other
indebtedness of Company or any Subsidiary of Company having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote)
on any matters on which the stockholders of Company or any Subsidiary of Company
may vote are issued or outstanding. Except as specified in Section 4.1(d) of the
Disclosure Schedule, all of the outstanding shares of capital stock of each
Subsidiary of Company have been duly authorized, validly issued, fully paid and
nonassessable and are owned by Company, by one or more Subsidiaries of Company,
by Company and one or more such Subsidiaries, or by persons who are designees of
Company or a Subsidiary of Company in the case of foreign qualifying shares held
by such persons in accordance with the laws of the jurisdiction of organization
of certain foreign Subsidiaries of Company, free and clear of Liens (as
hereinafter defined). Company has taken all necessary corporate action to
authorize, reserve for issuance and permit the issuance of, and at all times
from the date hereof until the Stock Option Agreement terminates will keep
reserved for issuance upon exercise of the option granted to Parent pursuant to
the Stock Option Agreement, all Common Shares or other securities which may be
issuable pursuant to the Stock Option Agreement. All Common Shares or other
securities which may be issuable pursuant to the Stock Option Agreement, upon
issuance pursuant thereto, will be duly authorized, validly issued, fully paid
and nonassessable, and will be delivered free and clear of all Liens. All Common
Shares held pursuant to the Escrow Agreement, dated as of July 18, 1996, by and
among Bachman Information Systems, Inc., James P. Lally, as agent for the former
stockholders of Cadre Technologies, and State Street Bank and Trust Company, as
escrow agent, have been distributed in accordance with the terms thereof.
(e) SEC Documents. Company has filed all reports, schedules,
forms, statements and other documents required to be filed with the SEC pursuant
to the Securities Act or the Exchange Act since December 31, 1994 (such reports,
schedules, forms, statements and other documents are hereinafter referred to as
the "SEC Documents"). As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Documents, and none of (i) the SEC
Documents as of such dates or (ii) any press release or other public statement
issued or made by Company (with any statement pertaining to the Company made by
an executive officer of Company being deemed for purposes of this Section 4.1(e)
to have been made by Company) since December 31, 1994, as of their respective
dates of issuance, contained any untrue statements of a material fact or omitted
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of Company included
in the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited consolidated quarterly
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statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may otherwise be indicated in the notes
thereto) and fairly present the consolidated financial position of Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited quarterly statements, to normal year-end audit
adjustments).
(f) Absence of Certain Changes or Events; No Undisclosed Material
-------------------------------------------------------------
Liabilities.
- -----------
(i) Except as disclosed in the SEC Documents filed and
publicly available prior to the date of this Agreement (the "Filed SEC
Documents") or specified in Section 4.1(f) of the Disclosure Schedule, since the
date of the most recent audited financial statements included in the Filed SEC
Documents, Company and its Subsidiaries have conducted their businesses only in
the ordinary course, and there has not been: (A) any Material Adverse Change;
(B) any declaration, setting aside or payment of any dividend or other
distribution in respect of shares of Company's capital stock, or any redemption
or other acquisition by Company of any shares of its capital stock; (C) any
increase in the rate or terms of compensation payable or to become payable by
Company or its Subsidiaries to their directors, officers or key employees,
except increases occurring in the ordinary course of business consistent with
past practice; (D) any entry into, or increase in the rate or terms of, any
bonus, insurance, severance, pension or other employee or retiree benefit plan,
payment or arrangement made to, for or with any such directors, officers or key
employees, except increases occurring in the ordinary course of business
consistent with past practices or as required by applicable law; (E) any entry
into any agreement, commitment or transaction by Company or any of its
Subsidiaries which is material to Company and its Subsidiaries taken as a whole,
except for agreements, commitments or transactions entered into in the ordinary
course of business consistent with past practice; (F) any change by Company in
accounting methods, principles or practices, except as required or permitted by
generally accepted accounting principles; (G) any write-off or write-down of, or
any determination to write-off or write-down, any asset of Company or any of its
Subsidiaries or any portion thereof which write-off, write-down or determination
exceeds $50,000 individually or $250,000 in the aggregate; (H) any announcement
or implementation of any reduction in force, lay-off, early retirement program,
severance program or other program or effort concerning the termination of
employment of employees of Company or its Subsidiaries; or (I) any announcement
of or entry into any agreement, commitment or transaction by Company or any of
its Subsidiaries to do any of the things described in the preceding clauses (A)
through (H) otherwise than as expressly provided for herein.
(ii) Except as disclosed in the Filed SEC Documents or
specified in Section 4.1(f) of the Disclosure Schedule and liabilities incurred
in the ordinary course of business consistent with past practice since the date
of the most recent financial statements included in the Filed SEC Documents,
there are no liabilities of Company or its Subsidiaries of any kind whatsoever,
whether accrued, contingent, absolute, due, to become due, determined,
determinable or otherwise, having or which could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company.
(g) Certain Information. The Proxy Statement will, at the time it
-------------------
is filed with the SEC, at any time that it is amended or supplemented, at the
time it is mailed to the stockholders of Company and at the time of the
Stockholders Meeting referred to in Section 6.2,
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(i) comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder and (ii) not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading; provided,
however, that no representation or warranty is made by Company with respect to
statements made therein based on information supplied by Parent or Merger Sub
specifically for inclusion therein.
(h) Real Property; Other Assets.
---------------------------
(i) Section 4.1(h)(i) of the Disclosure Schedule sets
forth all of the real property owned in fee by Company and its Subsidiaries (the
"Owned Real Property").
(ii) Company or one of its Subsidiaries has good and
marketable title to each parcel of Owned Real Property and to each other asset
reflected in the latest balance sheet of Company included in the Filed SEC
Documents (other than any such other asset disposed of or consumed in the
ordinary course of business or as specified in Section 4.1(h)(ii) of the
Disclosure Schedule) free and clear of all Liens except (A) those reflected or
reserved against in the latest balance sheet of Company included in the Filed
SEC Documents, (B) taxes and general and special assessments not in default and
payable without penalty and interest, and (C) other Liens that individually or
in the aggregate would not have a Material Adverse Effect on Company.
(iii) Company has heretofore made available to Parent true,
correct and complete copies of all leases, subleases and other agreements (the
"Real Property Leases") under which Company or any of its Subsidiaries uses or
occupies or has the right to use or occupy, now or in the future, any real
property or facility (the "Leased Real Property"), including all modifications,
amendments and supplements thereto. Except in each case where the failure could
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Company: (A) Company or one of its Subsidiaries has a valid
and subsisting leasehold interest in each parcel of Leased Real Property free
and clear of all Liens and each Real Property Lease is in full force and effect,
(B) all rent and other sums and charges payable by Company or its Subsidiaries
as tenants thereunder are current in all material respects, (C) no termination
event or condition or uncured default of a material nature on the part of
Company or any such Subsidiary or, to Company's knowledge, the landlord, exists
under any Real Property Lease, and (D) Company or one of its Subsidiaries is the
sole undisputed lessee of each Leased Real Property, is in actual possession
thereof and is entitled to quiet enjoyment thereof in accordance with the terms
of the applicable Real Property Lease.
(i) Software.
--------
(i) Section 4.1(i)(i) of the Disclosure Schedule sets
forth under the caption "Owned Software" a true, correct and complete list of
all computer programs (source code or object code) owned by Company or any
Subsidiary of Company, including without limitation any computer programs in the
development or testing phase (collectively, the "Owned Software"), and Section
4.1(i)(i) of the Disclosure Schedule sets forth under the caption "Licensed
Software" a true, correct and complete list of all computer programs (source
code or object code) licensed to Company or any Subsidiary of Company by another
person (other than
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any off-the-shelf computer program that is so licensed under a shrink wrap
license) (collectively, the "Licensed Software" and, together with the Owned
Software, the "Software").
(ii) Except as specified in Section 4.1(i)(ii) of the
Disclosure Schedule, Company, directly or through its Subsidiaries, has good,
marketable and exclusive title to, and the valid and enforceable power and
unqualified right to sell, license, lease, transfer, use or otherwise exploit,
all versions and releases of the Owned Software and all copyrights thereof, free
and clear of all Liens. Company, directly or through its Subsidiaries, is in
actual possession of the source code and object code for each computer program
included in the Owned Software, and Company, directly or through its
Subsidiaries, is in possession of all other documentation (including without
limitation all related engineering specifications, program flow charts,
installation and user manuals) and know-how required for the effective use of
the Software as currently used in Company's business or as offered or
represented to Company's customers or potential customers. Company, directly or
through its Subsidiaries, is in actual possession of the object code and user
manuals for each computer program included in the Licensed Software. The
Software constitutes all of the computer programs necessary to conduct Company's
business as now conducted, and includes all of the computer programs used in the
development, marketing, licensing, sale or support of the products and the
services presently offered by Company. Except as specified in Section 4.1(i)(ii)
of the Disclosure Schedule, no person other than Company and its Subsidiaries
has any right or interest of any kind or nature in or with respect to the Owned
Software or any portion thereof or any rights to sell, license, lease, transfer,
use or otherwise exploit the Owned Software or any portion thereof.
(iii) Section 4.1(i)(iii) of the Disclosure Schedule sets
forth a true, correct and complete list, by computer program, of (A) all persons
other than Company and its Subsidiaries that have been provided with the source
code or have a right to be provided with the source code (including any such
right that may arise after the occurrence of any specified event or
circumstance, either with or without the giving of notice or passage of time or
both) for any of the Owned Software, and (B) all source code escrow agreements
relating to any of the Owned Software (setting forth as to any such escrow
agreement the source code subject thereto and the names of the escrow agent and
all other persons who are actual or potential beneficiaries of such escrow
agreement), and identifies with specificity all agreements and arrangements
pursuant to which the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby would entitle any third
party or parties to receive possession of the source code for any of the Owned
Software or any related technical documentation. Except as specified in Section
4.1(i)(iii) of the Disclosure Schedule, no person (other than Company and its
Subsidiaries and any person that is a party to a contract referred to in clause
(v) of the first sentence of Section 4.1(l) that restricts such person from
disclosing any information concerning such source code) is in possession of, or
has or has had access to, any source code for any computer program included in
the Owned Software.
(iv) There are no defects in any computer program included
in the Software that would adversely affect the functioning thereof in
accordance with any published specifications therefor or which would cause the
Owned Software or, to Company's knowledge, the Licensed Software, to fail to be
Year 2000 compliant in all material respects. Without limiting the generality of
the foregoing, all of the Owned Software and, to Company's knowledge, all of the
Licensed Software has the following properties and capabilities: (A) the
capability to correctly recognize and accurately process dates expressed as a
four-digit number (or the binary equivalent
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or other machine readable iteration thereof) (collectively, the "Four-Digit
Dates"); (B) the capability to accurately execute calculations using Four-Digit
Dates; (C) the functionality (both on-line and batch), including entry, inquiry,
maintenance and update, to support processing involving Four-Digit Dates; (D)
the capability to generate interfaces and reports that support processing
involving Four-Digit Dates; (E) the capability to generate and successfully
transition, without human intervention, into the year 2000 using the correct
system date and to thereafter continue processing with Four-Digit Dates; and (F)
the capability to provide correct results in forward and backward data
calculations spanning century boundaries, including the conversion of pre-2000
dates currently stored as two-digit dates; provided, however, that no
representation or warranty is made as to the effect that defects in computer
programs, hardware or systems provided by third parties (or the inability of any
such programs, hardware or systems, other than those contemplated by the
documentation for the Software to be used in conjunction with the Software, to
properly exchange date data with the Software) may, when used in conjunction
with the Software, have on the foregoing capabilities. Each computer program
included in the Software is in machine readable form and contains all current
revisions. Section 4.1(i)(iv) of the Disclosure Schedule sets forth a true,
correct and complete list of any current developments or maintenance efforts
with respect to the Owned Software, including without limitation the development
of new computer programs, enhancements or revisions to existing computer
programs included in the Owned Software.
(v) Except as specified in Section 4.1(i)(v) of the
Disclosure Schedule, none of the sale, license, lease, transfer, use,
reproduction, distribution, modification or other exploitation by Company, any
Subsidiary of Company or any of their respective successors or assigns of any
version or release of any computer program included in the Software obligates or
will obligate Company, any Subsidiary of Company or any of their respective
successors or assigns to pay any royalty, fee or other compensation to any other
person.
(vi) Neither Company nor any of its Subsidiaries markets,
or has marketed, and none of them has supported or is obligated to support, any
Licensed Software.
(vii) Except as specified in Section 4.1(i)(vii) of the
Disclosure Schedule, no agreement, license or other arrangement pertaining to
any of the Software (including without limitation any development, distribution,
marketing, user or maintenance agreement, license or arrangement) to which
Company or any Subsidiary of Company is a party will terminate or become
terminable by any party thereto as a result of the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
(j) Intellectual Property.
---------------------
(i) Section 4.1(j)(i) of the Disclosure Schedule sets
forth a true, correct and complete list (including, to the extent applicable,
registration, application or file numbers) of all patents, trademarks, trade
names, service marks, domain names and registered copyrights used by Company or
any Subsidiary of Company in connection with the conduct of Company's business,
and all registrations of or applications for registration of any of the
foregoing, including any additions thereto or extensions, continuations,
renewals or divisions thereof (setting forth the registration, issue or serial
number and a description of the same) (collectively, together with all trade
dress, trade secrets, processes, formulae, designs, know-how and other
intellectual property rights that are so used, the "Intellectual Property").
Parent has
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heretofore been furnished with true, correct and complete copies of each U.S.
registration or application for U.S. registration covering any of the
Intellectual Property which is registered with, or in respect of which any
application for registration has been filed with, any U.S. Governmental Entity.
(ii) The Intellectual Property includes all of the
intellectual property rights owned or licensed by Company and its Subsidiaries
that are reasonably necessary to conduct Company's business as it is now
conducted, and includes all of the intellectual property rights owned or
licensed by Company and its Subsidiaries that are used in the development,
marketing, licensing or support of the Software. Except as specified in Section
4.1(j)(ii) of the Disclosure Schedule, (A) Company, directly or through its
Subsidiaries, has good, marketable and exclusive title to, and the valid and
enforceable power and unqualified right to use, the Intellectual Property free
and clear of all Liens and (B) no person or entity other than Company and its
Subsidiaries has any right or interest of any kind or nature in or with respect
to the Intellectual Property or any portion thereof or any rights to use, market
or exploit the Intellectual Property or any portion thereof.
(k) No Infringement. Except as specified in Section 4.1(k) of the
---------------
Disclosure Schedule, neither the existence nor the sale, license, lease,
transfer, use, reproduction, distribution, modification or other exploitation by
Company, any Subsidiary of Company or any of their respective successors or
assigns of any Software or Intellectual Property, as such Software or
Intellectual Property, as the case may be, is or was, or is currently
contemplated to be, sold, licensed, leased, transferred, used or otherwise
exploited by such persons, does, did or will (i) infringe on any patent,
trademark, copyright or other right of any other person, (ii) constitute a
misuse or misappropriation of any trade secret, know-how, process, proprietary
information or other right of any other person, or (iii) entitle any other
person to any interest therein, or right to compensation from Company, any
Subsidiary of Company or any of their respective successors or assigns, by
reason thereof. Except as specified in Section 4.1(k) of the Disclosure
Schedule, neither Company nor any of its Subsidiaries has received any
complaint, assertion, threat or allegation or otherwise has notice of any
lawsuit, claim, demand, proceeding or investigation involving matters of the
type contemplated by the immediately preceding sentence or is aware of any facts
or circumstances that could reasonably be expected to give rise to any such
lawsuit, claim, demand, proceeding or investigation. Except as specified in
Section 4.1(k) of the Disclosure Schedule, there are no restrictions on the
ability of Company, any Subsidiary of Company or any of their respective
successors or assigns to sell, license, lease, transfer, use, reproduce,
distribute, modify or otherwise exploit any Software or Intellectual Property.
(l) Material Contracts. There have been made available to Parent
------------------
and its representatives true, correct and complete copies of all of the
following contracts to which Company or any of its Subsidiaries is a party or by
which any of them is bound (collectively, the "Material Contracts"): (i)
contracts with any current officer or director of Company or any of its
Subsidiaries; (ii) contracts pursuant to which Company or any of its
Subsidiaries licenses other persons to use the Software and pursuant to which
other persons license Company or any of its Subsidiaries to use the Licensed
Software; (iii) contracts (A) for the sale of any of the assets of Company or
any of its Subsidiaries, other than contracts entered into in the ordinary
course of business or (B) for the grant to any person of any preferential rights
to purchase any of its assets; (iv) contracts which restrict Company or any of
its Subsidiaries from competing in any line of business or with any person in
any geographical area or which restrict any other person from
14
<PAGE>
competing with Company or any of its Subsidiaries in any line of business or in
any geographical area; (v) contracts which restrict Company or any of its
Subsidiaries from disclosing any information concerning or obtained from any
other person or which restrict any other person from disclosing any information
concerning or obtained from Company or any of its Subsidiaries; (vi) indentures,
credit agreements, security agreements, mortgages, guarantees, promissory notes
and other contracts relating to the borrowing of money; and (vii) all other
agreements, contracts or instruments entered into outside of the ordinary course
of business or which are material to Company. Except as specified in Section
4.1(l) of the Disclosure Schedule, all of the Material Contracts are in full
force and effect and are the legal, valid and binding obligation of Company
and/or its Subsidiaries, enforceable against them in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity). Except as
specified in Section 4.1(l) of the Disclosure Schedule, neither Company nor any
of its Subsidiaries is in breach or default in any material respect under any
Material Contract nor, to the knowledge of Company, is any other party to any
Material Contract in breach or default thereunder in any material respect.
(m) Litigation, etc. As of the date hereof, except as specified
---------------
in Section 4.1(m) of the Disclosure Schedule, (i) there is no suit, claim,
action, proceeding (at law or in equity) or investigation pending or, to the
knowledge of Company, threatened against Company or any of its Subsidiaries
before any court or other Governmental Entity, and (ii) neither Company nor any
of its Subsidiaries is subject to any outstanding order, writ, judgement,
injunction, decree or arbitration order or award that, in any such case
described in clauses (i) and (ii), has had or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company. As
of the date hereof, there are no suits, claims, actions, proceedings or
investigations pending or, to the knowledge of Company, threatened, seeking to
prevent, hinder, modify or challenge the transactions contemplated by this
Agreement.
(n) Compliance with Applicable Laws. All federal, state, local
-------------------------------
and foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Permits") necessary for each
of Company and its Subsidiaries to own, lease or operate its properties and
assets and to carry on its business as now conducted have been obtained or made,
and there has occurred no default under any such Permit, except for the lack of
Permits and for defaults under Permits which lack or default could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Company. Except as disclosed in the Filed SEC Documents or in
Section 4.1(n) of the Disclosure Schedule, Company and its Subsidiaries are in
compliance with all applicable statutes, laws, ordinances, rules, orders and
regulations of any Governmental Entity, except for non-compliance which could
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Company.
(o) Environmental Laws. Except as specified in Section 4.1(o) of
------------------
the Disclosure Schedule and as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company: (A)
neither Company nor any of its Subsidiaries has violated or is in violation of
any Environmental Law; (B) none of the Owned Real Property or Leased Real
Property (including without limitation soils and surface and ground waters) are
contaminated with any Hazardous Substance in quantities which require
investigation
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or remediation under Environmental Laws; (C) neither Company nor any of its
Subsidiaries is liable for any off-site contamination; (D) neither Company nor
any of its Subsidiaries has any liability or remediation obligation under any
Environmental Law; (E) no assets of Company or any of its Subsidiaries are
subject to pending or threatened Liens under any Environmental Law; (F) Company
and its Subsidiaries have all Permits required under any Environmental Law
("Environmental Permits"); and (G) Company and its Subsidiaries are in
compliance with their respective Environmental Permits.
(p) Taxes. Except as specified in Section 4.1(p) of the
-----
Disclosure Schedule:
(i) Except where the failure to do so could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Company, each of Company and each Subsidiary of Company (and
any affiliated or unitary group of which any such person was a member) has (A)
timely filed all federal, state, local and foreign returns, declarations,
reports, estimates, information returns and statements ("Returns") required to
be filed by or for it in respect of any Taxes (as hereinafter defined) and has
caused such Returns as so filed to be true, correct and complete, (B)
established reserves that are reflected in Company's most recent financial
statements included in the Filed SEC Documents and that as so reflected are
adequate for the payment of all Taxes not yet due and payable with respect to
the results of operations of Company and its Subsidiaries through the date
hereof, and (C) timely withheld and paid over to the proper taxing authorities
all Taxes and other amounts required to be so withheld and paid over. Each of
Company and each Subsidiary of Company (and any affiliated or unitary group of
which any such person was a member) has timely paid all Taxes that are shown as
being due on the Returns referred to in the immediately preceding sentence.
(ii) (A) There has been no taxable period since 1991 for
which a Return of Company or any of its Subsidiaries has been examined by the
Internal Revenue Service (the "IRS"), (B) all examinations described in clause
(A) have been completed without the assertion of material deficiencies, and (C)
except for alleged deficiencies which have been finally and irrevocably
resolved, Company has not received formal or informal notification that any
deficiency for any Taxes, the amount of which could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company,
has been or will be proposed, asserted or assessed against Company or any of its
Subsidiaries by any federal, state, local or foreign taxing authority or court
with respect to any period.
(iii) Neither Company nor any of its Subsidiaries has (A)
executed or entered into with the IRS or any other taxing authority any
agreement or other document that continues in force and effect beyond the
Effective Time and that extends or has the effect of extending the period for
assessments or collection of any federal, state, local or foreign Taxes, (B)
executed or entered into with the IRS or any other taxing authority any closing
agreement or other similar agreement (nor has Company or any of its Subsidiaries
received any ruling, technical advice memorandum or similar determination)
affecting the determination of Taxes required to be shown on any Return not yet
filed, or (C) requested any extension of time to be granted to file after the
Effective Time any Return required by applicable law to be filed by it.
(iv) Neither Company nor any of its Subsidiaries has made
an election under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code)
16
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owned by Company or any of its Subsidiaries. None of the assets of Company or
any of its Subsidiaries is required to be treated as being owned by any other
person pursuant to the "safe harbor" leasing provisions of Section 168(f)(8) of
the Internal Revenue Code of 1954 as formerly in effect.
(v) Neither Company nor any of its Subsidiaries is a
party to, is bound by or has any obligation under any tax sharing agreement or
similar agreement or arrangement.
(vi) Company has not agreed to make, nor is it required to
make, any material adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise.
(vii) Neither Company nor any of its Subsidiaries is, or
has been, a United States Real Property Holding Corporation within the meaning
of Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(viii) Except for the group of which Company is presently a
member, Company has never been a member of an affiliated group of corporations,
within the meaning of Section 1504 of the Code, other than as a common parent
corporation, and each of Company's Subsidiaries has never been a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, except where Company was the common parent of such affiliated group.
(ix) Neither Company nor any Subsidiary is a party to any
agreement, contract, arrangement or plan that has resulted, or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
For purposes of this Agreement, "Taxes" shall mean all federal, state,
local, foreign income, property, sales, excise, employment, payroll, franchise,
withholding and other taxes, tariffs, charges, fees, levies, imposts, duties,
licenses or other assessments of every kind and description, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
(q) Benefit Plans. Section 4.1(q) of the Disclosure Schedule sets
-------------
forth a true, correct and complete list of all the employee benefit plans (as
that phrase is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained or contributed to (or to
which Company has any obligation to contribute) for the benefit of any current
or former employee, officer or director of the Company or any of its
Subsidiaries ("Company ERISA Plans") and any other benefit or compensation plan,
program or arrangement maintained or contributed to (or to which Company has any
obligation to contribute) for the benefit of any current or former employee,
officer or director of the Company or any of its Subsidiaries (Company ERISA
Plans and such other plans being referred to as "Company Plans"). Company has
furnished or made available to Parent and its representatives a true, correct
and complete copy of every document pursuant to which each Company Plan is
established or operated (including any summary plan descriptions), a written
description of any Company Plan for which there is no written document, and the
three most recent annual reports, financial
17
<PAGE>
statements and actuarial valuations with respect to each Company Plan. Except as
specified in Section 4.1(q) of the Disclosure Schedule:
(i) none of the Company ERISA Plans is a "multiemployer
plan" within the meaning of ERISA;
(ii) none of the Company Plans promises or provides
retiree health benefits or retiree life insurance benefits to any person;
(iii) none of the Company Plans provides for payment of a
benefit, the increase of a benefit amount, the payment of a contingent benefit
or the acceleration of the payment or vesting of a benefit by reason of the
execution of this Agreement or the consummation of the transactions contemplated
by this Agreement;
(iv) neither Company nor any of its Subsidiaries has an
obligation to adopt, or is considering the adoption of, any new benefit or
compensation plan, program or arrangement or, except as required by law, the
amendment of an existing Company Plan;
(v) each Company ERISA Plan intended to be qualified
under Section 401(a) of the Code has received a favorable determination letter
from the IRS that it is so qualified and nothing has occurred since the date of
such letter that could reasonably be expected to affect the qualified status of
such Company ERISA Plan;
(vi) each Company Plan has been operated in accordance
with its terms and the requirements of all applicable law, and no prohibited
transaction described in Section 406 of ERISA or Section 4975 of the Code has
occurred with respect to any Company ERISA Plan;
(vii) neither Company nor any of its Subsidiaries or
members of their "controlled group" has incurred any direct or indirect
liability under ERISA or the Code in connection with the termination of,
withdrawal from or failure to fund, any Company ERISA Plan or other retirement
plan or arrangement, and no fact or event exists that could reasonably be
expected to give rise to any such liability;
(viii) the aggregate accumulated benefit obligations of each
Company ERISA Plan subject to Title IV of ERISA (as of the date of the most
recent actuarial valuation prepared for such Company ERISA Plan and based on the
discount rate and other actuarial assumptions used in such valuation) do not
exceed the fair market value of the assets of such Company ERISA Plan (as of the
date of such valuation);
(ix) Company is not aware of any claims relating to the
Company Plans, other than routine claims for benefits; and
(x) None of the Company Plans provides for benefits or
other participation therein, and Company has received no claims or demands for
participation in or benefits under any Company Plan, by any individual
classified or treated by the Company as an independent contractor;
18
<PAGE>
provided, however, that the failure of the representations set forth in clauses
(v), (vi), (vii), (ix) and (x) to be true and correct shall not be deemed to be
a breach of any such representation unless such failures could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Company.
(r) Absence of Changes in Benefit Plans. Except as disclosed in
-----------------------------------
the Filed SEC Documents or in Section 4.1(r) of the Disclosure Schedule, since
the date of the most recent audited financial statements included in the Filed
SEC Documents, neither Company nor any of its Subsidiaries has adopted or agreed
to adopt any collective bargaining agreement or any Company Plan.
(s) Labor Matters.
-------------
(i) Except as specified in Section 4.1(s)(i) of the
Disclosure Schedule, neither Company nor any of its Subsidiaries is a party to
any employment, labor or collective bargaining agreement, and there are no
employment, labor or collective bargaining agreements which pertain to employees
of Company or any of its Subsidiaries. Company has heretofore made available to
Parent true, complete and correct copies of the agreements set forth in Section
4.1(s)(i) of the Disclosure Schedule, together with all amendments,
modifications, supplements or side letters affecting the duties, rights and
obligations of any party thereunder.
(ii) No employees of Company or any of its Subsidiaries
are represented by any labor organization and, to the knowledge of Company, no
labor organization or group of employees of Company or any of its Subsidiaries
has made a pending demand for recognition or certification. There are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened in writing to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority and, to the knowledge of Company, there are no
organizing activities involving Company or any of its Subsidiaries pending with
any labor organization or group of employees of Company or any of its
Subsidiaries.
(iii) Except as specified in Section 4.1(s)(iii) of the
Disclosure Schedule, there are no (A) unfair labor practice charges, grievances
or complaints pending or threatened in writing by or on behalf of any employee
or group of employees of Company or any of its Subsidiaries, or (B) complaints,
charges or claims against Company or any of its Subsidiaries pending, or
threatened in writing to be brought or filed, with any Governmental Entity or
arbitrator based on, arising out of, in connection with, or otherwise relating
to the employment or termination of employment of any individual by Company or
any of its Subsidiaries.
(t) Brokers. No broker, investment banker, financial advisor or
-------
other person, other than Adams, Harkness & Hill, the fees and expenses of which
will be paid by Company, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of Company.
(u) Written Opinion of Financial Advisor. Company has received
------------------------------------
the written opinion of Adams, Harkness & Hill, dated August 26, 1998 (a true,
correct and complete copy of which has been delivered to Parent by Company), to
the effect that, based upon and subject to the
19
<PAGE>
matters set forth therein and as of the date thereof, the Merger Consideration
is fair to the holders of Shares from a financial point of view, and such
opinion has not been withdrawn or modified.
(v) Voting Requirements. The affirmative votes of each of (i) the
-------------------
holders of two-thirds of the outstanding Shares entitled to vote at the
Stockholders Meeting with respect to the approval of this Agreement, taken as a
whole, (ii) the affirmative vote of the holders of two-thirds of the outstanding
Common Shares entitled to vote at the Stockholders Meeting with respect to the
approval of this Agreement, taken separately, and (iii) the affirmative vote of
the holders of two-thirds of the outstanding Preferred Shares entitled to vote
at the Stockholders Meeting with respect to the approval of this Agreement,
taken separately, are the only votes of the holders of any class or series of
Company's capital stock or other securities required in connection with the
consummation by Company of the Merger and the other transactions contemplated
hereby to be consummated by Company. The restrictions contained in Chapters
110C, 110D, 110E and 110F of the Massachusetts General Laws are not applicable
to the transactions contemplated hereby, including the transactions contemplated
by the Stock Option Agreement and the Stockholder Agreement.
Section 4.2 Representations and Warranties of Parent and Merger Sub.
--------------------------------------------------------
Parent and Merger Sub represent and warrant to Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent
------------------------------------------
and Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated.
(b) Authority; Noncontravention. Parent and Merger Sub have the
---------------------------
requisite corporate power and authority to enter into this Agreement. The
execution and delivery of this Agreement by Parent and Merger Sub and the
consummation by Parent and Merger Sub of the transactions contemplated hereby
have been duly authorized by the Executive Committee of the Board of Directors
of Parent and the Board of Directors of Merger Sub and have been duly approved
by Parent as sole stockholder of Merger Sub, and no other corporate proceedings
on the part of Parent or Merger Sub are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by each of Parent and Merger Sub and, assuming this
Agreement constitutes a valid and binding obligation of Company, constitutes a
valid and binding obligation of each of Parent and Merger Sub, enforceable
against each such party in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to general
principals of equity. The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions of this Agreement will not (i) conflict with any of the provisions of
the certificate of incorporation or bylaws of Parent or Merger Sub, in each case
as amended to the date of this Agreement, (ii) subject to the governmental
filings and other matters referred to in Section 4.2(c), conflict with, result
in a breach of or default (with or without notice or lapse of time, or both)
under, or give rise to a material obligation, a right of termination,
cancellation or acceleration of any obligation or loss of a material benefit
under, or require the consent of any person under, any indenture, or other
agreement, permit, concession, franchise, license or similar instrument or
undertaking to which Parent or Merger Sub is a party or by which Parent or
Merger Sub or any of their respective assets is bound or affected, or (iii)
subject to the governmental filings and other matters referred to in Section
4.2(c), contravene any law, rule or
20
<PAGE>
regulation, or any order, writ, judgment, injunction, decree, determination or
award currently in effect, which, in the case of clauses (ii) and (iii) above,
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Parent.
(c) Consents and Approvals. No consent, approval or authorization
----------------------
of, or declaration or filing with, or notice to, any Governmental Entity which
has not been received or made is required by or with respect to Parent or Merger
Sub in connection with the execution and delivery of this Agreement by Parent or
Merger Sub or the consummation by Parent or Merger Sub, as the case may be, of
any of the transactions contemplated hereby, except for (i) the filing of
premerger notification and report forms under the HSR Act with respect to the
Merger, (ii) the filing with the SEC of such reports under the Exchange Act as
may be required in connection with this Agreement and the transactions
contemplated hereby, (iii) the filing of the Massachusetts Articles of Merger
with the Massachusetts State Secretary and the filing of the Georgia Certificate
of Merger with the Georgia State Secretary and appropriate documents with the
relevant authorities of other states in which Company is qualified to do
business, and (iv) any other consents, approvals, authorizations, filings or
notices the failure to make or obtain which could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Parent.
(d) Certain Information. None of the information supplied or to
-------------------
be supplied by Parent or Merger Sub specifically for inclusion in the Proxy
Statement will, at the time it is so supplied, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(e) Financing. Parent and Merger Sub collectively have cash on
---------
hand or financing commitments from financially responsible third parties, or a
combination thereof, in an aggregate amount sufficient to enable Parent and
Merger Sub to (i) pay in full the Merger Consideration and all fees and expenses
payable by Parent and Merger Sub in connection with this Agreement and the
transactions contemplated thereby and (ii) satisfy and discharge such of
Company's existing indebtedness as, pursuant to its terms, will become due and
payable prior to its stated maturity as a result of the consummation of the
transactions contemplated hereby.
ARTICLE V
CONDUCT OF BUSINESS OF COMPANY
Section 5.1 Conduct of Business of Company. Except as expressly
------------------------------
provided for herein, during the period from the date of this Agreement to the
Effective Time, Company shall, and shall cause each of its Subsidiaries to, act
and carry on its business only in the ordinary course of business consistent
with past practice and, to the extent consistent therewith, use reasonable
efforts to preserve intact its current business organizations, keep available
the services of its current key officers and employees and preserve the goodwill
of those engaged in material business relationships with Company, and to that
end, without limiting the generality of the foregoing, Company shall not, and
shall not permit any of its Subsidiaries to, without the prior consent of
Parent:
21
<PAGE>
(i) (A) declare, set aside or pay any dividends on, or
make any other distributions (whether in cash, securities or other property) in
respect of, any of its outstanding capital stock (other than, with respect to a
Subsidiary of Company, to its corporate parent), (B) split, combine or
reclassify any of its outstanding capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its outstanding capital stock, or (C) purchase, redeem or
otherwise acquire any shares of outstanding capital stock or any rights,
warrants or options to acquire any such shares, except, in the case of this
clause (C), for the acquisition of Shares from holders of Options in full or
partial payment of the exercise price payable by such holder upon exercise of
Options;
(ii) issue, sell, grant, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any securities
convertible into or exchangeable for, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible or exchangeable
securities, other than upon the exercise of Options outstanding on the date of
this Agreement;
(iii) amend its articles of organization, by-laws or other
comparable charter or organizational documents;
(iv) directly or indirectly acquire, make any investment
in, or make any capital contributions to, any person other than in the ordinary
course of business consistent with past practice;
(v) directly or indirectly sell, pledge or otherwise
dispose of or encumber any of its properties or assets that are material to its
business, except for sales, pledges or other dispositions or encumbrances in the
ordinary course of business consistent with past practice;
(vi) (A) incur any indebtedness for borrowed money or
guarantee any such indebtedness of another person, other than indebtedness owing
to or guarantees of indebtedness owing to Company or any direct or indirect
wholly owned Subsidiary of Company or (B) make any loans or advances to any
other person, other than to Company or to any direct or indirect wholly owned
Subsidiary of Company and other than routine advances to employees consistent
with past practice, except, in the case of clause (A), for borrowings under the
Existing Credit Agreement (as hereinafter defined) in the ordinary course of
business consistent with past practice or pursuant to Advances provided for in
Section 6.11;
(vii) grant or agree to grant to any officer, employee or
consultant any increase in wages or bonus, severance, profit sharing,
retirement, deferred compensation, insurance or other compensation or benefits,
or establish any new compensation or benefit plans or arrangements, or amend or
agree to amend any existing Company Plans, except as may be required under
existing agreements or by law;
(viii) accelerate the payment, right to payment or vesting
of any bonus, severance, profit sharing, retirement, deferred compensation,
stock option, insurance or other compensation or benefits;
22
<PAGE>
(ix) enter into or amend any employment, consulting,
severance or similar agreement with any individual, except with respect to new
hires of non-officer employees in the ordinary course of business consistent
with past practice;
(x) adopt or enter into a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other material reorganization or any agreement relating to an Acquisition
Proposal (as hereinafter defined);
(xi) make any tax election or settle or compromise any
income tax liability of Company or of any of its Subsidiaries involving on an
individual basis more than $50,000;
(xii) make any change in any method of accounting or
accounting practice or policy, except as required by any changes in generally
accepted accounting principles;
(xiii) enter into any agreement, understanding or commitment
that restrains, limits or impedes Company's ability to compete with or conduct
any business or line of business;
(xiv) except as specified in Section 5.1 of the Disclosure
Schedule, plan, announce, implement or effect any reduction in force, lay-off,
early retirement program, severance program or other program or effort
concerning the termination of employment of employees of Company or its
Subsidiaries;
(xv) accelerate the collection of any account receivable
or delay the payment of any account payable, or otherwise reduce the assets or
increase the liabilities of Company or any of its Subsidiaries otherwise than in
the ordinary course of business consistent with past practice, in any such case
with the purpose or effect of using the resulting increase in the cash flow of
Company or any of its Subsidiaries to reduce the total indebtedness of Company
and its Subsidiaries for money borrowed; or
(xvi) authorize any of, or commit or agree to take any of,
the foregoing actions in respect of which it is restricted by the provisions of
this Section 5.1.
ARTICLE VI
ADDITIONAL COVENANTS
Section 6.1 Preparation of the Proxy Statement. As soon as practicable
----------------------------------
following the date hereof, Company and Parent shall jointly prepare a proxy
statement (the "Proxy Statement"), in accordance with the Exchange Act and the
rules and regulations under the Exchange Act, with respect to the transactions
contemplated hereby. Company, Parent and Merger Sub shall cooperate with each
other in the preparation of the Proxy Statement. Company and Parent shall use
all reasonable efforts to respond promptly to any comments made by the SEC with
respect to the Proxy Statement and to cause the Proxy Statement to be mailed to
the stockholders of Company at the earliest practicable date.
23
<PAGE>
Section 6.2 Stockholders Meeting. Company shall take all action
--------------------
necessary, in accordance with the MBCL, the Exchange Act and other applicable
law and its articles of organization and by-laws, to convene and hold a special
meeting of the stockholders of Company (the "Stockholders Meeting") as promptly
as practicable after the date hereof for the purpose of considering and voting
upon this Agreement and to solicit proxies pursuant to the Proxy Statement in
connection therewith. Subject to the provisions of Section 6.6(b), the Board of
Directors of Company shall recommend that the holders of Shares vote in favor of
the approval of this Agreement at the Stockholders Meeting and shall cause such
recommendation to be included in the Proxy Statement. At the Stockholders
Meeting, Parent and Merger Sub shall vote any Shares beneficially owned by them
(which may be voted by them pursuant to applicable law) in favor of the approval
of this Agreement.
Section 6.3 Access to Information; Confidentiality. Each of Parent and
---------------------------------------
Company shall, and shall cause each of its Subsidiaries to, afford to the other
and its officers, employees, counsel, financial advisors and other
representatives access during the period prior to the Effective Time to all its
properties, books, contracts, commitments, Returns, personnel and records and,
during such period, each of Parent and Company shall, and shall cause each of
its Subsidiaries to, furnish as promptly as practicable to the other such
information concerning its business, properties, financial condition, operations
and personnel as the other may from time to time request. Any such
investigation by Parent or Company shall not affect the representations or
warranties contained in this Agreement. Except as required by law, Parent and
Company will hold, and will cause its directors, officers, employees,
accountants, counsel, financial advisors and other representatives and
affiliates to hold, any non-public information obtained from the other in
confidence to the extent required by, and in accordance with the provisions of,
the letter agreement, dated June 9, 1998, between Parent and Company with
respect to confidentiality and other matters.
Section 6.4 Reasonable Best Efforts. On the terms and subject to the
------------------------
conditions set forth in this Agreement, each of the parties shall use its
reasonable best efforts to take, or cause to be taken, all actions, and do, or
cause to be done, and assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated hereby, including the satisfaction of the respective conditions set
forth in Article VII.
Section 6.5 Public Announcements. Parent and Merger Sub, on the one
--------------------
hand, and Company, on the other hand, shall consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press release, SEC filing (including without limitation the Proxy Statement) or
other public statements with respect to the transactions contemplated hereby,
including the Merger, and shall not issue any such press release or make any
such public statement prior to such consultation, except as may be required by
applicable law, by court process or by obligations pursuant to any listing
agreement with any national securities exchange.
Section 6.6 No Solicitation; Acquisition Proposals.
--------------------------------------
(a) During the period from and including the date of this
Agreement to and including the Effective Time, Company shall not, and shall not
authorize or permit any of its Subsidiaries, or any of its or their affiliates,
officers, directors, employees, agents or
24
<PAGE>
representatives (including without limitation any investment banker, financial
advisor, attorney or accountant retained by Company or any of its Subsidiaries),
to, directly or indirectly, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries, any expression of interest or the making of any proposal that
constitutes, or may reasonably be expected to lead to, an Acquisition Proposal,
or enter into or maintain or continue discussions or negotiate with any person
in furtherance of such inquiries or to obtain an Acquisition Proposal or agree
to or endorse any Acquisition Proposal; provided, however, that nothing in this
Agreement shall prohibit the Board of Directors of Company, prior to the time at
which this Agreement shall have been approved by Company's stockholders, from
furnishing information to, or entering into, maintaining or continuing
discussions or negotiations with, any person that makes an unsolicited, bona
fide written Acquisition Proposal after the date hereof if, and to the extent
that, the Board of Directors of Company, after consultation with and based upon
the advice of independent legal counsel, determines in good faith that (i) such
Acquisition Proposal would be more favorable to Company's stockholders than the
Merger, and (ii) the failure to take such action would result in a breach by the
Board of Directors of Company of its fiduciary duties to Company's stockholders
under applicable law, and, prior to furnishing any non-public information to
such person, Company receives from such person an executed confidentiality
agreement with provisions no less favorable to Company than the letter agreement
relating to the furnishing of confidential information of Company to Parent
referred to in the last sentence of Section 6.3. Company shall promptly (and, in
any event within 24 hours) notify Parent after receipt of any Acquisition
Proposal or any request for information relating to Company or any of its
Subsidiaries or for access to the properties, books or records of Company or any
of its Subsidiaries by any person who has informed Company that such person is
considering making, or has made, an Acquisition Proposal (which notice shall
identify the person making, or considering making, such Acquisition Proposal and
shall set forth the material terms of any Acquisition Proposal received), and
Company shall keep Parent informed in reasonable detail of the terms, status and
other pertinent details of any such Acquisition Proposal.
(b) During the period from and including the date of this
Agreement to and including the Effective Time, neither the Board of Directors of
Company nor any committee thereof shall withdraw or modify, or propose publicly
to withdraw or modify, in a manner adverse to Parent or Merger Sub, the approval
of this Agreement or the transactions contemplated hereby or the recommendation
referred to in the penultimate sentence of Section 6.2; provided, however, that
nothing contained in this Agreement will prohibit the Board of Directors of
Company from withdrawing or modifying the recommendation referred to in the
penultimate sentence of Section 6.2 following the receipt by Company after the
date hereof, under circumstances not involving any breach of the provisions of
Section 6.6(a), of an unsolicited Acquisition Proposal if, and to the extent
that, the Board of Directors of Company, after consultation with and based upon
the advice of independent legal counsel, determines in good faith that (i) the
transactions contemplated by such Acquisition Proposal would be more favorable
to Company's stockholders than the transactions contemplated hereby, and (ii)
the failure to take such action would result in a breach by the Board of
Directors of Company of its fiduciary duties to Company's stockholders under
applicable law; and provided further that nothing contained in this Agreement
will prohibit the Board of Directors of Company from, to the extent applicable,
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal.
(c) Nothing in this Section 6.6, and no action taken by the Board
of Directors of the Company pursuant to this Section 6.6, will (i) have any
effect on Company's obligations
25
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under the first sentence of Section 6.2, which obligations shall be absolute and
unconditional, (ii) permit Company to terminate this Agreement except in
accordance with the provisions of Section 8.1, (iii) permit Company to enter
into any agreement providing for any transaction contemplated by an Acquisition
Proposal for as long as this Agreement remains in effect, or (iv) affect in any
manner any other obligation of Company under this Agreement.
(d) For purposes of this Agreement, "Acquisition Proposal" means
an inquiry, offer, proposal or other indication of interest regarding any of the
following (other than the transactions contemplated by this Agreement or the
Stock Option Agreement with Parent or Merger Sub) involving Company: (i) any
merger, consolidation, share exchange, recapitalization, business combination or
other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of all or substantially all the assets of Company
and its Subsidiaries, taken as a whole, in a single transaction or series of
related transactions; (iii) any tender offer or exchange offer for 20% percent
or more of the outstanding shares of capital stock of Company or the filing of a
registration statement under the Securities Act in connection therewith; or (iv)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
Section 6.7 Consents, Approvals and Filings. Upon the terms and subject
--------------------------------
to the conditions hereof, each of the parties hereto shall (a) make promptly its
respective filings, and thereafter make any other required submissions, under
the HSR Act and the Exchange Act, with respect to the Merger and the other
transactions contemplated hereby and (b) use its reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the Merger and the other
transactions contemplated hereby, including without limitation using its
reasonable best efforts to obtain all licenses, permits, consents, approvals,
authorizations, qualifications and orders of Governmental Entities and parties
to contracts with Company and its Subsidiaries as are necessary for the
consummation of the Merger and the other transactions contemplated hereby and to
fulfill the conditions to the Merger; provided, however, that in no event shall
Parent or any of its Subsidiaries be required to agree or commit to divest, hold
separate, offer for sale, abandon, limit its operation of or take similar action
with respect to any assets (tangible or intangible) or any business interest of
it or any of its Subsidiaries (including without limitation the Surviving
Corporation after consummation of the Merger) in connection with or as a
condition to receiving the consent or approval of any Governmental Entity
(including without limitation under the HSR Act). In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement shall use their reasonable best efforts to take all such action.
Section 6.8 Board Action Relating to Stock Option Plans. As soon as
-------------------------------------------
practicable following the date of this Agreement, the Board of Directors of
Company (or, if appropriate, any committee administering a Stock Option Plan)
shall adopt such resolutions and take such actions as may be required to cause
each outstanding Option to be automatically converted, at the Effective Time,
into a Substitute Option in accordance with Section 2.2 and shall make such
other changes to the Stock Option Plans as it deems appropriate to give effect
to the Merger (subject to the approval of Parent, which shall not be
unreasonably withheld).
Section 6.9 Employee Benefit Matters.
-------------------------
26
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(a) From and after the Effective Time, Parent shall, and shall
cause its Subsidiaries (including the Surviving Corporation) to, honor and
provide for payment of all accrued obligations and benefits under all Company
Plans and employment or severance agreements between Company and persons who are
or had been employees of Company or any of its Subsidiaries at or prior to the
Effective Time ("Covered Employees"), all in accordance with their respective
terms.
(b) From and after the Effective Time, Parent shall, and shall
cause its Subsidiaries (including the Surviving Corporation) to, provide Covered
Employees who remain in the employ of Parent or any such Subsidiary employee
benefits that are reasonably comparable to the employee benefits provided to
similarly situated employees of Parent or any such Subsidiary who are not
Covered Employees. To the extent that Covered Employees are included in any
benefit plan of Parent or its Subsidiaries, Parent agrees that the Covered
Employees shall receive credit under such plan (other than any such plan
providing for sabbaticals) for service prior to the Effective Time with Company
and its Subsidiaries to the same extent such service was counted under similar
Company Plans for purposes of eligibility, vesting, eligibility for retirement
(but not for benefit accrual) and, with respect to vacation, disability and
severance, benefit accrual. To the extent that Covered Employees are included in
any medical, dental or health plan other than the plan or plans they
participated in at the Effective Time, Parent agrees that any such plans shall
not include pre-existing condition exclusions, except to the extent such
exclusions were applicable under the similar Company Plan at the Effective Time,
and shall provide credit for any deductibles and co-payments applied or made
with respect to each Covered Employee in the calendar year of the change.
(c) Notwithstanding anything in this Agreement to the contrary,
from and after the Effective Time, the Surviving Corporation will have sole
discretion over the hiring, promotion, retention, firing and other terms and
conditions of the employment of employees of the Surviving Corporation. Except
as otherwise provided in this Section 6.9, nothing herein shall prevent Parent
or the Surviving Corporation from amending or terminating any Company Plan in
accordance with its terms.
Section 6.10 Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) For a period of five years after the Effective Time, the
provisions with respect to indemnification set forth in the certificate of
incorporation and bylaws of Merger Sub as in effect on the date of this
Agreement (true, correct and complete copies of which have been provided to
Company) shall not be amended, repealed or otherwise modified in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of Company in respect of
actions or omissions occurring at or prior to the Effective Time (including
without limitation the transactions contemplated by this Agreement), unless such
modification is required by law.
(b) For a period commencing at the Effective Time and expiring
not later than the fifth anniversary of the Effective Time, Parent shall cause
to be maintained in effect policies of directors' and officers' liability
insurance, for the benefit of those persons who are covered by Company's
directors' and officers' liability insurance policies at the Effective Time,
providing coverage with respect to matters occurring prior to the Effective Time
that is at least equal to the
27
<PAGE>
coverage provided under Company's current directors' and officers' liability
insurance policies, to the extent that such liability insurance can be
maintained at an annual cost to Parent not greater than 150 percent of the
premium for the current Company directors' and officers' liability insurance;
provided that if such insurance cannot be so maintained at such cost, Parent
shall maintain as much of such insurance as can be so maintained at a cost equal
to 150 percent of the current annual premiums of Company for such insurance.
Section 6.11 Credit Arrangements.
-------------------
(a) During the period from and after the date hereof to the
earlier of the Effective Time and the termination of this Agreement pursuant to
Section 8.1, Company shall not (i) modify, amend or supplement, or waive any
rights under or in relation to, or enter into any agreement or arrangement
inconsistent with, the Forbearance Agreement, the Overadvance Note or the Loan
Documents (or request any of the foregoing from Silicon Valley Bank), (ii) make
any payments on account of any outstanding borrowings or other obligations under
the Loan Documents, except (A) mandatory payments of accrued interest on
outstanding principal balances under the Loan Documents as contemplated by
Section 5(b) and Section 7 of the Forbearance Agreement and (B) mandatory
payments in respect of Overadvances as contemplated by Section 6 of the
Forbearance Agreement, or (iii) effect any advance under the Overadvance
Facility (each, an "Advance"), except with Parent's prior written consent
obtained in accordance with the provisions of Section 6.11(b).
(b) Company may request that Parent consent to one or more
Advances to be used by Company solely to finance its working capital
requirements in the ordinary course of business consistent with past practice.
Each request for Parent's consent to an Advance under this Section 6.11(b) shall
set forth the proposed amount thereof, the intended use of the proceeds thereof
and confirmation that the conditions set forth in Section 6.11(c) are then
satisfied (it being understood that Company shall request an Advance only to the
extent that Company's other uncommitted sources of working capital are at the
time inadequate to satisfy Company's working capital requirements). Subject to
Company's compliance with this Section 6.11(b) and the satisfaction of the
conditions set forth in Section 6.11(c), Parent shall consent to an Advance so
long as the making of such Advance would not result in all Advances in the
aggregate exceeding $3,000,000; provided, however, that Parent, in its sole and
absolute discretion, may consent to one or more Advances that would result in
all Advances in the aggregate exceeding $3,000,000 or at a time when all
Advances in the aggregate already exceed $3,000,000.
(c) The obligation of Parent to consent to any Advance shall be
subject to the satisfaction on the date that any Advance is to be made (an
"Advance Date") of the following conditions:
(i) The Forbearance Agreement, the Overadvance Note and
the Loan Documents shall be in full force and effect without modification,
amendment or supplement, and neither Company nor Silicon Valley Bank shall have
(A) waived any rights thereunder without Parent's prior written consent or (B)
taken or omitted to take (or expressed any intention to take or omit to take)
any action in contravention thereof.
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<PAGE>
(ii) Company shall not have taken or omitted to take (or
expressed any intention to take or omit to take) any action in contravention of
the provisions of this Section 6.11 or the Cash Management Plan set forth in
Annex 6.11 to this Agreement.
(iii) All conditions to the obligations of Parent and
Merger Sub to effect the Merger set forth in Section 7.1(b) and Sections 7.2(a),
7.2(b), 7.2(c) and 7.2(d) shall have been satisfied (with the references in
Sections 7.2(a) and 7.2(b) to the "Closing Date" being deemed for purposes of
this Section 6.11(b)(ii) to be references to the applicable Advance Date).
(iv) From the date hereof to the applicable Advance Date,
neither Company nor any of its Subsidiaries or any of its or their affiliates,
officers, directors, employees, agents or representatives (including without
limitation any investment banker, financial advisor, attorney or accountant
retained by Company or any of its Subsidiaries) shall have (A) initiated,
solicited or encouraged (including by way of providing information or
assistance), or taken any other action to facilitate, any inquiries, any
expression of interest or the making of any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal or (B) entered into,
maintained or continued discussions or negotiated with any person in furtherance
of such inquiries or to obtain an Acquisition Proposal or agreed to or endorsed
any Acquisition Proposal.
(v) The making of an Advance to Company shall not cause a
default or event of default to occur under the Forbearance Agreement, the
Overadvance Note, the Loan Documents or any other obligations of Company or any
of its Subsidiaries for borrowed money or evidenced by indentures, credit
agreements, security agreements, mortgages, guarantees, promissory notes or
other contracts relating to the borrowing of money.
(vi) If a default or event of default has occurred and is
continuing under any indenture, credit agreement, security agreement, mortgage,
guaranty, promissory note or other contract relating to the borrowing of money
(including the Forbearance Agreement, the Overadvance Note and the Loan
Documents) to which the Company is a party, Company shall have obtained a
written waiver of such default or event of default or a forbearance agreement,
in each case in form and substance reasonably satisfactory to Parent.
(d) Neither Parent nor Merger Sub nor any of their respective
affiliates, directors, officers, employees or agents shall have any liability to
Company or any other person in connection with any action taken or omitted to be
taken under this Section 6.11 or in connection with any Advance or request for
an Advance; provided, however, without limiting the generality or effect of
Sections 8.1(c) and 8.2, that nothing contained in this Section 6.11(d) shall
relieve Parent of liability for any willful or intentional breach by Parent of
this Section 6.11.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligation of each party to effect the Merger is subject to the
satisfaction or written waiver on or prior to the Closing Date of the following
conditions:
29
<PAGE>
(a) Stockholder Approval. This Agreement shall have been approved
--------------------
by the affirmative vote of the holders of the requisite number of shares of
capital stock of Company in the manner required pursuant to Company's articles
of organization and by-laws, the MBCL and other applicable law.
(b) No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the party
invoking this condition shall have complied with its obligations under Section
6.7.
(c) HSR Act. All necessary waiting periods under the HSR Act
-------
applicable to the Merger shall have expired or been earlier terminated.
Section 7.2 Conditions to Obligations of Parent and Merger Sub. The
---------------------------------------------------
obligation of each of Parent and Merger Sub to effect the Merger is further
subject to satisfaction or written waiver on or prior to the Closing Date of the
following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Company contained in this Agreement, which representations and
warranties shall be deemed for purposes of this Section 7.2 not to include any
qualification or limitation with respect to materiality (whether by reference to
"Material Adverse Effect" or otherwise), shall be true and correct as of the
Closing Date, except where the matters in respect of which such representations
and warranties are not true and correct, in the aggregate, have not had and
could not reasonably be expected to have a Material Adverse Effect on Company,
with the same effect as though such representations and warranties were made as
of the Closing Date, and Parent and Merger Sub shall have received a certificate
signed on behalf of Company by an authorized officer of Company to such effect.
(b) Performance of Obligations of Company. Company shall have
-------------------------------------
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent and Merger
Sub shall have received a certificate signed on behalf of Company by an
authorized officer of Company to such effect.
(c) No Material Adverse Change. Since the date of this Agreement,
--------------------------
Company and its Subsidiaries, taken as a whole, shall not have experienced any
Material Adverse Change.
(d) Certain Litigation. There shall not be pending or threatened
------------------
any suit, action or proceeding seeking to restrain or prohibit the Merger or
seeking to obtain from Parent or Company or any of their respective affiliates
in connection with the Merger any material damages, or seeking any other relief
that, following the Merger, would materially limit or restrict the ability of
Parent and its Subsidiaries to own and conduct both the assets and businesses
owned and conducted by Parent and its Subsidiaries prior to the Merger and the
assets and businesses owned and conducted by Company and its Subsidiaries prior
to the Merger.
(e) Consents. All consents, authorizations, orders and approvals
--------
of (or filings or registrations with) any Governmental Entity or any other
person required to be obtained or
30
<PAGE>
made prior to the Effective Time in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for the
filing of the articles of merger pursuant to Section 1.3 and except where the
failure to have obtained or made such consents, authorizations, orders,
approvals, filings or registrations could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent or the
Surviving Corporation.
(f) Insurance. Parent and Company shall have received written
---------
confirmation reasonably satisfactory to Parent from the insurers identified on
Annex 7.2 to this Agreement as to the matters set forth on such Annex.
(g) Termination or Modification of Certain Agreements. Each of
-------------------------------------------------
the Agreement, dated December 1, 1996, between Company and SciTools Inc.
(formerly known as Scientific Toolworks, Inc.) relating to ADA Professional
Developers Tool, as amended, the Agreement, dated August 12, 1997, between
Company and Proforma Corporation relating to Provision Workbench/BPR Modelers,
as amended, and the Agreement, dated January 1, 1998, between Company and Mesa
Systems Guild, Inc. relating to Mesa/Teamwork Model Bridge, as amended, shall
have been terminated or modified on terms reasonably satisfactory to Parent.
(h) Certain Actions by Secured Lender. Silicon Valley Bank shall
---------------------------------
not have exercised any rights or remedies or taken any other action under or in
respect of the Loan Documents or the Overadvance Note (as such terms are
hereinafter defined) and shall not have failed to make any Advance requested by
Company and consented to by Parent pursuant to Section 6.11.
Section 7.3 Conditions to Obligation of Company. The obligation of the
------------------------------------
Company to effect the Merger is further subject to satisfaction or written
waiver on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of each of Parent and Merger Sub contained in this Agreement, which
representations and warranties shall be deemed for purposes of this Section 7.3
not to include any qualification or limitation with respect to materiality
(whether by reference to "Material Adverse Effect" or otherwise), shall be true
and correct as of the Closing Date, except where the matters in respect of which
such representations and warranties are not true and correct, in the aggregate,
have not had and could not reasonably be expected to have a Material Adverse
Effect on Parent or a material adverse effect on the economic benefits to be
realized by the holders of Shares as a result of the consummation of the Merger,
with the same effect as though such representations and warranties were made as
of the Closing Date, and Company shall have received a certificate signed on
behalf of Parent and Merger Sub by an authorized officer of Parent to such
effect.
(b) Performance of Obligations of Parent and Merger Sub. Each of
---------------------------------------------------
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of Parent by an authorized officer of Parent to such effect.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination.
-----------
(a) This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the stockholders of Company, in any one of
the following circumstances:
(i) By mutual written consent duly authorized by the
Boards of Directors of Parent and Company.
(ii) By Parent or Company, if the Effective Time shall not
have occurred on or before December 31, 1998, otherwise than as a result of any
material breach of any provision of this Agreement by the party seeking to
effect such termination.
(iii) By Parent or Company, if any federal or state court
of competent jurisdiction or other Governmental Entity shall have issued an
order, decree or ruling, or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling or
other action shall have become final and non-appealable, provided that neither
party may terminate this Agreement pursuant to this Section 8.1(a)(iii) if it
has not complied with its obligations under Section 6.7.
(iv) By Parent or Company, if the Stockholders Meeting
shall have been held and this Agreement shall not have been approved by the
affirmative vote of the holders of the requisite number of shares of capital
stock of Company, provided that Company may not terminate this Agreement
pursuant to this Section 8.1(a)(iv) unless it shall have paid to Parent the Fee
provided for in Section 8.1(b).
(v) By Parent, if (A) the Board of Directors of Company
or any committee thereof shall have (1) withdrawn or modified, in a manner
adverse to Parent or Merger Sub, its approval of this Agreement or the
transactions contemplated hereby or the recommendation referred to in the
penultimate sentence of Section 6.2, (2) approved, endorsed or recommended to
its stockholders an Acquisition Proposal, or (3) resolved to do any of the
foregoing or (B) if the Stockholders Meeting shall not have been held by October
31, 1998 as a result of a breach by Company of its obligations under Section
6.2.
(vi) By Parent or Company, if (A) the other party shall
have failed to comply in any material respect with any of the material covenants
and agreements contained in this Agreement to be complied with or performed by
such party at or prior to such date of termination, and such failure continues
for 20 business days after the actual receipt by such party of a written notice
from the other party setting forth in detail the nature of such failure, or (B)
the representations and warranties of the other party contained in this
Agreement, which representations and warranties shall be deemed for purposes of
this Section 8.1(a)(vi) not to include any qualification or limitation with
respect to materiality (whether by reference to a "Material Adverse Effect" or
otherwise), shall have been untrue in any respect on the date when made (or in
the case of any representations and warranties that are made as of a different
date, as of such different date) and the matters in respect
32
<PAGE>
of which such representations and warranties shall have been untrue, in the
aggregate, have had or could reasonably be expected to have a Material Adverse
Effect on such other party.
(b) If this Agreement is terminated pursuant to:
(i) Section 8.1(a)(iv); or
(ii) Section 8.1(a)(v);
then, in such event, Company shall pay to Parent prior to such termination, in
the case of termination by Company pursuant to Section 8.1(a)(iv), or promptly
(and in any event within three business days) after such termination, in the
case of termination by Parent pursuant to Section 8.1(a)(iv) or Section
8.1(a)(v), a fee in the amount of $570,000 (the "Fee"), which amount shall be
payable in immediately available funds.
(c) If this Agreement is terminated by Company pursuant to
Section 8.1(a)(vi), then, in such event, (i) Parent shall pay to or for the
account of Company promptly (and in any event within three business days) after
such termination, an amount in immediately available funds equal to $570,000
(the "Liquidated Damages Amount") to be applied as follows: (i) first, to any
accrued and unpaid interest on any then-outstanding Advances, (ii) next, to the
principal amount of any then-outstanding Advances, and (iii) finally, to the
extent not applied pursuant to clauses (i) and/or (ii), to an account specified
by Company for such purpose. Notwithstanding anything in this Agreement to the
contrary, the payment of the Liquidated Damages Amount pursuant to the
immediately preceding sentence shall be the sole and exclusive remedy of Company
for any and all damages arising or resulting from or relating to any of the
matters referred to in Section 8.1(a)(vi) and, upon compliance by Parent with
its obligations (if any) under this Section 8.1(c), none of Parent, Merger Sub,
any other Subsidiary of Parent or any of their respective officers, directors,
employees, agents, representatives or stockholders shall have any liability or
further obligation to Company or any of its officers, directors, employees,
agents, representatives or stockholders, or to any other person in respect of
any such matters.
Section 8.2 Effect of Termination. In the event of the termination and
---------------------
abandonment of this Agreement pursuant to Section 8.1(a) hereof, this Agreement
(except for the provisions of Section 4.1(t), the last sentence of Section 6.3,
paragraphs (b) and (c) of Section 8.1, this Section 8.2 and Article IX) shall
forthwith become void and cease to have any force or effect, without any
liability on the part of any party hereto or any of its affiliates; provided,
however, that nothing in this Section 8.2 shall relieve any party to this
Agreement of liability for any willful or intentional breach of this Agreement.
Section 8.3 Amendment. Subject to any applicable provisions of the
---------
MBCL, at any time prior to the Effective Time, the parties hereto may modify or
amend this Agreement by written agreement executed and delivered by duly
authorized officers of the respective parties; provided, however, that after
approval of this Agreement at the Stockholders Meeting, no amendment shall be
made which would reduce the amount or change the type of consideration into
which each Share shall be converted upon consummation of the Merger. This
Agreement may not be modified or amended except by written agreement executed
and delivered by duly authorized officers of each of the respective parties.
33
<PAGE>
Section 8.4 Extension; Waiver. At any time prior to the Effective
-----------------
Time, the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c)
subject to Section 8.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in a written instrument executed and delivered by a duly authorized
officer on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
Section 8.5 Procedure for Termination, Amendment, Extension or Waiver.
---------------------------------------------------------
A termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of Parent, Merger Sub
or Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
Section 9.2 Fees and Expenses. Whether or not the Merger shall be
-----------------
consummated, each party hereto shall pay its own expenses incident to preparing
for, entering into and carrying out this Agreement and the consummation of the
transactions contemplated hereby, except that each of Company and Parent shall
bear and pay one-half of the costs and expenses incurred in connection with the
filing of the premerger notification and report forms under the HSR Act
(including filing fees).
Section 9.3 Definitions. For purposes of this Agreement:
-----------
(a) an "affiliate" of any person means another person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person;
(b) "business day" means any day other than Saturday, Sunday or
any other day on which banks in the City of New York are required or permitted
to close;
(c) "Common Merger Consideration" means the amount of cash the
right to receive which a Common Share shall be converted into at the Effective
Time pursuant to Section 2.1(c).
(d) "Conversion Factor" means an amount equal to the quotient
obtained by dividing the Common Merger Consideration by $21.50 (i.e., the
----
closing price for shares of Parent Common Stock on August 26, 1998).
34
<PAGE>
(e) "Disclosure Schedule" means the disclosure schedule delivered
by each party to the other simultaneously with the execution of this Agreement;
(f) "Environmental Laws" means any federal, state or local law
relating to: (i) releases or threatened releases of Hazardous Substances or
materials containing Hazardous Substances; (ii) the manufacture, handling,
transport, use, treatment, storage or disposal of Hazardous Substances or
materials containing Hazardous Substances; or (iii) otherwise relating to
pollution of the environment or the protection of human health;
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, including the rules and regulations promulgated by the SEC pursuant
thereto;
(h) "Forbearance Agreement" means the Forbearance Agreement,
dated as of August 27, 1998, among Silicon Valley Bank, Company, Cayenne
Software Limited, Bachman GmbH and Cadre Technologies;
(i) "Hazardous Substances" means: (i) those substances defined in
or regulated under the following federal statutes and their state counterparts,
as each may be amended from time to time, and all regulations thereunder: the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act,
the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Clean Air Act; (ii)
petroleum and petroleum products including crude oil and any fractions thereof;
(iii) natural gas, synthetic gas and any mixtures thereof; (iv) radon; (v) any
other contaminant; and (vi) any substance with respect to which any Governmental
Entity requires environmental investigation, monitoring, reporting or
remediation;
(j) "knowledge" means the actual knowledge of any executive
officer of Company or Parent, as the case may be;
(k) "Liens" means, collectively, all pledges, claims, liens,
charges, mortgages, conditional sale or title retention agreements,
hypothecations, collateral assignments, security interests, easements and other
encumbrances of any kind or nature whatsoever;
(l) "Loan Documents" has the meaning ascribed thereto in the
Forbearance Agreement, as such Loan Documents are modified by the Forbearance
Agreement;
(m) "Material Adverse Change" means any one or more changes,
events or occurrences which have had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company;
provided, however, that, solely for purposes of this definition insofar as it
relates to changes, events, or occurrences after the date hereof and, subject to
the next following proviso, no effect that is directly attributable to (i) the
performance by Company of its covenants hereunder, (ii) decreases in Company's
consolidated revenues, or (iii) the inability of Company or any of its
Subsidiaries to collect their respective accounts receivable after making
collection efforts consistent with past practice shall be deemed to constitute a
Material Adverse Effect on Company; provided, further, however, that the
inability of Company to pay its debts when the same are due and payable (whether
or not in the ordinary course of business or as a result of any action by any
person (other than a breach by Parent of its obligations under Section 6.11)
that affects
35
<PAGE>
the time at which such obligations are due and payable) shall in all events be
deemed to constitute a Material Adverse Effect on Company for purposes of this
definition;
(n) a "Material Adverse Effect" with respect to any person means
a material adverse effect on (i) the ability of such person to perform its
obligations under this Agreement or to consummate the transactions contemplated
hereby or (ii) the condition (financial or otherwise), assets, liabilities
(actual or contingent), results of operations or business of such person and its
Subsidiaries taken as a whole;
(o) the "NYSE" means the New York Stock Exchange;
(p) "Overadvance Facility" has the meaning ascribed thereto in
the Forbearance Agreement;
(q) "Overadvance Note" has the meaning ascribed thereto in the
Forbearance Agreement;
(r) a "person" means an individual, corporation, partnership,
joint venture, association, trust, unincorporated organization or other entity;
(s) "Preferred Merger Consideration" means the amount of cash the
right to receive which a Preferred Share shall be converted into at the
Effective Time pursuant to Section 2.1(c).
(t) "Preferred Stockholders" means Integral Capital Partners III,
L.P., Integral Capital Partners International III, L.P., Winston Partners L.P.,
Winston II LLC and Winston II LDC;
(u) "Securities Act" means the Securities Act of 1933, as
amended, including the rules and regulations promulgated by the SEC pursuant
thereto;
(v) a "Subsidiary" of any person means any other person of which
(i) the first mentioned person or any Subsidiary thereof is a general partner,
(ii) voting power to elect a majority of the board of directors or others
performing similar functions with respect to such other person is held by the
first mentioned person and/or by any one or more of its Subsidiaries, or (iii)
at least 50% of the equity interests of such other person is, directly or
indirectly, owned or controlled by such first mentioned person and/or by any one
or more of its Subsidiaries.
Section 9.4 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
36
<PAGE>
(i) if to Parent or to Merger Sub, to
Sterling Software, Inc.
300 Crescent Court
Suite 1200
Dallas, Texas 75201
Attention: Don J. McDermett, Jr., Esq.
Telecopy: (214) 981-1265
with a copy (which shall not constitute notice) to:
Jones, Day, Reavis & Pogue
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Mark E. Betzen, Esq.
Telecopy: (214) 969-5100
(ii) if to Company, to
Cayenne Software, Inc.
14 Crosby Drive
Bedford, Massachusetts 07130
Attention: Frederick H. Phillips
Telecopy: (781) 280-6018
with a copy (which shall not constitute notice) to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: Peter H. Dodson, Esq.
Telecopy: (617) 951-7050
Section 9.5 Interpretation. When a reference is made in this Agreement
--------------
to a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for convenience of reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
Section 9.6 Entire Agreement; Third-Party Beneficiaries. This
--------------------------------------------
Agreement constitutes the entire agreement, and supersede all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement (except for the letter agreement referenced in
the last sentence of Section 6.3 and the Stock Option Agreement). This
Agreement is not intended to confer upon any person (including without
limitation any employees or former employees of Company), other than the parties
hereto, any rights or remedies.
37
<PAGE>
Section 9.7 Governing Law. Except to the extent necessarily governed
-------------
by the GBCC, this Agreement shall be governed by, and construed in accordance
with, the laws of The Commonwealth of Massachusetts, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Section 9.8 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations under this Agreement may be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties, and any such assignment without
such prior written consent shall be null and void, except that Parent and/or
Merger Sub may assign this Agreement to any direct or indirect wholly owned
Subsidiary of Parent without the prior consent of Company; provided that Parent
and/or Merger Sub, as the case may be, shall remain liable for all of its
obligations under this Agreement. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 9.9 Enforcement. Irreparable damage would occur in the event
-----------
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. Accordingly, the parties
shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this Agreement
in any appropriate state court in The Commonwealth of Massachusetts or federal
court in Suffolk County in The Commonwealth of Massachusetts, this being in
addition to any other remedy to which they are entitled at law or in equity.
Each of the parties hereto (i) shall submit itself to the personal jurisdiction
of any appropriate state court in The Commonwealth of Massachusetts or federal
court in Suffolk County in The Commonwealth of Massachusetts in the event any
dispute arises out of this Agreement or any of the transactions contemplated
hereby, (ii) shall not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, and (iii) shall not bring
any action relating to this Agreement or any of the transactions contemplated
hereby in any court other than any appropriate state court in The Commonwealth
of Massachusetts or federal court in Suffolk County in The Commonwealth of
Massachusetts.
Section 9.10 Severability. Whenever possible, each provision or
-------------
portion of any provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision or
portion of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement shall be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision had
never been contained herein.
Section 9.11 Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which shall be considered one and the same instrument
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties.
[signature page follows]
38
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
-----------------------------------
Don J. McDermett, Jr.
Senior Vice President and General Counsel
STERLING SOFTWARE (SOUTHERN), INC.
By: /s/ Don J. McDermett, Jr.
-----------------------------------
Don J. McDermett, Jr.
Vice President and Secretary
CAYENNE SOFTWARE, INC.
By: /s/ John J. Alexander
-----------------------------------
John J. Alexander
President and Chief Executive Officer
39
<PAGE>
Exhibit 2.8
-----------
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
STERLING SOFTWARE, INC.
STERLING SOFTWARE (ARIZONA), INC.
and
COREDATA, INC.
dated as of July 12, 1999
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
AGREEMENT AND PLAN OF MERGER.. 1
ARTICLE I THE MERGER..................................................... 2
Section 1.1 The Merger............................................... 2
Section 1.2 Closing.................................................. 2
Section 1.3 Effective Time........................................... 2
Section 1.4 Effects of the Merger.................................... 2
Section 1.5 Certificate of Incorporation; Bylaws..................... 3
Section 1.6 Directors; Officers...................................... 3
ARTICLE II EFFECT OF THE MERGER ON THE CAPITALSTOCK OF THE
CONSTITUENT CORPORATIONS.................................................... 3
Section 2.1 Effect on Capital Stock.................................. 3
Section 2.2 Stock Options............................................ 5
ARTICLE III PAYMENT FOR SHARES............................................. 5
Section 3.1 Payment for Shares....................................... 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES................................. 8
Section 4.1 Representations and Warranties of Company................ 8
Section 4.2 Representations and Warranties of Parent and
Merger Sub............................................... 23
ARTICLE V CONDUCT OF BUSINESS OF COMPANY................................. 25
Section 5.1 Conduct of Business of Company........................... 25
ARTICLE VI ADDITIONAL COVENANTS........................................... 27
Section 6.1 Preparation of the Proxy Statement....................... 27
Section 6.2 Stockholders Meeting..................................... 28
Section 6.3 Access to Information; Confidentiality................... 28
Section 6.4 Reasonable Best Efforts.................................. 28
Section 6.5 Public Announcements..................................... 29
Section 6.6 No Solicitation; Acquisition Proposals................... 29
Section 6.7 Consents, Approvals and Filings.......................... 31
Section 6.8 Board Action Relating to Stock Option Plans.............. 31
<PAGE>
Section 6.9 Employee Benefit Matters................................. 31
ARTICLE VII CONDITIONS PRECEDENT........................................... 32
Section 7.1 Conditions to Each Party's Obligation to Effect
the Merger............................................... 32
Section 7.2 Conditions to Obligations of Parent and Merger Sub....... 32
Section 7.3 Conditions to Obligations of Company..................... 33
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 34
Section 8.1 Termination.............................................. 34
Section 8.2 Effect of Termination.................................... 35
Section 8.3 Amendment................................................ 35
Section 8.4 Extension; Waiver........................................ 35
Section 8.5 Procedure for Termination, Amendment, Extension
or Waiver................................................ 36
ARTICLE IX GENERAL PROVISIONS............................................. 36
Section 9.1 Nonsurvival of Representations and Warranties............ 36
Section 9.2 Fees and Expenses........................................ 36
Section 9.3 Definitions.............................................. 36
Section 9.4 Notices.................................................. 38
Section 9.5 Interpretation........................................... 39
Section 9.6 Entire Agreement; Third-Party Beneficiaries.............. 39
Section 9.7 Disclosure Schedules..................................... 39
Section 9.8 Governing Law............................................ 40
Section 9.9 Assignment............................................... 40
Section 9.10 Enforcement.............................................. 41
Section 9.11 Severability............................................. 41
Section 9.12 Counterparts............................................. 41
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of July 12, 1999 (this
"Agreement"), is made and entered into among Sterling Software, Inc., a Delaware
corporation ("Parent"), Sterling Software (Arizona), Inc., a Delaware
corporation and an indirect wholly owned subsidiary of Parent ("Merger Sub"),
and CoreData, Inc., an Arizona corporation ("Company").
RECITALS:
A. The Executive Committee of the Board of Directors of Parent and the
respective Boards of Directors of Merger Sub and Company have determined that it
would be advisable and in the best interests of their respective stockholders
for Parent to acquire Company, by means of a merger of Merger Sub with and into
Company (the "Merger"), on the terms and subject to the conditions set forth in
this Agreement.
B. Concurrently with the execution and delivery of this Agreement and as
a condition to Parent's and Merger Sub's willingness to enter into this
Agreement, Parent has entered into a Shareholder Agreement, dated as of the date
hereof (the "Shareholder Agreement"), with each of the Stockholders (as
hereinafter defined), pursuant to which each Stockholder has (x) agreed, among
other things, to vote all shares of capital stock of Company owned by such
Stockholder in favor of the approval of this Agreement and (y) granted to Parent
an option to purchase all shares of capital stock of Company owned by such
Stockholder.
C. Parent, Merger Sub and Company desire to make certain
representations, warranties and covenants in connection with the Merger and to
prescribe various conditions to the consummation of the Merger.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. On the terms and subject to the conditions set
----------
forth in this Agreement, and in accordance with the Delaware General Corporation
Law (the "DGCL") and the Arizona Business Corporation Act (the "ABCA"), the
<PAGE>
Merger shall be effected and Merger Sub shall be merged with and into Company at
the Effective Time (as hereinafter defined). At the Effective Time, the
separate existence of Merger Sub shall cease and Company shall continue as the
surviving corporation (sometimes hereinafter referred to as the "Surviving
Corporation").
Section 1.2 Closing. Unless this Agreement shall have been terminated and
-------
the transactions herein contemplated shall have been abandoned pursuant to
Article VIII, and subject to the satisfaction or waiver of all of the conditions
set forth in Article VII, the closing of the Merger (the "Closing") will take
place as soon as practicable, but in no event later than 10:00 a.m. on the
second business day (the "Closing Date") following satisfaction or waiver of all
of the conditions set forth in Article VII, other than those conditions that by
their nature are to be satisfied at the Closing, but subject to the fulfillment
or waiver of those conditions, at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 919 Third Avenue, New York, New York, unless another date, time or
place is agreed to in writing by the parties hereto.
Section 1.3 Effective Time. On the Closing Date (or on such other date as
--------------
Parent and Company may agree), the parties hereto (a) shall file with the
Secretary of State of the State of Delaware (the "Delaware State Secretary") a
certificate of merger (the "Delaware Certificate of Merger") and any other
appropriate documents, executed in accordance with the relevant provisions of
the DGCL (b) shall file with the Corporation Commission of the State of Arizona
(the "Arizona Corporation Commission") a certificate of merger (the "Arizona
Certificate of Merger") and any other appropriate documents, executed in
accordance with the relevant provisions of the ABCA, and (c) shall make all
other filings or recordings required under the DGCL and ABCA in connection with
the Merger. The Merger shall become effective upon the filing of the Delaware
Certificate of Merger and the filing of the Arizona Certificate of Merger, or at
such later time as may be specified in the Delaware Certificate of Merger or the
Arizona Certificate of Merger (the "Effective Time").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
---------------------
forth in the applicable provisions of the DGCL and the ABCA. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
property of Company and Merger Sub shall vest in the Surviving Corporation, and
all liabilities of Company and Merger Sub shall become the liabilities of the
Surviving Corporation.
Section 1.5 Certificate of Incorporation; Bylaws. At the Effective Time,
------------------------------------
(a) the certificate of incorporation of Merger Sub as in effect at the Effective
Time shall, from and after the Effective Time, be the certificate of
incorporation of the Surviving Corporation until thereafter changed or amended
in accordance with the
2
<PAGE>
provisions thereof and applicable law and (b) the bylaws of Merger Sub as in
effect at the Effective Time shall, from and after the Effective Time, be the
bylaws of the Surviving Corporation until thereafter changed or amended in
accordance with the provisions thereof and applicable law.
Section 1.6 Directors; Officers. From and after the Effective Time, (a)
-------------------
the directors of Merger Sub shall be the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be, and (b) the
officers of Merger Sub shall be the officers of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
Section 2.1 Effect on Capital Stock. At the Effective Time, by virtue of
-----------------------
the Merger and without any action on the part of any holder of shares of
Company's common stock, no par value per share (the "Common Shares"), shares of
Company's Class A Preferred Stock, no par value per share (the "Class A
Preferred Shares"), the Company's Class B Preferred Stock, no par value per
share (the "Class B Preferred Shares"), and the Company's Class C Preferred
Stock, no par value per share (the "Class C Preferred Shares", and, together
with the Class A Preferred Shares, the Class B Preferred Shares, and the Common
Shares, the "Shares"), or any other capital stock of Company or any shares of
capital stock of Merger Sub:
(a) Common Stock of Merger Sub. Each share of common stock, par
--------------------------
value $.01 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and become one validly issued, fully
paid and nonassessable share of common stock of the Surviving Corporation.
(b) Cancellation of Treasury Shares and Company-Owned Shares. Each
--------------------------------------------------------
Share issued and outstanding immediately prior to the Effective Time that is
owned by Company (other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third parties)
shall automatically be canceled and retired and shall cease to exist, and no
cash or other consideration shall be delivered or deliverable in exchange
therefor.
3
<PAGE>
(c) Conversion of Shares. Each Share issued and outstanding
--------------------
immediately prior to the Effective Time (other than Shares to be canceled and
retired in accordance with Section 2.1(b) and any Dissenting Shares (as
hereinafter defined)) shall be converted into the right to receive $2.5795 per
Share (the "Merger Consideration"), upon surrender of the certificate formerly
representing such Share in accordance with this Agreement.
(d) Dissenting Shares. Notwithstanding anything in this Agreement
-----------------
to the contrary, any Shares issued and outstanding immediately prior to the
Effective Time held by a holder who has the right to demand, and who properly
demands, payment for such Shares ("Dissenting Shares") in accordance with
Sections 10-1301 through 10-1331 of the ABCA (together with any successor
provisions, the "Appraisal Provisions") shall not be converted into a right to
receive the applicable Merger Consideration, unless such holder fails to perfect
or otherwise loses such holder's right to payment in accordance with the
Appraisal Provisions. If, after the Effective Time, such holder fails to perfect
or loses any such right, each such Share of such holder shall be treated as a
Share that had been converted as of the Effective Time into the right to receive
the applicable Merger Consideration in accordance with Section 2.1(c). At the
Effective Time, any holder of Dissenting Shares shall cease to have any rights
with respect thereto, except the rights provided in the Appraisal Provisions and
as provided in the immediately preceding sentence. Company shall give prompt
notice to Parent of any demands received by Company for payment in accordance
with the Appraisal Provisions, and Parent shall have the right to participate in
and direct all negotiations and proceedings with respect to such demands.
Company shall not, except with the prior written consent of Parent, make any
payment with respect to, or settle or offer to settle, any such demands.
Section 2.2 Stock Options.
-------------
(a) Immediately prior to the Effective Time, each holder of a then-
outstanding option to purchase Common Shares (a "Company Option") under the
Company's 1997 Stock Option Plans (the "Stock Option Plans") will be entitled to
receive from the Company or Parent, and shall receive, in settlement of each
Company Option a cash amount (the "Option Cash Amount"), which amount shall be
advanced to Company by Parent. All Options shall terminate as of the Effective
Time. The Option Cash Amount shall be payable with respect to that number of
Common Shares which may be purchased by the holder of such Company Option
pursuant to the terms thereof. The Option Cash Amount shall be equal to the
product of (i) the excess, if any, of the Common Merger Consideration over the
exercise price
4
<PAGE>
per Share of such Company Option and (ii) the number of Shares constituting such
Company Option.
(b) Except as may be otherwise agreed to by Parent and the Company,
the Stock Option Plan established by the Company shall terminate as of the
Effective Time and the provisions in any other plan, program or arrangement
providing for the issuance or grant of any other interest in respect of the
capital stock of Company shall be deleted, terminated and of no further force or
effect as of the Effective Time.
(c) Company shall use its best efforts to obtain all necessary
waivers, consents or releases from holders of Options granted under the Stock
Option Plan and take any such other action as may be reasonably necessary to
give effect to the transactions contemplated by Section 2.2(a).
ARTICLE III
PAYMENT FOR SHARES
Section 3.1 Payment for Shares.
------------------
(a) Payment Fund. Concurrently with the Effective Time, Parent
------------
shall deposit, or shall cause to be deposited, with or for the account of a bank
or trust company designated by Parent, which shall be reasonably satisfactory to
Company (the "Exchange Agent"), for the benefit of the holders of Shares, cash
in an amount sufficient to pay the aggregate Merger Consideration payable upon
the conversion of Shares pursuant to Section 2.1(c) (the "Payment Fund").
(b) Letters of Transmittal; Surrender of Certificates. As soon as
-------------------------------------------------
reasonably practicable after the Effective Time, Parent shall instruct the
Exchange Agent to mail to each holder of record (other than Company or Parent,
Merger Sub or any other Subsidiary of Parent) of a certificate or certificates
that, immediately prior to the Effective Time, evidenced outstanding Shares (the
"Certificates"), (i) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent, and
shall be in such form and have such other provisions as Parent may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the applicable Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
5
<PAGE>
such letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions, the holder of such Certificate
shall be entitled to receive in exchange therefor cash in an amount equal to the
product of (i) the number of Shares theretofore represented by such Certificate
and (ii) the applicable Merger Consideration, and the Certificate so surrendered
shall forthwith be canceled. No interest shall be paid or accrued on any cash
payable upon the surrender of any Certificate. If payment is to be made to a
person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the surrendered Certificate or established to the satisfaction of
Parent and the Surviving Corporation that such taxes have been paid or are not
applicable.
(c) Cancellation and Retirement of Shares; No Further Rights. As of
--------------------------------------------------------
the Effective Time, all Shares (other than Shares to be canceled in accordance
with Section 2.1(b)) issued and outstanding immediately prior to the Effective
Time shall cease to be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of any such Shares shall cease
to have any rights with respect thereto or arising therefrom (including without
limitation the right to vote), except the right to receive the applicable Merger
Consideration, without interest, upon surrender of such Certificate in
accordance with Section 3.1(b), and until so surrendered, each such Certificate
shall represent for all purposes only the right to receive the applicable Merger
Consideration, without interest. The Merger Consideration paid upon the
surrender for exchange of Certificates in accordance with the terms of this
Article III shall be deemed to have been paid in full satisfaction of all rights
pertaining to the Shares theretofore represented by such Certificates.
(d) Investment of Payment Fund. The Exchange Agent shall invest the
--------------------------
Payment Fund, as directed by Parent, in (i) direct obligations of the United
States of America, (ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for the payment of principal and
interest, (iii) commercial paper rated the highest quality by either Moody's
Investors Services, Inc. or Standard & Poor's Corporation, or (iv) certificates
of deposit, bank repurchase agreements or bankers' acceptances of commercial
banks with capital exceeding $500 million. Any net earnings with respect to the
Payment Fund shall be the property of and paid over to Parent as and when
requested by Parent.
6
<PAGE>
(e) Termination of Payment Fund. Any portion of the Payment Fund
---------------------------
which remains undistributed to the holders of Certificates for 180 days after
the Effective Time shall be delivered to Parent, upon demand, and any holders of
Certificates that have not theretofore complied with this Article III shall
thereafter look only to Parent, and only as general creditors thereof, for
payment of their claim for any Merger Consideration.
(f) No Liability. None of Parent, Merger Sub, the Surviving
------------
Corporation or the Exchange Agent shall be liable to any person in respect of
any payments or distributions payable from the Payment Fund delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to five
(5) years after the Effective Time (or immediately prior to such earlier date on
which any Merger Consideration in respect of such Certificate would otherwise
escheat to or become the property of any Governmental Entity (as hereinafter
defined)), any amounts payable in respect of such Certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
(g) Withholding Rights. Parent and Merger Sub shall be entitled to
------------------
deduct and withhold, or cause to be deducted or withheld, from the consideration
otherwise payable pursuant to this Agreement to any holder of Shares, Options or
Certificates such amounts as are required to be deducted and withheld with
respect to the making of such payment under the Internal Revenue Code of 1986,
as amended (the "Code"), or any provision of applicable state, local or foreign
tax law. To the extent that amounts are so deducted and withheld, such deducted
and withheld amounts shall be treated for all purposes of this Agreement as
having been paid to such holders in respect of which such deduction and
withholding was made.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Company. Company represents
-----------------------------------------
and warrants to Parent and Merger Sub as follows:
(a) Organization, Standing and Corporate Power. Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of
7
<PAGE>
the State of Arizona and has the requisite corporate power and authority to
carry on its business as now being conducted. Company is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
(as hereinafter defined) on Company. Company has delivered to Parent true,
complete and correct copies of the articles of incorporation and by-laws of
Company, in each case as amended to the date of this Agreement. The Company has
no Subsidiaries.
(b) Authority; Noncontravention. Company has the requisite corporate
---------------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Company and the consummation by Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Company, subject to the approval of this Agreement by its stockholders as
contemplated by Section 6.2. This Agreement has been duly executed and
delivered by Company and, assuming that this Agreement constitutes a valid and
binding obligation of Parent and Merger Sub, constitutes a valid and binding
obligation of Company, enforceable against Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity. Except as specified in
Section 4.1(b) of the Disclosure Schedule, the execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated hereby
and compliance with the provisions hereof will not, (i) conflict with any of the
provisions of the articles of incorporation or by-laws of Company, in each case
as amended to the date of this Agreement, (ii) subject to the governmental
filings and other matters referred to in Section 4.1(c), conflict with, result
in a breach of or default (with or without notice or lapse of time, or both)
under, or give rise to a material obligation, a right of termination,
cancellation or acceleration of any obligation or a loss of a material benefit
under, or require the consent of any person under, any indenture or other
agreement, permit, concession, franchise, license or similar instrument or
undertaking to which Company is a party or by which Company or any of its assets
is bound or affected, or (iii) subject to the governmental filings and other
matters referred to in Section 4.1(c), contravene any applicable domestic or
foreign law, rule or regulation or any order, writ, judgment, injunction,
decree, determination or award currently in effect, which, in the case of
clauses (ii) and (iii) above could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on Company.
8
<PAGE>
(c) Consents and Approvals. No consent, approval or authorization of,
----------------------
or declaration or filing with, or notice to, any domestic or foreign
governmental agency or regulatory authority (a "Governmental Entity") which has
not been received or made is required by or with respect to Company in
connection with the execution and delivery of this Agreement by Company or the
consummation by Company of the transactions contemplated hereby, except for (i)
the filing of the Delaware Certificate of Merger with the Delaware Secretary of
State and the filing of the Arizona Certificate of Merger with the Arizona
Corporation Commissioner, (ii) such other consents, approvals, authorizations,
filings or notices as are specified in Section 4.1(c) of the Disclosure
Schedule, and (iii) any other consents, approvals, authorizations, filings or
notices the failure to make or obtain which could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company.
(d) Capital Structure. The authorized capital stock of Company
-----------------
consists solely of: 10,000,000 Common Shares; 3,000,000 Class A Preferred
Shares; 2,000,000 Class B Preferred Shares; and1,000,000 Class C Preferred
Shares. As of the date hereof: (i) 2,090,207 Common Shares are issued and
outstanding; (ii) 1,000,000 Class A Preferred Shares are issued and outstanding;
(iii) 1,800,000 Class B Preferred Shares are issued and outstanding; (iv)
120,000 Class C Preferred Shares are issued and outstanding; (v) 240, 376 Common
Shares are reserved for issuance pursuant to outstanding Options granted under
the Stock Option Plan and 100,000 Common Shares are reserved for issuance in
connection with an option held by the Riley Family Trust and 102,642 Common
Shares are reserved for issuance to Micro Age, pursuant to certain antidilution
provisions of its Convertible Preferred Stock and Warrant Purchase Agreement;
(vi) 1,000,000 Common Shares were reserved for issuance upon conversion of
Series A Preferred Shares; (vii) 1,800,000 Common Shares were reserved for
issuance upon conversion of Series B Preferred Shares; (viii) 120,000 Common
Shares were reserved for issuance upon conversion of Series C Preferred Shares;
and (ix) no Common Shares were held by Company in its treasury. Except as set
forth in the immediately preceding sentence, as of the date hereof, no shares of
capital stock or other equity securities of Company were issued, reserved for
issuance or outstanding. All outstanding shares of capital stock of Company are
and all Common Shares which could be issued pursuant to the exercise of
outstanding Company Options or other options described in clause (v) above will
be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. Except as specified above or in Section 4.1(d) of the
Disclosure Schedule, Company does not have and is not subject to or bound by or,
at or after the Effective Time will
9
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not have or be subject to or bound by, any outstanding option, warrant, call,
subscription or other right (including any preemptive right), agreement or
commitment which (i) obligates Company to issue, sell or transfer, or
repurchase, redeem or otherwise acquire, any shares of the capital stock of
Company, (ii) restricts the transfer of any shares of capital stock of Company,
or (iii) relates to the voting of any shares of capital stock of Company. No
bonds, debentures, notes or other indebtedness of Company having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which the stockholders of Company may vote are issued or
outstanding.
(e) Financial Statements. The Company has delivered to the Parent and
--------------------
Merger Sub the audited financial statements of the Company as of, and for the
years ended December 31, 1996, 1997 and 1998 (together with the notes thereto),
certified by the Company's independent public accountants, and accompanied by
their reports thereon (the "Audited Financial Statements"). The Company also
has delivered to the Parent and Merger Sub the unaudited financial statements of
the Company as of June 30, 1999 and for the six (6) months then ended
(collectively, with the Audited Financial Statements, the "Financial
Statements"). The Financial Statements have been prepared in accordance with
the books and records of the Company in accordance with generally accepted
accounting principles ("GAAP"). The Financial Statements fairly present, in all
material respects, (a) the assets, liabilities and financial condition of the
Company, as at the dates thereof, and (b) the results of operations and cash
flows of the Company for the periods then ended. The statements of income and
retained earnings and cash flows included in the Financial Statements do not
contain any material items of special or nonrecurring income not earned in the
ordinary course of business and consistent with applicable industry standards
and practice.
(f) Absence of Certain Changes or Events; No Undisclosed Material
-------------------------------------------------------------
Liabilities.
- -----------
(i) Except as specified in Section 4.1(f)(i) of the
Disclosure Schedule, since the date of the Audited Financial Statements, Company
has conducted its business only in the ordinary course, and there has not been:
(A) any Material Adverse Change; (B) any declaration, setting aside or payment
of any dividend or other distribution in respect of shares of Company's capital
stock, or any redemption or other acquisition by Company of any shares of its
capital stock; (C) any increase in the rate or terms of compensation payable or
to become payable by Company to its directors, officers or key employees, except
increases occurring in the ordinary course of business consistent with past
practice; (D) any entry into, or
10
<PAGE>
increase in the rate or terms of, any bonus, insurance, severance, pension or
other employee or retiree benefit plan, payment or arrangement made to, for or
with any such directors, officers or key employees, except increases occurring
in the ordinary course of business consistent with past practices or as required
by applicable law; (E) any entry into any agreement, commitment or transaction
by Company which is material to Company, except for agreements, commitments or
transactions entered into in the ordinary course of business consistent with
past practice; (F) any change by Company in accounting methods, principles or
practices, except as required or permitted by GAAP; (G) any write-off or write-
down of, or any determination to write-off or write-down, any asset of Company
or any portion thereof which write-off, write-down or determination exceeds
$5,000 individually or $25,000 in the aggregate; (H) any announcement or
implementation of any reduction in force, lay-off, early retirement program,
severance program or other program or effort concerning the termination of
employment of employees of Company; or (I) any announcement of or entry into any
agreement, commitment or transaction by Company to do any of the things
described in the preceding clauses (A) through (H) otherwise than as expressly
provided for herein.
(ii) Except as disclosed in the Financial Statements or
specified in Section 4.1(f)(ii) of the Disclosure Schedule and liabilities
incurred in the ordinary course of business consistent with past practice and of
the same type and magnitude as those set forth in the Financial Statements since
the date of the most recent Financial Statements, there are no liabilities of
Company of any kind whatsoever, whether accrued, contingent, absolute, due, to
become due, determined, determinable or otherwise.
(g) Real Property; Other Assets.
---------------------------
(i) The Company does not own any real property in fee.
(ii) Company has heretofore made available to Parent true,
correct and complete copies of all leases, subleases and other agreements (the
"Real Property Leases") under which Company uses or occupies or has the right to
use or occupy, now or in the future, any real property or facility (the "Leased
Real Property"), including all modifications, amendments and supplements
thereto. Except in each case where the failure could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on Company:
(A) Company has a valid and subsisting leasehold interest in each parcel of
Leased Real Property free and clear of all Liens and each Real Property Lease is
in full force and effect, (B) all rent and other sums and charges payable by
Company as tenants thereunder are current in all
11
<PAGE>
material respects, (C) no termination event or condition or uncured default of a
material nature on the part of Company or, to Company's knowledge, the landlord,
exists under any Real Property Lease, and (D) Company is the sole undisputed
lessee of each Leased Real Property, is in actual possession thereof and is
entitled to quiet enjoyment thereof in accordance with the terms of the
applicable Real Property Lease.
(h) Software.
--------
(i) Section 4.1(h)(i) of the Disclosure Schedule sets forth
under the caption "Owned Software" a true, correct and complete list of all
computer programs (source code or object code) owned by Company, including
without limitation any computer programs in the development or testing phase
(collectively, the "Owned Software"), and Section 4.1(h)(i) of the Disclosure
Schedule sets forth under the caption "Licensed Software" a true, correct and
complete list of all computer programs (source code or object code) licensed to
Company by another person (other than any off-the-shelf computer program that is
so licensed under a shrink wrap license) (collectively, the "Licensed Software"
and, together with the Owned Software, the "Software").
(ii) Except as specified in Section 4.1(h)(ii) of the
Disclosure Schedule, Company has good, marketable and exclusive title to, and
the valid and enforceable power and unqualified right to sell, license, lease,
transfer, use or otherwise exploit, all versions and releases of the Owned
Software and all copyrights thereof, free and clear of all Liens. Company is in
actual possession of (A) the source code and object code for each computer
program included in the Owned Software, and (B) the object code and, to the
extent required for the effective use of the Software as currently used in
Company's business or as offered or represented to Company's customers or
potential customers, the source code, for each computer program included in the
Licensed Software. Company is in possession of all other documentation
(including without limitation all related engineering specifications, program
flow charts, installation and user manuals) and know-how required for the
effective use of the Software as currently used in Company's business or as
offered or represented to Company's customers or potential customers. The
Software constitutes all of the computer programs necessary to conduct Company's
business as now conducted, and includes all of the computer programs used in the
development, marketing, licensing, sale or support of the products and the
services presently offered by Company. Except as specified in Section 4.1(h)(ii)
of the Disclosure Schedule, no person other than Company has any right or
interest of any kind or nature in or with respect to the Owned Software or any
portion thereof or any rights to sell, license, lease, transfer, use or
otherwise exploit the Owned Software or any portion thereof.
12
<PAGE>
(iii) Section 4.1(h)(iii) of the Disclosure Schedule sets forth
a true, correct and complete list, by computer program, of (A) all persons other
than Company that have been provided with the source code or have a right to be
provided with the source code (including any such right that may arise after the
occurrence of any specified event or circumstance, either with or without the
giving of notice or passage of time or both) for any of the Owned Software, and
(B) all source code escrow agreements relating to any of the Owned Software
(setting forth as to any such escrow agreement the source code subject thereto
and the names of the escrow agent and all other persons who are actual or
potential beneficiaries of such escrow agreement), and identifies with
specificity all agreements and arrangements pursuant to which the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby would entitle any third party or parties to
receive possession of the source code for any of the Owned Software or any
related technical documentation. Except as specified in Section 4.1(h)(iii) of
the Disclosure Schedule, no person (other than Company and any person that is a
party to a contract referred to in clause (v) of the first sentence of Section
4.1(k) that restricts such person from disclosing any information concerning
such source code) is in possession of, or has or has had access to, any source
code for any computer program included in the Owned Software.
(iv) There are no defects in any computer program included in
the Software that would adversely affect the functioning thereof in accordance
with any published specifications therefor or which would cause the Owned
Software or, to Company's knowledge, the Licensed Software, to fail to be Year
2000 compliant in all material respects. Without limiting the generality of the
foregoing, all of the Owned Software and, to Company's knowledge, all of the
Licensed Software has the following properties and capabilities: (A) the
capability to correctly recognize and accurately process dates expressed as a
four-digit number (or the binary equivalent or other machine readable iteration
thereof) (collectively, the "Four-Digit Dates"); (B) the capability to
accurately execute calculations using Four-Digit Dates; (C) the functionality
(both on-line and batch), including entry, inquiry, maintenance and update, to
support processing involving Four-Digit Dates; (D) the capability to generate
interfaces and reports that support processing involving Four-Digit Dates; (E)
the capability to generate and successfully transition, without human
intervention, into the Year 2000 using the correct system date and to thereafter
continue processing with Four-Digit Dates; and (F) the capability to provide
correct results in forward and backward data calculations spanning century
boundaries, including the conversion of pre-2000 dates currently stored as two-
digit dates; provided, however, that no representation or warranty is made as to
the effect that defects in computer
13
<PAGE>
programs, hardware or systems provided by third parties (or the inability of any
such programs, hardware or systems, other than those contemplated by the
documentation for the Software to be used in conjunction with the Software, to
properly exchange date data with the Software) may, when used in conjunction
with the Software, have on the foregoing capabilities. Except as specified in
Section 4(1)(h)(iv) of the Disclosure Schedule, the Company has made no
representations, warranties or disclosures of any sort regarding the Company's
or any of the Software's Year 2000 compliance. Each computer program included in
the Software is in machine readable form and contains all current revisions.
Section 4.1(h)(iv) of the Disclosure Schedule sets forth a true, correct and
complete list of any current developments or maintenance efforts with respect to
the Owned Software, including without limitation the development of new computer
programs, enhancements or revisions to existing computer programs included in
the Owned Software.
(v) Except as specified in Section 4.1(h)(v) of the
Disclosure Schedule, none of the sale, license, lease, transfer, use,
reproduction, distribution, modification or other exploitation by Company, or
any of its successors or assigns of any version or release of any computer
program included in the Software obligates or will obligate Company or any of
its successors or assigns to pay any royalty, fee or other compensation to any
other person.
(vi) Company does not market and has not marketed, and has not
supported and is not obligated to support, any Licensed Software.
(vii) Except as specified in Section 4.1(h)(vii) of the
Disclosure Schedule, no agreement, license or other arrangement pertaining to
any of the Software (including without limitation any development, distribution,
marketing, user or maintenance agreement, license or arrangement) to which
Company is a party will terminate or become terminable by any party thereto as a
result of the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
(i) Intellectual Property.
---------------------
(i) Section 4.1(i)(i) of the Disclosure Schedule sets forth a
true, correct and complete list (including, to the extent applicable,
registration, application or file numbers) of all patents, trademarks, trade
names, service marks, domain names and registered and material unregistered
copyrights used by Company in connection with the conduct of Company's business,
and all registrations of or applications for registration of any of the
foregoing, including any additions thereto or
14
<PAGE>
extensions, continuations, renewals or divisions thereof (setting forth the
registration, issue or serial number and a description of the same)
(collectively, together with all trade dress, trade secrets, processes,
formulae, designs, know-how and other intellectual property rights that are so
used, the "Intellectual Property"). Parent has heretofore been furnished with
true, correct and complete copies of each U.S. and foreign registration or
application for U.S. or foreign registration covering any of the Intellectual
Property which is registered with, or in respect of which any application for
registration has been filed with, any U.S. Governmental Entity or foreign
government equivalent entity. All such registrations and applications are valid
and subsisting, in full force and effect, and have not been cancelled, expired
or abandoned. Company is listed in the records of the appropriate U.S.
Governmental Entity or foreign government equivalent entity as the sole owner of
record for each such application and registration.
(ii) The Intellectual Property includes all of the
intellectual property rights owned or licensed by Company that are reasonably
necessary to conduct Company's business as it is now conducted, and includes all
of the intellectual property rights owned or licensed by Company that are used
in the development, marketing, licensing or support of the Software. Except as
specified in Section 4.1(i)(ii) of the Disclosure Schedule, (A) Company has
good, marketable and exclusive title to, and the valid and enforceable power and
unqualified right to use, the Intellectual Property free and clear of all Liens
and (B) no person or entity other than Company has any right or interest of any
kind or nature in or with respect to the Intellectual Property or any portion
thereof or any rights to use, market or exploit the Intellectual Property or any
portion thereof.
(iii) Company takes reasonable measures to protect the
confidentiality of its material trade secrets, know-how or other confidential
information, including requiring employees, independent contractors and
licensees having access thereto to execute written non-disclosure agreements
that adequately protect Company's proprietary interests in and to such trade
secrets, know-how and other confidential information.
(j) No Infringement.
---------------
(i) Except as specified in Section 4.1(j)(i) of the
Disclosure Schedule, neither the existence nor the sale, license, lease,
transfer, use, reproduction, distribution, modification or other exploitation by
Company, or any of its successors or assigns of any Software or Intellectual
Property, as such Software or Intellectual Property, as the case may be, is or
was, or is currently contemplated to be, sold,
15
<PAGE>
licensed, leased, transferred, used or otherwise exploited by such persons,
does, did or will (A) infringe, whether directly, by inducement, contributorily,
vicariously or otherwise ("Infringe"), any patent, trademark, copyright or other
right of any other person, (B) constitute a misuse or misappropriation of any
trade secret, know-how, process, proprietary information or other right of any
other person, or (C) entitle any other person to any interest therein, or right
to compensation from Company, or any of its successors or assigns, by reason
thereof. Except as specified in Section 4.1(j)(i) of the Disclosure Schedule,
the Company has not received any complaint, assertion, threat or allegation or
otherwise has notice of any lawsuit, claim, demand, proceeding or investigation
involving either matters of the type contemplated by the immediately preceding
sentence or otherwise challenging the ownership, use, validity or enforceability
of any Intellectual Property, nor is Company aware of any facts or circumstances
that could reasonably be expected to give rise to any such lawsuit, claim,
demand, proceeding or investigation. Except as specified in Section 4.1(j)(i) of
the Disclosure Schedule, there are no restrictions on the ability of Company, or
any of its successors or assigns to sell, license, lease, transfer, use,
reproduce, distribute, modify or otherwise exploit any Software or Intellectual
Property.
(ii) Except as specified in Schedule 4.1(j)(ii) of the
Disclosure Schedule, Company is not aware of any Infringement, misappropriation
or other violation of any Software or Intellectual Property, and no lawsuit,
claim, demand, proceeding or investigation has been brought by Company against
any third party.
(k) Material Contracts. There have been made available to Parent
------------------
and its representatives true, correct and complete copies of all of the
following contracts to which Company is a party or by which it is bound
(collectively, the "Material Contracts"): (i) contracts with any current officer
or director of Company; (ii) contracts pursuant to which Company licenses other
persons to use the Software and pursuant to which other persons license Company
to use the Licensed Software; (iii) contracts (A) for the sale of any of the
assets of Company, other than contracts entered into in the ordinary course of
business or (B) for the grant to any person of any preferential rights to
purchase any of its assets; (iv) contracts which restrict Company from competing
in any line of business or with any person in any geographical area or which
restrict any other person from competing with Company in any line of business or
in any geographical area; (v) contracts which restrict Company from disclosing
any information concerning or obtained from any other person or which restrict
any other person from disclosing any information concerning or obtained from
Company; (vi) indentures, credit agreements, security agreements, mortgages,
guarantees, promissory notes and other contracts relating to the borrowing of
money; and (vii) all other agreements, contracts or instruments entered into
16
<PAGE>
outside of the ordinary course of business or which are material to Company.
Except as specified in Section 4.1(k) of the Disclosure Schedule, all of the
Material Contracts are in full force and effect and are the legal, valid and
binding obligation of Company, enforceable against it in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity). Except
as specified in Section 4.1(k) of the Disclosure Schedule, Company is not in
breach or default in any material respect under any Material Contract nor, to
the knowledge of Company, is any other party to any Material Contract in breach
or default thereunder in any material respect.
(l) Litigation, etc. As of the date hereof, except as specified in
---------------
Section 4.1(l) of the Disclosure Schedule, (i) there is no suit, claim, action,
proceeding (at law or in equity) or investigation pending or, to the knowledge
of Company, threatened against Company before any court or other Governmental
Entity, and (ii) the Company is not subject to any outstanding order, writ,
judgement, injunction, decree or arbitration order or award that, in any such
case described in clauses (i) and (ii), has had or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on Company.
As of the date hereof, there are no suits, claims, actions, proceedings or
investigations pending or, to the knowledge of Company, threatened, seeking to
prevent, hinder, modify or challenge the transactions contemplated by this
Agreement.
(m) Compliance with Applicable Laws. All federal, state, local and
-------------------------------
foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Permits") necessary for each
of Company to own, lease or operate its properties and assets and to carry on
its business as now conducted have been obtained or made, and there has occurred
no default under any such Permit, except for the lack of Permits and for
defaults under Permits which lack or default could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company.
Except as disclosed in Section 4.1(m) of the Disclosure Schedule, Company are in
compliance with all applicable statutes, laws, ordinances, rules, orders and
regulations of any Governmental Entity.
(n) Environmental Laws. Except as specified in Section 4.1(n) of the
------------------
Disclosure Schedule and as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company: (A)
Company has not violated or is in violation of any Environmental Law; (B) none
of the Leased Real Property (including without limitation soils and surface and
ground waters) are
17
<PAGE>
contaminated with any Hazardous Substance in quantities which require
investigation or remediation under Environmental Laws; (C) Company is not liable
for any off-site contamination; (D) Company has no any liability or remediation
obligation under any Environmental Law; (E) no assets of Company are subject to
pending or threatened Liens under any Environmental Law; (F) Company have all
Permits required under any Environmental Law ("Environmental Permits"); and (G)
Company is in compliance with its respective Environmental Permits.
(o) Taxes. Except as specified in Section 4.1(o) of the Disclosure
-----
Schedule:
(i) Company has (A) timely filed all federal, state, local and
foreign Tax Returns (as hereinafter defined), required to be filed by or for it
in respect of any Taxes (as hereinafter defined) and all such Tax Returns are
true, correct and complete, (B) established reserves that are reflected in the
Financial Statements and that as so reflected are adequate for the payment of
all Taxes not yet due and payable with respect to the results of operations of
Company through the date hereof, and (C) timely withheld and paid over to the
proper taxing authorities all Taxes and other amounts required to be so withheld
and paid over. Company has timely paid all Taxes that are required to be paid.
(ii) (A) The Tax Returns of Company either have been examined and
settled with the appropriate Tax authority or closed by virtue of the expiration
of the applicable statute of limitations, (B) all examinations described in
clause (A) have been completed without the assertion of material deficiencies,
and (C) except for alleged deficiencies which have been finally and irrevocably
resolved, Company has not received formal or informal notification that any
deficiency for any Taxes, the amount of which could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company,
has been or will be proposed, asserted or assessed against Company by any
federal, state, local or foreign taxing authority or court with respect to any
period.
(iii) Company has not (A) executed or entered into with the IRS
or any other taxing authority any agreement or other document that continues in
force and effect beyond the Effective Time and that extends or has the effect of
extending the period for assessments or collection of any federal, state, local
or foreign Taxes, (B) executed or entered into with the IRS or any other taxing
authority any closing agreement or other similar agreement (nor has Company
received any ruling, technical advice memorandum or similar determination)
affecting the determination of Taxes required to be shown on any Tax Return not
yet filed, or
18
<PAGE>
(C) requested any extension of time to be granted to file after the Effective
Time any Tax Return required by applicable law to be filed by it.
(iv) Company has not made an election under Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of
a subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by Company. None of the assets of Company is required to be treated
as being owned by any other person pursuant to the "safe harbor" leasing
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954 as formerly
in effect.
(v) Company (i) is not a party to, is bound by or has any
obligation under any tax sharing agreement or similar agreement or arrangement
or (ii) has no liability for Taxes of any party (other than Company) under
Treasury Regulation Section 1.1502-6 or any similar provision of state, local or
foreign law, as a transferee or successor, by contract or otherwise.
(vi) Company has not agreed to make, nor is it required to make, any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise and, to the knowledge of Company, the IRS has not proposed
any such adjustment or change in accounting method.
(vii) Company is not, nor has been, a United States Real Property
Holding Corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(viii) Company has never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code.
(ix) Company is not a party to any agreement, contract, arrangement
or plan that has resulted, or would result, separately or in the aggregate, in
the payment of any "excess parachute payments" within the meaning of Section
280G of the Code.
(x) There are no Tax liens upon any assets or properties of
Company except for statutory liens not yet due.
(xi) No audits or other administrative proceedings or court
proceedings are presently pending or threatened with regard to any Taxes or Tax
Return of the Company (other than those being contested in good faith and for
which
19
<PAGE>
adequate reserves have been established) and no material issues have been raised
by any Tax authority in connection with any Tax or Tax Return.
For purposes of this Agreement, the term "Taxes" means all taxes,
charges, fees, levies or other assessments, including, without limitation, all
income, gross receipts, excise, property, sales, use, occupation, transfer,
license, ad valorem, gains, profits, gift, estimated, social security,
unemployment, disability, premium, recapture, credit, payroll, withholding,
severance, stamp, capital stock, franchise and other taxes or similar charges of
any kind imposed by any governmental entity, including any interest and
penalties on or additions to or in respect of a failure to comply with any
requirement relating to any Tax Return. For purposes of this Agreement, the
term "Tax Return" means any report, return or other information or document
required to be supplied to a Tax authority or jurisdiction in connection with
Taxes, including, without limitation, combined, unitary or consolidated returns
for any group of entities.
(p) Benefit Plans.
-------------
(i) Section 4.1(p) of the Disclosure Schedule sets forth a
true, correct and complete list of all the employee benefit plans (as that
phrase is defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) maintained or contributed to (or to which Company
has any obligation to contribute) for the benefit of any current or former
employee, officer or director of the Company ("Company ERISA Plans") and any
other benefit or compensation plan, program or arrangement maintained or
contributed to (or to which Company has any obligation to contribute) for the
benefit of any current or former employee, officer or director of the Company
(Company ERISA Plans and such other plans being referred to as "Company Plans").
Company has furnished or made available to Parent and its representatives a
true, correct and complete copy of every document pursuant to which each Company
Plan is established or operated (including any summary plan descriptions), a
written description of any Company Plan for which there is no written document,
and the three most recent annual reports, financial statements and actuarial
valuations with respect to each Company Plan.
(ii) Except as specified in Section 4.1(p) of the Disclosure
Schedule:
(A) none of the Company ERISA Plans is a
"multiemployer plan" within the meaning of ERISA;
20
<PAGE>
(B) none of the Company Plans promises or provides
retiree health benefits or retiree life insurance benefits to any
person;
(C) none of the Company Plans provides for payment
of a benefit, the increase of a benefit amount, the payment of a
contingent benefit or the acceleration of the payment or vesting of a
benefit by reason of the execution of this Agreement or the
consummation of the transactions contemplated by this Agreement;
(D) Company does not have an obligation to adopt,
and is not considering the adoption of, any new benefit or
compensation plan, program or arrangement or, except as required by
law, the amendment of an existing Company Plan;
(E) each Company ERISA Plan intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the IRS that it is so qualified and nothing
has occurred since the date of such letter that could reasonably be
expected to affect the qualified status of such Company ERISA Plan;
(F) each Company Plan has been operated in
accordance with its terms and the requirements of all applicable law,
and no prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Code has occurred with respect to any Company
ERISA Plan;
(G) Company has not incurred any direct or indirect
liability under ERISA or the Code in connection with the termination
of, withdrawal from or failure to fund, any Company ERISA Plan or
other retirement plan or arrangement, and no
21
<PAGE>
fact or event exists that could reasonably be expected to give rise to
any such liability;
(H) the aggregate accumulated benefit obligations
of each Company ERISA Plan subject to Title IV of ERISA (as of the
date of the most recent actuarial valuation prepared for such Company
ERISA Plan and based on the discount rate and other actuarial
assumptions used in such valuation) do not exceed the fair market
value of the assets of such Company ERISA Plan (as of the date of such
valuation);
(I) Company is not aware of any claims relating to
the Company Plans, other than routine claims for benefits; and
(J) None of the Company Plans provides for benefits
or other participation therein, and Company has received no claims or
demands for participation in or benefits under any Company Plan, by
any individual classified or treated by the Company as an independent
contractor;
provided, however, that the failure of the representations set forth in clauses
(v), (vi), (vii), (ix) and (x) to be true and correct shall not be deemed to be
a breach of any such representation unless such failures could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Company.
(q) Absence of Changes in Benefit Plans. Except as disclosed in
-----------------------------------
Section 4.1(q) of the Disclosure Schedule, since the date of the most recent
Audited Financial Statements, Company has not adopted or agreed to adopt any
collective bargaining agreement or any Company Plan.
(r) Labor Matters.
-------------
(i) Except as specified in Section 4.1(r)(i) of the Disclosure
Schedule, Company is not a party to any employment, labor or collective
bargaining agreement, and there are no employment, labor or collective
bargaining agreements which pertain to employees of Company. Company has
heretofore made available to Parent true, complete and correct copies of the
agreements set forth in
22
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Section 4.1(r)(i) of the Disclosure Schedule, together with all amendments,
modifications, supplements or side letters affecting the duties, rights and
obligations of any party thereunder.
(ii) No employees of Company are represented by any labor
organization and, to the knowledge of Company, no labor organization or group of
employees of Company has made a pending demand for recognition or certification.
There are no representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened in writing to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority and, to the knowledge of Company, there are no
organizing activities involving Company pending with any labor organization or
group of employees of Company.
(iii) Except as specified in Section 4.1(r)(iii) of the
Disclosure Schedule, there are no (A) unfair labor practice charges, grievances
or complaints pending or threatened in writing by or on behalf of any employee
or group of employees of Company, or (B) complaints, charges or claims against
Company pending, or threatened in writing to be brought or filed, with any
Governmental Entity or arbitrator based on, arising out of, in connection with,
or otherwise relating to the employment or termination of employment of any
individual by Company.
(s) Brokers. No broker, investment banker, financial advisor or
-------
other person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Company.
(t) Voting Requirements. The affirmative votes of each of the
-------------------
holders of a majority of the outstanding Shares entitled to vote at the
Stockholders Meeting with respect to the approval of this Agreement, taken as a
whole, and the affirmative votes of the holders of a majority of each Class of
Preferred Stock are the only votes of the holders of any class or series of
Company's capital stock or other securities required in connection with the
consummation by Company of the Merger and the other transactions contemplated
hereby to be consummated by Company. The Company is not subject to any Arizona
"fair price," "business combination," "control share acquisition" or similar
statute which would apply to the transactions contemplated by this Agreement.
(u) Certain Information. The Proxy Statement (as hereinafter
defined) will, at the time it is mailed to the stockholders of Company, at any
time that
23
<PAGE>
it is amended or supplemented and at the time of the Stockholders Meeting
referred to in Section 6.2, not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading; provided, however, that no representation or
warranty is made by Company with respect to statements made therein based on
information supplied by Parent or Merger Sub specifically for inclusion therein.
Section 4.2 Representations and Warranties of Parent and Merger Sub.
-------------------------------------------------------
Parent and Merger Sub represent and warrant to Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent
------------------------------------------
and Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated.
(b) Authority; Noncontravention. Parent and Merger Sub have the
---------------------------
requisite corporate power and authority to enter into this Agreement. The
execution and delivery of this Agreement by Parent and Merger Sub and the
consummation by Parent and Merger Sub of the transactions contemplated hereby
have been duly authorized by the Executive Committee of the Board of Directors
of Parent and the Board of Directors of Merger Sub and have been duly approved
by Parent as sole stockholder of Merger Sub, and no other corporate proceedings
on the part of Parent or Merger Sub are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by each of Parent and Merger Sub and, assuming this
Agreement constitutes a valid and binding obligation of Company, constitutes a
valid and binding obligation of each of Parent and Merger Sub, enforceable
against each such party in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity. The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions of this Agreement will not (i) conflict with any of the provisions of
the certificate of incorporation or bylaws of Parent or Merger Sub, in each case
as amended to the date of this Agreement, (ii) subject to the governmental
filings and other matters referred to in Section 4.2(c), conflict with, result
in a breach of or default (with or without notice or lapse of time, or both)
under, or give rise to a material obligation, a right of termination,
cancellation or acceleration of any obligation or loss of a material benefit
under, or require the consent of any person under, any indenture, or other
agreement, permit, concession, franchise, license or similar instrument or
undertaking to which Parent or Merger Sub
24
<PAGE>
is a party or by which Parent or Merger Sub or any of their respective assets is
bound or affected, or (iii) subject to the governmental filings and other
matters referred to in Section 4.2(c), contravene any law, rule or regulation,
or any order, writ, judgment, injunction, decree, determination or award
currently in effect, which, in the case of clauses (ii) and (iii) above, could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent.
(c) Consents and Approvals. No consent, approval or authorization of,
----------------------
or declaration or filing with, or notice to, any Governmental Entity which has
not been received or made is required by or with respect to Parent or Merger Sub
in connection with the execution and delivery of this Agreement by Parent or
Merger Sub or the consummation by Parent or Merger Sub, as the case may be, of
any of the transactions contemplated hereby, except for (i) the filing of the
Delaware Certificate of Merger with the Delaware Secretary of State and the
filing of the Arizona Certificate of Merger with the Arizona Corporation
Commissioner, and (iv) any other consents, approvals, authorizations, filings or
notices the failure to make or obtain which could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Parent.
(d) Financing. Parent and Merger Sub collectively have cash on hand
---------
or financing commitments from financially responsible third parties, or a
combination thereof, in an aggregate amount sufficient to enable Parent and
Merger Sub to (i) pay in full the Merger Consideration and all fees and expenses
payable by Parent and Merger Sub in connection with this Agreement and the
transactions contemplated thereby and (ii) satisfy and discharge such of
Company's existing indebtedness as, pursuant to its terms, will become due and
payable prior to its stated maturity as a result of the consummation of the
transactions contemplated hereby.
ARTICLE V
CONDUCT OF BUSINESS OF COMPANY
Section 5.1 Conduct of Business of Company. Except as expressly provided
------------------------------
for herein, during the period from the date of this Agreement to the Effective
Time, Company shall, act and carry on its business only in the ordinary course
of business consistent with past practice and, to the extent consistent
therewith, use reasonable efforts to preserve intact its current business
organizations, keep available the services of its current key officers and
employees and preserve the goodwill of those engaged in material business
relationships with Company, and to that end,
25
<PAGE>
without limiting the generality of the foregoing, Company shall not, without the
prior consent of Parent:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions (whether in cash, securities or other property) in respect
of, any of its outstanding capital stock, (B) split, combine or reclassify any
of its outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (C) purchase, redeem or otherwise acquire any
shares of outstanding capital stock or any rights, warrants or options to
acquire any such shares, except, in the case of this clause (C), for the
acquisition of Shares from holders of Options in full or partial payment of the
exercise price payable by such holder upon exercise of Options;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities convertible
into or exchangeable for, or any rights, warrants or options to acquire, any
such shares, voting securities or convertible or exchangeable securities, other
than upon the exercise of Options outstanding on the date of this Agreement;
(iii) amend its articles of incorporation, by-laws or other
organizational documents;
(iv) directly or indirectly acquire, make any investment in, or make
any capital contributions to, any person other than in the ordinary course of
business consistent with past practice;
(v) directly or indirectly sell, pledge or otherwise dispose of or
encumber any of its properties or assets that are material to its business,
except for sales, pledges or other dispositions or encumbrances in the ordinary
course of business consistent with past practice;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, other than indebtedness owing to or
guarantees of indebtedness owing to Company or (B) make any loans or advances to
any other person, other than routine advances to employees consistent with past
practice;
(vii) grant or agree to grant to any officer, employee or consultant
any increase in wages or bonus, severance, profit sharing, retirement, deferred
compensation, insurance or other compensation or benefits, or establish any
26
<PAGE>
new compensation or benefit plans or arrangements, or amend or agree to amend
any existing Company Plans, except as may be required under existing agreements
or by law;
(viii) accelerate the payment, right to payment or vesting of any
bonus, severance, profit sharing, retirement, deferred compensation, stock
option, insurance or other compensation or benefits;
(ix) enter into or amend any employment, consulting, severance or
similar agreement with any individual;
(x) adopt or enter into a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other material reorganization or any agreement relating to an Acquisition
Proposal (as hereinafter defined);
(xi) make any tax election or settle or compromise any Tax
liability of Company involving on an individual basis more than $10,000;
(xii) make any change in any method of accounting or accounting
practice or policy (including any method, practice or policy relating to Taxes),
except as required by any changes in generally accepted accounting principles or
otherwise required by law;
(xiii) enter into any agreement, understanding or commitment that
restrains, limits or impedes Company's ability to compete with or conduct any
business or line of business;
(xiv) except as specified in Section 5.1 of the Disclosure
Schedule, plan, announce, implement or effect any reduction in force, lay-off,
early retirement program, severance program or other program or effort
concerning the termination of employment of employees of Company;
(xv) accelerate the collection of any account receivable or delay
the payment of any account payable, or otherwise reduce the assets or increase
the liabilities of Company otherwise than in the ordinary course of business
consistent with past practice, in any such case with the purpose or effect of
using the resulting increase in the cash flow of Company to reduce the total
indebtedness of Company for money borrowed; or
27
<PAGE>
(xvi) authorize any of, or commit or agree to take any of,
the foregoing actions in respect of which it is restricted by the provisions of
this Section 5.1.
ARTICLE VI
ADDITIONAL COVENANTS
Section 6.1 Preparation of the Proxy Statement. As soon as practicable
----------------------------------
following the date hereof, Company shall prepare a proxy statement (the "Proxy
Statement"), with respect to the transactions contemplated hereby. Company,
Parent and Merger Sub shall cooperate with each other in the preparation of the
Proxy Statement. Company shall use all reasonable efforts to cause the Proxy
Statement to be mailed to the stockholders of Company at the earliest
practicable date.
Section 6.2 Stockholders Meeting. Company shall take all action
--------------------
necessary, in accordance with the ABCA and other applicable law and its articles
of incorporation and by-laws, to convene and hold a special meeting of the
stockholders of Company (the "Stockholders Meeting") as promptly as practicable
after the date hereof for the purpose of considering and voting upon this
Agreement and to solicit proxies pursuant to the Proxy Statement in connection
therewith. Subject to the provisions of Section 6.6(b), the Board of Directors
of Company shall recommend that the holders of Shares vote in favor of the
approval of this Agreement at the Stockholders Meeting and shall cause such
recommendation to be included in the Proxy Statement. At the Stockholders
Meeting, Parent and Merger Sub shall vote any Shares beneficially owned by them
(which may be voted by them pursuant to applicable law) in favor of the approval
of this Agreement.
Section 6.3 Access to Information; Confidentiality. Each of Parent and
--------------------------------------
Company shall afford to the other and its officers, employees, counsel,
financial advisors and other representatives access during the period prior to
the Effective Time to all its properties, books, contracts, commitments, Tax
Returns, personnel and records and, during such period, each of Parent and
Company shall furnish as promptly as practicable to the other such information
concerning its business, properties, financial condition, operations and
personnel as the other may from time to time request. Any such investigation by
Parent or Company shall not affect the representations or warranties contained
in this Agreement. Except as required by law, Parent and Company will hold, and
will cause its directors, officers, employees, accountants, counsel, financial
advisors and other representatives and affiliates to
28
<PAGE>
hold, any non-public information obtained from the other in confidence to the
extent required by, and in accordance with the provisions of, the letter
agreement, dated January 21, 1999, between Parent and Company with respect to
confidentiality and other matters.
Section 6.4 Reasonable Best Efforts. On the terms and subject to the
-----------------------
conditions set forth in this Agreement, each of the parties shall use its
reasonable best efforts to take, or cause to be taken, all actions, and do, or
cause to be done, and assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated hereby, including the satisfaction of the respective conditions set
forth in Article VII.
Section 6.5 Public Announcements. Parent and Merger Sub, on the one hand,
--------------------
and Company, on the other hand, shall consult with each other before issuing,
and provide each other the opportunity to review and comment upon, any press
release, filing with the Securities and Exchange Commission or other public
statements with respect to the transactions contemplated hereby, including the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
law, by court process or by obligations pursuant to any listing agreement with
any national securities exchange.
Section 6.6 No Solicitation; Acquisition Proposals.
--------------------------------------
(a) During the period from and including the date of this
Agreement to and including the Effective Time, Company shall not, and shall not
authorize or permit any of its affiliates, officers, directors, employees,
agents or representatives (including without limitation any investment banker,
financial advisor, attorney or accountant retained by Company), to, directly or
indirectly, initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries, any expression of interest or the making of any proposal that
constitutes, or may reasonably be expected to lead to, an Acquisition Proposal,
or enter into or maintain or continue discussions or negotiate with any person
in furtherance of such inquiries or to obtain an Acquisition Proposal or agree
to or endorse any Acquisition Proposal; provided, however, that nothing in this
Agreement shall prohibit the Board of Directors of Company, prior to the time at
which this Agreement shall have been approved by Company's stockholders, from
furnishing information to, or entering into, maintaining or continuing
discussions or negotiations with, any person that makes an unsolicited, bona
fide written Acquisition Proposal after the date hereof if, and to the extent
that, the Board of Directors of
29
<PAGE>
Company, after consultation with and based upon the advice of independent legal
counsel, determines in good faith that (i) such Acquisition Proposal would be
more favorable to Company's stockholders than the Merger, and (ii) the failure
to take such action would result in a breach by the Board of Directors of
Company of its fiduciary duties to Company's stockholders under applicable law,
and, prior to furnishing any non-public information to such person, Company
receives from such person an executed confidentiality agreement with provisions
no less favorable to Company than the letter agreement relating to the
furnishing of confidential information of Company to Parent referred to in the
last sentence of Section 6.3. Company shall promptly (and, in any event within
24 hours) notify Parent after receipt of any Acquisition Proposal or any request
for information relating to Company for access to the properties, books or
records of Company by any person who has informed Company that such person is
considering making, or has made, an Acquisition Proposal (which notice shall
identify the person making, or considering making, such Acquisition Proposal and
shall set forth the material terms of any Acquisition Proposal received), and
Company shall keep Parent informed in reasonable detail of the terms, status and
other pertinent details of any such Acquisition Proposal.
(b) During the period from and including the date of this
Agreement to and including the Effective Time, neither the Board of Directors of
Company nor any committee thereof shall withdraw or modify, or propose publicly
to withdraw or modify, in a manner adverse to Parent or Merger Sub, the approval
of this Agreement or the transactions contemplated hereby or the recommendation
referred to in the penultimate sentence of Section 6.2; provided, however, that
nothing contained in this Agreement will prohibit the Board of Directors of
Company from withdrawing or modifying the recommendation referred to in the
penultimate sentence of Section 6.2 following the receipt by Company after the
date hereof, under circumstances not involving any breach of the provisions of
Section 6.6(a), of an unsolicited Acquisition Proposal if, and to the extent
that, the Board of Directors of Company, after consultation with and based upon
the advice of independent legal counsel, determines in good faith that (i) the
transactions contemplated by such Acquisition Proposal would be more favorable
to Company's stockholders than the transactions contemplated hereby, and (ii)
the failure to take such action would result in a breach by the Board of
Directors of Company of its fiduciary duties to Company's stockholders under
applicable law.
(c) Nothing in this Section 6.6, and no action taken by the
Board of Directors of the Company pursuant to this Section 6.6, will (i) have
any effect on Company's obligations under the first sentence of Section 6.2,
which obligations shall be absolute and unconditional, (ii) permit Company to
terminate this Agreement
30
<PAGE>
except in accordance with the provisions of Section 8.1, (iii) permit Company to
enter into any agreement providing for any transaction contemplated by an
Acquisition Proposal for as long as this Agreement remains in effect, or (iv)
affect in any manner any other obligation of Company under this Agreement.
(d) For purposes of this Agreement, "Acquisition Proposal" means
an inquiry, offer, proposal or other indication of interest regarding any of the
following (other than the transactions contemplated by this Agreement with
Parent or Merger Sub) involving Company: (i) any merger, consolidation, share
exchange, recapitalization, business combination or other similar transaction;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of all or substantially all the assets of Company, in a single transaction or
series of related transactions; (iii) any offer to purchase 20% percent or more
of the outstanding shares of capital stock of Company; or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
Section 6.7 Consents, Approvals and Filings. Upon the terms and subject
-------------------------------
to the conditions hereof, each of the parties hereto shall use its reasonable
best efforts to take, or cause to be taken, all appropriate action, and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the Merger and the other
transactions contemplated hereby, including without limitation using its
reasonable best efforts to obtain all licenses, permits, consents, approvals,
authorizations, qualifications and orders of Governmental Entities and parties
to contracts with Company as are necessary for the consummation of the Merger
and the other transactions contemplated hereby and to fulfill the conditions to
the Merger; provided, however, that in no event shall Parent or any of its
Subsidiaries be required to agree or commit to divest, hold separate, offer for
sale, abandon, limit its operation of or take similar action with respect to any
assets (tangible or intangible) or any business interest of it or any of its
Subsidiaries (including without limitation the Surviving Corporation after
consummation of the Merger) in connection with or as a condition to receiving
the consent or approval of any Governmental Entity. In case at any time after
the Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement shall use their reasonable best efforts to take all such action.
Section 6.8 Board Action Relating to Stock Option Plan. As soon as
------------------------------------------
practicable following the date of this Agreement, the Board of Directors of
Company (or, if appropriate, any committee administering the Stock Option Plan)
shall adopt such resolutions and take such actions as may be required to cause
each outstanding
31
<PAGE>
Option to be automatically converted, at the Effective Time, into the right to
receive the Option Cash Amount for such Option in accordance with Section 2.2
and shall make such other changes to the Stock Option Plan as it deems
appropriate to give effect to the Merger (subject to the approval of Parent,
which shall not be unreasonably withheld).
Section 6.9 Employee Benefit Matters.
------------------------
(a) From and after the Effective Time, Parent shall, and shall
cause its Subsidiaries (including the Surviving Corporation) to, honor and
provide for payment of all accrued obligations and benefits under all Company
Plans and employment or severance agreements between Company and persons who are
or had been employees of Company at or prior to the Effective Time ("Covered
Employees"), all in accordance with their respective terms.
(b) Notwithstanding anything in this Agreement to the contrary,
from and after the Effective Time, the Surviving Corporation will have sole
discretion over the hiring, promotion, retention, firing and other terms and
conditions of the employment of employees of the Surviving Corporation. Except
as otherwise provided in this Section 6.9, nothing herein shall prevent Parent
or the Surviving Corporation from amending or terminating any Company Plan in
accordance with its terms.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligation of each party to effect the Merger is subject to the
satisfaction or written waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved
--------------------
by the affirmative vote of the holders of the requisite number of shares of
capital stock of Company in the manner required pursuant to Company's articles
of incorporation and by-laws, the ABCA and other applicable law.
(b) No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the
32
<PAGE>
Merger shall be in effect; provided, however, that the party invoking this
condition shall have complied with its obligations under Section 6.7.
Section 7.2 Conditions to Obligations of Parent and Merger Sub. The
--------------------------------------------------
obligation of each of Parent and Merger Sub to effect the Merger is further
subject to satisfaction or written waiver on or prior to the Closing Date of the
following conditions:
(a) Representations and Warranties and Covenants. The
--------------------------------------------
representations and warranties of Company contained in this Agreement which are
not qualified by "materiality" or "Material Adverse Effect" shall be true and
accurate in all material respects, and the representations and warranties that
are qualified by "materiality" or "Material Adverse Effect" shall be true and
accurate in all respects, in each case when made and as of the Closing Date
(except for those representations and warranties that address matters only as of
a particular date or only with respect to a specific period of time which need
only be true and accurate as of such date or with respect to such period) and
Company shall have performed or complied with any obligation, agreement or
covenant required by the Agreement to be performed or complied with by it prior
to the Closing, and Parent and Merger Sub shall have received a certificate to
such effect dated the Closing Date and executed by a duly authorized officer of
Company.
(b) No Material Adverse Change. Since the date of this Agreement,
--------------------------
Company shall not have experienced any Material Adverse Change.
(c) Certain Litigation. There shall not be pending or threatened
------------------
any suit, action or proceeding seeking to restrain or prohibit the Merger or
seeking to obtain from Parent or Company or any of their respective affiliates
in connection with the Merger any material damages, or seeking any other relief
that, following the Merger, would materially limit or restrict the ability of
Parent and its Subsidiaries to own and conduct both the assets and businesses
owned and conducted by Parent and its Subsidiaries prior to the Merger and the
assets and businesses owned and conducted by Company prior to the Merger.
(d) Consents. All consents, authorizations, orders and approvals
--------
of (or filings or registrations with) any Governmental Entity or any other
person required to be obtained or made prior to the Effective Time in connection
with the execution, delivery and performance of this Agreement shall have been
obtained or made, except for the filing of the certificates of merger pursuant
to Section 1.3 and
33
<PAGE>
except where the failure to have obtained or made such consents, authorizations,
orders, approvals, filings or registrations could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on the
Surviving Corporation.
Section 7.3 Conditions to Obligations of Company. The obligation of
------------------------------------
Company to effect the Merger is further subject to satisfaction or written
waiver on or prior to the Closing Date of the following conditions:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of each of Parent and Merger Sub contained in this Agreement
which are not qualified by "materiality" or "Material Adverse Effect" shall be
true and accurate in all material respects, and the representations and
warranties that are qualified by "materiality" or "Material Adverse Effect"
shall be true and accurate in all respects, in each case when made and as of the
Closing Date (except for those representations and warranties that address
matters only as of a particular date or only with respect to a specific period
of time which need only be true and accurate as of such date or with respect to
such period) and Parent and Merger Sub shall have performed or complied with any
obligation, agreement or covenant required by the Agreement to be performed or
complied with by either of them prior to the Closing, and Company shall have
received a certificate to such effect dated the Closing Date and executed by a
duly authorized officer of Parent and Merger Sub.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time, notwithstanding approval thereof by the stockholders of Company,
in any one of the following circumstances:
(a) By mutual written consent duly authorized by the Boards of
Directors of Parent and Company.
(b) By Parent or Company, if the Effective Time shall not have
occurred on or before August 31, 1999, otherwise than as a result of any
material breach of any provision of this Agreement by the party seeking to
effect such termination.
34
<PAGE>
(c) By Parent or Company, if any federal or state court of
competent jurisdiction or other Governmental Entity shall have issued an order,
decree or ruling, or taken any other action permanently restraining, enjoining
or otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and non-appealable, provided that neither party
may terminate this Agreement pursuant to this Section 8.1(a)(iii) if it has not
complied with its obligations under Section 6.7.
(d) By Parent, if the Stockholders Meeting shall have been held
and this Agreement shall not have been approved by the affirmative vote of the
holders of the requisite number of shares of capital stock of Company.
(e) By Parent, if (A) the Board of Directors of Company or any
committee thereof shall have (1) withdrawn or modified, in a manner adverse to
Parent or Merger Sub, its approval of this Agreement or the transactions
contemplated hereby or the recommendation referred to in the penultimate
sentence of Section 6.2, (2) approved, endorsed or recommended to its
stockholders an Acquisition Proposal, or (3) resolved to do any of the foregoing
or (B) if the Stockholders Meeting shall not have been held by August 15, 1999
as a result of a breach by Company of its obligations under Section 6.2.
(f) By Parent or Company, if (A) the other party shall have failed
to comply in any material respect with any of the material covenants and
agreements contained in this Agreement to be complied with or performed by such
party at or prior to such date of termination, and such failure continues for 20
business days after the actual receipt by such party of a written notice from
the other party setting forth in detail the nature of such failure, or (B) the
representations and warranties of the other party contained in this Agreement,
which representations and warranties shall be deemed for purposes of this
Section 8.1(a)(vi) not to include any qualification or limitation with respect
to materiality (whether by reference to a "Material Adverse Effect" or
otherwise), shall have been untrue in any respect on the date when made (or in
the case of any representations and warranties that are made as of a different
date, as of such different date) and the matters in respect of which such
representations and warranties shall have been untrue, in the aggregate, have
had or could reasonably be expected to have a Material Adverse Effect on such
other party.
Section 8.2 Effect of Termination. In the event of the termination and
---------------------
abandonment of this Agreement pursuant to Section 8.1(a) hereof, this Agreement
(except for the provisions of Section 4.1(s), the last sentence of Section 6.3,
this
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Section 8.2 and Article IX) shall forthwith become void and cease to have
any force or effect, without any liability on the part of any party hereto or
any of its affiliates; provided, however, that nothing in this Section 8.2 shall
relieve any party to this Agreement of liability for any breach of this
Agreement.
Section 8.3 Amendment. Subject to any applicable provisions of the DGCL
---------
and the ABCA, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement by written agreement executed and delivered by
duly authorized officers of the respective parties; provided, however, that
after approval of this Agreement at the Stockholders Meeting, no amendment shall
be made which would reduce the amount or change the type of consideration into
which each Share shall be converted upon consummation of the Merger. This
Agreement may not be modified or amended except by written agreement executed
and delivered by duly authorized officers of each of the respective parties.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time,
-----------------
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c)
subject to Section 8.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in a written instrument executed and delivered by a duly authorized
officer on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
Section 8.5 Procedure for Termination, Amendment, Extension or Waiver. A
---------------------------------------------------------
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of Parent, Merger Sub
or Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
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ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
Section 9.2 Fees and Expenses. Whether or not the Merger shall be
-----------------
consummated, each party hereto shall pay its own expenses incident to preparing
for, entering into and carrying out this Agreement and the consummation of the
transactions contemplated hereby, provided that the expenses incurred by the
Company shall not exceed $75,000.
Section 9.3 Definitions. For purposes of this Agreement:
-----------
(a) an "affiliate" of any person means another person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person;
(b) "business day" means any day other than Saturday, Sunday or
any other day on which banks in the City of New York are required or permitted
to close;
(c) "Disclosure Schedule" means the disclosure schedule delivered
by Company to Parent and Merger Sub simultaneously with the execution of this
Agreement;
(d) "Environmental Laws" means any federal, state or local law
relating to: (i) releases or threatened releases of Hazardous Substances or
materials containing Hazardous Substances; (ii) the manufacture, handling,
transport, use, treatment, storage or disposal of Hazardous Substances or
materials containing Hazardous Substances; or (iii) otherwise relating to
pollution of the environment or the protection of human health;
(e) "Hazardous Substances" means: (i) those substances defined in
or regulated under the following federal statutes and their state counterparts,
as each
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<PAGE>
may be amended from time to time, and all regulations thereunder: the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act,
the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Clean Air Act; (ii)
petroleum and petroleum products including crude oil and any fractions thereof;
(iii) natural gas, synthetic gas and any mixtures thereof; (iv) radon; (v) any
other contaminant; and (vi) any substance with respect to which any Governmental
Entity requires environmental investigation, monitoring, reporting or
remediation;
(f) "knowledge" means the actual knowledge of any executive officer
of Company or Parent, as the case may be, after reasonable inquiry under the
circumstances;
(g) "Liens" means, collectively, all pledges, claims, liens,
charges, mortgages, conditional sale or title retention agreements,
hypothecations, collateral assignments, security interests, easements and other
encumbrances of any kind or nature whatsoever;
(h) "Material Adverse Change" means any one or more changes, events
or occurrences which have had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company;
(i) a "Material Adverse Effect" with respect to any person means a
material adverse effect on (i) the ability of such person to perform its
obligations under this Agreement or to consummate the transactions contemplated
hereby or (ii) the condition (financial or otherwise), assets, liabilities
(actual or contingent), results of operations or business of such person and its
Subsidiaries taken as a whole;
(j) a "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
(k) "Stockholders" means Steve Gubin, Gary Legner, Jim Parker, the
Riley Family Trust, Jim Pitre, Kent Mueller, MicroAge, Alan Hald, Jack Wertheim,
Jack Riley, Karl Forster, Ken Kark and Tom Schlarman.
(l) a "Subsidiary" of any person means any other person of which
(i) the first mentioned person or any Subsidiary thereof is a general partner,
(ii) voting power to elect a majority of the board of directors or others
performing similar functions with respect to such other person is held by the
first mentioned person
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and/or by any one or more of its Subsidiaries, or (iii) at least 50% of the
equity interests of such other person is, directly or indirectly, owned or
controlled by such first mentioned person and/or by any one or more of its
Subsidiaries.
Section 9.4 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(i) if to Parent or to Merger Sub, to
Sterling Software, Inc.
300 Crescent Court
Suite 1200
Dallas, Texas 75201
Attention: Don J. McDermett, Jr., Esq.
Telecopy: (214) 981-1265
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom, LLP
919 Third Avenue
New York, New York 10022
Attention: Richard J. Grossman, Esq.
Telecopy: (212) 735-2572
(ii) if to Company, to
CoreData, Inc.
4114 East Wood Street, Suite II
Phoenix, AZ 85040
Attention: Jim Parker
Telecopy: (602) 437-5066
39
<PAGE>
with a copy (which shall not constitute notice) to:
Bryan Cave LLP
Two North Central Avenue
Suite 2200
Phoenix, Arizona 85004-4406
Attention: Frank M. Placenti, Esq.
Telecopy: (602) 364-7070
Section 9.5 Interpretation. When a reference is made in this Agreement to
--------------
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for convenience of reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
Section 9.6 Entire Agreement; Third-Party Beneficiaries. This Agreement
-------------------------------------------
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement (except for the letter agreement referenced in
the last sentence of Section 6.3). This Agreement is not intended to confer
upon any person (including without limitation any employees or former employees
of Company), other than the parties hereto, any rights or remedies.
Section 9.7 Disclosure Schedules.
--------------------
(a) On or prior to the date hereof, Company shall have delivered
to Parent and Merger Sub the Disclosure Schedule setting forth, among other
things, items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a provision of this
Agreement or as an exception to one or more representations or warranties
contained in Article IV or to one or more covenants contained in Article VI,
provided, that the mere inclusion of an item on the Disclosure Schedule as an
exception to a representation or warranty shall not be deemed an admission by a
party that such item represents a material exception or fact, event or
circumstance or that such item is reasonably likely to cause a Material Adverse
Change. Each section of the Disclosure Schedule shall contain (including by
cross-reference) all disclosures required or applicable to such section,
regardless of whether such information is also disclosed on another section of
the Disclosure Schedule.
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<PAGE>
(b) From time to time prior to the Closing Date, Company shall
promptly amend, update or supplement the Disclosure Schedule. If the disclosure
in the updated Disclosure Schedule represents a change from the matters
previously disclosed therein which reflects the occurrence or result of a
Material Adverse Change, Parent and Merger Sub shall have the right to terminate
this Agreement by delivering, within five (5) business days after receipt of
such updated or supplemented Disclosure Schedule, written notice of its election
to terminate. Upon a failure to effectively exercise a termination right as
provided in the immediately preceding sentence, then Parent and Merger Sub shall
be deemed to have waived such right to object to such updated or supplemented
Disclosure Schedule, which thereafter shall be deemed to have cured any
misrepresentation or breach of warranty that otherwise might have existed by
reason of any development or change disclosed in such amended, updated or
supplemented Disclosure Schedule.
Section 9.8 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
Section 9.9 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations under this Agreement may be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties, and any such assignment without
such prior written consent shall be null and void, except that Parent and/or
Merger Sub may assign this Agreement to any direct or indirect wholly owned
Subsidiary of Parent without the prior consent of Company; provided that Parent
and/or Merger Sub, as the case may be, shall remain liable for all of its
obligations under this Agreement. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 9.10 Enforcement. Irreparable damage would occur in the event that
-----------
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. Accordingly, the parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this Agreement
in any appropriate state court in the State of Arizona or federal court in
Maricopa County in the State of Arizona, this being in addition to any other
remedy to which they are entitled at law or in equity. Each of the parties
hereto (i) shall submit itself to the personal jurisdiction of
41
<PAGE>
any appropriate state court in the State of Arizona or federal court in Maricopa
County in the State of Arizona in the event any dispute arises out of this
Agreement or any of the transactions contemplated hereby, (ii) shall not attempt
to deny or defeat such personal jurisdiction by motion or other request for
leave from any such court, and (iii) shall not bring any action relating to this
Agreement or any of the transactions contemplated hereby in any court other than
any appropriate state court in State of Arizona or federal court in Maricopa
County in State of Arizona.
Section 9.11 Severability. Whenever possible, each provision or portion
------------
of any provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
Section 9.12 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same instrument and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
---------------------------
Don J. McDermett, Jr.
Senior Vice President, General Counsel and Secretary
STERLING SOFTWARE (ARIZONA), INC.
By: /s/ Don J. McDermett, Jr.
---------------------------
Don J. McDermett, Jr.
Vice President and Secretary
COREDATA, INC.
By: /s/ Jim Parker
----------------------------------
Jim Parker
President
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<PAGE>
Exhibit 3.1
-----------
RESTATED CERTIFICATE OF INCORPORATION
OF
STERLING SOFTWARE, INC.
Sterling Software, Inc., a Delaware corporation (the "corporation"), does
hereby certify that this Restated Certificate of Incorporation was duly adopted
in accordance with Section 245 of the General Corporation Law of the State of
Delaware; and the corporation's original Certificate of Incorporation was filed
with the Delaware Secretary of State on February 14, 1983. This Restated
Certificate of Incorporation restates and integrates, but does not further amend
the provisions of the Certificate of Incorporation of this corporation as
heretofore amended or supplemented, and there is no discrepancy between those
provisions and the provisions of this Restated Certificate of Incorporation
which is hereby restated to read in its entirety as follows:
FIRST. The name of the corporation is Sterling Software, Inc.
-----
SECOND. The address of the corporation's registered office in the State of
------
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19805. The name of the Corporation's registered agent at such address is The
Corporation Service Company.
THIRD. The nature of the business or purposes to be conducted or promoted
-----
by the corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
FOURTH. Section 1. Authorized Capital Stock. The total number of shares
------ ------------------------
of stock of all classes which the corporation shall have authority to issue is
Two Hundred Sixty Million (260,000,000), consisting of Two Hundred Fifty Million
(250,000,000) shares of Common Stock having a par value of $.10 per share, and
Ten Million (10,000,000) shares of Preferred Stock having a par value of $.10
per share.
Section 2. Common Stock. Shares of Common Stock and, subject to the
------------
provisions of this Article Fourth, shares of any series of Preferred Stock may
be issued from time to time as the corporation's board of directors (the "Board
of Directors") determines and on such terms and for such consideration as may be
fixed by the Board of Directors.
Subject to the provisions of law and the preferences of the Preferred
Stock, dividends may be paid on the Common Stock at such time and in such
amounts as the Board of Directors may deem advisable.
The authorized amount of shares of Common Stock and of Preferred Stock may,
without a class or series vote, be increased or decreased from time to time by
the affirmative vote of the holders of a majority of the stock of the
corporation entitled to a vote thereon.
Except as otherwise specifically required by law or as specifically
provided in any resolution or resolutions of the Board of Directors providing
for the issue of any particular
1
<PAGE>
series of Preferred Stock, the exclusive voting power of the corporation shall
be vested in the Common Stock of the corporation. Each share of Common Stock
shall entitle the holder thereof to one vote at all meetings of the stockholders
of the corporation.
Section 3. Preferred Stock. The Preferred Stock may be issued in one or more
---------------
series as may be determined from time to time by the Board of Directors. The
Preferred Stock of each such series shall have such voting powers, full or
limited, or no voting powers, and such designations, preferences, and relative,
participating, optional, redemption, conversion, exchange or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed by the Board of Directors in the resolution or resolutions
providing for the issue of such series of Preferred Stock pursuant to the
authority to do so which is hereby expressly vested in the Board of Directors.
Except as otherwise provided in any resolution or resolutions of the Board of
Directors providing for the issue of any particular series of Preferred Stock,
the number of shares of stock of any such series so set forth in such resolution
or resolutions may be increased or decreased (but not below the number of shares
of such series then outstanding) by a resolution or resolutions likewise adopted
by the Board of Directors. No approval by class or series vote or otherwise, of
the holders of the Preferred Stock or any series thereof will be required for
the issue by the Board of Directors of any other series of Preferred Stock,
whether or not in any respect senior to or on a parity with any such outstanding
series, provided, however, that the Board of Directors may condition the issue
of such additional series of Preferred Stock on the approval, by such proportion
as the Board of Directors may specify, of any such outstanding series.
Except as otherwise provided in any resolution or resolutions of the Board of
Directors providing for the issue of any particular series of Preferred Stock,
Preferred Stock redeemed or otherwise acquired by the corporation shall assume
the status of authorized but unissued Preferred Stock and shall be unclassified
as to series and may thereafter, subject to the provisions of this Article
Fourth and to any restrictions contained in any resolution or resolutions of the
Board of Directors providing for the issue of any such series of Preferred
Stock, be reissued in the same manner as other authorized but unissued Preferred
Stock.
Section 3.1 Series A Junior Participating Preferred Stock. Pursuant to
---------------------------------------------
authority vested in the Board of Directors by its Certificate of Incorporation,
as theretofore amended, and pursuant to the provisions of Section 151 of the
Delaware General Corporation Law, the corporation's board of directors on
December 26, 1996 created a series of Preferred Stock designated Series A Junior
Participating Preferred Stock and a Certificate of Designations of the Series A
Junior Participating Preferred Stock was filed with the Delaware Secretary of
State. Pursuant to authority vested in the Board of Directors by its
Certificate of Incorporation, as theretofore amended, and the Delaware General
Corporation Law, the Board of Directors on March 11, 1998 adopted a resolution
providing for the amendment and restatement of the Certificate of Designations
of the Series A Junior Participating Preferred Stock solely to effect an
increase in the number of shares constituting such Series A Junior Participating
Preferred Stock and an Amended Certificate of Designations of Series A Junior
Participating Preferred Stock (the
2
<PAGE>
"Amended Certificate of Designations") was filed with the Delaware Secretary of
State on March 11, 1998. The designation and amount thereof and the voting
powers, preferences and relative, participating, optional and other special
rights of the shares of Series A Junior Participating Preferred Stock, and the
qualifications, limitations or restrictions thereof, shall continue in all
respects as set forth in the Amended Certificate of Designations, but for
convenience of reference only are set forth in full below:
(a) Designation and Amount. The shares of such series will be designated
as Series A Junior Participating Preferred Stock (the "Series A Preferred")
and the number of shares constituting the Series A Preferred is 1,250,000.
Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, however, that no decrease will reduce the
-------- -------
number of shares of Series A Preferred to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance
upon the exercise of outstanding options, rights or warrants or upon the
conversion of any outstanding securities issued by the corporation
convertible into shares of Series A Preferred.
(b) Dividends and Distribution.
(1) Subject to the rights of the holders of any shares of any series
of Preferred Stock ranking prior to the shares of Series A Preferred with
respect to dividends, the holders of shares of Series A Preferred, in
preference to the holders of Common Stock of the corporation, and of any
other junior stock, will be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
dividends payable in cash on such dates as are from time to time
established for the payment of cash dividends on the Common Stock (each
such date being referred to herein as a "Dividend Payment Date"),
commencing on the first Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred (the "First Dividend
Payment Date"), in an amount per share (rounded to the nearest cent) equal
to the greater of (i) $1.00 or (ii) subject to the provision for adjustment
hereinafter set forth, one hundred times the aggregate per share amount of
all cash dividends, and one hundred times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Dividend
Payment Date or, with respect to the First Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred.
In the event that the corporation at any time after the filing of the
Amended Certificate of Designations with the Delaware Secretary of State
(i) declares a dividend on the outstanding shares of Common Stock payable
in shares of Common Stock, (ii) subdivides the outstanding shares of Common
Stock, (iii) combines the outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any
such reclassification in connection with a consolidation or merger in which
the corporation is the continuing or surviving corporation), then, in each
such case and regardless of
3
<PAGE>
whether any shares of Series A Preferred are then issued or outstanding,
the amount to which holders of shares of Series A Preferred would otherwise
be entitled immediately prior to such event under clause (ii) of the
preceding sentence will be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(2) Dividends will accrue on outstanding shares of Series A Preferred
from the Dividend Payment Date next preceding the date of issue of such
shares, unless (i) the date of issue of such shares is prior to the record
date for the First Dividend Payment Date, in which case dividends on such
shares will accrue from the date of the first issuance of a share of Series
A Preferred or (ii) the date of issue is a Dividend Payment Date or is a
date after the record date for the determination of holders of shares of
Series A Preferred entitled to receive a dividend and before such Dividend
Payment Date, in either of which events such dividends will accrue from
such Dividend Payment Date. Accrued but unpaid dividends will cumulate from
the applicable Dividend Payment Date but will not bear interest. Dividends
paid on the shares of Series A Preferred in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
will be allocated pro rata on a share-by-share basis among all such shares
at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred entitled to
receive payment of a dividend or distribution declared thereon, which
record date will be not more than 60 calendar days prior to the date fixed
for the payment thereof.
(c) Voting Rights. The holders of shares of Series A Preferred will have
the following voting rights:
(1) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred will entitle the holder thereof to one
hundred votes on all matters submitted to a vote of the stockholders of the
corporation. In the event the corporation at any time after the filing of
the Amended Certificate of Designations with the Delaware Secretary of
State (i) declares a dividend on the outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivides the outstanding shares
of Common Stock, (iii) combines the outstanding shares of Common Stock into
a smaller number of shares, or (iv) issues any shares of its capital stock
in a reclassification of the outstanding shares of Common Stock (including
any such reclassification in connection with a consolidation or merger in
which the corporation is the continuing or surviving corporation), then, in
each such case and regardless of whether any shares of Series A Preferred
are then issued or outstanding, the number of votes per share to which
holders of shares of Series A Preferred would otherwise be entitled
immediately prior to such event will be adjusted by multiplying such number
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is
4
<PAGE>
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(2) Except as otherwise provided herein, in any other Preferred Stock
Designation creating a series of Preferred Stock or any similar stock, or
by law, the holders of shares of Series A Preferred and the holders of
shares of Common Stock and any other capital stock of the corporation
having general voting rights will vote together as one class on all matters
submitted to a vote of stockholders of the corporation.
(3) Except as set forth herein, or as otherwise provided by law,
holders of shares of Series A Preferred will have no voting rights.
(d) Certain Restrictions.
(1) Whenever dividends or other distributions payable on the Series A
Preferred are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Preferred outstanding have been paid in full, the corporation will not:
(i) Declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the shares of Series A
Preferred;
(ii) Declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution, or winding up) with the shares of
Series A Preferred, except dividends paid ratably on the shares of
Series A Preferred and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) Redeem, purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the shares of Series A
Preferred; provided, however, that the corporation may at any time
-------- -------
redeem, purchase or otherwise acquire shares of any such junior stock
solely in exchange for shares of any stock of the corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the shares of Series A Preferred; or
(iv) Redeem, purchase or otherwise acquire for consideration
any shares of Series A Preferred, or any shares of stock ranking on a
parity with the shares of Series A Preferred, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the
5
<PAGE>
Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, may determine in good faith will result
in fair and equitable treatment among the respective series or
classes.
(2) The corporation will not permit any majority-owned subsidiary
of the corporation to purchase or otherwise acquire for consideration any
shares of stock of the corporation unless the corporation could, under
paragraph (1) of this subsection (d), purchase or otherwise acquire such
shares at such time and in such manner.
(e) Reacquired Shares. Any shares of Series A Preferred purchased or
otherwise acquired by the corporation in any manner whatsoever will be
retired and canceled promptly after the acquisition thereof. All such
shares will upon their cancellation become authorized but unissued shares
of Preferred Stock and may be reissued as part of a new series of Preferred
Stock subject to the conditions and restrictions on issuance set forth
herein, or in any other Preferred Stock Designation creating a series of
Preferred Stock or any similar stock or as otherwise required by law.
(f) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the corporation, no distribution will be made
(1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution, or winding up) to the shares of
Series A Preferred unless, prior thereto, the holders of shares of Series A
Preferred have received $100 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment; provided, however, that the holders of shares of
-------- -------
Series A Preferred will be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal
to one hundred times the aggregate amount to be distributed per share to
holders of shares of Common Stock or (2) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation,
dissolution, or winding up) with the shares of Series A Preferred, except
distributions made ratably on the shares of Series A Preferred and all such
parity stock in proportion to the total amounts to which the holders of all
such shares are entitled upon such liquidation, dissolution, or winding up.
In the event the corporation at any time after the filing of the Amended
Certificate of Designations with the Delaware Secretary of State (i)
declares a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivides the outstanding shares of Common
Stock, (iii) combines the outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any
such reclassification in connection with a consolidation or merger in which
the corporation is the continuing or surviving corporation), then, in each
such case and regardless of whether any shares of Series A Preferred are
then issued or outstanding, the aggregate amount to which each holder of
shares of Series A
6
<PAGE>
Preferred would otherwise be entitled immediately prior to such event under
the proviso in clause (1) of the preceding sentence will be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(g) Consolidation, Merger, Etc. In the event that the corporation enters
into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then, in each such case, each
share of Series A Preferred will at the same time be similarly exchanged
for or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to one hundred times the aggregate
amount of stock, securities, cash and/or any other property (payable in
kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the corporation at any time
after the filing of the Amended Certificate of Designations with the
Delaware Secretary of State (1) declares a dividend on the outstanding
shares of Common Stock payable in shares of Common Stock, (2) subdivides
the outstanding shares of Common Stock, (3) combines the outstanding shares
of Common Stock in a smaller number of shares, or (4) issues any shares of
its capital stock in a reclassification of the outstanding shares of Common
Stock (including any such reclassification in connection with a
consolidation or merger in which the corporation is the continuing or
surviving corporation), then, in each such case and regardless of whether
any shares of Series A Preferred are then issued or outstanding, the amount
set forth in the preceding sentence with respect to the exchange or change
of shares of Series A Preferred will be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(h) Redemption. The shares of Series A Preferred are not redeemable.
(i) Rank. The shares of Series A Preferred rank, with respect to the
payment of dividends and the distribution of assets, junior to all other
series of the corporation's Preferred Stock.
(j) Amendment. Notwithstanding anything contained herein to the contrary
and in addition to any other vote required by applicable law, the
Certificate of Incorporation of the corporation may not be amended in any
manner that would materially alter or change the powers, preferences or
special rights of the Series A Preferred so as to affect them adversely
without the affirmative vote of the holders of at least 80% of the
outstanding shares of Series A Preferred, voting together as a single
series.
7
<PAGE>
FIFTH. In furtherance and not in limitation of the powers conferred by the
-----
laws of the State of Delaware, the Board of Directors is expressly authorized to
make, alter or repeal the Bylaws of the corporation.
SIXTH. All power of the corporation shall be exercised by or under the
-----
direction of the Board of Directors except as otherwise provided herein or
required by law.
For the management of the business and for the conduct of the affairs of the
corporation, and in further creation, definition, limitation and regulation of
the power of the corporation and of its directors and of its stockholders, it is
further provided:
Section 1. Election of Directors. Election of directors need not be by
-----------------------
written ballot unless the Bylaws of the corporation shall so provide.
Section 2. Number, Election and Term of Directors. Except as otherwise
---------------------------------------
fixed pursuant to the provisions of Article Fourth hereof relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of directors of the
corporation shall be fixed from time to time by or pursuant to the Bylaws. The
directors, other than those who may be elected by the holders of any class or
series of stock having preference over the Common Stock as to dividends or
upon liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the Bylaws, one
class to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1988, another class to hold office initially for a
term expiring at the annual meeting of stockholders to be held in 1989, and
another class to hold office initially for a term expiring at the annual
meeting of stockholders to be held in 1990, with members of each class to hold
office until their successors are elected and qualified. At each annual
meeting of the stockholders of the corporation, the successors to the class of
directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election.
Section 3. Stockholder Nomination of a Director. Advance notice of
------------------------------------
nominations for the election of directors, other than by the Board of
Directors or a Committee thereof, shall be given in the manner provided by the
Bylaws.
Section 4. Amendment, Repeal, etc. Notwithstanding anything contained
----------------------
in this Restated Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 75% of the voting power of all shares of the
corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend or adopt any
provision inconsistent with, or repeal, this Article Sixth or any provision
hereof.
8
<PAGE>
SEVENTH: The corporation reserves the right to amend, alter, change or
-------
repeal any provision contained in this Restated Certificate of Incorporation, to
the extent and in the manner now or hereafter prescribed by the laws of the
State of Delaware, and additional provisions authorized by such laws as are then
in force may be added hereto. All rights conferred upon the directors, officers
and stockholders of the corporation herein or in any amendment hereof are
granted subject to this reservation.
EIGHTH: To the fullest extent permitted by the Delaware General
------
Corporation Law as the same exists or may hereafter be amended, a director of
the corporation shall not be liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
NINTH: No action required to be taken, or which may be taken, at any
-----
annual or special meeting of stockholders of the corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
IN WITNESS WHEREOF, we have signed this Restated Certificate of
Incorporation this 4th day of November, 1999.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
--------------------------
Don J. McDermett, Jr.
Senior Vice President,
General Counsel and Secretary
ATTEST:
/s/ Mark H. Kleinman
- --------------------------
Mark H. Kleinman
Assistant Secretary and
Assistant General Counsel
9
<PAGE>
Exhibit 3.2
-----------
RESTATED
BYLAWS
OF
STERLING SOFTWARE, INC.
(Adopted and effective as of October 22, 1999)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - OFFICES.....................................................1
Section 1. Registered Office......................................1
Section 2. Other Offices..........................................1
ARTICLE II - STOCKHOLDERS...............................................1
Section 1. Meetings...............................................1
Section 2. Annual Meeting; Advance Notice for New Business........1
Section 3. List of Stockholders...................................2
Section 4. Special Meetings.......................................3
Section 5. Notice.................................................5
Section 6. Quorum.................................................5
Section 7. Voting.................................................5
Section 8. Proxy..................................................5
ARTICLE III - BOARD OF DIRECTORS........................................6
Section 1. Board of Directors.....................................6
Section 2. Number of Directors; Advance Notice for
Nomination of Directors...............................6
Section 3. Vacancies..............................................7
ARTICLE IV - MEETINGS OF THE BOARD......................................8
Section 1. Meetings...............................................8
Section 2. Annual Meeting.........................................8
Section 3. Regular Meetings.......................................8
Section 4. Special Meetings.......................................8
Section 5. Quorum.................................................8
Section 6. Executive Committee....................................9
Section 7. Other Committees.......................................9
Section 8. Action by Consent......................................9
Section 9. Compensation of Directors..............................9
ARTICLE V - NOTICE OF MEETINGS.........................................10
Section 1. Form of Notice........................................10
Section 2. Waiver................................................10
Section 3. Telephone Meetings....................................10
<PAGE>
ARTICLE VI - OFFICERS..................................................10
Section 1. In General............................................10
Section 2. Election..............................................10
Section 3. Other Officers and Agents.............................10
Section 4. Salaries..............................................11
Section 5. Term of Office and Removal............................11
Section 6. Chairman of the Board.................................11
Section 7. Vice Chairman of the Board............................11
Section 8. Chief Executive Officer...............................11
Section 9. President.............................................11
Section 10. Vice Presidents.......................................11
Section 11. Secretary.............................................12
Section 12. Assistant Secretaries.................................12
Section 13. Treasurer.............................................12
Section 14. Assistant Treasurers..................................12
Section 15. Controller............................................12
Section 16. Bonding...............................................12
ARTICLE VII - CERTIFICATES OF SHARES...................................13
Section 1. Form of Certificates..................................13
Section 2. Lost Certificates.....................................13
Section 3. Transfer of Shares....................................13
Section 4. Registered Stockholders...............................13
ARTICLE VIII - GENERAL PROVISIONS......................................14
Section 1. Dividends.............................................14
Section 2. Reserves..............................................14
Section 3. Fiscal Year...........................................14
Section 4. Seal..................................................14
Section 5. Annual Statement......................................14
Section 6. Checks................................................14
ATTICLE IX - INDEMNITY.................................................14
Section 1. Indemnification.......................................14
Section 2. Advancement of Expenses...............................15
Section 3. Indemnification Additional to Other Rights............15
ARTICLE X - AMENDMENTS.................................................15
Section 1. By Stockholders.......................................15
Section 2. By the Board of Directors.............................15
<PAGE>
ARTICLE I
OFFICES
Section 1. Registered Office. The initial registered office of the
--------- -----------------
corporation shall be at such place as is designated in the Certificate of
Incorporation (herein, as amended from time to time, so called), or thereafter
the registered office may be at such other place as the Board of Directors may
from time to time designate by resolution.
Section 2. Other Offices. The Company may also have offices at such other
--------- -------------
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Company may require.
ARTICLE II
STOCKHOLDERS
Section 1. Meetings. All meetings of the stockholders for the election of
--------- --------
Directors shall be held at the principal office of the corporation, or at such
other place within or without the State of Delaware, as may be fixed from time
to time by the Board of Directors. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meeting; Advance Notice for New Business. An annual
--------- -----------------------------------------------
meeting of the stockholders shall be held on such date in each fiscal year of
the corporation as the Board of Directors shall select, at which meeting the
stockholders shall elect a Board of Directors and transact such other business
as may properly be brought before the meeting. No business may be transacted at
an annual meeting of stockholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (c) otherwise properly brought before the annual meeting by any stockholder
of the corporation (i) who is a stockholder of record on the date of the giving
of the notice provided for in this Section 2 and on the record date for the
determination of stockholders entitled to vote at such annual meeting and (ii)
who complies with the notice procedures set forth in this Section 2.
In addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
-1-
<PAGE>
To be timely, a stockholder's notice to the Secretary must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not within forty-five (45)
days before or after such anniversary date, notice by the stockholder in order
to be timely must be so received not later than the close of business on the
tenth (10th) day following the day on which notice of the date of the annual
meeting was mailed or public disclosure of the date of the annual meeting was
made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting. In addition, notwithstanding anything in this Section 2 to the
contrary, a stockholder intending to nominate one or more persons for election
as a Director at an annual or special meeting must comply with Article III,
Section 2 of these Bylaws (herein, as amended from time to time, so called) for
such nomination or nominations to be properly brought before such meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 2, provided, however, that, once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 2 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 3. List of Stockholders. At least ten days before each meeting of
--------- --------------------
stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, with the address of and the number of
voting shares registered in the name of each, shall be prepared by the officer
or agent having charge of the stock transfer books. Such list shall be kept on
file either at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so specified
at the place where the meeting is to be held for a period of ten days prior to
such meeting and shall be subject to inspection by any stockholder at any time
during usual business hours. Such list shall be produced and kept open at the
time and place of the meeting during the whole time thereof, and shall be,
subject to the inspection of any stockholder who may be present. The Board of
-2-
<PAGE>
Directors may fix in advance a record date for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
record date to be not less than ten nor more than sixty days prior to such
meeting, or the Board of Directors may close the stock transfer books for such
purpose for a period of not less than ten nor more than sixty days prior to such
meeting. In the absence of any action by the Board of Directors, the close of
business on the date next preceding the day on which the notice is given shall
be the record date.
Section 4. Special Meetings.
--------- ----------------
(a) Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by the General Corporation Law of the
State of Delaware (herein called the "Act"), by the Certificate of Incorporation
or by the Bylaws, may be called by the President or the Board of Directors or
shall be called by the President or Secretary at the request in writing sent by
registered mail of holders entitled to cast at least 20% of the votes which all
stockholders are entitled to cast at the particular meeting.
(b) Any stockholders of record requesting the corporation to call a
special meeting of stockholders pursuant to this Section 4 (collectively, the
"Initiating Stockholder") shall deliver or mail by registered mail written
notice of such request to the Secretary of the corporation at its principal
executive offices (the "Notice"). The Notice must contain (i) a brief
description of the business desired to be brought before the special meeting and
the reasons for conducting such business at a special meeting, (ii) the name and
record address of the Initiating Stockholder, (iii) the class or series and
number of shares of capital stock of the corporation which are owned
beneficially or of record by the Initiating Stockholder, (iv) a description of
all arrangements or understandings between the Initiating Stockholder and any
other person or persons (including their names) in connection with the calling
of a special meeting or the proposal of such business at a special meeting by
the Initiating Stockholder and any material interest of the Initiating
Stockholder in such special meeting or such business, and (v) a representation
that the Initiating Stockholder intends to appear in person or by proxy at the
special meeting to bring such business before the meeting. The purposes of a
special meeting shall be stated in the order therefor, and the business
transacted at such special meeting shall be confined to such purposes.
(c) If the Initiating Stockholder owns of record shares of the
corporation entitled to cast at least 20% of the votes that all stockholders are
entitled to cast at the particular meeting (the "Requisite Shares"), the
corporation shall be required to call the special meeting of stockholders
requested by the Initiating Stockholder in accordance with the provisions of
this Section 4.
(d) If the Initiating Stockholder does not own of record the
Requisite Shares, the provisions of this subsection (d) shall apply. Within 10
days after the Secretary's receipt of the Notice from the Initiating Stockholder
containing all the information required by subsection (b) of this Section 4, the
Board of Directors shall fix a record date for determining the stockholders of
record entitled to join in the request for the calling of the special meeting of
stockholders. The corporation shall give prompt written notice of the fixing of
the record date to the Initiating Stockholder. If such record date is not fixed
within such 10 day period, the record date shall be
-3-
<PAGE>
the close of business on the date next preceding the day on which the Initiating
Stockholder requests in writing that a record date be set. If stockholders of
record on the record date purporting to own of record the Requisite Shares
deliver or mail written requests to the Secretary of the corporation at its
principal executive offices that the corporation call the special meeting, the
corporation shall promptly appoint an inspector to perform a ministerial review
of, and render a report to the corporation and the Initiating Stockholder
concerning, the validity of such requests and any revocations thereof. The
inspector will be instructed to perform such review and render such report
promptly. The corporation shall not be required to call the special meeting
until the inspector has rendered such report and certified in writing to the
corporation and the Initiating Stockholder that valid, unrevoked requests for
the calling of the special meeting were received from stockholders of record on
the record date owning of record on such date the Requisite Shares. Nothing
contained in this subsection (d) shall be construed to mean or imply that the
Board of Directors or any stockholder shall not be entitled to contest the
validity of any written request or revocation thereof, whether before or after
certification by the inspector, through court proceedings or otherwise. Any
dispute as to whether or not the corporation is required to call the special
meeting of stockholders will be resolved through appropriate court proceedings,
in which the corporation will request the court to resolve the dispute as
expeditiously as possible.
(e) Notwithstanding any other provision of these Bylaws, no written
request to call a special meeting of stockholders shall be effective unless,
within 60 days after the record date fixed pursuant to subsection (d) of this
Section 4, the corporation has received such written requests from stockholders
of record on such record date owning on such date the Requisite Shares.
(f) The record date for determining the stockholders of record
entitled to vote at a special meeting called pursuant to this Section 4 shall be
fixed by the Board of Directors within 10 days after it is determined that the
corporation is required to call such meeting in accordance with the provisions
of this Section 4. Written notice of such record date shall be sent promptly to
the Initiating Stockholder and the meeting shall be held on such date as shall
be determined by the Board of Directors in its sole discretion, which shall be
not less than ninety (90) nor more than one hundred twenty (120) days after the
date on which (i) a satisfactory request for a special meeting is made by an
Initiating Stockholder pursuant to subsection (c) of this Section 4 or (ii) a
determination is made pursuant to subsection (d) of this Section 4 that
sufficient written consents requesting a special meeting have been received by
the inspector. If such record date is not fixed within such 10 day period, the
record date shall be the close of business on the tenth day following the day on
which it is determined that the corporation is required to call such special
meeting.
(g) The business to be conducted at a special meeting called pursuant
to this Section 4 shall be limited to the business set forth in the Notice and
such other business or proposals as the Board of Directors shall determine and
shall be set forth in the notice of meeting. The Board of Directors or the
Chairman of the Board of Directors may determine rules and procedures for the
conduct of the special meeting.
-4-
<PAGE>
Section 5. Notice. Written or printed notice stating the place, day and
--------- ------
hour of any meeting of the stockholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten nor more than sixty days before the date of the meeting, either
personally or by mail, by or at the direction of the President, the Secretary,
or the officer or person calling the meeting, to each stockholder of record
entitled to vote at the meeting.
Section 6. Quorum. At all meetings of the stockholders, the presence in
--------- ------
person or by proxy of the holders of a majority of the shares issued and
outstanding and entitled to vote shall be necessary and sufficient to constitute
a quorum for the transaction of business except as otherwise provided by the
Act, by the Certificate of Incorporation or by these Bylaws. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 7. Voting. When a quorum is present at any meeting, the vote of
--------- ------
the holders of a majority of the shares having voting power present in person or
represented by proxy at such meeting shall decide any questions brought before
such meeting, unless the question is one upon which, by express provision of the
Act or of the Certificate of Incorporation or of these Bylaws, a different vote
is required, in which case such express provision shall govern and control the
decision of such question. Election of Directors at an annual or special
meeting shall be by plurality vote, i.e., the person or persons receiving the
greatest number of votes cast shall be duly elected to the directorship or
directorships being filled at such meeting. The stockholders present in person
or by proxy at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum.
Section 8. Proxy. Each outstanding share, regardless of class, shall be
--------- -----
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Certificate of Incorporation. At
any meeting of the stockholders, every stockholder having the right to vote
shall be entitled to vote in person, or by proxy appointed or authorized in any
manner permitted or not prohibited by the Act. No such proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. Such proxy shall be filed with the Secretary of the corporation
prior to or at the time of the meeting.
A duly executed proxy shall be irrevocable if, and only as long as, it is
coupled with an interest sufficient in law to support an irrevocable power. A
proxy may be made irrevocable regardless of whether the interest with which it
is coupled is an interest in the stock itself or an interest in the corporation
generally.
-5-
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
Section 1. Board of Directors. The business and affairs of the corporation
--------- ------------------
shall be managed by its Board of Directors who may exercise all such powers of
the corporation and do all such lawful acts and things as are not by the Act or
by the Certificate of Incorporation or by these Bylaws directed or required to
be exercised or done by the stockholders.
Section 2. Number of Directors; Advance Notice for Nomination of Directors.
--------- ---------------------------------------------------------------
Except as otherwise provided in the Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of Directors shall be fixed
by resolution of the Board of Directors from time to time, none of whom need be
stockholders or residents of the State of Delaware. The Directors, other than
those who may be elected by the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, as determined by the Board
of Directors, one class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1988, another class to hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1989, and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1990, with members of each class to
hold office until their successors are elected and qualified. At each annual
meeting of the stockholders of the corporation, the successors to the class of
Directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as Directors of the corporation, except as may be
otherwise provided in the Certificate of Incorporation with respect to the right
of holders of preferred stock of the corporation to nominate and elect a
specified number of directors in certain circumstances. Nominations of persons
for election to the Board of Directors may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors, (a) by or at the direction of the Board of Directors (or
any duly authorized committee thereof) or (b) by any stockholder of the
Corporation (i) who is a stockholder of record on the date of the giving of the
notice provided for in this Section 2 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 2.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the corporation.
-6-
<PAGE>
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the corporation (a)
in the case of an annual meeting, not less ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called or a date
that is not within forty-five (45) days before or after such anniversary date,
notice by the stockholder in order to be timely must be so received not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs; and (b) in the case
of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the tenth (10th) day
following the day on which notice of the date of the special meeting was mailed
or public disclosure of the date of the special meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nominations are to be made by such stockholder, (iv) a representation
that such stockholder intends to appear in person or by proxy at the meeting to
nominate the persons named in its notice and (v) any other information relating
to such stockholder that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with solicitations of proxies
for election of directors pursuant to Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder. Such notice must be accompanied
by a written consent of each proposed nominee to being named as a nominee and to
serve as a director if elected.
No person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section 2.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 3. Vacancies. Any Director may be removed for cause, at any
--------- ----------
special or annual meeting of stockholders by the affirmative vote of a majority
in number of shares of the stockholders present in person or by proxy at such
meeting and entitled to vote for the election of such Director. Newly created
directorships resulting from any increase in the authorized
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<PAGE>
number of directors and any vacancies occurring in the Board of Directors caused
by death, resignation, retirement, disqualification or removal from office of
any Directors or otherwise, may be filled by the vote of a majority of the
Directors then in office, though less than a quorum. Any Director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been elected and qualified.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. Meetings. The Directors of the corporation may hold their
--------- --------
meetings, both regular and special, at such times and places as are fixed from
time to time by resolution of the Board of Directors.
Section 2. Annual Meeting. The first meeting of each newly elected Board
--------- --------------
of Directors shall be held without further notice immediately following the
annual meeting of stockholders, and at the same place, unless by unanimous
consent of the Directors then elected and serving such time or place shall be
changed.
Section 3. Regular Meetings. Regular meetings of the Board of Directors
--------- ----------------
may be held without notice at such time and place as shall from time to time be
determined by resolution of the Board.
Section 4. Special Meetings. Special meetings of the Board of Directors may
--------- ----------------
be called by the Chairman of the Board, the President or by a majority of the
Directors in office. The purpose of any special meeting shall be specified in
the notice or any waiver of notice. Each notice of a meeting of the Board of
Directors may be delivered personally or by telephone to a Director not later
than the day before the day on which the meeting is to be held; sent to a
Director at his residence or usual place of business, or at any other place of
which he will have notified the corporation, by telegram, telex, cable,
wireless, facsimile or similar means at least 24 hours before the time at which
the meeting is to be held; or posted to him at such place by prepaid first class
or air mail, as appropriate, at least three days before the day on which the
meeting is to be held. Notice of a meeting of the Board of Directors need not
be given to any Director who submits a signed waiver of notice, whether before
or after the meeting, or who attends the meeting without protesting, prior to or
at its commencement, the lack of notice to him.
Section 5. Quorum. At all meetings of the Board of Directors the presence
--------- ------
of a majority of the number of Directors then constituting the Board of
Directors shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the affirmative vote of at least a majority of the
Directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by the
Act or by the Certificate of Incorporation or by these Bylaws. If a quorum
shall not be present at
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<PAGE>
any meeting of Directors, the Directors present thereat may adjourn the meeting
from time to time without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Executive Committee. The Board of Directors may, by resolution
--------- -------------------
passed by a majority of the whole Board, designate an Executive Committee, to
consist of two or more Directors of the corporation, one of whom shall be
designated as chairman, who shall preside at all meetings of such Committee.
The Executive Committee shall have and may exercise all of the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; provided, however, that the
Executive Committee shall not have power or authority in reference to (i)
approving or adopting, or recommending to the stockholders, any action or matter
expressly required by the Act to be submitted to stockholders for approval, or
(ii) adopting, amending or repealing any bylaw of the corporation. The
Executive Committee shall keep regular minutes of its proceedings and report the
same to the Board of Directors when required. Any member of the Executive
Committee may be removed, for or without cause, by the affirmative vote of a
majority of the whole Board of Directors. If any vacancy or vacancies occur in
the Executive Committee caused by death, resignation, retirement,
disqualification, removal from office or otherwise, the vacancy shall be filled
by the affirmative vote of a majority of the whole Board of Directors.
Section 7. Other Committees. The Board of Directors may, by resolution
--------- ----------------
passed by a majority of the whole Board, designate other committees, each
committee to consist of two or more Directors of the corporation, which
committees shall have such power and authority and shall perform such functions
as may be provided in such resolution. Such committee or committees shall have
such name or names as may be designated by the Board and shall keep regular
minutes of their proceedings and report the same to the Board of Directors when
required.
Section 8. Action by Consent. Any action required or permitted to be taken
--------- -----------------
at any meeting of the Board of Directors, the Executive Committee or any other
committee of the Board of Directors, may be taken without such a meeting if a
consent in writing, setting forth the action so taken, is signed by all the
members of the Board of Directors or the Executive Committee or such other
committee, as the case may be and the writing or writings are filed with the
minutes of proceedings of the Board or Committee.
Section 9. Compensation of Directors. Directors, as such, shall not receive
--------- -------------------------
any stated salary for their services, but may receive such compensation and
reimbursements as may be determined from time to time by resolution of the
Board; provided that nothing herein contained shall be construed to preclude any
Director from serving the corporation in any other capacity and receiving
compensation therefor.
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ARTICLE V
NOTICE OF MEETINGS
Section 1. Form of Notice. Whenever under the provisions of the Act or of
--------- --------------
the Certificate of Incorporation or of these Bylaws, notice is required to be
given to any Director or stockholder, and no provision is made as to how such
notice shall be given, it shall not be construed to mean personal notice, but
any such notice may be given in writing, by mail, postage prepaid, addressed to
such Director or stockholder at such address as appears on the books of the
corporation. Any notice required or permitted to be given by mail shall be
deemed to be given at the time when the same be thus deposited in the United
States mail as aforesaid.
Section 2. Waiver. Whenever any written notice is required to be given to
--------- ------
any stockholder or Director of the corporation, under the provisions of the Act
or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in
writing signed by the person or persons entitled to such notice, whether before
or after the time stated in such notice, shall be deemed equivalent to the
giving of such notice.
Section 3. Telephone Meetings. Stockholders, members of the Board of
--------- ------------------
Directors or members of any committee designated by the Board of Directors may
participate in and hold meetings of such stockholders, Board or committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
ARTICLE VI
OFFICERS
Section 1. In General. The officers of the corporation shall be elected by
--------- ----------
the Board of Directors and shall be a President, a Vice President, a Secretary
and a Treasurer. The Board of Directors may also elect a Chairman of the Board,
Vice Chairman of the Board, additional Vice Presidents, Assistant Vice
Presidents, a Controller, and one or more Assistant Secretaries and Assistant
Treasurers. Any two or more offices may be held by the same person.
Section 2. Election. The Board of Directors shall annually elect officers
--------- --------
and shall, by resolution, designate one of such officers to be the Chief
Executive Officer of the corporation. None of such officers need be a member of
the Board of Directors.
Section 3. Other Officers and Agents. The Board of Directors may also
--------- -------------------------
elect and appoint such other officers and agents as it shall deem necessary, who
shall be elected and appointed for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board.
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<PAGE>
Section 4. Salaries. The salaries of all officers and agents of the
--------- --------
corporation shall be fixed by the Board of Directors or, if so authorized by the
Board of Directors, by the Chief Executive Officer.
Section 5. Term of Office and Removal. Each officer of the corporation
--------- --------------------------
shall hold office until his death, or his resignation or removal from office, or
the election and qualification of his successor, whichever shall first occur.
Any officer or agent elected or appointed by the Board of Directors may be
removed by the Board of Directors, whenever in its judgment the best interests
of the corporation will be served thereby. If the office of any officer becomes
vacant for any reason, the vacancy may be filled by the Board of Directors.
Section 6. Chairman of the Board. The Chairman of the Board, if any,
--------- ---------------------
shall preside at all meetings of the stockholders at which he may be present and
at all meetings of the Board at which he may be present, and shall be ex officio
a member of all standing committees and shall perform such other duties as may
be assigned to him by the Board of Directors.
Section 7. Vice Chairman of the Board. The Vice Chairman of the Board, if
--------- --------------------------
any, shall have such powers and perform such duties as the Board of Directors or
the Executive Committee may from time to time prescribe or as the Chairman of
the Board may from time to time delegate to him. In the absence or disability
of the Chairman of the Board, the Vice Chairman of the Board shall perform the
duties and exercise the powers of the Chairman of the Board.
Section 8. Chief Executive Officer. The Chief Executive Officer of the
--------- -----------------------
corporation shall have, subject only to the Board of Directors and the Executive
Committee, general and active management and supervision of the business and
affairs of the corporation and shall see that all orders and resolutions of the
Board of Directors and the Executive Committee are carried into effect. He
shall have all powers and duties of supervision and management usually vested in
the general manager of a corporation, including the supervision and direction of
all other officers of the corporation and the power to appoint and discharge
agents and employees. In the absence of the Chairman of the Board or the Vice
Chairman of the Board, if any, he shall preside at all meetings of the Board of
Directors. He shall be ex officio a member of all standing committees and shall
execute bonds, mortgages, and all other contracts or instruments requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed, and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors or the
Executive Committee to some other officer or agent of the corporation.
Section 9. President. The President shall be the chief administrative
--------- ---------
officer of the corporation. The President shall perform such other duties as
from time to time may be assigned to him by the Board of Directors or the
Executive Committee and by the Chief Executive Officer of the corporation.
Section 10. Vice Presidents. Each Vice President shall have such powers
---------- ---------------
and perform such duties as the Board of Directors or the Executive Committee may
from time to
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<PAGE>
time prescribe, or as the Chief Executive Officer may from time to time delegate
to him. In the absence or disability of the President, a Vice President
designated by the Board of Directors shall perform the duties and exercise the
powers of the President.
Section 11. Secretary. The Secretary shall attend all meetings of the
---------- ---------
stockholders and record all votes and the minutes of all proceedings in a book
to be kept for that purpose. The Secretary shall perform like duties for the
Board of Directors and the Executive Committee when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors and shall perform such other duties as may be
prescribed by the Board of Directors or the Chief Executive Officer, under whose
supervision he shall be. He shall keep in safe custody the seal of the
corporation.
Section 12. Assistant Secretaries. Each Assistant Secretary shall have
---------- ---------------------
such powers and perform such duties as the Board of Directors may from time to
time prescribe. Unless otherwise provided by the Board of Directors, in the
absence or disability of the Secretary, any Assistant Secretary may perform the
duties and exercise the powers of the Secretary.
Section 13. Treasurer. The Treasurer shall have the custody of all
---------- ---------
corporate funds and securities, shall keep full and accurate accounts of
receipts and disbursements of the corporation, and shall deposit all moneys and
other valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, shall render to the Chief Executive
Officer and Directors, at the regular meetings of the Board, or whenever they
may require it, an account of all his transactions as Treasurer and of the
financial condition of the corporation, and shall perform such other duties as
the Board of Directors may prescribe.
Section 14. Assistant Treasurers. Each Assistant Treasurer shall have such
---------- --------------------
powers and perform such duties as the Board of Directors may from time to time
prescribe. Unless otherwise provided by the Board of Directors, in the absence
or disability of the Treasurer, any Assistant Treasurer may perform and exercise
the powers of the Treasurer.
Section 15. Controller. The Controller shall share with the Treasurer
---------- ----------
responsibility for the financial and accounting books and records of the
corporation, shall report to the Treasurer, and shall perform such other duties
as the Board of Directors or the Executive Committee or the Chief Executive
Officer may from time to time prescribe.
Section 16. Bonding. If required by the Board of Directors, all or certain
---------- -------
of the officers shall give the corporation a bond, in such form, in such sum,
and with such surety or sureties as shall be satisfactory to the Board, for the
faithful performance of the duties of their office and for the restoration to
the corporation, in case of their death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in their possession or under their control belonging to the corporation.
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ARTICLE VII
CERTIFICATES OF SHARES
Section 1. Form of Certificates. Certificates, in such form as may be
--------- --------------------
determined by the Board of Directors, representing shares to which stockholders
are entitled shall be delivered to each stockholder. Such certificates shall be
consecutively numbered and shall be entered in the stock book of the corporation
as they are issued. Each certificate shall state on the face thereof the
holder's name, the number, class of shares, and the par value of such shares or
a statement that such shares are without par value. They shall be signed by the
President or a Vice President and the Secretary or an Assistant Secretary, and
may be sealed with the seal of the corporation or a facsimile thereof. If any
certificate is countersigned by a transfer agent, or an assistant transfer agent
or registered by a registrar, either of which is other than the corporation or
an employee of the corporation, the signatures of the corporation's officers may
be facsimiles. In case any officer or officers who have signed, or whose
facsimile signature or signatures have been used on such certificate or
certificates, shall cease to be such officer or officers of the corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates have been delivered by the corporation or its agents, such
certificate or certificates may nevertheless be adopted by the corporation and
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the corporation.
Section 2. Lost Certificates. The Board of Directors may direct that a new
--------- -----------------
certificate be issued in place of any certificate theretofore issued by the
corporation alleged to have been lost, stolen or destroyed and the Board of
Directors may require the owner of such lost, stolen or destroyed certificate,
or his legal representative, to give the corporation a bond, in such form, in
such sum, and with such surety or sureties as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 3. Transfer of Shares. Shares of stock shall be transferable only
--------- ------------------
on the books of the corporation by the holder thereof in person or by his duly
authorized attorney, lawfully constituted in writing. No transfer shall be
made which is inconsistent with law.
Section 4. Registered Stockholders. The corporation shall be entitled to
--------- -----------------------
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
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ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the outstanding shares of the
--------- ---------
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting. Dividends may be declared and paid in cash, in property, or in shares
of the corporation, subject to the provisions of the Act and the Certificate of
Incorporation. The Board of Directors may fix in advance a record date for the
purpose of determining stockholders entitled to receive payment of any dividend,
such record date to be not more than sixty days prior to the payment date of
such dividend, or the Board of Directors may close the stock transfer books for
such purpose for a period of not more than sixty days prior to the payment date
of such dividend. In the absence of any action by the Board of Directors, the
date upon which the Board of Directors adopts the resolution declaring such
dividend shall be the record date.
Section 2. Reserves. There may be created by resolution of the Board of
--------- --------
Directors out of the net profits of the corporation such reserve or reserves as
the Directors from time to time, in their discretion, think proper to provide
for contingencies, or to equalize dividends, or to repair or maintain any
property of the corporation, or for such other purpose as the Directors shall
think beneficial to the corporation, and the Directors may modify or abolish any
such reserve in the manner in which it was created.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
--------- -----------
by resolution of the Board of Directors.
Section 4. Seal. The corporation shall have a seal, and said seal may be
--------- ----
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. Any officer of the corporation shall have authority to
affix the seal to any document requiring it.
Section 5. Annual Statement. The Board of Directors shall present at each
--------- ----------------
annual meeting, and when called for by vote of the stockholders at any special
meeting of the stockholders, a full and clear statement of the business and
condition of the corporation.
Section 6. Checks. All checks or demands for money and notes of the
--------- ------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
ARTICLE IX
INDEMNITY
Section 1. Indemnification. The corporation shall indemnify its directors
--------- ---------------
and officers to the fullest extent permitted by the Act and may, if and to the
extent authorized by the
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<PAGE>
Board of Directors, so indemnify any other person whom it has the power to
indemnify against any liability, expense or other matter whatsoever.
Section 2. Advancement of Expenses. Expenses incurred by a director or
-----------------------
officer in defending or investigating a threatened or pending action, suit or
proceeding shall be timely paid by the corporation as and when such expenses are
incurred and in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
this Article IX.
Section 3. Indemnification Additional to Other Rights. The rights of
--------- ------------------------------------------
indemnification provided for in this Article IX shall be in addition to any
rights to which any such Director, officer or employee may be entitled under any
agreement, vote of stockholders, the Certificate of Incorporation, or as a
matter of law or otherwise.
ARTICLE X
AMENDMENTS
Section 1. By Stockholders. These Bylaws may be amended or repealed by the
--------- ---------------
vote of stockholders entitled to at least a majority of the votes which all
stockholders are entitled to cast thereon, at any regular or special meeting of
the stockholders, duly convened after notice to the stockholders of that
purpose.
Section 2. By the Board of Directors. These Bylaws may also be amended or
--------- -------------------------
repealed by the Board of Directors by the vote of a majority of Directors,
except as such power may be limited by any one or more bylaws adopted by the
stockholders.
Adopted and effective as of October 22, 1999
/s/ Don J. McDermett, Jr.
- -------------------------
Don J. McDermett, Jr.,
Secretary
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<PAGE>
Exhibit 10.4
------------
STERLING SOFTWARE, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
----------------------
Sterling Software, Inc., a Delaware corporation (the "Company"),
established the Sterling Software, Inc. 1996 Stock Option Plan (the "Plan"),
effective as of April 22, 1996. The Plan was approved by the Company's
stockholders on May 29, 1996, was amended and restated effective as of September
4, 1996, and was subsequently amended and restated as of February 12, 1999.
1. Purpose. The purpose of the Plan is to attract and retain the best
-------
available talent and encourage the highest level of performance by executive
officers, key employees, directors, advisors and consultants, and to provide
them with incentives to put forth maximum efforts for the success of the
Company's business, in order to serve the best interests of the Company and its
stockholders. All options granted under the Plan are intended to be
nonstatutory stock options.
2. Definitions. The following terms, when used in the Plan with initial
-----------
capital letters, will have the following meanings:
(a) "Act" means the Securities Exchange Act of 1934 as in effect from
time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as in effect from
time to time.
(d) "Common Stock" means the common stock, par value $.10 per share,
of the Company or any security into which such common stock may be changed
by reason of any transaction or event of the type described in Paragraph 6.
(e) "Date of Grant" means the date specified by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable,
on which a grant of Stock Options will become effective (which date will
not be earlier than the date on which such committee or the Board takes
action with respect thereto).
(f) "Market Value per Share" means (i) the fair market value per share
of the Common Stock on the Date of Grant as determined by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable,
with respect to Stock Options granted to Participants, and (ii) with
respect to Stock Options granted to Nonemployee Directors pursuant to
Paragraph 5A, the average of the high and low closing sale prices as
reported on any national securities exchange on which the Common Stock is
listed on the Date of Grant if such date is a trading day and, if such date
is not a trading day, on the immediately preceding date which is a trading
day.
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<PAGE>
(g) "Nonemployee Director" means a member of the Board who is not an
employee of the Company or any Subsidiary, who qualifies as a "Non-Employee
Director" within the meaning of Rule 16b-3 and who is a member of the
Special Stock Option Committee.
(h) "Option Price" means the purchase price per share payable on
exercise of a Stock Option.
(i) "Participant" means a person who is selected by the Stock Option
Committee, the Special Stock Option Committee or the Board, as applicable,
to receive Stock Options under Paragraph 5 of the Plan and who is at that
time (i) an executive officer or other key employee of the Company or any
Subsidiary, (ii) a Prospective Key Employee of the Company or any
Subsidiary, (iii) an advisor or consultant to the Company or any
Subsidiary, or (iv) a member of the Board other than a Non-Employee
Director.
(j) "Prospective Key Employee" means a person to whom the Company or
any Subsidiary has extended or intends to extend an offer of employment.
(k) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act as such
Rule is in effect from time to time.
(l) "Special Stock Option Committee" means the 1996 Special Stock
Option Committee, which is a committee of the Board whose members are
appointed by the Board from time to time. All of the members of the
Special Stock Option Committee, which may not be less than two, are
intended at all times to qualify as "outside directors" within the meaning
of Section 162(m) of the Code, and as "Non-Employee Directors" within the
meaning of Rule 16b-3; provided, however, that the failure of a member of
-------- -------
such committee to so qualify shall not be deemed to invalidate any Stock
Option granted by such committee. Although the Special Stock Option
Committee has the authority under the Plan to make grants of Stock Options
to any Participant, it is anticipated that the Special Stock Option
Committee will make grants of Stock Options to those Participants who are
executive officers of the Company and/or members of the Board, and as a
result thereof are subject to Section 16 of the Act and the rules
promulgated thereunder.
(m) "Stock Option" means the right to purchase a share of Common Stock
upon exercise of an option granted pursuant to Paragraph 5 or Paragraph 5A.
(n) "Stock Option Committee" means the 1996 Stock Option Committee,
which is a committee of the Board whose members are appointed by the Board
from time to time. Although the Stock Option Committee has the authority
under the Plan to make grants of Stock Options to any Participant, it is
anticipated that the Stock Option Committee will make grants of Stock
Options to those Participants who are neither executive officers of the
Company nor members of the Board, and as a result thereof are not subject
to Section 16 of the Act and the rules promulgated thereunder.
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<PAGE>
(o) "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Company owns or controls, directly or indirectly,
not less than 50% of the total combined voting power or equity interests
represented by all classes of stock issued by such corporation,
partnership, joint venture or other entity.
3. Shares Available Under Plan. The shares of Common Stock which may be
---------------------------
issued under the Plan will not exceed in the aggregate 15,500,000 shares,
subject to adjustment as provided in this Paragraph 3. Such shares may be
shares of original issuance or treasury shares or a combination of the
foregoing.
(a) Any shares of Common Stock which are subject to Stock Options that
are terminated unexercised, forfeited or surrendered or that expire for any
reason will again be available for issuance under the Plan.
(b) If, as of the close of business on the last day of each fiscal
quarter of the Company following the effective date of the Plan, the sum of
(i) the total number of shares of Common Stock previously issued upon the
exercise of Stock Options, (ii) the total number of shares of Common Stock
then subject to outstanding Stock Options, and (iii) the total number of
shares of Common Stock then remaining available for future Stock Option
grants under the Plan (such sum being the "Plan Shares") is less than 20%
of the total number of shares of Common Stock then outstanding computed on
a fully diluted basis (such total number being the "Outstanding Shares"),
the number of shares of Common Stock available for issuance under the Plan
will be increased (but not decreased) so that the number of Plan Shares
will be equal to 20% of the number of Outstanding Shares. For purposes of
the foregoing adjustment, all outstanding Stock Options will be treated as
fully exercised in computing the number of outstanding shares of Common
Stock on a fully diluted basis, without regard to whether the Stock Options
are then fully exercisable.
(c) The shares available for issuance under the Plan also will be
subject to adjustment as provided in Paragraph 6.
4. Individual Limitation on Stock Options. The maximum aggregate number
--------------------------------------
of shares of Common Stock with respect to which Stock Options may be granted to
any Participant during the term of the Plan will not exceed 5,425,000 shares.
5. Grants of Stock Options. The Stock Option Committee, the Special Stock
-----------------------
Option Committee or the Board may from time to time authorize grants to any
Participant of Stock Options upon such terms and conditions as such committee or
the Board, as applicable, may determine in accordance with the provisions set
forth below.
(a) Each grant will specify the number of shares of Common Stock to
which it pertains.
-3-
<PAGE>
(b) Each grant will specify the Option Price, which will not be less
than 100% of the Market Value per Share on the Date of Grant.
(c) Each grant will specify whether the Option Price will be payable
(i) in cash or by check acceptable to the Company, (ii) by the transfer to
the Company of shares of Common Stock owned by the Participant for at least
six months (or, with the consent of the Stock Option Committee, the Special
Stock Option Committee or the Board, as applicable, for less than six
months) having an aggregate fair market value per share at the date of
exercise equal to the aggregate Option Price, (iii) with the consent of the
Stock Option Committee, the Special Stock Option Committee or the Board, as
applicable, by authorizing the Company to withhold a number of shares of
Common Stock otherwise issuable to the Participant having an aggregate fair
market value per share on the date of exercise equal to the aggregate
Option Price or (iv) by a combination of such methods of payment; provided,
--------
however, that the payment methods described in clauses (ii) and (iii) will
-------
not be available at any time that the Company is prohibited from purchasing
or acquiring such shares of Common Stock. Any grant may provide for
deferred payment of the Option Price from the proceeds of sale through a
bank or broker of some or all of the shares to which such exercise relates.
(d) Successive grants may be made to the same Participant whether or
not any Stock Options previously granted to such Participant remain
unexercised.
(e) Each grant will specify the required period or periods (if any) of
continuous service by the Participant with the Company or any Subsidiary
and/or any other conditions to be satisfied before the Stock Options or
installments thereof will become exercisable, and any grant may provide, or
may be amended to provide, for the earlier exercise of the Stock Options in
the event of a change in control of the Company (as defined in the stock
option agreement evidencing such grant or in any agreement referred to in
such stock option agreement) or in the event of any other similar
transaction or event.
(f) Each Stock Option granted pursuant to this Paragraph 5 may be made
subject to such transfer restrictions as the Stock Option Committee, the
Special Stock Option Committee or the Board, as applicable, may determine.
(g) Each grant will be evidenced by a stock option agreement executed
on behalf of the Company by the Chief Executive Officer (or another officer
designated by the Stock Option Committee, the Special Stock Option
Committee or the Board, as applicable) and delivered to the Participant and
containing such further terms and provisions, consistent with the Plan, as
such committee or the Board, as applicable, may approve.
5A. Stock Options for Nonemployee Directors. Each Nonemployee Director
---------------------------------------
(other than a Nonemployee Director who holds options that were granted under
Paragraph 5 prior to February 12, 1999) will be granted on the date of his or
her initial appointment to the Special Stock Option Committee an option to
purchase 100,000 shares of Common Stock (less the number of shares of Common
Stock subject to options granted to such Nonemployee Director within the
-4-
<PAGE>
previous five years). Each Nonemployee Director will also be granted an
additional option to purchase 100,000 shares of Common Stock (less the number of
shares of Common Stock subject to options granted to such Nonemployee Director
within the five years prior to such additional grant) every five years on the
anniversary date of the initial grant (or, in the case of a Nonemployee
Directors who holds options that were granted under Paragraph 5 prior to
February 12, 1999, on the fifth anniversary of the date of such prior grant),
beginning on the fifth anniversary of the initial grant (or such prior grant),
provided that such individual continues to serve as a member of the Special
Stock Option Committee through the close of business on such anniversary date.
All Stock Options granted pursuant to this Paragraph 5A will contain the terms
and conditions set forth below.
(a) Each grant will specify the number of Common Stock to which it
pertains.
(b) Each grant will specify the Option Price, which will be 100% of
the Market Value per Share on the Date of Grant.
(c) Each grant will specify that the Option Price will be payable (i)
in cash or by check acceptable to the Company, (ii) by the transfer to the
Company of shares of Common Stock owned by the Nonemployee Director for at
least six months (or, with the consent of the Special Stock Option
Committee, for less than six months) having an aggregate fair market value
per share at the date of exercise equal to the aggregate Option Price,
(iii) with the consent of the Special Stock Option Committee, by
authorizing the Company to withhold a number of shares of Common Stock
otherwise issuable to the Nonemployee Director having an aggregate fair
market value per share on the date of exercise equal to the aggregate
Option Price or (iv) by a combination of such methods of payment; provided,
however, that the payment methods described in clauses (ii) and (iii) will
not be available at any time that the Company is prohibited from purchasing
or acquiring such shares of Common Stock. Each grant will also provide for
deferred payment of the Option Price from the proceeds of sale through a
bank or broker of some or all of the shares to which such exercise relates.
(d) Stock Options for Nonemployee Directors will become exercisable in
cumulative annual installments of one-fourth of the shares subject to the
Stock Options, beginning one year after the Date of Grant, and will expire
on the fifth anniversary of the Date of Grant. Such Stock Options will
also provide for immediate exercise in the event of a Change in Control, as
hereinafter defined.
(e) Each Stock Option granted pursuant to this Paragraph 5A may be
subject to such transfer restrictions as the Stock Option Committee or the
Board may determine.
(f) Each grant will be evidenced by a stock option agreement executed
on behalf of the Company by the Chief Executive Officer (or another officer
designated by the Stock Option Committee or the Board) and delivered to the
Nonemployee Director and containing such other terms and provisions,
consistent with the Plan, as the Stock Option Committee or the Board may
approve.
-5-
<PAGE>
For purposes of this Paragraph 5A, a "Change in Control" means the
occurrence, prior to the expiration of a Stock Option granted to a Nonemployee
Director, 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 Act, disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial
owner (as the term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Act) of securities
representing 50% 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 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) a Subsidiary or (C) any
Company-sponsored employee stock ownership plan or any
-6-
<PAGE>
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 Act disclosing beneficial
ownership by it of shares of Voting Stock of the Company, whether in excess of
50% 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.
6. Adjustments. The Stock Option Committee, the Special Stock Option
-----------
Committee or the Board may make or provide for such adjustments in the maximum
number of shares specified in Paragraph 3, in the number of shares of Common
Stock covered by outstanding Stock Options granted hereunder, in the Option
Price applicable to any such Stock Options, and/or in the kind of shares covered
thereby (including shares of another issuer), as such committee or the Board, as
applicable, in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of
Participants and Nonemployee Directors that otherwise would result from any
stock dividend, stock split, combination of shares, recapitalization or other
change in the capital structure of the Company, merger, consolidation, spin-off,
reorganization, partial or complete liquidation, issuance of rights or warrants
to purchase securities or any other corporate transaction or event having an
effect similar to any of the foregoing. In the event the Stock Option Committee
and the Special Stock Option Committee shall disagree (or either or both shall
disagree with the Board) with respect to the foregoing adjustments, the Board's
determination will be final and conclusive. Any fractional shares resulting
from the foregoing adjustments will be eliminated.
7. Withholding of Taxes. To the extent that the Company is required to
--------------------
withhold federal, state, local or foreign taxes in connection with any benefit
realized by an optionee under the Plan, or is requested by an optionee to
withhold additional amounts with respect to such taxes, and the amounts
available to the Company for such withholding are insufficient, it will be a
condition to the realization of such benefit that the optionee make arrangements
satisfactory to the Company for payment of the balance of such taxes required or
requested to be withheld. In addition, if permitted by the Stock Option
Committee, the Special Stock Option Committee or the Board, an optionee may
elect to have any withholding obligation of the Company satisfied with shares of
Common Stock that would otherwise be transferred to the optionee on exercise of
the Stock Option.
8. Administration of the Plan.
--------------------------
(a) The Plan will be administered by the Stock Option Committee, the
Special Stock Option Committee and the Board. For purposes of any action
taken by the Stock Option Committee, the Special Stock Option Committee or
the Board, whichever is applicable, a majority of the members will
constitute a quorum, and the action of the members present at any meeting
at which a quorum is present, or acts unanimously approved in writing, will
be the acts of the Stock Option Committee, the Special Stock Option
Committee or the Board.
-7-
<PAGE>
(b) The Stock Option Committee, the Special Stock Option Committee and
the Board have the full authority and discretion to administer the Plan and
to take any action that is necessary or advisable in connection with the
administration of the Plan, including without limitation the authority and
discretion to interpret and construe any provision of the Plan or of any
agreement, notification or document evidencing the grant of a Stock Option.
The interpretation and construction by the Stock Option Committee, the
Special Stock Option Committee or the Board, as applicable, of any such
provision and any determination by the Stock Option Committee, the Special
Stock Option Committee or the Board pursuant to any provision of the Plan
or of any such agreement, notification or document will be final and
conclusive; provided, that in the event the Stock Option Committee and the
--------
Special Stock Option Committee shall disagree (or either or both shall
disagree with the Board) with respect to such interpretation, construction
or determination, the Board's determination will be final and conclusive.
No member of the Stock Option Committee, the Special Stock Option Committee
or the Board will be liable for any such action or determination made in
good faith.
(c) Notwithstanding any provision of the Plan to the contrary, the
Special Stock Option Committee will have the exclusive authority and
discretion to take any action required or permitted to be taken under the
provisions of Paragraph 6, Paragraph 8(a), Paragraph 8(b), Paragraph 9(a)
and Paragraph 9(b) with respect to Stock Options granted under the Plan
that are intended to comply with the requirements of Section 162(m) of the
Code.
9. Amendments, Etc.
----------------
(a) The Stock Option Committee, the Special Stock Option Committee or
the Board, as applicable, may, without the consent of the optionee, amend
any agreement evidencing a Stock Option granted under the Plan, or
otherwise take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock Option,
to waive any other condition or restriction applicable to such Stock Option
or to the exercise of such Stock Option, to reduce the exercise price of
such Stock Option, to amend the definition of a change in control of the
Company (if such a definition is contained in such agreement) to expand the
events that would result in a change in control of the Company and to add a
change in control provision to such agreement (if such provision is not
contained in such agreement) and may amend any such agreement in any other
respect with the consent of the optionee.
(b) The Plan may be amended from time to time by the Board or any duly
authorized committee thereof. In the event any law, or any rule or
regulation issued or promulgated by the Internal Revenue Service, the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., any stock exchange upon which the Common Stock is listed for
trading, or any other governmental or quasi-governmental agency having
jurisdiction over the Company, the Common Stock or the Plan, requires the
Plan to be amended, or in the event Rule 16b-3 is amended or supplemented
(e.g., by addition of alternative rules) or any of the rules under Section
----
16 of the Act are amended or
-8-
<PAGE>
supplemented, in either event to permit the Company to remove or lessen any
restrictions on or with respect to Stock Options, the Stock Option
Committee, the Special Stock Option Committee and the Board each reserves
the right to amend the Plan to the extent of any such requirement,
amendment or supplement, and all Stock Options then outstanding will be
subject to such amendment.
(c) The Plan may be terminated at any time by action of the Board.
The termination of the Plan will not adversely affect the terms of any
outstanding Stock Option.
(d) The Plan will not confer upon any Participant or Nonemployee
Director any right with respect to continuance of employment or other
service with the Company or any Subsidiary, nor will it interfere in any
way with any right the Company or any Subsidiary would otherwise have to
terminate a Participant's employment or other service at any time.
STERLING SOFTWARE, INC.
By /s/ Sterling L. Williams
-------------------------------
Sterling L. Williams
President and Chief Executive Officer
-9-
<PAGE>
Exhibit 10.8
------------
STERLING SOFTWARE, INC
1996 STOCK OPTION PLAN
Stock Option Agreement
----------------------
This Stock Option Agreement (the "Agreement") is entered into by and
between Sterling Software, Inc., a Delaware corporation (the "Company"), and
_____________ (the "Participant"). The Company and the Participant agree as
follows:
1. Grant of Stock Option. The Company hereby grants to the Participant
---------------------
effective as of __________ (the "Date of Grant"), upon the terms and conditions
set forth below and subject to the terms and conditions of the Company's 1996
Stock Option Plan (the "Plan"), an option (the "Stock Option") to purchase from
the Company a total of _______ shares of the Company's common stock, par value
$0.10 per share ("Common Stock"), at an exercise price per share equal to
$________ (the "Option Price"). Any terms, when used in this Agreement with
initial capital letters but not defined herein, have the same meanings as in the
Plan, the provisions of which are incorporated into this Agreement by reference.
The Participant acknowledges receipt of a copy of the Plan.
2. Time of Exercise. The Stock Option may be exercised, in whole or in
----------------
part, according to the following schedule:
Percentage
Exercisable Periods
----------- -------
0% Immediately
25% On the first anniversary of the Date of Grant
50% On the second anniversary of the Date of Grant
75% On the third anniversary of the Date of Grant
100% On the fourth anniversary of the Date of Grant
Notwithstanding the foregoing schedule, in the event of a Change in
Control (as defined in Section 1(c) of the Change-in-Control Severance Agreement
dated ___________ between the Participant and the Company and any amendments
thereto) or a threatened Change in Control, all of the unexercised portion of
this Stock Option will become immediately exercisable, and the right of the
Participant to exercise the Stock Option as to such unexercised portion will
continue for the entire term described in Section 3 below, regardless of whether
the Participant's employment with the Company or any Subsidiary terminates
before the expiration of such term. Whether a Change in Control is threatened
will be determined solely by the Board.
The unexercised portion of the Stock Option from one annual period may
be carried over to a subsequent annual period or periods, and the right of the
Participant to exercise
<PAGE>
the Stock Option as to such unexercised portion will continue for the entire
term described in Section 3 below, subject to the provisions of Sections 9 and
10 below. In no event may the Stock Option be exercised in whole or in part,
however, after the expiration of such term.
3. Term. The Stock Option will expire and all rights under this Agreement
----
will terminate on the tenth anniversary of the Date of Grant.
4. Restrictions on Exercise. The Stock Option:
------------------------
(a) may be exercised only with respect to full shares and no
fractional shares of Common Stock will be issued upon exercise of the Stock
Option; and
(b) may be exercised in whole or in part, but no certificates
representing shares subject to the Stock Option will be delivered if any
requisite registration with, clearance by, or consent, approval or
authorization of, any governmental authority of any kind having
jurisdiction over the exercise of the Stock Option, or issuance of
securities upon such exercise, has not been obtained or secured.
5. Manner of Exercise. The Stock Option may be exercised by written
------------------
notice to the Company of the number of shares being purchased and the Option
Price to be paid, accompanied by full payment of the Option Price (a) in cash or
by check acceptable to the Company, (b) by the transfer to the Company of shares
of Common Stock owned by the Participant for at least six months and having an
aggregate fair market value per share at the date of exercise equal to the
aggregate Option Price (provided that the payment method described in this
clause (b) will not be available at any time that the Company is prohibited from
purchasing or acquiring such shares of Common Stock), or (c) by a combination of
any of the foregoing, provided that payment of the Option Price may also be made
by deferred payment from the proceeds of sale through a bank or broker of some
or all of the shares to which the exercise relates. Any federal, state or local
taxes required to be paid or withheld at the time of exercise will be paid or
withheld in full prior to any delivery of shares upon exercise.
6. Transferability of Stock Options. This Stock Option may be transferred
--------------------------------
by the Participant on five days prior written notice to the Company and upon
compliance with such other conditions (e.g., execution of an appropriate
assignment and assumption instrument) as the Company may reasonably request.
Such notice period may be waived in the discretion of the Secretary of the
Company. In the event of a transfer, the transferee will succeed to all of the
rights, restrictions and obligations of the Participant under this Agreement.
7. Rights as Stockholder. Neither the Participant nor any of the
---------------------
Participant's beneficiaries will be deemed to have any rights as a stockholder
with respect to any shares covered by the Stock Option until the issuance of a
certificate to the Participant for such shares.
-2-
<PAGE>
8. Adjustments. The number of shares of Common Stock covered by the Stock
-----------
Option evidenced by this Agreement, and the Option Price thereof, will be
subject to adjustment as provided in the Plan. No adjustment will be made for
dividends or other rights for which the record date is prior to the issuance of
the certificate or certificates representing shares issued pursuant to the Stock
Option.
9. Rights in Event of Death or Termination of Employment as a Result of
--------------------------------------------------------------------
Disability of Participant. If the Participant dies or terminates employment as
- -------------------------
a result of disability prior to termination of the Participant's rights to
exercise the Stock Option, any unexercised portion of the Stock Option will
continue to vest in accordance with Section 2 and will be exercisable, subject
to all conditions of the Plan and this Agreement, for a period of one year from
the date of the Participant's death or termination of employment as a result of
disability. In the event of the death of the Participant, the Stock Option may
be exercised by the Participant's estate or a person who acquired the right to
exercise the Stock Option by bequest or inheritance or by reason of the death of
the Participant. For purposes of this section, the Executive Committee of the
Board will have sole discretion to determine whether termination of a
Participant's employment has occurred "as a result of disability." In no event
may the Stock Option be exercised after the expiration date set forth in Section
3.
10. Rights in Event of Termination of Employment Other Than as a Result of
----------------------------------------------------------------------
Death or Disability. With respect to a Participant who is an employee of the
- -------------------
Company or any Subsidiary on the Date of Grant, if the Participant ceases to be
employed by the Company and all Subsidiaries, other than as a result of death or
disability, prior to the termination of the Participant's rights to exercise the
Stock Option, any unexercised portion of the Stock Option will continue to vest
in accordance with Section 2 and will be exercisable through the 90th day
following the last day on which the Participant is entitled to receive any
compensation, including but not limited to severance or termination payments,
from the Company. In no event may the Stock Option be exercised after the
expiration date set forth in Section 3.
11. Stock Purchased for Investment. Unless the shares are covered by a
------------------------------
then current and effective registration statement under the Securities Act of
1933, as then in effect, the Participant, by accepting the Stock Option,
represents, warrants, covenants and agrees on behalf of the Participant and the
Participant's transferees that all shares of Common Stock purchased upon the
exercise of the Stock Option will be acquired for investment and not for resale
or distribution, and that upon each exercise of any portion of the Stock Option,
the person entitled to exercise the same will furnish evidence satisfactory to
the Company (including a written and signed representation) to the effect that
the shares are being acquired in good faith for investment and not for resale or
distribution. The Participant agrees to furnish or execute such documents as
the Company in its discretion deems necessary to (a) evidence such exercise of
the Stock Option, (b) determine whether registration is then required under the
Securities Act of 1933, as then in effect, and (c) comply with or satisfy the
requirements of the Securities Act of 1933, or any other federal, state or local
law, as then in effect.
-3-
<PAGE>
12. Notices. Each notice relating to this Agreement will be in writing
-------
and delivered in person or by certified mail to the proper address. Each notice
will be deemed to have been given on the date it is received. Each notice to
the Company will be addressed to it at its principal office, now 300 Crescent
Court, Suite 1200, Dallas, Texas 75201, attention of the Secretary. Each notice
to the Participant or other person or persons then entitled to exercise the
Stock Option will be addressed to the Participant or such other person or
persons at the Participant's address specified below. Anyone to whom a notice
may be given under this Agreement may designate a new address by notice to that
effect.
13. Employment. This Agreement does not confer upon the Participant any
----------
right to be employed or to continue in the employ of the Company or any
Subsidiary, nor does it in any way interfere with the right of the Company or
any Subsidiary to terminate the employment of the Participant at any time.
14. No Obligation to Exercise Stock Option. This Agreement does not
--------------------------------------
impose any obligation upon the Participant to exercise the Stock Option.
15. Amendments. The Special Stock Option Committee, the Stock Option
----------
Committee or the Board, as authorized pursuant to the Plan, may, without the
consent of the Participant, amend this Agreement, or otherwise take action, to
accelerate the time or times at which the Stock Option may be exercised, to
extend the term described in Section 3 above, to waive any other condition or
restriction applicable to the Stock Option or to the exercise of the Stock
Option, to reduce the Option Price and to make any other change permitted to be
made under the Plan without the consent of the Participant; and may amend the
Agreement in any other respect with the consent of the Participant.
16. Governing Law. This Agreement is intended to be performed in the
-------------
State of Texas and will be construed and enforced in accordance with and
governed by the laws of such State, except as to matters of corporate law, which
will be governed by the laws of the State of Delaware.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have executed this
Agreement as of the __________________.
STERLING SOFTWARE, INC.
By:
-------------------------
Sterling L. Williams
President and Chief Executive Officer
PARTICIPANT:
------------------------------------------
Signature
------------------------------------------
Print Name
Social Security Number:
-------------------
Address for Notice:
------------------------------------------
------------------------------------------
-5-
<PAGE>
Exhibit 10.11
-------------
EXECUTIVE COMPENSATION PLAN
Sterling Software, Inc.
Group Presidents
FY00
PURPOSE
- -------
The purpose of the Executive Compensation Plan (the "Plan") is to provide
rewards for Group Presidents based on their ability to achieve and exceed
specific Group objectives.
ELIGIBILITY
- -----------
All Group Presidents ("Participants") are eligible to participate in the Plan.
Eligibility of certain persons to participate in the Plan may be changed at any
time at the sole discretion of the Chief Operating Officer of Sterling Software,
Inc. (the "COO").
EFFECTIVE PERIOD
- ----------------
The Plan is in effect beginning October 1, 1999 through September 30, 2000,
subject to change at any time at the sole discretion of the COO. The Plan does
not constitute an employment agreement and the COO reserves the right to
terminate the employment of the Participants without cause at any time.
GROUP OBJECTIVES
- ----------------
Certain Plan compensation will be based on the achievement of specific Group
Operating Profit Objectives. Each Participant in the Plan agrees to provide a
detailed action plan to achieve his assigned Group Objectives against which his
performance will subsequently be measured. Group Objectives, their achievement
and the methods of measuring achievement will be determined by the COO for the
purposes of this Plan. Objectives are subject to change at any time at the sole
discretion of the COO in the exercise of his reasonable business judgment.
COMPENSATION TERMS
- ------------------
The amounts and types of compensation to be received under the Plan will be
determined by each Participant's Executive Compensation Agreement (the
"Agreement").
PAYMENTS
- --------
Salaries provided for under the Agreement are payable bi-weekly from the
effective date of the Agreement. Contingent compensation provided for under the
Agreement is payable (i) no later than sixty days after the applicable quarter
end with respect to compensation based upon quarterly objectives and (ii) no
later than ninety-five days after the fiscal year end with respect to
compensation based upon annual objectives. No payment of contingent
compensation will be
<PAGE>
EXECUTIVE COMPENSATION PLAN
Page Two
made unless a Participant is a full-time employee of Sterling Software, Inc.
acting in the capacity of a Group President at quarter end, with respect to any
quarterly objective, or at September 30, 2000, with respect to an annual
objective; provided however that in the event of termination of a Participant's
employment as a result of the death or disability of a Participant while acting
in the capacity of a Group President, Sterling Software, Inc. shall pay to such
Participant a prorated portion of the contingent compensation provided for
herein, provided that at least 90% of the Group Operating Profit had been
attained on a prorata basis as of the Participant's termination of employment.
The existence of a disability shall be determined by the COO in his sole
discretion.
-2-
<PAGE>
Exhibit 10.15
-------------
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
October 22, 1999, by and between Sterling Software, Inc., a Delaware corporation
(the "Company"), and ______________________________ (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and is expected to
make major contributions to the profitability, growth and financial strength of
the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control (as hereinafter defined) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the sum of (i) the Executive's annual fixed or base
compensation, as may be determined from time to time by the Company, whether
acting through its Board of Directors (the "Board") or a committee thereof,
its President and CEO or otherwise, and (ii) the annual fees, if any, paid or
payable to the Executive in respect of his service during any fiscal year of
the Company as a member of the Board and any committee thereof.
(b) "Change in Control" means the occurrence during the Term of any of
the following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors ("Voting Stock") of
such corporation or person immediately after such transaction are held
in the aggregate by the holders of Voting Stock of the Company
immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and less than two-thirds of the
1
<PAGE>
combined voting power of the then-outstanding Voting Stock of such
corporation or person is held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such sale or
transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-
1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, at any time 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 (other than a Director whose initial
assumption of office is in connection with an actual or threatened
election contest) who is first elected, or first nominated for
election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company (or a committee thereof) then
still in office who were Directors of the Company at the beginning of
any such period will be deemed to have been a Director of the Company
at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), 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.
(c) "Employee Benefits" means the perquisites, benefits and service
credit for perquisites or benefits as provided under any and all employee
perquisite or benefit policies, plans, programs or arrangements in which
the Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension, 401(k),
employee stock ownership (ESOP), employee stock purchase (ESPP),
supplemental
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executive retirement, or other retirement income or welfare benefit,
deferred compensation, incentive compensation, group or other life, health,
medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), disability, salary continuation, expense
reimbursement, executive automobile, tax and financial planning, club
memberships, incentive travel, tax reimbursement and other employee benefit
policies, plans, programs or arrangements that may now exist or any
successor policies, plans, programs or arrangements that may be adopted
hereafter by the Company.
(d) "Incentive Pay" means the aggregate annual bonus, incentive or
other payments of cash compensation, in addition to Base Pay, made or
authorized or contemplated to be made in regard to services rendered by the
Executive in any fiscal year pursuant to any bonus, incentive compensation,
profit-sharing, performance, discretionary pay or similar agreement,
policy, plan, program or arrangement (whether or not funded) of the Company
or any successor thereto.
(e) "Severance Period" means the period of time commencing on the date
of the first occurrence of a Change in Control and continuing until the
earliest of (i) the seventh anniversary of the occurrence of the Change in
Control, or (ii) the Executive's death; provided, however, that commencing
on each anniversary of the Change in Control, the Severance Period will
automatically be extended for an additional year unless, not later than 90
calendar days prior to such anniversary date, either the Company or the
Executive shall have given written notice to the other that the Severance
Period is not to be so extended.
(f) "Term" means the period commencing as of the date first set forth
above and expiring as of the later of (i) the close of business on December
31, 2004, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 2001 and each January 1
thereafter, the Term of this Agreement will automatically be extended for
an additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given written
notice that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 8, if,
prior to a Change in Control, the Executive ceases for any reason to be an
employee of the Company or any Subsidiary, thereupon without further action
the Term shall be deemed to have expired and this Agreement will
immediately terminate and be of no further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
compensation and benefits provided by Section 4 hereof.
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(b) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period, with the right to the compensation and benefits as provided in
Section 4, upon the occurrence of one or more of the following events
(regardless of whether any other reason for such termination exists or has
occurred, including without limitation, other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties attached to
the position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay or Incentive Pay as in effect for the Executive immediately prior to
the occurrence of a Change in Control or such higher amount of Base Pay or
Incentive Pay as may thereafter be determined by the Company, whether
acting through the Board or a committee thereof, its President and CEO or
otherwise, or (C) the termination or denial of the Executive's rights to
Employee Benefits or a reduction in the scope or value thereof, any of
which is not remedied by the Company within 10 calendar days after receipt
by the Company of written notice from the Executive of such change,
reduction, termination or denial, as the case may be;
(iii) A determination by the Executive (which determination will be
conclusive and binding upon the parties hereto provided it has been made in
good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered the
Executive's performance of, or has caused the Executive to suffer a
substantial reduction in, any of the authorities, powers, functions,
responsibilities or duties attached to the position held by the Executive
immediately prior to the Change in Control, which situation is not remedied
within 10 calendar days after written notice to the Company from the
Executive of such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities
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or duties hereunder at least 20% more (in terms of aggregate days in any
calendar year or in any calendar quarter when annualized for purposes of
comparison to any prior year) than was required of the Executive in any of
the three full years immediately prior to the Change in Control without, in
either case, his prior written consent; or
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor thereto.
(c) A termination by the Company pursuant to Section 3(a) or by the
Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights shall be
governed by the terms thereof. Notwithstanding anything in this Agreement to
the contrary, in the event that the Company and the Executive are parties to any
other severance or similar agreement (a "Severance Agreement") pursuant to which
the Executive is entitled to receive payments and/or benefits upon the
termination of his employment with the Company, and the Executive's employment
with the Company is terminated under circumstances in which the Executive would
otherwise be entitled to receive payments and benefits under both this Agreement
and a Severance Agreement, the Executive shall have the right to elect to
receive payments and benefits under either this Agreement or a Severance
Agreement, but not both (except that the Executive may in all events receive all
payments and benefits to which he or she is entitled under a Severance Agreement
during the period between the Termination Date and the Election Date (as such
terms are defined below)). Within five business days following the date of the
termination of the Executive's employment with the Company under the
circumstances described in the preceding sentence, which shall be the effective
date of such termination if the termination is pursuant to Section 3(a) or such
other date that may be specified by the Executive if the termination is pursuant
to Section 3(b), the Company shall provide the Executive, in writing, a
reasonably detailed determination of the payments and other benefits under each
of this Agreement and the applicable Severance Agreement. The Executive shall
make the election provided for in this Section 3(c) by providing the Company
written notice thereof within 30 days after the Executive's receipt of the
written determination referred to in the preceding sentence; provided, however,
that if such election is not so made within such 30-day period, the Executive
shall be irrevocably deemed to have elected to receive payments and benefits
under this Agreement (the date on which such election is so made or deemed to
have been made being the "Election Date").
4. Severance Compensation and Benefits: (a) If, following the occurrence
-----------------------------------
of a Change in Control, the Company terminates the Executive's employment during
the Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (or, in the event that the circumstance described in
Section 3(c) hereof is applicable, within five business days after the
Election Date), a lump sum payment (the "Severance Payment") in an amount
equal to seven times the sum of (A) Base Pay (the aggregate amount and the
components of which shall be determined based on the highest rate in effect
for any period prior to the Termination Date), plus (B) Incentive Pay in an
amount equal to the higher of (i) the highest annual amount of Incentive
Pay paid to or earned by
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the Executive with respect to any fiscal year during the three fiscal years
immediately preceding the fiscal year in which the Termination Date occurs,
and (ii) 100% of the Incentive Pay amount payable upon the attainment of
100% of the objective(s) and 100% of the targeted or planned amount(s)
specified in or pursuant to the applicable agreement, policy, plan, program
or arrangement, whether or not attained as of such Termination Date, for
such Executive for the fiscal year in which the Termination Date occurs;
provided however, that in the event that the circumstance described in
Section 3(c) hereof is applicable, the Severance Payment shall be reduced
by the aggregate amount of all cash payments, if any, previously received
by the Executive pursuant to the Severance Agreement prior to the Election
Date. For purposes of this Agreement, the term "Termination Date" means the
effective date of the termination of Executive's employment with the
Company if the termination is pursuant to Section 3(a) hereof or such other
date as may be specified by the Executive if the termination is pursuant to
Section 3(b) hereof.
(ii) (A) for eighty-four (84) months following the Termination Date
(the "Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are substantially similar to the
better of (when considered in the aggregate) (X) those Employee Benefits
which the Executive was receiving or entitled to receive immediately prior
to the Change in Control, or (Y) those Employee Benefits which the
Executive was receiving or entitled to receive immediately prior to the
Termination Date, and (B) such Continuation Period will be considered
service with the Company for the purpose of determining service credits
under or in respect of any Employee Benefits applicable to the Executive,
his dependents or his beneficiaries; provided that for purposes of this
Section 4(a)(ii), Employee Benefits shall not include any Incentive Pay and
nothing in this Section 4(a) shall be construed to require the Company to
make any new grants of stock options to the Executive. If and to the
extent that any Employee Benefit described in subsection (A) or (B) of this
Section 4(a)(ii) is not or cannot be paid or provided under any applicable
law or regulation or under any policy, plan, program or arrangement of the
Company, then the Company will take all action necessary to ensure that
such Employee Benefit is provided through other means to the Executive, his
dependents and beneficiaries, as applicable, or the Company shall timely
pay to the Executive an amount in cash equal to the fair market value of
such foregone Employee Benefit.
(b) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided hereunder on a timely basis, the Company will pay interest on
the amount or value thereof at an annualized rate of interest equal to the so-
called composite "prime rate" as quoted from time to time during the relevant
period in the Southwest Edition of The Wall Street Journal. Such interest will
-----------------------
be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
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5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such tax (such tax or taxes, together with any
such interest and penalties, being hereafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment or payments (collectively, a "Gross-Up Payment"); provided, however,
that no Gross-Up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with an
ISO described in clause (i). The Gross-Up Payment shall be in an amount such
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Gross-Up Payment to the Executive. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall, at the same time as it makes such determination, furnish the Company and
the Executive a written opinion to the effect that the Executive has substantial
authority not to report any Excise Tax on his federal, state or local income or
other tax return. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) and the possibility of
similar uncertainty regarding applicable state or local tax law at the time of
any determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 5(f) and the Executive thereafter is required to make a payment of
any Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.
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(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 5. Any determination by the Accounting Firm as to
the amount of any Gross-Up Payment or Underpayment shall be binding upon the
Company and the Executive.
(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this Section
5 shall be borne by the Company. If such fees and expenses are initially paid
by the Executive, the Company shall reimburse the Executive the full amount of
such fees and expenses within five business days after receipt from the
Executive of a statement therefor and reasonable evidence of his payment
thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim and the
Executive shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive, subject to the provisions of Section 5(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
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(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested
claim shall be limited to issues with respect to which a Gross-Up Payment would
be payable hereunder and the Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without the Executive's prior written consent except as required by
law.
6. No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult and may be impossible for the Executive to find reasonably
comparable employment within a reasonable time period following the Termination
Date. In addition, the Company acknowledges that its severance pay plans and
policies applicable in general to its salaried
9
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employees typically do not provide for mitigation, offset or reduction of any
severance payments received thereunder. Accordingly, the payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement is hereby acknowledged by the Company to be reasonable,
and the Executive will not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
will any profits, income, earnings or other benefits from any source whatsoever
create any mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise.
7. Legal Fees and Expenses: It is the intent of the Company that the
-----------------------
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of the Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Executive hereunder. Accordingly, if it should appear to the
Executive that the Company has failed to comply with any of its obligations
under this Agreement or in the event that the Company or any other person takes
or threatens to take any action to declare this Agreement void or unenforceable,
or institutes any litigation or other action or proceeding designed to deny, or
to recover from, the Executive the benefits provided or intended to be provided
to the Executive hereunder, the Company irrevocably authorizes the Executive
from time to time to retain counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel and irrevocably
waives any related conflict of interest on the part of such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
8. Employment Rights: Nothing expressed or implied in this Agreement will
-----------------
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company or any Subsidiary prior to or
following any Change in Control. Any event or occurrence described in Section
3(b)(i), (ii), (v) or (vi) hereof following the commencement of a discussion
with a third person that ultimately results in a Change in Control shall be
deemed to have occurred after a Change in Control for the purposes of this
Agreement.
9. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
10. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and
10
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any successor to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or otherwise
(and such successor shall thereafter be deemed the "Company" for the purposes of
this Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive and the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by the Executive's
will or by the laws of descent and distribution and, in the event of any
attempted assignment or transfer contrary to this Section 10(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
11. Notices: For all purposes of this Agreement (except as otherwise
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expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 300 Crescent
Court, Suite 1200, Dallas, Texas 75201 (to the attention of the President of
the Company) and to the Executive at the Company's address, with a copy to the
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of changes of address shall be effective only upon receipt.
12. Governing Law: The validity, interpretation, construction and
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performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
13. Validity: If any provision of this Agreement or the application of
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any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
14. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed
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by such other party will be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. References to Sections are to references to
Sections of this Agreement.
15. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
16. Termination of Prior Agreements. The Change In Control Severance
-------------------------------
Agreement between the Executive and the Company, dated February 12, 1996, as
amended to the date hereof (the "Prior Agreement"), shall terminate
automatically upon the execution and delivery of this Agreement by the parties
hereto and shall thereafter be of no further force or effect; provided, however,
that if this Agreement is held by a court of competent jurisdiction to be wholly
invalid, unenforceable or otherwise illegal, the preceding clause shall have no
effect and the Prior Agreement shall be deemed to have continued at all times in
full force and effect. Subject to the immediately preceding proviso, this
Agreement supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By:
-----------------------
Don J. McDermett, Jr.
Senior Vice President &
General Counsel
--------------------------
[Executive]
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Exhibit 10.16
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CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
October 22, 1999, by and between Sterling Software, Inc., a Delaware corporation
(the "Company"), and Sterling L. Williams (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and is expected
to make major contributions to the profitability, growth and financial strength
of the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control (as hereinafter defined) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the sum of (i) the Executive's annual fixed or
base compensation, as may be determined from time to time by the Company,
whether acting through its Board of Directors (the "Board") or a committee
thereof, its President and CEO or otherwise, and (ii) the annual fees, if
any, paid or payable to the Executive in respect of his service during any
fiscal year of the Company as a member of the Board and any committee
thereof.
(b) "Change in Control" means the occurrence during the Term of any
of the following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors ("Voting Stock") of
such corporation or person immediately after such transaction are held
in the aggregate by the holders of Voting Stock of the Company
immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and less than two-thirds of the
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combined voting power of the then-outstanding Voting Stock of such
corporation or person is held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such sale or
transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-
1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, at any time 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 (other than a Director whose initial
assumption of office is in connection with an actual or threatened
election contest) who is first elected, or first nominated for
election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company (or a committee thereof) then
still in office who were Directors of the Company at the beginning of
any such period will be deemed to have been a Director of the Company
at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), 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.
(c) "Employee Benefits" means the perquisites, benefits and service
credit for perquisites or benefits as provided under any and all employee
perquisite or benefit policies, plans, programs or arrangements in which
the Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension,
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401(k), employee stock ownership (ESOP), employee stock purchase (ESPP),
supplemental executive retirement, or other retirement income or welfare
benefit, deferred compensation, incentive compensation, group or other
life, health, medical/hospital or other insurance (whether funded by actual
insurance or self-insured by the Company), disability, salary continuation,
expense reimbursement, executive automobile, tax and financial planning,
club memberships, incentive travel, tax reimbursement and other employee
benefit policies, plans, programs or arrangements that may now exist or any
successor policies, plans, programs or arrangements that may be adopted
hereafter by the Company.
(d) "Incentive Pay" means the aggregate annual bonus, incentive or
other payments of cash compensation, in addition to Base Pay, made or
authorized or contemplated to be made in regard to services rendered by the
Executive in any fiscal year pursuant to any bonus, incentive compensation,
profit-sharing, performance, discretionary pay or similar agreement,
policy, plan, program or arrangement (whether or not funded) of the Company
or any successor thereto.
(e) "Severance Period" means the period of time commencing on the
date of the first occurrence of a Change in Control and continuing until
the earliest of (i) the fifth anniversary of the occurrence of the Change
in Control, or (ii) the Executive's death; provided, however, that
commencing on each anniversary of the Change in Control, the Severance
Period will automatically be extended for an additional year unless, not
later than 90 calendar days prior to such anniversary date, either the
Company or the Executive shall have given written notice to the other that
the Severance Period is not to be so extended.
(f) "Term" means the period commencing as of the date first set forth
above and expiring as of the later of (i) the close of business on December
31, 2004, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 2001 and each January 1
thereafter, the Term of this Agreement will automatically be extended for
an additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given written
notice that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 8, if,
prior to a Change in Control, the Executive ceases for any reason to be an
employee of the Company or any Subsidiary, thereupon without further action
the Term shall be deemed to have expired and this Agreement will
immediately terminate and be of no further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
compensation and benefits provided by Section 4 hereof.
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(b) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period, with the right to the compensation and benefits as provided in
Section 4, upon the occurrence of one or more of the following events
(regardless of whether any other reason for such termination exists or has
occurred, including without limitation, other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties attached to
the position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay or Incentive Pay as in effect for the Executive immediately prior to
the occurrence of a Change in Control or such higher amount of Base Pay or
Incentive Pay as may thereafter be determined by the Company, whether
acting through the Board or a committee thereof, its President and CEO or
otherwise, or (C) the termination or denial of the Executive's rights to
Employee Benefits or a reduction in the scope or value thereof, any of
which is not remedied by the Company within 10 calendar days after receipt
by the Company of written notice from the Executive of such change,
reduction, termination or denial, as the case may be;
(iii) A determination by the Executive (which determination will
be conclusive and binding upon the parties hereto provided it has been made
in good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered the
Executive's performance of, or has caused the Executive to suffer a
substantial reduction in, any of the authorities, powers, functions,
responsibilities or duties attached to the position held by the Executive
immediately prior to the Change in Control, which situation is not remedied
within 10 calendar days after written notice to the Company from the
Executive of such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities
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or duties hereunder at least 20% more (in terms of aggregate days in any
calendar year or in any calendar quarter when annualized for purposes of
comparison to any prior year) than was required of the Executive in any of
the three full years immediately prior to the Change in Control without, in
either case, his prior written consent; or
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor
thereto.
(c) A termination by the Company pursuant to Section 3(a) or by
the Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights shall be
governed by the terms thereof.
4. Severance Compensation and Benefits: (a) If, following the occurrence
-----------------------------------
of a Change in Control, the Company terminates the Executive's employment during
the Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (as defined below), a lump sum payment (the "Severance
Payment") in an amount equal to five times the sum of (A) Base Pay (the
aggregate amount and the components of which shall be determined based on
the highest rate in effect for any period prior to the Termination Date),
plus (B) Incentive Pay in an amount equal to the higher of (i) the highest
annual amount of Incentive Pay paid to or earned by the Executive with
respect to any fiscal year during the three fiscal years immediately
preceding the fiscal year in which the Termination Date occurs, and (ii)
100% of the Incentive Pay amount payable upon the attainment of 100% of the
objective(s) and 100% of the targeted or planned amount(s) specified in or
pursuant to the applicable agreement, policy, plan, program or arrangement,
whether or not attained as of such Termination Date, for such Executive for
the fiscal year in which the Termination Date occurs. For purposes of this
Agreement, the term "Termination Date" means the effective date of the
termination of Executive's employment with the Company if the termination
is pursuant to Section 3(a) hereof or such other date as may be specified
by the Executive if the termination is pursuant to Section 3(b) hereof.
(ii) (A) for 60 months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are substantially similar to the
better of (when considered in the aggregate) (X) those Employee Benefits
which the Executive was receiving or entitled to receive immediately prior
to the Change in Control, or (Y) those Employee Benefits which the
Executive was receiving or entitled to receive immediately prior to the
Termination Date, and (B) such Continuation Period will be considered
service with the Company for the purpose of determining service credits
under or in respect of any Employee Benefits applicable to the Executive,
his dependents or his beneficiaries; provided that for purposes of this
Section 4(a)(ii), Employee Benefits shall not include any Incentive Pay and
nothing in this Section 4(a) shall be construed to require the Company to
make any new grants of stock options to the Executive. If and to the
extent that any Employee Benefit described in subsection (A) or
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(B) of this Section 4(a)(ii) is not or cannot be paid or provided under any
applicable law or regulation or under any policy, plan, program or
arrangement of the Company, then the Company will take all action necessary
to ensure that such Employee Benefit is provided through other means to the
Executive, his dependents and beneficiaries, as applicable, or the Company
shall timely pay to the Executive an amount in cash equal to the fair
market value of such foregone Employee Benefit.
(b) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided hereunder on a timely basis, the Company will pay interest on
the amount or value thereof at an annualized rate of interest equal to the so-
called composite "prime rate" as quoted from time to time during the relevant
period in the Southwest Edition of The Wall Street Journal. Such interest will
-----------------------
be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such tax (such tax or taxes, together with any
such interest and penalties, being hereafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment or payments (collectively, a "Gross-Up Payment"); provided, however,
that no Gross-Up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with an
ISO described in clause (i). The Gross-Up Payment shall be in an amount such
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the
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Termination Date, if applicable, and any such other time or times as may be
requested by the Company or the Executive. If the Accounting Firm determines
that any Excise Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to the Executive within five business days after
receipt of such determination and calculations with respect to any Gross-Up
Payment to the Executive. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, it shall, at the same time as it makes such
determination, furnish the Company and the Executive a written opinion to the
effect that the Executive has substantial authority not to report any Excise Tax
on his federal, state or local income or other tax return. As a result of the
uncertainty in the application of Section 4999 of the Code (or any successor
provision thereto) and the possibility of similar uncertainty regarding
applicable state or local tax law at the time of any determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts or fails to pursue its remedies pursuant to Section
5(f) and the Executive thereafter is required to make a payment of any Excise
Tax, the Executive shall direct the Accounting Firm to determine the amount of
the Underpayment that has occurred and to submit its determination and detailed
supporting calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment shall be promptly paid by the Company to, or for
the benefit of, the Executive within five business days after receipt of such
determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 5. Any determination by the Accounting Firm as to
the amount of any Gross-Up Payment or Underpayment shall be binding upon the
Company and the Executive.
(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this Section
5 shall be borne by the Company. If such fees and expenses are initially paid
by the Executive, the Company shall reimburse the Executive the full amount of
such fees and expenses within five business days after receipt from the
Executive of a statement therefor and reasonable evidence of his payment
thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the
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payment by the Company of a Gross-Up Payment. Such notification shall be given
as promptly as practicable but no later than 10 business days after the
Executive actually receives notice of such claim and the Executive shall further
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid (in each case, to the extent known by the Executive).
The Executive shall not pay such claim prior to the earlier of (i) the
expiration of the 30-calendar-day period following the date on which he gives
such notice to the Company and (ii) the date that any payment of amount with
respect to such claim is due. If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive, subject to the provisions of Section 5(h) of this Agreement,
shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested
claim shall be limited to issues with respect to which a Gross-Up Payment would
be payable hereunder and the Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
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(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without the Executive's prior written consent except as required by
law.
6. No Mitigation Obligation: The Company hereby acknowledges that it
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will be difficult and may be impossible for the Executive to find reasonably
comparable employment within a reasonable time period following the Termination
Date. In addition, the Company acknowledges that its severance pay plans and
policies applicable in general to its salaried employees typically do not
provide for mitigation, offset or reduction of any severance payments received
thereunder. Accordingly, the payment of the severance compensation by the
Company to the Executive in accordance with the terms of this Agreement is
hereby acknowledged by the Company to be reasonable, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income, earnings
or other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive hereunder or
otherwise.
7. Legal Fees and Expenses: It is the intent of the Company that the
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Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of the Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Executive hereunder. Accordingly, if it should appear to the
Executive that the Company has failed to comply with any of its obligations
under this Agreement or in the event that the Company or any other person takes
or threatens to take any action to declare this Agreement void or unenforceable,
or institutes any litigation or other action or proceeding designed to deny, or
to recover from, the Executive the benefits provided or intended to be provided
to the Executive hereunder, the Company irrevocably authorizes the Executive
from time to time to retain counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel and irrevocably
waives any related conflict of interest on the part of such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to
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whether the Executive prevails, in whole or in part, in connection with any of
the foregoing, the Company will pay and be solely financially responsible for
any and all attorneys' and related fees and expenses incurred by the Executive
in connection with any of the foregoing.
8. Employment Rights: Nothing expressed or implied in this Agreement
-----------------
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any Subsidiary
prior to or following any Change in Control. Any event or occurrence described
in Section 3(b)(i), (ii), (v) or (vi) hereof following the commencement of a
discussion with a third person that ultimately results in a Change in Control
shall be deemed to have occurred after a Change in Control for the purposes of
this Agreement.
9. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
10. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but will
not otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive and the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by the Executive's
will or by the laws of descent and distribution and, in the event of any
attempted assignment or transfer contrary to this Section 10(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
11. Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier
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service such as Federal Express, UPS, or Purolator, addressed to the Company at
300 Crescent Court, Suite 1200, Dallas, Texas 75201 (to the attention of the
President of the Company) and to the Executive at the Company's address, with a
copy to the Executive at his or her principal residence, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
12. Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
13. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
14. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are to references to Sections of this
Agreement.
15. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
16. Termination of Prior Agreements. The Change in Control Severance
-------------------------------
Agreement between the Executive and the Company, dated February 12, 1996, as
amended to the date hereof (the "Prior Agreement"), shall terminate
automatically upon the execution and delivery of this Agreement by the parties
hereto and shall thereafter be of no further force or effect; provided, however,
that if this Agreement is held by a court of competent jurisdiction to be wholly
invalid, unenforceable or otherwise illegal, the preceding clause shall have no
effect and the Prior Agreement shall be deemed to have continued at all times in
full force and effect. Subject to the immediately preceding proviso, this
Agreement supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof. Executive and the Company agree that all
references to the Prior Agreement made in that certain CEO Agreement dated
February 12, 1996 between Executive and the Company shall henceforth be deemed
to be references to this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By:
-----------------------------------
Don J. McDermett
Senior Vice President &
General Counsel
---------------------------------------
Sterling L. Williams
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Exhibit 10.17
-------------
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
October 22, 1999, by and between Sterling Software, Inc., a Delaware corporation
(the "Company"), and ______________________________ (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and is expected
to make major contributions to the profitability, growth and financial strength
of the Company;
WHEREAS, the Company recognizes that, as is the case of most companies, the
possibility of a Change in Control (as hereinafter defined) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means .the Executive's annual fixed or base
compensation, as may be determined from time to time by the Company,
whether acting through its Board of Directors (the "Board") or a committee
thereof, its President and CEO or otherwise.
(b) "Change in Control" means the occurrence during the Term of any of
the following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than two-thirds of
the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors ("Voting Stock") of
such corporation or person immediately after such transaction are held
in the aggregate by the holders of Voting Stock of the Company
immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and less than two-thirds of the combined voting power of the
then-outstanding Voting Stock of such corporation or person is held in
the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
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(iii) There is a report filed on Schedule 13D or Schedule 14D-
1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) If, at any time 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 (other than a Director whose initial
assumption of office is in connection with an actual or threatened
election contest) who is first elected, or first nominated for
election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company (or a committee thereof) then
still in office who were Directors of the Company at the beginning of
any such period will be deemed to have been a Director of the Company
at the beginning of such period.
Notwithstanding the foregoing provisions of Sections 1(b)(iii) or 1(b)(iv),
unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(b)(iii) or 1(b)(iv) solely because (A) the Company,
(B) an entity in which the Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock (a "Subsidiary"), 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.
(c) "Employee Benefits" means the perquisites, benefits and service
credit for perquisites or benefits as provided under any and all employee
perquisite or benefit policies, plans, programs or arrangements in which
Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension, 401(k),
employee stock ownership (ESOP), employee stock purchase (ESPP),
supplemental executive retirement, or other retirement income or welfare
benefit, deferred compensation, incentive compensation, group or other
life, health, medical/hospital or other insurance (whether funded by actual
insurance or self-insured by the Company), disability, salary
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continuation, expense reimbursement, executive automobile, tax and
financial planning, club memberships, incentive travel, tax reimbursement
and other employee benefit policies, plans, programs or arrangements that
may now exist or any successor policies, plans, programs or arrangements
that may be adopted hereafter by the Company.
(d) "Incentive Pay" means the aggregate annual bonus, incentive or
other payments of cash compensation, in addition to Base Pay, made or
authorized or contemplated to be made in regard to services rendered by the
Executive in any fiscal year pursuant to any bonus, incentive compensation,
profit-sharing, performance, discretionary pay or similar agreement,
policy, plan, program or arrangement (whether or not funded) of the Company
or any successor thereto.
(e) "Severance Period" means the period of time commencing on the
date of the first occurrence of a Change in Control and continuing until
the earliest of (i) the _____ anniversary of the occurrence of the Change
in Control, or (ii) the Executive's death; provided, however, that
commencing on each anniversary of the Change in Control, the Severance
Period will automatically be extended for an additional year unless, not
later than 90 calendar days prior to such anniversary date, either the
Company or the Executive shall have given written notice to the other that
the Severance Period is not to be so extended.
(f) "Term" means the period commencing as of the date first set forth
above and expiring as of the later of (i) the close of business on December
31, 2004, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 2001 and each January 1
thereafter, the Term of this Agreement will automatically be extended for
an additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given written
notice that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 8, if,
prior to a Change in Control, the Executive ceases for any reason to be an
employee of the Company or any Subsidiary, thereupon without further action
the Term shall be deemed to have expired and this Agreement will
immediately terminate and be of no further effect.
2. Operation of Agreement: This Agreement will be effective and binding
----------------------
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time
during the Term, without further action, this Agreement shall become immediately
operative.
3. Termination Following a Change in Control: (a) In the event of the
-----------------------------------------
occurrence of a Change in Control, the Executive's employment may be terminated
by the Company during the Severance Period. If, during the Severance Period,
the Executive's employment is terminated by the Company or any Subsidiary other
than as a result of the Executive's death, the Executive will be entitled to the
compensation and benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate his or her employment with the Company during the
Severance Period, with the right to the compensation and benefits as provided in
Section 4, upon the occurrence of one or more of the
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following events (regardless of whether any other reason for such termination
exists or has occurred, including without limitation, other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office of the Company which the Executive held immediately
prior to a Change in Control, or the removal of the Executive as a Director
of the Company (or any successor thereto) if the Executive shall have been
a Director of the Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties attached to
the position which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate amount of the Executive's Base
Pay or Incentive Pay as in effect for the Executive immediately prior to
the occurrence of a Change in Control or such higher amount of Base Pay or
Incentive Pay as may thereafter be determined by the Company, whether
acting through the Board or a committee thereof, its President and CEO or
otherwise, or (C) the termination or denial of the Executive's rights to
Employee Benefits or a reduction in the scope or value thereof, any of
which is not remedied by the Company within 10 calendar days after receipt
by the Company of written notice from the Executive of such change,
reduction, termination or denial, as the case may be;
(iii) A determination by the Executive (which determination will be
conclusive and binding upon the parties hereto provided it has been made in
good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following a Change in
Control, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the Change in Control, which has rendered the
Executive substantially unable to carry out, has substantially hindered
Executive's performance of, or has caused Executive to suffer a substantial
reduction in, any of the authorities, powers, functions, responsibilities
or duties attached to the position held by the Executive immediately prior
to the Change in Control, which situation is not remedied within 10
calendar days after written notice to the Company from the Executive of
such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 10(a);
(v) The Company relocates its principal executive offices, or
requires the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or requires the Executive to
travel away from his office in the course of discharging his
responsibilities or duties hereunder at least 20% more (in terms of
aggregate days in any calendar year or in any calendar quarter when
annualized for purposes of comparison to any prior year) than
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was required of Executive in any of the three full years immediately prior
to the Change in Control without, in either case, his prior written
consent; or
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor
thereto.
(c) A termination by the Company pursuant to Section 3(a) or by
the Executive pursuant to Section 3(b) will not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights shall be
governed by the terms thereof. The Company and the Executive are parties to a
Severance Agreement, dated as of __________ __, 199_ (as such agreement may be
amended from time to time, the "Severance Agreement"). Notwithstanding anything
contained in this Agreement to the contrary, in the event the Executive's
employment with the Company is terminated under circumstances in which the
Executive would otherwise be entitled to receive payments and benefits under
both this Agreement and the Severance Agreement, the Executive shall have the
right to elect to receive payments and benefits under either this Agreement or
the Severance Agreement, but not both (except that the Executive may in all
events receive all payments and benefits to which he or she is entitled under
the Severance Agreement during the period between the Termination Date and the
Election Date (as such terms are defined below)). Within five business days
following the date of the termination of the Executive's employment with the
Company under the circumstances described in the preceding sentence (the
"Termination Date"), which shall be the effective date of such termination if
the termination is pursuant to Section 3(a) or such other date that may be
specified by the Executive if the termination is pursuant to Section 3(b), the
Company shall provide the Executive, in writing, a reasonably detailed
determination of the payments and other benefits under each of this Agreement
and the Severance Agreement. Executive shall make the election provided for in
this Section 3(c) by providing the Company written notice thereof within 30 days
after the Executive's receipt of the written determination referred to in the
preceding sentence; provided, however, that if such election is not so made
within such 30-day period, the Executive shall be irrevocably deemed to have
elected to receive payments and benefits under this Agreement (the date on which
such election is so made or deemed to have been made being the "Election Date").
4. Severance Compensation and Benefits: (a) If, following the occurrence
-----------------------------------
of a Change in Control, the Company terminates the Executive's employment during
the Severance Period pursuant to Section 3(a) (other than as a result of the
Executive's death), or if the Executive terminates his employment during the
Severance Period pursuant to Section 3(b), the Company will:
(i) pay to the Executive, within five business days after the
Termination Date (or, in the event that the circumstance described in
Section 3(c) hereof is applicable, within five business days after the
Election Date), a lump sum payment (the "Severance Payment") in an amount
equal to ___________ times the sum of (A) Base Pay (the aggregate amount
and the components of which shall be determined based on the highest rate
in effect for any period prior to the Termination Date), plus (B) Incentive
Pay in an amount equal to the higher of (i) the highest annual amount of
Incentive Pay paid to or earned by the Executive with respect to any fiscal
year during the three fiscal years immediately preceding the fiscal year in
which the Termination Date occurs, and (ii) 100% of the
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Incentive Pay amount payable upon the attainment of 100% of the
objective(s) and 100% of the targeted or planned amount(s) specified in or
pursuant to the applicable agreement, policy, plan, program or arrangement,
whether or not attained as of such Termination Date, for such Executive for
the fiscal year in which the Termination Date occurs; provided however,
that the Severance Payment shall be reduced by the aggregate amount of all
cash payments, if any, previously received by the Executive pursuant to the
Severance Agreement prior to the Election Date.
(ii) (A) for _____ months following the Termination Date (the
"Continuation Period"), arrange at its sole expense, to provide the
Executive with Employee Benefits that are substantially similar to the
better of (when considered in the aggregate) (X) those Employee Benefits
which the Executive was receiving or entitled to receive immediately prior
to the Change in Control, or (Y) those Employee Benefits which the
Executive was receiving or entitled to receive immediately prior to the
Termination Date, and (B) such Continuation Period will be considered
service with the Company for the purpose of determining service credits
under or in respect of any Employee Benefits applicable to the Executive,
his dependents or his beneficiaries; provided that for purposes of this
Section 4(a)(ii), Employee Benefits shall not include any Incentive Pay and
nothing in this Section 4(a) shall be construed to require the Company to
make any new grants of stock options to the Executive. If and to the
extent that any Employee Benefit described in subsection (A) or (B) of this
Section 4(a)(ii) is not or cannot be paid or provided under any applicable
law or regulation or under any policy, plan, program or arrangement of the
Company, then the Company will take all action necessary to ensure that
such Employee Benefit is provided through other means to the Executive, his
dependents and beneficiaries, as applicable, or the Company shall timely
pay to the Executive an amount in cash equal to the fair market value of
such foregone Employee Benefit.
(b) Without limiting the rights of the Executive at law or in
equity, if the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will pay
interest on the amount or value thereof at an annualized rate of interest equal
to the so-called composite "prime rate" as quoted from time to time during the
relevant period in the Southwest Edition of The Wall Street Journal. Such
-----------------------
interest will be payable as it accrues on demand. Any change in such prime rate
will be effective on and as of the date of such change.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company: (a) Anything in this
------------------------------------------
Agreement to the contrary notwithstanding, in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
all or any portion of any payment or distribution by the Company or any of its
affiliates to or for the benefit of the Executive pursuant to the terms of this
Agreement or otherwise, including under any stock option or other agreement,
plan, policy, program or arrangement (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto), by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto), or
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to any similar tax imposed by state or local law, or any interest or penalties
with respect to such tax (such tax or taxes, together with any such interest and
penalties, being hereafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment or payments
(collectively, a "Gross-Up Payment"); provided, however, that no Gross-Up
Payment shall be made with respect to the Excise Tax, if any, attributable to
(i) any incentive stock option, as defined by Section 422 of the Code ("ISO")
granted prior to the execution of this Agreement, or (ii) any stock appreciation
or similar right, whether or not limited, granted in tandem with an ISO
described in clause (i). The Gross-Up Payment shall be in an amount such that,
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Gross-Up Payment to the Executive. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall, at the same time as it makes such determination, furnish the Company and
the Executive a written opinion to the effect that the Executive has substantial
authority not to report any Excise Tax on his federal, state or local income or
other tax return. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) and the possibility of
similar uncertainty regarding applicable state or local tax law at the time of
any determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 5(f) and the Executive thereafter is required to make a payment of
any Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 5. Any determination by the Accounting Firm as to
the amount of any Gross-Up Payment or Underpayment shall be binding upon the
Company and the Executive.
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(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this Section
5 shall be borne by the Company. If such fees and expenses are initially paid
by the Executive, the Company shall reimburse the Executive the full amount of
such fees and expenses within five business days after receipt from the
Executive of a statement therefor and reasonable evidence of his payment
thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim and the
Executive shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive, subject to the provisions of Section 5(h) of
this Agreement, shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 5(f), the
8
<PAGE>
Company shall control all proceedings taken in connection with the contest of
any claim contemplated by this Section 5(f) and, at its sole option, may pursue
or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim (provided,
however, that the Executive may participate therein at his own cost and expense)
and may, at its option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 5(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 5(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Any information provided by Executive to the Company under this
Section 5 shall be treated confidentially by the Company and will not be
provided by the Company to any other person than the Company's professional
advisors without Executive's prior written consent except as required by law.
6. No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult and may be impossible for the Executive to find reasonably
comparable employment within a reasonable time period following the Termination
Date. In addition, the Company acknowledges that its severance pay plans and
policies applicable in general to its salaried employees typically do not
provide for mitigation, offset or reduction of any severance payments received
thereunder. Accordingly, the payment of the severance compensation by the
Company to the Executive in accordance with the terms of this Agreement is
hereby acknowledged by the Company to be reasonable, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income, earnings
or other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive hereunder or
otherwise.
9
<PAGE>
7. Legal Fees and Expenses: It is the intent of the Company that the
-----------------------
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel and irrevocably
waives any related conflict of interest on the part of such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
8. Employment Rights: Nothing expressed or implied in this Agreement
-----------------
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any Subsidiary
prior to or following any Change in Control. Any event or occurrence described
in Section 3(b)(i), (ii), (v) or (vi) hereof following the commencement of a
discussion with a third person that ultimately results in a Change in Control
shall be deemed to have occurred after a Change in Control for the purposes of
this Agreement.
9. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
10. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but will
not otherwise be assignable, transferable or delegable by the Company.
10
<PAGE>
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive and the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 10(c), the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
11. Notices: For all purposes of this Agreement (except as otherwise
-------
expressly provided in this Agreement with respect to notice periods), all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
ten business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or five business days
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company at 300 Crescent
Court, Suite 1200, Dallas, Texas 75201 (to the attention of the President of
the Company) and to the Executive at the Company's address, with a copy to the
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of changes of address shall be effective only upon receipt.
12. Governing Law: The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
13. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
14. Miscellaneous: No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are to references to Sections of this
Agreement.
11
<PAGE>
15. Counterparts: This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
16. Termination of Prior Agreements. The Change in Control Severance
-------------------------------
Agreement between the Executive and the Company, dated _______________, as
amended to the date hereof (the "Prior Agreement"), shall terminate
automatically upon the execution and delivery of this Agreement by the parties
hereto and shall thereafter be of no further force or effect; provided, however,
that if this Agreement is held by a court of competent jurisdiction to be wholly
invalid, unenforceable or otherwise illegal, the preceding clause shall have no
effect and the Prior Agreement shall be deemed to have continued at all times in
full force and effect. Subject to the immediately preceding proviso, this
Agreement supersedes all prior agreements, arrangements and understandings with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
STERLING SOFTWARE, INC.
By:
--------------------------------
Don J. McDermett, Jr.
Senior Vice President &
General Counsel
------------------------------------
[Executive]
12
<PAGE>
Exhibit 10.19
-------------
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the 30th
day of June, 1997 by and between Sterling Software, Inc., a Delaware corporation
("Sterling Software"), and F. L. "Mike" Harvey, an individual ("Executive").
RECITALS:
WHEREAS, Sterling Software acquires, develops, markets and supports a broad
range of products and services; and
WHEREAS, Sterling Software desires to retain Executive as its Senior Vice
President; and
WHEREAS, Executive is willing to accept such responsibilities;
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Employment. Executive agrees to render such managerial services as
----------
are customarily required of a Senior Vice President, and Sterling
Software agrees to utilize such services on the terms and conditions
contained herein.
2. Term. This Agreement shall commence on the date first set forth above
----
and shall continue in effect for twenty-four (24) months after the
"Notice Date" as defined in Section 3 hereof.
3. Termination of Employment. The parties acknowledge that Executive is
-------------------------
employed "at will" and may be terminated by Sterling Software at any
time with or without cause. The Executive shall be entitled to
termination pay calculated in accordance with Section 4 hereof upon
termination of Executive's employment by Sterling Software, with or
without cause.
The date on which a notice of termination is given to Executive by
Sterling Software shall be deemed the "Notice Date" with the
termination to be effective twenty-four (24) months following the
Notice Date. On the Notice Date, Executive shall be deemed to have
been assigned "no duties," shall vacate his or her office and shall
resign as an officer of Sterling Software and its subsidiaries. Since
Executive will be assigned "no duties" with Sterling Software,
Executive
<PAGE>
shall be free to pursue other employment or consulting opportunities
during the 24-month period in which Executive receives termination
pay.
4. Termination Pay. For purposes of this Agreement, if Executive's
---------------
employment is terminated (or deemed to be terminated) pursuant to
Section 3, upon receipt from Executive (or Executive's estate or
personal representative) of a fully executed release in form
reasonably acceptable to counsel for Sterling Software, Sterling
Software shall pay, or cause one of its subsidiaries to pay, to
Executive as termination pay:
(a) an amount equal to two hundred percent of Executive's aggregate
monthly salary for the twelve (12) months immediately preceding
the Notice Date (or, if Executive shall not have been employed
for such twelve month period, an amount equal to two hundred
percent of Executive's annual salary rate in effect immediately
prior to the Notice Date); and
(b) an amount equivalent to the product of two times:
(i) if Executive shall have completed at least twelve months
employment with Sterling Software prior to the Notice Date,
the amount of Executive's aggregate bonuses during the
twelve months immediately prior to the Notice Date (the
"Last Bonus"), after deducting from such product one hundred
percent (100%) of the accrued but unpaid bonus amount
Executive is entitled to receive on the Notice Date,
pursuant to any bonus or incentive compensation plan of
Sterling Software, for periods of service after the period
for which Executive received or was entitled to receive the
Last Bonus or
(ii) if Executive shall not have completed at least twelve months
employment with Sterling Software prior to the Notice Date,
an amount equal to the greater of
(x) the amount of the Last Bonus, if any or
(y) 100% of the aggregate of the budgeted annual bonus,
incentive or other budgeted payments of cash
compensation, in addition to the Executive's annual
base salary, at plan for such Executive in effect
immediately prior to the Notice Date,
after deducting from such product under this clause (ii) one
hundred percent (100%) of the accrued but unpaid bonus
amount Executive is entitled to receive on the Notice Date,
pursuant to any bonus or incentive plan of Sterling
Software, for periods of service
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<PAGE>
after the period for which Executive received or was
entitled to receive the Last Bonus, if any.
In the event of Executive's death or disability following the Notice
Date, Executive, Executive's estate or Executive's personal
representative, as the case may be, shall continue to receive the
termination payments provided for in this Section 4.
5. Disbursement of Termination Pay. The aggregate amount of all
-------------------------------
termination payments that are payable to Executive as provided in
Section 4 hereof shall be determined in good faith by Sterling
Software within 15 days following the Notice Date, and such
termination payments shall be distributed by Sterling Software to
Executive in forty-eight (48) equal twice-monthly installments
beginning thirty (30) days following the Notice Date and continuing
twice-monthly thereafter.
6. Continuation of Medical and Health Benefits. For a period of twenty-
-------------------------------------------
four (24) months following the Notice Date, Sterling Software shall
arrange to provide Executive, at no additional charge to Executive,
with life, medical, dental, health, accident and disability insurance
benefits substantially similar to those that Executive is receiving or
is entitled to receive immediately prior to the Notice Date, which
benefits shall in no event be less than those benefits in effect
immediately prior to the Notice Date.
7. Continued Participation in Employee Plans. For a period of twenty-
-----------------------------------------
four (24) months following the Notice Date, Executive shall continue
to participate in Sterling Software's Employee Stock Ownership Plan
and/or 401(k) Plan and any other such plans as may be adopted in the
future for the benefit and retention of Sterling Software's executive
officers. In no event will Sterling Software be required to make any
new grants of options to such Executive under Sterling Software's
Stock Option Plans after the Notice Date.
8. Change-in-Control. Sterling Software and the Executive are parties to
-----------------
a Change-in-Control Severance Agreement, dated as of June 30, 1997 (as
such agreement may be amended from time to time, the "Change-in-
Control Agreement"). Notwithstanding anything contained in this
Agreement to the contrary, in the event the Notice Date occurs under
circumstances in which the Executive would otherwise be entitled to
receive payments and benefits under both this Agreement and the
Change-in-Control Agreement, the Executive shall have the right to
elect to receive payments and benefits under either this Agreement or
the Change-in-Control Agreement, but not both. Within five business
days following the Notice Date under circumstances in which this
Section 8 would apply, Sterling Software shall provide the Executive,
in writing, a reasonably detailed determination of the payments and
other benefits under each of this Agreement and the Change-in-Control
Agreement. The Executive shall make the election provided for in this
Section 8 within thirty calendar days after Executive's receipt of the
written
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<PAGE>
determination referred to in the preceding sentence; provided,
however, that if such election is not so made within such 30-day
period, the Executive shall be irrevocably deemed to have elected to
receive payments and benefits under the Change-in-Control Agreement.
Prior to the date on which Executive makes or is deemed to have made
the election referred to above, he shall receive all benefits under
Sections 4, 5, 6 and 7 of this Agreement as if the Executive had made
the election to receive benefits and payments under this Agreement.
9. Miscellaneous.
-------------
(i) Notices, demands, payments, reports and correspondence shall be
addressed to the parties hereto at the address for such party
set forth below or such other places as may from time to time be
designated in writing to the other party. Notices hereunder
shall be deemed to be given on the date such notices are
actually received.
If to Sterling Software, to: 300 Crescent Court, Suite 1200
Dallas, Texas 75201
Attention: President
If to Executive, to: F. L. "Mike" Harvey
P.O. Box 241
Lincoln, Mass. 01773
(ii) This Agreement shall be binding upon Sterling Software and
Executive and their respective successors, assigns, heirs and
personal representatives.
(iii) The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of the
provisions of this Agreement.
(iv) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and Sterling
Software. No waiver by either party hereto at any time of any
breach by the other party hereto or compliance with any
condition or provision of this Agreement to be performed by such
other party will be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, expressed or implied with respect to the subject
matter hereof have been made by either party which are not set
forth expressly in this Agreement. References to Sections are to
references to Sections of this Agreement.
-4-
<PAGE>
Executed by the parties hereto as of the date first set forth above.
EXECUTIVE
-----------------------------------
F. L. "Mike" Harvey
STERLING SOFTWARE, INC.
By:
--------------------------------
Sterling L. Williams
President and
Chief Executive Officer
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<PAGE>
Exhibit 10.21
-------------
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT is made and entered into as of the 22nd day of
October 1999, by and between Sterling Software, Inc., a Delaware corporation
(the "Company"), and _______________ ("Indemnitee"), a Director and/or Officer
of the Company.
WITNESSETH:
WHEREAS, it is essential to the Company to retain and attract as Directors and
Officers the most capable persons available; and
WHEREAS, service as a director or officer of a corporation, particularly a
corporation the securities of which are or are to be publicly held, may subject
a person to substantial litigation and other risks; and
WHEREAS, it is the express policy of the Company to indemnify its Directors
and Officers so as to provide them with the maximum possible protection
permitted by law; and
WHEREAS, Indemnitee does not regard the indemnification provided for under the
Company's Certificate of Incorporation and Bylaws as adequate in the present
circumstances and may not be willing to serve as a Director or Officer without
the provision of further rights to indemnification, and the Company desires
Indemnitee to serve in such capacity;
NOW THEREFORE, the Company and Indemnitee do hereby agree as follows:
1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as a
------------------
Director and/or Officer of the Company until his or her death, or his or her
resignation or removal from office, or the election or appointment and
qualification of his or her successor, whichever shall first occur.
2. Definitions. As used in this Agreement:
-----------
(a) The term "Proceeding" shall include any threatened, pending or
completed investigation, claim, action, suit or proceeding, whether of a
civil, criminal, administrative or investigative nature (including without
limitation any action, suit or proceeding by or in the right of the
corporation to procure a judgment in its favor), in which Indemnitee may be or
may have been or may be threatened to be made to become involved in any manner
(including without limitation as a party or a witness) by reason of the fact
that Indemnitee is or was a Director, Officer, employee or agent of the
Company, or is or was serving at the request of the Board of Directors or an
Officer of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (whether or
not for profit), or by reason of anything actually or allegedly done or not
done by Indemnitee in any such capacity, whether or not Indemnitee is serving
in such capacity at the time any liability or expense is incurred for which
indemnification or reimbursement can be provided under this Agreement.
-1-
<PAGE>
(b) The term "Expenses" includes, without limitation, attorneys' fees and
disbursements and all other costs, expenses and obligations actually and
reasonably incurred by Indemnitee in connection with (i) investigating,
defending, being a witness in or otherwise participating in, or preparing to
defend, be a witness in or participate in, any Proceeding, (ii) establishing a
right to indemnification under Paragraph 7 of this Agreement, or (iii)
obtaining recovery under any directors' and officers' liability or similar
insurance policy or policies purchased or maintained at any time by the
Company, but shall not include the amount of any judgments, fines or penalties
entered or assessed against Indemnitee or any amounts paid or payable in
settlement by Indemnitee.
(c) The term "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 less
than two-thirds of the combined voting power of the then-outstanding
Voting Stock of such corporation or person is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale
or transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
disclosing that any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange
Act) of securities representing 20% or more of the combined voting power
of the then-outstanding Voting Stock of the Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of the
Company has occurred or will occur in the future pursuant to any then-
existing contract or transaction; or
(v) If, at any time 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 (other than a director whose initial assumption of office
is in
-2-
<PAGE>
connection with an actual or threatened election contest) 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), unless
otherwise determined in a specific case by majority vote of the board of
directors of the Company, a "Change in Control" shall not be deemed to have
occurred for purposes of clause (iii) or (iv) solely because (A) the
Company, (B) an entity in which the Company directly or indirectly
beneficially owns 50% or more of the outstanding Voting Stock (a
"Subsidiary"), 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.
(d) References to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with
respect to any employee benefit plan; references to "serving at the request
of the Board of Directors or an Officer of the Company" shall include any
service as a Director, Officer, employee or agent of the Company which
imposes duties on, or involves services by, such Director, Officer, employee
or agent with respect to an employee benefit plan or its participants or
beneficiaries; and a person who acted in good faith and in a manner he or
she reasonably believed to be in the interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" for purposes of
this Agreement.
3. Indemnity in Third-Party Proceedings. The Company shall indemnify
------------------------------------
Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee
is or was or is threatened to be made to become involved in any manner,
including without limitation as a party or witness, in any Proceeding (other
than a Proceeding by or in the right of the Company to procure a judgment in its
favor) against any and all Expenses and any and all judgments, fines and
penalties entered or assessed against Indemnitee, and any and all amounts
reasonably paid or payable in settlement by Indemnitee, in connection with such
Proceeding, but only if Indemnitee acted in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Company and, in the case of a Proceeding of a criminal nature, in addition, had
no reasonable cause to believe that his or her conduct was unlawful.
4. Indemnity in Proceedings By or In the Right of the Company. The
----------------------------------------------------------
Company shall indemnify Indemnitee in accordance with the provisions of this
Paragraph 4 if Indemnitee is or was or is threatened to be made to become
involved in any manner, including without limitation as a party or witness, in
any Proceeding by or in the right of the Company, against any and all Expenses,
but only if Indemnitee acted in good faith and in a manner he or she reasonably
believed to be in or not opposed
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<PAGE>
to the best interests of the Company, except that no indemnification for
Expenses shall be made under this Paragraph 4 in respect of any claim, issue or
matter as to which Indemnitee shall have been adjudged to be liable to the
Company, unless and only to the extent that any court in which such Proceeding
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, Indemnitee is fairly
and reasonably entitled to indemnity for such Expenses as such court shall deem
proper.
5. Indemnification of Expenses of Successful Party; No Adverse
-----------------------------------------------------------
Presumption. Notwithstanding any other provisions of this Agreement, to the
- -----------
extent that Indemnitee has been successful, on the merits or otherwise, in
defense of any Proceeding or in defense of any claim, issue or matter therein,
including the dismissal of an action without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith. The
termination of any Proceeding by judgment, order of court, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption for purposes of any provision of this Agreement
that Indemnitee did not act in good faith in a manner which he or she reasonably
believed to be in the best interests of the Company, or with respect to any
Proceeding of a criminal nature, that such person had reasonable cause to
believe that his or her conduct was unlawful.
6. Advances of Expenses. The Expenses incurred by Indemnitee pursuant to
--------------------
Paragraphs 3 and 4 in any Proceeding shall be paid by the Company in advance,
promptly upon the written request of the Indemnitee, if Indemnitee shall
undertake to repay such amount to the extent that it is ultimately determined
that Indemnitee is not entitled to indemnification. No security for the
performance of any such undertaking shall be required and any such undertaking
shall be accepted by the Company without regard to the financial capacity of
Indemnitee to perform its obligations thereunder.
7. Right of Indemnitee to Indemnification Upon Application: Procedure
------------------------------------------------------------------
Upon Application. Without limiting the obligation of the Company to promptly
- ----------------
make payments in respect of Expenses in accordance with Paragraph 6, any
indemnification under Paragraphs 3 and 4 shall be made no later than 45 days
after receipt by the Company of the written request of Indemnitee, unless a
determination is made within said 45-day period by (1) the Board of Directors of
the Company by a majority vote of a quorum consisting of Directors who are not
and were not parties to the relevant Proceeding, or (2) independent legal
counsel in a written opinion (which counsel shall be appointed if such a quorum
is not obtainable) that the Indemnitee has not met the relevant standards for
indemnification set forth in Paragraphs 3 and 4; provided, however, that
following a Change in Control of the Company, any determination that Indemnitee
has not met the relevant standards for indemnification may only be made by
independent counsel selected by Indemnitee (and reasonably satisfactory to the
Company) in a written opinion. The fees and expenses of such counsel shall be
paid by the Company in a timely manner and, upon the request of the Indemnitee,
the Company shall provide reasonable assurances to such counsel of the timely
payment of their fees and expenses.
The right to indemnification or advances as provided by this Agreement shall
be enforceable by Indemnitee in any court of competent jurisdiction. The burden
of proving that indemnification is not appropriate shall be on the Company.
Indemnitee's Expenses reasonably incurred in connection with
-4-
<PAGE>
successfully establishing his or her right to indemnification, in whole or in
part, in any such Proceeding shall also be indemnified by the Company.
8. Indemnification Hereunder Not Exclusive. The indemnification provided
---------------------------------------
by this Agreement shall not be deemed exclusive of any other rights to which
Indemnitee may be entitled under the General Company Law of the State of
Delaware, the Certificate of Incorporation and/or Bylaws of the Company, any
other agreement, any vote of stockholders or disinterested Directors, or
otherwise, either as to action in his or her official capacity or as to action
in any other capacity. To the extent that Indemnitee otherwise would have any
greater right to indemnification under any provision of the General Company Law
of the State of Delaware or the Certificate of Incorporation and/or Bylaws of
the Company as in effect on the date hereof, Indemnitee will be deemed to have
such greater right hereunder, and, to the extent that any change is made to the
General Company Law of the State of Delaware (whether by legislative action or
judicial decision) and/or the Certificate of Incorporation and/or the Bylaws of
the Company which permits any greater right to indemnification than that
provided under this Agreement as of the date hereof, Indemnitee will be deemed
to have such greater right hereunder. The Company will not adopt any amendment
to the Certificate of Incorporation or Bylaws of the Company the effect of which
would be to deny, diminish or encumber Indemnitee's right to indemnification
under the General Company Law of the State of Delaware, the Certificate of
Incorporation and/or the Bylaws of the Company or otherwise as applied to
anything actually or allegedly done or failed to be done in whole or in part
prior to the date upon which the amendment was approved by the Company's Board
of Directors and/or its stockholders, as the case may be.
The rights to indemnification and advancement of expenses under this
Agreement shall continue as to Indemnitee even though he or she may have ceased
to be a Director and/or Officer or to serve in any capacity the Company or any
other enterprise and shall inure to the benefit of the heirs, executors,
administrators or estate of Indemnitee.
9. Partial Indemnification. In the event that Indemnitee is entitled
-----------------------
under any provision of this Agreement to indemnification by the Company for a
portion but less than the entire amount of any Expenses, judgments, fines,
penalties and/or amounts paid or payable in settlement, the Company shall fully
indemnify Indemnitee in accordance with the applicable provisions of this
Agreement for such portion of such Expenses, judgments, fines, penalties and/or
amounts paid in settlement.
10. Liability Insurance and Funding. To the extent the Company purchases
-------------------------------
or maintains any insurance policy or policies providing directors' and officers'
liability or similar insurance, Indemnitee shall be covered by such policy or
policies, in accordance with its or their terms, to the maximum extent of the
coverage available for any Director or Officer of the Company. Indemnitee's
Expenses in connection with successfully obtaining any recovery under any such
directors' and officers' liability insurance or similar policy shall also be
indemnified by the Company. The Company may, but shall not be required to,
create a trust fund, grant a security interest or use other means (including
without limitation procuring one or more letters of credit) to ensure the
payment of such amounts as may be necessary to satisfy its obligations to
provide indemnification and advance Expenses pursuant to this Agreement.
11. Subrogation. In the event that the Company provides any
-----------
indemnification or makes any payment to Indemnitee in respect of any matter in
respect of which indemnification or the
-5-
<PAGE>
advancement of expenses is provided for herein (regardless of whether such
indemnification or payment is provided or made under the provisions of this
Agreement, the General Company Law of the State of Delaware, the Certificate of
Incorporation and/or Bylaws of the Company or otherwise), the Company shall be
subrogated to the extent of such indemnification or other payment to all of the
related rights of recovery of Indemnitee against other persons or entities.
Indemnitee shall execute all papers reasonably required and shall do everything
that may be reasonably necessary to secure such rights and enable the Company
effectively to bring suit to enforce such rights (with all of Indemnitee's
reasonable costs and expenses, including attorneys' fees and disbursements, to
be reimbursed by or, at the option of Indemnitee, advanced by the Company).
12. No Duplication of Payments. The Company shall not be obligated under
--------------------------
this Agreement to provide any indemnification or make any payment to which
Indemnitee is otherwise entitled hereunder to the extent, but only to the
extent, that such indemnification or payment hereunder would be duplicative of
any amount actually received by Indemnitee pursuant to any insurance policy, the
General Company Law of the State of Delaware, the Certificate of Incorporation
and/or the Bylaws of the Company or otherwise.
13. Saving Clause. If any provision of this Agreement or the application
-------------
of any provision hereof to any circumstance is held illegal, invalid or
otherwise unenforceable, the remainder of this Agreement and the application of
such provision to any other circumstance shall not be affected, and the
provision so held to be illegal, invalid or otherwise unenforceable shall be
reformed to the extent (but only to the extent) necessary to make it legal,
valid and enforceable.
14. Notice. Indemnitee shall give to the Company notice in writing as soon
------
as practicable of any claim made against him or her for which indemnification
will or could be sought under this Agreement, provided, however, that any
failure to give such notice to the Company will relieve the Company from its
obligations hereunder only if, and to the extent that, such failure results in
the forfeiture of substantial rights and defenses. Notice to the Company shall
be directed to the Company (to the attention of the President, with a copy to
the General Counsel) at its principal executive office or such other address as
the Company shall designate in writing to Indemnitee. Notice shall be deemed
received when hand delivered or dispatched by electronic facsimile transmission
(with receipt thereof orally confirmed), or three calendar days after having
been mailed by United States registered or certified mail, return receipt
requested, postage prepaid, or one business day after having been sent for next-
day delivery by a nationally recognized overnight courier. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and shall be within Indemnitee's power.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute one and the same instrument.
16. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
-6-
<PAGE>
17. Successors. This Agreement shall be binding upon the Company and its
----------
successors, including without limitation any person acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor will thereafter be deemed the "Company" for purposes of this
Agreement), but will not otherwise be assignable, transferable or delegatable by
the Company. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company, to assume and
agree in writing to perform this Agreement, expressly for the benefit of
Indemnitee, in the same manner and to the same extent the Company would be
required to perform if no such succession had taken place.
18. Prior Indemnity Agreement Superceded. This Agreement supercedes that
------------------------------------
certain Indemnity Agreement between the Indemnitee and the Company dated
___________, 19__.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first above written.
STERLING SOFTWARE, INC.
By:
------------------------
Don J. McDermett, Jr.
Senior Vice President &
General Counsel
-----------------------------
[Name of Officer or Director]
-7-
<PAGE>
EXHIBIT 21.1
STERLING SOFTWARE, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Sterling Software (Eastern), Inc. Delaware
Sterling Software International, Inc. Delaware
Sterling Software Leasing Company Delaware
Sterling Software (Midwest), Inc. Delaware
Sterling Software (Northern), Inc. Delaware
Information Advantage of Australia Pty Ltd Australia
Sterling Software V GmbH Germany
Sterling Software (UK) VII Limited United Kingdom
Sterling Software (Southern), Inc. Georgia
Sterling Software(Australia) II Pty Limited Australia
Sterling Software Beratungs und Vertriebs GmbH Austria
Sterling Software (Canada) II, Inc./Logiciel
Sterling (Canada) II, Inc. Canada
Sterling Software (Malaysia) Sdn. Bhd. Malaysia
Sterling Software (Singapore) II Pte Ltd. Singapore
Sterling Software (Espana) II S.L. Spain
Sterling Software (UK) III Limited United Kingdom
Sterling Software (Benelux) II N.V./S.A. Belgium
Sterling Software (France) III S.A. France
Sterling Software II GmbH Germany
Sterling Software (Italia) II Srl Italy
Sterling Software (Netherlands) III B.V. Netherlands
Sterling Software (Netherlands) V BV Netherlands
Sterling Software (Switzerland) II S.A. Switzerland
Sterling Software (UK) IV Limited United Kingdom
Sterling Software (U.S.), Inc. Delaware
Sterling Software Weather, Inc. Delaware
Sterling Software (U.S.A.), Inc. California
Sterling Software (U.S. of America), Inc. Delaware
Sterling Software (Western), Inc. Delaware
Southwest Beta Services, Inc. Delaware
Sterling Software (Pacific) Pty Limited Australia
Sterling Software (Australia) Pty Limited Australia
Sterling Software (Benelux) NV Belgium
Sterling Software (Benelux) BVBA Belgium
Sterling Software do Brasil Participacoes Ltda. Brazil
Sterling Software do Brasil Ltda. (49%
subsidiary) Brazil
Sterling Software (France) SA France
Sterling Software GmbH Germany
Sterling Software (Israel), Ltd. Israel
Sterling Software (Italia) Srl Italy
Sterling Software (Japan) Ltd. Japan
Sterling Software Applications KK Japan
Sterling Software (Netherlands) I BV Netherlands
Sterling Software International Marketing II,
Inc. Cayman Islands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Sterling Software (Luxembourg) I SARL Luxembourg
Sterling Software International SARL France
Sterling Software International Marketing, Inc. Cayman Islands
Sterling Software (Netherlands Antilles) NV Netherlands Antilles
Sterling Software (Netherlands) IV BV Netherlands
Sterling Software (New Zealand) Limited New Zealand
Sterling Software (Scandinavia) AS Norway
Sterling Software (Portugal) Informatica, Lda Portugal
Sterling Software (Singapore) PTE Ltd. Singapore
Sterling Software (Espana), S.A. Spain
Sterling Software AB Sweden
Synon Europe Limited United Kingdom
Sterling Software (UK) Limited United Kingdom
Sterling Software International (UK) Limited United Kingdom
Sterling Software (Virgin Islands), Inc. Virgin Islands
</TABLE>
- --------
Notes:
1. Indented names are subsidiaries of subsidiaries.
2. Inclusion in the list is not a representation that the subsidiary is a
significant subsidiary.
3. Except as noted, the voting shares of all subsidiaries are 100% owned by
Sterling Software, Inc., its subsidiaries or employee nominees.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (File No. 333-66341 and No. 333-13303) and in the Registration
Statements on Form S-8 (File No. 333-78463, No. 333-86369, No 333-66167, No.
333-60475, No. 333-58825, No. 333-42721, No. 333-37653, No. 33-65402, and
No. 33-56681) of Sterling Software, Inc. and in the related Prospectuses of
our report dated October 29, 1999, with respect to the consolidated financial
statements and schedule of Sterling Software, Inc. included in this Annual
Report on Form 10-K for the year ended September 30, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
November 8, 1999
<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. ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 318,748
<SECURITIES> 112,285
<RECEIVABLES> 294,409
<ALLOWANCES> 26,174
<INVENTORY> 0
<CURRENT-ASSETS> 754,174
<PP&E> 72,137
<DEPRECIATION> 63,134
<TOTAL-ASSETS> 1,230,031
<CURRENT-LIABILITIES> 332,338
<BONDS> 0
0
0
<COMMON> 8,687
<OTHER-SE> 803,045
<TOTAL-LIABILITY-AND-EQUITY> 1,230,031
<SALES> 807,004
<TOTAL-REVENUES> 807,004
<CGS> 293,397
<TOTAL-COSTS> 805,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> 34,467
<INCOME-TAX> 45,223
<INCOME-CONTINUING> (10,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,756)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
