<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
STERLING SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1873956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Crescent Court, Suite 1200
Dallas, Texas 75201
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (214) 981-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Shares Outstanding as of February 4, 2000
----------------------------- -----------------------------------------
Common Stock, $0.10 par value 82,499,131
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements............................................................................................... 3
Sterling Software, Inc. Consolidated Balance Sheets at December 31, 1999 and
September 30, 1999..................................................................................................... 3
Sterling Software, Inc. Consolidated Statements of Operations for the Three
Months Ended December 31, 1999 and 1998................................................................................ 4
Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for the Three
Months Ended December 31, 1999......................................................................................... 5
Sterling Software, Inc. Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998....................................................................................... 6
Sterling Software, Inc. Notes to Consolidated Financial Statements.......................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................................. 14
</TABLE>
PART II- OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K................................................................................... 22
</TABLE>
-2-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
A S S E T S
December 31 September 30
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 376,574 $ 318,748
Marketable securities........................................................ 111,942 112,285
Accounts and notes receivable, net........................................... 239,093 294,409
Prepaid expenses and other current assets.................................... 29,247 28,732
---------- ----------
Total current assets..................................................... 756,856 754,174
Property and equipment, net of accumulated depreciation of $67,252 at
December 31, 1999 and $63,134 at September 30, 1999.......................... 73,460 72,137
Computer software, net of accumulated amortization of $118,538 at
December 31, 1999 and $114,813 at September 30, 1999......................... 147,337 144,367
Excess cost over net assets of businesses acquired, net of accumulated
amortization of $44,680 at December 31, 1999 and $38,742 at
September 30, 1999........................................................... 225,547 231,738
Other assets.................................................................... 23,126 27,615
---------- ----------
$1,226,326 $1,230,031
========== ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 194,532 $ 226,510
Deferred revenue............................................................. 96,620 105,828
----------- -----------
Total current liabilities................................................ 291,152 332,338
Noncurrent deferred revenue..................................................... 42,333 45,677
Other noncurrent liabilities.................................................... 38,304 40,284
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares authorized, no shares
issued or outstanding......................................................
Common stock, $.10 par value; 250,000,000 shares authorized; 87,959,000
and 86,873,000 shares issued at December 31, 1999 and
September 30, 1999, respectively........................................... 8,796 8,687
Additional paid-in capital................................................... 910,743 895,391
Accumulated other comprehensive loss......................................... (26,186) (21,899)
Retained earnings............................................................ 86,760 55,750
Less treasury stock, at cost; 5,924,000 and 5,953,000 shares at
December 31, 1999 and September 30, 1999, respectively..................... (125,576) (126,197)
---------- ----------
Total stockholders' equity............................................... 854,537 811,732
---------- ----------
$1,226,326 $1,230,031
========== ==========
</TABLE>
See accompanying notes.
-3-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
---------------------------
1999 1998
--------- --------
<S> <C> <C>
Revenue:
Products................................................................... $ 89,444 $ 64,313
Product support............................................................ 55,952 51,541
Services................................................................... 61,560 58,605
--------- --------
206,956 174,459
Costs and expenses:
Cost of sales:
Products and product support............................................. 25,711 17,948
Services................................................................. 52,004 53,160
--------- --------
77,715 71,108
Product development and enhancement........................................ 8,290 9,355
Selling, general and administrative........................................ 80,283 61,609
Reorganization costs....................................................... 19,655
Purchased research and development......................................... 9,623
--------- --------
166,288 171,350
--------- --------
Income before other income (expense) and income taxes......................... 40,668 3,109
Other income (expense):
Interest expense........................................................... (70) (130)
Investment income.......................................................... 6,245 8,762
Other...................................................................... 143 172
--------- --------
6,318 8,804
--------- --------
Income before income taxes.................................................... 46,986 11,913
Provision for income taxes.................................................... 15,976 7,707
--------- --------
Net income.................................................................... $ 31,010 $ 4,206
========= ========
Income per common share:
Basic.................................................................... $ .38 $ .05
========= ========
Diluted.................................................................. $ .36 $ .05
========= ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended December 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
----------------- Accumulated ------------------
Additional Other Number Total
Number of Par Paid-in Comprehensive Retained of Stockholders'
Shares Value Capital Loss Earnings Shares Cost Equity
------ ------ -------- -------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1999......... 86,873 $8,687 $895,391 $(21,899) $55,750 5,953 $(126,197) $811,732
Net income................ 31,010 31,010
Adjustment to unrealized
gains (losses) on
available-for-sale
securities, net of tax
benefit of $206.......... (505) (505)
Foreign currency
translation adjustment... (3,782) (3,782)
--------
Total comprehensive
income................... 26,723
Issuance of common stock
pursuant to stock
options.................. 1,086 109 15,404 15,513
Issuance of common stock
to 401(k) plan........... (52) (29) 621 569
------ ------ -------- -------- ------- ----- --------- --------
Balance at
December 31, 1999.......... 87,959 $8,796 $910,743 $(26,186) $86,760 5,924 $(125,576) $854,537
====== ====== ======== ======== ======= ===== ========= ========
</TABLE>
See accompanying notes.
-5-
<PAGE>
STERLING SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income................................................................. $ 31,010 $ 4,206
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 19,394 11,837
Provision (benefit) for deferred income taxes.......................... 7,947 (746)
Reorganization costs................................................... 8,007
Purchased research and development..................................... 9,623
Changes in operating assets and liabilities, net of effects of business
acquisitions:
Decrease in accounts and notes receivable.......................... 55,218 7,204
Increase in prepaid expenses and other assets...................... (3,935) (1,844)
Decrease in accounts payable and accrued liabilities............... (31,593) (30,217)
Decrease in deferred revenue....................................... (9,208) (9,459)
Other.............................................................. (6,254) 7,095
-------- --------
Net cash provided by operating activities....................... 62,579 5,706
Investing activities:
Purchases of property and equipment........................................ (6,560) (8,403)
Purchases and capitalized cost of development of computer software......... (11,019) (7,402)
Business acquisitions, net of cash acquired................................ (7,891)
Purchases of investments................................................... (3,199) (86,170)
Proceeds from sales of investments......................................... 3,695 98,647
Other...................................................................... (152) 586
-------- --------
Net cash used in investing activities........................... (17,235) (10,633)
Financing activities:
Proceeds from issuance of common stock pursuant to exercise of stock
options.................................................................. 15,513 7,589
Other...................................................................... (1,549) (1,734)
-------- --------
Net cash provided by financing activities....................... 13,964 5,855
Effect of foreign currency exchange rate changes on cash...................... (1,482) 399
-------- --------
Increase in cash and cash equivalents......................................... 57,826 1,327
Cash and cash equivalents at beginning of period.............................. 318,748 397,312
-------- --------
Cash and cash equivalents at end of period.................................... $376,574 $398,639
======== ========
</TABLE>
See accompanying notes.
-6-
<PAGE>
STERLING SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(unaudited)
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. The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies at December 31, 1999 and
September 30, 1999 and the results of operations for the three months ended
December 31, 1999 and 1998. Actual amounts may differ from such estimates and
assumptions.
Revenue
The Company recognizes revenue in accordance with the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants ("AcSec") Statement of Position 97-2 "Software Revenue Recognition."
On December 15, 1998, AcSec released Statement of Position 98-9, "Modification
of SOP 97-2, 'Software Revenue Recognition,' with Respect to Certain
Transactions" ("SOP 98-9"). The Company adopted the provisions of SOP 98-9
effective October 1, 1999. Retroactive application was prohibited. The adoption
of SOP 98-9 did not have a material impact on the financial position or results
of operations of the Company.
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.
-7-
<PAGE>
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.
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.
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 firm, 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.
-8-
<PAGE>
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company's total comprehensive income (loss) for the three months ended
December 31, 1999 and 1998 was $26,723,000 and $(712,000), respectively.
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.
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.
-9-
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended December 31, 1999 and 1998 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Basic:
Net income.......................................... $ 31,010 $ 4,206
======== ========
Weighted average common shares outstanding.......... 81,389 82,536
======== ========
Net income per common share......................... $ .38 $ .05
======== ========
Diluted:
Net income.......................................... $ 31,010 $ 4,206
======== ========
Weighted average common shares outstanding.......... 81,389 82,536
Effect of dilutive employee stock options........... 5,177 5,190
-------- --------
Adjusted weighted average common shares............. 86,566 87,726
======== ========
Net income per common share......................... $ .36 $ .05
======== ========
</TABLE>
2. Unaudited Interim Financial Statements
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments which are
of a normal recurring nature and are necessary for a fair presentation of the
financial position and results of operations for the periods presented. Results
of operations for the periods presented herein are not necessarily indicative of
results of operations for the entire fiscal year. The information included in
this report should be read in conjunction with the information presented under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1999.
3. Business Acquisitions and Reorganizations
1999 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 (the "Cayenne Acquisition"). The total cost of the Cayenne
Acquisition was approximately $33,184,000, including costs directly related to
the acquisition of approximately $21,784,000, consisting of employee termination
costs, transaction costs, costs associated with the elimination of duplicate
facilities and other direct costs. The Cayenne Acquisition was accounted for in
accordance with the purchase method of accounting and, accordingly, the results
of operations of Cayenne were included in the Company's results of operations
from the date of the acquisition as part of the Company's application
development business segment. Results of operations for the first quarter of
1999 include $9,623,000 of purchased research and development costs, which is
the portion of the
-10-
<PAGE>
purchase price for Cayenne attributed to in-process research and development,
and which was charged to expense in accordance with the purchase method of
accounting.
During 1999, the Company completed a total of five acquisitions,
including the Cayenne Acquisition (the "1999 Acquisitions"), for a total cost of
approximately $358,062,000, including direct costs related to the 1999
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. At December 31, 1999, the balance of the
direct costs incurred in the 1999 Acquisitions that remained to be paid totaled
approximately $27,957,000, related primarily to the elimination of duplicate
facilities and leases and, in respect of the recently completed Information
Advantage, Inc. acquisition, employee severance and benefits.
The Company is using the purchased research and development associated
with the 1999 Acquisitions to create new products that are expected to become
part of the product portfolios offered by the systems management and business
intelligence business segments. The Company expects that products developed from
the purchased research and development will generally be released during fiscal
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.
During the quarter ended December 31, 1999, there were no significant
changes to the Company's estimated costs to complete or expected release dates
related to products to be developed from research and development acquired
through the 1999 Acquisitions.
Reorganization Costs
The Company's results of operations for the first quarter of 1999
included reorganization costs of $19,655,000 related to the reorganization of
the Company's operations in connection with the Cayenne Acquisition. Total
reorganization costs for 1999 were $99,620,000, primarily related to the 1999
Acquisitions, including costs associated with the realignment of the application
development business segment. Of the total reorganization costs of $99,620,000,
$57,464,000 required cash outlays. At December 31, 1999, the remaining balance
to be paid totaled approximately $28,658,000, related primarily to commitments
under lease arrangements for office space and equipment and, in respect of the
recently completed realignment of the application development business segment,
employee termination costs and benefits.
The Company does not expect to incur costs related to the above described
reorganizations in excess of the amounts previously charged to operations.
-11-
<PAGE>
4. Legal Proceedings and Claims
The Company is subject to various legal proceedings and claims that arise
in the normal course of its business. While many of these matters involve
inherent uncertainty, the Company's management believes that the amount of the
liability, if any, ultimately incurred by Sterling Software with respect to any
such existing proceedings and claims, net of applicable reserves and available
insurance, will not materially affect the business, financial condition or
results of operations of the Company.
5. Segment Information
Sterling Software is a worldwide developer and supplier of 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 results of the former application management segment
- - now comprised of the application development and business intelligence
segments - for periods ended prior to September 30, 1999 have been reclassified
to conform to the current year presentation. 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
business intelligence business segment provides 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.
The application development business segment provides 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.
-12-
<PAGE>
Financial information concerning the Company's operations, by business
segment, for the three months ended December 31, 1999 and 1998, is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended December 31
_______________________
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Systems Management........................... $ 67,989 $ 48,241
Business Intelligence........................ 41,610 19,107
Application Development...................... 56,001 68,491
Federal Systems.............................. 41,356 38,620
-------- --------
Consolidated totals........................ $206,956 $174,459
======== ========
Operating Profit (Loss):
Systems Management........................... $ 23,340 $ 15,616
Business Intelligence........................ 9,823 8,213
Application Development...................... 12,629 13,815
Federal Systems.............................. 3,578 2,810
Reorganization costs......................... (19,655)
Purchased research and development........... (9,623)
Corporate and other.......................... (8,702) (8,067)
-------- --------
Consolidated totals........................ $ 40,668 $ 3,109
======== ========
</TABLE>
Due to the reclassification of the former application management business
segment into the new application development and business intelligence business
segments, the Company is including the following historical segment information,
reclassified to conform to the current year presentation (in thousands):
<TABLE>
<CAPTION>
Years Ended
Three Months Ended September 30
-------------------------------------------------- ----------------------
December 31 March 31 June 30 September 30
1998 1999 1999 1999 1999 1998
---------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Systems Management.......... $ 48,241 $ 60,279 $ 76,120 $105,486 $290,126 $204,529
Business Intelligence....... 19,107 20,492 19,984 26,225 85,808 79,941
Application Development..... 68,491 72,625 73,122 57,799 272,037 286,072
Federal Systems............. 38,620 38,990 40,539 40,884 159,033 148,773
Corporate and other......... 628
---------- ----------- ---------- ---------- --------- ----------
Consolidated totals...... $174,459 $192,386 $209,765 $230,394 $807,004 $719,943
========== =========== ========== ========== ========= ===========
Operating Profit (Loss):
Systems Management.......... $ 15,616 $ 23,193 $ 29,479 $ 46,801 $115,089 $ 77,337
Business Intelligence....... 8,213 8,880 9,273 9,790 36,156 33,119
Application Development..... 13,815 17,420 18,241 3,743 53,219 42,862
Federal Systems............. 2,810 3,098 3,136 3,337 12,381 9,911
Reorganization costs........ (19,655) (14,098) (65,867) (99,620) (45,162)
Purchased research and
development.............. (9,623) (22,468) (51,475) (83,566)
Corporate and other......... (8,067) (8,114) (7,831) (7,854) (31,866) (31,564)
---------- ----------- ---------- ---------- --------- ----------
Consolidated totals...... $ 3,109 $ 44,477 $ 15,732 $(61,525) $ 1,793 $ 86,503
========== =========== ========== ========== ========= ===========
</TABLE>
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Combinations and Reorganizations
1999 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 (the "Cayenne Acquisition"). The total cost of the Cayenne
Acquisition was approximately $33,184,000, including costs directly related to
the acquisition of approximately $21,784,000, consisting of employee termination
costs, transaction costs, costs associated with the elimination of duplicate
facilities and other direct costs. The Cayenne Acquisition was accounted for in
accordance with the purchase method of accounting and, accordingly, the results
of operations of Cayenne were included in the Company's results of operations
from the date of the acquisition as part of the Company's application
development business segment. Results of operations for the first quarter of
1999 include $9,623,000 of purchased research and development costs, which is
the portion of the purchase price for Cayenne attributed to in-process research
and development, and which was charged to expense in accordance with the
purchase method of accounting.
During 1999, the Company completed a total of five acquisitions,
including the Cayenne Acquisition (the "1999 Acquisitions"), for a total cost of
approximately $358,062,000, including direct costs related to the 1999
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. At December 31, 1999, the balance of the
direct costs incurred in the 1999 Acquisitions that remained to be paid totaled
approximately $27,957,000, related primarily to the elimination of duplicate
facilities and leases and, in respect of the recently completed Information
Advantage, Inc. ("Information Advantage") acquisition, employee severance and
benefits.
The Company is using the purchased research and development associated
with the 1999 Acquisitions to create new products that are expected to become
part of the product portfolios offered by the systems management and business
intelligence business segments. The Company expects that products developed from
the purchased research and development will generally be released during fiscal
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.
During the quarter ended December 31, 1999, there were no significant
changes to the Company's estimated costs to complete or expected release dates
related to products to be developed from research and development acquired
through the 1999 Acquisitions.
-14-
<PAGE>
Reorganization Costs
The Company's results of operations for the first quarter of 1999
included reorganization costs of $19,655,000 related to the reorganization of
the Company's operations in connection with the Cayenne Acquisition. Total
reorganization costs for 1999 were $99,620,000 primarily related to the 1999
Acquisitions, including costs associated with the realignment of the application
development business segment. Of the total reorganization costs of $99,620,000,
$57,464,000 required cash outlays. At December 31, 1999, the remaining balance
to be paid totaled approximately $28,658,000, related primarily to commitments
under lease arrangements for office space and equipment and, in respect of the
recently completed realignment of the application development business segment,
employee termination costs and benefits.
The Company does not expect to incur costs related to the above described
reorganizations in excess of the amounts previously charged to operations.
Results of Operations
Three Months Ended December 31, 1999 and 1998
Total revenue increased $32,497,000, or 19%, in the first quarter of 2000
over the same period in 1999 due to increases in products revenue, product
support revenue and services revenue of 39%, 9% and 5%, respectively. The
increase in products and product support revenue is due to increased products
and product support revenue in both the systems management and business
intelligence business segments, partially offset by a decline in products and
product support revenue in the application development business segment. The
increase in services revenue is primarily due to an increase in services revenue
in the business intelligence and federal systems business segments, partially
offset by a decrease in services revenue in the application development business
segment.
Revenue from the systems management business segment increased
$19,748,000, or 41%, in the first quarter of 2000 over the same period of 1999,
primarily due to a 54% increase in products revenue and a 17% increase in
product support revenue. The increase in products revenue was mainly
attributable to internal growth as well as revenue added as a result of the
systems management business segment's 1999 acquisitions. The Company's storage
management business grew products revenue 77% and grew total revenue 54%. The
Company's network management business grew products revenue 75% and grew total
revenue 74%. Consistent with external market trends, VM systems management
revenue declined compared with the prior year, a trend that is expected to
continue. VM systems management products revenue declined 54% and total revenue
declined 43%. Approximately 51% of the systems management business segment's
total revenue in the first quarter of 2000 was derived from the Company's
international operations compared to 55% in the first quarter of 1999.
Revenue from the business intelligence business segment increased
$22,503,000, or 118%, in the first quarter of 2000 over the same period of 1999,
due to increases in products revenue, product support revenue and services
revenue of 123%, 57% and 887%, respectively. The increase in revenues was
principally the result of the acquisition of Information Advantage
-15-
<PAGE>
during August 1999 and strong internal growth. Approximately 12% of the business
intelligence business segment's total revenue in the first quarter of 2000 was
derived from the Company's international operations, compared to 9% in the first
quarter of 1999.
In the fourth quarter of 1999 the Company realigned its application
development business, shifting both the strategy and organization to take
advantage of the e-business market opportunity. The Company added headcount in
areas such as Java tools, where more investment was necessary, and reduced
headcount in certain more mature market areas. The Company released its new Java
development tool, COOL:Joe, on December 31, 1999, and additional product
releases supporting the e-business initiatives in the Company's application
development business are planned for the second and third quarters. As planned,
due to the realignment of the application development business segment, revenue
declined $12,490,000, or 18%, in the first quarter of 2000 over the same period
of 1999. Products revenue, product support revenue and services revenue declined
20%, 11% and 26%, respectively, in the first quarter. The planned revenue
declines are expected to continue through the Company's third quarter. Positive
year-over-year comparisons are not expected in this business until the Company's
fourth quarter when revenue opportunities from planned product releases are
expected to offset declines in the areas where the Company decreased its
investment. Approximately 63% of the application development business segment's
total revenue was derived from the Company's international operations in both
the first quarter of 2000 and the same period of 1999.
Revenue from the federal systems business segment increased $2,736,000,
or 7%, in the first quarter of 2000 over the same period of 1999 primarily due
to higher contract billings in the segment's defense business.
Total revenue generated from the Company's international operations was
$75,143,000 and $71,364,000 in the first quarter of 2000 and 1999, respectively,
representing an increase of $3,779,000, or 5%. This was due to a year-over-year
increase in international revenue generated by the systems management and
business intelligence business segments of 32% and 203%, respectively, partially
offset by an 18% year-over-year decline in international revenue generated by
the application development business segment. Revenue from the Company's
international operations represented 36% of total revenue for the first quarter
of 2000 down from 41% in the first quarter of 1999.
The Company's recurring revenue includes revenue from product support
agreements generally having terms ranging from one to three years and federal
contracts generally having terms ranging from one to five years. Like most
federal contracts, Sterling Software's federal contracts permit termination by
the government for convenience or for failure to obtain funding. Recurring
revenue decreased to 47% of total revenue in the first quarter of 2000 compared
to 51% in the same period of 1999 as a decrease in federal contracts as a
percentage of the total revenue was combined with an increase in products
revenue as a percentage of total revenue.
-16
<PAGE>
Total costs and expenses decreased $5,062,000, or 3%, in the first
quarter of 2000 over the same period of 1999. However, excluding the Cayenne-
related reorganization costs of $19,655,000 and the related write-off of
purchased research and development costs of $9,623,000 in the first quarter of
1999, total costs and expenses increased $24,216,000, or 17%. Even excluding
these one time costs, however, total costs as a percentage of total revenue
declined year over year. The Company's operating profit margins improved in the
systems management, application development, and federal systems business
segments. The operating profit margin declined in the business intelligence
business segment due to additional amortization as a result of the purchase
acquisition of Information Advantage and higher general and administrative costs
in the post-acquisition business. For the same reasons, the Company expects the
operating profit margin in the business intelligence business segment for the
remainder of fiscal 2000 to be lower than fiscal 1999.
Total cost of sales increased $6,607,000, or 9%, in the first quarter of
2000 over the same period of 1999, and represented 38% and 41% of total revenue
in the first quarters of 2000 and 1999, respectively. Cost of sales for products
and product support represented 18% of products and product support revenue in
the first quarter of 2000 compared to 15% in the same period in 1999. This
increase is primarily due to higher amortization of goodwill and purchased
software from the 1999 Acquisitions. Cost of sales for services represented 84%
of services revenue in the first quarter of 2000 compared to 91% in the first
quarter of 1999. This improvement in services margin was due primarily to the
higher margin services business acquired from Information Advantage, and
favorable contract completion and resolution of reserved funding issues in the
federal systems business segment.
Product development expense for the first quarter of 2000 was $8,290,000
as compared to product development expense in the first quarter of 1999 of
$9,355,000. Gross product development expense, before capitalization of
software, was 10% of non-federal systems revenue in the first quarter of 2000
compared to 11% for the first quarter of 1999. In the first quarter of 2000, the
Company capitalized $8,814,000 of development costs and amortized $8,232,000 of
software costs. This compares to $6,152,000 of capitalized development costs and
$5,078,000 of software amortization in the first quarter of 1999. The increase
in both gross and capitalized software development costs in the first quarter of
2000 over the same period in 1999 is attributable to an increase in product
development efforts that were in process in the application development, systems
management and business intelligence business segments. Increased product
development efforts in the application development business segment supported
the business' e-business solutions offerings, including COOL:Joe, its new
Enterprise Java Bean development tool. Increased product development effort in
the systems management business segment included product integration efforts
following acquisitions, as well as new storage management products for
distributed environments. Increased development efforts in the business
intelligence business segment included the completion of a product integration
effort following the Information Advantage acquisition and a new release of the
Company's business intelligence portal. 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.
-17-
<PAGE>
Selling, general and administrative expenses increased $18,674,000, or
30%, in the first quarter of 2000 compared to the same period in 1999, and
represented 39% and 35% of total revenue in the first quarters of 2000 and 1999,
respectively. This increase is primarily due to higher general and
administrative costs in the post-acquisition business intelligence business
segment.
Investment income decreased $2,517,000 in the first quarter of 2000
compared to the same period of 1999 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 before income taxes in the first quarter of 2000 was $46,986,000
compared to $11,913,000 for the same period of 1999. However, excluding the
Cayenne-related reorganization costs of $19,655,000 and the related write-off of
purchased research and development costs of $9,623,000 in the first quarter of
1999, income before income taxes increased $5,795,000, or 14%, primarily due to
higher profits in the systems management, business intelligence and federal
systems business segments, partially offset by lower profits in the application
development business segment and a decline in investment income.
The Company's effective tax rate for the first quarter of 2000 was 34%
compared to 65% in the first quarter of 1999. The effective tax rate for the
first quarter of 1999 was adversely impacted by the write-off of purchased
research and development costs related to the Cayenne Acquisition that will not
provide a tax benefit to the Company. Before the net tax benefit related to the
Cayenne-related reorganization costs and the write-off of purchased research and
development costs, the Company's effective tax rate for the first quarter of
1999 was 34%.
Liquidity and Capital Resources
The Company had $465,704,000 of working capital at December 31, 1999,
which includes $376,574,000 of cash and cash equivalents and $111,942,000 of
marketable securities. Net cash provided by operating activities was $62,579,000
in the first three months of 2000 compared to $5,706,000 in the first three
months of 1999. Net cash provided by operating activities in first quarter of
2000 was reduced by payments of approximately $20,362,000 directly related to
the 1999 Acquisitions and related reorganizations. Net cash provided by
operating activities in the first quarter of 1999 was reduced by payments made
during the period of approximately $12,681,000 directly related to acquisitions
and related reorganizations completed by the Company in 1998 and 1997.
Investing activities used $17,235,000 of cash in the first quarter of
2000 compared to $10,633,000 in the first quarter of 1999. Capital expenditures
for the first quarter of 2000 were $6,560,000 compared to $8,403,000 for the
first quarter of 1999. Purchases and capitalized costs of computer software were
$11,019,000 and $7,402,000 for the first quarter of 2000 and 1999, respectively.
Net cash used in investing activities in the first quarter of 1999 included
$7,891,000 of payments, net of cash acquired, related to the Cayenne
Acquisition. Cash provided by operating activities, together with other
available cash, was used to fund capital expenditures and additions to computer
software.
-18-
<PAGE>
Financing activities provided $13,964,000 of cash in the first quarter of
2000 compared to $5,855,000 in the first quarter of 1999. Sterling Software
received proceeds of approximately $15,513,000 and $7,589,000 from the exercise
of employee stock options in the first quarter of 2000 and 1999, respectively.
On September 3, 1999, the Company announced a share repurchase program
authorizing the repurchase of up to 5,000,000 shares of the Company's common
stock, par value $0.10 per share ("Common Stock"), from time to time. No shares
of Common Stock were repurchased under this program in the quarter ended
December 31, 1999.
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 the first quarter of 2000 or 1999.
At December 31, 1999, the Company's short and long-term cash commitments,
including remaining costs related to recent acquisitions and reorganizations,
consisted primarily of commitments under lease arrangements for office space and
equipment and employee severance obligations. The Company intends to meet such
obligations primarily from cash provided by operating activities.
The Company believes available cash balances, cash equivalents and
short-term investments combined with cash provided by operating activities and
amounts available under existing credit agreements, are sufficient to meet the
Company's cash requirements for the foreseeable future.
Other Matters
Foreign Currency Matters
The assets and liabilities of the Company's non-U.S. operations are
translated into U.S. dollars at exchange rates in effect as of the applicable
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its exposure to
foreign currency exchange rate fluctuations through decentralized sales,
marketing and support operations, and through international development
facilities, in which substantially all costs are local-currency based. In the
past, the Company has entered, and may in the future enter, into hedging
transactions in an effort to reduce its exposure to currency exchange risks.
Acquisition Strategy
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy has
contributed significantly to the Company's growth in revenue and operating
profit. The impact of future acquisitions on continued growth in revenue and
operating profit cannot presently be determined. The Company expects to finance
-19-
<PAGE>
future acquisitions, if any, through a combination of cash on hand and cash from
operations and the possible issuance of equity or debt securities.
Year 2000 Issues
The following discussion regarding year 2000 matters constitutes a "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
Like most companies in the IT industry, the Company has been dealing with
and addressing the so-called "year 2000" issue for some time. Although the date
change to the year 2000 has already occurred, the Company continues to monitor
its product support and internal MIS organizations and the status of third-party
provided services for any indications that the year 2000 issue has impacted its
products, its material internal systems or its material third party
relationships. Although not all year 2000 disruption scenarios have been
experienced, and there is a possibility of disruptions in the future, through
the date of this Quarterly Report on Form 10-Q, the Company has not experienced
any material (or even any significant) year 2000 issues with respect to its
products, its material internal systems or the systems of its material vendors
and suppliers. Obviously, there can be no assurance that the Company or any
third parties will not experience year 2000 issues that may have a material
adverse effect on the Company's business, results of operations or financial
condition in the future.
A more detailed discussion of certain risks associated with the year 2000
issue and the Company's actions and plans to address this issue is set forth in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999.
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" in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999 and the statements under captions such as "Risk
-20-
<PAGE>
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.
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
2.1 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software,
Inc. (1), (2)
2.2 Agreement and Plan of Merger, dated as of July 15, 1999, among the
Company, Sterling Software Acquisition Corp. and Information
Advantage, Inc. (1), (3)
3.1 Restated Certificate of Incorporation of the Company (2)
3.2 Restated Bylaws of the Company (2)
10.1 Sterling Software, Inc. Deferred Compensation Plan (restated
effective January 3, 2000) (4)
10.2 Amended and Restated Supplemental Executive Retirement Plan II
regarding benefits of Geno P. Tolari under former Informatics
General Corporation Supplemental Executive Retirement Plan II (4)
27 Financial Data Schedule (4)
- -------------
(1) In accordance with Item 601 of Regulation S-K, the schedules and exhibits
relating to the agreement have been omitted. The Company will furnish
supplementally to the Securities and Exchange Commission such schedules or
exhibits upon request.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated herein by
reference (SEC File No. 99746823)
(3) 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).
(4) Filed herewith.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the three
month period ended December 31, 1999.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING SOFTWARE, INC.
Date: February 9, 2000 By: /s/ Sterling L. Williams
-----------------------------------------------
Sterling L. Williams
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: February 9, 2000 /s/ R. Logan Wray
-----------------------------------------------
R. Logan Wray
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
2.1 Agreement and Plan of Merger, dated as of August 27, 1998, among the
Company, Sterling Software (Southern), Inc. and Cayenne Software, Inc.
(1), (2)
2.2 Agreement and Plan of Merger, dated as of July 15, 1999, among the
Company, Sterling Software Acquisition Corp. and Information
Advantage, Inc. (1), (3)
3.1 Restated Certificate of Incorporation of the Company (2)
3.2 Restated Bylaws of the Company (2)
10.1 Sterling Software, Inc. Deferred Compensation Plan (restated effective
January 3, 2000) (4)
10.2 Amended and Restated Supplemental Executive Retirement Plan II
regarding benefits of Geno P. Tolari under former Informatics General
Corporation Supplemental Executive Retirement Plan II (4)
27 Financial Data Schedule (4)
- -------------
(1) In accordance with Item 601 of Regulation S-K, the schedules and exhibits
relating to the agreement have been omitted. The Company will furnish
supplementally to the Securities and Exchange Commission such schedules or
exhibits upon request.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated herein by
reference (SEC File No. 99746823).
(3) 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).
(4) Filed herewith.
-24-
<PAGE>
EXHIBIT 10.1
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
(Amended & Restated Effective January 3, 2000)
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title................................................................ 2
1.2 Definitions.......................................................... 2
ARTICLE II.
PARTICIPATION
2.1 Participation........................................................ 6
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation...................................... 6
3.2 Investment Elections................................................. 7
3.3 Match Funding........................................................ 8
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts................................................. 8
4.2 Quarterly Statements................................................. 9
ARTICLE V.
VESTING
5.1 Account.............................................................. 9
ARTICLE VI.
DISTRIBUTIONS
6.1 At or After Termination of Employment................................ 9
6.2 Death Benefits....................................................... 11
6.3 Unscheduled Early Distributions...................................... 11
6.4 Scheduled Early Distributions........................................ 12
(i)
<PAGE>
6.5 Special Withdrawals.................................................. 12
6.6 Financial Hardship Withdrawals....................................... 13
6.7 Inability To Locate Participant...................................... 13
6.8 Directors and Consultants............................................ 14
6.9 Claims Procedure..................................................... 14
ARTICLE VII.
ADMINISTRATION
7.1 Committee............................................................ 15
7.2 Committee Action..................................................... 15
7.3 Powers and Duties of the Committee................................... 15
7.4 Construction and Interpretation...................................... 16
7.5 Information.......................................................... 17
7.6 Compensation, Expenses and Indemnity................................. 17
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor........................................... 17
8.2 Restriction Against Assignment....................................... 18
8.3 Withholding.......................................................... 18
8.4 Amendment, Modification, Suspension or Termination................... 18
8.5 Governing Law........................................................ 19
8.6 Receipt or Release................................................... 19
8.7 Payments on Behalf of Persons Under Incapacity....................... 20
8.8 Successors and Assigns............................................... 20
8.9 No Employment Rights................................................. 20
8.10 Headings, etc. Not Part of Agreement................................. 20
(ii)
<PAGE>
STERLING SOFTWARE, INC.
DEFERRED COMPENSATION PLAN
Sterling Software, Inc., a Delaware corporation (the "Company") acting
on behalf of itself and its designated subsidiaries, hereby adopts the
provisions of this amended and restated plan document to govern the operation
and administration of the Sterling Software, Inc. Deferred Compensation Plan
(the "Plan"), effective as of January 3, 2000.
RECITALS
1. Effective as of February 1, 1997, the Plan was adopted and
established by the Company, acting on behalf of itself and its designated
subsidiaries, as an unfunded supplemental retirement plan for the benefit of
selected highly compensated employees, directors and consultants and their
respective beneficiaries. Benefits under the Plan are to paid by the Company
from its general assets or from the assets of the trust hereinafter described.
2. Concurrently with the adoption and establishment of the Plan, the
Company entered into a trust agreement with First American Trust Company, as
trustee, and established a trust (the "Trust") to hold and manage certain assets
contributed by the Company in connection with the Plan. The Trust is intended to
qualify as a "grantor trust" under the Internal Revenue Code of 1986, as
amended, with the principal and income of the Trust to be treated as assets and
income of the Company for federal and state income tax purposes.
3. The assets of the Plan held in the Trust will at all times be
subject to the claims of the general creditors of the Company.
4. Effective as of October 27, 1997, the Plan was amended in certain
respects by the First Amendment thereto dated such date (the "First Amendment").
Effective as of December 21, 1998, the Plan was further amended in certain
respects by the Second Amendment thereto dated such date (the "Second
Amendment").
5. Effective as of December 21, 1998, the Plan was restated solely for
purposes of incorporating therein the amendments to the Plan effected by the
First Amendment and the Second Amendment.
6. Effective as of January 3, 2000, the Plan was further amended and
restated to read in its entirety as set forth below.
1
<PAGE>
ARTICLE I.
TITLE AND DEFINITIONS
1.1 Title.
-----
This Plan shall be known as the Sterling Software, Inc. Deferred
Compensation Plan.
1.2 Definitions.
-----------
Whenever the following words and phrases are used in this Plan, with
the first letter capitalized, they shall have the meanings specified below.
(a) "Account" means for each Participant the bookkeeping account
-------
maintained by the Committee on the books of the Company that is credited with
amounts equal to (i) the portion of the Participant's Compensation that he or
she elects to defer, and (ii) the deemed earnings on such deferred Compensation
that are credited pursuant to Section 4.1(ii).
(b) "Beneficiary" or "Beneficiaries" means the beneficiary or
----------- -------------
beneficiaries last designated in writing by a Participant, in accordance with
procedures established by the Committee, to receive benefits under the Plan in
the event of the Participant's death. No beneficiary designation shall become
effective unless and until it is filed with the Committee during the
Participant's lifetime.
(c) "Board of Directors" or "Board" means the Board of Directors of
------------------ -----
Sterling Software, Inc. Any determination or other action specified in this Plan
to be made, taken or effectuated by the Board may be made, taken or effectuated
by the Executive Committee of the Board.
(d) "Change in Control" means the occurrence of any of the following
-----------------
events:
(i) the Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than two-thirds of the
combined voting power of the then-outstanding securities entitled to
vote generally in the election of directors ("Voting Stock") of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of Voting Stock of the Company immediately
prior to such transaction;
(ii) the Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than two-thirds
of the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
(iii) there is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"),
disclosing that any person (as the term
2
<PAGE>
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding Voting Stock
of the Company;
(iv) the Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(v) if, during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
directors of the Company cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this clause
(v) each director who is first elected, or first nominated for election
by the Company's stockholders, by a vote of at least two-thirds of the
directors of the Company (or a committee thereof) then still in office
who were directors of the Company at the beginning of any such period
will be deemed to have been a director of the Company at the beginning
of such period.
Notwithstanding the foregoing provisions of clauses (iii) or (iv) above, unless
otherwise determined in a specific case by majority vote of the Board, a "Change
in Control" will not be deemed to have occurred for purposes of clause (iii) or
clause (iv) above solely because (A) the Company, (B) an entity in which the
Company directly or indirectly beneficially owns 50% or more of the outstanding
Voting Stock (a "Subsidiary"), or (C) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock
of the Company, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has occurred or will occur in
the future by reason of such beneficial ownership or any increase or decrease
thereof.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Administrative Committee appointed to
---------
administer the Plan in accordance with Article VII.
(g) "Company" means Sterling Software, Inc., a Delaware corporation,
-------
any successor corporation to Sterling Software, Inc. satisfying the requirements
of Section 8.8 and any entity that is directly or indirectly controlled by
Sterling Software, Inc. or in which Sterling Software, Inc. has a significant
equity or investment interest, as determined by the Board.
(h) "Compensation" means (a) the following items of remuneration
------------
payable to an Eligible Individual for services rendered to the Company during a
calendar year: Salary, Incentive Bonus, annual retainer and meeting fees payable
to members of the Board and fees
3
<PAGE>
payable to consultants, and (b) any Post Employment Payments payable to an
Eligible Individual. An Eligible Individual's Compensation shall be computed
before giving effect to the Eligible Individual's salary reduction elections
under Code Sections 125 or 401(k) and the Eligible Individual's deferral
election under Section 3.1 of this Plan.
(i) "Distributable Amount" means the balance of a Participant's
--------------------
Account at any given time.
(j) "Effective Date" means February 1, 1997.
--------------
(k) "Eligible Individual" for a Plan Year means (i) a common law
-------------------
employee of the Company whose Compensation is paid on a United States payroll in
United States dollars and (A) whose Compensation equaled or exceeded the
Threshold Amount in the prior calendar year (or, in the case of an employee
employed only during a portion of such prior calendar year, whose annualized
Compensation would have equaled or exceeded the Threshold Amount), or (B) who
satisfied any alternative eligibility criteria established by the Committee
pursuant to Section 7.3(iv) of the Plan; (ii) a member of the Board of Directors
who is not a common law employee of the Company; (iii) a consultant who is not a
common law employee of the Company and who is specifically designated by the
Committee as eligible to participate in the Plan, or (iv) any former employee,
board member or consultant entitled to any Post Employment Payments from the
Company, who had immediately prior to receiving notice of termination or actual
termination of employment, Board membership or consultancy relationship, been a
Participant. An individual's status as an Eligible Individual for a Plan Year
shall be determined prior to the first day of such Plan Year; provided, however,
that in the case of individuals described in clause (iv) above, status as an
Eligible Individual for one or more Plan Years shall be irrevocably established
upon the earlier of receipt of notice of termination or actual termination of
employment, Board membership or consultancy relationship. For purposes of this
Section 1.1(k) and Section 1.1(s) below, "termination of employment" shall be
deemed to have occurred when the Participant ceases to actively work for or
provide services to the Company on a regular basis, regardless of whether the
Participant continues on the payroll of the Company during any severance period,
pay-in-lieu-of-notice period, paid leave of absence not coupled with a planned
return to active service or any similar period. Notwithstanding the foregoing,
the Committee may in its discretion (I) determine in writing that an otherwise
Eligible Individual may not participate in this Plan for one or more Plan Years,
and (II) determine to admit a newly hired employee (whether hired through an
acquisition or otherwise) into the Plan on a date other than the first day of a
Plan Year and to establish criteria for the admission of such newly hired
employees in addition to or in lieu of those set forth above, provided that such
criteria are consistent with the purpose of the Plan to provide benefits for a
select group of management or highly compensated employees. An individual who is
classified by the Company as an independent contractor whose compensation for
services is reported by the Company on a form other than Form W-2 (or any
successor form for reporting wages paid to employees) will not be an Eligible
Individual unless the Committee specifically designates such individual by name
as an Eligible Individual pursuant to clause (iii) above.
(l) "Fund" or "Funds" means one or more of the investment funds or
---- -----
contracts selected by the Committee pursuant to Section 7.3(i).
4
<PAGE>
(m) "Incentive Bonus" means any cash incentive compensation payable
---------------
to a Participant in addition to the Participant's Salary.
(n) "Initial Election Period" for an Eligible Individual means the
-----------------------
30-day period ending January 31, 1997.
(o) "Interest Rate" means, for any Fund and for any month, an amount
-------------
expressed as a percentage equal to the net rate of gain or loss on the assets of
such Fund during such month.
(p) "Participant" means any Eligible Individual who elects to defer
-----------
Compensation in accordance with Section 3.1.
(q) "Plan" means the Sterling Software, Inc. Deferred Compensation
----
Plan set forth herein, as amended from time to time in accordance with Section
8.4.
(r) "Plan Year" means the 12-consecutive month period beginning
---------
January 1 and ending December 31 of each year, provided that the first Plan Year
shall be a short year beginning February 1, 1997 and ending December 31, 1997.
(s) "Post Employment Payments" means any payments which are made to
------------------------
an Eligible Individual following receipt of notice of termination or actual
termination of employment, Board membership or consultancy relationship in
respect of such Eligible Individual's former employment, consultancy or Board
membership with the Company, including payment in lieu of vacation, payment in
lieu of notice or any severance payments (which may be in the form of a lump sum
payment or salary or bonus continuation), payable by the Company pursuant to any
Company plan, agreement or policy which provides for such payments (including
without limitation, any payments pursuant to severance agreements or change in
control agreements). Notwithstanding the foregoing, the term "Post Employment
Payments" shall not include payments in respect of any excise tax imposed by
Section 4999 of the Code (or any successor provision thereto), any similar tax
imposed by state or local law, any interest or penalties with respect to any
such tax, or any gross-up or similar payments with respect to any of the
foregoing.
(t) "Salary" means for any calendar year (i) in the case of an
------
employee of the Company whose compensation from the Company does not include
commission income, the employee's base salary during the calendar year and (ii)
in the case of an employee of the Company whose compensation from the Company
includes commission income, the total of the employee's base salary plus
commissions during the calendar year. Salary excludes any other form of
compensation such as Incentive Bonuses, restricted stock, income from stock
options or stock appreciation rights, severance payments, moving expenses, car
or other special allowances, reimbursements for taxes or any other remuneration
for personal services included in an Eligible Individual's taxable income.
(u) "Threshold Amount" means, for the first Plan Year, the sum of
----------------
$120,000 and, for any subsequent Plan Year, such other amount as may be
determined by the Committee pursuant to Section 7.3.
(v) "Trust" means the trust established by the Trust Agreement.
-----
5
<PAGE>
(w) "Trust Agreement" means the Sterling Software, Inc. Deferred
---------------
Compensation Plan Trust Agreement dated as of February 1, 1997, by and between
the Company and First American Trust Company, as Trustee.
(x) "Trustee" means First American Trust Company or any successor
-------
trustee appointed pursuant to the Trust Agreement.
ARTICLE II.
PARTICIPATION
2.1 Participation.
-------------
An Eligible Individual shall become a Participant in the Plan for a
Plan Year by electing to defer all or a portion of his or her Compensation for
such Plan Year in accordance with Section 3.1, by completing all required
applications for life insurance (as determined by the Committee in its
discretion), and by complying with any applicable medical underwriting
requirements of the issuer of any policy of insurance on the life of the
Eligible Individual.
ARTICLE III.
DEFERRAL ELECTIONS
3.1 Elections to Defer Compensation.
-------------------------------
(a) Elections. For the first Plan Year, each Eligible Individual may
---------
elect to defer Compensation by filing with the Committee an election that
conforms to the requirements of this Section 3.1, on a form provided by the
Committee (an "Election Form"), no later than the last day of the Initial
Election Period. For each subsequent Plan Year, an Eligible Individual may make
an election to defer Compensation by filing an Election Form with the Committee
on or before the December 31 preceding the Plan Year for which the election is
to be effective or, in the case of a newly hired employee who is admitted into
the Plan on a date other than the first day of a Plan Year, on or before the
date such employee receives his first payroll distribution from the Company. An
Eligible Individual who does not elect to defer Compensation for a Plan Year may
become a Participant with respect to a subsequent Plan Year by filing an
Election Form with the Committee on or before the December 31 preceding the Plan
Year for which the election is to be effective.
(b) General Rule. Subject to the limitations set forth in subsection
------------
(c) below, an Eligible Individual may elect to defer any whole percentage of his
or her Compensation up to 100%; provided, however, that if an Eligible
Individual's deferral election would reduce the Compensation paid to the
Eligible Individual to an amount that is less than (i) the amount necessary to
satisfy the Eligible Individual's portion of applicable employment taxes for the
Plan Year, (ii) amounts necessary to satisfy any other benefit plan elections or
loan repayments for the Plan Year under any other plan sponsored by the Company
and (iii) any income taxes payable with respect to taxable compensation that is
not eligible for deferral, then the Participant must
6
<PAGE>
remit to the Company, at the time or times requested by the Company, any amounts
necessary to permit the Company to satisfy its obligation to withhold such
taxes, implement such benefit plan elections or deduct such loan repayments. In
addition, a deferral election made by an Eligible Individual will not be
effective unless and until the Eligible Individual completes all required
applications for life insurance (as determined by the Committee in its
discretion).
(c) Minimum Deferrals. For each Plan Year during which an Eligible
-----------------
Individual is a Participant, the minimum dollar amount of Compensation that may
be deferred by the Eligible Individual under the Plan is $5,000. To the extent
that a Participant's actual deferrals in a Plan Year are less than $5,000, such
deferrals, together with earnings or loss thereon through the last day of such
Plan Year, will be refunded as promptly as practicable after the end of such
Plan Year.
(d) Duration of Compensation Deferral Election. Any deferral election
------------------------------------------
made under this Section 3.1 shall be irrevocable and shall apply only to the
Compensation paid or payable during the Plan Year for which the election is
made. Without limiting the generality of the foregoing, such election shall be
effective (i) with respect to Salary or consulting fees paid or payable during
the Plan Year for which the election is made, (ii) with respect to director fees
paid or payable during the Plan Year for which the election is made, (iii) with
respect to Incentive Bonuses paid or payable during the Plan Year for which the
election is made; and (iv) with respect to any Post Employment Payments paid or
payable after receipt of notice of termination or actual termination of
employment, Board membership or consultancy relationship that occurs during the
Plan Year for which the election is made.
3.2 Investment Elections.
--------------------
(a) The Committee shall provide each Participant with a list of
multiple Funds available for hypothetical investment and each Participant may
designate, on a form provided by the Committee, one or more of such Funds in
which his or her Account will be deemed to be invested for purposes of
determining the amount of earnings to be credited to such Account. The list
shall consist of at least five Funds, collectively offering a wide range of
investment options (domestic and international) with a spectrum of risk and
return potential (from conservative, low risk/low return potential to
aggressive, high risk/high return potential), comparable as a whole to the
initial list of Funds attached hereto as Exhibit A. The Committee may in its
discretion change from time to time the Funds available for hypothetical
investment, provided Participants are given at least 90 days' prior written
notice of the effective date of the deletion of any Fund (including, without
limitation, the deletion of a Fund in connection with the substitution of a new
Fund in its place); it being understood, however, that where the deletion of a
Fund is beyond the control of the Committee (e.g., where the provider of a
Matching Investment unilaterally effects such a deletion), the Committee's
obligation shall be to give Participants written notice of the effective date of
such deletion as promptly as practicable after the Committee obtains knowledge
thereof. The Committee may in its discretion add new Funds at any time and
Participants shall be given written notice of such additions as promptly as
practicable after the Committee decides to add a new Fund. The Interest Rate of
each Fund shall be used to determine the amount of earnings to be credited to
Participant's Accounts under Section 4.1(ii).
7
<PAGE>
(b) In making the investment designation pursuant to this Section
3.2, the Participant may specify that all, or any whole percentage, of his or
her Account will be deemed to be invested in one or more of the Funds designated
by the Committee (with a minimum of 5% of the Account balance deemed to be
invested in any one Fund and all such designations in the aggregate not to
exceed 100% of the Participant's Account balance). Effective as of the beginning
of any calendar month, a Participant may change the Fund designations made under
this Section 3.2 by filing a new designation, on a form provided by the
Committee, at least five days prior to the end of the immediately preceding
calendar month (or such other period prior to the end of the immediately
preceding month as the Committee may from time to time prescribe).
(c) If a Participant fails to elect a Fund under this Section 3.2, or
if the Participant's investment designation is less than 100% of his or her
Account balance, for any portion of the Account balance for which no investment
designation has been made he or she shall be deemed to have designated the Fund
that the Committee determines in its sole judgment to have the least risk of
loss of principal.
3.3 Match Funding.
-------------
To the extent authorized by the Committee in its discretion, and in
such case to the fullest extent practicable, the Company shall match fund (in
terms of both timing and amount) all of its obligations to Participants under
the Plan by acquiring and contributing to the Trust, or by causing the Trustee
to acquire or maintain on behalf of the Trust, life insurance investments
("Matching Investments") corresponding as closely as possible to amounts from
time to time allocated to the Investment Fund Subaccounts (as hereinafter
defined) of all Participants. To the extent that the Company wishes to prefund
Matching Investments for a given Plan Year, such Matching Investments shall be
maintained in the Fund offering the least risk of loss of principal, or a
conservative money market fund, until such Matching Investments are periodically
allocated to investment options corresponding to the periodic deferral amounts
of the Participants. Notwithstanding the foregoing, the Company and the Trustee
may maintain cash reserves in an amount reasonably necessary to pay benefits
under and administer this Plan.
While the Plan is in existence the Company shall at all times comply
with its duties and obligations under the Trust Agreement, and all Participants
and their beneficiaries are expressly acknowledged by the Company to be bona
fide third party beneficiaries under the Trust Agreement.
ARTICLE IV.
ACCOUNTS
4.1 Participant Accounts.
--------------------
The Committee shall establish and maintain an Account for each
Participant under the Plan. Each Participant's Account shall be further divided
into separate subaccounts ("Investment Fund Subaccounts"), each of which
corresponds to a Fund elected by the Participant pursuant to Section 3.2. A
Participant's Account shall be debited and credited as follows:
8
<PAGE>
(i) As of the last day of each month, the Committee shall
credit the Investment Fund Subaccounts of the Participant's Account
with an amount equal to any Compensation deferred by the Participant
during all pay periods ending in that month in accordance with the
Participant's election; that is, the portion of the Participant's
deferred Compensation that the Participant has elected to be deferred
and deemed to be invested in a certain Fund shall be credited to the
Investment Fund Subaccount corresponding to that Fund.
(ii) As of the last day of each month, each Investment Fund
Subaccount of a Participant's Account shall be credited with earnings
in an amount determined by multiplying the balance credited to such
Investment Fund Subaccount as of the last day of the preceding month by
the Interest Rate for the corresponding Fund for the then current
month. To the extent any such Interest Rate is negative in any month
(due to a net loss in the applicable Fund), the applicable Investment
Fund Subaccount will be debited in the same manner.
(iii) As of the first day of each calendar month, each
Investment Fund Subaccount will be debited or credited to appropriately
reflect any change in Fund designations made by Participants pursuant
to Section 3.2.
4.2 Quarterly Statements.
--------------------
Under procedures established by the Committee, a Participant shall
receive a statement with respect to such Participant's Account on a quarterly
basis.
ARTICLE V.
VESTING
5.1 Account.
-------
A Participant's interest in his or her Account shall be 100% vested at
all times.
ARTICLE VI.
DISTRIBUTIONS
6.1 At or After Termination of Employment.
-------------------------------------
(a) Forms of Payment. A Participant's Distributable Amount with respect
----------------
to each Plan Year will be paid, in accordance with the Participant's election,
either in a lump sum payment or in quarterly installments over a period of 5,
10, 15 or 20 years. Such lump sum payment shall be made or such quarterly
installments shall commence, as applicable, either upon termination of the
Participant's employment or at a later date elected by the Participant in
accordance with Section 6.1(b). If a Participant fails to make an election, he
will be deemed to
9
<PAGE>
have elected to receive his Distributable Amount in a lump sum
payment upon termination of employment.
(b) Payment Election. Each Participant shall elect, at the time of his
----------------
or her election to defer Compensation under the Plan for a Plan Year, to have
that portion of his or her Distributable Amount attributable to such Plan Year
paid in installments or in a lump sum payment, as described in subsection (a)
above, and shall elect the installment payment commencement date or the lump sum
payment date, as applicable, which may be the date of termination of the
Participant's employment or any later date specified by the Participant.
(c) Payment Commencement Date. Unless a Participant receives an early
-------------------------
distribution with respect to the Distributable Amount for a Plan Year pursuant
to Section 6.3, Section 6.4, Section 6.5 or Section 6.6, such Distributable
Amount (or remaining portion thereof) will be paid after the Participant
terminates employment with the Company. Payments will be paid in accordance with
the Participant's election. If a Participant elected to receive a lump sum
payment upon termination of employment, such payment shall be made as soon as
practicable following the Participant's termination of employment, but in no
event later than 90 days after the date of such termination. If a Participant
elected to receive a lump sum payment on a specified date occurring after the
Participant's termination of employment, such payment shall be made as soon as
practicable following the specified date, but in no event later than 90 days
after such specified date. Quarterly installment payments will begin as soon as
administratively practicable following the applicable payment commencement date
elected by the Participant and shall continue quarterly thereafter until the
applicable portion of the Distributable Amount has been fully distributed. Each
quarterly installment payment will be made pro rata from the Participant's
Investment Fund Subaccounts according to the balances in such Subaccounts.
During the period preceding any lump sum distribution date and during the period
in which quarterly installment payments are being made, the Participant's
Account will continue to be credited monthly with earnings pursuant to Section
4.1(ii) of the Plan and the Participant may continue to change Fund designations
pursuant to Section 3.2 of the Plan. Quarterly installment payments will be
adjusted annually to reflect earnings, gains and losses until all amounts
credited to a Participant's Account under the Plan have been distributed. To the
fullest extent practicable, but subject to such annual adjustments, quarterly
installment payments shall be comparable in amount over the entire distribution
period. Once a Participant's Distributable Amount declines to a level below the
sum of $25,000, such Distributable Amount may be distributed in a lump sum
payment and quarterly installment payments shall cease.
(d) Change in Distribution Election. Subject to the limitations and
-------------------------------
requirements specified below, a Participant (whether or not such Participant has
terminated employment with the Company) may change (i) his or her previously
elected form of payment (i.e., lump sum payment versus quarterly installment
payments) to the other payment form permitted by the Plan, (ii) a previously
elected payment commencement date to a different payment commencement date, or
(iii) an election to receive a distribution upon termination of employment or a
date subsequent thereto pursuant to Section 6.1 to a scheduled early
distribution pursuant to Section 6.4, or vice versa, with respect to that
portion of his or her Distributable Amount attributable to one or more Plan
Years. A Participant must file a written election with the Committee to effect
any such change at least six months prior to the date that payment of such
portion of his or her Distributable Amount would otherwise be made. Except as
provided in Sections 6.3 or 6.5(b)
10
<PAGE>
hereof, if payment of such portion is to commence (or actually commences because
of the Participant's termination of employment) less than six months prior to
the effective date of such written election, such written election shall be void
and the immediately preceding valid written election shall control. If there is
no previous written election on file, then distributions shall be governed by
the default provisions of Section 6.1(a). A Participant's election concerning
(i) form of payment, (ii) payment commencement date or (iii) payment upon or
after termination of employment versus scheduled early distribution pursuant to
Section 6.4 with respect to a given Plan Year may not be changed after payment
of that portion of the Distributable Amount attributable to such Plan Year has
been made or has begun.
(e) Exception for Small Balances. Notwithstanding the foregoing
----------------------------
provisions of this Section 6.1 or of Section 6.2, if at the time that any
Participant becomes entitled to receive payment of all or any portion of his
Distributable Amount, such Participant's entire Distributable Amount does not
exceed the sum of $25,000, such portion of his Distributable Amount shall
automatically be distributed in the form of a lump sum payment.
6.2 Death Benefits. If a Participant dies while employed by the Company, or
--------------
after termination of employment, the Participant's Distributable Amount shall be
paid to the Participant's Beneficiary in the same form and in accordance with
the same payment schedule under which the Distributable Amount was being or
would have been paid to the Participant. All references in this Plan to rights,
options or other attributes of a Participant shall be deemed to refer equally to
a Beneficiary, unless the context clearly requires otherwise.
6.3 Unscheduled Early Distributions. Subject to paragraph (vi) below,
-------------------------------
Participants shall be permitted to request to withdraw amounts from their
Accounts at any time ("Early Distributions"). Upon receiving a withdrawal
request, the Committee shall determine, in its sole discretion, whether to
permit any such withdrawal and the amount, if any, to be withdrawn, subject to
the following restrictions:
(i) The election to take an Early Distribution shall be made
by filing a form provided by and filed with the Committee.
(ii) The maximum amount payable to a Participant in
connection with an Early Distribution shall in all cases equal 90% of
the amount requested by the Participant (which requested amount must be
not less than $10,000 or the Participant's entire Distributable Amount
if less than $10,000); provided, however, that the maximum amount
payable to a Participant in connection with an Early Distribution shall
be 90% of the Distributable Amount as of the end of the calendar month
in which the Early Distribution request is received by the Committee.
(iii) The amount described in paragraph (ii) above shall be
paid in a single lump sum by the end of the calendar month next
following the calendar month in which the Early Distribution request is
received by the Committee. A distribution pursuant to this Section 6.3
of less than the Participant's entire interest in the Plan will be made
pro rata from his or her Investment Fund Subaccounts according to the
balances in such Subaccounts.
11
<PAGE>
(iv) If a Participant receives an Early Distribution, the
remaining portion of the requested or approved amount, as applicable,
in excess of the amount payable under paragraph (ii) above (i.e., 10%
---
of such amount), shall be permanently forfeited and the Company shall
have no obligation to the Participant or his or her Beneficiary with
respect to such forfeited amount.
(v) If a Participant receives an Early Distribution, the
Participant shall be ineligible to make any additional deferrals under
the Plan for the balance of the Plan Year in which the Early
Distribution occurs and for the immediately following Plan Year.
(vi) A Participant shall be limited to a maximum of two Early
Distributions during all of his or her periods of Plan participation.
6.4 Scheduled Early Distributions. Participants may elect to have payments
-----------------------------
in respect of Compensation deferred during a given Plan Year be made in a lump
sum amount on a future date while still employed, provided the payment date is
at least 2 years after the date such Plan Year commences. This election shall
apply to the Compensation deferred for the Plan Year specified by the
Participant on his or her election form and the earnings credited thereto until
the payment date. A Participant may elect a different payment date for the
Compensation deferred for each Plan Year. In addition, payment dates elected
pursuant to this Section 6.4 may be deferred by not less than six months, by
filing with the Committee written notice not less than six months prior to the
payment date to be deferred. A distribution pursuant to this Section 6.4 of less
than the Participant's entire interest in the Plan shall be made pro rata from
his or her Investment Fund Subaccounts according to the balances in such
Subaccounts. Notwithstanding the foregoing, if a Participant terminates
employment with the Company for any reason prior to the date on which a payment
is scheduled to be made pursuant to this Section 6.4, the Participant's entire
Distributable Amount will be paid pursuant to the provisions of Section 6.1. In
the event of any conflict between the provisions of Section 6.1(d) and the
provisions of this Section 6.4, the provisions of this Section 6.4 shall
control.
6.5 Special Withdrawals.
-------------------
(a) Change in Control. Following a Change in Control, a
-----------------
Participant may elect in writing at any time to commence the distribution of the
Participant's entire Distributable Amount without penalty and without regard to
whether the Participant has terminated employment with the Company or whether
installment payments have commenced, provided that such election shall be
effective and such commencement of payment(s) shall begin on a date not sooner
than six months following the date such election is made. The requested
distribution will be made in a lump sum payment or in quarterly installments
over 5, 10, 15 or 20 years, as elected by the Participant. A Participant's
election pursuant to this Section 6.5(a) will supersede any prior payment
election made under the Plan. A Participant who elects to receive the
distribution of his or her Distributable Amount under this Section 6.5(a) will,
upon receipt of the Participant's election by the Committee, cease to be
eligible to defer additional amounts under the Plan for the balance of the Plan
Year in which such receipt occurs.
(b) Early Post-Termination Distributions. Following
------------------------------------
termination of a Participant's employment, a Participant may elect in writing at
any time to receive a payment of
12
<PAGE>
the Participant's entire Distributable Amount, without regard to whether
installment payments have commenced. Notwithstanding the preceding sentence, if
the requested payment date of any such election is less than six months
following the date of such election, then the maximum amount payable to a
Participant in connection with such election shall in all cases equal 90% of the
Participant's Distributable Amount. The remaining 10% of such Participant's
Distributable Amount shall be permanently forfeited and the Company shall have
no obligation to the Participant or his or her Beneficiary with respect to such
forfeited amount. All payments made pursuant to this Section 6.5(b) shall be in
a single lump sum.
6.6 Financial Hardship Withdrawals. The Committee may, pursuant to rules or
------------------------------
policies from time to time adopted by it and applied in a consistent manner,
accelerate the date of distribution of all or any portion of a Participant's
Account balance because of a financial hardship. A financial hardship means an
unforeseeable, severe financial emergency resulting from (a) a sudden and
unexpected illness or accident of the Participant or his or her dependents (as
defined in Section 152(a) of the Code); (b) loss of the Participant's property
due to casualty; or (c) other similar extraordinary and unforeseeable
circumstances arising out of events beyond the control of the Participant, which
may not be relieved through other available resources of the Participant, as
determined by the Committee in accordance with such rules and policies. A
distribution pursuant to this Section 6.6 of less than the Participant's entire
interest in the Plan shall be made pro rata from his or her Investment Fund
Subaccounts according to the balances in such Subaccounts. Subject to the
foregoing, payment of any amount with respect to which a Participant has filed a
request under this Section 6.6 shall be made as soon as practicable after
approval of such request by the Committee. Distributions made pursuant to this
Section 6.6 shall be without penalty.
6.7 Inability To Locate Participant.
-------------------------------
(a) Forfeiture of Account. In the event that the Committee is unable to
---------------------
locate a Participant or, with respect to a Participant who has died, any
Beneficiary within two years following the date on which any payment of the
Participant's Distributable Amount is scheduled to be made or begin, the amount
allocated to the Participant's Account shall be forfeited. Following the date of
forfeiture, the Participant's Account which is forfeited shall be invested in
the Fund offering the least risk of loss of principal or conservative money
market funds. If, after such forfeiture and prior to the escheat of the
Participant's Account as provided in Section 6.7(b), the Participant or
Beneficiary later claims such benefit and establishes to the reasonable
satisfaction of the Committee such Participant's or Beneficiary's right to
receive same, such Account shall be reinstated at its balance at the date of
forfeiture without additional interest, earnings, gains or losses from the date
of forfeiture through the date of reinstatement. The Participant's restored
Account balance will be invested in the manner that the Participant or
Beneficiary elects pursuant to Section 3.2 and will be distributed to the
Participant or Beneficiary in accordance with the Participant's payment
elections made pursuant to this Article VI. In addition, any installment
payments that were scheduled to have been made during the period in which the
Participant or Beneficiary could not be located will be made to the Participant
or Beneficiary in a lump sum catch-up payment as soon as administratively
practicable.
(b) Escheat of Account. The Committee, in its discretion, may escheat,
------------------
or may cause the Trustee to escheat, to the state of Texas (or such other state
as the Committee, in its
13
<PAGE>
discretion, determines is appropriate) any Participant's Account which was
forfeited if either (i) the Committee has been unable to locate the Participant
or Beneficiary for a period of five years following the date on which any
payment of the Participant's Distributable Amount is scheduled to be made or
begin or (ii) the Plan is terminated and the Committee has been unable to locate
the Participant or Beneficiary for a period of two years following the date on
which any payment of the Participant's Distributable Amount is scheduled to be
made or begin. Upon the escheat of the Participant's Account, the Participant or
Beneficiary shall have no further right to any benefits or payments under the
Plan, and neither the Company, the Committee nor the Trustee shall have any
liability to such Participant or Beneficiary for the amount of the Participant's
Account.
6.8 Directors and Consultants. For purposes of the preceding sections of
-------------------------
this Article VI, a Participant who is a member of the Board or a consultant, but
who is not an employee of the Company, will be deemed to be employed by the
Company as long as he or she is a director or is engaged as a consultant and
will be deemed to have terminated employment when he or she is no longer a
director or is no longer engaged as a consultant and is not then an employee of
the Company.
6.9 Claims Procedure.
----------------
(a) Claim for Benefits. If a Participant or Beneficiary does not
------------------
receive the benefits which the Participant or Beneficiary believes he or she is
entitled to receive under the Plan, the Participant or Beneficiary may file a
claim for benefits with the Committee. All claims shall be made in writing and
shall be signed by the claimant. If the claimant does not furnish sufficient
information to enable the Committee to process the claim, the Committee will
indicate to the claimant any additional information which is required.
(b) Notification by the Committee. Each claim will be approved or
-----------------------------
disapproved by the Committee within 90 days following the receipt of the
information necessary to process the claim. In the event the Committee denies a
claim for benefits in whole or in part, the Committee will notify the claimant
in writing of the denial of the claim. Such notice by the Committee will also
set forth, in a manner calculated to be understood by the claimant, the specific
reason for such denial, the specific Plan provisions on which the denial is
based, a description of any additional material or information necessary for the
claim to be approved, if possible, with an explanation of why such material or
information is necessary, and an explanation of the Plan's claim review
procedure as set forth in subsection (c). If no action is taken by the Committee
on a claim within such 90 day period, the claim will be deemed to be denied for
purposes of the review procedure.
(c) Review Procedure. A claimant may appeal a denial of his or her
----------------
claim by requesting a review of the decision by the Committee or a person
designated by the Committee. An appeal must be submitted in writing within 60
days after receipt by the claimant of written notification of the denial and
must (i) request a review of the claim for benefits under the Plan, (ii) set
forth all of the grounds upon which the claimant's request for review is based
and any facts in support thereof, and (iii) set forth any issues or comments
which the claimant deems pertinent to the appeal. The Committee or the person
designated by the Committee will make a full and fair review of each appeal and
any written materials submitted in connection with the
14
<PAGE>
appeal. The Committee or the person designated by the Committee will act upon
each appeal within 60 days after receipt thereof unless special circumstances
require an extension of the time for processing, in which case a decision will
be rendered as soon as possible but not later than 120 days after the appeal is
received. The claimant will be given the opportunity to review documents or
materials directly pertinent to the appeal upon submission of a reasonable
written request to the Committee or person designated by the Committee, provided
the Committee or person designated by the Committee in its reasonable judgment
finds the requested documents or materials are directly pertinent to the appeal.
On the basis of its review, the Committee or person designated by the Committee
will make an independent determination of the claimant's eligibility for
benefits under the Plan. The decision of the Committee or person designated by
the Committee on any claim for benefits will be final and conclusive upon all
parties thereto. In the event the Committee or person designated by the
Committee denies an appeal in whole or in part, it will give written notice of
the decision to the claimant, which notice will set forth in a manner calculated
to be understood by the claimant the specific reasons for such denial and which
will make specific reference to the pertinent Plan provisions on which the
decision was based.
ARTICLE VII.
ADMINISTRATION
7.1 Committee.
---------
The Committee for the Plan shall be appointed by, and serve at the
pleasure of, the Board. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member with or without cause
by delivering a certified copy of its resolution of removal to such member.
Vacancies in the membership of the Committee shall be filled as soon as
practicable by the Board.
7.2 Committee Action.
----------------
The Committee shall act at meetings by affirmative vote of a majority
of the members of the Committee. Any action permitted to be taken at a meeting
may be taken without a meeting if, prior to such action, a written consent to
the action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. Any two members of the Committee may execute any
certificate or other written direction on behalf of the Committee.
7.3 Powers and Duties of the Committee.
----------------------------------
The Committee shall administer the Plan in accordance with its terms
and shall have all powers, authority and discretion necessary to accomplish its
purposes, including, but not by way of limitation, the authority and discretion
to:
15
<PAGE>
(i) select the Funds and change the Funds from time to time
pursuant to Section 3.2;
(ii) appoint a plan administrator or any other agent, and
delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time
prescribe;
(iii) resolve all questions relating to the eligibility of
employees, directors and consultants to be or become Eligible
Individuals or Participants;
(iv) determine the Threshold Amount applicable to any Plan
Year after the first Plan Year and establish alternative criteria,
consistent with the purpose of the Plan to provide benefits to a select
group of management or highly compensated employees, for what shall
constitute an employee of the Company an Eligible Individual with
respect to any given Plan Year, in addition to or in lieu of the
eligibility criteria set forth in Section 1.2(k) of the Plan;
(v) determine the amount of benefits payable to
Participants or their Beneficiaries under this Plan, and determine the
time and manner in which such benefits are to be paid;
(vi) authorize and direct all disbursements by the Trustee
from the Trust;
(vii) engage any administrative, legal, accounting, clerical,
or other services it deems appropriate in administering the Plan or the
Trust Agreement;
(viii) construe and interpret this Plan and the Trust
Agreement, supply omissions from, correct deficiencies in, and resolve
ambiguities in the language of this Plan and the Trust Agreement, and
adopt rules for the administration of this Plan and the Trust Agreement
that are not inconsistent with the terms of such documents;
(ix) compile and maintain all records it determines to be
necessary, appropriate or convenient in connection with the
administration of this Plan and of benefit payments hereunder;
(x) determine the disposition of assets in the Trust in the
event this Plan is terminated;
(xi) review the performance of the Trustee with respect to
the Trustee's administrative duties, responsibilities and obligations
under this Plan and the Trust Agreement, report to the Board regarding
such administrative performance of the Trustee, and recommend to the
Board, if necessary, the removal of the Trustee and the appointment of
a successor Trustee; and
(xii) resolve all questions relating to any matter for which
it has administrative responsibility.
16
<PAGE>
7.4 Construction and Interpretation.
-------------------------------
The Committee shall have full authority and discretion to construe and
interpret the terms and provisions of this Plan, which interpretation or
construction shall be final and binding on all parties, including but not
limited to the Company and any Eligible Individual, Participant or Beneficiary.
The Committee shall administer the Plan in a consistent and nondiscriminatory
manner and in full accordance with any and all laws applicable to the Plan.
7.5 Information.
-----------
To enable the Committee to perform its functions, the Company shall
supply full and timely information to the Committee on all matters relating to
the Compensation of all Participants, their death or other cause of termination,
and such other pertinent facts as the Committee may reasonably require.
7.6 Compensation, Expenses and Indemnity.
------------------------------------
(a) Expenses. The members of the Committee shall serve without
--------
compensation for their services hereunder. All expenses and fees incurred in
connection with the administration of the Plan and the Trust shall be paid by
the Company.
(b) Indemnification. To the fullest extent permitted by applicable law,
---------------
the Company shall indemnify and save harmless the Committee and each member
thereof, the Board and any delegate of the Committee who is an employee of the
Company against any and all expenses, liabilities and claims, including legal
fees to defend against such liabilities and claims, arising out of their
discharge in good faith of responsibilities under or incident to the Plan, other
than expenses and liabilities arising out of willful misconduct. Without
limiting the generality of the foregoing, the Company shall, promptly upon
request, advance funds to persons entitled to indemnification hereunder to the
extent necessary to defray legal and other expenses incurred in the defense of
such liabilities and claims, as and when incurred. This indemnity shall not
preclude such further indemnities as may be available under insurance purchased
by the Company or provided by the Company under any bylaw, agreement or
otherwise.
ARTICLE VIII.
MISCELLANEOUS
8.1 Unsecured General Creditor.
--------------------------
Participants and their Beneficiaries, heirs, successors, and assigns
shall have no legal or equitable rights, claims, or interests in any Matching
Investments or in any other property or assets of the Company or the Trust. No
assets of the Company shall be held as collateral security for the obligations
of the Company under this Plan. Any and all assets of the Trust shall be and
shall remain unpledged and unencumbered. The Company's obligation under the Plan
shall be merely that of an unfunded and unsecured promise of the Company to pay
money in the future, and the rights of the Participants and Beneficiaries shall
be no greater than those of unsecured general creditors. The Company shall
maintain the Trust at all times during the term of the Plan.
17
<PAGE>
All assets of the Company and the Trust shall be subject to the claims of the
Company's creditors.
8.2 Restriction Against Assignment.
------------------------------
The Company or the Trustee shall pay all amounts payable hereunder only
to the person or persons designated pursuant to the Plan and not to any other
person or entity. No part of a Participant's Account shall be liable for the
debts, contracts, or engagements of any Participant, his or her Beneficiary, or
successors in interest, nor shall a Participant's Account be subject to
execution by levy, attachment, or garnishment or by any other legal or equitable
proceeding, nor shall any such person have any right to alienate, anticipate,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever, without the prior written consent of the Committee, which may
be withheld in its sole discretion. If any Participant, Beneficiary or successor
in interest is adjudicated bankrupt or purports to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any distribution or payment from
the Plan, voluntarily or involuntarily, the Committee, in its discretion, may
cancel such distribution or payment (or any part thereof) to or for the benefit
of such Participant, Beneficiary or successor in interest in such manner as the
Committee shall direct.
8.3 Withholding.
-----------
There shall be deducted from each payment made under the Plan all taxes
which are required to be withheld by the Company in respect to such payment.
8.4 Amendment, Modification, Suspension or Termination.
--------------------------------------------------
(a) The Committee may amend, modify, suspend or terminate the Plan in
whole or in part, provided that (i) no amendment, modification, suspension or
termination shall have any retroactive effect that would directly or indirectly
reduce any amounts allocated to a Participant's Account or otherwise deprive any
Participant of any benefits already vested under the Plan; (ii) any amendment,
modification, suspension or termination of the Plan that will significantly
increase costs to the Company shall be approved by the Board; (iii) no
amendment, modification, suspension or termination of the Plan shall have the
effect of causing any Participant's Account to be distributed earlier than the
time contemplated by the Plan and the Participant's elections without the prior
written consent of the Participant; (iv) no amendment or modification shall
materially and adversely affect the interests of Participants without the prior
written consent of at least 75% of the Participants (such percentage to be
determined by the number of Participants and not by their percentage interest in
all Account balances); and (v) for a period of two years following a Change in
Control, the Plan may not be amended, modified, suspended or terminated without
the prior written consent of at least 75% of the Participants (such percentage
to be determined by the number of Participants and not by their percentage
interest in all Account balances).
(b) Without limiting the generality of Section 8.4(a)(iv) above, any
amendment or modification which directly or indirectly has any of the following
effects shall be deemed to materially and adversely affect the interests of
Participants: (i) any amendment or modification to the defined term "Change in
Control" or any amendment or modification of the consequences
18
<PAGE>
under the Plan resulting from a Change in Control; (ii) any amendment or
modification that would eliminate or reduce the Company's obligations under
Sections 3.2 or 3.3; (iii) any amendment or modification that would adversely
affect the timing or circumstances under which Participants may receive vested
benefits under the Plan; or (iv) any amendment or modification of this Section
8.4.
(c) Notwithstanding clauses (iii) and (iv) of Section 8.4(a) above, the
Company shall have the right (i) to unilaterally amend, modify or suspend the
Plan in the event that the Company determines in good faith that such action is
required in order to maintain or qualify the Trust as a grantor trust under
Section 671 of the Code or to maintain or qualify the Plan as an unfunded plan
maintained primarily to provide deferred compensation for a select group of
management or highly compensated employees as described in Section 201(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), provided,
however, that the Company shall amend, modify or suspend the Plan in such manner
as will have the least onerous overall effect on the vested interests of the
Participants; and (ii) to unilaterally terminate the Plan in the event that the
Company determines in good faith that continued compliance with the Code and
ERISA, as generally contemplated in clause (i) above, is not practicable or, if
practicable, would have a material adverse effect on the Participants.
(d) Notwithstanding anything to the contrary in this Section 8.4, the
Company may unilaterally amend the Plan at any time to cause the cessation of
deferrals of Compensation by the Participants in any future Plan Year or to
change the manner or terms of future deferrals in any such future Plan Year;
provided, however, that no such amendment under this Section 8.4(d) may be
effected for a period of two years following any Change in Control.
(e) As a condition precedent to the effectiveness of any amendment,
modification, suspension or termination of this Plan, the Trustee and the
Committee shall have received a written opinion of counsel (which counsel and
which opinion shall be satisfactory to each) to the effect that such action is
being validly and properly effected in accordance with the requirements of this
Section 8.4.
(f) In the event that this Plan is terminated in accordance with this
Section 8.4, the balance of each Participant's Account shall be distributed to
the Participant (or, in the event of the death of the Participant, to the
Participant's Beneficiary) in a lump sum payment as soon as administratively
feasible and in any event within 90 days of such termination.
8.5 Governing Law.
-------------
The Plan will be construed and governed in all respects in accordance
with applicable federal law and, to the extent not preempted by such federal
law, in accordance with the laws of the State of Texas, including without
limitation, the Texas statute of limitations, but without giving effect to the
principles of conflicts of laws of such State.
19
<PAGE>
8.6 Receipt or Release.
------------------
Any payment to a Participant or the Participant's Beneficiary in
accordance with the provisions of the Plan shall, to the extent thereof, be in
full satisfaction of all claims against the Committee and the Company with
respect to the amount paid. The Committee may require such Participant or
Beneficiary, as a condition precedent to such payment, to execute a receipt and
release to such effect.
8.7 Payments on Behalf of Persons Under Incapacity.
----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgment of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefor, the Committee
may direct that such payment be made to any person found by the Committee, in
its sole judgment, to have assumed the care of such person. Any payment made
pursuant to such determination shall, to the extent thereof, constitute a full
release and discharge of the Committee and the Company with respect to the
amount paid.
8.8 Successors and Assigns.
----------------------
The Company may not assign its obligations under this Plan, whether by
contract, merger, operation of law or otherwise, unless the assignment is to an
assignee or successor entity (in either case, hereafter called a "Successor")
that has stockholders' equity or the closest equivalent thereto (as measured by
the most recent audited financial statements of such Successor) equal to or
greater than the stockholders' equity of the Company (as measured immediately
prior to the event that causes such entity to become a Successor to the
Company). The provisions of this Section 8.8 shall be binding upon each and
every Successor to the Company.
8.9 No Employment Rights.
--------------------
Participation in this Plan shall not confer upon any person any right
to be employed by the Company nor any other right not expressly provided
hereunder.
8.10 Headings, etc. Not Part of Agreement.
------------------------------------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
20
<PAGE>
IN WITNESS WHEREOF, the Company has caused this document to be executed
by its duly authorized officer as of the 3rd day of January, 2000.
STERLING SOFTWARE, INC.
By:
------------------------------
Name: Don J. McDermett, Jr.
Title: Senior Vice President and General Counsel
21
<PAGE>
EXHIBIT A
LN Money Market Fund, Inc.
Janus Apsen Series Balanced Portfolio
Maverick Fund USA, Ltd.
BT Equity 500 Index Fund
LN Equity-Income Fund, Ltd.
Fidelity VIP Growth Portfolio-Service Class
Baron Capital Asset Fund
Janus Aspen Series Worldwide Growth Portfolio
<PAGE>
EXHIBIT 10.2
STERLING SOFTWARE, INC.
AMENDED AND RESTATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN II
--------------------------------------------------------------
PREAMBLE
--------
The purpose of this Amended and Restated Supplemental Executive Retirement Plan
II (this "Plan") is to continue the benefits accrued by Geno P. Tolari under the
Informatics General Corporation Supplemental Executive Retirement Plan II (the
"Previous Plan"). This Plan amends and supersedes, effective as of January 1,
1990, the Previous Plan in its entirety with respect to the Previous Plan
benefits of Geno P. Tolari.
SECTION I
---------
Definitions
-----------
1.1 "Basic Plan Benefit" has the meaning set forth in Section 3.1.
1.2 "Change in Control" has the meaning set forth in Section 6.7.
1.3 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.4 "Committee" means the Executive Committee of the Board of Directors of
the Company (excluding, however, the Participant), which has been given
authority by the Board of Directors to administer this Plan.
1.5 "Company" means Sterling Software, Inc.
1.6 "CPI" means the Consumer Price Index or appropriate equivalent index as
determined by the Committee.
1.7 "Earnings" means base salary payable plus cash incentive compensation
payable for a calendar year, but excluding all incentive cash
compensation in excess of 50% of base salary in the calendar year in
which such incentive awards are received by the Participant or, if the
Participant elects to defer receipt of all or part of such incentive
awards pursuant to the Company's Deferred Compensation Plan or
otherwise, in the calendar year in which such incentive awards first
would have been received by the Participant, averaged over the highest
consecutive three years of Service. Notwithstanding any provision
contained herein, the limitation for recognition of incentive cash
compensation as "Earnings" contained in the previous sentence shall be
applied to the Participant's base salary for his last full calendar
year of Service in determining such limitation with respect to the
Participant's incentive compensation for his last full calendar year of
Service. Salary deferred by the election of the Participant pursuant to
the Company's Deferred Compensation Plan or otherwise shall be included
in Earnings in the calendar year for which such salary relates (i.e.,
the year in which the related services are performed), cash incentive
compensation so deferred shall be included in Earnings in the calendar
year in
<PAGE>
which, but for such deferral, such incentive compensation first would
have been received, and deferred compensation (both salary and
incentive compensation) that is included in Earnings pursuant to this
sentence shall not be included in Earnings when it is later actually
received by the Participant. For example, annual incentive cash
compensation is earned in calendar year 1995 in the amount of $80,000
and is paid in calendar year 1996. The $80,000 paid in 1996 is compared
to a $120,000 1996 base salary. Since $80,000 is greater than $60,000
(50% of 1996 base salary) only $60,000 of the award will be used
towards Earnings for 1995 under the Plan. The Earnings for 1995 would
be the same even if the Participant deferred receipt of all or a
portion of the $80,000 or $120,000 until some time after 1996. "Monthly
Earnings" means Earnings divided by twelve.
1.8 "Informatics Plan" means the Informatics General Corporation Retirement
Plan, a terminated money purchase pension plan.
1.9 "Participant" means Geno P. Tolari.
1.10 "Plan" means the Sterling Software, Inc. Amended and Restated
Supplemental Executive Retirement Plan II.
1.11 "Retirement" means the termination of the Participant's employment with
the Company on one of the retirement dates specified in Section 2.1.
1.12 "Service" means the Participant's months of service from October 5,
1970, his date of hire by Informatics General Corporation, to
Retirement. Such service will include without duplication periods of
employment with Informatics General Corporation; the Company; and any
of their subsidiaries, affiliates, or successors. If the Participant
becomes disabled and is receiving long-term disability benefits from
the Company's Long-Term Disability Plan, such period shall be
considered Service under this Plan.
1.13 "Severance Agreement" means either or both of the Severance Agreement
dated November 15, 1999 and/or the Change in Control Severance
Agreement dated November 15, 1999 (the latter agreement referred to
herein as the "Change in Control Agreement"), both between the Company
and the Participant, as well as any amendments made to such agreements.
1.14 "Surviving Spouse" means the Participant's spouse married to him for at
least one year prior to the earlier of the Participant's death or
Retirement.
1.15 The singular may include the plural, unless the context clearly
indicates the contrary.
SECTION II
----------
Eligibility for Benefits
------------------------
2.1 Subject to Section IV of this Plan, the Participant is eligible to
retire and receive a benefit under this Plan beginning on one of the
following dates.
2
<PAGE>
(a) "Normal Retirement Date," which is the first day of the month
following the month in which the Participant reaches age 65.
(b) "Early Retirement Date," which is the first day of any month
before the Normal Retirement Date or Disability Retirement
Date, following the month in which the Participant reaches age
55 and has 15 or more years of Service.
(c) "Postponed Retirement Date," with the Committee's consent,
which is the first day of the month following the
Participant's Normal Retirement Date in which the Participant
terminates employment with the Company.
(d) "Disability Retirement Date," which is the first day of the
month in which the Participant begins receiving a long-term
disability benefit from the Company's Long-Term Disability
Plan.
SECTION III
-----------
Amount of Benefit
-----------------
3.1 The monthly retirement benefit payable to the Participant if he retires
at his Normal Retirement Date or his Postponed Retirement Date under
the Plan will equal the lessor of (i) or (ii), where
(i) is equal to 1/6 of 1% times months of Service times Monthly
Earnings; and
(ii) is equal to 50% of Monthly Earnings less the Basic Plan
Benefit (as hereinafter defined).
For purposes of the Plan, the term "Basic Plan Benefit" means the
monthly annuity payment (as hereinafter determined), payable (x) in the
form of a 50% joint and survivor annuity to the Participant if he has a
Surviving Spouse at the Normal Retirement Date or Postponed Retirement
Date; or (y) if the Participant does not have a Surviving Spouse at
such time, in the form of a single life annuity, that could be provided
by the accumulation with interest of 3% of Compensation for each
calendar year of the Participant's Service beginning with the calendar
year in which he first participated in the Informatics Plan and ending
on the later of the Participant's Normal Retirement Date or his
Postponed Retirement Date.
For purposes of this Section, (1) the term "Applicable Rate" means an
annual rate of interest equal to:
(a) for periods prior to January 1, 1990, the rate credited to
contributions under the Informatics Plan for such years, and
3
<PAGE>
(b) for periods after December 31, 1989, the average rate of
return credited for each completed calendar year under the
fixed income investment option of the Sterling Software, Inc.
Savings and Security (401k) Plan with the highest quality
rating (excluding cash equivalents or money marked options).
The Applicable Rate for the calendar year in which retirement
occurs shall be the annual rate of interest on 30-year
Treasury securities for the month of November preceding such
calendar year.
(2) the term "Compensation" means the Participant's taxable wages as
reported on Form W-2 up to any limit under Section 401(a)(17) of the
Code or any successor provision; and (3) all annuity amounts will be
determined by using the annual rate of interest on 30-year Treasury
securities for the month of November preceding the calendar year in
which benefit payments begin and the applicable mortality table as
prescribed by the Secretary of the Treasury under Section 417(e)(3) of
the Code or any successor provision.
3.2 The monthly benefit payable to the Participant if he retires on an
Early Retirement Date will equal the benefit determined in Section 3.1,
except that the 50% multiplier described in Section 3.1(ii) will be
multiplied by a fraction, the numerator of which is Service (as may be
adjusted pursuant to Section 3.8 (a)) as of his Early Retirement Date
and the denominator of which is his Service projected to his Normal
Retirement Date. For example, if the Participant was 35 when hired and
retired early at age 55, his annual benefit would be determined as the
lesser of (i) or (ii), where
(i) is equal to 1/6 of 1% times months of Service at Early
Retirement Date times Monthly Earnings at Early Retirement
Date; and
(ii) is equal to 33-1/3% of Monthly Earnings less the Basic Plan
Benefit;
where 33-1/3% is equal to 50% multiplied by the fraction 240/360; and
where 240 is his Service to age 55 and 360 is the service he would have
had if he had continued to work to age 65, his Normal Retirement Date.
The monthly benefit determined under this Section 3.2 will become
payable on the Participant's Normal Retirement Date. For purposes of
determining the Basic Plan Benefit under this section, all amounts to
be determined under paragraphs (a), (b) and (c) of Section 3.1 shall be
determined as of the Participant's Early Retirement Date. At the
Committee's discretion, or, following a Change in Control (as that term
is defined below), at the Participant's election, payments may begin
any time after the Participant's Early Retirement Date and prior to his
Normal Retirement Date and such monthly benefit shall be actuarially
reduced based on the interest and mortality assumptions contained in
clause (3) of the last sentence of Section 3.1; and such monthly
benefit shall be further reduced by 10% (which 10% shall be forfeited)
if such payment commencement date is at the Participant's election and
is less than six months following the date of such election.
4
<PAGE>
3.3 The monthly benefit payable at a Postponed Retirement Date will be
equal to the monthly benefit determined in accordance with Section 3.1
based on Service, Earnings, and the Participant's Basic Plan Benefit,
as of the Participant's Postponed Retirement Date.
3.4 If the Participant becomes disabled and if he receives long-term
disability benefits from the Company's Long-Term Disability Plan, the
monthly benefit payable at Normal Retirement Date to the Participant
under this Plan will be equal to the monthly benefit determined in
accordance with Section 3.1 based on Service to Normal Retirement Date
and Earnings and the Participant's Basic Plan Benefit as of the
Participant's date of disability.
3.5 The monthly benefit payable at a Disability Retirement Date will be
equal to 66-2/3% of the Participant's Monthly Earnings as of his
Disability Retirement Date, in excess of $7,500. Such benefit, payable
monthly, shall commence on the date the Participant begins receiving a
long-term disability benefit from the Company's Long-Term Disability
Plan and will be payable as long as the Participant continues to
receive a long-term disability benefit from such plan. Benefits from
this Plan, payable as a result of a disability, will stop when benefits
from the Long-Term Disability Plan cease. At age 65, benefits will
commence in accordance with Section 3.4.
3.6 The benefits payable under the Plan, as determined in accordance with
the appropriate preceding section of this Section III, except those
determined in accordance with Section 3.5, will be payable in equal
monthly installments, adjusted if appropriate as provided in Section
3.7, during the Participant's lifetime with benefits ceasing upon the
Participant's death; however, if, at the time of the Participant's
death, he has a Surviving Spouse, such Surviving Spouse shall receive a
benefit equal to 50% of the Participant's benefit as so adjusted,
commencing on the first day of the month following the later of the
month in which the surviving Spouse reaches age 55 or the month in
which the Participant dies with such payments continuing to the death
of the Surviving Spouse.
3.7 Any benefits payable hereunder, except those determined in Section 3.5,
shall be adjusted upward annually, effective each March 1, beginning
with the March 1 occurring at least 12 months after entitlement to
benefit payments first occurs, to the extent that the CPI for the
preceding calendar year exceeds a 5% increase from the next preceding
calendar year. Any benefits payable hereunder shall be adjusted
downward annually, effective each March 1, beginning with the March 1
occurring at least 12 months after entitlement to benefit payments
first occurs, to the extent that any decrease in the CPI for the
preceding calendar year over the CPI for the next preceding calendar
year exceeds 5%; provided, however, that, in no event shall the
Participant's monthly benefit be less than the monthly benefit paid to
him during the first month after entitlement to benefit payments first
occurs.
3.8 To the extent that the Participant's employment is terminated in a
manner that entitles him to severance benefits under the provisions of
the Severance Agreement, (a) his benefit under this Plan shall be
calculated by (i) giving the Participant credit as Service for the
5
<PAGE>
number of months for which the Participant is entitled to severance
benefits pursuant to the terms of the Severance Agreement; (ii) deeming
the date of his retirement to be the later date determined by adding to
his actual retirement date the number of months for which the
Participant is entitled to severance benefits pursuant to the terms of
the Severance Agreement and (iii) deeming the Participant's Earnings
with respect to each additional twelve month period referenced in
subparagraph (i) above to equal the sum of base salary and incentive
cash compensation, such components to be determined in the manner that
Base Pay and Incentive Pay (as defined in the Change in Control
Agreement), respectively, are determined under Section 4(a)(i) of the
Change in Control Agreement, except that incentive cash compensation
shall in no case exceed 50% of base salary for this purpose; and (b)
any severance benefits to which the Participant is entitled pursuant to
the terms of the Severance Agreement shall not be included in the
calculation of "Earnings."
SECTION IV
----------
Payment of Retirement Benefits
------------------------------
4.1 Benefits payable in accordance with Section III, except Section 3.5,
will commence on the Participant's Normal or Postponed Retirement Date
or upon a date determined in accordance with Section 3.2. The last
payment will be on the first day of the month in which the Participant
dies unless he has a Surviving Spouse in accordance with Section 3.6.
SECTION V
---------
Death Benefits Payable
----------------------
5.1 If the Participant dies before Retirement, excluding Disability
Retirement, his Surviving Spouse will receive a monthly benefit equal
to 50% of the amount of the Participant's monthly benefit determined in
accordance with Section 3.1 as if the Participant had retired and
commenced receiving a benefit on the first day of the month following
the date of his death.
5.2 A surviving Spouse's benefits will be payable monthly, and will
commence on the first day of the month following the later of the month
in which the Surviving Spouse reaches age 55 or the month in which the
Participant dies. The last payment will be on the first day of the
month in which the Surviving Spouse dies. Cost of living adjustments
determined as described in Section 3.7 will apply to a Surviving
Spouse's benefits.
SECTION VI
----------
Miscellaneous
-------------
6.1 Nothing contained herein will confer upon the Participant the right to
be retained in the service of the Company, nor will it interfere with
the right of the Company to discharge or otherwise deal with the
Participant without regard to the existence of this Plan.
6
<PAGE>
6.2 This Plan is unfunded, and the Company will make Plan benefit payments
solely on a current disbursement basis.
6.3 To the maximum extent permitted by law, no benefit under this Plan
shall be assignable or subject in any manner to alienation, sale,
transfer, claims of creditors, pledge, attachment, or encumbrance of
any kind.
6.4 The Committee may adopt rules and regulations to assist it in the
administration of the Plan.
6.5 The Participant shall receive a copy of this Plan.
6.6 The Plan will be construed and governed in all respects in accordance
with applicable federal law and, to the extent not preempted by such
federal law, in accordance with the laws of the State of Texas,
including without limitation, the Texas statute of limitations, but
without giving effect to the principles of conflicts of laws of such
State.
6.7 Subject to the following provisions of this Section 6.7, this Plan may
be terminated or from time to time amended by the Committee in its
discretion. Notwithstanding the preceding sentence or any other
provision herein to the contrary, (a) this Plan may not be terminated
or amended if such termination or amendment would reduce or adversely
affect benefits previously accrued hereunder, and (b) from and after
the date of a Change in Control, this Plan may not be terminated or
amended in any manner that could reasonably be expected to have an
adverse effect on the Participant or his Surviving Spouse, without the
prior written consent of the Participant or such Surviving Spouse. As
used herein, the term "Change in Control" shall mean 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
7
<PAGE>
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 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.
STERLING SOFTWARE, INC.
By: /s/ Don J. McDermett, Jr.
---------------------------
Don J. McDermett, Jr.
Senior Vice President & General
Counsel
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE STERLING SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 376,574
<SECURITIES> 111,942
<RECEIVABLES> 239,093
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 756,856
<PP&E> 73,460
<DEPRECIATION> 67,252
<TOTAL-ASSETS> 1,226,326
<CURRENT-LIABILITIES> 291,152
<BONDS> 0
0
0
<COMMON> 8,796
<OTHER-SE> 845,741
<TOTAL-LIABILITY-AND-EQUITY> 1,226,326
<SALES> 206,956
<TOTAL-REVENUES> 206,956
<CGS> 77,715
<TOTAL-COSTS> 166,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 46,986
<INCOME-TAX> 15,976
<INCOME-CONTINUING> 31,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,010
<EPS-BASIC> .38
<EPS-DILUTED> .36
</TABLE>
