-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mg8TGGWYc8MCSbg2YahprAhwP+ZkwuPkSMLcYh/z38OBfi1BjxNMRN8z/WVfHZXo 7C2/VST6ihCuu4ODt8dwwQ== 0000930661-97-000234.txt : 19970222 0000930661-97-000234.hdr.sgml : 19970222 ACCESSION NUMBER: 0000930661-97-000234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING SOFTWARE INC CENTRAL INDEX KEY: 0000716714 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 751873956 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08465 FILM NUMBER: 97525361 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1100 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918600 10-Q 1 FORM 10-Q UNITED STATES 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, 1996 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) 8080 North Central Expressway, Suite 1100 Dallas, Texas 75206 (Address of principal executive offices) (Zip Code) (214) 891-8600 (Registrant's telephone number, including area code) 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 7, 1997 ------------------------------ ----------------------------------------- Common Stock, $0.10 par value 38,439,298 -1- PART I - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements (unaudited)................................... 3 Sterling Software, Inc. Consolidated Balance Sheets at December 31, 1996 and September 30, 1996....................................................... 3 Sterling Software, Inc. Consolidated Statements of Operations for the Three Months Ended December 31, 1996 and 1995.................................. 4 Sterling Software, Inc. Consolidated Statements of Stockholders' Equity for the Three Months Ended December 31, 1996 and 1995........................ 5 Sterling Software, Inc. Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1996 and 1995............................ 6 Sterling Software, Inc. Notes to Consolidated Financial Statements.......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 12 PART II- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................... 17 -2- STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information) A S S E T S
December 31 September 30 1996 1996 ------------- -------------- (unaudited) Current assets: Cash and cash equivalents................................................................ $541,724 $524,237 Marketable securities.................................................................... 206,994 231,919 Accounts and notes receivable, net....................................................... 111,622 133,383 Income tax receivable.................................................................... 5,871 8,000 Prepaid expenses and other current assets................................................ 17,665 17,104 ----------- ---------- Total current assets.................................................................. 883,876 914,643 Property and equipment, net of accumulated depreciation of $45,234 at December 31, 1996 and $42,029 at September 30, 1996...................................... 45,498 39,330 Computer software, net of accumulated amortization of $87,938 at December 31, 1996 and $84,099 at September 30, 1996...................................... 58,002 57,488 Excess cost over net assets acquired, net of accumulated amortization of $27,482 at December 31, 1996 and $26,128 at September 30, 1996............................................... 68,032 69,504 Noncurrent deferred income taxes............................................................ 657 2,986 Other assets................................................................................ 11,592 13,662 ------------ ----------- $1,067,657 $1,097,613 ============ ========== 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: Current portion of long-term debt........................................................ $ 1,587 $ 388 Accounts payable and accrued liabilities................................................. 56,295 77,349 Amounts due to Sterling Commerce......................................................... 3,050 35,134 Deferred revenue......................................................................... 77,474 68,854 ------------ ------------ Total current liabilities............................................................. 138,406 181,725 Noncurrent deferred revenue................................................................. 15,856 15,778 Other noncurrent liabilities................................................................ 20,341 20,619 Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized, no shares issued or outstanding........................................................................... Common stock, $.10 par value; 75,000,000 shares authorized; 39,811,000 and 39,807,000 shares issued at December 31, 1996 and September 30, 1996, respectively.................................................................... 3,981 3,981 Additional paid-in capital............................................................... 804,516 804,451 Retained earnings........................................................................ 143,654 130,156 Less treasury stock, at cost; 1,372,000 shares at December 31, 1996 and September 30, 1996.................................................................... (59,097) (59,097) ------------ ----------- Total stockholders' equity............................................................ 893,054 879,491 ------------- ----------- $1,067,657 $1,097,613 ============= ===========
See accompanying notes. -3- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) (unaudited)
Three Months Ended December 31 ----------------------- 1996 1995 --------- -------- Revenue: Products................................................................................. $36,556 $ 34,972 Product support.......................................................................... 30,336 31,194 Services................................................................................. 30,249 29,819 -------- -------- 97,141 95,985 Costs and expenses: Cost of sales: Products and product support.......................................................... 16,554 15,154 Services.............................................................................. 26,308 26,076 -------- -------- 42,862 41,230 Product development and enhancement...................................................... 4,806 6,072 Selling, general and administrative...................................................... 40,732 38,677 -------- -------- 88,400 85,979 -------- -------- Income from continuing operations before other income (expense) and income taxes............ 8,741 10,006 Other income (expense): Interest expense......................................................................... (147) (1,839) Investment income........................................................................ 10,773 3,105 Other.................................................................................... 233 531 -------- -------- 10,859 1,797 -------- -------- Income from continuing operations before income taxes....................................... 19,600 11,803 Provision for income taxes.................................................................. 6,860 2,785 -------- -------- Income from continuing operations........................................................... 12,740 9,018 Income from discontinued operations, net.................................................... 12,289 -------- -------- Net income.................................................................................. $12,740 $21,307 ======== ======== Income per common share: Income from continuing operations: Primary............................................................................... $ .33 $ .31 ======== ======== Fully diluted......................................................................... $ .33 $ .30 ======== ======== Net income: Primary............................................................................... $ .33 $ .72 ======== ======== Fully diluted......................................................................... $ .33 $ .66 ======== ======== Average common shares outstanding........................................................ 38,439 26,630 ======== ========
See accompanying notes. -4- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended December 31, 1996 and 1995 (in thousands) (unaudited)
Common Stock Treasury Stock -------------------- Number Additional Number Total of Par Paid-in Retained of Stockholders' Shares Value Capital Earnings Shares Cost Equity --------- -------- ----------- ---------- -------- ---------- -------------- Balance at September 30, 1995....... 26,529 $2,653 $336,752 $ 9,515 56 $ (582) $348,338 Net income....................... 21,307 21,307 Purchase of common stock for treasury.................... 700 (30,931) (30,931) Issuance of common stock pursuant to stock options and warrants.................... 880 88 19,933 20,021 Issuance of common stock pursuant to conversion of 5.75% Debentures................ 4 105 105 Issuance of common stock to retirement plan.............. (40) (8) 326 286 Other............................ (3) (3) -------- -------- ---------- ---------- ------- ---------- ---------- Balance at December 31, 1995........ 27,413 $2,741 $356,747 $30,822 748 $(31,187) $359,123 ======== ======== ========== ========== ======= ========== ========== Balance at September 30, 1996....... 39,807 $3,981 $804,451 $130,156 1,372 $(59,097) $879,491 Net income....................... 12,740 12,740 Issuance of common stock pursuant to stock options and warrants.................... 4 65 65 Other............................ 758 758 -------- -------- ---------- ---------- ------- ---------- ---------- Balance at December 31, 1996........ 39,811 $3,981 $804,516 $143,654 1,372 $(59,097) $893,054 ======== ======== ========== ========== ======= ========== ==========
See accompanying notes. -5- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended December 31 ------------------------- 1996 1995 ---------- ---------- Operating activities: Net income............................................................................... $12,740 $21,307 Less: Income from discontinued operations................................................ (12,289) ---------- ---------- Income from continuing operations........................................................ 12,740 9,018 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 8,292 7,705 Provision for losses on accounts receivable......................................... 669 1,178 Provision for deferred income taxes................................................. 4,458 7,556 Changes in operating assets and liabilities, net of effects of business acquisitions: Decrease in accounts and notes receivable........................................ 22,325 5,020 Decrease in prepaid expenses and other assets.................................... 350 290 Decrease in accounts payable and accrued liabilities and amounts due to Sterling Commerce.............................................................. (53,138) (15,431) Increase (decrease) in deferred revenue.......................................... 8,620 (2,811) Other............................................................................ (1,782) (2,668) ---------- ---------- Net cash provided by operating activities................................... 2,534 9,857 Investing activities: Purchases of property and equipment...................................................... (9,352) (2,128) Purchases and capitalized cost of development of computer software....................... (4,300) (3,316) Business acquisitions, net of cash acquired.............................................. (7,186) Purchases of investments................................................................. (41,790) (124,326) Proceeds from sales of investments....................................................... 68,645 43,030 Other.................................................................................... 184 366 ---------- ---------- Net cash provided by (used in) investing activities......................... 13,387 (93,560) Financing activities: Acquisition of common stock for treasury................................................. (30,931) Retirement and redemption of debt and capital lease obligations.......................... (1,144) (3,186) Proceeds from issuance of debt........................................................... 2,350 2,729 Proceeds from issuance of common stock pursuant to exercise of stock options and warrants................................................................... 65 20,021 Other.................................................................................... 1,000 539 ---------- ---------- Net cash provided by (used in) financing activities......................... 2,271 (10,828) Cash flows provided by discontinued operations.............................................. 6,189 Effect of foreign currency exchange rate changes on cash.................................... (705) (118) ---------- ---------- Increase (decrease) in cash and cash equivalents............................................ 17,487 (88,460) Cash and cash equivalents at beginning of period............................................ 524,237 178,910 ---------- ---------- Cash and cash equivalents at end of period.................................................. $541,724 $90,450 ========== ========== Supplemental cash flow information: Interest paid............................................................................ $133 $370 ========== ========== Income taxes paid........................................................................ $1,089 $866 ========== ========== Income tax refunds....................................................................... $186 $387 ========== ==========
See accompanying notes. -6- STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 (unaudited) 1. Summary of Significant Accounting Policies The Company Sterling Software, Inc. ("Sterling Software" or the "Company") was founded in 1981 and became a publicly owned corporation in 1983. Sterling Software is a recognized worldwide supplier of software products and services within three major markets classified as systems management, applications management and federal systems. Sterling Software's international operations are responsible for sales, marketing and first-level support of the Company's products outside the United States and Canada. The Company's international operations also sell, market and provide first-level support outside of the United States, its territories and Canada for the interchange and communications software products of Sterling Commerce, Inc. ("Sterling Commerce"), the results of which are included in the business segment information presented herein under "Corporate and other." See Notes 3 and 5. Consistent with Sterling Software's decentralized operating structure, major markets are served by independently operated business groups which consist of divisions that focus on specific business niches within those markets. See Note 5. Sterling Software believes that its decentralized organizational structure promotes operating flexibility, improves responsiveness to customer requirements and focuses management on achieving revenue and operating profit objectives. Sterling Software has historically expanded its operations through internal growth and by business and product acquisitions. Basis of Presentation The consolidated financial statements include the accounts of Sterling Software and its wholly owned subsidiaries after elimination of all significant intercompany balances and transactions. Certain amounts for periods ended prior to December 31, 1996 have been reclassified to conform to the current year presentation, including restatements to reflect the reclassification of Sterling Commerce as a discontinued operation, giving effect to the spin-off of Sterling Commerce on September 30, 1996. See Note 3. 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, liabilities and the disclosure of contingencies. While management has based their assumptions and estimates on the facts and circumstances known at December 31, 1996, final amounts may differ from such estimates. Revenue Revenue from license fees, including leasing transactions, for standard software products is recognized when the software is delivered, provided no significant future vendor obligations exist and collection is probable. Service revenue and revenue from products involving installation or other services are recognized as the services are performed. -7- Product support contracts entitle the customer to telephone support, bug fixing and the right to receive software updates if and when they are released. Revenue from product support contracts, including product support included in initial license fees, is recognized ratably over the contract period. All significant costs and expenses associated with product support contracts are expensed ratably over the contract period. If software product transactions include the right to receive future products, a portion of the software product revenue is deferred and recognized as products are delivered. Contract accounting is applied for sales of software products requiring significant modification or customization, such that revenue is recognized only when the modification or customization is complete. When products, product support and services are billed prior to the time the related revenue is recognized, deferred revenue is recorded and related costs paid in advance are deferred. Revenue from professional services provided to the federal government under multi-year contracts is recognized as the services are performed. Revenue for services under other long-term contracts is recognized using the percentage-of-completion method of accounting. Losses on long-term contracts are recognized when the current estimate of total contract costs indicates a loss on a contract is probable. Cash Equivalents, Marketable Securities and Other Investments Cash equivalents consist primarily of highly liquid investments in investment-grade commercial paper of various issuers and repurchase agreements backed by U.S. Treasury securities, with maturities of three months or less when purchased. Cash equivalents are recorded at fair value. The Company currently invests excess cash in a diversified portfolio of marketable securities consisting of a variety of investment grade securities, including commercial paper, medium-term notes, U.S. government obligations 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. 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. -8- 3. Discontinued Operations On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce with the pro rata distribution (the "Distribution") of its remaining 81.6% ownership interest in Sterling Commerce to Sterling Software's stockholders by means of a tax-free dividend. Holders of record of the Company's $0.10 par value common stock ("Software Stock") as of the close of business on September 30, 1996 received 1.59260 shares of common stock, par value $0.01 per share, of Sterling Commerce ("Commerce Stock") for each share of Software Stock owned on such date. The Distribution resulted in the reduction of Sterling Software stockholders' equity in the amount of $113,549,000, representing the book value of net assets distributed. Prior year financial statements have been restated to reflect the discontinuation of Sterling Software's former electronic commerce business segment (presently conducted by Sterling Commerce). Summary operating results of discontinued operations for the three months ended December 31, 1995 are as follows (in thousands): Revenue.................................... $56,150 Total costs and expenses................... $35,459 Income before income taxes................. $20,481 Income taxes............................... $ 8,192 Income from discontinued operations, net... $12,289 4. Commitments and Contingencies The Company is subject to certain legal proceedings and claims that arise in the ordinary conduct of its business. In the opinion of management, the ultimate liability with respect to these actions, net of applicable reserves, will not materially affect the financial condition or results of operations of the Company. 5. Segment Information The Company acquires, develops, markets and supports a broad range of computer software products and services in three major markets classified as systems management, applications management and federal systems. Major markets are represented through independently operated business segments. The systems management business segment provides enterprise-wide systems management software for large computing environments. The applications management business segment provides products for developing new applications, revitalizing, integrating and extending existing applications and facilitating enterprise information access. The federal systems business segment provides highly technical professional services to the federal government under several multi-year contracts primarily in support of two major customers, the National Aeronautics and Space Administration (NASA) and the Department of Defense. The Company's international operations are responsible for sales, marketing and first-level support of the Company's products outside of the United States and Canada. These international operating results are included, as applicable, in the Company's -9- systems management and applications management segments in the business segment tables contained herein. Under an agreement that expires in March 1999, the Company's international operations also sell, market and provide first-level support outside of the United States, its territories and Canada for Sterling Commerce's interchange and communications software products, the results of which are included in the business segment information presented herein under "Corporate and other." International operating results allocated to these business segments included revenue of $35,388,000 and $38,190,000 and international operating profit (exclusive of intercompany royalties) of $9,978,000 and $17,208,000 for the three months ended December 31, 1996 and 1995, respectively. The international operating profit of $17,208,000 for the quarter ended December 31, 1995 is before consideration of $3,483,000 of intercompany royalties related to Sterling Commerce. Financial information concerning the Company's operations, by business segment, for the three months ended December 31, 1996 and 1995, is summarized as follows (in thousands):
Three Months Ended December 31 ------------------------ 1996 1995 -------- -------- Revenue: Systems Management.................................... $36,950 $35,210 Federal Systems....................................... 27,858 26,262 Applications Management............................... 21,952 26,459 Corporate and other................................... 10,381 8,054 -------- -------- Consolidated totals................................. $97,141 $95,985 ======== ======== Operating Profit (Loss): Systems Management.................................... $12,889 $11,625 Federal Systems....................................... 2,395 2,300 Applications Management............................... 2,224 3,859 Corporate and other................................... (8,767) (7,778) -------- -------- Consolidated totals................................. $8,741 $10,006 ======== ========
The amounts presented for "Corporate and other" include corporate expense, inter-segment eliminations, the results of operations of the Company's retail software division and the results of operations for the international distribution of Sterling Commerce's interchange and communications software products and related product support services. 6. Rights Plan On December 18, 1996, the Board of Directors of the Company declared a dividend distribution of one right (a "Right") for each share of Software Stock outstanding at the close of business on December 31, 1996 (the "Record Date"), pursuant to the terms of a Rights Agreement, dated as of December 18, 1996 (the "Rights Plan"). The Rights Plan also provides, subject to specified exceptions and limitations, that shares of Software Stock issued after the Record Date will be entitled to and accompanied by Rights. Pursuant to the Rights Plan, one Right to purchase 1/100th of a share of Series A Junior Participating Preferred Stock ("Junior Preferred Share") (structured so as to be substantially the equivalent of a share of Software Stock) is attached to each issued and outstanding share of Software Stock. Subject to certain -10- conditions, each Right entitles the holder to purchase 1/100th of a Junior Preferred Share at a price (the "Purchase Price") of $200.00 per 1/100th of a Junior Preferred Share (subject to adjustment). In general, the Rights will not become exercisable, or transferable apart from the shares of Software Stock, unless a person or group of affiliated or associated persons becomes the beneficial owner of, or commences a tender offer that would result in beneficial ownership of, 15% or more of the outstanding shares of Software Stock (any such person or group of persons being referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under certain circumstances, each Right (other than any Rights that are or were beneficially owned by an Acquiring Person, which Rights will be void) could become exercisable to purchase at the Purchase Price a number of shares of Software Stock (or, in certain circumstances, the common stock of a company into which the Company is merged or consolidated or to which the Company sells all or substantially all of its assets) having a market value equal to two times the Purchase Price. The Rights will expire on December 31, 2006, unless earlier redeemed by the Company at a redemption price of $0.01 per Right (subject to adjustment), or otherwise exchanged or amended in accordance with the terms of the Rights Plan. -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Subsidiary Initial Public Offering and Spin-Off Sterling Commerce, previously a wholly owned subsidiary of Sterling Software, completed an initial public offering of 13,800,000 shares of Commerce Stock on March 13, 1996 (the "Offering"). Pursuant to the Offering, Sterling Software sold to the public 12,000,000 of its 73,200,000 shares of Commerce Stock and Sterling Commerce sold 1,800,000 of previously unissued shares of Commerce Stock. The Offering price was $24 per share of Commerce Stock, resulting in net proceeds to Sterling Software of approximately $265,458,000 after deducting underwriting discounts and commissions and Sterling Software's pro rata share of Offering expenses. Sterling Software recorded a gain of approximately $126,103,000, net of tax, from the sale of Commerce Stock in the Offering. In connection with the Offering, Sterling Software accelerated the vesting of substantially all outstanding options granted under Sterling Software's stock option plans in existence at the time of the Offering. Sterling Software received proceeds of approximately $276,637,000 from the exercise of approximately 9,222,000 employee stock options and warrants during fiscal 1996. Under the terms of Sterling Software's existing stock option plans, options that were unexercised with respect to 81,681 shares of Software Stock at the close of business on September 30, 1996 were adjusted to thereafter be exerciseable with respect to 207,950 shares of Software Stock at exercise prices ranging from $3.36 to $32.40 per share, to preserve the economic value of such options. On September 30, 1996, Sterling Software completed the spin-off of Sterling Commerce with the distribution of its remaining 81.6% ownership interest in Sterling Commerce to Sterling Software stockholders by means of a tax-free dividend. Holders of record of Software Stock as of the close of business on September 30, 1996 received 1.59260 shares of Commerce Stock for each share of Software Stock owned as such date. The distribution resulted in the reduction of Sterling Software's stockholders' equity in the amount of $113,549,000, representing the book value of the net assets distributed. Three Months Ended December 31, 1996 and 1995 The results of Sterling Software's international operations (other than those related to the sale of Sterling Commerce products) are included in the systems management and applications management business segments for the purpose of management's discussion and analysis of financial condition and results of operations. Sterling Software's historical results of operations reflect the reclassification of Sterling Commerce as a discontinued operation, giving effect to the spin-off of Sterling Commerce on September 30, 1996. The results of the Company's international operations related to selling, marketing and providing first-level support outside of the United States, its territories and Canada for Sterling Commerce's interchange and communications software products are included in the business segment information presented herein under "Corporate and other." -12- Total revenue increased $1,156,000, or 1%, in the first quarter of 1997 over the same period in 1996 due to increases in the Company's systems management and federal systems business segments as well as increases in revenue from the Company's international operations related to selling, marketing and providing first-level support for certain of Sterling Commerce's electronic commerce products. These increases in revenue were offset by declines in revenue in the applications management business segment due to the decline in products and product support revenue of the Company's Computer Aided Software Engineering ("CASE") products and due to discontinued products. Excluding both the effect of the decline in CASE products and product support revenue and the effect of discontinued products, the Company's total revenue increased 7% in the first quarter of 1997 over the same period in 1996. Revenue from the systems management business segment increased $1,740,000, or 5%, in the first quarter of 1997 compared to the same period of 1996 primarily due to a 9% increase in products revenue. The increase in products revenue was mainly attributable to strong product sales domestically in the storage management product line as well as moderate growth in VM product line sales. Product support revenue increased 2% primarily due to an increase in product support revenue in the storage management product line offset by declines in the operations management product line and relatively flat product support revenue in the VM product line. The decline in product support revenue in the operations management product line was due to amounts billed in arrears in the first quarter of 1996 by one of the Company's international distributors which did not occur again in 1997. Revenue from the applications management business segment decreased $4,507,000, or 17%, in the first quarter of 1997 over the same period of 1996 primarily due to a 13% decline in products revenue, a 17% decline in product support revenue and a 30% decline in consulting and education services revenue. The majority of the decline in products and product support revenue occurred in the CASE products. As previously disclosed, the Company expects the market for CASE development tools to continue to rapidly decline. The remainder of the decrease in products and product support revenue is attributable to a decline related to products marketed in the first quarter of 1996 that were not marketed in the first quarter of 1997 either because they are no longer owned or no longer actively marketed. Excluding both the effect of the decline in CASE development tools and the effect of discontinued products, applications management products revenue increased 13% and product support revenue increased 10%. Revenue from the federal systems business segment increased $1,596,000, or 6%, due to higher contract billings in both the Information Technology Division and the Scientific Systems Division. Total revenue generated from Sterling Software's international operations was $35,388,000 in the first quarter of 1997 and $38,190,000 in the first quarter of 1996, representing a decrease of $2,802,000, or 7%, primarily due to declines in both the applications management (down 35%) and systems management (down 8%) business segments, which were only partially offset by increased revenue from sales of Sterling Commerce's interchange and communications software products internationally. International applications management revenue declined due to the decline in CASE development tool revenue and, to a lesser extent, discontinued products. -13- International systems management revenue declined due to a large contract recorded in the first quarter of 1996 which was not repeated in the first quarter of 1997. Revenue for the Company's international operations represented 36% and 40% of total revenue for the first quarter of 1997 and 1996, respectively. The Company expects revenue from its international operations to continue to constitute a significant percentage of its total revenue. International operating results were not materially impacted by foreign exchange rate fluctuations in the first quarter of 1997. However, changes in foreign currency exchange rates resulting from a strengthening or weakening U.S. dollar can have a net negative or net positive impact, respectively, on the Company's financial results. See "Other Matters." The Company's recurring revenue includes revenue from product support agreements generally having terms ranging from one to three years, fixed-term product lease and rental agreements generally having terms ranging from month-to-month to year-to-year, 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 represented 60% of total revenue in the first quarter of 1997 compared to 61% in the same period of the prior year. During the first quarter of 1997, 33% of total software revenue was derived from platforms other than stand-alone mainframes, compared with 35% for the same period of 1996. The decline in revenue from platforms other than stand-alone mainframes is mainly due to the discontinued non-mainframe products in the applications management business segment. Excluding the effect of these discontinued non-mainframe products, the Company's total software revenue derived from platforms other than stand-alone mainframe would have increased slightly from 32% in the first quarter of 1996 to 33% in the first quarter of 1997. Total costs and expenses increased $2,421,000, or 3%, in the first quarter of 1997 compared to the same period of 1996. Cost of sales increased $1,632,000, or 4%. Cost of sales represented 44% of revenue in the first quarter of 1997 compared to 43% in the first quarter of 1996. Product development expense for the first quarter of 1997 was $4,806,000, net of $4,280,000 of capitalized software costs, as compared to the first quarter of 1996 product development expense of $6,072,000, net of $3,132,000 of capitalized software costs. Gross product development expense was 13% of non-federal revenue in both the first quarter of 1997 and 1996. Capitalized development costs represented 47% and 34% of gross development costs in the first quarter of 1997 and 1996, respectively. Product development expenses and the capitalization rate historically have, and may in the future continue to, fluctuate from period to period depending in part upon the number and status of software development projects which are in process. Such was the case in the first quarter of 1997 compared to the same period of 1996. Selling, general and administrative expense represented 42% of revenue in the first quarter of 1997 compared to 40% in the first quarter of 1996. Selling, general and administrative expense increased $2,055,000, or 5%, primarily due to increased sales and marketing activities and headcount in the systems management business segment. Interest expense decreased $1,692,000 in the first quarter of 1997 compared to the first quarter of 1996 primarily due to the redemption in the second quarter of 1996 of the Company's 5.75% Convertible Subordinated Debentures. Investment income in the first quarter of 1997 increased $7,668,000 over the first quarter of 1996 as a result of substantially higher average cash -14- and cash equivalents and marketable securities balances as well as realized gains from the liquidation of investment fund partnerships. Income from continuing operations before income taxes in the first quarter of 1997 was $19,600,000 compared to $11,803,000 in the first quarter of 1996. The increase was primarily attributable to increases in investment income as well as declines in interest expense. The effective tax rate for the first quarter of 1997 was 35% compared to 24% for the same quarter of 1996. The effective tax rate for 1996 was favorably impacted by the conclusion of an audit conducted by the Internal Revenue Service. Income from continuing operations in the first quarter of 1997 increased $3,722,000, or 41%, when compared to the first quarter of 1996. Income from discontinued operations, net, for 1996 represents the restatement of Sterling Commerce as a discontinued operation, giving effect to the spin-off of Sterling Commerce on September 30, 1996. See Note 3 to the Consolidated Financial Statements. Liquidity and Capital Resources The Company maintained a strong liquidity and financial position with $745,470,000 of working capital at December 31, 1996, which includes $541,724,000 of cash and cash equivalents and $206,994,000 of marketable securities. Net cash flows from operations was $2,534,000 in the first quarter of 1997 as compared to $9,857,000 in the first quarter of 1996. Cash flows from operations for the first quarter of 1997 were negatively impacted by payments made to Sterling Commerce during the quarter, reducing the outstanding amount owed by Sterling Software to Sterling Commerce by approximately $32,000,000 from September 30, 1996 to December 31, 1996. First quarter 1997 operating cash flows were also negatively impacted by a decrease in accounts payable and accruals of approximately $21,000,000, primarily due to a decrease in year-end incentive compensation accruals. Days sales outstanding at December 31, 1996, measured on a quarterly basis, was 103 versus 120 at December 31, 1995 and 95 at September 30, 1996. Cash flows from operations and available cash balances were used to fund operations, marketable securities purchases and capital expenditures. At December 31, 1996, after the utilization of $1,247,000 for standby letters of credit, $33,753,000 was available for borrowing on the Company's $35 million revolving credit and term loan agreement. Certain of the Company's foreign subsidiaries have separate lines of credit available for foreign exchange exposure management and working capital requirements. These lines of credit are guaranteed by Sterling Software, Inc. In the aggregate, at December 31, 1996, $1,512,000 was outstanding pursuant to foreign lines of credit and $19,793,000 was available for borrowing thereunder. At December 31, 1996, the Company's capital commitments consisted primarily of commitments under lease arrangements for office space and equipment. The Company intends to meet such obligations primarily from cash flow from operations. The Company believes available cash balances, cash equivalents and short-term investments combined with cash flows from operations and amounts available under existing loan agreements are sufficient to meet the Company's cash requirements for the foreseeable future. Other Matters Demand for many of the Company's products tends to increase with increases in the rate of inflation as customers strive to improve employee productivity and reduce costs. However, -15- the effect of inflation on the Company's relatively labor intensive cost structure could adversely affect its results of operations to the extent the Company is unable to recover increased operating costs through increased prices for products and services. The assets and liabilities of the Company's non-U.S. operations are translated into U.S. dollars at exchange rates in effect as of the respective balance sheet dates, and revenue and expense accounts of these operations are translated at average exchange rates during the month the transactions occur. Unrealized translation gains and losses are included as an adjustment to retained earnings. The Company has mitigated a portion of its currency exposure through decentralized sales, marketing and support operations and through international development facilities, in which all costs are local-currency based. The Company has, and may in the future, enter into hedging transactions in an effort to reduce its exposure to currency exchange risks. The Company maintains a strategy of seeking to acquire businesses and products to fill strategic market niches. This acquisition strategy has contributed in part to the Company's growth in revenue and operating profit before restructuring charges. The impact of future acquisitions on continued growth in revenue and operating profit cannot presently be determined. Forward-Looking Information This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain certain forward-looking statements and information that are based on the beliefs of the Company's management as well as estimates and assumptions made by, and information currently available to, the Company's management. When used in SEC Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions, as they relate to Sterling Software or Sterling Software's management, identify forward-looking statements. Such statements reflect the current views of Sterling Software with respect to future events and are subject to certain risks, uncertainties and assumptions relating to Sterling Software's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by Sterling Software, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying estimates or assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. -16- 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: 3.1 - Certificate of Incorporation, as amended, of the Company (3) 3.2 - Restated Bylaws of the Company (1) 4.1 - Rights Agreement, dated December 18, 1996, by and between the Company and The First National Bank of Boston, as Rights Agent (2) 10.1 - Amendment No .1 to International Distributor Agreement, dated as of January 31, 1997, between Sterling Commerce B. V. and Sterling Software International, Inc. (a/k/a the International Marketing Agreement) (3) 10.2 - Third Amendment and Modification Agreement dated December 16, 1996 by and between the Company, The First National Bank of Boston, Bank One, Texas, National Association and Bank of America National Trust and Savings Association, and The First National Bank of Boston, as agent (3) 11.1 - Computation of Earnings Per Share, Three Months Ended December 31, 1996 (3) 11.2 - Computation of Earnings Per Share, Three Months Ended December 31, 1995 (3) 27 - Financial Data Schedule (3) - ------------------ (1) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 on Form S-8 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated December 18, 1996 and incorporated herein by reference. (3) Filed herewith. (b) Reports on Form 8-K. During the three-month period ended December 31, 1996 the Company filed Current Reports on Form 8-K, dated September 30, 1996, October 15, 1996 and December 18, 1996. Each such report included information reported under Item 5--Other Events. -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STERLING SOFTWARE, INC. Date: February 11, 1997 /s/Sterling L. Williams --------------------------------------------------- Sterling L. Williams President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 11, 1997 /s/ Jeannette P. Meier --------------------------------------------------- Jeannette P. Meier Executive Vice President, Chief Financial Officer, General Counsel and Secretary (Principal Financial and Accounting Officer) -18- EXHIBIT INDEX ------------- Exhibit No. Description - ------------- -------------------------------------------------------------- 3.1 - Certificate of Incorporation, as amended, of the Company (3) 3.2 - Restated Bylaws of the Company (1) 4.1 - Rights Agreement, dated December 18, 1996, by and between the Company and The First National Bank of Boston, as Rights Agent (2) 10.1 - Amendment No .1 to International Distributor Agreement, dated as of January 31, 1997, between Sterling Commerce B. V. and Sterling Software International, Inc. (a/k/a the International Marketing Agreement) (3) 10.2 - Third Amendment and Modification Agreement dated December 16, 1996 by and between the Company, The First National Bank of Boston, Bank One, Texas, National Association and Bank of America National Trust and Savings Association, and The First National Bank of Boston, as agent (3) 11.1 - Computation of Earnings Per Share, Three Months Ended December 31, 1996 (3) 11.2 - Computation of Earnings Per Share, Three Months Ended December 31, 1995 (3) 27 - Financial Data Schedule (3) - -------------------- (1) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 on Form S-8 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated December 18, 1996 and incorporated herein by reference. (3) Filed herewith. EX-3.1 2 CERTIFICATE OF INCORPORATION EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF STERLING SOFTWARE, INC. ARTICLE I The name of the corporation is STERLING SOFTWARE, INC. ARTICLE II The address of the corporation's registered office in the State of Delaware is 100 West Tenth Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted by the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The total number of shares of stock of all classes which the corporation shall have authority to issue is Twenty-Two Million (22,000,000), consisting of Twenty Million (20,000,000) shares of Common Stock having a par value of $.10 per share, and Two Million (2,000,000) shares of Preferred Stock having a par value of $.10 per share. The Preferred Stock may be issued in one or more series as may be determined from time to time by the Board of Directors. The Preferred Stock of each such series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, redemption, conversion, exchange or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed by the Board of Directors in the resolution or resolutions providing for the issue of such series of Preferred Stock pursuant to the authority to do so which is hereby expressly vested in the Board of Directors. Except as otherwise provided in any resolution or resolutions of the Board of Directors providing for the issue of any particular series of Preferred Stock, the number of shares of stock of any such series so set forth in such resolution or resolutions may be increased or decreased (but not below the number of shares of such series then outstanding) by a resolution or resolutions likewise adopted by the Board of Directors. No approval by class or series vote or otherwise, of the holders of the Preferred Stock or any series thereof will be required for the issue by the Board of Directors of any other series of Preferred Stock, whether or not in any respect senior to or on a parity with any such outstanding series, provided, however, that the Board of Directors may condition the issue of such additional series of Preferred Stock on the approval, by such proportion as the Board of Directors may specify, of any such outstanding series. Except as otherwise provided in any resolution or resolutions of the Board of Directors providing for the issue of any particular series of Preferred Stock, Preferred Stock redeemed or otherwise acquired by the corporation shall assume the status of authorized but unissued Preferred Stock and shall be unclassified as to series and may thereafter, subject to the provisions of this Article IV and to any restrictions contained in any resolution or resolutions of the Board of Directors providing for the issue of any such series of Preferred Stock, be reissued in the same manner as other authorized but unissued Preferred Stock. Shares of Common Stock and, subject to the provisions of this Article, shares of any series of Preferred Stock may be issued from time to time as the Board of Directors 2 determines and on such terms and for such consideration as may be fixed by the Board of Directors. Subject to the provisions of law and the preferences of the Preferred Stock, dividends may be paid on the Common Stock at such time and in such amounts as the Board of Directors may deem advisable. The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the corporation entitled to a vote thereon. Except as otherwise specifically required by law or as specifically provided in any resolution or resolutions of the Board of Directors providing for the issue of any particular series of Preferred Stock, the exclusive voting power of the corporation shall be vested in the Common Stock of the corporation. Each share of Common Stock shall entitle the holder thereof to one vote at all meetings of the stockholders of the corporation. ARTICLE V Section 1. The name and mailing address of the incorporator is as follows: Robert L. Jones 4400 InterFirst One Dallas, Texas 75202 Section 2. The name and mailing address of each person who is to serve as a director of the corporation until the first annual meeting of the stockholders of the corporation or until a successor is elected and qualified is as follows: 3 Sterling L. Williams 1001 Campbell Centre 8350 North Central Expressway Dallas, Texas 75206 ARTICLE VI In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the corporation. ARTICLE VII Election of directors need not be by written ballot unless the by-laws of the corporation shall so provide. Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes of the State of Delaware) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the corporation. ARTICLE VIII The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, to the extent and in the manner now or hereafter prescribed by the laws of the State of Delaware, and additional provisions authorized by such laws as are then in force may be added hereto. All rights conferred upon the directors, officers and stockholders of the corporation herein or in any amendment hereof are granted subject to this reservation. I, THE UNDERSIGNED, being the incorporator hereinabove named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of 4 Delaware, do make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 10th day of February, 1983. /s/ Robert L. Jones --------------------- Robert L. Jones 5 CERTIFICATE OF THE DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES A OF STERLING SOFTWARE, INC. ----------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ----------------------------- STERLING SOFTWARE, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That, pursuant to the authority expressly vested in the Board of Directors by Article Four of the Certificate of Incorporation of the Corporation, as amended, and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors, duly adopted, by written consent, a resolution providing for the issuance of Four Hundred Seventeen Thousand Eight Hundred Fifty Seven (417,857) shares of Cumulative Redeemable Preferred Stock, Series A, which resolution is as follows: RESOLVED, that, pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of Article Four of the Certificate of Incorporation of the Corporation, as amended, this Board of Directors hereby creates a series of the Preferred Stock, $0.10 par value, of the Corporation to consist of Four Hundred Seventeen Thousand Eight Hundred Fifty Seven (417,857) shares (the "Authorized Amount"), and this Board of Directors hereby fixes the designation and the powers, preferences and rights, and the qualifications, limitations or restrictions thereon, of the shares of such series (in addition to the powers, preferences and rights, and the qualifications, limitations or restrictions thereon, set forth in the Certificate of Incorporation, as amended, which are applicable to all series of the Preferred Stock, $0.10 par value, of the Corporation) as follows: Four Hundred Seventeen Thousand Eight Hundred Fifty Seven (417,857) shares of the Preferred Stock, $0.10 par value, of the Corporation are hereby constituted as a series of the Preferred Stock designated as "Cumulative Redeemable Preferred Stock, Series A" (hereinafter called the "Series A Stock") with the voting powers and the preferences and rights hereinafter set forth. 1. Definitions. As used herein: ----------- "Acquisition" means SSI Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the Corporation, and any successor thereto. "Common Stock" means (i) the class of stock designated as the Common Stock of the Corporation as of August 12, 1985, or (ii) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from par value to no par value or from no par value to par value. "Consolidated Current Liabilities," as of the date of determination means (i) the aggregate amount of liabilities of the Corporation and its Consolidated Subsidiaries which may properly be classified as current liabilities (including, without limitation, taxes accrued as estimated), on a consolidated basis, after eliminating all inter-company items between the Corporation and any Subsidiary and (ii) all current maturities of long-term and short-term Indebtedness, as determined in accordance with generally accepted accounting principles. "Consolidated Net Assets," as of any date, means the total amount of assets (less accumulated depreciation or amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a consolidated balance sheet of the Corporation and its Consolidated Subsidiaries as at such date as recorded after the Merger giving effect to purchase accounting, after deducting therefrom the amounts of: (a) Consolidated Current Liabilities; (b) minority interests held by persons other than the Corporation and its Consolidated Subsidiaries; (c) any revaluation or other write-up in book value of assets subsequent to June 30, 1985 as a result of a change in the method of valuation of accordance with generally accepted accounting principles, other than any revaluation or write-up of tangible assets made in accordance with generally accepted accounting principles in connection with the Merger or in connection with the acquisition of another business; -2- (d) all other intangible assets, including without limitation, goodwill, patents, trademarks, tradenames, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs, and research and development costs), but excluding goodwill and intangible assets, if any, recorded in the Merger and purchased software; (e) treasury stock (if included in total assets); (f) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of capital stock to the extent such obligation is not reflected in Consolidated Current Liabilities; (g) investments in Unconsolidated Subsidiaries; and (h) the excess, if any, of the amount at which securities issued by any Person (other than a Consolidated Subsidiary) are carried over the lesser of the cost or market value (as determined in good faith by the Board of Directors of the Corporation or SSI Acquisition, Inc., as the case may be, and as evidenced by a resolution of such Board of Directors) of such securities; provided, however, if such excess is less than $100,000 -------- ------- for any class of securities and is less than $1,000,000 in the aggregate for all such securities, such excess shall not be deducted, and no such determination by the Board of Directors shall be required; the amounts of such assets and deductions therefrom to be computed in accordance with generally accepted accounting principles, consistently applied. "Consolidated Net Earnings," for any period, means the aggregate of the Net Earnings of the Corporation and its Subsidiaries for such period, on a consolidated basis, determined in accordance with generally accepted accounting principles; provided that (i) the Net Earnings of any Person other than a Consolidated Subsidiary in which the Corporation or any Subsidiary has a joint interest with a third party shall be included only to the extent of the amount of dividends or distributions paid to the Corporation or a Consolidated Subsidiary, (ii) the Net Earnings of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the Net Earnings of any Unconsolidated Subsidiary which is designated as a Consolidated Subsidiary attributable to any period prior to the date of such designation shall be excluded and (iv) the Net Earnings of any subsidiary incorporated in a jurisdiction other than the United States or a State thereof shall be excluded to the extent such Net Earnings are not permitted to be distributed by such Subsidiary. "Consolidated Net Worth," as of any date, means Consolidated Net Assets (including, if any, recapture upon the termination of employee benefit plans) less Consolidated liabilities as determined in accordance with generally accepted accounting principles consistently applied (other than Consolidated Current Liabilities, treasury stock if included in total assets and minority interests specified in clause (b) of the definition of -3- Consolidated Net Assets), excluding any unrealized gains or losses from foreign currency translations, if any, of the Corporation and its Subsidiaries. "Consolidated Subsidiary" means a Subsidiary which for financial reporting purposes is accounted for by the Corporation as a consolidated subsidiary. "Indebtedness" means (i) any liabilities of any Person (a) for borrowed money or (b) evidenced by a note, debenture or similar instrument (including a purchase money obligation) whether issued in connection with the acquisition of any property, assets (other than inventory or similar property acquired in the ordinary course of business) or securities, or otherwise, (ii) Capitalized Lease Obligations of such Person, (iii) any liability of others described in the preceding clause (i) or (ii) which the Person has guaranteed or which is otherwise its legal liability, and (iv) any amendment, renewal, extension or refunding of any liability of the types referred to in clauses (i), (ii) and (iii) above. "Informatics" means Informatics General Corporation, a Delaware corporation, to be merged with Acquisition pursuant to the Agreement and Plan of Merger, dated June 20, 1985, among the corporation, Acquisition and Informatics. "Merger" means any consolidation of Acquisition with, or merger of Acquisition into, Informatics or any merger of such corporation into Acquisition. "Net Earnings" of any Person for any period means the net earnings (loss) from continuing operations of such period determined in accordance with generally accepted accounting principles consistently applied (except for changes concurred in by the Person's independent public accountants). "Net Proceeds" means the gross consideration received (in cash, or if the consideration is other than cash, the fair value of the consideration received as determined by the Board of Directors of the Corporation or Acquisition, as the case may be) from Sales of Assets by the Corporation and its Subsidiaries less the amount of fees and commissions (including investment banking fees) payable to Persons other than an Affiliate, legal, title and recording tax expenses and other costs and expenses directly incident to such Sales of Assets which are to be paid in cash; provided, however, that (i) gross consideration received in the form of debt instruments shall not be deemed to be Net Proceeds until such time as such debt instruments are paid, redeemed, sold or otherwise disposed of, and (ii) the amount of liabilities, if any, assumed by the purchaser or other transferee in connection with a Sale of Assets, the amount of liabilities to which the transferred assets are subject which are repaid at the time of such sale or other disposition out of the proceeds thereof or the amount of liabilities to which the transferred assets remain subject (but only to the extent such liabilities are without recourse to Acquisition or the Subsidiaries) shall not be deemed to be a part of gross consideration received. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. -4- "Purchase Agreement" means the Purchase Agreement dated as of August 13, 1985 among the Corporation, Acquisition and the Purchasers named therein ("Purchasers"). "Restricted Payment" means (i) any Stock Payment by Acquisition or the Corporation; (ii) any Stock Payment by a Consolidated Subsidiary of the Corporation to any Person other than the Corporation or Acquisition or a Consolidated Subsidiary of the Corporation; (iii) any consideration paid by the Corporation or a Subsidiary of the Corporation to acquire any securities of any Person other than securities of any Person that was a Consolidated Subsidiary of the Corporation immediately prior to the acquisition of such securities; (iv) the issuance by the Corporation of its Capital Stock convertible into, or exchangeable for, property other than Capital Stock of the Corporation or the issuance by any Subsidiary of its Capital Stock convertible into, or exchangeable for, property other than Capital Stock of such Subsidiary of (v) any direct or indirect payment by the Corporation or any Subsidiary of the Corporation (whether made in cash, property or securities) to any Affiliate thereof (other than the Corporation or a Subsidiary of the Corporation) including, without limitation, all interest, principal payments (whether at maturity, by operation of sinking fund, mandatory redemption or otherwise), capital contributions, investments, advances, loans or other extensions of credit or payments on account of the redemption, repurchase, retirement or acquisition of any securities of the Corporation or a Subsidiary of the Corporation or on account of the purchase or acquisition of any securities of such Affiliate, except that none of the following shall be deemed to be Restricted Payments: (w) payments in the form of cash, stock or indebtedness made by the Corporation or by any Subsidiary to acquire (directly or indirectly by the acquisition of securities) all or substantially all of the business (by purchase of assets or securities or otherwise) of any Person which business is a business or ancillary to a business in which the Corporation or such Subsidiary is then engaged, (x) payments in the form of cash, stock of indebtedness not exceeding $4,000,000 in the aggregate for the acquisition of partial interests in businesses which are businesses or ancillary to businesses in which the Corporation or such Subsidiary is then engaged, provided that the Corporation or such Subsidiary acquires simultaneously with such payment the right to acquire all or substantially all of such businesses (by purchase of assets or securities or otherwise), provided, further, that at the time the partial interest is no longer in existence (due to exercise of the right to acquire all or substantially all of such business, disposition of such partial interest or otherwise), the amount of the payment made to acquire such partial interest shall not be included in the $4,000,000 limitation, (y) payments for goods and services, rental payments in respect of leased property and payments in respect of loans; provided that the transactions giving rise to such payments are in the ordinary course of business and such transactions are on terms no less favorable to the Corporation or such Subsidiary than would be available in a comparable transaction with an unrelated Person, and provided further that, if the amount (including all contingent and deferred amounts) involved in any one such transaction exceeds $1,000,000, the Board of Directors (as evidenced by a resolution of the Board of Directors) shall have determined that the terms thereof are no less favorable to the Corporation or such Subsidiary than would be available in a comparable transaction with an unrelated Person, and (z) reasonable compensation for services in connection with employment. -5- "Restricted Securities" means shares of Series A Stock sold to the Purchasers pursuant to the Purchase Agreement and which cannot be publicly resold by the holder thereof without registration under the Securities Act of 1933, as amended, or the availability of an exemption thereunder; provided, however, such securities shall cease to be Restricted Securities when (i) they have been registered under the Securities Act of 1933, as amended, the registration statement in connection therewith has been declared effective, (ii) they are distributed to the public pursuant to Rule 144 (or any similar provision then in force) under the Securities Act of 1933, as amended, or (iii) they have been otherwise transferred and new certificates or other evidences of ownership for them not bearing the legend set forth in Section 3.2 of the Purchase Agreement and not subject to any stop transfer order or other restriction on transfer have been delivered by the Corporation. "Sale of Assets" means, with respect to the Corporation, Acquisition or any of their Subsidiaries, any sale, lease, conveyance or other disposition of assets of the Corporation, Acquisition or such Subsidiary, as the case may be, not made in the ordinary course of business, other than (i) any recapture by Acquisition upon termination of employee benefit plans, (ii) sales, leases, conveyances or other dispositions of assets between or among Acquisition and its Consolidated Subsidiaries, and (iii) sales of accounts and notes receivable pursuant to working capital financing. "Stock Payment" means, with respect to any Person, any dividend, either in cash or in property (except dividends payable in common stock or common shares of Capital Stock of such Person) on, or the making by such Person of any other distribution on account of any shares of any class of its Capital Stock, now or hereafter outstanding, or the redemption, repurchase, retirement or other acquisition by such Person, directly or indirectly, of any shares of any class of its Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of its Capital Stock, now or hereafter outstanding. "Subsidiary" means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Corporation, by the Corporation and a Subsidiary or Subsidiaries of the Corporation or by a Subsidiary or Subsidiaries of the Corporation or (ii) any other person (other than a corporation) in which the Corporation, a Subsidiary or Subsidiaries of the Corporation or the Corporation and a Subsidiary or Subsidiaries of the Corporation, directly or indirectly, at the date of determination thereof has at least majority ownership interest. "Unconsolidated Subsidiary" means any Subsidiary that is not a Consolidated Subsidiary. 2. Dividends. --------- (a) The holders of the Series A Stock shall be entitled to receive, when, as, and if declared by the Board of Directors and out of the assets of the Corporation which are legally available for the payment of dividends, cumulative preferential cash dividends payable quarterly on the fifteenth day of February, May, August and November (each such -6- date being referred to herein as a "Dividend Payment Date") to the holders of record on the first day of the month in which such Dividend Payment Date occurs, in each year, commencing November 15, 1985, provided, that the payment of -------- dividends declared prior to May 15, 1986 may be deferred until May 15, 1986 but any dividends with such deferred payment shall be cumulative and compounding. Holders of the Series A Stock shall be entitled to receive dividends at the annual rate of $12.00 per share until the first Dividend Payment Date subsequent to the date when the Securities and Exchange Commission has, under the Securities Act of 1933, as amended, declared effective a registration statement covering the Series A Stock (the "Sale Date") and from and after such Dividend Payment Date at the annual rate of $11.00 per share. So long as any shares of Series A Stock shall remain outstanding, and notwithstanding Paragraph 4(e) no dividend whatsoever shall be paid upon any class of stock or series thereof ranking junior to or on a parity with the Series A Stock in the payment of dividends, nor shall any shares of any class of stock or series thereof ranking junior to or on a parity with the Series A Stock in payment of dividends to be redeemed or purchased by the Corporation or any Subsidiaries thereof, nor shall any monies be paid to or made available for sinking fund for the redemption or purchase of any shares of any class of stock or series thereof ranking junior to or on a parity with the Series A Stock in payment of dividends. (b) Cash dividends upon shares of the Series A Stock shall commence to accrue and be cumulative from the date of issue thereof. Accumulation of dividends on any shares of the Series A Stock shall not bear interest. 3. Preference on Liquidation. ------------------------- (a) In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, after payment of provision for payment of the debts and other liabilities of the Corporation, the holders of shares of Series A Stock shall be entitled to receive, out of the net assets of the Corporation, $100.00 per share plus an amount equal to all dividends accrued and unpaid thereon to the date fixed for distribution, and no more, before any distribution shall be made to the holders of the Common Stock or any other class of stock or series thereof ranking junior to the Series A Stock with respect to the distribution of assets. (b) Nothing herein contained shall be deemed to prevent redemption of shares of the Series A Stock by the Corporation in the manner provided in Paragraph 4 hereof. Neither the Merger nor consolidation of the Corporation into or with any other corporation, nor the Merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall be deemed to be a dissolution, liquidation or winding up of the Corporation within the meaning of this Paragraph 3. (c) Written notice of any dissolution, liquidation or winding up of the affairs of the Corporation, stating a payment date and the place where the distributable amounts shall be payable shall be given by mail, postage prepaid, not less than 20 days prior -7- to the payment date stated therein, to the holders of record of the Series A Stock at their respective addresses as the same shall appear on the books of the Corporation. (d) No payment on account of such dissolution, liquidation or winding up of the affairs of the Corporation shall be made to the holders of any class or series of stock ranking on a parity with the Series A Stock in respect of the distribution of assets, unless there shall likewise be paid at the same time to the holders of the Series A Stock like proportionate distributive amounts, ratably, in proportion to the full distributive amounts to which they and the holders of such parity stock are respectively entitled with respect to such preferential distribution. 4. Redemption and Sinking Fund. --------------------------- (a) The Corporation shall have the right, at its option and by resolution of its Board of Directors, to redeem at any time shares of the Series A Stock, in whole or in part, in accordance with paragraphs 4(h) and 4(i) upon payment in cash, in respect of each share redeemed, at a redemption price equal to $100 per share plus an amount equal to all dividends accrued and unpaid thereon to the date fixed for redemption. (b) On August 13, 1994, 1995, 1996 and 1997, the Corporation shall redeem 25% of the Authorized Amount of the Series A Stock. In satisfaction of all or part of mandatory redemptions required by this Paragraph 4(b), the Corporation may elect to credit against such redemptions otherwise required to be made in accordance with Paragraph 4(i) shares of Series A Stock which the Corporation has acquired or purchased (otherwise than mandatory redemptions pursuant to this Paragraph 4) and which have not previously been applied as a credit against mandatory redemptions required by this Paragraph 4. Such shares of Series A Stock shall be applied, on a pro rata basis, against all mandatory redemptions required by this Paragraph 4(b) in such year and in all subsequent years. Any shares of Series A Stock applied as a credit against the next mandatory redemption required by this Paragraph 4(b) shall be credited against the next mandatory redemption to be made in respect of Restricted Securities held by the Purchasers and all other shares of Series A Stock on a pro rata basis, based upon the number of shares of Series A Stock held by Purchasers and the remaining number of shares of Series A Stock, in each case outstanding at the time a selection of shares of Series A Stock is or would be made pursuant to Paragraph 4(i); provided, however, that credits to be made against a mandatory redemption in respect to Restricted Securities may only be made from Restricted Securities purchased by the Corporation. (c) After none of Acquisition's Increasing Rate Senior Notes due no later than 1990 or 15 1/8% Senior Subordinated Notes due 1993 are outstanding, to the extent that Net Proceeds received by the Corporation, Acquisition or any of its Subsidiaries, as the case may be, in connection with any single Sale of Assets exceeds $1 million for each such sale, the Corporation shall apply a sum of money equal to the Net Proceeds to redeem pro rata, shares of Series A Stock, at a redemption price of $100 per share plus any accrued and unpaid dividends with respect thereto; provided, however, that for the purposes of this -8- Paragraph 4(c), a Sale of Assets shall not include a sale of Informatics common stock prior to the date of the Merger. Any redemption of Series A Stock pursuant to this Paragraph 4 shall be made by the Corporation in the manner set forth in Paragraphs 4(h) and 4(i), except that the notice of redemption referred to in such paragraph must be sent within 30 days after the receipt of such Net Proceeds and must set forth in reasonable detail the calculation of the number of shares of Series A Stock to be redeemed. (d) If the Merger is not consummated on or prior to February 13, 1987, the Corporation shall redeem on March 13, 1987 all outstanding shares of the Series A Stock at a redemption price of $100 per share plus accrued and unpaid dividends thereon. (e) If the Corporation, Acquisition, or any of their Subsidiaries, directly or indirectly, makes any Restricted Payment, within 30 days of such Restricted Payment the Corporation shall redeem all of the outstanding shares of Series A Stock at a redemption price of $100 per share plus accrued and unpaid dividends thereon unless (i) immediately prior to such Restricted Payment Consolidated Net Worth exceeds $60,000,000; and (ii) upon giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments (the amount expended for such purposes, if other than in cash, to be determined in good faith by the Board of Directors of the Corporation, Acquisition, or such Subsidiary, as the case may be, whose determination shall be conclusive and evidenced by a resolution of such Board of Directors) subsequent to the last day of the fiscal quarter in which Consolidated Net Worth exceeds $60,000,000 does not exceed the sum of: (a) 50% of the aggregate Consolidated Net Earnings of the Corporation accrued on a cumulative basis subsequent to the last day of the fiscal quarter in which Consolidated Net Worth exceeds $60,000,000 (or if such Consolidated Net Earnings is a deficit, 100% of such deficit); and (b) 50% of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Board of Directors of the Corporation, Acquisition, or such Subsidiary, as the case may be, whose determination shall be conclusive and evidenced by a resolution of such Board of Directors) received by the Corporation and its Subsidiaries from the issue or sale (other than to a Subsidiary) after the last day of the fiscal quarter in which Consolidated Net Worth exceeds $60,000,000 of Capital Stock of the Corporation and its Subsidiaries (including Capital Stock of the Corporation and its Subsidiaries issued upon the conversion of, or in exchange for, securities issued subsequent to the last day of the fiscal quarter in which Consolidated Net Worth exceeds $60,000,000 other than Capital Stock including warrants and rights to purchase Capital Stock but excluding the issuance of Capital Stock of the Corporation and its -9- Subsidiaries convertible into or exchangeable for property other than Capital Stock of the Corporation and its Subsidiaries); provided, that the Corporation shall not be required to redeem any shares of Series A Stock pursuant to this Paragraph 4(e) on account of (x) the payment of any dividend within 60 days after the date of the declaration thereof, if at said date of declaration such payment would not have required any redemption pursuant to this Paragraph 4(e), (y) the payment of any dividends on, or the redemption of, any shares of Series A Stock, or the payment of the call price for any outstanding warrants to purchase shares of Common Stock or (z) the issuance of 450,000 shares of Capital Stock of the Corporation upon the conversion of $3,900,000 aggregate principal amount of convertible debentures presently outstanding and presently held by officers and directors of the Corporation, although such Capital Stock shall be included in any computation made pursuant to clause (ii)(b) above. For purposes of clause (ii)(b) above, the aggregate net proceeds received by the Corporation and its Subsidiaries, as the case may be, from the issuance of Capital Stock upon the conversion of, or exchange for, securities other than Capital Stock shall include the aggregate net proceeds of the original sale of the securities so converted or exchanged or, in the case of convertible debentures provided to officers and directors of the Corporation, the aggregate principal amount of such debentures so converted. (f) If subsequent to August 13, 1985 the Corporation's Consolidated Net Worth at the end of any two consecutive fiscal quarters is less than $14 million, then on the last day of the fiscal quarter next following such second fiscal quarter (the "Accelerated Redemption Date") the Corporation shall redeem, pro rata, 10% of the Authorized Amount of the Series A Stock, less any shares of Series A Stock that the Corporation has acquired (otherwise than pursuant to Paragraph 4(b) hereof) and which have not previously been applied as a credit against any redemptions required by Paragraph 4, plus any accrued and unpaid dividends to the Accelerated Redemption Date. In no event shall the failure to meet the minimum Consolidated Net Worth stated above at the end of any fiscal quarter be counted toward more than one accelerated redemption pursuant to this Paragraph 4(f). Until the Corporation's Consolidated Net Worth exceeds $14 million, the Corporation shall redeem, pro rata, at the end of each six month period following the first Accelerated Redemption Date an additional 10% of the Authorized Amount of the Series A Stock less any redemptions made subsequent to the most recent date upon which the Corporation redeemed shares of Series A Stock pursuant to this Paragraph 4(f). Redemption of Series A Stock pursuant to this Paragraph 4(f) shall be made by the Corporation in the manner set forth in Paragraphs 4(h) and 4(i) and any shares of Series A Stock applied as a credit against redemptions required by this Paragraph 4(f) shall be credited in accordance with the credit provisions relating to mandatory redemptions required by Paragraph 4(b) as set forth in Paragraph 4(b). (g) In the event that the Corporation, Acquisition or any Subsidiary, directly or indirectly, creates, incurs, issues, assumes, guarantees, or in any other manner becomes liable with respect to, contingently or otherwise, any Indebtedness (other than (i) Acquisition's increasing Rate Senior Notes due no later than 1990, (ii) Acquisition's 15-1/8% Senior Subordinated Notes due 1993, (iii) performance bonds in an aggregate amount -10- not to exceed $500,000 at any time outstanding and (iv) up to $5,000,000 of Indebtedness incurred solely for working capital requirements, provided that such Indebtedness may not be secured and no such Indebtedness shall be outstanding for 6 consecutive months in any twelve month period) within 30 days of such transaction the Corporation shall redeem all of the outstanding shares of Series A Stock, unless (i) none of Acquisition's Increasing Rate Senior Notes due no later than 1990 are outstanding and (ii) the aggregate amount of Senior Indebtedness incurred subsequent to the date upon which none of Acquisition's Increasing Rate Senior Notes due no later than 1990 are outstanding does not exceed 50% of the Corporation's Increase in Consolidated Net Worth subsequent to the last day of the fiscal quarter in which Consolidated Net Worth exceeds $60,000,000. (h) Notice of any redemption pursuant to this Paragraph 4, specifying the date fixed for said redemption the number of shares of Series A Stock and the place where the amount to be paid upon redemption is payable shall be mailed, postage prepaid, at least 30 days but not more than 60 days prior to said redemption date to the holders of record of the Series A Stock to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. If such notice of redemption shall have been so mailed, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been irrevocably deposited in trust for the account of the holders of the shares of the Series A Stock to be redeemed (and so as to be and continue to be available therefor), then, on and after said redemption date, notwithstanding that any certificate for shares of the Series A Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby so called for redemption shall be deemed to be no longer outstanding, the right to receive dividends thereon shall cease to accrue, and all rights with respect to such shares of the Series A Stock so called for redemption shall forthwith cease and terminate, except only the right of the holders thereof to receive out of the funds so set aside in trust the amount payable on redemption thereof, but without interest. Any interest accrued on such funds shall belong to the Corporation. However, if such notice of redemption shall have been so mailed, and if prior to the date of redemption specified in such notice all said funds necessary for such redemption shall have been irrevocably deposited in trust, for the account of the holders of the shares of the Series A Stock to be redeemed (and so as to be and continue to be available therefor), with a bank or trust company named in such notice doing business in the Borough of Manhattan in the City of New York, New York or in the City of Dallas, Texas and having capital, surplus and undivided profits of at least $50,000,000, thereupon and without awaiting the redemption date, all shares of the Series A Stock with respect to which such notice shall have been so mailed and such deposit shall have been so made shall be deemed to be no longer outstanding, and all rights with respect to such shares of Series A Stock shall forthwith upon such deposit in trust cease and terminate, except the right of the holders thereof on or after the redemption fate to receive from such deposit the amount payable upon the redemption, but without interest. Any interest accrued on such funds shall belong to the Corporation. In case the holders of shares of the Series A Stock which shall have been redeemed shall not within six years (or any longer period if required by law) after the redemption date claim any amount so deposited in trust for the redemption of shares, such bank or trust company shall, upon demand, pay over to the Corporation any such unclaimed amount so deposited with it, and shall thereupon be relieved of all responsibility in respect -11- thereof, and thereafter the holders of such shares shall look only to the Corporation for payment of the redemption price thereof, but without interest. (i) If less than all of the outstanding shares of the Series A Stock are to be redeemed pursuant to the provisions of this Paragraph 4, the particular shares to be redeemed shall be allocated as nearly pro rata as practicable between Restricted Securities held by the Purchasers and the remaining shares of Series A Stock, based upon the number of outstanding shares Series A Stock which are Restricted Securities held by the Purchasers and the remaining shares of Series A Stock. The Restricted Securities held by the Purchasers to be redeemed shall be selected pro rata (or as nearly pro rata as practicable) and the remaining shares of Series A Stock to be redeemed shall be selected pro rata (or as nearly pro rata as practicable), by lot, or by any other method that complies with the requirements of the principal national securities exchange on which the shares of Series A Stock being redeemed are listed at the discretion of the Corporation. (j) Shares of the Series A Stock redeemed or otherwise purchased or acquired by the Corporation shall not be reissued as shares of the Series A Stock, but shall assume the status of authorized but unissued Preferred Stock, $0.10 par value, of the Corporation. 5. Voting Rights. The holders of the Series A Stock shall have only ------------- the voting rights expressly provided by applicable law, except that without the written consent of each holder of Series A Stock, in no event shall the powers, preferences or rights of, and the qualifications, limitations or restrictions on, of the Series A Stock as set forth herein be modified or changed so as to extend the maturity of any Series A Stock, reduce the amount of dividends to be paid thereon, affect the terms of redemption of the Series A Stock or the payment of dividends thereon or reduce the percentage of holders necessary to otherwise modify or change the powers, preferences or rights of, and the qualifications, limitations or restrictions on, of the Series A Stock as set forth herein. 6. Election of Directors. The holders of the Series A Stock shall --------------------- have the right to replace the Board of Directors of the Corporation in the event that any quarterly dividend referred to in Paragraph 2(a) and required to be declared on or prior to May 15, 1986 is not declared prior to its respective Dividend Payment Date at a time when funds were legally available therefore. -12- IN WITNESS WHEREOF, STERLING SOFTWARE, INC. has caused its corporate seal to be hereunto affixed and this certificate to be signed by W. Mack Goforth, its Vice President, and Phillip A. Moore, its Secretary, this 12th day of August, 1985. STERLING SOFTWARE, INC. By:/s/ W. Mack Goforth ----------------------------- W. Mack Goforth ATTEST: /s/ Phillip A. Moore - --------------------------- Phillip A. Moore Secretary [Corporate Seal] -13- AMENDED CERTIFICATE OF DESIGNATION TO THE CERTIFICATE OF THE DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES A, OF STERLING SOFTWARE, INC. - -------------------------------------------------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware - -------------------------------------------------------------------------------- STERLING SOFTWARE, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT: 1. Pursuant to the authority expressly vested in the Board of Directors by Article Four of the Certificate of Incorporation of the Corporation, as amended, and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors, duly adopted, by written consent, a resolution providing for the issuance of 417,857 shares of Cumulative Redeemable Preferred Stock, Series A (the "Series A Stock") which resolution fixed the designation and the powers, preferences and rights, and the qualifications, limitations or restrictions thereon. 2. Such resolution is on file with the Secretary of State of the State of Delaware in the Certificate of the Designation, Preferences, Rights and Limitations of Cumulative Redeemable Preferred Stock, Series A (the "Certificate"). 3. The Board of Directors of the Corporation has adopted a resolution in the form attached hereto as Exhibit A amending the definition of "Restricted Payment" contained in Section 1 of the Certificate. 4. All of the holders of the Series A Stock have consented in writing to the approval of the amendments which is set forth in the attached Exhibit A. IN WITNESS WHEREOF, STERLING SOFTWARE, INC. has caused its corporate seal to be hereunder affixed and this certificate to be signed by George H. Ellis, its Vice President, and Jeannette P. Meier, its Secretary, this 11th day of December, 1985. STERLING SOFTWARE, INC. By: /s/ George H. Ellis -------------------------- George H. Ellis Vice President ATTEST: /s/ Jeannette P. Meier - ----------------------------- Jeannette P. Meier Secretary Each of the undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of his or her own knowledge. Executed at Dallas, Texas on December 11, 1985. /s/ George H. Ellis -------------------------- George H. Ellis /s/ Jeannette P. Meier -------------------------- Jeannette P. Meier -2- THE STATE OF TEXAS (S) (S) COUNTY OF DALLAS (S) BEFORE ME, the undersigned, a Notary Public in and for said County and State, on this day personally appeared George H. Ellis, known to me to be the person whose name is subscribed to the foregoing instrument as Vice President of Sterling Software, Inc., and being by me first duly sworn, declared that the statements therein contained are true and correct. GIVEN under my hand and seal of office this 11th day of December, 1985. /s/ Kelley H. Stetzler ----------------------------- Notary Public in and for Dallas County, Texas My commission expires: 6/3/89 ------ THE STATE OF TEXAS (S) (S) COUNTY OF DALLAS (S) BEFORE ME, the undersigned, a Notary Public in and for said County and State, on this day personally appeared Jeannette P. Meier, known to me to be the person whose name is subscribed to the foregoing instrument as Secretary of Sterling Software, Inc., and being by me first duly sworn, declared that the statements therein contained are true and correct. GIVEN under my hand and seal of office this 11th day of December, 1985. /s/ Kelley H. Stetzler ----------------------------- Notary Public in and for Dallas County, Texas My commission expires: 6/3/89 ------- -3- Exhibit A --------- FURTHER RESOLVED, that, whereas the Board of Directors deems it advisable and in the best interests of the Company to amend the definition of "Restricted Payment" contained in the Certificate of Designation, Preferences, Rights and Limitations of Cumulative Redeemable Preferred Stock, Series A (the "Series A Stock") on file with the Secretary of State of the State of Delaware (the "Certificate"), pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by the provisions of Article Four of the Certificate of Incorporation of the Company, as amended, this Board of Directors hereby amends the Certificate so that the definition of Restricted Payment contained in Section 1 of the Certificate shall read in its entirety as follows: "Restricted Payment" means (i) any Stock Payment by Sterling or the Company; (ii) any Stock Payment by a Consolidated Subsidiary of Sterling to any Person other than Sterling or the Company or a Consolidated Subsidiary of Sterling; (iii) any consideration paid by Sterling or a Subsidiary of Sterling to acquire any securities of any Person other than securities of any Person that was a Consolidated Subsidiary of Sterling immediately prior to the acquisition of such securities; (iv) the issuance by Sterling of its Capital Stock convertible into, or exchangeable for, property other than Capital Stock of Sterling or the issuance by any Subsidiary of its Capital Stock convertible into, or exchangeable for, property other than Capital Stock of such Subsidiary or (v) any direct or indirect payment by Sterling or any Subsidiary of Sterling (whether made in cash, property or securities) to any Affiliate thereof (other than Sterling or a Subsidiary of Sterling) including, without limitation, all interest, principal payments (whether at maturity, by operation of sinking fund, mandatory redemption or otherwise), capital contributions, investments, advances, loans or other extensions of credit or payments on account of the redemption, repurchase, retirement or acquisition of any securities of Sterling or a Subsidiary of Sterling or on account of the purchase or acquisition of any securities of such Affiliate, except that none of the following shall be deemed to be Restricted Payments: (V) payments in the form of cash, stock or Indebtedness made by Sterling or by any Subsidiary to acquire (directly or indirectly by the acquisition of securities) all or substantially all of the business (by purchase of assets or securities or otherwise) of any Person which business is a business or ancillary to a business in which Sterling or such Subsidiary is then engaged; (W) payments in the form of cash, stock or Indebtedness not exceeding $4,000,000 in the aggregate for the acquisition of partial interests in businesses which are businesses or ancillary to businesses in which Sterling or such Subsidiary is then engaged, provided that Sterling or such Subsidiary acquires simultaneously with such payment the right to acquire all or substantially all of such businesses (by purchase of assets or securities or otherwise), provided, further, that at the time the partial interest is no longer in existence (due to exercise of the right to acquire all or substantially all of such business, disposition of such partial interest or otherwise), the amount of the payment made to acquire such partial interest shall not be included in the $4,000,000 limitation; (X) payments for goods and services, rental payments in respect of leased property and payments in respect of loans; provided that the transactions giving rise to such payments are -4- in the ordinary course of business and such transactions are on terms no less favorable to Sterling or such Subsidiary than would be available in a comparable transaction with an unrelated Person, and provided further that, if the amount (including all contingent and deferred amounts) involved in any one such transaction exceeds $1,000,000, the Board of Directors (as evidenced by a resolution of the Board of Directors filed with the Trustee) shall have determined that the terms thereof are no less favorable to Sterling or such Subsidiary than would be available in a comparable transaction with an unrelated Person; (Y) payments for preferred stock of any Person or payments for notes, debentures or similar instruments are not at any time convertible into or exchangeable for instruments which represent equity ownership in any Person and so long as such preferred stock, notes, debentures or similar instruments have a final maturity of no later than two years, except in the case of increasing rate notes or other resettable or extendable notes; and (Z) reasonable compensation for services in connection with employment; and be it FURTHER RESOLVED, that the proper officer of the Company shall submit such amendment of the Certificate for approval by either vote or written consent of the holders of all of the outstanding shares of Series A Stock; and be it FURTHER RESOLVED, that upon approval by the holders of all of the outstanding shares of Series A Stock, the proper officers of the Company are hereby authorized, empowered and directed to take any and all action necessary to amend the Certificate, including, without limitation, filing a Certificate of Amendment with the Secretary of State of Delaware. -5- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Sterling Software, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Sterling Software, Inc. and by a separate unanimous written consent of the Directors, resolutions were duly adopted setting forth proposed amendments of the Certificate of Incorporation of said corporation, declaring said amendments to be advisable and directing that said amendments be considered at the next annual meeting of the stockholders. The resolutions setting forth the proposed amendments are as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article numbered "IV" so that, as amended, said paragraph of said Article shall be and read as follows : "The total number of shares of stock of all classes which the corporation shall have authority to issue is Fifty-Two Million (52,000,000), consisting of Fifty Million (50,000,000) shares of Common Stock having a par value of $.10 per share, and Two Million (2,000,000) shares of Preferred Stock having a par value of $.10 per share." RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "VII" so that, as amended said Article shall be and read as follows: "ARTICLE VII All power of the corporation shall be exercised by or under the direction of the Board of Directors except as otherwise provided herein or required by law. For the management of the business and for the conduct of the affairs of the corporation, and in further creation, definition, limitation and regulation of the power of the corporation and of its directors and of its stockholders, it is further provided: (i) Election of Directors. Election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. (ii) Number, Election and Term of Directors. Except as otherwise fixed pursuant to the provisions of Article IV hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors of the corporation shall be fixed from time to time by or pursuant to the Bylaws. The directors, other than those who may be elected by the holders of any class or series of stock having preference over the Common Stock as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the manner specified in the Bylaws, one class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1988, another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1989, and another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1990, with members of each class to hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. (iii) Stockholder Nomination of a Director. Advance notice of nominations for the election of directors, other than by the Board of Directors or a Committee thereof, shall be given in the manner provided by the Bylaws. (iv) Amendment, Repeal, etc. Notwithstanding anything contained in this' Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 75% of the voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or adopt any provision inconsistent with, or repeal, this Article VII or any provision hereof." RESOLVED, that the Certificate of Incorporation of this corporation be amended by adding a new Article numbered "IX" to read in its entirety as follows: "ARTICLE IX To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of the corporation shall not be liable to the corporation or its -2- stockholders for monetary damages for breach of fiduciary duty as a director." RESOLVED, that the Certificate of Incorporation of this corporation be amended by adding a new Article numbered "X" to read in its entirety as follows: "ARTICLE X No action required to be taken, or which may be taken, at any annual or special meeting of stockholders of the corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied." SECOND: That thereafter, pursuant to certain resolutions, the Board of Directors directed that said amendments be considered at the next annual meeting of the stockholders. An annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of each of the amendments. THIRD: That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendments. IN WITNESS WHEREOF, Sterling Software, Inc. has caused this certificate to be signed by Sterling L. Williams, its President, and Jeannette P. Meier, its Secretary, this 13th day of March, 1987. By: /s/ Sterling L. Williams ---------------------------------- Sterling L. Williams, President ATTEST: /s/ Jeannette P. Meier ------------------------------ Jeannette P. Meier, Secretary -3- STATE OF TEXAS (S) (S) SS: COUNTY OF DALLAS (S) BEFORE ME, the undersigned authority, on this day personally appeared Sterling L. Williams and Jeannette P. Meier, President and Secretary, respectively, of Sterling Software, Inc., known to me to be the persons whose names are subscribed to the foregoing instrument, and acknowledged to me that they executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 13th day of March, 1987. /s/ Sharon B. Cron ----------------------------- Notary Public in and for the State of Texas My Commission Expires: July 31, 1987 ------------- -4- CERTIFICATE OF DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF STERLING SOFTWARE, INC. Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware (the "G.C.L."), Sterling Software, Inc., a corporation organized and existing under the G.C.L. (the "Corporation"), DOES HEREBY CERTIFY That, pursuant to authority conferred upon the Board of Directors of the Corporation in Article 4 of its Certificate of Incorporation, as amended, and pursuant to the provisions of Section 151(g) of the G.C.L., the Board of Directors, on May 4, 1987, duly adopted a resolution providing for the issuance of two hundred thousand shares of Series B Preferred Stock, par value $.10 per share, which resolution is as follows: RESOLVED, that a series of Preferred Stock of this Corporation, to be designated "Series B Preferred Stock", be and it hereby is, created to consist of two hundred thousand shares of which the preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions of such preferences and rights, are as follows: Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "Series B Preferred Stock," and the number of shares constituting such series shall be two hundred thousand. Section 2. Dividends and Distributions. --------------------------- (A) The holders of Series B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available for such purpose, cumulative dividends at the annual rate of $.982135 per share, and no more, in equal quarterly payments on the fifteenth day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing November 15, 1987. No accrued and unpaid dividends shall be paid to the holders of Series B Preferred Stock so long as there are in arrears dividends payable on the then outstanding shares of the Corporation's $7.20 Exchangeable Preferred Stock (the "$7.20 Preferred Stock"). (B) Dividends shall begin to accrue and be cumulative from the date of issue of the Series B Preferred Stock. The amount of dividends so payable shall be determined on the basis of twelve 30-day months and a 360-day year. Accrued but unpaid dividends shall not bear interest. (C) All dividends paid on shares of Series B Preferred Stock shall be paid pro-rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series B Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than sixty days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of Series B Preferred Stock shall ------------- not be entitled to the following voting rights: (A) Except as otherwise expressly provided herein or as required by law, the holders of shares of Series B Preferred Stock and Common Stock shall be entitled to vote together as a single class on all matters with respect to which stockholders are entitled to vote, and each holder of Series B Preferred Stock shall be entitled to one (1) vote in person or by proxy for each share of Series B Preferred Stock standing in his name on the stock transfer records of the Corporation. (B) The affirmative vote of the holders of at least 66-2/3% of the outstanding shares of the Series B Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for that purpose, shall be necessary (i) to authorize the issuance of securities of any class of the Corporation's capital stock ranking prior (either as to dividends or upon liquidation, dissolution or winding up) to Series B Preferred Stock, or (ii) to amend the Certificate of Incorporation of the Corporation in any manner which would materially alter the relative rights and preferences of Series B Preferred Stock so as to adversely affect holders thereof (other than to increase or decrease the authorized number of shares of Series B Preferred Stock); provided, however, that the affirmative vote of the holders of Series B Preferred Stock shall not be required for the Corporation's Board of Directors to authorize and issue the $7.20 Preferred Stock. The affirmative vote of the holders of at least 51% of the outstanding shares of Series B Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for that purpose shall be necessary to amend the Certificate of Incorporation of the Corporation to create a class of preferred stock which is equal in preference as to dividends and upon liquidation, dissolution or winding up to the Series B Preferred Stock. (C) In the event the Corporation proposes to effect any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Corporation or any of its subsidiaries, or any consolidation or merger involving the Corporation or any of its subsidiaries, or any reclassification, or any dissolution, liquidation or winding up of the Corporation, or any other -2- reorganization of the Corporation which requires the consent of stockholders ("Proposed Reorganization Event"), the holders of Series B Preferred Stock shall be entitled to ten (10) votes for each share of Series B Preferred Stock standing in his name on the stock transfer records of the Corporation; provided, however, that if any such Proposed Reorganization Event is unanimously approved by all of the members of the Board of Directors who are not holders of Series B Preferred Stock, each holder of Series B Preferred Stock shall only be entitled to one (1) vote for each share of Series B Preferred Stock standing in his name on the stock transfer records of the Corporation. Section 4. Certain Restrictions. Whenever quarterly dividends payable on -------------------- Series B Preferred Stock as provided in Section 2 are in arrears, thereafter and until all dividends, including all accrued dividends, on shares of Series B Preferred Stock outstanding shall have been paid in full or declared and set apart for payment, the Corporation shall not (A) pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to Series B Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for, or out of the net cash proceeds from the sale of, other shares of any such junior stock, (B) pay dividends on or make any other distributions on any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series B Preferred Stock, except dividends paid ratably on Series B Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled, or (C) redeem or purchase or otherwise acquire for consideration any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series B Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking Junior to Series B Preferred Stock. The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could purchase such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series B Preferred Stock ----------------- redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued by resolution or resolutions of the Board of Directors, subject to the conditions or restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, -------------------------------------- dissolution or winding up of the Corporation, no distribution shall be made (A) to the holders of stock ranking junior (either as to dividends or upon -3- liquidation, dissolution or winding up) to Series B Preferred Stock unless, prior thereto, the holders of Series B Preferred Stock shall have received $8.9285 per share, plus an amount equal to unpaid dividends thereon, including accrued dividends, whether or not declared, to the date of such payment or (B) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up), with Series B Preferred Stock, except distributions made ratably on Series B Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. The foregoing notwithstanding, upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of Series B Preferred Stock unless, prior thereto, the holders of the Corporation's outstanding $7.20 Preferred Stock have been paid, out of the net assets of the Corporation, an amount equal to $48.00 per share of the $7.20 Preferred Stock then outstanding plus an amount equal to all dividends accrued and unpaid thereon on the date fixed for distribution. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this Certificate of Designation, Preferences, Rights and Limitations to be signed by Jeannette P. Meier, its Senior Vice President, and attested by Brenda Rudd, its Assistant Secretary, this 11th day of May, 1987. STERLING SOFTWARE, INC. By: /s/ Jeannette P. Meier ------------------------- Jeannette P. Meier Senior Vice President [Corporate Seal] ATTEST: By: /s/ Brenda Rudd ----------------------------------- Brenda Rudd, Assistant Secretary -4- CERTIFICATE OF DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF STERLING SOFTWARE, INC. Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware (the "G.C.L."), Sterling Software, Inc., a corporation organized and existing under the G.C.L. (the "Corporation"), DOES HEREBY CERTIFY That, pursuant to authority conferred upon the Board of Directors of the Corporation in Article 4 of its Certificate of Incorporation, as amended, and pursuant to the provisions of Section 151(g) of the G.C.L., the Board of Directors, on May 3, 1987, duly adopted a resolution providing for the issuance of six hundred twenty-five thousand shares of $7.20 Exchangeable Preferred Stock, par value $.10 per share, which resolution is as follows: RESOLVED, that a series of Preferred Stock of this Corporation, to be designated "$7.20 Exchangeable Preferred Stock", be and it hereby is, created to consist of six hundred twenty-five thousand shares of which the preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions of such preferences and rights, are as follows: Section 1. Designation and Amount. The shares of such series shall ---------------------- be designated as "$7.20 Exchangeable Preferred Stock" ("$7.20 Preferred Stock"), and the number of shares constituting such series shall be six hundred twenty-five thousand. Section 2. Dividends and Distributions. --------------------------- (A) The holders of $7.20 Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available for such purpose, cumulative dividends at the initial annual rate of $7.20 per share, and no more, in equal quarterly payments on the fifteenth day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing November 15, 1987. The foregoing notwithstanding, beginning August 15, 2002 and on each August 15 thereafter (the "Redetermination Date"), the annual rate of the cumulative dividend with respect to $7.20 Preferred Stock then outstanding for the year commencing on such Redetermination Date shall be determined by adding $.48 to the annual rate paid during the year ending on such Redetermination Date; provided, however, that in no event shall the annual dividend rate exceed $9.69. (B) Dividends shall begin to accrue and be cumulative from the date of issue of the $7.20 Preferred Stock. The amount of dividends so payable shall be determined on the basis of twelve 30-day months and a 360- day year. Accrued but unpaid dividends shall bear interest at the annual rate of 15%. (C) All dividends paid on shares of $7.20 Preferred Stock shall be paid pro-rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of $7.20 Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than sixty days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of $7.20 Preferred Stock shall ------------- not be entitled to any voting rights except as follows: (A) Whenever quarterly dividends payable on $7.20 Preferred Stock as provided in Section 2 are in arrears in an aggregate amount at least equal to six full quarterly dividends (which need not be consecutive), the number of directors constituting the Board of Directors of the Corporation shall be increased by two and the holders of $7.20 Preferred Stock shall have, in addition to the rights set forth in paragraph (B), the special right, voting separately as a single class, to elect two directors of the Corporation to fill such newly created directorships at the next succeeding annual meeting of stockholders (and at each succeeding annual meeting of stockholders thereafter until such right shall terminate as hereinafter provided). At each meeting of stockholders at which the holders of $7.20 Preferred Stock shall have the right to vote as a class, as provided in this paragraph (A), the presence in person or by proxy of the holders of record of a majority of the total number of shares of $7.20 Preferred Stock then outstanding shall be necessary and sufficient to constitute a quorum of such class for such election by such stockholders as a class. At any such meeting or adjournment thereof. (i) the absence of a quorum of holders of $7.20 Preferred Stock shall not prevent the election of directors other than those to be elected by the holders of $7.20 Preferred Stock, and the absence of a quorum of the holders of any such class of stock for the election of such other directors shall not prevent the election of the directors to be elected by the holders of $7.20 Preferred Stock, and -2- (ii) in the absence of a quorum of the holders of $7.20 Preferred Stock, a majority of the holders present in person or by proxy shall have the power to adjourn the meeting from time to time and place to place without notice other than announcement at the meeting until a quorum shall be present. Each director elected by the holders of $7.20 Preferred Stock as provided in this paragraph (A) shall hold office until the annual meeting of stockholders next succeeding such director's election or until such director's successor, if any, is elected by such holders and qualified. In case any vacancy shall occur among the directors elected by the holders of $7.20 Preferred Stock as provided in this paragraph (A), such vacancy may be filled for the unexpired portion of the term by vote of the remaining directors theretofore elected by such stockholders, or such director's successors in office, or by the vote of such stockholders given at a special meeting of such stockholders called for that purpose. Whenever all dividends accrued and unpaid on $7.20 Preferred Stock shall have been paid and dividends thereon for the current quarterly period shall have been paid or declared and set apart for payment, the special right of the holders of $7.20 Preferred Stock to elect directors as provided in this paragraph (A) shall terminate, but subject always to the same provisions for the vesting of such special right of the holders of $7.20 Preferred Stock to elect directors in the case of future unpaid dividends as hereinabove provided. (B) The affirmative vote of the holders of at least 66-2/3% of the outstanding shares of the $7.20 Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for that purpose, shall be necessary (i) to authorize the issuance of securities of any class of the Corporation's capital stock ranking prior (either as to dividends or upon liquidation, dissolution or winding up) to $7.20 Preferred Stock, or (ii) to amend the Certificate of Incorporation of the Corporation in any manner which would materially alter the relative rights and preferences of $7.20 Preferred Stock so as to adversely affect holders thereof (other than to increase or decrease the authorized number of shares of $7.20 Preferred Stock). The affirmative vote of the holders of at least 51% of the outstanding shares of $7.20 Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for that purpose shall be necessary to amend the Certificate of Incorporation of the Corporation to create a class of preferred stock which is equal to the ranking of the $7.20 Preferred Stock as to dividends or upon liquidation, dissolution or winding up. Section 4. Certain Restrictions. Whenever quarterly dividends -------------------- payable on $7.20 Preferred Stock as provided in Section 2 are in arrears, -3- thereafter and until all dividends, including all accrued dividends, on shares of $7.20 Preferred Stock outstanding shall have been paid in full or declared and set apart for payment, the Corporation shall not (A) pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to $7.20 Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for, or out of the net cash proceeds from the sale of, other shares of any such junior stock, (B) pay dividends on or make any other distributions on any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with $7.20 Preferred Stock, except dividends paid ratably on $7.20 Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled, or (C) redeem or purchase or otherwise acquire for consideration any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with $7.20 Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior to $7.20 Preferred Stock. The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could purchase such shares at such time and in such manner. Section 5. Redemption. ---------- (A) The Corporation shall not have any right to redeem shares of the $7.20 Preferred Stock prior to August 15, 1990. Thereafter, the Corporation shall have the right, at its sole option and election, to redeem shares of $7.20 Preferred Stock, in whole or in part, at any time and from time to time, at (i) a redemption price per share of:
If Redeemed prior Redemption to August 15, Price 1991 $50.40 1992 $50.16 1993 $49.92 1994 $49.68 1995 $49.44 1996 $49.20 1997 $48.96 1998 $48.72 1999 $48.24 2000 $48.00
-4- plus (ii) in each case, an amount per share equal to all accrued and unpaid dividends thereon to the date fixed for redemption (hereinafter called a "Redemption Date"). The foregoing notwithstanding, unless the full cumulative dividends on all outstanding shares of $7.20 Preferred Stock shall have been paid or contemporaneously are declared and paid for all past dividend periods, none of the shares of $7.20 Preferred Stock shall be redeemed unless all outstanding shares of $7.20 Preferred Stock are simultaneously redeemed. (B) If less than all $7.20 Preferred Stock at the time outstanding is to be redeemed, the shares so to be redeemed shall be selected by lot, pro-rata or in such other manner as the Board of Directors may determine to be fair and proper. (C) Notice of any redemption of $7.20 Preferred Stock shall be mailed at least thirty, but not more than sixty, days prior to the date fixed for redemption to each holder of $7.20 Preferred Stock to be redeemed, at such holder's address as it appears in the books of the Corporation. In order to facilitate the redemption of $7.20 Preferred Stock, the Board of Directors may fix a record date for the determination of holders of $7.20 Preferred Stock to be redeemed, not more than sixty days nor less than ten days, prior to the date fixed for such redemption. (D) On the Redemption Date specified in the notice given pursuant to paragraph (C), the Corporation shall, at any time after such notice shall have been mailed and before such Redemption Date the Corporation may, deposit, for the pro-rata benefit of the holders of the shares of $7.20 Preferred Stock so called for redemption, the funds necessary for such redemption with a bank or trust company in New York City having a capital and surplus of at least $50,000,000. Any monies so deposited by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall revert to the general funds of the Corporation. After such reversion, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment of the redemption price. Any interest accrued on funds so deposited pursuant to this paragraph (D) shall be paid from time to time to the Corporation for its own account. (E) Upon the deposit of funds pursuant to paragraph (D) in respect of shares of $7.20 Preferred Stock called for redemption, notwithstanding that any certificate for such shares shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the rights to receive dividends thereon shall cease to accrue from and after the Redemption Date designated in the notice of -5- redemption and all rights of the holders of the shares of $7.20 Preferred Stock called for redemption shall cease and terminate, excepting only the right to receive the redemption price therefor. Section 6. Exchange. -------- (A) The Corporation shall not have the right to exchange shares of the $7.20 Preferred Stock prior to August 15, 1989. Thereafter, the Corporation shall have the right, at its sole option and election to exchange the $7.20 Preferred Stock, in whole or in part, on any Quarterly Dividend Payment Date for the Corporation's 15% Subordinated Notes, each of which Notes shall be due on such date which shall be fifteen years from the date of original issue of such Notes (the "15% Notes"), to be issued pursuant to the form of indenture (the "Indenture"), filed as Exhibit g(3) to the Corporation's Schedule 13E-4 dated May 12, 1987, a copy of which is on file with the Secretary of the Corporation. Holders of the outstanding shares of $7.20 Preferred Stock will be entitled to receive $48 principal amount of the 15% Notes in exchange for each share of $7.20 Preferred Stock exchanged. At the time shares of $7.20 Preferred Stock are exchanged, the rights of the holders of $7.20 Preferred Stock to be exchanged as stockholders of the Corporation shall cease (except the right to receive on the date of exchange an amount equal to the amount of accrued and unpaid dividends to the date of exchange), and the person or persons entitled to receive the 15% Notes issuable upon exchange of $7.20 Preferred Stock for all purposes as the registered holder or holders of such 15% Notes. Notice of any exchange of $7.20 Preferred Stock shall be mailed at least thirty, but not more than sixty, days prior to the date fixed for exchange to each holder of $7.20 Preferred Stock to be exchanged, at such holder's address as it appears on the books of the Corporation. Such notice shall set forth the procedures for exchanging certificates formerly representing $7.20 Preferred Stock for 15% Notes. The 15% Notes will be issued only in denominations of $1,000 and integral multiples thereof and separately, in denominators of less than $1,000, in integral multiples of $1. Any holder of $7.20 Preferred Stock otherwise entitled to a 15% Note in a principal amount which is not an integral multiple of $1 will receive cash in lieu of the amount less than $1. Prior to giving notice of its intention to exchange, the Corporation shall execute with and deliver to a bank or trust company selected by the Corporation the Indenture with such changes as may be required by law or usage. The Corporation will cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, and will cause the 15% Notes to be authenticated as of the date on which the exchange is effective. (B) If less than all the $7.20 Preferred Stock at the time outstanding is to be exchanged, the shares so to be exchanged shall be selected by lot, pro-rata or in such other manner as the Board of Directors may determine to be fair and proper. -6- Section 7. Reacquired Shares. Any shares of $7.20 Preferred Stock ----------------- redeemed, purchased, exchanged or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued by resolution or resolutions of the Board of Directors, subject to the conditions or restrictions on issuance set forth herein. Section 8. Liquidation, Dissolution or Winding Up. Upon any -------------------------------------- liquidation, dissolution or winding up of the Corporation, no distribution shall be made (A) to the holders of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to $7.20 Preferred Stock unless, prior thereto, the holders of $7.20 Preferred Stock shall have received $48.00 per share, plus an amount equal to unpaid dividends thereon, including accrued dividends, whether or not declared, to the date of such payment or (B) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up), with $7.20 Preferred Stock, except distributions made ratably on $7.20 Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. -7- IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this Certificate of Designation, Preferences, Rights and Limitations to be signed by its Senior Vice President, Jeannette P. Meier, and attested by its Assistant Secretary this 19th day of June, 1987. STERLING SOFTWARE, INC. By:/s/ Jeannette P. Meier -------------------------- Jeannette P. Meier Senior Vice President and General Counsel [Corporate Seal] ATTEST: By:/s/ Brenda H. Rudd ----------------------- Assistant Secretary -8- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Sterling Software, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Sterling Software, Inc. and by a separate unanimous written consent of the Directors, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that said amendment be considered at the next annual meeting of the stockholders. The resolutions setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article numbered "IV" so that, as amended, said paragraph of said Article shall be read as follows: "The total number of shares of stock of all classes which the corporation shall have authority to issue is Sixty Million (60,000,000), consisting of Fifty Million (50,000,000) shares of Common Stock having a par value of $.10 per share, and Ten Million (10,000,000) shares of Preferred Stock having a par value of $.10 per share." SECOND: That thereafter, pursuant to certain resolutions, the Board of Directors directed that said amendment be considered at the next annual meeting of the stockholders. An annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, Sterling Software, Inc. has caused this Certificate to be signed by Sterling L. Williams, its President, and Jeannette P. Meier, its Secretary, this 14th day of October, 1988. By: /s/ Sterling L. Williams ------------------------- Sterling L. Williams, President ATTEST: /s/ Jeannette P. Meier ----------------------- Jeannette P. Meier, Secretary -2- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Sterling Software, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Sterling Software, Inc., resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that said amendment be considered at the next annual meeting of the stockholders. The resolution setting forth the proposed amendments is as follows: RESOLVED, that, subject to approval of the Company's stockholders of the Charter Amendment, the Company's Certificate of Incorporation be, and it hereby is, amended by changing the first paragraph of the Article numbered "IV" so that, as amended, said paragraph of said Article shall read as follows: "The total number of shares of stock of all classes which the corporation shall have authority to issue is Eighty-Five Million (85,000,000), consisting of Seventy-Five Million (75,000,000) shares of Common Stock having a par value of $.10 per share, and Ten Million (10,000,000) shares of Preferred Stock having a par value of $.10 per share." SECOND: That thereafter, pursuant to certain resolutions, the Board of Directors directed that said amendments be considered at the next annual meeting of the stockholders. An annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Sterling Software, Inc. has caused this certificate to be signed by Albert K. Hoover, its Vice President, on this 11th day of May, 1995. By: /s/ Albert K. Hoover ---------------------------------- Albert K. Hoover, Vice President CERTIFICATE OF DESIGNATION of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of STERLING SOFTWARE, INC. (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) Sterling Software, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Company"), DOES HEREBY CERTIFY: That, pursuant to authority vested in the Board of Directors of the Company by its Certificate of Incorporation, and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company has adopted the following resolution providing for the issuance of a series of Preferred Stock: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company (hereinafter called the "Board of Directors" or the "Board") by the Certificate of Incorporation of the Company, a series of Preferred Stock, par value $0.10 per share (the "Preferred Stock"), of the Company be, and it hereby is, created, and that the designation and amount thereof and the powers, designations, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: I. Designation and Amount ---------------------- The shares of such series will be designated as Series A Junior Participating Preferred Stock (the "Series A Preferred") and the number of shares constituting the Series A Preferred is 750,000. Such number of shares may be increased or decreased by resolution of the Board; provided, however, that no decrease will -------- ------- reduce the number of shares of Series A Preferred to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into shares of Series A Preferred. II. Dividends and Distributions --------------------------- (a) Subject to the rights of the holders of any shares of any series of Preferred Stock ranking prior to the shares of Series A Preferred with respect to dividends, the holders of shares of Series A Preferred, in preference to the holders of Common Stock, par value $0.10 per share (the "Common Stock"), of the Company, and of any other junior stock, will be entitled to receive, when, as and if declared by the Board out of funds legally available for the purpose, dividends payable in cash on such dates as are from time to time established for the payment of cash dividends on the Common Stock (each such date being referred to herein as a "Dividend Payment Date"), commencing on the first Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred (the "First Dividend Payment Date"), in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set forth, one hundred times the aggregate per share amount of all cash dividends, and one hundred times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Dividend Payment Date or, with respect to the First Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred. In the event that the Company at any time (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such case and regardless of whether any shares of Series A Preferred are then issued or outstanding, the amount to which holders of shares of Series A Preferred would otherwise be entitled immediately prior to such event under clause (ii) of the preceding sentence will be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Dividends will accrue on outstanding shares of Series A Preferred from the Dividend Payment Date next preceding the date of issue of such shares, unless (i) the date of issue of such shares is prior to the record date for the First Dividend Payment Date, in which case dividends on such shares will accrue from the date of the first issuance of a share of Series A Preferred or (ii) the date of issue is a Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred entitled to receive a dividend and before such Dividend Payment Date, in either of which events such dividends will accrue from such Dividend Payment Date. Accrued but unpaid dividends will cumulate from the applicable Dividend Payment Date but will not bear interest. Dividends paid on the shares of Series A Preferred in an amount less than the total amount of such dividends at the time accrued and payable on such shares will be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board may fix a record date for the determination of holders of shares of Series A Preferred entitled to -2- receive payment of a dividend or distribution declared thereon, which record date will be not more than 60 calendar days prior to the date fixed for the payment thereof. III. Voting Rights ------------- The holders of shares of Series A Preferred will have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred will entitle the holder thereof to one hundred votes on all matters submitted to a vote of the stockholders of the Company. In the event the Company at any time (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such case and regardless of whether any shares of Series A Preferred are then issued or outstanding, the number of votes per share to which holders of shares of Series A Preferred would otherwise be entitled immediately prior to such event will be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other Preferred Stock Designation creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights will vote together as one class on all matters submitted to a vote of stockholders of the Company. (c) Except as set forth in the Certificate of Incorporation or herein, or as otherwise provided by law, holders of shares of Series A Preferred will have no voting rights. IV. Certain Restrictions -------------------- (a) Whenever dividends or other distributions payable on the Series A Preferred are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred outstanding have been paid in full, the Company will not: (i) Declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the shares of Series A Preferred; (ii) Declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, -3- dissolution, or winding up) with the shares of Series A Preferred, except dividends paid ratably on the shares of Series A Preferred and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) Redeem, purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the shares of Series A Preferred; provided, however, that the Company may at any time redeem, -------- ------- purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the shares of Series A Preferred; or (iv) Redeem, purchase or otherwise acquire for consideration any shares of Series A Preferred, or any shares of stock ranking on a parity with the shares of Series A Preferred, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, may determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Company will not permit any majority-owned subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (a) of this Article IV, purchase or otherwise acquire such shares at such time and in such manner. V. Reacquired Shares ----------------- Any shares of Series A Preferred purchased or otherwise acquired by the Company in any manner whatsoever will be retired and canceled promptly after the acquisition thereof. All such shares will upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation of the Company, or in any other Preferred Stock Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. VI. Liquidation, Dissolution or Winding Up -------------------------------------- Upon any liquidation, dissolution or winding up of the Company, no distribution will be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution, or winding up) to the shares of Series A Preferred unless, prior thereto, the holders of shares of Series A Preferred have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; provided, however, that the holders of shares of Series A -------- ------- Preferred will be entitled to receive an aggregate amount per share, subject to the -4- provision for adjustment hereinafter set forth, equal to one hundred times the aggregate amount to be distributed per share to holders of shares of Common Stock or (b) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution, or winding up) with the shares of Series A Preferred, except distributions made ratably on the shares of Series A Preferred and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution, or winding up. In the event the Company at any time (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such case and regardless of whether any shares of Series A Preferred are then issued or outstanding, the aggregate amount to which each holder of shares of Series A Preferred would otherwise be entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence will be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. VII. Consolidation, Merger, Etc. --------------------------- In the event that the Company enters into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then, in each such case, each share of Series A Preferred will at the same time be similarly exchanged for or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to one hundred times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company at any time (a) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (b) subdivides the outstanding shares of Common Stock, (c) combines the outstanding shares of Common Stock in a smaller number of shares, or (d) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such case and regardless of whether any shares of Series A Preferred are then issued or outstanding, the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred will be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. -5- VIII. Redemption ---------- The shares of Series A Preferred are not redeemable. IX. Rank ---- The shares of Series A Preferred rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of the Company's Preferred Stock. X. Amendment --------- Notwithstanding anything contained in the Certificate of Incorporation of the Company to the contrary and in addition to any other vote required by applicable law, the Certificate of Incorporation of the Company may not be amended in any manner that would materially alter or change the powers, preferences or special rights of the Series A Preferred so as to affect them adversely without the affirmative vote of the holders of at least 80% of the outstanding shares of Series A Preferred, voting together as a single series. -6- IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Company by its Executive Vice President, Chief Financial Officer, General Counsel and Secretary and attested by its Assistant Secretary this 18th day of December, 1996. /s/ Jeannette P. Meier ----------------------- Jeannette P. Meier, Executive Vice President, Chief Financial Officer, General Counsel and Secretary Attest: /s/ Don J. McDermett, Jr. - -------------------------- Don J. McDermett, Jr., Assistant Secretary -7- EX-10.1 3 AMD. #1 TO INTERNATIONAL DISTRIBUTOR AGREEMENT EXHIBIT 10.1 AMENDMENT NO. 1 --------------- TO INTERNATIONAL DISTRIBUTOR AGREEMENT BETWEEN STERLING COMMERCE INTERNATIONAL, INC. AND STERLING SOFTWARE INTERNATIONAL, INC. THIS AMENDMENT NO. 1 (this "Amendment") is made and entered into as of January 31, 1997, by and between Sterling Commerce B.V., a private limited liability company organized and existing under the laws of The Netherlands ("SCII"), and Sterling Software International, Inc., a Delaware corporation ("Distributor"). Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed to them in the Agreement (as hereinafter defined). WHEREAS, Sterling Commerce International, Inc., a Delaware corporation ("SC International"), was an original party to the Agreement; WHEREAS, effective January 1, 1997, SC International assigned all of its rights and obligations under the Agreement to SCII, a wholly owned subsidiary of SCI; and WHEREAS, SCII and Distributor desire to clarify and/or correct certain provisions under the Agreement; NOW, THEREFORE, effective as of the date hereof, the International Distributor Agreement, dated as of March 4, 1996, between SC International and Distributor (together with all exhibits and schedules thereto, the "Agreement"), is hereby amended as follows: 1. References in the Agreement to SCII shall mean and refer to Sterling Commerce B.V., a private limited liability company organized and existing under the laws of The Netherlands. 2. The first "WHEREAS" clause of the Agreement is deleted in its entirety and replaced with the following: WHEREAS, Sterling Commerce (Mid America), Inc. ("ISG"), a subsidiary of SCI, and the Communications Software Group ("CSG"), an operating group of SCI (ISG and CSG, collectively the "SCI Companies"), market, license, install, maintain and support certain computer software products, including the Products (as defined below); 3. Section 1.a.: The first sentence of Section l.a. is deleted and ------------ replaced with the following: Except as otherwise provided in Section 1.d., SCII hereby grants to Distributor, and Distributor hereby accepts from SCII, the exclusive right to market, sublicense, install, maintain and support the Products within the Territory, either directly and/or through such wholly owned subsidiaries of SSW (collectively, "SSW Subdistributors") and unaffiliated third parties (collectively, "Third-Party Subdistributors" and, together with SSW Subdistributors, "Subdistributors") as may be appointed by Distributor in accordance with this Section 1.a. 4. Section 1.b.: Reference to "that SCII makes available to Distributor" ------------ in the second line of Section 1.b. is deleted and replaced with "that SCII makes available for third-party distribution within the Territory". 5. Section 1.c.: The first sentence of Section 1.c. is deleted and ------------ replaced with the following: "Territory" means everywhere in the world except the United States of America, its territories, Puerto Rico and Canada. 6. Section 1.d. The following Section 1.d. shall be inserted: ------------ d. Services. Distributor acknowledges that SCII markets and provides, -------- and is not prohibited under this Agreement from marketing or providing, directly or through third parties, Commerce Services (as herein defined) to entities located in the Territory, and that Distributor is not authorized to market or provide the Commerce Services. Furthermore, Distributor acknowledges that specialized software, such as the Enabling Software (as herein defined), is required to enable and facilitate the use and provision of, and is an integral part of, certain of the Commerce Services. Accordingly, and notwithstanding anything in this Agreement to the contrary, SCII specifically shall have the right within the Territory to directly or indirectly market, sublicense, install, maintain and support: (A) GENTRAN:Basic, GENTRAN:Director, GENTRAN: Integrator, GENTRAN: SmartForms and any other similar PC software products marketed under the GENTRAN tradename (collectively, the "Enabling Software") the principal purpose of which is to enable or facilitate SCII's service offerings, marketed under the COMMERCE tradename, including without limitation COMMERCE:Network, COMMERCE:Exchange and other substantially similar service offerings (all such services collectively, "Commerce Services"); provided that the Enabling Software is marketed in the Territory by SCII and/or its subdistributors only in connection with the Commerce Services; and (B) Products that are a component of, integrated with, embedded in or provided as an add-on to COMMERCE:Exchange or any substantially similar service offering of SCII or its subdistributors (collectively, "Exchange 2 Components"). Distributor shall not be entitled to any payment hereunder with respect to Exchange Components and shall not market or sublicense Products as Exchange Components to licensees of Commerce Exchange or substantially similar service offerings ("Exchange Customers"). Notwithstanding the foregoing provisions of this clause (B), if Distributor or any Subdistributor independently brings to SCII's attention a potential purchaser of Exchange Components not theretofore known to SCII (or its subdistributors or affiliates), Distributor or such Subdistributor shall be entitled to a royalty from SCII for those Products (I) actually delivered to and licensed by such purchaser, and (II) with respect to which Distributor or such Subdistributor would have had full right to market and sublicense if not a component of, embedded in or provided as an add-on to COMMERCE:Exchange or any substantially similar service offering of SCII or its subdistributors (the "Exchange Offerings"). The amount of such royalty for any such referral shall be fifty percent (50%) of the relative value attributable to such Exchange Components within the particular Exchange Offering. In determining such value, consideration will be given to the relative functionality and significance of the different pieces of software contained in such Exchange Offering (including such Exchange Components), the relative list prices of such software and overall discounts, if any. The parties shall cooperate and work in good faith in making such determinations. In order to avoid interfering with SCII's Commerce Services business, neither Distributor nor any Subdistributor shall market or sublicense Enabling Software to the following persons or entities: (i) A person or entity that is a party to or an express third- party beneficiary under an agreement for the provision of Commerce Services; or (ii) A person or entity that is a subdistributor or remarketer of Commerce Services or a Prospect (as herein defined). A Prospect shall be any person or entity that is in discussions or negotiations with SCII (or an affiliate of SCII) to become a subdistributor or remarketer of Commerce Services, as identified in a written notice to Distributor. From time to time, SCII shall provide Distributor with the list of such subdistributors and remarketers and Prospects. Subject to the prohibitions set forth in clauses (i) and (ii) above, Distributor and its Subdistributors may market, sublicense, install, maintain and support Enabling Software within the Territory. Without limiting the provisions above, in the event Distributor, an SSW Subdistributor or Third-Party Subdistributor sublicenses (x) Enabling Software to any of the persons or entities in clauses (i) or (ii) above or (y) Products as Exchange Components to Exchange Customers, the percentage royalty payable to SCII pursuant to Section 6 of this Agreement shall be 100% in the case of a sublicense by Distributor or an SSW Subdistributor, and 200%, in 3 the case of a sublicense by a Third-Party Subdistributor. SCII and Distributor and its Subdistributors acknowledge and agree that they will cooperate and communicate with one another in good faith and in a timely and responsive manner in order to promote full compliance with the provisions of this Section 1(d) and to avoid interfering with, and to in fact maximize, their respective marketing efforts within the Territory. Without limiting the generality of the preceding sentence, when SCII or Distributor (or any Subdistributor) is uncertain as to whether a prospective customer (whether end-user, reseller or otherwise) has a relationship that would be subject to the foregoing provisions of this Section 1(d), the party confronting such uncertainty shall make due inquiry of the other party hereunder in order to resolve such uncertainty as promptly as possible. 7. Section 2.e.: The fifth sentence of Section 2.e. is deleted and ------------ replaced with the following: Neither Distributor nor any Subdistributor will make any material modification or amendment to the Product Use Contract without SCII's prior written approval, such approval to be given on a case-by-case basis and not to be unreasonably withheld. For purposes of this Agreement, and without limiting the foregoing, any modification or amendment that has the effect of modifying the provisions of Sections 2 (Grant and Use of Software), 3 (Title and Confidentiality, 5 (Warranty and Liability), and 7 (Services) of the Product Use Contract shall be deemed material. 8. Section 2.f.: Reference to "then current maintenance agreements" in ------------ the first sentence of Section 2.f. shall be deleted and replaced with "under then current Product Use Contracts." 9. Section 4.b.: The first sentence of Section 4.b. is deleted and ------------ replaced with the following: SCII may accept or reject at its discretion any non-standard order or non- standard Product Use Contract that has been materially modified or amended without SCII's prior written consent as required under Section 2.e, subject to any written and binding commitment that SCII may hereafter make to Distributor outside of this Agreement. 10. Exhibit C: The third paragraph under the heading DISTRIBUTOR PROFILE --------- is hereby deleted and replaced with the following: Future financials both with and, to the extent publicly available, without SCII Product representation; 11. Exhibit D: Exhibit D of the Agreement is hereby amended as follows: --------- 4 (i) Paragraph 2.1: Paragraph 2.1 is deleted in its entirety and replaced ------------- with the following: In consideration of the payment by Customer of the Product Use Charge(s) as provided for in this Contract and more specifically defined in the Schedule and subject to the terms and conditions set forth in this Contract, Licensor hereby grants to Customer a personal, non-transferable and non-exclusive right to execute one copy of the applicable Software only at the designated Computer Installation(s) specified in the Schedule. (ii) Paragraph 2.6: The phrase "during the term of this Contract," in the ------------- first line of Paragraph 2.6 is hereby deleted. The brackets surrounding the word "Australia" are hereby deleted. (iii) Paragraph 4.2: The brackets surrounding the phrase "the currency of ------------- the Installation Country" in Paragraph 4.2 are hereby deleted. (iv) Paragraph 6.3: The reference to "Paragraph 7.3" in the last line of ------------- Paragraph 6.3 is hereby deleted and replaced with "Paragraph 6.3." (v) Paragraph 6.5. After "Paragraph 2.6," insert "Section 3.0." ------------- As soon as practicable after date hereof, SCII will prepare an amended and restated Exhibit D incorporating solely those amendments set forth in this Section 9. 12. On and after the date hereof, each reference in the Agreement to "this Agreement," "hereunder," "herein" or words of like import referring to the Agreement will be a reference to the Agreement as amended by this Amendment No.1. 13. Except as specifically amended by this Amendment No.1, the Agreement will remain in full force and effect and is hereby ratified and confirmed. STERLING COMMERCE B.V. STERLING SOFTWARE INTERNATIONAL, INC. By: /s/ Albert K. Hoover By: /s/ James E. Jenkins, Jr. ------------------------------ ----------------------------------- Name: Albert K. Hoover Name: James E. Jenkins, Jr. Title: Managing Director Title: Vice President 5 EX-10.2 4 THIRD AMENDMENT AND MODIFICATION AGREEMENT EXHIBIT 10.2 THIRD AMENDMENT AND MODIFICATION AGREEMENT THIRD AMENDMENT AND MODIFICATION AGREEMENT dated as of December 16, 1996 (this "Amendment") by and among STERLING SOFTWARE, INC., a Delaware corporation (the "Company"); the direct and indirect subsidiaries of the Company listed on the signature pages hereto (collectively, the "Sterling Subsidiaries"); THE FIRST NATIONAL BANK OF BOSTON, BANK ONE, TEXAS, NATIONAL ASSOCIATION, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (collectively, the "Banks"); and THE FIRST NATIONAL BANK OF BOSTON, AS AGENT (the "Agent") for the Banks, amending certain provisions of the Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of August 24, 1995 (as heretofore amended, the "Agreement") among the Company, the Banks and the Agent and the other Loan Documents (as defined in the Agreement). Terms not otherwise defined herein which are defined in the Agreement shall have the respective meanings assigned to such terms in the Agreement. WHEREAS, the Company has requested that the Agent and the Banks amend certain provisions of the Agreement; and WHEREAS, upon the terms and subject to the conditions contained herein, the Agent and the Banks are willing to amend such provisions of the Credit Agreement; NOW, THEREFORE, in consideration of the mutual agreements contained in the Agreement, the other Loan Documents and this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: (S)1. AMENDMENT OF (S)9.15 OF THE AGREEMENT. Section 9.15 of the ------------------------------------- Agreement is hereby deleted in its entirety, and the following new text is hereby substituted in lieu thereof: "(S)9.15. Intentionally omitted." (S)2. AMENDMENT OF (S)10.4 OF THE AGREEMENT. Section 10.4 of the ------------------------------------- Agreement is hereby deleted in its entirety, and the following new (S)10.4 is hereby substituted in lieu thereof: "(S)10.4. Consolidated Net Worth. The Company shall not cause or ---------------------- permit Consolidated Net Worth at the end of any fiscal quarter of the Company to be less than the sum of (a) $725,000,000, plus (b) on a ---- cumulative basis, commencing with the fiscal quarter ending December 31, 1996, seventy-five percent (75%) of the Consolidated Net Income for each fiscal quarter (calculated without deduction for any net losses) through the fiscal quarter then ended, after preferred stock dividends actually paid by the Company since September 30, 1996 (to the extent permitted by (S)9.16), and as adjusted from time to time to reflect stock -2- splits, distributions (other than repurchases by the Company of its issued and outstanding capital stock, as permitted by (S)9.16), or recapitalizations or reclassifications, plus (c) one hundred percent (100%) ---- of the net proceeds received by the Company of any new equity (not including shares of the Company reissued by the Company following the Company's repurchase thereof as permitted by (S)9.16) issued by the Company since September 30, 1996. (S)3. CONDITIONS TO EFFECTIVENESS. This Amendment shall be deemed to be --------------------------- effective as of the date first written above (the "Effective Date") (provided, -------- however, that the amendment contained in (S)1 hereof shall be deemed to be effective as of July 31, 1996) upon the Agent's receipt on or before December 20, 1996, of facsimile copies of original counterparts (to be followed promptly by original counterparts) or original counterparts of this Amendment, duly executed by each of the Company, the Sterling Subsidiaries, the Agent and the Banks. (S)4. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; AUTHORIZATION. Each of --------------------------------------------------------- the Company and the Sterling Subsidiaries hereby represents and warrants to each of the Agent and the Banks as follows: (a) Each of the representations and warranties of the Company and the Sterling Subsidiaries contained in the Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Agreement, the other Loan Documents or this Amendment was true as of the date as of which it was made, and no Default or Event of Default has occurred and is continuing as of the date of this Amendment; and (b) This Amendment has been duly authorized, executed and delivered by the Company and each of the Sterling Subsidiaries, and shall be in full force and effect upon the satisfaction of the conditions set forth in (S)3 hereof, and the agreements of the Company and each of the Sterling Subsidiaries, contained herein, in the Agreement, as herein or heretofore amended, or in the other Loan Documents, as heretofore amended, respectively constitute the legal, valid and binding obligations of the Company and each of the Sterling Subsidiaries, party hereto or thereto, enforceable against the Company or such Sterling Subsidiary, in accordance with their respective terms. (S)5. RATIFICATION, ETC. Except as expressly amended hereby, the ----------------- Agreement, the other Loan Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. All references in the Agreement or such other Loan Documents or in any related agreement or instrument to the Agreement or such other Loan Documents shall hereafter refer to such agreements as amended hereby, pursuant to the provisions of the Agreement. (S)6. NO IMPLIED WAIVER, ETC. Except as expressly provided herein, ---------------------- nothing contained herein shall constitute a waiver of, impair or otherwise affect any of the Obligations, any other obligations of the Company or any of the Sterling Subsidiaries or any right of the Agent or the Banks consequent thereon. -3- The waivers and consents provided herein are limited strictly to their terms. Neither the Agent nor any of the Banks shall have any obligation to issue any further waiver or consent with respect to the subject matter hereof or any other matter. (S)7. COUNTERPARTS. This Amendment may be executed in one or more ------------ counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. (S)8. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED BY ------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CHOICE OR CONFLICTS OF LAWS). -4- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. THE FIRST NATIONAL BANK OF BOSTON, individually and as Agent By: ------------------------------ Title: BANK ONE, TEXAS, NATIONAL ASSOCIATION By: ------------------------------ Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------ Title: STERLING SOFTWARE, INC. By: ------------------------------ Title: -5- Each of the undersigned hereby acknowledges the foregoing Amendment as of the Effective Date and agrees that its obligations under the Guaranty will extend to the Agreement, as so amended, and the other Loan Documents, as so amended. STERLING SOFTWARE (U.S.), INC. By: ------------------------------ Title: STERLING SOFTWARE (SOUTHERN), INC. By: ------------------------------ Title: STERLING SOFTWARE (U.S.A.), INC. By: ------------------------------ Title: STERLING SOFTWARE INTERNATIONAL, INC. By: ------------------------------ Title: STERLING SOFTWARE LEASING COMPANY By: ------------------------------ Title: -6- STERLING SOFTWARE (U.S. OF AMERICA), INC. By: ----------------------------- Title: EX-11.1 5 COMPUTATION OF EARNINGS PER SHARE STERLING SOFTWARE, INC. EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED DECEMBER 31, 1996 (in thousands, except per share information) (unaudited)
Fully Primary Diluted ------------ -------- Earnings: Earnings applicable to common stockholders.................................... $12,740 $12,740 ========= ========= Shares: Weighted average of shares outstanding........................................ 38,439 38,439 Add common shares issued on assumed exercise of options and warrants.......... 6,787 6,787 Less common shares assumed repurchased........................................ (6,081) (6,081) --------- --------- 39,145 39,145 ========= ========= Earnings per common share: Primary....................................................................... $ .33 ========== Fully diluted................................................................. $ .33 =========
EX-11.2 6 COMPUTATION OF EARNINGS PER SHARE STERLING SOFTWARE, INC. EXHIBIT 11.2 COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED DECEMBER 31, 1995 (in thousands, except per share information) (unaudited)
Fully Primary Diluted --------- --------- Earnings: Earnings applicable to common stockholders............................................... $21,307 $21,307 Add: Interest expense on amounts outstanding for the 5 3/4% Convertible Subordinated Debentures (net of applicable income taxes)......................... 218 1,160 ------- ------- $21,525 $22,467 ======= ======= Shares: Weighted average of shares outstanding................................................... 26,630 26,630 Add common shares issued on assumed exercise of options and warrants..................... 8,616 8,616 Less common shares assumed repurchased................................................... (5,333) (5,074) ------- ------- 29,913 30,172 ======= Common shares issued on assumed conversion of 5 3/4% Convertible Subordinated Debentures.................................................................. 4,052 ------- 34,224 ======= Earnings per common share: Primary.................................................................................. $ .72 ======= Fully diluted............................................................................ $ .66 =======
EX-27 7 FINANCIAL DATA SCHEDULE
5 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 QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 541,724 206,994 111,622 0 0 883,876 90,732 45,234 1,067,657 138,406 0 0 0 3,981 889,073 1,067,657 97,141 97,141 42,862 88,400 0 0 147 19,600 6,860 12,740 0 0 0 12,740 .33 .33
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