-----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, PacUHzzSOgAkxbb3aTL3rqSvhQuio2UIGe7dXg9CRPVDUJsGWnkJhoaGR9946RRr v6dYirtUllgQXCBXuCcf5g== 0000930661-98-000910.txt : 19980430 0000930661-98-000910.hdr.sgml : 19980430 ACCESSION NUMBER: 0000930661-98-000910 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980428 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: SEC FILE NUMBER: 001-08465 FILM NUMBER: 98602908 BUSINESS ADDRESS: STREET 1: 300 CRESCENT COURT STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149811000 MAIL ADDRESS: STREET 1: 300 CRESCENT COURT STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 FORM 10-Q 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 March 31, 1998 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ COMMISSION FILE NO. 1-8465 STERLING SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1873956 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 300 CRESCENT COURT, SUITE 1200 DALLAS, TEXAS 75201 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (214) 981-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title Shares Outstanding as of April 23, 1998 - ----------------------------- --------------------------------------- Common Stock, $0.10 par value 77,695,836 PART I - FINANCIAL INFORMATION
Page ---- ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)............................................ 3 Sterling Software, Inc. Consolidated Balance Sheets at March 31, 1998 and September 30, 1997................................................................. 3 Sterling Software, Inc. Consolidated Statements of Operations for the Three and Six Months Ended March 31, 1998 and 1997............................................... 4 Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for the Six Months Ended March 31, 1998........................................................ 5 Sterling Software, Inc. Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1998 and 1997...................................................... 6 Sterling Software, Inc. Notes to Consolidated Financial Statements................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................... 12
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS........................................................... 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 22
-2- STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) A S S E T S
MARCH 31 SEPTEMBER 30 1998 1997 ---------- ---------- (UNAUDITED) Current assets: Cash and cash equivalents................................................... $ 421,507 $ 435,726 Marketable securities....................................................... 234,750 206,965 Accounts and notes receivable, net.......................................... 162,924 149,422 Income tax receivable....................................................... 8,200 9,941 Prepaid expenses and other current assets................................... 20,713 24,847 ---------- ---------- Total current assets....................................................... 848,094 826,901 Property and equipment, net of accumulated depreciation of $44,641 at March 31, 1998 and $42,430 at September 30, 1997............................. 52,061 48,598 Computer software, net of accumulated amortization of $93,804 at March 31, 1998 and $87,258 at September 30, 1997............................. 76,750 70,422 Excess cost over net assets acquired, net of accumulated amortization of $23,557 at March 31, 1998 and $20,650 at September 30, 1997................. 79,526 84,701 Noncurrent deferred income taxes............................................. 4,503 22,130 Other assets................................................................. 18,830 12,906 ---------- ---------- $1,079,764 $1,065,658 ========== ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y Current liabilities: Accounts payable and accrued liabilities.................................... $ 137,096 $ 172,700 Deferred revenue............................................................ 91,043 95,455 ---------- ---------- Total current liabilities................................................. 228,139 268,155 Noncurrent deferred revenue.................................................. 24,780 20,432 Other noncurrent liabilities................................................. 32,965 28,817 Commitments and contingencies Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized, no shares issued or outstanding...................................................... Common stock, $.10 par value; 125,000,000 and 75,000,000 shares authorized at March 31, 1998 and September 30, 1997, respectively; 80,270,000 and 79,808,000 shares issued at March 31, 1998 and September 30, 1997, respectively............................................................... 8,027 7,981 Additional paid-in capital.................................................. 807,953 802,030 Retained earnings (deficit)................................................. 34,989 (3,506) Less treasury stock, at cost; 2,649,000 and 2,704,000 shares at March 31, 1998 and September 30, 1997, respectively.................................. (57,089) (58,251) ---------- ---------- Total stockholders' equity................................................ 793,880 748,254 ---------- ---------- $1,079,764 $1,065,658 ========== ==========
See accompanying notes. -3- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED MARCH 31 ENDED MARCH 31 ----------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenue: Products................................. $ 65,300 $ 47,579 $122,451 $ 84,135 Product support.......................... 40,197 29,179 80,816 59,515 Services................................. 53,900 29,986 104,959 60,235 -------- -------- -------- -------- 159,397 106,744 308,226 203,885 Costs and expenses: Cost of sales: Products and product support............ 14,447 18,966 29,942 35,520 Services................................ 46,709 26,056 91,031 52,364 -------- -------- -------- -------- 61,156 45,022 120,973 87,884 Product development and enhancement...... 7,812 5,011 16,665 9,817 Selling, general and administrative...... 58,613 43,560 117,148 84,292 -------- -------- -------- -------- 127,581 93,593 254,786 181,993 -------- -------- -------- -------- Income before other income (expense) and income taxes............................. 31,816 13,151 53,440 21,892 Other income (expense): Interest expense......................... (30) (120) (61) (267) Investment income........................ 8,364 10,244 16,611 21,017 Other.................................... (302) 121 (304) 354 -------- -------- -------- -------- 8,032 10,245 16,246 21,104 -------- -------- -------- -------- Income before income taxes................ 39,848 23,396 69,686 42,996 Provision for income taxes................ 13,549 8,072 23,694 14,932 -------- -------- -------- -------- Net income................................ $ 26,299 $ 15,324 $ 45,992 $ 28,064 ======== ======== ======== ======== Income per common share: Net income: Basic................................... $ .34 $ .20 $ .59 $ .36 ======== ======== ======== ======== Diluted................................. $ .32 $ .20 $ .57 $ .36 ======== ======== ======== ========
See accompanying notes. -4- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS) (UNAUDITED)
COMMON STOCK TREASURY STOCK -------------------- -------------------- NUMBER ADDITIONAL RETAINED NUMBER TOTAL OF PAR PAID-IN EARNINGS OF STOCKHOLDERS' SHARES VALUE CAPITAL (DEFICIT) SHARES COST EQUITY -------- -------- -------- -------- -------- -------- -------- Balance at September 30, 1997........... 79,808 $ 7,981 $802,030 $ (3,506) 2,704 $(58,251) $748,254 Net income............................. 45,992 45,992 Issuance of common stock pursuant to stock options......................... 462 46 6,198 6,244 Issuance of common stock to retirement plan.................................. (275) (55) 1,162 887 Other.................................. (7,497) (7,497) -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 1998............... 80,270 $ 8,027 $807,953 $ 34,989 2,649 $(57,089) $793,880 ======== ======== ======== ======== ======== ======== ========
See accompanying notes. -5- STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31 ------------------------------ 1998 1997 --------- --------- Operating activities: Net income.................................................................. $ 45,992 $ 28,064 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization............................................. 19,763 17,133 Provision for losses on accounts receivable............................... 3,049 1,284 Provision for deferred income taxes....................................... 19,368 7,535 Changes in operating assets and liabilities, net of effects of business acquisitions: (Increase) decrease in accounts and notes receivable................... (16,646) 16,308 Increase in prepaid expenses and other assets.......................... (150) (5,293) Decrease in accounts payable, accrued liabilities and amounts due to Sterling Commerce, Inc................................................ (36,016) (46,556) (Decrease) increase in deferred revenue................................ (4,954) 1,471 Other.................................................................. 8,015 4,002 --------- --------- Net cash provided by operating activities............................. 38,421 23,948 Investing activities: Purchases of property and equipment......................................... (10,540) (18,094) Purchases and capitalized cost of development of computer software.......... (11,635) (9,059) Business acquisitions, net of cash acquired................................. (3,626) (2,995) Purchases of investments.................................................... (112,106) (163,298) Proceeds from sales of investments.......................................... 85,120 214,044 Other..................................................................... 1,495 398 --------- --------- Net cash (used in) provided by investing activities................... (51,292) 20,996 Financing activities: Retirement and redemption of debt and capital lease obligations............. (1,080) (6,567) Proceeds from issuance of debt.............................................. 198 7,522 Proceeds from issuance of common stock pursuant to exercise of stock options 6,244 1,310 Other....................................................................... (4,460) 1,205 --------- --------- Net cash provided by financing activities............................. 902 3,470 Effect of foreign currency exchange rate changes on cash..................... (2,250) (1,150) --------- --------- (Decrease) increase in cash and cash equivalents............................. (14,219) 47,264 Cash and cash equivalents at beginning of period............................. 435,726 524,237 --------- --------- Cash and cash equivalents at end of period................................... $ 421,507 $ 571,501 ========= ========= Supplemental cash flow information: Income taxes paid........................................................... $ 2,301 $ 5,160 ========= ========= Income tax refunds.......................................................... $ 232 $ 186 ========= =========
See accompanying notes. -6- STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Sterling Software, Inc. ("Sterling Software" or the "Company") was founded in 1981 and became a publicly owned corporation in 1983. Sterling Software is a recognized worldwide supplier of software products and services within three major markets: applications management, systems management and federal systems. Consistent with Sterling Software's decentralized operating structure, major markets are served by independently operated business groups which consist of divisions and business units that focus on specific business niches within those markets. Sterling Software believes that its decentralized organizational structure promotes operating flexibility, improves responsiveness to customer requirements and focuses management on achieving revenue and operating profit objectives. Sterling Software has historically expanded its operations through internal growth and by business and product acquisitions. Basis of Presentation The consolidated financial statements include the accounts of Sterling Software after elimination of all significant intercompany balances and transactions. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingencies at March 31, 1998 and September 30, 1997 and the results of operations for the three and six months ended March 31, 1998 and 1997. While management has based their assumptions and estimates on the facts and circumstances currently known, final amounts may differ from such estimates. Revenue Revenue from license fees for standard software products is recognized when the software is delivered, provided no significant future vendor obligations exist and collection is probable. Service revenue and revenue from products involving installation or other services are recognized as the services are performed. Product support contracts allow customers to receive updated versions of Sterling Software's products when and if they become available, as well as bug fixing, and Internet and telephone access to the Company's technical personnel. Revenue from product support contracts, including product support included in initial license fees, is recognized ratably over the contract period. All significant costs and expenses associated with product support contracts are expensed ratably over the contract period. -7- If software product transactions include the right to receive future products, a portion of the software product revenue is deferred and recognized as products are delivered. Contract accounting is applied for sales of software products requiring significant modification or customization, such that revenue is recognized only when the modification or customization is complete. When products, product support and services are billed prior to the time the related revenue is recognized, deferred revenue is recorded and related costs paid in advance are deferred. Revenue from specialized information technology ("IT") services provided to the federal government under multi-year contracts is recognized as the services are performed. Revenue for services under other long-term contracts is recognized using the percentage-of-completion method of accounting. Losses on long-term contracts are recognized when the current estimate of total contract costs indicates a loss on a contract is probable. Returns and allowances and other similar adjustments to revenue involving software products historically have not been material to the Company's results of operations. Cash Equivalents, Marketable Securities and Other Investments Cash equivalents consist primarily of highly liquid investments in investment-grade commercial paper of various issuers and repurchase agreements backed by U.S. Treasury securities, with maturities of three months or less when purchased. Cash equivalents are recorded at fair value. The Company currently invests excess cash in a diversified portfolio of marketable securities consisting of a variety of investment-grade securities, including commercial paper, medium-term notes, U.S. government obligations and certificates of deposit. The fair values for marketable securities are based on quoted market prices. All marketable securities and long-term investments are classified as available-for-sale securities. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 sets forth new rules for computing earnings per share which replace previously reported "primary" and "fully diluted" earnings per share with "basic" and "diluted" earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The Company adopted FAS 128 in the first quarter of 1998. -8- On March 11, 1998, the Sterling Software Board of Directors authorized a 2-for-1 stock split that was effected by means of a dividend consisting of one share of the Company's common stock, par value $.10 per share ("Common Stock"), for each share of Common Stock outstanding (the "Stock Split Dividend"). The Stock Split Dividend was paid April 3, 1998 to holders of record on March 20, 1998. Earnings per share amounts for all prior periods presented herein have been restated to conform with FAS 128 and to reflect the Stock Split Dividend. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 ------------------- ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Basic: Earnings applicable to common stockholders............................. $26,299 $15,324 $45,992 $28,064 ======= ======= ======= ======= Weighted average shares................... 77,413 76,931 77,297 76,895 ======= ======= ======= ======= Basic earnings per share.................. $ .34 $ .20 $ .59 $ .36 ======= ======= ======= ======= Diluted: Earnings applicable to common stockholders............................. $26,299 $15,324 $45,992 $28,064 ======= ======= ======= ======= Weighted average shares................... 77,413 76,931 77,297 76,895 Effect of dilutive employee stock options. 4,704 490 3,871 1,117 ------- ------- ------- ------- 82,117 77,421 81,168 78,012 ======= ======= ======= ======= Diluted earnings per share................ $ .32 $ .20 $ .57 $ .36 ======= ======= ======= =======
Foreign Currency Translation The financial statements of the Company's subsidiaries outside the United States are generally prepared using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at exchange rates in effect as of the applicable balance sheet date and any resulting translation adjustments are included as an adjustment to retained earnings. Revenue and expense items of these subsidiaries are translated at average exchange rates during the month the transactions occur. Gains and losses from foreign currency transactions are included in net earnings. Foreign currency transaction gains and losses historically have not been material to the Company's results of operations. -9- 2. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim consolidated financial information contained herein is unaudited but, in the opinion of management, includes all adjustments which are of a normal recurring nature and are necessary for a fair presentation of the financial position and results of operations for the periods presented. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire fiscal year. The information included in this report should be read in conjunction with the information presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 3. COMMITMENTS AND CONTINGENCIES The Company is subject to certain legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the amount of the liability, if any, ultimately incurred by Sterling Software with respect to any existing proceedings and claims, net of applicable reserves and available insurance, will not materially affect the financial condition or results of operations of the Company. 4. SEGMENT INFORMATION The Company acquires, develops, markets and supports a broad range of computer software products and services in three major markets: applications management, systems management and federal systems. Major markets are represented through independently operated business segments. The applications management business segment provides application development products and services for business modeling through code generation, as well as products and services that enable customers to extend the life and usefulness of legacy applications and to facilitate enterprise information access. The systems management business segment provides products that enable customers to ensure the quality of service of IT applications across enterprise networked computing environments. The federal systems business segment provides specialized IT services to the federal government under numerous multi-year contracts primarily in support of two major customers, the National Aeronautics and Space Administration ("NASA") and the Department of Defense. Through June 30, 1997, the Company's international operations sold, marketed and provided first-level support outside of the United States and Canada for the interchange and communications software products of Sterling Commerce, Inc. ("Sterling Commerce"), the results of which are included in the business segment information under "Corporate and other". -10- Financial information concerning the Company's operations, by business segment, for the three and six months ended March 31, 1998 and 1997, is summarized as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED MARCH 31 ENDED MARCH 31 ---------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenue: Applications Management................... $ 73,178 $ 21,834 $145,653 $ 43,786 Systems Management........................ 50,314 43,916 92,375 80,866 Federal Systems........................... 35,905 27,954 69,570 55,812 Corporate and other....................... 13,040 628 23,421 -------- -------- -------- -------- Consolidated totals....................... $159,397 $106,744 $308,226 $203,885 ======== ======== ======== ======== Operating Profit (Loss): Applications Management................... $ 18,730 $ 2,824 $ 32,076 $ 5,048 Systems Management........................ 18,680 17,099 32,518 29,988 Federal Systems........................... 2,468 2,303 4,707 4,698 Corporate and other....................... (8,062) (9,075) (15,861) (17,842) -------- -------- -------- -------- Consolidated totals...................... $ 31,816 $ 13,151 $ 53,440 $ 21,892 ======== ======== ======== ========
The amounts presented for "Corporate and other" include corporate expense, inter-segment eliminations, the results of operations of the Company's retail software division and, for the three and six months ended March 31, 1997, the results of operations relating to the international distribution of Sterling Commerce's interchange and communications software products. 5. INCREASE IN AUTHORIZED COMMON STOCK AND STOCK SPLIT DIVIDEND On March 11, 1998, the Sterling Software stockholders approved an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of Common Stock from 75,000,000 shares to 125,000,000 shares. Also on March 11, 1998, the Board of Directors of Sterling Software authorized a 2-for-1 stock split that was effected by means of the Stock Split Dividend. The Stock Split Dividend was paid on April 3, 1998 to holders of record of outstanding shares of Common Stock at the close of business on March 20, 1998. Common stock, treasury stock and earnings per share information included in this report have been restated to reflect the Stock Split Dividend. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS COMBINATIONS AND DIVESTITURES Acquisition of TI Software On June 30, 1997, Sterling Software completed the acquisition (the "Acquisition") of certain assets (including the capital stock of certain foreign subsidiaries) of Texas Instruments Incorporated ("Texas Instruments") for approximately $214,774,000, including costs directly related to the Acquisition of approximately $49,774,000. Such assets constitute substantially all of the assets used by Texas Instruments' Software Division ("TI Software") in its business of developing, marketing, licensing, supporting and maintaining application development software and providing related consulting services. The results of operations of TI Software are included in the Company's results of operations from the date of the Acquisition. Termination of International Distributor Agreement Effective as of June 30, 1997, Sterling Software and Sterling Commerce, formerly a wholly owned subsidiary of Sterling Software formed to operate the business of Sterling Software's former Electronic Commerce Group, completed an agreement terminating the International Distributor Agreement dated March 4, 1996 (the "International Distributor Agreement"), pursuant to which Sterling Software acted as the exclusive distributor of Sterling Commerce's interchange and communications software products in markets outside the United States and Canada. The results of the Company's international operations related to selling, marketing and providing first level support of these products outside of the United States and Canada for the three and six months ended March 31, 1997 are included in the business segment information presented herein under "Corporate and other". RESULTS OF OPERATIONS Three Months Ended March 31, 1998 and 1997 Total revenue increased $52,653,000, or 49%, in the second quarter of 1998 over the same period of 1997 due to revenue increases in all three of the Company's business segments, partially offset by a decline in corporate and other revenue due to the termination of the International Distributor Agreement with Sterling Commerce in the third quarter of 1997. Revenue from the applications management, systems management and federal systems business segments increased 235%, 15% and 30%, respectively, in the second quarter of 1998 over the same period in 1997. Both the applications management business segment as well as the federal systems business segment benefited substantially from the domestic and international operations acquired by Sterling Software in the Acquisition. -12- Total revenue generated from the Company's international operations was $60,176,000 and $39,571,000 in the second quarter of 1998 and 1997, respectively, representing an increase of $20,605,000, or 52%, due to increases in the applications management business segment (up 542%) and in the systems management business segment (up 9%). The increase in international revenue was partially offset by a decline in revenue from sales of Sterling Commerce's interchange and communications software products and services due to the termination of the International Distributor Agreement in the third quarter of 1997. In addition, international operating results in the second quarter of 1998 were adversely impacted by foreign currency exchange rate fluctuations as a result of a stronger U.S. dollar. Had foreign currency exchange rates remained consistent with the same period of the previous year, international revenue would have been higher in the second quarter of 1998 by approximately $4,000,000. Revenue from the Company's international operations represented 38% and 37% of total revenue in the second quarter of 1998 and 1997, respectively. The Company's recurring revenue includes revenue from product support agreements generally having terms ranging from one to three years and federal contracts generally having terms ranging from one to five years. Like most federal contracts, Sterling Software's federal contracts permit termination by the government for convenience or for failure to obtain funding. Recurring revenue decreased to 47% of total revenue in the second quarter of 1998 compared to 54% in the same period of 1997, primarily due to the significant increase in products and services revenue from the applications management business segment. Overall, services revenue increased from 28% of total revenue in the second quarter of 1997 to 34% of total revenue for the same period of 1998. This increase resulted primarily from generally higher levels of consulting services associated with product sales in the applications management segment. The Company currently expects that revenue from services will continue to constitute a larger percentage of the Company's total revenue in future reporting periods than was the case prior to the Acquisition. Revenue from the applications management business segment increased $51,344,000, or 235%, in the second quarter of 1998 over the same period of 1997 due to a 194% increase in products revenue, a 150% increase in product support revenue and a 1,014% increase in services revenue. The significant increase in revenue from the applications management business segment is primarily attributable to revenue from the Applications Development and Applications International divisions, which include the non-federal domestic and international operations, respectively, acquired in the Acquisition. Approximately 50% of the applications management business segment's total revenue in the second quarter of 1998 was derived from the Company's international operations, compared to 26% in the same period of 1997. Revenue from the systems management business segment increased $6,398,000, or 15%, in the second quarter of 1998 over the same period of 1997 primarily due to a 24% increase in products revenue attributable to increased domestic and international product sales across all three product lines. Product support revenue in the second quarter of 1998 was consistent with product support revenue in the same period of 1997 due to the adverse impact of foreign currency exchange rate fluctuations as a result of a stronger U.S. dollar. Approximately 47% of the systems management business segment's total revenue in the second quarter of 1998 was derived from the Company's international operations, compared to 49% in the same period of 1997. -13- Revenue from the federal systems business segment increased $7,951,000, or 28%, in the second quarter of 1998 over the same period of 1997 due primarily to a contract added to the Company's federal systems business segment as a result of the Acquisition and, to a lesser extent, to higher contract billings in both the Information Technology Division and the Scientific Systems Division. As previously reported, in June of 1997 NASA announced that the Company was not selected for continuation of a contract with NASA's Ames Research Center. After NASA's initial selection of another bidder was rescinded, a number of months elapsed while NASA re-evaluated the procurement. In April of 1998, NASA announced that it had once again awarded the contract to the bidder originally selected in June of 1997. After evaluating its alternatives, the Company decided to work together with NASA to achieve an orderly transition of the procurement. In order to assist in this transition, the Company will continue to provide services under the pre-existing contract through June 30, 1998. The loss of this contract will not have a material effect on the Company's profit in future reporting periods. Total costs and expenses increased $33,988,000, or 36%, in the second quarter of 1998 compared to the same period of 1997, and represented 80% and 88% of total revenue in the second quarter of 1998 and 1997, respectively. Total cost of sales increased $16,134,000, or 36%, in the second quarter of 1998 compared to the same period of 1997, and represented 38% and 42% of total revenue in the second quarter of 1998 and 1997, respectively. Cost of sales for products and product support decreased $4,519,00, or 24%, in the second quarter of 1998 compared to the same period of 1997 and represented 14% and 25% of products and product support revenue in the second quarter of 1998 and 1997, respectively. The decrease in cost of sales for products and product support is primarily attributable to the decrease in royalties payable to Sterling Commerce due to the termination of the International Distributor Agreement, as well as a decrease in royalties payable to other third parties related to products no longer marketed by the Company. Cost of sales for services increased $20,653,000, or 79%, in the second quarter of 1998 compared to the same period of 1997 and represented 87% of revenue in both the second quarter of 1998 and 1997. The significant increase in cost of sales for services is primarily attributable to the increase in services revenue from the applications management business segment. Product development expense for the second quarter of 1998 was $7,812,000, net of $6,345,000 of capitalized software costs, as compared with product development expense in the same period of 1997 of $5,011,000, net of $4,729,000 of capitalized software costs. Gross product development expense was 11% of non-federal revenue in the second quarter of 1998 compared with 12% for the same period of 1997. Capitalized development costs represented 45% of gross development costs in the second quarter of 1998 compared with 49% of gross development costs for the same period of 1997. Product development expenses and the capitalization rate historically have fluctuated, and may in the future continue to fluctuate, from period to period depending in part upon the number and status of software development projects that are in process. Selling, general and administrative expenses increased $15,053,000, or 35%, in the second quarter of 1998 compared to the same period of 1997, and represented 37% and 41% of total revenue in the second quarter of 1998 and 1997, respectively. The decrease in selling, general and administrative expenses as a percentage of total revenue is primarily attributable to the cost structure implemented by the Company as a result of the Acquisition, the related reorganization in the third quarter of 1997 and cost savings resulting from the termination of the Company's International Distributor Agreement with Sterling Commerce. -14- Investment income decreased $1,880,000 in the second quarter of 1998 compared to the same period of 1997 as a result of lower average cash and cash equivalents balances primarily due to the use of cash in connection with the Acquisition and the related reorganization in the third quarter of 1997. Income before income taxes in the second quarter of 1998 was $39,848,000 compared to $23,396,000 for the same period of 1997. The increase of $16,452,000, or 70%, in the second quarter of 1998 over the same period of 1997 in income before income taxes is primarily attributable to higher profits in the applications management and systems management business segments partially offset by a decline in investment income. Six Months Ended March 31, 1998 and 1997 Total revenue increased $104,341,000, or 51%, in the first six months of 1998 over the same period of 1997 due to revenue increases in all three of the Company's business segments, partially offset by a decline in corporate and other revenue due to the termination of the International Distributor Agreement with Sterling Commerce in the third quarter of 1997. Revenue from the applications management, systems management and federal systems business segments increased 233%, 14% and 25%, respectively, in the first six months of 1998 over the same period in 1997. Both the applications management business segment as well as the federal systems business segment benefited substantially from the domestic and international operations acquired by Sterling Software in the Acquisition. Total revenue generated from the Company's international operations was $118,891,000 and $74,959,000 in the first six months of 1998 and 1997, respectively, representing an increase of $43,932,000, or 59%, due to increases in the applications management business segment (up 499%) and in the systems management business segment (up 9%). The increase in international revenue was partially offset by a decline in revenue from sales of Sterling Commerce's interchange and communications software products and services due to the termination of the International Distributor Agreement in the third quarter of 1997. In addition, international operating results in the first six months of 1998 were adversely impacted by foreign currency exchange rate fluctuations as a result of a stronger U.S. dollar. Had foreign currency exchange rates remained consistent with the same period of the previous year, international revenue would have been higher in the first six months of 1998 by approximately $9,000,000. Revenue from the Company's international operations represented 39% and 37% of total revenue in the first six months of 1998 and 1997, respectively. The Company's recurring revenue includes revenue from product support agreements generally having terms ranging from one to three years and federal contracts generally having terms ranging from one to five years. Like most federal contracts, Sterling Software's federal contracts permit termination by the government for convenience or for failure to obtain funding. Recurring revenue decreased to 49% of total revenue in the first six months of 1998 compared to 57% in the same period of 1997, primarily due to the significant increase in products and services revenue from the applications management business segment. Overall, services revenue increased from 30% of total revenue in the first six months of 1997 to -15- 34% of total revenue for the same period of 1998. This increase resulted primarily from generally higher levels of consulting services associated with product sales in the applications management segment. The Company currently expects that revenue from services will continue to constitute a larger percentage of the Company's total revenue in future reporting periods than was the case prior to the Acquisition. Revenue from the applications management business segment increased $101,867,000, or 233%, in the first six months of 1998 over the same period of 1997 due to a 207% increase in products revenue, a 143% increase in product support revenue and a 809% increase in services revenue. The significant increase in revenue from the applications management business segment is primarily attributable to revenue from the Applications Development and Applications International divisions, which include the non-federal domestic and international operations, respectively, acquired in the Acquisition. Approximately 51% of the applications management business segment's total revenue in the first six months of 1998 was derived from the Company's international operations, compared to 28% in the same period of 1997. Revenue from the systems management business segment increased $11,509,000, or 14%, in the first six months of 1998 over the same period of 1997 primarily due to a 27% increase in products revenue partially offset by a 3% decline in product support revenue due in part to the adverse impact of foreign currency exchange rate fluctuations as a result of a stronger U.S. dollar. The increase in products revenue was mainly attributable to strong domestic and international product sales in the operations management and storage management product lines. Approximately 48% of the systems management business segment's total revenue in the first six months of 1998 was derived from the Company's international operations, compared to 50% in the same period of 1997. Revenue from the federal systems business segment increased $13,758,000, or 25%, in the first six months of 1998 over the same period of 1997 due primarily to a contract added to the Company's federal systems business segment as a result of the Acquisition and, to a lesser extent, to higher contract billings in both the Information Technology Division and the Scientific Systems Division. Total costs and expenses increased $72,793,000, or 40%, in the first six months of 1998 compared to the same period of 1997, and represented 83% and 89% of total revenue in the first six months of 1998 and 1997, respectively. Total cost of sales increased $33,089,000, or 38%, in the first six months of 1998 compared to the same period of 1997, and represented 39% and 43% of total revenue in the first six months of 1998 and 1997, respectively. Cost of sales for products and product support decreased $5,578,000, or 16%, in the first six months of 1998 compared to the same period of 1997 and represented 15% and 25% of products and product support revenue in the first six months of 1998 and 1997, respectively. The decrease in cost of sales for products and product support is primarily attributable to the decrease in royalties payable to Sterling Commerce due to the termination of the International Distributor Agreement, as well as a decrease in royalties payable to other third parties related to products no longer marketed by the Company. Cost of sales for services increased $38,667,000, or 74%, in the first six months of 1998 compared to the same period of 1997 and represented 87% of revenue in both the first six months of 1998 and 1997. The significant increase in cost of sales for services is primarily attributable to the increase in services revenue from the applications management business segment. Product development expense for the first six months of 1998 was $16,665,000, net of $11,470,000 of capitalized software costs, as compared with product development expense in the first six months of 1997 of $9,817,000, net of $9,009,000 of capitalized software costs. Gross -16- product development expense was 12% of non-federal revenue in the first six months of 1998 compared with 13% for the same period of 1997. Capitalized development costs represented 41% of gross development costs in the first six months of 1998 compared with 48% of gross development costs for the same period of 1997. Product development expenses and the capitalization rate historically have fluctuated, and may in the future continue to fluctuate, from period to period depending in part upon the number and status of software development projects that are in process. Selling, general and administrative expenses increased $32,856,000, or 39%, in the first six months of 1998 compared to the same period of 1997, and represented 38% and 41% of total revenue in the first six months of 1998 and 1997, respectively. The decrease in selling, general and administrative expenses as a percentage of total revenue is primarily attributable to the cost structure implemented by the Company as a result of the Acquisition, the related reorganization in the third quarter of 1997 and cost savings resulting from the termination of the Company's International Distributor Agreement with Sterling Commerce. Investment income decreased $4,406,000 in the first six months of 1998 compared to the same period of 1997 as a result of lower average cash and cash equivalents balances primarily due to the use of cash in connection with the Acquisition and the related reorganization in the third quarter of 1997. Income before income taxes in the first six months of 1998 was $69,686,000 compared to $42,996,000 for the same period of 1997. The increase of $26,690,000, or 62%, in the first six months of 1998 over the same period of 1997 in income before income taxes is primarily attributable to higher profits in the applications management and systems management business segments partially offset by a decline in investment income. LIQUIDITY AND CAPITAL RESOURCES The Company maintained a strong liquidity and financial position with $619,955,000 of working capital at March 31, 1998, which includes $421,507,000 of cash and cash equivalents and $234,750,000 of marketable securities. Net cash provided by operating activities was $38,421,000 in the first six months of 1998 compared to $23,948,000 for the same period of 1997. Net cash provided by operating activities in the first six months of 1998 was reduced by payments made during the period of approximately $20,499,000 directly related to the Acquisition and the related reorganization that occurred in the third quarter of 1997. Net cash provided by operating activities in the first six months of 1997 was reduced by payments of approximately $32,000,000 made to Sterling Commerce during the period. Investing activities used $51,292,000 in cash during the first six months of 1998 while providing $20,996,000 in cash for the same period of 1997. Capital expenditures for the first six months of 1998 were $10,540,000 compared to $18,094,000 for the same period of 1997. Purchases and capitalized costs of computer software were $11,635,000 and $9,059,000 for the first six months of 1998 and 1997, respectively. Cash provided by operating activities, together with other available cash, were used to fund capital expenditures and additions to computer software. -17- The Company used $1,348,000 for financing activities during the first six months of 1998 while $3,470,000 was provided in the same period of 1997. Effective July 1, 1997, the Company entered into an amended Revolving Credit Agreement ("Credit Agreement") with an unsecured borrowing capacity of $35,000,000 and a stated maturity of June 30, 2000. The Credit Agreement requires that the Company maintain certain financial ratios. Borrowings under the Credit Agreement bear interest at the lower of the lender's base rate or a Eurodollar lending rate plus one-half percent. No amounts were borrowed under the Credit Agreement during the first six months of 1998 or 1997. At March 31, 1998, the Company's existing short and long-term cash commitments, including remaining costs related to the Acquisition and the related reorganization in the third quarter of 1997, consisted primarily of commitments under lease arrangements for office space and equipment. The Company intends to meet such obligations primarily from cash provided by operating activities. The Company believes available cash balances, cash equivalents and short- term investments combined with cash provided by operating activities and amounts available under existing credit agreements are sufficient to meet the Company's cash requirements for the foreseeable future. OTHER MATTERS Demand for many of the Company's products tends to increase with increases in the rate of inflation as customers strive to improve employee productivity and reduce costs. However, the effect of inflation on the Company's relatively labor intensive cost structure could adversely affect its results of operations to the extent the Company is unable to recover increased operating costs through increased prices for, or increased sales of, its products and services. The assets and liabilities of the Company's non-U.S. operations are translated into U.S. dollars at exchange rates in effect as of the applicable balance sheet dates, and revenue and expense accounts of these operations are translated at average exchange rates during the month the transactions occur. Unrealized translation gains and losses are included as an adjustment to retained earnings. The Company has mitigated a portion of its currency exposure through decentralized sales, marketing and support operations and through international development facilities, in which substantially all costs are local-currency based. In the past, the Company has entered, and may in the future enter, into hedging transactions in an effort to reduce its exposure to currency exchange risks. The Company maintains a strategy of seeking to acquire businesses and products to fill strategic market niches. This acquisition strategy has contributed in part to the Company's growth in revenue and operating profit before reorganization and purchased research and development costs. The impact of future acquisitions on continued growth in revenue and operating profit cannot presently be determined. -18- 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, and information currently available to, the Company's management, as well as estimates and assumptions made by the Company's management. When used in SEC Filings, words such as "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 markets and 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 or outcomes may vary significantly from those anticipated, believed, estimated, expected, intended or planned. -19- PART II - OTHER INFORMATION Item 1. Legal Proceedings. On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc. ("KnowledgeWare"), in a stock-for-stock acquisition. On March 14, 1995, the Securities and Exchange Commission (the "Commission") entered an Order Directing Private Investigation and Designating Officers to take Testimony titled "In the Matter of KnowledgeWare, Inc. (NY-6231)". The investigation generally relates to (i) trading in KnowledgeWare securities from July 1, 1992 through the time of the stock-for-stock transaction by which Sterling Software acquired KnowledgeWare, (ii) KnowledgeWare's compliance with its filing and reporting obligations under the federal securities laws and (iii) the adequacy and/or accuracy of KnowledgeWare's public disclosures, recordkeeping and accounting controls. In February of 1998, the staff of the Commission informally advised Sterling Software that the Commission does not intend to pursue any enforcement actions against Sterling Software or the Company's wholly owned subsidiary that was the surviving corporation in the KnowledgeWare merger. Also in February of 1998, the Commission notified certain individuals who were formerly associated with KnowledgeWare that the Commission may pursue civil enforcement actions against them, and invited these individuals to make submissions to the Commission responding to the allegations and analysis of the Commission staff. Sterling Software may have an indemnity obligation with respect to certain of these individuals. While any legal investigation or proceeding involves inherent uncertainty, Sterling Software's management believes based upon presently available information that the ultimate resolution of this matter will not materially affect the financial condition or results of operations of the Company. The Company is also subject to certain legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the amount of the liability, if any, ultimately incurred by Sterling Software with respect to any such existing proceedings and claims, net of applicable reserves and available insurance, will not materially affect the financial condition or results of operations of the Company. -20- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on March 11, 1998, at which the stockholders of the Company voted on and approved the following: 1. The election of three Class B directors of the Company for terms expiring at the Company's Annual Meeting of Stockholders in 2001. 2. The amendment of the Company's Certificate of Incorporation to increase the number of shares of authorized Common Stock from 75,000,000 shares to 125,000,000 shares. 3. The approval of the Sterling Software, Inc. Employee Stock Purchase Plan. The voting with respect to each of these matters was as follows: 1. Election of Directors --------------------- Name For Withheld ---- ---------- -------- Charles J. Wyly, Jr. 33,535,231 387,386 Phillip A. Moore 33,540,677 381,940 Michael C. French 33,139,297 783,321 2. Amendment to the Company's Certificate of Incorporation ------------------------------------------------------- For Against Abstentions --- ------- ----------- 31,218,072 2,599,657 104,888 3. Approval of the Sterling Software, Inc. Employee Stock Purchase Plan -------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 32,557,803 1,244,220 120,594 -21- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q: 2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas Instruments Incorporated and the Company (1) 2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by and between Texas Instruments Incorporated, the Company and certain subsidiaries of the Company, and Amendment No. 2 to Asset Purchase Agreement, dated June 28, 1997, by and between Texas Instruments Incorporated, the Company and certain subsidiaries of the Company (2) 3.1 Certificate of Incorporation of the Company, as amended (3) 3.2 Restated Bylaws of the Company (4) 4.1 Rights Agreement, dated as of December 18, 1996, by and between the Company and BankBoston, N.A., as Rights Agent (5) 4.2 First Amendment to Rights Agreement, dated as of March 12, 1998, by and between the Company and BankBoston, N.A., as Rights Agent (5) 10.1 Sterling Software, Inc. Amended and Restated Employee Stock Purchase Plan (3), (6) 10.2 Form of Amendment to Stock Option Agreement, dated March 20, 1998, between the Company and each of its executive officers (3), (6) 27 Financial Data Schedule (3) - ------------- (1) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. In accordance with Item 601 of Regulation S-K, this copy of the Asset Purchase Agreement does not include the schedules or exhibits thereto, which schedules and exhibits are listed in the table of contents to the Asset Purchase Agreement. The Company agrees to furnish supplementary to the Securities and Exchange Commission a copy of such schedules and exhibits upon request. (2) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated June 30, 1997, as amended, and incorporated herein by reference. (3) Filed herewith. (4) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 and incorporated herein by reference. -22- (5) Previously filed as an exhibit to the Company's Registration Statement on Form 8-A/A filed April 3, 1998 and incorporated herein by reference. (6) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. None. -23- 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: April 28, 1998 By: /s/Sterling L. Williams -------------------------------------------- Sterling L. Williams President, Chief Executive Officer and Director Date: April 28, 1998 /s/ R. Logan Wray ------------------------------------------- R. Logan Wray Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -24- EXHIBIT INDEX ------------- EXHIBIT NO. Description - ------- ------------------------------------------------------------ 2.1 Asset Purchase Agreement, dated April 18, 1997, by and between Texas Instruments Incorporated and the Company (1) 2.2 Amendment No. 1 to Asset Purchase Agreement, dated June 19, 1997, by and between Texas Instruments Incorporated, the Company and certain subsidiaries of the Company, and Amendment No. 2 to Asset Purchase Agreement, dated June 28, 1997, by and between Texas Instruments Incorporated, the Company and certain subsidiaries of the Company (2) 3.1 Certificate of Incorporation of the Company, as amended (3) 3.2 Restated Bylaws of the Company (4) 4.1 Rights Agreement, dated as of December 18, 1996, by and between the Company and BankBoston, N.A., as Rights Agent (5) 4.2 First Amendment to Rights Agreement, dated as of March 12, 1998, by and between the Company and BankBoston, N.A., as Rights Agent (5) 10.1 Sterling Software, Inc. Amended and Restated Employee Stock Purchase Plan (3), (6) 10.2 Form of Amendment to Stock Option Agreement, dated March 20, 1998, between the Company and each of its executive officers (3), (6) 27 Financial Data Schedule (3) - ------------- (1) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. In accordance with Item 601 of Regulation S-K, this copy of the Asset Purchase Agreement does not include the schedules or exhibits thereto, which schedules and exhibits are listed in the table of contents to the Asset Purchase Agreement. The Company agrees to furnish supplementary to the Securities and Exchange Commission a copy of such schedules and exhibits upon request. (2) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated June 30, 1997, as amended, and incorporated herein by reference. (3) Filed herewith. (4) Previously filed as an exhibit to the Company's Registration Statement No. 33-47131 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Registration Statement on Form 8-A/A filed April 3, 1998 and incorporated herein by reference. (6) Management contract or compensatory plan or arrangement. 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 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 amendment is as follows: RESOLVED, that, subject to approval of the Charter Amendment by the requisite vote of the Company's stockholders, the first paragraph of Article IV of the Company's Certificate of Incorporation be amended to read in its entirety as follows: "The total number of shares of stock of all classes which the corporation shall have authority to issue is One Hundred Thirty-Five Million (135,000,000), consisting of One Hundred Twenty-Five Million (125,000,000) 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. IN WITNESS WHEREOF, Sterling Software, Inc. has caused this certificate to be signed by Don J. McDermett, Jr., its Senior Vice President, on this 11th day of March, 1998. By: /s/ Don J. McDermett, Jr. -------------------------- Don J. McDermett, Jr. Senior Vice President AMENDED CERTIFICATE OF DESIGNATIONS 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: 1. 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 on December 26, 1996 created a series of 750,000 shares of Preferred Stock designated Series A Junior Participating Preferred Stock, of which no shares have been issued. 2. That pursuant to authority vested in the Board of Directors of the Company by its Certificate of Incorporation and the General Corporation Law of the State of Delaware, the Board of Directors on March 11, 1998 adopted a resolution providing for the amendment and restatement of the Certificate of Designations of the Series A Junior Participating Preferred Stock solely to effect an increase in the number of shares constituting such Series A Junior Participating Preferred Stock as follows: 1 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 1,250,000. Such number of shares may be increased or decreased by resolution of the Board of Directors of the Company (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 after the filing of this Amended Certificate of Designations (this "Certificate") with the Secretary of State of the State of Delaware (the "Delaware Secretary of State") (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the 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. 2 (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 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 after the filing of this Certificate with the Delaware Secretary of State (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the 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. 3 (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, 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 solely 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. 4 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 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 after the filing of this Certificate with the Delaware Secretary of State (i) declares a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iv) issues any shares of its capital stock in a reclassification of the outstanding shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the 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. 5 VIII. 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 after the filing of this Certificate with the Delaware Secretary of State (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. 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 Amended Certificate of Designations is executed on behalf of the Company by its Senior Vice President and General Counsel attested by its Assistant Secretary this 12th day of March, 1998. /s/ Don J. McDermett, Jr. ---------------------------------- Don J. McDermett, Jr. Senior Vice President and General Counsel Attest: /s/ Mark H. Kleinman - -------------------- Mark H. Kleinman, Assistant Secretary 7 EX-10.1 3 AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.1 STERLING SOFTWARE, INC. AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN (Effective as of March 20, 1998) STERLING SOFTWARE, INC. AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN Table of Contents ----------------- I. Purpose of the Plan.................................................... 1 II. Administration of the Plan............................................. 1 III. Stock Subject to Plan.................................................. 1 IV. Purchase Periods....................................................... 2 V. Eligibility............................................................ 2 VI. Payroll Deductions; Additional Contributions; Shortfall Contributions.. 2 VII. Purchase Rights........................................................ 4 VIII. Accrual Limitations.................................................... 6 IX. Effective Date and Term of the Plan.................................... 7 X. Amendment of the Plan.................................................. 7 XI. General Provisions..................................................... 8 Appendix.....................................................................A-1 STERLING SOFTWARE, INC. AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN ------------------------------------------------- I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of Sterling Software, Inc. and certain of its subsidiaries by providing eligible employees with the opportunity to acquire a proprietary interest in the Company through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN A. The Plan Administrator shall administer the Plan and shall have full authority and discretion to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary, and to take any action it may deem necessary in order to comply with the requirements of Section 423 of the Code. Decisions of the Plan Administrator and the Administrative Committee described in paragraph B. below shall be final and binding on all parties having an interest in the Plan. The Plan Administrator shall have full authority and discretion to retain and engage such third party firms (including, without limitation, brokerage and record keeping firms) as it shall from time to time deem advisable or appropriate. B. The Administrative Committee for the Plan shall have the full authority and discretion to designate Corporate Affiliates (other than domestic subsidiaries of the Company) as Participating Companies from time to time and to terminate any such designation; to decide any questions relating to the administration of the Plan that are referred to the Administrative Committee by the Plan Administrator; and to amend the Plan as provided in Section X. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued Common Stock or shares of Common Stock held in the Company's treasury. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 3,500,000 shares. B. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. PURCHASE PERIODS Shares of Common Stock shall be offered for purchase under the Plan through a series of successive Purchase Periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the Effective Date shall be eligible to participate in the Plan on the first day of any Purchase Period under the Plan, provided such individual remains an Eligible Employee on such day. Until the Administrative Committee designates one or more foreign subsidiaries of the Company as a Participating Company, eligibility to participate in the Plan shall be limited to Eligible Employees employed by the Company or by a U.S. subsidiary of the Company. B. Each individual who becomes an Eligible Employee after the Effective Date shall be eligible to participate in the Plan on the first day of any Purchase Period commencing thereafter, provided such individual remains an Eligible Employee on such day. C. To participate in the Plan for a particular Purchase Period, an Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator and file such forms with the Plan Administrator (or its designee) before the first day of such Purchase Period. An Eligible Employee's enrollment in the Plan for a Purchase Period will remain in effect for all subsequent Purchase Periods until modified or terminated by the Eligible Employee or until he or she no longer qualifies as an Eligible Employee. VI. PAYROLL DEDUCTIONS; ADDITIONAL CONTRIBUTIONS; SHORTFALL CONTRIBUTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan may be any whole multiple of one percent (1%) of the Eligible Compensation paid to the Participant during each Purchase Period, up to a maximum of twenty-five percent (25%). The deduction rate so authorized shall continue in effect for the entire Purchase Period. The Participant may not increase his or her rate of payroll deduction during a Purchase Period. However, the Participant may, at any time prior to the tenth (10th) Business Day immediately preceding the Purchase Date for the Purchase Period, reduce his or her rate of payroll deduction to any whole percentage or to zero, such reduction to become effective prospectively as soon as administratively feasible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Period. If a Participant reduces his or her payroll deductions to zero, the 2 Participant's previous payroll deductions for the Purchase Period will still be applied to the purchase of shares of Common Stock on the Purchase Date, unless the Participant elects to terminate his or her purchase rights for the Purchase Period in accordance with Section VII.E. B. Payroll deductions shall begin on the first pay day of each Purchase Period and shall (unless sooner terminated) continue through the pay day ending on or immediately prior to the last day of the Purchase Period. The amounts so collected shall be credited to the Participant's Account under the Plan. Except as otherwise provided in paragraph D below, Interest shall accrue and be credited on each pay day in the Purchase Period on the amount of the Participant's Account balance that has been credited to the Participant's Account during the entire pay period ending on such pay day. No Interest will accrue or be credited on any amount that is credited to the Participant's Account for any period that is less than a full pay period. Payroll deduction amounts, Additional Contribution amounts and credited Interest need not be held in any segregated account or trust fund and may be commingled with the general assets of the Company and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. In addition to payroll deductions, a Participant may make one Additional Contribution to the Plan during each Purchase Period. An Additional Contribution may be made in cash, by personal check or in any other form permitted from time to time by the Plan Administrator. All Additional Contributions will be credited to the Participant's Account and will be credited with Interest. Such Interest will accrue and be credited to the Participant's Account in the same manner as Interest is accrued and credited to the Participant's Account under paragraph B of this Section. An Eligible Employee who has not authorized payroll deductions, or who has terminated payroll deductions, for a Purchase Period may not thereafter make an Additional Contribution to the Plan for such Purchase Period. E. A Participant whose net pay after all deductions therefrom on any given pay day is not sufficient to fund the payroll deduction authorized by the Participant for a Purchase Period shall be permitted to fund any such shortfall by contributing the amount thereof to the Plan in cash, by personal check or in any other form permitted from time to time by the Plan Administrator ("Shortfall Contributions"). Shortfall Contributions must be contributed to the Plan before the tenth (10th) Business Day immediately preceding the Purchase Date for the Purchase Period. Interest will accrue and be credited in respect of Shortfall Contributions in the same manner as for Additional Contributions. All references in this Plan to payroll deductions also shall be deemed to refer to and include Shortfall Contributions, except where the context clearly requires otherwise. 3 VII. PURCHASE RIGHTS A. A Participant shall be granted a separate purchase right on the first day of each Purchase Period in which he or she participates. The purchase right shall provide the Participant with the right to purchase shares of Common Stock on the Purchase Date upon the terms set forth below. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Section 424(d) of the Code) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Corporate Affiliate. B. Each purchase right shall be automatically exercised on the Purchase Date, and shares of Common Stock shall accordingly be purchased on such date on behalf of each Participant participating in the related Purchase Period (other than any Participant whose payroll deductions have previously been refunded in accordance with paragraph E below). The purchase shall be effected by applying the Participant's Account balance as of the last day of the Purchase Period (including Interest credited through such day) to the purchase of shares of Common Stock (subject to the limitation on the maximum number of shares purchasable per Participant) at the Purchase Price in effect for that Purchase Period. C. The number of shares of Common Stock purchasable by a Participant on each Purchase Date shall be the number of whole shares obtained by dividing the Participant's Account balance on the last day of the Purchase Period by the Purchase Price in effect for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed 6,000 shares. D. Any portion of the Participant's Account balance that is not applied to the purchase of shares of Common Stock on any Purchase Date because such portion is not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date, unless the Participant has elected not to participate during the next Purchase Period, in which case the Participant's entire remaining Account balance shall be refunded to the Participant as soon as administratively feasible. Any portion of the Participant's Account balance that is not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date shall be refunded as soon as administratively feasible. E. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the tenth (10th) Business Day immediately preceding the Purchase Date for the Purchase Period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designee), and no further payroll deductions or Additional Contributions shall be collected from or made by the Participant with respect to such terminated purchase right. The Participant's entire Account 4 balance as of the effective date of such termination shall be refunded as soon as administratively feasible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the Purchase Period for which the terminated purchase right was granted. In order to resume participation in any subsequent Purchase Period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) before the first day of the new Purchase Period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in employment status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and the Participant's entire Account balance shall be refunded as soon as administratively feasible. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the tenth (10th) Business Day immediately preceding the Purchase Date for the Purchase Period in which such leave commences, to withdraw his or her entire Account balance. If a Participant on such an unpaid leave does not exercise this right, such Participant's Account balance shall be held for the purchase of shares at the next Purchase Date. In no event, however, shall any Additional Contributions or any further payroll deductions be collected on the Participant's behalf during any such unpaid leave. Upon the return to active service of any Participant previously on unpaid leave, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, unless the Participant elected to withdraw his or her Account balance for the Purchase Period in which the leave commenced. (iv) Notwithstanding any other provision of the Plan to the contrary, a Participant's purchase rights with respect to a Purchase Period shall terminate, and his or her Account balance shall be refunded as soon as administratively feasible, if the Participant's employment with the Participating Companies terminates for any reason on or before the Purchase Date for such Purchase Period. F. Each outstanding purchase right shall automatically be exercised, immediately prior to the date any Corporate Transaction is consummated, by applying the Participant's Account balance to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the first day of the Purchase Period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the date such Corporate Transaction is consummated. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase. Any portion of the Participant's Account balance that is not applied to the purchase of shares of Common Stock because such portion is not sufficient to purchase a whole share of Common Stock shall be refunded to the Participant as soon as administratively feasible. 5 The Company shall use reasonable efforts to provide prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. G. Should the total number of shares of Common Stock which are to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the Account balance of each Participant, to the extent in excess of the aggregate Purchase Price payable for the Common Stock pro-rated to such individual, shall be refunded as soon as administratively feasible. H. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. I. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become the owner of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such rights, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Company and of any Corporate Affiliate (determined on the basis of the Fair Market Value of such stock on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding, subject to the following: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue on the Purchase Date in effect for the Purchase Period for which such right is granted. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. 6 B. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Period, then the Participant's Account balance with respect to such purchase right shall be refunded as soon as administratively feasible. C. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on December 3, 1997, approved by the requisite vote of the stockholders of the Company on March 11, 1998, and became effective as of the Effective Date. Pursuant to Section III.B above and Section X below, the Plan was amended and restated in its entirety, effective as of March 20, 1998, in order to reflect a two-for-one stock split effected by the Company with respect to the Common Stock through a 100% stock dividend paid to stockholders of record as of March 20, 1998. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest to occur of (i) the last Business Day in December 2007, (ii) the date on which all shares available for issuance under the Plan shall have been sold to Participants pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. Following such termination, no further purchase rights shall be granted or exercised, and no further payroll deductions or Additional Contributions shall be collected, under the Plan. X. AMENDMENT OF THE PLAN A. The Plan may be amended from time to time by the Board or any duly authorized committee thereof, or by the Administrative Committee, and all purchase rights outstanding at the effective date of any such amendment will be subject to such amendment. In the event any law, or any rule or regulation issued or promulgated by the Internal Revenue Service, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., any stock exchange upon which the Common Stock is listed for trading, or any other governmental or quasi-governmental agency having jurisdiction over the Company, the Common Stock or the Plan, requires the Plan to be amended, or in the event any of the rules under Section 16 of the 1934 Act are amended or supplemented (e.g., by addition of alternative rules), in either event to require or permit the Company to add, remove or lessen any restrictions on or with respect to purchase rights under the Plan, the Administrative Committee and the Board each reserves the right to amend the Plan to the extent of any such requirement, amendment or supplement, and all purchase rights then outstanding will be subject to such amendment. B. The Plan may be terminated at any time by action of the Board; provided, however, that the termination of the Plan shall not adversely affect the terms of any outstanding purchase rights. 7 C. Notwithstanding the foregoing, the Board may not, without the approval of the Company's stockholders, increase the number of shares of Common Stock issuable under the Plan, except to the extent permitted under Section III.B. D. With respect to any Participating Corporation which employs Eligible Employees who reside outside of the United States, and notwithstanding anything herein to the contrary, the Administrative Committee may in its sole discretion amend the terms of the Plan, or any purchase right granted under the Plan, in order to comply with the requirements of local law, and may, where appropriate, establish one or more sub-plans to reflect such amended provisions applicable to such Eligible Employees. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Company. B. Nothing in the Plan shall confer upon any Participant any right to continue in the employ of the Company or any Corporate Affiliate for any period of specific duration, or interfere with or otherwise restrict in any way the rights of the Company (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such Participant's employment at any time for any reason, with or without cause. 8 APPENDIX -------- The following definitions shall be in effect under the Plan: A. ACCOUNT shall mean the account established by the Plan Administrator to record a Participant's payroll deductions, credited Interest and Additional Contributions (if any) as of any given date. B. ADDITIONAL CONTRIBUTION shall mean a Participant's contribution (other than by payroll deductions) for a Purchase Period in an amount that does not exceed $2,000 and which is made before the tenth (10th) Business Day immediately preceding the Purchase Date for the Purchase Period. C. ADMINISTRATIVE COMMITTEE shall mean a committee consisting of one or more persons appointed by the Board from time to time to act as the administrative committee of the Plan. D. BOARD shall mean the Company's Board of Directors or the Executive Committee thereof. E. BUSINESS DAY shall mean a day on which the New York Stock Exchange is open for trading. F. CODE shall mean the Internal Revenue Code of 1986, as amended. G. COMMON STOCK shall mean the Company's common stock, par value $0.10 per share. H. COMPANY shall mean Sterling Software, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Sterling Software, Inc. which shall by appropriate action adopt the Plan. I. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation of the Company (as determined in accordance with Section 424 of the Code), whether now existing or subsequently established. J. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Company is a party: (i) a merger, consolidation or reorganization of the Company into or with another corporation or legal person as a result of which securities possessing less than fifty percent (50%) of the total combined voting power of the then-outstanding voting securities of such corporation or person immediately after A-1 such transaction are held in the aggregate by the holders of the voting securities of the Company immediately prior to such transaction, or (ii) a sale or other transfer of all or substantially all of the assets of the Company to another corporation or other legal person as a result of which securities possessing less than fifty percent (50%) of the total combined voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer are held in the aggregate by the holders of the voting securities of the Company immediately prior to such sale or transfer. K. EFFECTIVE DATE shall mean February 1, 1998. L. ELIGIBLE COMPENSATION means the following items of remuneration paid to a Participant by one or more Participating Companies during each Purchase Period: base salary, overtime pay, commissions and cash incentive compensation, computed before giving effect to the Participant's salary reduction elections under Section 125 or Section 401(k) of the Code or the Participant's deferral elections under any nonqualified deferred compensation plan of the Company or any Corporate Affiliate. M. ELIGIBLE EMPLOYEE shall mean an Employee who is employed by a Participating Company on a basis under which he or she is regularly expected to render at least twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages. Notwithstanding the foregoing, a person who is an independent contractor performing services for a Participating Company shall not be eligible to participate in the Plan. N. EMPLOYEE shall mean an individual who is a common law employee of the Company or any Corporate Affiliate. O. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. P. INTEREST shall mean an additional amount of compensation calculated at the annual rate of interest of six month Treasury bills as quoted in The Wall Street Journal published on the last Business Day of the month immediately preceding the applicable Purchase Period during which such compensation is credited, prorated for periods of less than one year. Q. 1933 ACT shall mean the Securities Act of 1933, as amended. R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. A-2 S. PARTICIPANT shall mean any Eligible Employee of a Participating Company who is actively participating in the Plan. T. PARTICIPATING COMPANY shall mean the Company, each Corporate Affiliate that is a direct or indirect domestic subsidiary of the Company and each other Corporate Affiliate that is authorized from time to time by the Administrative Committee to extend the benefits of the Plan to its Eligible Employees. For purposes of the foregoing, the term "subsidiary" has the meaning set forth in Section 424(f) of the Code. U. PLAN shall mean the Company's Amended and Restated Employee Stock Purchase Plan, as set forth in this document. V. PLAN ADMINISTRATOR shall mean the person or persons appointed by the Board from time to time as the plan administrator of the Plan. W. PURCHASE DATE shall mean the last Business Day of each Purchase Period or, with respect to a Corporate Transaction, the date specified for the purchase in Section VII.F. X. PURCHASE PERIOD shall mean a period of six (6) months extending from January 1 to June 30 and from July 1 to December 31 of each year; provided, however, that the first Purchase Period shall begin on February 1, 1998, and shall end on June 30, 1998. Y. PURCHASE PRICE shall mean the purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date and shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the first day of the Purchase Period in which the Purchase Date occurs or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. Z. SERVICE shall mean the performance of services to the Company or any Corporate Affiliate by a person in the capacity of an Employee. AA. SHORTFALL CONTRIBUTIONS shall have the meaning ascribed to such term in Section VI.E. of the Plan. A-3 EX-10.2 4 AMENDMENT TO STOCK OPTION AGREEMENT EXHIBIT 10.2 AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT (this "Amendment") is made and entered into as of the 20th day of March, 1998, by and between Sterling Software, Inc., a Delaware corporation ("Sterling Software"), and [________________] (the "Participant"). RECITALS: WHEREAS, Sterling Software and the Participant are parties to a Stock Option Agreement dated as of [_____________, 199__] (the "Agreement"); and WHEREAS, on March 11, 1998 the Board of Directors of Sterling Software declared a 2-for-1 split of the Common Stock, payable in the form of a 100% stock dividend (the "Stock Dividend") to all Sterling Software stockholders of record as of the close of business on the date hereof (such time and date are referred to herein as the "Record Date"); and WHEREAS, in connection with the Stock Dividend, the Board of Directors adjusted the Stock Option evidenced by the Agreement (herein also called the "Stock Option") to (i) double the number of shares of Common Stock subject on the Record Date to the Stock Option and (ii) halve the Option Price thereof; and WHEREAS, Sterling Software and the Participant desire to amend the Agreement in the manner set forth in this Amendment; NOW, THEREFORE, Sterling Software and the Participant hereby agree as follows: 1. Correct Owner and Holder. The undersigned Participant hereby represents and warrants to Sterling Software that he or she is the true and lawful owner and holder of the Stock Option. 2. Amendment. The Agreement is hereby amended such that (i) the number of shares of Common Stock subject to the unexercised portion of the Stock Option on the Record Date is doubled to [______________] shares, such increase to apply pro rata to the portion of the Stock Option currently exercisable and the portions to become exercisable in the future pursuant to Section 2 of the Agreement, and (ii) the Option Price of the shares of Common Stock subject to the unexercised portion of the Stock Option on the Record Date is halved to $[___________]. 3. References to and Continuation of Agreement. On and after the Record Date, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import referring to the Agreement will be a reference to the Agreement as amended by this Amendment. Except as specifically amended by this Amendment, the Agreement will remain in full force and effect and is hereby ratified and confirmed. 4. Use of Defined Terms. Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. 5. GOVERNING LAW. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AMENDMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. 6. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered as of the date first above written. STERLING SOFTWARE, INC. By: ----------------------------------- Sterling L. Williams, President & Chief Executive Officer -------------------------------------- [Participant] -2- EX-27 5 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 10Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS SEP-30-1998 SEP-30-1998 JAN-01-1998 OCT-01-1997 MAR-31-1998 MAR-31-1998 421,507 421,507 234,750 234,750 169,924 169,924 0 0 0 0 848,094 848,094 52,061 52,061 44,641 44,641 1,079,764 1,079,764 228,138 228,139 0 0 0 0 0 0 8,027 8,027 785,853 785,853 1,079,764 1,079,764 159,397 308,226 159,397 308,226 61,156 120,973 127,581 254,786 302 304 0 0 30 61 39,848 69,686 13,549 23,694 26,299 45,992 0 0 0 0 0 0 26,299 45,992 .34 .59 .32 .57
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