-----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, UJ7Hiletj2kwWi/UbheBkqPb2i7HBT2Fv1fLGFYgdD5syNiKdUelG34MJeBdvgJG FKDkP/R4Yy6WGT2Z4CdH7g== 0000930661-98-001613.txt : 19980804 0000930661-98-001613.hdr.sgml : 19980804 ACCESSION NUMBER: 0000930661-98-001613 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980803 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: 98675814 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 June 30, 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 July 27, 1998 ----------------------------- -------------------------------------- Common Stock, $0.10 par value 79,497,388 PART I - FINANCIAL INFORMATION
Page ---- ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)............................................. 3 Sterling Software, Inc. Consolidated Balance Sheets at June 30, 1998 and September 30, 1997.................................................................. 3 Sterling Software, Inc. Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 1998 and 1997................................................. 4 Sterling Software, Inc. Consolidated Statement of Stockholders' Equity for the Nine Months Ended June 30, 1998.......................................................... 5 Sterling Software, Inc. Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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........................................................ 13
PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION............................................................ 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 25
- 2 - STERLING SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) A S S E T S
JUNE 30 SEPTEMBER 30 1998 1997 ------------------ ----------------- (UNAUDITED) Current assets: Cash and cash equivalents................................................... $ 441,619 $ 435,726 Marketable securities....................................................... 252,441 206,965 Accounts and notes receivable, net.......................................... 154,522 149,422 Income tax receivable....................................................... 4,250 9,941 Prepaid expenses and other current assets................................... 24,328 24,847 -------------- -------------- Total current assets....................................................... 877,160 826,901 Property and equipment, net of accumulated depreciation of $45,278 at June 30, 1998 and $42,430 at September 30, 1997.............................. 58,434 48,598 Computer software, net of accumulated amortization of $98,644 at June 30, 1998 and $87,258 at September 30, 1997.............................. 78,032 70,422 Excess cost over net assets acquired, net of accumulated amortization of $25,429 at June 30, 1998 and $20,650 at September 30, 1997.................. 77,654 84,701 Noncurrent deferred income taxes............................................. 22,130 Other assets................................................................. 18,921 12,906 -------------- -------------- $1,110,201 $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.................................... $ 130,136 $ 172,700 Deferred revenue............................................................ 83,627 95,455 -------------- -------------- Total current liabilities................................................. 213,763 268,155 Noncurrent deferred revenue.................................................. 25,305 20,432 Other noncurrent liabilities................................................. 37,936 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 June 30, 1998 and September 30, 1997, respectively; 80,917,000 and 79,808,000 shares issued at June 30, 1998 and September 30, 1997, respectively........................................... 8,093 7,981 Additional paid-in capital.................................................. 816,879 802,030 Retained earnings (deficit)................................................. 64,739 (3,506) Less treasury stock, at cost; 2,622,000 and 2,704,000 shares at June 30, 1998 and September 30, 1997, respectively.................................. (56,514) (58,251) -------------- -------------- Total stockholders' equity................................................ 833,197 748,254 -------------- -------------- $1,110,201 $1,065,658 ============== ==============
See accompanying notes. - 3 - STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------ ------------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenue: Products................................. $ 67,144 $ 52,234 $189,595 $ 136,369 Product support.......................... 40,787 29,106 121,603 88,621 Services................................. 53,614 32,904 158,573 93,139 ---------- ----------- ----------- ----------- 161,545 114,244 469,771 318,129 Costs and expenses: Cost of sales: Products and product support............ 14,554 17,668 44,496 53,188 Services................................ 47,268 29,350 138,299 81,714 ---------- ----------- ----------- ----------- 61,822 47,018 182,795 134,902 Product development and enhancement...... 6,456 4,532 23,121 14,349 Selling, general and administrative...... 56,272 45,288 173,420 129,580 Reorganization costs..................... 106,037 106,037 Purchased research and development....... 137,849 137,849 ---------- ----------- ----------- ----------- 124,550 340,724 379,336 522,717 ---------- ----------- ----------- ----------- Income (loss) before other income (expense) and income taxes............... 36,995 (226,480) 90,435 (204,588) Other income (expense): Interest expense......................... (78) (96) (139) (363) Investment income........................ 8,652 10,142 25,263 31,159 Other.................................... (507) 26 (811) 380 ---------- ----------- ----------- ----------- 8,067 10,072 24,313 31,176 ---------- ----------- ----------- ----------- Income (loss) before income taxes......... 45,062 (216,408) 114,748 (173,412) Provision (benefit) for income taxes...... 15,320 (30,945) 39,014 (16,013) ---------- ----------- ----------- ----------- Net income (loss)......................... $ 29,742 $(185,463) $ 75,734 $(157,399) ========== =========== =========== =========== Income (loss) per common share: Net income (loss): Basic................................... $.38 $(2.41) $.98 $(2.05) ========== =========== =========== =========== Diluted................................. $.36 $(2.41) $.92 $(2.05) ========== =========== =========== ===========
See accompanying notes. - 4 - STERLING SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED JUNE 30, 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............................. 75,734 75,734 Issuance of common stock pursuant to stock options......................... 1,109 112 15,214 15,326 Issuance of common stock to retirement plan.................................. (365) (82) 1,737 1,372 Other.................................. (7,489) (7,489) ------- -------- --------- --------- -------- --------- ------------ Balance at June 30, 1998................ 80,917 $8,093 $816,879 $64,739 2,622 $(56,514) $833,197 ======= ======== ========= ========= ======== ========= ============
See accompanying notes. - 5 - STERLING SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED JUNE 30 --------------------------- 1998 1997 ---------- --------- Operating activities: Net income (loss)........................................................... $ 75,734 $(157,399) Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization............................................. 30,044 24,642 Provision for losses on accounts receivable............................... 2,810 1,672 Provision (benefit) for deferred income taxes............................. 31,614 (27,399) Purchased research and development........................................ 137,849 Reorganization costs...................................................... 63,726 Changes in operating assets and liabilities, net of effects of business acquisitions: (Increase) decrease in accounts and notes receivable................... (8,715) 25,354 Increase in prepaid expenses and other assets.......................... (2,760) (5,466) Decrease in accounts payable, accrued liabilities and amounts due to Sterling Commerce, Inc................................................ (43,768) (13,311) Decrease in deferred revenue........................................... (12,370) (865) Other.................................................................. 9,505 11,845 ---------- --------- Net cash provided by operating activities............................. 82,094 60,648 Investing activities: Purchases of property and equipment......................................... (21,451) (22,703) Purchases and capitalized cost of development of computer software.......... (17,767) (13,553) Business acquisitions, net of cash acquired................................. (3,626) (167,995) Purchases of investments.................................................... (189,944) (198,177) Proceeds from sales of investments.......................................... 145,720 254,429 Other....................................................................... 1,798 700 ---------- --------- Net cash used in investing activities................................. (85,270) (147,299) Financing activities: Retirement and redemption of debt and capital lease obligations............. (1,080) (7,457) Proceeds from issuance of debt.............................................. 990 7,522 Proceeds from issuance of common stock pursuant to exercise of stock options................................................................... 15,326 1,399 Other....................................................................... (3,986) 44 ---------- --------- Net cash provided by financing activities............................. 11,250 1,508 Effect of foreign currency exchange rate changes on cash..................... (2,181) (1,774) ---------- --------- Increase (decrease) in cash and cash equivalents............................. 5,893 (86,917) Cash and cash equivalents at beginning of period............................. 435,726 524,237 ---------- --------- Cash and cash equivalents at end of period................................... $ 441,619 $ 437,320 ========== ========= Supplemental cash flow information: Income taxes paid........................................................... $ 2,891 $ 6,407 ========== ========= Income tax refunds.......................................................... $ 328 $ 186 ========== =========
See accompanying notes. - 6 - STERLING SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 and liabilities, the disclosure of contingencies at June 30, 1998 and September 30, 1997 and the results of operations for the three and nine months ended June 30, 1998 and 1997. While management has based its estimates and assumptions on facts and circumstances known to it as of the date of this report, actual amounts may differ from such estimates and assumptions. Revenue Revenue from license fees for 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, municipal obligations and certificates of deposit. The fair values for marketable securities are based on quoted market prices. All marketable securities and long-term investments are classified as available-for-sale securities. 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. 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 - 8 - 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 NINE MONTHS ENDED JUNE 30 JUNE 30 ------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------ Basic: Earnings applicable to common stockholders............................. $29,742 $(185,463) $75,734 $(157,399) ============= ============= ============= ============ Weighted average shares................... 78,047 77,065 77,547 76,952 ============= ============= ============= ============ Basic earnings per share.................. $ .38 $ (2.41) $ .98 $ (2.05) ============= ============= ============= ============ Diluted: Earnings applicable to common stockholders............................. $29,742 $(185,463) $75,734 $(157,399) ============= ============= ============= ============ Weighted average shares................... 78,047 77,065 77,547 76,952 Effect of dilutive employee stock options............................ 5,574 4,574 ------------- ------------- ------------- ------------ 83,621 77,065 82,121 76,952 ============= ============= ============= ============ Diluted earnings per share................ $ .36 $ (2.41) $ .92 $ (2.05) ============= ============= ============= ============
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. 2. BUSINESS ACQUISITIONS, DIVESTITURES AND REORGANIZATIONS 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 constituted 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 portion of the cost of the Acquisition that was allocable to purchased research and development costs was charged to expense in 1997 in accordance with - 9 - the purchase method of accounting. The results of operations of TI Software are included in the Company's results of operations from the date of the Acquisition. Effective as of June 30, 1997, Sterling Software and Sterling Commerce, Inc. ("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 the United States and Canada for the three and nine months ended June 30, 1997 are included in the business segment information presented herein under "Corporate and other". The Company's 1997 results of operations included costs of $106,037,000 primarily related to the reorganization of the Company's operations in connection with the Acquisition and the termination of the International Distributor Agreement with Sterling Commerce in the third quarter of 1997. These reorganization costs also include the write-down of certain excess cost over net assets acquired related to the Company's federal systems business. 3. 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. 4. 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. - 10 - 5. 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. The Company addresses these major markets 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 under numerous multi-year contracts in support of various customers in the Department of Defense and civil agencies of the federal government. 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, the results of which are included in the business segment information under "Corporate and other". Financial information concerning the Company's operations, by business segment, for the three and nine months ended June 30, 1998 and 1997, is summarized as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------ Revenue: Applications Management................... $ 74,403 $ 22,015 $220,056 $ 65,801 Systems Management........................ 49,983 46,045 142,358 126,911 Federal Systems........................... 37,159 30,919 106,729 86,731 Corporate and other....................... 15,265 628 38,686 ------------- ------------- ------------- ------------ Consolidated totals...................... $161,545 $ 114,244 $469,771 $ 318,129 ============= ============= ============= ============ Operating Profit (Loss): Applications Management................... $ 22,834 $ 3,378 $ 54,910 $ 8,426 Systems Management........................ 19,524 18,530 52,042 48,518 Federal Systems........................... 2,412 1,826 7,119 6,524 Reorganization costs...................... (106,037) (106,037) Purchased research and development........ (137,849) (137,849) Corporate and other....................... (7,775) (6,328) (23,636) (24,170) ------------- ------------- ------------- ------------ Consolidated totals...................... $ 36,995 $(226,480) $ 90,435 $(204,588) ============= ============= ============= ============
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 nine months ended June 30, 1997, the results of operations relating to the international distribution of Sterling Commerce's interchange and communications software products. - 11 - 6. INCREASE IN AUTHORIZED COMMON STOCK 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. 7. SUBSEQUENT EVENTS Effective July 9, 1998, Sterling Software acquired Mystech Associates, Inc. ("Mystech") in a stock-for-stock merger transaction to be accounted for as a pooling of interests. Mystech became a wholly owned subsidiary of the Company and each issued and outstanding share of Mystech common stock was converted into the right to receive 5.49313 shares of Common Stock. In addition, the Company agreed to assume all outstanding stock options granted under the stock option plans maintained by Mystech. As a result of the transaction, Sterling Software is in the process of issuing approximately 769,000 shares of Common Stock in exchange for the previously outstanding shares of Mystech common stock and has reserved approximately 174,000 shares of the Company's Common Stock for issuance upon exercise of the assumed Mystech options. Effective July 31, 1998, Sterling Software acquired Synon Corporation ("Synon") in a stock-for-stock merger transaction to be accounted for as a pooling of interests. Synon was merged into a wholly owned subsidiary of the Company and each issued and outstanding share of Synon common stock, Synon Series A Preferred Stock and Synon Series E Preferred Stock was converted into the right to receive .14357 shares of Common Stock, and each issued and outstanding share of Synon Series D Preferred Stock was converted into the right to receive .27149 shares of Common Stock. In addition, the Company agreed to assume all outstanding stock options granted under the stock option plans maintained by Synon. As a result of the transaction, Sterling Software is in the process of issuing approximately 2,603,000 shares of Common Stock in exchange for the previously outstanding shares of Synon capital stock and has reserved approximately 375,000 shares of the Company's Common Stock for issuance upon exercise of the assumed Synon options. The Company expects to incur a non-recurring charge to operations in the fourth quarter of 1998 currently estimated to be between $40 million and $50 million to reflect the combination of the Company with Synon, and to a lesser extent, the combination of the Company with Mystech. These charges relate to employee termination costs, transaction costs, costs associated with the elimination of duplicate facilities, the write down of capitalized software and other direct costs. - 12 - 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 constituted 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 portion of the cost of the Acquisition that was allocable to purchased research and development costs was charged to expense in 1997 in accordance with the purchase method of accounting. 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, Inc. ("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 nine months ended June 30, 1997 are included in the business segment information presented herein under "Corporate and other". Reorganization Costs The Company's results of operations for 1997 include reorganization costs of $106,037,000 primarily related to the reorganization of the Company's operations in connection with the Acquisition and the termination of the Company's International Distributor Agreement with Sterling Commerce in the third quarter of 1997. These reorganization costs also include the write-down of certain excess cost over net assets acquired related to the Company's federal systems business. The Company does not expect to incur costs related to this reorganization in excess of the amount charged to operations in 1997. - 13 - BUSINESS COMBINATIONS SUBSEQUENT TO JUNE 30, 1998 Acquisition of Mystech Associates, Inc. Effective July 9, 1998, Sterling Software acquired Mystech Associates, Inc. ("Mystech") in a stock-for-stock merger transaction to be accounted for as a pooling of interests. Mystech became a wholly owned subsidiary of the Company and each issued and outstanding share of Mystech common stock was converted into the right to receive 5.49313 shares of Common Stock. In addition, the Company agreed to assume all outstanding stock options granted under the stock option plans maintained by Mystech. As a result of the transaction, Sterling Software is in the process of issuing approximately 769,000 shares of Common Stock in exchange for the previously outstanding shares of Mystech common stock and has reserved approximately 174,000 shares of the Company's Common Stock for issuance upon exercise of the assumed Mystech options. Mytech's information technology services business and substantially all of its approximately 300 employees became part of the newly created Tactical Systems Division within the Federal Systems Group. Acquisition of Synon Corporation Effective July 31, 1998, Sterling Software acquired Synon Corporation ("Synon") in a stock-for-stock merger transaction to be accounted for as a pooling of interests. Synon was merged into a wholly owned subsidiary of the Company and each issued and outstanding share of Synon common stock, Synon Series A Preferred Stock and Synon Series E Preferred Stock was converted into the right to receive .14357 shares of Common Stock, and each issued and outstanding share of Synon Series D Preferred Stock was converted into the right to receive .27149 shares of Common Stock. In addition, the Company agreed to assume all outstanding stock options granted under the stock option plans maintained by Synon. As a result of the transaction, Sterling Software is in the process of issuing approximately 2,603,000 shares of Common Stock in exchange for the previously outstanding shares of Synon capital stock and has reserved approximately 375,000 shares of the Company's Common Stock for issuance upon exercise of the assumed Synon options. Of Synon's approximately 500 worldwide employees, approximately 250 were added to the Applications Management Group. Reorganization Costs The Company expects to incur a non-recurring charge to operations in the fourth quarter of 1998 currently estimated to be between $40 million and $50 million to reflect the combination of the Company with Synon, and to a lesser extent, the combination of the Company with Mystech. These charges relate to employee termination costs, transaction costs, costs associated with the elimination of duplicate facilities, the write down of capitalized software and other direct costs. - 14 - RESULTS OF OPERATIONS Three Months Ended June 30, 1998 and 1997 Total revenue increased $47,301,000, or 41%, in the third 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 238%, 9% and 20%, respectively, in the third quarter of 1998 over the same period in 1997. Both the applications management business segment and 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 $60,650,000 and $45,858,000 in the third quarter of 1998 and 1997, respectively, representing an increase of $14,792,000, or 32%, primarily due to an increase in international revenue generated by the applications management business segment (up 472%). The overall 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 third 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 third quarter of 1998 by approximately $3,000,000. Revenue from the Company's international operations represented 38% and 40% of total revenue in the third 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 third quarter of 1998 compared to 50% 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 29% of total revenue in the third quarter of 1997 to 33% 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 $52,388,000, or 238%, in the third quarter of 1998 over the same period of 1997 due to a 202% increase in products revenue, a 171% increase in product support revenue and a 780% 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 - 15 - Applications International divisions, which include the non-federal domestic and international operations, respectively, acquired in the Acquisition. Approximately 49% of the applications management business segment's total revenue in the third quarter of 1998 was derived from the Company's international operations, compared to 29% in the same period of 1997. Revenue from the systems management business segment increased $3,938,000, or 9%, in the third quarter of 1998 over the same period of 1997 primarily due to an 11% increase in products revenue attributable to increased domestic product sales across all three product lines and increased international product sales in the storage management and operations management product lines. Product support revenue in the third 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 48% of the systems management business segment's total revenue in the third quarter of 1998 was derived from the Company's international operations, compared to 54% in the same period of 1997. Revenue from the federal systems business segment increased $6,240,000, or 20%, in the third 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 and the Scientific Systems divisions. As previously reported, while the Company was not selected for continuation of a contract with NASA's Ames Research Center, the Company continued to provide services under the pre-existing contract through June 30, 1998, at which time such services ceased. Total costs and expenses decreased $216,174,000, or 63%, in the third quarter of 1998 compared to the same period of 1997. However, excluding the Acquisition-related reorganization costs of $106,037,000 and the write-off of purchased research and development costs of $137,849,000 in the third quarter of 1997, total costs and expenses increased $27,712,000, or 29%, in the third quarter of 1998 compared to the same period of 1997. Total cost of sales increased $14,804,000, or 31%, in the third quarter of 1998 compared to the same period of 1997 and represented 38% and 41% of total revenue in the third quarter of 1998 and 1997, respectively. Cost of sales for products and product support decreased $3,114,000, or 18%, in the third quarter of 1998 compared to the same period of 1997 and represented 13% and 22% of products and product support revenue in the third 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 $17,918,000, or 61%, in the third quarter of 1998 compared to the same period of 1997 and represented 88% and 89% of services revenue in the third quarter of 1998 and 1997, respectively. 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 third quarter of 1998 was $6,456,000, net of $6,063,000 of capitalized software costs, as compared with product development expense in the same period of 1997 of $4,532,000, net of $4,371,000 of capitalized software costs. Gross - 16 - product development expense was 10% of non-federal revenue in the third quarter of 1998 compared with 11% for the same period of 1997. Capitalized development costs represented 48% of gross development costs in the third 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 $10,984,000, or 24%, in the third quarter of 1998 compared to the same period of 1997, and represented 35% and 40% of total revenue in the third 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. Investment income decreased $1,490,000 in the third 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 third quarter of 1998 was $45,062,000 compared to a loss before income taxes of $216,408,000 for the same period of 1997. Excluding the Acquisition-related reorganization costs of $106,037,000 and the write-off of purchased research and development costs of $137,849,000 in the third quarter of 1997, income before income taxes increased $17,584,000, or 64%, primarily due to higher profits in the applications management business segment partially offset by a decline in investment income. Nine Months Ended June 30, 1998 and 1997 Total revenue increased $151,642,000, or 48%, in the first nine 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 234%, 12% and 23%, respectively, in the first nine months of 1998 over the same period in 1997. Both the applications management business segment and 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 $179,541,000 and $120,817,000 in the first nine months of 1998 and 1997, respectively, representing an increase of $58,724,000, or 49%, due to increases in international revenue generated by the applications management business segment (up 490%) and the systems management business segment (up 4%). The overall increase in international revenue was partially offset by a decline in revenue from sales of Sterling Commerce's interchange and communications software - 17 - 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 nine 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 nine months of 1998 by approximately $12,000,000. Revenue from the Company's international operations represented 38% of total revenue in both the first nine months of 1998 and 1997. The Company's recurring revenue includes revenue from product support agreements generally having terms ranging from one to three years and federal contracts generally having terms ranging from one to five years. Like most federal contracts, Sterling Software's federal contracts permit termination by the government for convenience or for failure to obtain funding. Recurring revenue decreased to 48% of total revenue in the first nine months 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 29% of total revenue in the first nine months 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 $154,255,000, or 234%, in the first nine months of 1998 over the same period of 1997 due to a 206% increase in products revenue, a 151% increase in product support revenue and an 800% 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 nine months of 1998 was derived from the Company's international operations, compared to 29% in the same period of 1997. Revenue from the systems management business segment increased $15,447,000, or 12%, in the first nine months of 1998 over the same period of 1997 primarily due to a 21% increase in products revenue partially offset by a 1% decline in product support revenue due in part to the adverse impact of foreign currency exchange rate fluctuations as a result of a stronger U.S. dollar. The increase in products revenue was mainly attributable to strong domestic 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 nine months of 1998 was derived from the Company's international operations, compared to 51% in the same period of 1997. Revenue from the federal systems business segment increased $19,998,000, or 23%, in the first nine 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 - 18 - extent, to higher contract billings in both the Information Technology and the Scientific Systems divisions. Total costs and expenses decreased $143,381,000, or 27%, in the first nine months of 1998 compared to the same period of 1997. However, excluding the Acquisition-related reorganization costs of $106,037,000 and the write-off of purchased research and development costs of $137,849,000 in the third quarter of 1997, total costs and expenses increased $100,505,000, or 36%, in the first nine months of 1998 compared to the same period of 1997. Total cost of sales increased $47,893,000, or 36%, in the first nine months of 1998 compared to the same period of 1997 and represented 39% and 42% of total revenue in the first nine months of 1998 and 1997, respectively. Cost of sales for products and product support decreased $8,692,000, or 16%, in the first nine months of 1998 compared to the same period of 1997 and represented 14% and 24% of products and product support revenue in the first nine 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 $56,585,000, or 69%, in the first nine months of 1998 compared to the same period of 1997 and represented 87% and 88% of revenue in the first nine months of 1998 and 1997, respectively. 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 nine months of 1998 was $23,121,000, net of $17,533,000 of capitalized software costs, as compared with product development expense in the first nine months of 1997 of $14,349,000, net of $13,380,000 of capitalized software costs. Gross product development expense was 11% of non-federal revenue in the first nine months of 1998 compared with 12% for the same period of 1997. Capitalized development costs represented 43% of gross development costs in the first nine 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 $43,840,000, or 34%, in the first nine months of 1998 compared to the same period of 1997, and represented 37% and 41% of total revenue in the first nine 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 $5,896,000 in the first nine months of 1998 compared to the same period of 1997 as a result of lower average cash and cash equivalents balances - 19 - 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 nine months of 1998 was $114,748,000, compared to a loss before income taxes of $173,412,000 for the same period of 1997. Excluding the Acquisition-related reorganization costs of $106,037,000 and the write-off of purchased research and development costs of $137,849,000 in the third quarter of 1997, income before income taxes increased $44,274,000, or 63%, primarily due 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 $663,397,000 of working capital at June 30, 1998, which includes $441,619,000 of cash and cash equivalents and $252,441,000 of marketable securities. Net cash provided by operating activities was $82,094,000 in the first nine months of 1998 compared to $60,648,000 for the same period of 1997. Net cash provided by operating activities in the first nine months of 1998 was reduced by payments made during the period of approximately $25,227,000 directly related to the Acquisition and the related reorganization that occurred in the third quarter of 1997. Operating cash flows in the first nine months of 1997 were negatively impacted by payments of approximately $32,000,000 made to Sterling Commerce during the period. Investing activities used $85,270,000 in cash during the first nine months of 1998 compared to $147,299,000 for the same period of 1997. Net cash used in investing activities in the first nine months of 1997 included the $165,000,000 payment to Texas Instruments on June 30, 1997 in connection with the Acquisition. Capital expenditures for the first nine months of 1998 were $21,451,000 compared to $22,703,000 for the same period of 1997. Purchases and capitalized costs of computer software were $17,767,000 and $13,553,000 for the first nine 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. Financing activities provided $11,250,000 in cash during the first nine months of 1998 compared to $1,508,000 for 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 nine months of 1998 or 1997. At June 30, 1998, in addition to commitments related to the Mystech and Synon acquisitions discussed above, the Company's short and long-term cash commitments, including remaining costs related to the Acquisition and the related reorganization in the third quarter of - 20 - 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. FORWARD-LOOKING INFORMATION This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. The following statements are or may constitute forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may", "will", "could", "should", "believe", "expect", "future", "potential", "anticipate", "intend", "plan", "estimate" or "continue" or the negative or other variations thereof and (ii) other statements regarding matters that are not historical facts. Such forward-looking statements are subject to - 21 - various risks and uncertainties, including (i) risks and uncertainties relating to the possible invalidity of the underlying beliefs and assumptions, (ii) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, and (iii) actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials. In addition to any risks and uncertainties specifically identified in the text surrounding such forward- looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Risk Factors" and "Special Considerations" in the SEC Filings constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements. - 22 - PART II - OTHER INFORMATION ITEM 5. OTHER MATTERS. The following information is provided to stockholders of the Company in light of recent amendments to certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and to certain provisions of the Company's Bylaws (the "Bylaws"). Stockholders of Sterling Software may submit proposals on matters appropriate for stockholder action at meetings of the Company's stockholders in accordance with Rule 14a-8 promulgated under the Exchange Act ("Rule 14a-8"). For such proposals to be included in the Company's proxy materials relating to its 1999 Annual Meeting of Stockholders (the "1999 Annual Meeting"), all applicable requirements of Rule 14a-8 must be satisfied and such proposals must be received by the Company no later than October 5, 1998. Except in the case of proposals made in accordance with Rule 14a-8, the Bylaws require that stockholders desiring to bring any business before an annual meeting of stockholders deliver written notice thereof to the Company not less than 60 days prior to the meeting. However, in the event that less than 67 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received by the Company not later than the close of business on the seventh day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Bylaws further require, among other things, that the notice by the stockholder set forth a description of the business to be brought before the meeting and certain information concerning the stockholder proposing such business, including such stockholder's name and address, the class and number of shares of the Company's capital stock that are owned beneficially by such stockholder and any material interest of such stockholder in the business proposed to be brought before the meeting. The Bylaws require that stockholders desiring to nominate one or more persons as directors of the Company deliver written notice thereof to the Company not later than (i) with respect to an election to be held at an annual meeting, 90 days prior to the anniversary date of the immediately preceding annual meeting, and (ii) with respect to an election to be held at a special meeting, the seventh day following the date on which notice of such special meeting is first given to stockholders. The Bylaws further require, among other things, that any such notice set forth the name and address of the stockholder and the person or persons to be nominated, a representation that the stockholder is a holder of record of stock in the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, a description of all arrangements or undertakings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder, such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission and the consent of each nominee to serve as a director of the Company if so elected. - 23 - Any stockholder proposal or nomination intended to be submitted in accordance with Rule 14a-8 or the provisions of the Bylaws described above should be directed to Sterling Software, Inc., Attention: Secretary, at 300 Crescent Court, Suite 1200, Dallas, Texas 75201. - 24 - 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) 2.2 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 (3) 2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the Company, Sterling Software (Connecticut), Inc. and Mystech Associates, Inc. (2), (4) 2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the Company, Sterling Software (Southern), Inc. and Synon Corporation (2), (5) 3.1 Certificate of Incorporation, as amended, of the Company (6) 3.2 Bylaws, as amended, of the Company (7) 10.1 Mystech Associates, Inc. Stock Option Plan (as amended and restated as of July 9, 1998) (8) 10.2 Synon Corporation 1990 Stock Option Plan (as amended and restated as of July 31, 1998) (8) 10.3 Synon Corporation Executive Share Option Scheme (as amended and restated as of July 30, 1998) (8) 27 Financial Data Schedule (8) _____________ (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. (2) In accordance with Item 601 of Regulation S-K, the schedules and exhibits relating to the agreement have been omitted. The Company will furnish supplementally to the Securities and Exchange Commission such schedules or exhibits upon request. (3) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated June 30, 1997, as amended, and incorporated herein by reference. - 25 - (4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-53747) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated June 21, 1998 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10- Q for the quarter ended March 31, 1998 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement on Form 8-A/A filed on May 27, 1998 and incorporated herein by reference. (8) Filed herewith. (b) Reports on Form 8-K. With respect to the three-month period ended June 30, 1998, the Company filed one Current Report on Form 8-K dated June 21, 1998, which included information reported under Item 5 (Other Events). - 26 - 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: August 3, 1998 By: /s/Sterling L. Williams --------------------------------------------- Sterling L. Williams President, Chief Executive Officer and Director Date: August 3, 1998 /s/ R. Logan Wray --------------------------------------------- R. Logan Wray Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) - 27 - 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) 2.2 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 (3) 2.3 Agreement and Plan of Merger, dated as of May 27, 1998, among the Company, Sterling Software (Connecticut), Inc. and Mystech Associates, Inc. (2), (4) 2.4 Agreement and Plan of Merger, dated as of June 20, 1998, among the Company, Sterling Software (Southern), Inc. and Synon Corporation (2), (5) 3.1 Certificate of Incorporation, as amended, of the Company (6) 3.2 Bylaws, as amended, of the Company (7) 10.1 Mystech Associates, Inc. Stock Option Plan (as amended and restated as of July 9, 1998) (8) 10.2 Synon Corporation 1990 Stock Option Plan (as amended and restated as of July 31, 1998) (8) 10.3 Synon Corporation Executive Share Option Scheme (as amended and restated as of July 30, 1998) (8) 27 Financial Data Schedule (8) _____________ (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. (2) In accordance with Item 601 of Regulation S-K, the schedules and exhibits relating to the agreement have been omitted. The Company will furnish supplementally to the Securities and Exchange Commission such schedules or exhibits upon request. (3) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated June 30, 1997, as amended, and incorporated herein by reference. (4) Previously filed as Appendix A to the Proxy Statement/Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-53747) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated June 21, 1998 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement on Form 8-A/A filed on May 27, 1998 and incorporated herein by reference. (8) Filed herewith. EX-10.1 2 MYSTECH STOCK OPTION PLAN EXHIBIT 10.1 MYSTECH ASSOCIATES, INC. STOCK OPTION PLAN --------------------------- This Plan, as adopted by the Board of Directors of the Corporation on October 14, 1994, at the Annual Meeting of the Board of Directors, sets forth the authority and the terms and conditions under which Options could be issued by the Board of Directors of the Corporation. This Plan, as amended and restated on July 9, 1998 in connection with the merger (the "Merger") of the Corporation with a wholly owned subsidiary of Sterling Software, Inc. ("Sterling Software"), is being maintained by the Corporation for the sole purpose of permitting the exercise of Options that were outstanding immediately prior to the effective time of the Merger (the "Effective Time"). 1.0 AUTHORITY The Mystech Stock Ownership Agreement, dated October 14, 1994, authorized and charged the Board of Directors of the Corporation to develop and implement a stock option plan intended to reward and provide incentive to technical, support and management employees. 2.0 DEFINITIONS The following terms as used herein have the meanings hereinafter set forth unless the context clearly indicates to the contrary: 2.1 "Board" shall mean the Board of Directors of the Corporation. 2.2 "Corporation" shall mean Sterling Software (Connecticut), Inc. (formerly known as Mystech Associates, Inc. (sometimes herein called "Mystech")), and the surviving corporation in any merger to which Sterling Software (Connecticut), Inc. may be a party. 2.3 "Committee" shall mean the 1996 Stock Option Committee of the Board of Directors of Sterling Software and any other committee of such Board of Directors that may succeed to the authority presently vested in such 1996 Stock Option Committee in relation to this Plan. 2.4 "Fair Market Value" of the Shares shall be as determined by the Committee. 2.5 "Incentive Stock Options" shall mean those Options granted hereunder as Incentive Stock Options as defined in, and which by their terms comply with the requirements of such options set out in, Section 422 of the Internal Revenue Code of 1986 and Treasury Regulations issued with respect thereto. 2.6 "Insider" shall mean any officer or director of the Corporation. 2.7 "Non-Qualified Stock Option" shall mean those stock options granted hereunder which do not qualify as Incentive Stock Options as described in Section 2.5. 2.8 "Option" shall mean an option to purchase Shares granted pursuant to the provisions of this Plan prior to the Effective Time. 2.9 "Optionee" shall mean a person to whom an Option has been granted under this Plan. 2.10 "Plan" shall mean this Mystech Associates, Inc. Stock Option Plan, as amended or amended and restated from time to time. - -------------------------------------------------------------------------------- -1- - -------------------------------------------------------------------------------- 2.11 "Shares" shall mean, from and after the Effective Time, and subject to the provisions of Section 14.2, shares of Common Stock, par value $0.10 per share, of Sterling Software. 2.12 "Stock Option Certificate," when used in reference to an Option, shall mean the document which defines the specific terms and conditions of the Option. 2.13 "Subsidiary" shall mean any corporation which is controlled by Sterling Software. 3.0 PURPOSE OF PLAN Prior to the Merger, the Plan was intended by Mystech to reward those Mystech employees who contributed to Mystech's success and to benefit those Mystech employees interested in a long-term investment in Mystech. The Plan is being maintained by the Corporation for the sole purpose of permitting the exercise of Options pursuant to the terms of the Plan, after giving effect to the adjustments to the terms of the Options described in Section 14.1. 4.0 EFFECTIVE DATE The effective date of this Plan is October 14, 1994. 5.0 SHARES RESERVED FOR PLAN 5.1 Sterling Software has reserved for issuance a sufficient number of Shares to permit the exercise in full of all Options that were outstanding immediately prior to the Effective Time. 5.2 The Shares subject to outstanding Options shall consist of authorized but unissued Shares or previously issued Shares acquired and held in the treasury of Sterling Software, or a combination of the foregoing. 6.0 ADMINISTRATION 6.1 The Plan shall be administered by the Committee. 6.2 Subject to the terms of this Plan, the Committee shall have complete authority to interpret this Plan, to prescribe, amend, and rescind rules and regulations relating to it, to determine the details and provisions of each Stock Option Certificate, and to make all other determinations necessary or desirable in the administration of this Plan or of any Option. 7.0 ELIGIBILITY [Intentionally omitted.] 8.0 TYPES OF OPTIONS All of the Options that were outstanding immediately prior to the Effective Time are Non-Qualified Stock Options. 9.0 NO FURTHER GRANTS No options of any kind will be granted under this Plan after the Effective Time. 10.0 TERM OF OPTION 10.1 Each Option commenced on the date as of which the Stock Option Certificate relating thereto became effective and shall terminate at such time as is provided in such Stock Option Certificate or, if earlier, the date that is six (6) years and one (1) day after the date of the grant. If an Optionee shall cease to be an employee of the Corporation, Sterling Software or any of Sterling Software's other Subsidiaries, for any reason other than termination for cause or a termination by reason of death, any unexercised portion of any Option held by such Optionee shall terminate sixty (60) days after the date of termination of employment, or upon the expiration of such Option, whichever comes first. 10.2 In the event that the Optionee's employment is terminated for cause, the unexercised portion of any Option held by such Optionee shall terminate immediately upon the giving of notice of such termination. Nothing in this Plan or in any Option - -------------------------------------------------------------------------------- -2- - -------------------------------------------------------------------------------- granted pursuant to this Plan shall confer on any Optionee the right to continue in the employ or other service of the Corporation, Sterling Software or any of its other Subsidiaries, or interfere in any way with the right of the Corporation, Sterling Software or any of its other Subsidiaries to terminate the Optionee's employment or other service at any time. 10.3 In the event of the death of the Optionee, the Optionee's estate may exercise the unexercised portion of any Option held by such Optionee on the date of his or her death, to the extent that the Optionee was entitled to exercise the same on the date of his or her death, until the earlier of (a) ninety (90) days after the death of the Optionee and (b) the expiration of the Option. 11.0 EXERCISE OF THE OPTION 11.1 An Option may be exercised in whole or in part at any time during the term of the Option by signing the Stock Option Certificate and giving written notice delivered to the Corporation. Such notice shall state the number of Shares with respect to which the Option is being exercised and shall be accompanied by payment in full of the purchase price of such Shares. Payment shall be made to the Corporation either (a) in cash (including certified check, bank draft, or money order), (b) by delivering Shares already owned by the Optionee which shall be valued at Fair Market Value on the day on which notice of exercise is received by the Corporation, or (c) a combination of such Shares and cash; provided, however, that no payment in the form of Shares shall be permitted at any time at which the Corporation is prohibited from purchasing or acquiring such Shares. Delivery of Shares pursuant to alternative (b) or (c) above shall be accomplished by the Optionee's delivery of one or more certificates representing at least the number of Shares to be used to pay the portion of the purchase price to be paid in the form of Shares, duly endorsed for transfer or accompanied by one or more properly executed stock powers, together with written instructions as to the number of Shares to be applied to the payment of the purchase price. Should the Optionee exercise only a portion of an Option, a new Stock Option Certificate for the unexercised portion of the surrendered Option will be issued to such Optionee. 11.2 Sterling Software may in its sole and absolute discretion provide for deferred payment of the exercise price for Shares purchased upon the exercise of an Option from the proceeds of sale through a bank or broker of some or all of the Shares to which such exercise relates. Any such deferred payment of the exercise price shall be on such terms and subject to such conditions, consistent with the terms of the Plan and the Options, including without limitation execution and delivery by the Optionee of such documents, and compliance by the Optionee with such other procedures, as the Committee may establish. 12.0 OPTION PRICE [Intentionally omitted.] 13.0 NON-ASSIGNABILITY OF THE OPTION Options are not transferable by the Optionee and may be exercised, during the Optionee's lifetime, only by the Optionee. 14.0 ADJUSTMENTS UPON FUNDAMENTAL CORPORATE CHANGE 14.1 Pursuant to the provisions of this Plan that were in effect immediately prior to the Effective Time, at the Effective Time, the terms of each then- outstanding Option were adjusted so that each Option immediately thereafter constituted an option to purchase, on substantially the same terms and subject to substantially the same conditions as were previously applicable thereto, a number of Shares (rounded down to the nearest whole share) determined by multiplying (i) the number of shares of common stock of the Corporation ("Mystech Common Stock") subject to such Option immediately prior to the Effective Time by (ii) 5.49313 (the "Option Conversion Factor"), at an exercise price per Share (increased to the nearest whole cent) equal to (i) the exercise price per share of Mystech Common Stock subject to such Option divided by (ii) the Option Conversion Factor. 14.2 Notwithstanding any other provision of this Plan, the Committee may make or provide for - -------------------------------------------------------------------------------- -3- - -------------------------------------------------------------------------------- such adjustments in the number of Shares covered by outstanding Options, in the purchase price per share of Shares covered by outstanding Options, and/or in the kind of shares covered thereby (including shares of another issuer), as the Committee, in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of Optionees that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of Sterling Software, merger, consolidation, spin-off, reorganization, liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. 15.0 COMPLIANCE WITH LAWS 15.1 Notwithstanding any contrary provisions of this Plan, the Options shall not be exercisable by the Optionee or the Optionee's legal representative during a time period in which such exercise would adversely affect the Corporation or Sterling Software under applicable state and federal securities laws. The Corporation shall, however, provide Optionees with an opportunity to elect to exercise the Options, within the limits specified in this Plan, at a minimum of approximately once a year and, if not sooner terminated, immediately prior to the expiration of the term of such Options. If an Option is terminated early pursuant to Section 10.1 or 10.3 of this Plan, and if the Optionee attempts to exercise the Option within the period specified in Section 10.1 or 10.3, as applicable, and if the Corporation determines that it should defer the exercise for the securities laws compliance reasons previously referenced in this Section, then the Corporation may extend the period of time during which an Optionee may exercise the Option. Any such extension shall last only until the next time the Corporation provides the Optionees with an opportunity to exercise Options granted under the Plan. 15.2 The Corporation shall have the right to require the payment (through withholding from the participant's salary, or otherwise as the Corporation shall determine) of any federal and state taxes required to be withheld from any transfer of Shares hereunder (including a transfer of Shares on the exercise of an Option granted hereunder). 16.0 NO RIGHTS IN OPTION STOCK No Optionee shall have any rights as a shareholder with respect to Shares as to which an Option shall not have been exercised and payment made as herein provided, and shall have no rights with respect to such Shares not expressly conferred by this Plan. 17.0 EFFECT ON CHANGE IN CAPITAL STRUCTURE The existence of the Options shall not affect in any way the right or power of Sterling Software or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in Sterling Software's capital structure or business, or any merger or consolidation of Sterling Software, or any issue of bonds, debentures, preferred or preference stocks senior to or affecting the Shares or the rights appurtenant thereto, or dissolution or liquidation of Sterling Software, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceedings, whether of a similar character or otherwise. 18.0 SUCCESSORS This Plan shall be binding upon any successors of the Corporation. 19.0 AMENDMENT AND TERMINATION Unless this Plan shall theretofore have been terminated as herein provided, it shall terminate at the earliest time at which all of the Options shall have been exercised or shall have expired. This Plan may be terminated, modified, or amended by the shareholders of the Corporation. The Committee may terminate this Plan or make such modifications or amendments thereof as it shall deem advisable, or in order to conform to any change in any law or regulation applicable thereto; provided, however, that the Committee may not, without approval by the shareholders of the - -------------------------------------------------------------------------------- -4- - -------------------------------------------------------------------------------- Corporation (a) increase the periods during which Options may be granted or exercised, except as provided in Section 15 of the Plan or (b) provide for the administration of this Plan otherwise than by the Committee. No termination, modification, or amendment of this Plan may, without the consent of the Optionee to whom any Option shall theretofore have been granted, adversely affect the rights of such Optionee under such Option. - -------------------------------------------------------------------------------- -5- EX-10.2 3 SYNON CORP. STOCK OPTION PLAN EXHIBIT 10.2 SYNON CORPORATION 1990 STOCK OPTION PLAN (AS AMENDED AND RESTATED AS OF JULY 31, 1998) 1. PURPOSES OF THE PLAN. Prior to the merger of Synon with and into the Company, the purposes of the Plan were to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees of Synon and its Subsidiaries and to promote the success of Synon's business. The Plan, as amended and restated as of July 31, 1998 in connection with the Merger, is being maintained for the sole purpose of permitting the exercise of Options pursuant to the provisions of the Plan and the applicable Option Agreements, after giving effect to the adjustments to the terms of the Options pursuant to Section 11 of the Plan and Section 2.2 of the Merger Agreement. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "Administrator" means the Committee. (b) "Board" means the Board of Directors of Parent. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the 1996 Stock Option Committee of the Board or any other committee of the Board appointed by the Board in accordance with Section 4(a). (e) "Common Stock" means the Common Stock of Parent. (f) "Company" means Sterling Software (Southern), Inc., a Georgia corporation and a wholly owned subsidiary of Parent. (g) "Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship between an Optionee and Parent, the Company or any other Subsidiary of Parent. Continuous Status as an Employee shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to any Parent policy adopted from time to time; or (iv) in the case of transfers between locations of Parent, the Company or any other Subsidiary of Parent. (h) "Effective Time" means the effective time of the Merger. (i) "Employee" means any person, including officers and directors, employed by Parent, the Company or any other Subsidiary of Parent and once employed by Synon or any Subsidiary of Synon. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange for the last market trading day prior to the time of determination) as reported in The Wall Street Journal or such other source as ----------------------- the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (l) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422A of the Code. (m) "Merger" means the merger of Synon with and into the Company, which merger occurred on July 31, 1998. (n) "Merger Agreement" means the Agreement and Plan of Merger, dated as of June 20, 1998, among Parent, the Company and Synon. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Option" means a stock option granted pursuant to the Plan which was outstanding as of the Effective Time. (q) "Option Agreement" means the written agreement evidencing an Option. (r) "Optioned Stock" means the Common Stock subject to an Option. (s) "Optionee" means a person who held an Option as of the Effective Time. (t) "Parent" means Sterling Software, Inc., a Delaware corporation. 2 (u) "Plan" means this 1990 Stock Option Plan, as amended or amended and restated from time to time. (v) "Share" means a share of Common Stock, as adjusted in accordance with Section 11 of the Plan. (w) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 425(f) of the Code. (x) "Synon" means Synon Corporation, a Delaware corporation which was merged with and into the Company at the Effective Time. 3. STOCK SUBJECT TO THE PLAN. Immediately following the Effective Time, after giving effect to the adjustments to the terms of the Options pursuant to Section 11 of the Plan and Section 2.2 of the Merger Agreement, there were 370,653 Shares subject to Options. Shares issued upon the exercise of Options may be authorized but unissued Shares, previously issued Shares acquired and held in the treasury of Parent or a Subsidiary of Parent or a combination of the foregoing. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. The Plan shall be administered by a committee of the Board designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of applicable state corporate and securities laws and of the Code (the "Applicable Laws"). Once appointed, such committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, and fill vacancies, however caused, all to the extent permitted by the Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, the Administrator shall have the authority, in its discretion: (i) to make any determination or take any action that is necessary or advisable in connection with the administration of the Plan and the Options, and to interpret and construe any provision of the Plan or any Option Agreement; (ii) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; (iii) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; and 3 (iv) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. STATUS OF OPTIONS. Neither the Plan nor any Option Agreement shall confer upon any Optionee any right with respect to continuance of employment or other service with Parent, the Company or any other Subsidiary of Parent, nor shall the Plan or any Option Agreement interfere in any way with any right Parent, the Company or any other Subsidiary of Parent would otherwise have to terminate such Optionee's employment or other service at any time. 6. TERM OF PLAN. Unless this Plan shall theretofore have been terminated as herein provided, it shall terminate at the earliest time at which all of the Options shall have been exercised or shall have expired. 7. TERM OF OPTION. The term of each Option shall be the term stated in the applicable Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may have been provided in the Option Agreement; and provided further that in the case of an Option granted to an Optionee who, at the time the Option was granted owned (10%) of the voting power of all classes of stock of Synon, the term of the Option shall be no more than five (5) years from the date of grant thereof or such shorter term as have been provided in the applicable Option Agreement. 8. OPTION CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option may consist entirely of cash, check or, at the discretion of the Administrator, a promissory note or such other consideration for the issuance of Shares to the extent permitted under the Applicable Laws. The method of payment shall be determined by the Administrator. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable in accordance with the terms of the Plan and the applicable Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of Parent or of a duly authorized transfer agent of Parent) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the 4 exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares subject to such Option equal to the number of Shares as to which the Option is exercised. Parent may in its sole and absolute discretion provide for (i) the deferred payment of the exercise price for Shares purchased upon the exercise of an Option from the proceeds of sale through a bank or broker of some or all of the Shares to which such exercise relates or (ii) the payment of the exercise price for Shares purchased upon the exercise of an Option by the transfer to Parent of shares of Common Stock owned by the Optionee having an aggregate Fair Market Value per share at the date of exercise equal to the aggregate exercise price or by withholding a number of Shares otherwise issuable to the Optionee having an aggregate Fair Market Value per share at the date of exercise equal to the aggregate exercise price or (iii) by a combination of such methods of payment or deferred payment. Any such payment or deferred payment of the exercise price shall be on such terms and subject to such conditions, consistent with the terms of the Plan and the Options, including without limitation execution and delivery by the Optionee of such documents, and compliance by the Optionee with such other procedures, as the Administrator may establish. (b) TERMINATION OF EMPLOYMENT. In the event of termination of an Optionee's Continuous Status as an Employee, such Optionee may, but only within ninety (90) days (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option having been made at the time of grant of the Option and not exceeding ninety (90) days) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the applicable Option Agreement), exercise his Option to the extent that such Optionee was entitled to exercise it at the date of such termination. The preceding sentence shall not apply to Options that were substituted for options to acquire ordinary shares of Synon Limited granted under the Synon Limited Employee Incentive Share Option Plan ("Substituted Options"). Instead, an Optionee's Substituted Option shall, subject to Sections 7, 9(c) and 9(d) herein, expire upon the termination of the Optionee's Continuous Status as an Employee; provided, however, that the Administrator may, in its sole discretion, by written notice given to an ex- Employee, permit the ex-Employee to exercise Substituted Options during a period following his or her termination of employment, which period shall not extend beyond the expiration date contained in the Option Agreement evidencing such Substituted Option. To the extent that an Optionee was not entitled to exercise the Option (including a Substituted Option, as the case may be) at the date of such termination, or if an Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's Continuous Status as an Employee as a result of his total and permanent disability (as defined in Section 22(e) (3) of the Code), the Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the applicable Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that an Optionee was not entitled to exercise the Option at the date of 5 termination, or if an Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. To the extent that an Optionee was not entitled to exercise the Option at the date of death, or if an Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any required action by the stockholders of Parent, the number of shares of Common Stock covered by each outstanding Option, and the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by Parent; provided, however, that conversion of any convertible securities of Parent shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by Parent of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of Parent, the Administrator shall notify the Optionee at least thirty (30) days prior to such proposed action. To the extent it has not theretofore expired or been exercised, the Option will terminate immediately prior to the consummation of such proposed action. In the event of a merger of Parent with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that such successor corporation does not agree to assume the Option or to substitute an equivalent option, the Administrator shall, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Administrator makes 6 an Option fully exercisable in lieu of assumption or substitution in the event of a merger, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. [INTENTIONALLY OMITTED.] 13. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Administrator may at any time amend, suspend or terminate the Plan, but no amendment, suspension or termination shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Section 422A of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), Parent shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for Parent with respect to such compliance. As a condition to the exercise of an Option, Parent may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for Parent, such a representation is required by any of the aforementioned relevant provisions of law. In addition, Parent may withhold, or cause to be withheld, from the Optionee's salary, wages or other cash compensation any federal, state, local or foreign taxes required to be withheld in connection with the exercise of an Option, and to the extent that such amounts are insufficient for such withholding, Parent may also require, as a condition to the exercise of the Option, that the Optionee make such arrangements for the payment of the balance of any such taxes as Parent in its discretion determines to be satisfactory, including, if elected by the Optionee, the satisfaction of any tax withholding obligation in Shares otherwise issuable to the Optionee. 7 15. RESERVATION OF SHARES. Parent has reserved for issuance a sufficient number of Shares to permit the exercise in full of all Options. The inability of Parent to obtain authority from any regulatory body having jurisdiction, which authority is deemed by Parent's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve Parent of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. OPTION AGREEMENTS. Options shall be evidenced by Option Agreements in such form as the Administrator shall approve from time to time. 17. [INTENTIONALLY OMITTED.] 18. INFORMATION TO OPTIONEES. Parent shall provide to each Optionee upon request therefor, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all stockholders of Parent. 8 EX-10.3 4 RULES OF EXECUTIVE SHARE OPTION SCHEME EXHIBIT 10.3 RULES OF THE EXECUTIVE SHARE OPTION SCHEME OF SYNON CORPORATION Amended pursuant to Rule 9(A) 30 July 1998 SYNON CORPORATION 1. Definitions In these Rules, unless the context otherwise requires, the following words and expressions shall have the following meanings:- (a) "Act": the Income and Corporation Taxes Act 1988. (b) "Auditors": the Auditors of the Corporation for the time being and from time to time. (c) "Corporation": SYNON CORPORATION (otherwise than as provided in Rule 6(J). (d) "Date of Commencement": the date on which the scheme is approved by the Corporation in general meeting. (e) "Directors": the Board of Directors of the Corporation for the time being and from time to time or a duly authorised committee thereof. (f) "Executive": a full-time director of any member of the Group who is required under the terms of his contract of employment to work for such member or members of the Group for the whole or substantially the whole of his working time and in any event for at least 25 hours per week in aggregate (excluding meal breaks) or an employee of any member of the Group (other than an employee who is a director of any member of the Group) who is required under the terms of his contract of employment to work for a member or members of the Group for the whole or substantially the whole of his working time and in any event for at least 20 hours per week in aggregate (excluding meal breaks). Provided that such director or employee is not at the date of offer of an Option within two years of his normal retirement date or of such other date of retirement as may have been already determined and excluding any director or employee who is precluded from participation by paragraph 8 of Schedule 9 to the Act or who owns Ordinary Shares comprising more than ten per cent of the total combined voting power of all classes of stock of the Corporation or any corporation in the Group. (g) "Group": the Corporation and any corporation or corporations for the time being under the control of the Corporation ("control" having the meaning given to the expression in Section 840 of the Act). (h) "Option": a right to subscribe for or acquire Ordinary Shares pursuant to the Scheme. (i) "Option Holder": an Executive to whom an Option has been granted in accordance with the Scheme and in whom rights under the Scheme are still vested or (where the context so requires) the legal personal representatives of such a person. (j) "Option Price": the price at which an Option Holder may subscribe for or acquire an Ordinary Share as determined pursuant to Clause 4 hereof. (k) "Ordinary Shares": shares of common stock of $0.001 par value in the capital of the Corporation which satisfy the conditions of paragraphs 10 to 14 of Schedule 9 to the Act. "Ordinary Shareholder" shall be construed accordingly. (l) "Relevant Emoluments": such of the Executive's emoluments in respect of his office or employment with the Group as are liable to be paid under deduction of tax pursuant to Section 203 of the Act after deducting from them amounts included by virtue of Chapter II Part V of the Act. (m) "Relevant Limit": the Relevant Emoluments for the current or preceding Year of Assessment (whichever shall be the greater) or where there were no Relevant Emoluments for the preceding Year of Assessment the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. (n) "Redundancy": dismissal or redundancy within the meaning of the Employment Protection (Consolidation) Act 1978. (o) "Rules": the rules for the administration of the Scheme contained herein or which are laid down by the Directors and which may be amended by them in accordance with the provisions of Clause 9 hereof. (p) "Scheme": the Executive Share Option Scheme set out herein. (q) "Year of Assessment": the meaning ascribed to it by Section 832 of the Act. (r) "Subsisting Option": an Option that has not lapsed, been renounced or exercised. Any reference to a statutory provision shall be deemed to include that provision as the same may from time to time be amended or re-enacted, any reference to a Corporation share option scheme includes that scheme as the same may be varied from time to time in accordance with its terms, and wherever the context so admits or requires the singular shall include the plural and vice versa and the masculine shall include the feminine. 2. Commencement The Scheme shall commence on the Date of Commencement. 3. Offer and Grant of Options (A) The Directors may, subject to the Rules, in their absolute discretion offer Options to Executives. (B) Options may be granted hereunder at any time following the date that the Board of Inland Revenue approve the Scheme. 3 (C) Subject to the limitations hereinafter set out, Options may be granted to such Executives in such amounts as the Directors shall in their absolute discretion from time to time determine. No person shall be entitled as of right to participate in the Scheme. (D) If the Directors determine to offer participation in the Scheme to an Executive they shall give him notice in writing of such offer specifying the number of Ordinary Shares over which he may take up an Option and the Option price thereof. Any such offer shall be personal to the Executive to whom it is made and shall remain open for acceptance for a period of 25 days from the date it is made. An offer not accepted within such 25 day period shall be deemed to have been declined and shall thereupon lapse. If accepted within the due period the Option shall be granted on the last day of such period. (E) Acceptance of an offer of an Option by an Executive shall be in such manner as the Directors may require and upon and by such acceptance the Executive shall be bound by the Rules. An offer may be accepted in part. The consideration payable by an Executive for the grant of an Option to him shall be the sum of $1 payable upon acceptance (regardless of the number of Ordinary Shares subject thereto) unless the option is granted under seal or as a Deed. (F) An Option shall be personal to the Option Holder and accordingly, save in the specific situations described in the Rules where the Option may be exercised by personal representatives, shall not be capable of being transferred, assigned, charged or otherwise encumbered by the Option Holder. Any breach of this provision shall entitle the Directors to cancel the Option. 4. The Option Price The Option Price shall be determined by the Directors but shall in no event be less than the greater of:- (a) the nominal value of an Ordinary Share; or (b) a price equal to the market value (as the same is defined in Section 187 of the Act) of an Ordinary Share on the day prior to the day on which the offer is made as determined by agreement between the Corporation and the Shares Valuation Division of the Board of Inland Revenue on or before that day PROVIDED THAT if the Ordinary Shares have been admitted to the Official List of the Stock Exchange the price falling to be determined within this paragraph (b) shall be a price equal to the average of the middle market quotations for an Ordinary Share on The Stock Exchange on the three dealing days immediately prior to the day on which the offer is made as derived from The Stock Exchange Daily Official List and if the Ordinary Shares have been admitted to the New York Stock Exchange the price falling to be determined within this paragraph (b) shall be the closing sales price of such Ordinary Share (or the closing bid, if no sales were reported, as quoted on such exchange) as reported 4 in the Wall Street Journal on the day prior to the date such Option is granted. The Option price shall be subject to variation pursuant to Rule 8. 5. Limitations of the Scheme (A) No Executive shall obtain rights under the Scheme which will, at the time they are obtained, cause the aggregate market value of the Ordinary Shares which he may acquire in pursuance of rights obtained under the Scheme or under any other share option or share incentive scheme approved under Schedule 9 to the Act (as amended from time to time), and any other executive share option scheme established for any directors or employees of members of the Group or any associated corporation of the Corporation (as the same is defined in Section 416 of the Act) and whether exercised or not, to exceed four times the Executive's Relevant Limit or Pound 100,000 which ever is the greater. Provided that no account shall be taken of subscription or acquisition moneys for shares comprised in such options granted more than ten years prior to the date of the proposed grant of such Option, whether exercised or not. (B) Subject to paragraph 5(C) below the total number of Ordinary Shares over which Options may be granted at any date under the Scheme shall not exceed five million (except to the extent that such options have lapsed (or been renounced). (C) The total number of Ordinary Shares over which Options may be granted under the Scheme at any date, when aggregated with the total number of Ordinary Shares in respect of which rights of subscription have been granted in the previous ten years under the Scheme and any other share option or share incentive scheme established for any directors or employees of members of the Group (except to the extent to which they have lapsed or been renounced or released), shall not exceed twenty per cent of the aggregate of the issued Ordinary Shares and "A" Preferred Stock and Ordinary Shares already put under option (and which have not lapsed or been renounced or been exercised) from time to time. (D) No Option may be granted under the Scheme more than ten years after the Date of Commencement. 6. Exercise, Lapse and Renunciation of Options (A) Subject to the following provisions of Rule 6(A) a subsisting Option may only be exercised in whole or in part by an Option Holder during the seven years following the expiration of a period of three years from the grant thereof. Notwithstanding the foregoing but subject to Rule 6(B) below a subsisting Option may nevertheless be exercised within such three year period if:- (i) The Option Holder ceases to be in the full time employment of a member of the Group by reason of his injury, disability, retirement, dismissal by reason of redundancy or because the corporation employing him ceases to be a member of the Group (unless the Option Holder is immediately employed by 5 another member of the Group), in any of which events the Option Holder shall have the right to exercise the Option during the period of three months from the date of such cessation; or (ii) the Option Holder dies whilst in the full time employment of a member of the Group in which event his legal personal representatives shall have the right to exercise the Option during the period of six months from the date of his death; or (iii) the Option Holder dies within three months of ceasing to be in the full time employment of a member of the Group for one of the reasons described in (A)(i) above, in which event his legal personal representatives shall have the right to exercise the Option during the period of six months from the date of such cessation; or (iv) a general offer is made to all the holders of Ordinary Shares (or all such holders other than the offeror and/or any person controlled by the offerer and/or any person acting in association or concert with the offeror) and such offer becomes or is declared unconditional in which event the Option Holder may at any time within three months after the date on which such offer is made exercise without restriction all or any part of his Option; or (v) notice of a meeting to consider a resolution for the voluntary winding up of the Corporation is given, in which event the Option Holder shall have the right to exercise the Option at any time before the resolution is duly passed or defeated or the meeting concluded or adjourned sine die. (B) Notwithstanding the terms of Rule 6(A) above an Option shall lapse automatically insofar as it is capable of exercise if it has not been exercised by the earlier of:- (i) the expiration of ten years from the date of grant thereof; (ii) the expiration of three months from the date on which an Option Holder ceases to be in the full-time employment of a member of the Group for the reasons described in (A)(i) or above; (iii) the expiration of six months from the date of the death of the Option Holder whilst in the full-time employment of a member of the Group; (iv) where the Option Holder dies within three months of ceasing to be in the full-time employment of a member of the Group for the reasons described in 6(A)(i) above, the expiration of six months from the date of such cessation; (v) the date on which an Option Holder is dismissed or leaves the employment of a member of the Group for any reason other than for those reasons or in the circumstances described in 6(A)(i) or 6(A)(ii) above; 6 (vi) providing that a subsisting Option is not released for a new Option pursuant to Rule 6(F), three months after the date of any offer in writing given to the holders of Ordinary Shares pursuant to Rule 6A(iv); (vii) the date of commencement of a winding up of the Corporation; (viii) the date the Option Holder is adjudicated bankrupt; (ix) upon cancellation of the Option by the Directors pursuant to Clause 3(F) hereof. (C) It shall be a condition of the Scheme that in the event of the termination of an Option Holder's full time employment with a member of the Group (for whatever reason) he shall not be entitled to any compensation whatsoever by reason of any alteration or determination thereon of his rights or expectations under the Scheme. (D) An Option Holder may at any time renounce his Option by serving notice in writing on the Corporation of his intention to so renounce. The renunciation shall be effective from the date of receipt of such notice of the Corporation, upon which date the Option Holder's Option shall be deemed to have lapsed. (E) No Option may be exercised by an Option Holder at any time when he is precluded by paragraph 8 of Schedule 9 to the Act from participating in the Scheme. (F) If any corporation (in this Rule 6(F) referred to as the acquiring corporation) makes an offer to all the holders of ordinary shares as referred to in Rule 6(A)(iv) the Directors shall before such offer becomes or is declared unconditional seek the agreement of the acquiring corporation for Option Holders to release subsisting Options to the acquiring Corporation in consideration of the acquiring Corporation granting new Options which relate to shares in the acquiring Corporation or any other corporation falling within Paragraph 10 of Schedule 9 to the act. If such agreement is obtained every Option Holder shall, after such time as the offer becomes or is declared unconditional and the acquiring corporation has obtained control of the Corporation, be entitled to release every subsisting Option held by him in consideration of the grant of new Option which satisfies the following conditions and providing that such transfer is within the appropriate period as set out in Rule 6(G):- (i) is over shares in the acquiring corporation or a corporation controlling the acquiring corporation which satisfy the conditions specified in paragraphs 10 to 14 inclusive of Schedule 9 to the Act (and the term "Ordinary Shares" in these Rules shall thereafter be construed accordingly) (ii) is a right to acquire such number of such common stock as has on acquisition of the new Option an aggregate market value equal to the aggregate market value of the Ordinary Shares subject to the old Option on its disposal 7 (iii) has an Option Price per Ordinary share such that the aggregate price payable on complete exercise of the Option equals the aggregate price that would have been payable on complete exercise of the old Option; and (iv) is otherwise identical in terms to the old Option. The new Option shall, for all other purposes of these Rules, be treated as having been acquired at the same time as the old Option for which it is released. (G) The "appropriate period" referred to in Rule 6(F) above means the period of three months beginning when the offeror has obtained control of the Corporation and any conditions subject to which the offer is made are satisfied. (H) Rules 6(F) and 6(G) above apply to all Options granted on or after the Date of Commencement. (I) The exercise of an Option pursuant to the preceding provisions of this Rule 6 shall be subject to the provisions of Rule 7 below. (J) Following the release of subsisting Options and the grant of new Options the term: i. "Corporation" shall for the purposes only of Rules 6(A), 6(B) (ii), (iii), (iv), (v), (vii), 6(C), 6(D), 6(F), 6(G), 7, 8, 9 (except 9(D)), 10, 11, and 13 mean in relation to the new Options, the corporation the share capital of which includes shares over which new Options have been granted and for the purposes of Rule 9(D) shall mean Synon Corporation and the acquiring corporation (as defined in 6(F)) and the term "Group" and "Executive" shall for the purposes of such Rules be construed accordingly; ii. "Directors" in Rules 6, 7, 8, 9, 10 and 11 shall mean in relation to the new options the directors of the acquiring corporation (as defined in 6(F). (K) Where in accordance with Rule 6(F) subsisting Options are released and new Options granted the new Options shall not be exercisable in accordance with Rule 6(A) (iv) by virtue of the event on which new Options were granted. 7. Manner of Exercise of Options (A) An Option may be exercised in whole or part by the Option Holder giving notice in writing to the Corporation stating that the Option is thereby exercised and the number of Ordinary Shares in respect of which it is exercised. With such notice the Option Holder shall forward to the Corporation in a form acceptable to the Directors the consideration for the Ordinary Shares in respect of which the Option is exercised calculated by reference to the Option Price. An Option (or part thereof) shall be deemed to have been exercised when the said notice together with the said 8 consideration is received by the Corporation. If the consideration is paid other than in cash, such consideration shall be deemed to have been received by the Corporation upon the bank of the Corporation confirming that such cash consideration has been credited to the bank account of the Corporation or to such other account as the Corporation shall direct. As soon as practicable and in any event within 30 days of receipt of the said notice and consideration the Corporation will send or cause to be sent to the Option Holder or his legal personal representatives (as the case may be) a definitive share certificate for the Ordinary Shares in respect of which the Option is exercised. (B) any Ordinary Shares allotted on the exercise of an Option shall rank pari passu in all respects with the Ordinary Shares in issue at the date of exercise of such Option and shall participate in all dividends or other distributions which may be declared, made or paid by reference to a record date after such date. (C) Any partial exercise of an Option (other than such partial exercise as completes the exercise of the said Option) shall be in respect of ten Ordinary Shares or an integral multiple thereof. 8. Issue or Reorganisation In the event of any capitalisation issue or rights issue or any subdivision or consolidation of the Ordinary Shares or any reduction of the Ordinary Share capital of the Corporation then the number of Ordinary Shares comprised in any Option, the number of Ordinary Shares which may be issued or made available pursuant to rights granted under the Scheme and the Option Price thereof may be adjusted by the Directors (subject to obtaining prior Board of Inland Revenue approval to such adjustment) in such manner and with effect from such date as they may in their absolute discretion determine to be appropriate. Provided that the auditors shall have confirmed in writing that in their opinion such adjustments are fair and reasonable. Any such adjustments shall be made on the basis that the total moneys originally payable by an Option Holder on full exercise of his option rights shall remain unchanged. 9. Administration and Amendment (A) The Scheme shall in all respects be administered by the Directors who may at any time and from time to time be resolution (and without other formality) amend or augment the Scheme in any respect Provided that:- (i) no amendment shall operate to affect adversely any rights already acquired by an Option Holder under the Scheme; (ii) no amendment may be made except by the Corporation in general meeting to nullify or override any of the provisions of Clauses 1(f), 1(k), 1(l), 1(m), 3(A), 3(B), 3(D), 3(E), 3(F), 4, 5, 6, 7(B), 8 and this Clause. 9 Notwithstanding anything to the contrary contained herein the Directors may at any time amend the Scheme in any way to the extent necessary either to secure the approval of the Scheme by the Board of Inland Revenue or to ensure that such approval is not withdrawn pursuant to any statutory modifications to the Act. (B) No amendment or alteration to the Scheme made after it has been approved under the provisions of Schedule 9 to the Act shall have effect unless such amendment or alteration has been approved by the Board of Inland Revenue. (C) The Corporation shall bear the costs of setting up and administering the Scheme. (D) The Corporation shall maintain all necessary books of account and records relating to the Scheme. (E) The Directors shall be entitled to authorise any person to execute on behalf of an Option Holder, at the request of the Option Holder, any document relating to the Scheme insofar as such document is required to be executed pursuant hereto. 10. Availability of Shares Subject to the provisions of this Clause the Corporation shall have available at all times sufficient authorised but unissued Ordinary Shares necessary to satisfy Options which have been granted but not exercised. On the exercise of an Option the Directors may satisfy the requirement for Ordinary Shares by allotment of Ordinary Shares, by purchasing Ordinary Shares or by such other means as they may determine. 11. Admission to the Official List If at any time prior to exercise of a Subsisting Option the Ordinary Share capital of the Corporation shall be admitted to the Official List of The Stock Exchange or if such shares shall be listed for trading on the New York Stock Exchange the Corporation shall within one month after the date of exercise of an Option apply to the Council of either above referenced Stock Exchanges for permission for the Ordinary Shares the subject of such exercise to be admitted to the Official List or to the New York market as the case may be. 12. Termination The Directors may at any time resolve not to grant further Options under the Scheme but the subsisting right of Option Holders under the Scheme shall remain in force. 13. Notices 10 (A) Option Holders shall be entitled while they have subsisting rights under the Scheme to receive copies of all notices and other documents sent by the Corporation to its Ordinary Shareholders. (B) Any notice or other communication between the Corporation and an Option Holder shall be given by sending the same by post or by personal delivery to, in the case of the Corporation, its principal place of business in the United Kingdom and in the case of the Option Holder, his address as notified to the Corporation from time to time. 11 EX-27 5 ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE STERLING SOFTWARE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS 9-MOS SEP-30-1998 SEP-30-1998 APR-01-1998 OCT-01-1997 JUN-30-1998 JUN-30-1998 441,619 441,619 252,441 252,441 154,522 154,522 0 0 0 0 877,160 877,160 58,434 58,434 45,278 45,278 1,110,201 1,110,201 213,763 213,763 0 0 0 0 0 0 8,093 8,093 825,104 825,104 1,110,201 1,110,201 161,545 469,771 161,545 469,771 61,822 182,795 124,550 379,336 507 811 0 0 78 139 45,062 114,748 15,320 39,014 29,742 75,734 0 0 0 0 0 0 29,742 75,734 .38 .98 .36 .92
-----END PRIVACY-ENHANCED MESSAGE-----