UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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 ended from _____ to _____
Commission File Number 0-10180
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Computer Associates Plaza
Islandia, New York 11788-7000
(Address of principal executive offices) (Zip Code)
(516) 342-5224
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock as of July 29, 1998
par value $.10 per share 561,253,957
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
June 30, 1998 and March 31, 1998 1
Consolidated Statements of Income -
Three Months Ended June 30, 1998 and 1997 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended June 30, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statement 4
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE> 1
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $467 $251
Marketable securities 279 59
Trade and installment accounts receivable 1,639 1,859
Inventories and other current assets 100 86
----- -----
TOTAL CURRENT ASSETS 2,485 2,255
Installment accounts receivable, due after one year 2,589 2,490
Property and equipment 461 459
Purchased software products 241 289
Excess of cost over net assets acquired 1,090 1,099
Investments and other noncurrent assets 125 114
----- -----
TOTAL ASSETS $6,991 $6,706
===== =====
LIABILITIES AND STOCKHOLDERS EQUITY:
Loans payable and current portion of long-term debt $111 $571
Other current liabilities 774 1,305
Long-term debt 2,030 1,027
Deferred income taxes 973 952
Deferred maintenance revenue 336 370
Stockholders equity 2,767 2,481
----- -----
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $6,991 $6,706
===== =====
<FN>
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE> 2
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
<CAPTION>
For the Three Months
Ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Product revenue and other related income $ 866 $ 712
Maintenance fees 181 179
TOTAL REVENUE 1,047 891
Costs and expenses:
Selling, marketing and administrative 471 381
Product development and enhancements 100 89
Commissions and royalties 52 45
Depreciation and amortization 83 95
Interest expense - net 30 32
1995 Stock Plan charge 1,071 0
TOTAL COSTS AND EXPENSES 1,807 642
(Loss) Income before income taxes (760) 249
(Benefit) Provision for income taxes (279) 93
NET (LOSS) INCOME $ (481) $ 156
BASIC (LOSS) EARNINGS PER SHARE $(0.87) $ .29
Basic weighted average shares used in
computation* 552 544
DILUTED (LOSS) EARNINGS PER SHARE $(0.87) $ .28
Diluted weighted average shares used in
computation* 552 ** 562
<FN>
* Shares and per share amounts adjusted for three-for-two stock split
effective November 5, 1997.
<FN>
** Common stock equivalents are not included since they would be
antidilutive.
</TABLE>
<PAGE> 3
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
For the Three Months
Ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net (loss) income $(481) $ 156
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 83 95
Provision for deferred income taxes 23 37
Compensation expense related to stock and pension
plans 771 21
Increase in noncurrent installment accounts
receivable (99) (101)
Decrease in deferred maintenance revenue (34) (23)
Changes in other operating assets and liabilities,
excludes effects of acquisitions (351) (8)
----- -----
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (88) 177
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing
rights and intangibles (10) (6)
Purchase of property and equipment (14) (15)
Increase in current marketable securities (220) (1)
Capitalized development costs (7) (6)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (251) (28)
FINANCING ACTIVITIES:
Debt borrowings (repayments) - net 541 (167)
Exercise of common stock options/other 17 18
Purchases of treasury stock (2) (10)
----- -----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 556 (159)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH 217 (10)
Effect of exchange rate changes on cash (1) (1)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 216 (11)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 251 143
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 467 $ 132
===== =====
<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 4
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Computer Associates International, Inc.s (the Registrant or the Company)
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
Cash Dividends: In May 1998, the Companys Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid
on July 7, 1998 to stockholders of record on June 19, 1998.
Statements of Cash Flows: For the three months ended June 30, 1998 and 1997,
interest payments were $25 million and $45 million respectively, and income
taxes paid were $135 million and $121 million, respectively.
Net Income per Share: The Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
per Share, for the period ended June 30, 1998. SFAS No. 128 requires the
Company to present basic and diluted earnings per share (EPS) on the face of
the income statement. Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the
sum of the weighted-average number of common shares outstanding for the
period end, plus the assumed exercise of all dilutive securities, such as
stock options. Diluted earnings per share for the periods presented are not
materially different from the net income per share amounts reported under
Accounting Principles Board Opinion No. 15.
<TABLE>
<CAPTION> For the Three Months
End June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net (Loss) Earnings (481) 156
===== =====
Diluted Earnings Per Share
Weighted average shares outstanding
and common share equivalents 552 * 562
Diluted Earnings Per Share $(0.87) $0.28
===== =====
Diluted Share Computation:
Average common shares outstanding 552 544
Average common share equivalents - net 18
----- -----
Weighted average shares outstanding
and common share equivalents 552 * 562
===== =====
<FN>
* Common stock equivalents are not included since they would be antidilutive.
</TABLE>
<PAGE> 5
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE B -- THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN
Under the 1995 Key Employee Stock Ownership Plan (1995 Plan), if the closing
price of the Companys common stock on the New York Stock Exchange exceeded
$53.33 for 60 trading days within any twelve month period, Additional Grants
(as defined in the 1995 Plan) of 13.5 million shares, plus 6.75 million
shares from an Initial Grant (as defined in the 1995 Plan) in January 1996 to
three key executives, or a total of 20.25 million shares, would vest and no
longer be subject to forfeiture. However, the 20.25 million shares granted
would continue to be subject to significant limitations on transfer during
the next seven years. On May 21, 1998 the closing price of the Companys
common stock exceeded $53.33 for sixty trading days beginning October 21,
1997. The Companys Executive Compensation Committee met June 12, 1998 to
review the results, verify the attainment of the 1995 Plan performance
objectives and authorize the issuance to the three key executives a total of
20.25 million shares. As a result of these issuances in the first quarter of
fiscal year 1999, the Company recorded a one time charge of $1,071 million
($675 million after tax). As provided in the 1995 Plan, the executives have
elected to pay some of the applicable taxes with vested shares. The Company
reduced the issuance by approximately 5.5 million shares for this purpose and
has reflected the net grant of 14.7 million shares.
NOTE C -- SUBSEQUENT EVENT
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Companys stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations,
and omissions regarding the Companys future financial performance. A
derivative action based on essentially the same facts was also brought,
naming as defendants all of the Companys directors. Although the ultimate
outcome and liability, if any, cannot be determined, management, after
consultation and review with counsel, believes that the facts do not support
the plaintiffs claims and that the Company and its officers have meritorious
defenses.
<PAGE> 6
Item 2:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the companys future prospects are
forward looking statements under the federal securities laws. There can be
no assurances that future results will be achieved and actual results could
differ materially from forecasts and estimates. Important factors that could
cause actual results to differ materially are discussed below in the section
Results of Operations.
RESULTS OF OPERATIONS
Revenue:
Total revenue for the quarter ended June 30, 1998 increased by 18% or $156
million dollars over the prior years comparable quarter. The increase was
largely attributable to growth in the client/server business which accounted
for 47% of the Companys overall revenue. The client/server revenue growth
was led by Unicenter TNG (The Next Generation), a family of integrated
business solutions for monitoring and administering systems management cross
multi-platform environments which accounted for approximately 23% of total
revenue. Total North American revenue grew 25% over the prior years
comparable quarter. North American sales represented 69% of the revenue in
the June 1998 quarter compared to 65% of revenue in the June 1997 quarter.
The strengthening of the US dollar against most currencies decreased
International revenue by approximately $20 million. In constant dollar
terms, International revenue would have increased by nearly $32 million or
10% over the prior years comparable quarter. Maintenance revenues remained
essentially unchanged from last years comparable quarter. Price changes did
not have a material impact in either quarter.
Costs and Expenses:
Selling, marketing and administrative expenses as a percentage of total
revenue for the June 1998 quarter increased to 45% from 43% in the June 1997
quarter. The increase was largely attributable to the additional salary and
benefit expense for an increased number of employees as well as major
promotional events including: CA-World, the Companys major annual user
conference; the bi-annual sales kickoff, an assembly of the Companys sales
force to inaugurate the new years sales plan; and the introduction of the
Enterprise Edition and Workgroup Solutions. The Enterprise Edition products
are the Companys state of the art mid-market solutions addressing security,
network management, asset management, application development, information
management, and E-commerce. The Workgroup Editions provide the same
solutions as the Enterprise Editions with a focus on smaller computing
environments. Net research and development expenditures increased $11
million, or 12%, over the June 1997 quarter. Continued emphasis on adapting
and enhancing products for the client/server environment, in particular
Unicenter TNG, Jasmine, the Enterprise and Workgroup Solutions, as well as
broadening of the Companys Internet/Intranet product offerings were largely
responsible for the increase. Commissions and royalties as a percentage of
revenue were 5% for both the June 1998 and 1997 quarters. Depreciation and
amortization expense in the June 1998 quarter decreased $12 million from the
June 1997 quarter. The decrease was primarily due to scheduled reductions in
the amortization associated with The ASK Group, Inc., Legent Corporation, and
Cheyenne Software acquisitions. In the June 1998 quarter, net interest
expense decreased by $2 million over the June 1997 quarter as a result of
higher average cash levels and a favorable rate environment.
<PAGE> 7
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Margins:
The pretax loss of $760 million for the June 1998 quarter was attributable to
the one-time charge of $1,071 million associated with the issuance of 20.25
million shares under the 1995 Key Employee Stock Ownership Plan. Net income
in the June 1998 quarter, excluding the charge, would have been $194 million,
compared to net income of $156 million in the June 1997 quarter, an increase
of $38 million or 25%. The Companys consolidated effective tax rate,
including the charge, was 36.8% for the June 1998 compared with 37.5% for
the prior years comparable quarter. Excluding the charge, the June 1998
quarters consolidated effective tax rate was 37.5%.
Operations:
The Companys products are designed to improve the productivity and efficiency
of its clients information processing resources. Accordingly, in a
recessionary environment, the Companys products are often a reasonable
economic alternative to customers faced with the prospect of incurring
expenditures to increase their existing information processing resources.
However, a general or regional slowdown in the world economy could adversely
affect the Companys operations.
The effects of the Asian economic turmoil on our multinational clients and
its potentially adverse impact on our near term business is a concern. This,
coupled with deferred software purchasing decisions as clients deal with
their Year 2000 projects, as well as mainframe hardware transition issues,
may slow revenue and earnings growth over the next several quarters.
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes
higher discretionary expense levels in relation to projected revenue for the
first half of the year. Historically, the Companys combined third and fourth
quarter revenues have been greater than the first half of the year, as these
two quarters coincide with clients calendar year budget periods and
culmination of the Companys annual sales plan. These historically higher
second half revenues have resulted in significantly higher profit margins
since total expenses have not increased in proportion to revenue. However,
past financial performance should not be considered to be a reliable
indicator of future performance.
The Companys future operating results may be affected by a number of other
factors, including, but not limited to: uncertainties relative to global
economic conditions; the adequacy of the Companys internal administrative
systems to efficiently process transactions, store and retrieve data
subsequent to the year 2000; the Companys increasing reliance on a single
family of products for a material portion of its sales; market acceptance of
competing technologies; the availability and cost of new solutions; delays in
delivery of new products or features; the Companys ability to update its
business application products to conform with the new, common European
currency known as the Euro; the Companys ability to successfully maintain or
increase market share in its core business while expanding its product base
into other markets; the strength of its distribution channels; the ability
either internally or through third party service providers to support client
implementation of the Companys products; the Companys ability to manage fixed
and variable expense growth relative to revenue growth; the outcome of
litigation to which the Company is a party; and the Companys ability to
effectively integrate acquired products and operations.
<PAGE> 8
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company may experience future uncertainties regarding year 2000
compliance of its products. The Company has designed and tested the vast
majority of its recent product offerings to be year 2000 compliant. However,
there is currently a small minority of the product offerings that have not
been updated to meet year 2000 compliance specifications. The Company is
making its best efforts to address this issue and will continue to update and
test its product offerings for year 2000 compliance. The Company has
publicly identified any products that will not be updated to be year 2000
compliant and has been encouraging clients using these products to migrate to
compliant versions. There can be no assurance that all of the Companys
products except those previously identified will be year 2000 compliant prior
to the January 1, 2000 nor can there be assurances that the Companys
currently compliant products do not contain undetected problems associated
with year 2000 compliance. Such problems may result in increased expenses
negatively affecting future operating results.
The Company recognizes the significance of the year 2000 problem as it
relates to our internal systems. It has an overall plan and a systematic
process in place to make its internal financial and administrative systems
year 2000 ready within the next twelve to fifteen months. The cost of this
exercise is not viewed to have a material effect on the Companys results of
operations or liquidity. Contingency plans have also been developed such
that any failure to convert will not adversely affect overall performance.
Liquidity and capital resources
During the first quarter, the Companys cash, cash equivalents and marketable
securities increased by approximately $436 million from the March 31, 1998
balance. Cash used in operations totaled $88 million for the quarter ended
June 30, 1998, including a $318 million tax payment made in lieu of shares
granted to certain executives under the 1995 Key Employee Stock Ownership
Plan. Cash generated from operations, excluding this tax payment, totaled
$230 million, an increase of 30% from the prior years first quarter and is
largely attributable to the increase in net income.
On April 24, 1998, the Company issued $1.75 billion of unsecured Senior Notes
in a transaction governed by Rule 144A of the Securities Act of 1933. The
proceeds, net of discount, underwriting fees and expenses, totaled $1.73
billion, which was primarily used to repay the outstanding drawn balance of
$1.21 billion under the Companys $1.50 and $1.10 billion credit facilities.
At June 30, 1998, the cumulative number of shares purchased under the
Companys various open market Common Stock repurchase programs was
approximately 121 million shares. The remaining number of shares available
for repurchase under these programs at June 30, 1998 is approximately 42
million. All references to number of shares reflect the November 1997 three-
for-two stock split.
The Company is proceeding with construction of its European Headquarters in
the United Kingdom and has begun various expansion and renovation projects at
its World Headquarters in Islandia, New York. These projects will be
completed over the next 18 months and will result in total cashflow
obligations of $225 million. In addition, various capital resource
requirements as of June 30, 1998 consisted of lease obligations for office
space, computer equipment, mortgage or loan obligations and amounts due as a
result of product and company acquisitions.
The Company anticipates that existing cash, cash equivalents, short-term
marketable securities, the availability of borrowings under committed and
uncommitted credit lines, as well as cash provided from operations, will be
sufficient to meet ongoing cash requirements.
<PAGE> 9
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: August 4, 1998 By: /s/ Sanjay Kumar
----------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: August 4, 1998 By: /s/ Ira Zar
----------------------
Ira Zar
Sr. Vice President - Finance
(Chief Financial and Accounting Officer)
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 467
<SECURITIES> 279
<RECEIVABLES> 1639
<ALLOWANCES> 0
<INVENTORY> 100
<CURRENT-ASSETS> 2485
<PP&E> 461
<DEPRECIATION> 0
<TOTAL-ASSETS> 6991
<CURRENT-LIABILITIES> 885
<BONDS> 2030
0
0
<COMMON> 0
<OTHER-SE> 2767
<TOTAL-LIABILITY-AND-EQUITY> 6991
<SALES> 866
<TOTAL-REVENUES> 1047
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</TABLE>
