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 September 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 1-9247
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 November 3, 1998
par value $.10 per share 538,260,743
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
September 30, 1998 and March 31, 1998 1
Consolidated Statements of Income -
Three Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Income -
Six Months Ended September 30, 1998 and 1997 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Condensed Financial Statement 5
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. Other Information:
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE> 1
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<CAPTION>
September 30, March 31,
1998 1998
------------ -------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 357 $ 251
Marketable securities 104 59
Trade and installment accounts receivable 1,759 1,859
Inventories and other current assets 92 86
----- -----
TOTAL CURRENT ASSETS 2,312 2,255
Installment accounts receivable, due after one year 2,794 2,490
Property and equipment 451 459
Purchased software products 206 289
Excess of cost over net assets acquired 1,176 1,099
Investments and other noncurrent assets 131 114
----- -----
TOTAL ASSETS $7,070 $6,706
===== =====
LIABILITIES AND STOCKHOLDERS EQUITY:
Loans payable and current portion of long-term debt $ 127 $ 571
Other current liabilities 970 1,305
Long-term debt 2,033 1,027
Deferred income taxes 1,011 952
Deferred maintenance revenue 336 370
Stockholders equity 2,593 2,481
----- -----
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $7,070 $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 September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Product revenue and other related income $1,031 $940
Maintenance fees 185 182
----- -----
TOTAL REVENUE 1,216 1,122
Costs and expenses:
Selling, marketing and administrative 473 428
Product development and enhancements 103 90
Commissions and royalties 62 55
Depreciation and amortization 79 85
Interest expense - net 29 29
----- -----
TOTAL COSTS AND EXPENSES 746 687
----- -----
Income before income taxes 470 435
Provision for income taxes 176 163
----- -----
NET INCOME $ 294 $ 272
----- -----
BASIC EARNINGS PER SHARE $ .53 $ .50
----- -----
Basic weighted average shares used in
computation* 554 546
DILUTED EARNINGS PER SHARE $ .52 $ .48
----- -----
Diluted weighted average shares used in
computation* 569 568
<FN>
*Shares and per share amounts adjusted for three-for-two stock split
effective November 5, 1997.
<FN>
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE> 3
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
For the Six Months
Ended September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Product revenue and other related income $1,897 $1,651
Maintenance fees 366 362
----- -----
TOTAL REVENUE 2,263 2,013
Costs and expenses:
Selling, marketing and administrative 944 810
Product development and enhancements 203 179
Commissions and royalties 114 100
Depreciation and amortization 162 179
Interest expense - net 59 61
1995 Stock Plan charge 1,071 -
----- -----
TOTAL COSTS AND EXPENSES 2,553 1,329
----- -----
(Loss) Income before income taxes (290) 684
(Benefit) Provision for income taxes (103) 256
----- -----
NET (LOSS) INCOME $(187) $ 428
----- -----
BASIC (LOSS) EARNINGS PER SHARE $(.34) $ .78
----- -----
Basic weighted average shares used in
computation* 553 545
DILUTED (LOSS) EARNINGS PER SHARE $(.34) $ .76
----- -----
Diluted weighted average shares used in
computation* 553 ** 565
<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.
<FN>
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE> 4
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
For the Six Months
Ended September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net (loss) income $(187) $428
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 162 179
Provision for deferred income taxes 58 101
Compensation expense related to stock and pension plans 774 21
Increase in noncurrent installment accounts receivable (259) (177)
Decrease in deferred maintenance revenue (36) (24)
Gain on sale of property and equipment (14)
Changes in other operating assets and liabilities,
excludes effects of acquisitions (267) (106)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 231 422
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing rights
and intangibles (106) (17)
Purchase of property and equipment (37) (31)
Proceeds from sale of property and equipment 38
Increase in current marketable securities (45) (3)
Capitalized development costs (14) (10)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (164) (61)
FINANCING ACTIVITIES:
Debt borrowings (repayments) - net 568 (354)
Dividends paid (23) (18)
Exercise of common stock options/other 26 46
Purchases of treasury stock (534) (43)
----- -----
NET CASH PROVIDED BY(USED IN)FINANCING ACTIVITIES 37 (369)
INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH 104 (8)
Effect of exchange rate changes on cash 2 (8)
----- -----
INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS 106 (16)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 251 143
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $357 $127
===== =====
<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 5
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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
SX. 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 six months ended September 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 six months ended September 30,1998 and 1997,
interest payments were $29 million and $64 million respectively, and income
taxes paid were $151 million and $212 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. 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.
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings (Loss) $ 294 $ 272 $ (187) $ 428
=== === === ===
Diluted Earnings Per Share
Weighted average shares outstanding
and common share equivalents 569 568 553 * 565
Diluted Earnings (Loss) Per Share $ .52 $ .48 $( .34) $ .76
==== ==== ==== ====
Diluted Share Computation:
Average common shares outstanding 554 546 553 545
Average common share equivalents net 15 22 - 20
---- ---- ---- ----
Weighted average shares outstanding
and common share equivalents 569 568 553 * 565
==== ==== ==== ====
<FN>
* Common stock equivalents for the six months ended September 30, 1998 are not
included since they would be antidilutive.
</TABLE>
<PAGE> 6
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130,
Reporting Comprehensive Income, which was adopted by the Company in fiscal year
1999. SFAS No. 130 establishes new rules for reporting and displaying
comprehensive income and its components; however, the adoption has no impact on
the Companys net income or shareholders equity. Comprehensive Income includes
foreign currency translation adjustments and unrealized gains or losses on
the Companys available-for-sale securities which prior to adoption were
reported separately in shareholders equity. The components of comprehensive
income, net of related tax, for the three month and six month periods ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In millions)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $294 $272 $(187) $428
Foreign Currency Translation
Gains (Losses) 32 (12) 35 (26)
Unrealized Gain on Equity Securities 1
--- --- --- ---
Total Comprehensive Income (Loss) $327 $260 $(152) $402
=== === === ===
</TABLE>
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2 Software
Revenue Recognition, as amended in March 1998 by SOP 98-4. These SOPs provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. Based on the Companys interpretation of the
requirements of the SOPs, application of these statements is not expected to
have a material impact on the Companys revenue recognition policies. However,
AcSEC is currently reviewing further modifications to the SOP with the
objective of providing more definitive, detailed implementation guidelines.
This guidance could lead to unanticipated changes in the Companys operational
and revenue recognition practices including, but not limited to changes in the
period over which revenue is recognized. Such changes may have a material
adverse effect on the Companys reported revenue, increase administrative costs,
or otherwise adversely modify existing operations.
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), or a total of 20.25
million shares, to three key executives would vest and no longer be subject to
forfeiture. However, the 20.25 million shares would continue to be subject to
significant limitations on transfer for up to seven years following vesting.
On May 21, 1998, the closing price of the Companys common stock exceeded $53.33
for the sixtieth trading day within the twelve month period ending May
21, 1998. Subsequent to May 21, 1998, the Compensation Committee of the
<PAGE> 7
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Companys Board of Directors reviewed the performance objectives of the 1995
Plan and certified the vesting of an aggregate of 20.25 million shares to the
three key executives. As a result, in the first quarter of fiscal year 1999,
the Company recorded a one time charge of $1,071 million ($675 million after
tax). The executives elected to have a portion of the vested shares withheld
for tax purposes.
NOTE C - SUBSEQUENT EVENT
In October 1998, the Company announced that it had increased the number of
shares of Common Stock authorized for repurchase under its July 1992 share
repurchase program. The Companys Board of Directors approved the repurchase of
an additional 36.875 million shares. Including previous authorizations, the
total amount authorized for repurchase is 200 million shares, of which
approximately 136 million have been repurchased through September 30,
1998. Shares repurchased will be used for general corporate purposes.
<PAGE> 8
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 September 30, 1998 increased 8%, or $94
million, over the prior years comparable quarter. The increase was primarily
attributable to growth in the client/server business which accounted for
approximately 50% of the Companys overall revenue for the second quarter. 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 across multi-platform environments, which accounted for
approximately 28% of total revenue for the second quarter. Total North
American revenue for the second quarter grew 3% over the prior years second
quarter. This resulted from lower mainframe software sales offset by continued
growth in client/server product sales. In the current quarter, North American
sales represented 64% of revenue compared to 67% of revenue one year ago. The
impact of foreign currencies against the US dollar decreased revenue in the
second quarter by approximately $13 million. In constant dollar terms, revenue
for the second quarter would have increased by nearly $107 million, or 10%, over
the prior years second quarter. Maintenance revenues remained essentially
unchanged from last years comparable quarter. Additional maintenance revenue
from prior year license arrangements was offset by the ongoing trend of site
consolidations and expanding client/server revenues, which yield lower
maintenance. Price changes did not have a material impact in this quarter or
the prior years second quarter.
On a year to date basis, total revenue increased 12% or $250 million from the
prior year. The increase was primarily attributable to growth in the
client/server business which accounted for 48% of the Companys overall revenue
year to date. Year to date client/server revenue, led by Unicenter TNG,
increased 30%, or $253 million, over the prior year. Unicenter TNG accounted
for approximately 26% of total revenue year to date. Total North American
revenue for the six months ended September 30, 1998 grew 13% over the prior
years comparable period. On a year to date basis, North American sales
represented 66% of revenue for both fiscal 1999 and fiscal 1998. On a year to
date basis, international revenue increased by nearly $82 million, or 12%, over
the prior year. In addition, the effect of foreign exchange rates on the US
dollar against most currencies decreased revenue by $32 million year to date.
Maintenance revenues remained essentially unchanged year to date. Price
Changes did not have a material impact year to date in fiscal year 1999 or in
the comparable period in fiscal year 1998.
Costs and Expenses:
Selling, marketing and administrative expenses as a percentage of total revenue
for the second quarter increased to 39% from 38% the prior year. Included in
these expenses was a $14 million gain from the sale of two properties.
Excluding the gain on the sale of these two properties, selling, marketing and
administrative expenses as a percentage of total revenue increased to 40% for
the September 1998 quarter. The increase was largely attributable to an
overall increase in personnel expense. The Company continues its ongoing
effort to
<PAGE> 9
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
expand its Global Professional Services division and worldwide sales
organization. Marketing costs related to new product introductions including
the Enterprise Edition and Workgroup Solutions also contributed to the
increase. 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 $13 million, or 14%, for the second quarter
compared to last years second quarter. There was continued emphasis on adapting
and enhancing products for the client/server environment, in particular
Unicenter TNG, Jasmine, Opal, the Enterprise and Workgroup Solutions,
as well as broadening of the Companys Internet/Intranet product offerings.
Commissions and royalties as a percentage of revenue were 5% for the second
quarter for both fiscal year 1999 and fiscal year 1998. Depreciation and
amortization expense in the second quarter decreased $6 million from the
comparable quarter in the prior year. The decrease was primarily due to
scheduled reductions in the amortization associated with The ASK Group, Inc.,
Legent Corporation, and Cheyenne Software, Inc. acquisitions, only partially
offset by smaller acquisitions in the current year. Net interest expense
remained unchanged from last years comparable quarter. The additional interest
expense related to the April 1998 issuance of $1.75 billion of unsecured senior
notes, reduced by the repayment of $1.2 billion under the Companys credit
facilities, was offset by the interest earned on the corresponding
increase in cash and marketable securities.
On a year to date basis, selling, marketing and administrative expenses as a
percentage of total revenue increased to 42% from 40% the prior year. The
current quarter $14 million gain on the sale of two properties did not have an
impact on selling, marketing and administrative expenses as a percentage of
total revenue. The increase was largely attributable to an overall increase in
personnel expense 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
increased marketing costs related to new product introductions including the
Enterprise Edition and Workgroup Solutions. Net research and development
expenditures increased $24 million, or 13%, year to date. Continued emphasis on
adapting and enhancing products for the client/server environment 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% year to date for both fiscal year 1999 and fiscal year 1998. On
a year to date basis, depreciation and amortization expense decreased by $17
million from the prior year. The decrease was primarily due to scheduled
reductions in the amortization associated with The ASK Group, Inc., Legent
Corporation, and Cheyenne Software, Inc. acquisitions. Net interest expense
remained unchanged year to date from last years comparable period.
Operating Margins:
The pretax income of $470 million, which includes $14 million associated with
property sales, for the second quarter is an increase of 8%, or $35 million,
over the second quarter in the prior year. On a year to date basis, the
pretax loss was $290 million, reflecting the onetime charge of $1,071 million
associated with the vesting of 20.25 million shares under the 1995 Key Employee
Stock Ownership Plan. The year to date net income, excluding the one time
charge, would have been $488 million, compared to net income of $428 million in
the prior year, an increase of $60 million, or 14%.
<PAGE> 10
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Companys consolidated effective tax rate for the September 1998 quarter and
the prior years September quarter was 37.5%. On a year to date basis, the
consolidated effective tax rate, including the charge, was 35.7% compared with
37.5% for the prior year. Excluding the above mentioned charge, the year to
date consolidated effective tax rate remains unchanged at 37.5%.
Operations:
In fiscal years 1997 and 1996, the Company incurred charges for the write off
of purchased research and development technology related to the Cheyenne and
Legent acquisitions. In both valuations, the Income Approach was utilized.
This approach focuses on the income producing capability of the asset and the
present value of the net benefit to be received over the life of the property.
The revenues generated are offset by the corresponding expenses including all
operating, research and development, and income tax expenses. The Cheyenne
products consist of network data storage, security and communications software
across multiple standalone as well as heterogeneous computer environments and
Legent is comprised of many systems management and database products. To date,
the vast majority of the projects in the aggregate have not varied materially
from original projections. Consistent with original projections, the
Company expects a seven year asset life, however, more rapid technological
change, market acceptance of competing technologies, and other internal and
external factors may negatively effect the total net benefit obtained from
the technology acquired.
Risks and Uncertainties:
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 world economies 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: the adequacy of the Companys internal
administrative systems to efficiently process transactions and store
and retrieve data subsequent to the year 2000; the significant percentage of
CAs quarterly sales recorded in the last few days of the quarter, making
financial predictions especially difficult and raising a substantial risk of
variance in actual results; the Companys increasing reliance on a single family
of products for a material
<PAGE> 11
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
portion of its sales; market acceptance of competing technologies; the
availability and cost of new solutions; delays in delivery of new products or
features; uncertainty of customer acceptance; the ability to recruit and retain
qualified personnel; the ability to update its business application products to
conform to 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 into other and new markets such as professional services; 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; the Companys ability to effectively integrate
acquired products and operations; the assimilation of business or
technology acquisitions; fluctuations in foreign currency exchange rates; the
volatility of the international marketplace, including the recent Asian and
Latin American turmoil; and other risks described in filings with the
Securities and Exchange Commission.
Within Europe, the European Economic and Monetary Union (EMU) will introduce a
new currency, the Euro, on January 1, 1999, initially available for currency
trading and noncash (banking) transactions. The existing local currencies will
remain legal tender through January 1, 2002. The Company has conducted risk
assessments and began implementing corrective actions to ensure preparedness
for the introduction of the Euro. Because of the staggered introduction of the
Euro regarding noncash and cash transactions, the Company has developed a plan
to address its accounting and business systems first. Compliance will be
achieved primarily through upgrading administrative systems. The Company does
not expect to experience significant operational disruptions or incur costs
which could materially affect the Companys liquidity or capital resources.
Year 2000:
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 continues to update
and test its product offerings for year 2000 compliance. Such costs are
included in net research and development expenses. 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. It is possible that the Company may experience increased expense
levels addressing migration issues for such customers. There can be no
assurance that all of the Companys products will be year 2000 compliant prior
to January 1, 2000 (except those the Company previously identified will not be
year 2000 compliant) 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 litigation and/or increased expenses
negatively affecting future operating results.
The Company recognizes the significance of the year 2000 problem as it relates
to our internal systems and understands that the impact extends beyond
traditional hardware and software to automated facility systems and
third parties. The Company has created and implemented an overall plan to make
its internal financial and administrative systems year 2000 ready by June 1999.
With regard to facility related systems (phone, voicemail, security systems,
etc.), the Company internally conducted assessment audits and is currently
sending questionnaires to vendors and service providers to confirm year 2000
readiness. The Company expects substantial completion of year 2000
readiness preparations by June 1999 and to continue comprehensive testing
through calendar 1999. The total cost of preparing internal systems to be year
2000 compliant is not expected
<PAGE> 12
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to be material to the Companys operations, liquidity, or capital resources.
Total expenditures, excluding personnel costs of existing staff, related to
internal systems year 2000 readiness is expected to be less than $20
million. Such expenses commenced in 1996 and are projected to continue
through calendar 1999. However, there can be no assurances that the Company
will not experience significant unanticipated negative performance and/or
flaws in the technology used in its internal systems. The Company is
in the process of completing its contingency plan for potential hardware and
software failures.
Liquidity and capital resources:
During the second quarter, the Companys cash, cash equivalents and marketable
securities decreased by approximately $285 million from the June 30, 1998
balance. The decrease is primarily attributable to the expenditure of
approximately $532 million for nearly 15 million shares of the Companys common
stock under its open market repurchase programs offset by cash provided
by operations and $38 million in proceeds from the sale of two properties.
Cash provided by operations totaled $319 million for the quarter ended
September 30, 1998. On a year to date basis, cash provided by operations
totaled $231 million, including a $318 million withholding tax payment made in
lieu of shares issued to certain executives under the 1995 Key Employee Stock
Ownership Plan. Year to date cash generated from operations, excluding this
withholding tax payment, totaled $549 million, an increase of 30% from the
prior year. This increase is primarily attributable to higher net income
(excluding the 1995 Stock Plan charge) and lower income tax payments resulting
from the 1995 Stock Plan charge.
On September 30, 1998, total debt outstanding consisted primarily of $1.75
billion of registered unsecured Senior Notes issued April 24, 1998, $320
million of unsecured Senior Notes issued April 1, 1996 and drawings on the
credit facility funding the construction of the European Headquarters totaling
$48 million. At September 30, 1998, the Company had no drawings outstanding
under its total of $2.6 billion credit facilities.
At September 30, 1998, the cumulative number of shares purchased under the
Companys various open market Common Stock repurchase programs was approximately
136 million shares. The remaining number of shares available for repurchase
under these programs at September 30, 1998 was approximately 27 million. The
number of shares authorized for repurchase under the program was increased in
October 1998. See Note C for additional information.
The Company is proceeding with construction of its European Headquarters in the
United Kingdom and its various expansion and renovation projects at its World
Headquarters in Islandia, New York. These projects will be completed over the
next 12 months and will result in total cashflow obligations of $225 million.
In addition, various capital resource requirements as of September 30, 1998
consisted of lease obligations for office space, computer equipment, mortgage
and 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 generated from operations, will be
sufficient to meet ongoing cash requirements.
<PAGE> 13
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
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. These cases
have been consolidated into a single action (the Shareholder Action) in the
United States District Court for the Eastern District of New York (NY Federal
Court). In addition, three derivative actions alleging similar facts were
brought in the NY Federal Court. An additional derivative action,
alleging that the Company issued 14.25 million more shares than were authorized
under the 1995 Key Employee Stock Ownership Plan (the 1995 Plan), was also
filed in the NY Federal Court. In all but one of these derivative actions, all
of the Companys directors were named as defendants. All of these derivative
actions have been consolidated into a single action (the Derivative Action) in
the NY Federal Court. The plaintiffs are expected to file an amended complaint
in both the Shareholder Action and the Derivative Action. Lastly, a derivative
action was filed in the Chancery Court in Delaware (the Delaware Action)
alleging that 9.5 million more shares were issued than were authorized under
the 1995 Plan. The Company and its directors have filed a motion to dismiss
the Delaware Action and the plaintiff has moved for summary judgment. Although
the ultimate outcome and liability, if any, cannot be determined, management,
after consultation and review with counsel, believes that the facts in each of
the actions do not support the plaintiffs claims and that the Company and its
officers and directors have meritorious defenses.
Item 4: Submission of Matters to a vote of Security Holders
(a) Annual meeting of Stockholders held on August 12, 1998.
(b) The stockholders elected Directors for the ensuing year as follows:
Affirmative Authority
Name Votes Withheld
- -------------- ----------- ---------
Russell M. Artzt 482,598,056 1,921,352
Willem F.P. de Vogel 482,609,070 1,910,338
Irving Goldstein 482,611,607 1,907,801
Richard A. Grasso 482,617,406 1,902,002
Shirley Strum Kenny 482,570,689 1,948,719
Sanjay Kumar 482,546,616 1,972,792
Charles B. Wang 482,425,991 2,093,417
(c) The Stockholders voted to approve an amendment to the 1996 Deferred Stock
Plan for Non Employee Directors as follows:
Affirmative 476,843,968
Negative Votes 6,632,010
Abstentions 1,043,430
(d) The Stockholders voted to approve the 1998 Incentive Award Plan as follows:
Affirmative 470,367,578
Negative Votes 13,219,227
Abstentions 932,603
<PAGE> 14
Item 4: (Continued)
(e) The Stockholders voted to ratify the appointment of Ernst & Young LLP as
the Companys independent auditors for the fiscal year ending March 31, 1999
as follows:
Affirmative 483,565,499
Negative Votes 443,418
Abstentions 510,491
<PAGE> 15
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: November 6, 1998 By:/s/ Sanjay Kumar
----------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: November 6, 1998 By:/s/ Ira Zar
----------------------
Ira Zar
Sr. Vice President - Finance
(Chief Financial and Accounting Officer)
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