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, 1999
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 11749
(Address of principal executive offices) (Zip Code)
(516) 342-5224
(Registrant's 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 issuer's classes of
Common Stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock as of October 28, 1999
par value $.10 per share 539,024,676
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
September 30, 1999 and March 31, 1999................... 1
Consolidated Condensed Statements of Operations -
Three Months Ended September 30, 1999 and 1998.......... 2
Consolidated Condensed Statements of Operations -
Six Months Ended September 30, 1999 and 1998............ 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 1999 and 1998............ 4
Notes to Consolidated Condensed Financial Statements.... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk.. 16
PART II. Other Information:
Item 1. Legal Proceedings....................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..... 18
Item 6. Exhibits and Reports on Form 8-K........................ 19
<PAGE>
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
September 30, March 31,
1999 1999
---------- -------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 252 $ 399
Marketable securities 104 137
Trade and installment accounts receivable 1,918 2,021
Inventories and other current assets 87 74
------- -------
TOTAL CURRENT ASSETS 2,361 2,631
Installment accounts receivable, due after one year 3,260 2,844
Property and equipment 736 598
Purchased software products 1,178 221
Excess of cost over net assets acquired 4,021 1,623
Investments and other noncurrent assets 250 153
------- -------
TOTAL ASSETS $11,806 $ 8,070
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 896 $ 492
Other current liabilities 1,865 1,371
Long-term debt 4,870 2,032
Deferred income taxes 1,073 1,034
Deferred maintenance revenue 422 412
Stockholders' equity 2,680 2,729
------- -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $11,806 $ 8,070
======= =======
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
For the Three Months
Ended September 30,
----------------------------
1999 1998
------------- -----------
<S> <C> <C>
Product revenue and other related income $ 1,390 $ 1,031
Maintenance fees 215 185
------------- -----------
TOTAL REVENUE 1,605 1,216
Costs and expenses:
Selling, marketing and administrative 597 473
Product development and enhancements 141 103
Commissions and royalties 79 62
Depreciation and amortization 156 79
Interest expense - net 97 29
------------- -----------
TOTAL COSTS AND EXPENSES 1,070 746
------------- -----------
Income before income taxes 535 470
Provision for income taxes 201 176
------------- -----------
NET INCOME $ 334 $ 294
------------- -----------
BASIC EARNINGS PER SHARE $ .62 $ .53
------------- -----------
Basic weighted average shares used in
computation 538 554
DILUTED EARNINGS PER SHARE $ .60 $ .52
------------- -----------
Diluted weighted average shares used in
computation 555 569
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
For the Six Months
Ended September 30,
-----------------------------
1999 1998
------------- -----------
<S> <C> <C>
Product revenue and other related income $ 2,416 $ 1,897
Maintenance fees 411 366
------------- -----------
TOTAL REVENUE 2,827 2,263
Costs and expenses:
Selling, marketing and administrative 1,131 944
Product development and enhancements 262 203
Commissions and royalties 139 114
Depreciation and amortization 270 162
Interest expense - net 147 59
Purchased research and development 646 -
1995 Stock Plan charge - 1,071
------------- -----------
TOTAL COSTS AND EXPENSES 2,595 2,553
------------- -----------
Income (loss) before income taxes 232 (290)
Provision (benefit) for income taxes 329 (103)
------------- -----------
NET LOSS $ (97) $ (187)
------------- -----------
BASIC LOSS PER SHARE $ (.18) $ (.34)
------------- -----------
Basic weighted average shares used in
computation 537 553
DILUTED LOSS PER SHARE $ (.18) $ (.34)
------------- -----------
Diluted weighted average shares used in
computation* 537 553
<FN>
* Common stock equivalents are not included since they would be antidilutive.
</FN>
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
For the Six Months
Ended September 30,
-------------------------------
1999 1998
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (97) $ (187)
Adjustments to reconcile net loss to net
cash provided by operating activities,
excluding effects of acquisitions:
Depreciation and amortization 270 162
Provision for deferred income taxes 44 58
Charge for purchased research and development 646 -
Compensation expense related to stock
and pension plans 27 774
Increase in noncurrent installment accounts
receivable (461) (259)
Decrease in deferred maintenance revenue (34) (36)
Gain on sale of property and equipment - (14)
Changes in other operating assets and
liabilities 277 (267)
-------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 672 231
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software,
marketing rights and intangibles (4,078) (106)
Purchase of property and equipment (93) (37)
Proceeds from sale of property and equipment - 38
Decrease (increase) in current marketable
securities 121 (45)
Capitalized software development costs (16) (14)
-------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,066) (164)
FINANCING ACTIVITIES:
Debt borrowings - net 3,227 568
Dividends paid (21) (23)
Exercise of common stock options/other 39 26
Purchases of treasury stock - (534)
-------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,245 37
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (149) 104
Effect of exchange rate changes on cash 2 2
-------------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (147) 106
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 399 251
-------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 252 $ 357
============== ===========
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed 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 considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. Operating results for the six months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2000. 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, 1999.
Cash Dividends: In May 1999, the Company's Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
July 19, 1999 to stockholders of record on June 29, 1999.
Statements of Cash Flows: For the six months ended September 30, 1999 and 1998,
interest payments were $111 million and $29 million respectively, and income
taxes paid were $149 million and $151 million, respectively.
Net Earnings (Loss) per Share: 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, plus
the assumed exercise of all dilutive securities, such as stock options.
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 334 $ 294 $ (97) $ (187)
======== ======== ======== ========
Diluted Earnings (Loss) Per Share
- --------------------------------------
Weighted average shares outstanding
and common share equivalents 555 569 537* 553*
Diluted Earnings (Loss) Per Share $ .60 $ .52 $ (.18) $ (.34)
======== ======== ======== ========
Diluted Share Computation:
Average common shares outstanding 538 554 537 553
Average common share
equivalents - net 17 15 - -
-------- -------- -------- --------
Weighted average shares outstanding
and common share equivalents 555 569 537* 553*
======== ======== ======== ========
<FN>
* Common share equivalents are not included since they would be antidilutive. If
the six months ended September 30, 1999 and 1998 resulted in a net income, the
weighted average shares outstanding and common share equivalents would have
been 554 million and 571 million, respectively.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
Comprehensive Income: Financial Accounting Standard ("FAS") No. 130, "Reporting
Comprehensive Income" establishes new rules for reporting and displaying
comprehensive income and its components; however, the adoption has no impact on
the Company's net income or shareholders' equity. Comprehensive income includes
foreign currency translation adjustments and unrealized gains or losses on the
Company's 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,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(In millions)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 334 $ 294 $ (97) $ (187)
Foreign currency translation
adjustment 38 52 2 55
Unrealized gain on equity securities 1
Reclassification adjustment included
in net loss (9)
-------- -------- -------- --------
Total comprehensive income (loss) $ 372 $ 346 $ (104) $ (131)
======== ======== ======== ========
</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 1998 by SOP 98-4 and further
amended by SOP 98-9, which is effective for transactions entered into in fiscal
years beginning after March 15, 1999. These SOPs provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions, requiring deferral of part or all of the revenue related to a
specific contract depending on the existence of vendor specific objective
evidence and the ability to allocate the total contract value to all elements
within the contract. Effective for the quarter ended June 30, 1999, the Company
implemented the guidelines of SOP 98-9, with no material impact on its overall
maintenance deferral. The Company believes that its maintenance deferral is
consistent with current interpretations; however, as additional implementation
guidelines become available, there may be unanticipated changes in the Company's
revenue recognition practices including, but not limited to, changes in the
period over which revenue is recognized up to and including recognition of
revenue over the contract term. Any future implementation guidelines and
interpretations may also require the Company to further change its business
practices in order to continue to recognize a substantial portion of its
software revenue when the product is delivered. These changes may extend sales
cycles, increase administrative costs, or otherwise adversely affect existing
operations and results of operations.
Segment Disclosure: During fiscal year 1999, the Company adopted FAS No. 131,
"Disclosures about Segments and Related Information" which establishes standards
for reporting operating segments and disclosures about products and services,
geographic areas, and major customers. The Company operates as a single segment
providing integrated computer software solutions. The Company has no individual
customers that constitute a significant concentration. See Management's
Discussion and Analysis of Financial Condition and Results of Operations for
additional information.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE B - ACQUISITIONS
On May 28, 1999, the Company acquired approximately 98% of the issued and
outstanding shares of common stock of Platinum technology International, inc.
("Platinum"), and on June 29, 1999, merged one of its wholly owned subsidiaries
into Platinum at which time Platinum became a wholly owned subsidiary of the
Company. The aggregate purchase price, including assumed liabilities, of
approximately $4.2 billion was paid, or will be paid, from drawings under the
Company's $4.5 billion credit agreements. Platinum was engaged in providing
software products in the areas of database management, e-commerce, application
infrastructure management, decision support, data warehousing, and knowledge
management, as well as Year 2000 reengineering and other consulting services.
The Company recorded a $646 million charge against earnings for the write-off of
purchased Platinum research and development technology that had not reached the
working model stage and has no alternative future use. Had this charge not been
taken during the quarter ended June 30, 1999, net income for the six months
ended September 30, 1999 would have been $548 million, or $.99 per share on a
diluted basis.
The following table reflects pro-forma combined results of operations of the
Company and Platinum on the basis that the acquisition of Platinum had taken
place at the beginning of the fiscal year for all periods presented:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,605 $ 1,469 $ 2,937 $ 2,743
Net income 334 253 (160) (369)
Diluted earnings per share $ .60 $ .44 $ (.30) $ (.67)
Shares used in computation 555 569 537 553
</TABLE>
The following table reflects pro-forma combined results of operations of the
Company and Platinum on the basis that the acquisition of Platinum had taken
place at the beginning of the fiscal year for all periods presented. All special
charges, net of taxes, including the purchased research and development charge
for Platinum in fiscal year 2000 of $646 million, the one-time charge of $1,071
million relating to the 1995 Key Employee Stock Ownership Plan (the "1995 Plan")
recorded in fiscal year 1999, and all special charges recorded by Platinum in
fiscal year 1999 have been excluded from all periods presented:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,605 $ 1,469 $ 2,937 $ 2,743
Net income 334 254 485 371
Diluted earnings per share $ .60 $ .45 $ .88 $ .65
Shares used in computation 555 569 554 571
</TABLE>
In management's opinion, the pro-forma combined results of operations are not
indicative of the actual results that would have occurred had the acquisition
been consummated at the beginning of fiscal year 2000 or of future operations of
the combined entities under the ownership and operation of the Company.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE B - ACQUISITIONS (CONTINUED)
On March 9, 1999, the Company acquired more than 98% of the issued and
outstanding shares of common stock of Computer Management Sciences, Inc.
("CMSI"), and on March 19, 1999, merged one of its wholly owned subsidiaries
into CMSI at which time CMSI became a wholly owned subsidiary of the Company.
The aggregate purchase price of approximately $400 million was funded from
drawings under the Company's credit agreements and cash from operations. CMSI
was engaged in providing custom developed information technology solutions to a
Fortune 1000 client base. The acquisition was accounted for as a purchase.
During fiscal year's 2000 and 1999, the Company acquired a number of other
consulting businesses and product technologies in addition to the ones described
above which, either individually or collectively, are not material. The
acquisitions were all accounted for as purchases. The excess of cost over net
assets acquired is amortized on a straight-line basis over the expected period
to be benefited. The consolidated condensed statements of operations reflect the
results of operations of the companies since the effective dates of the
purchase.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the Company's 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
For the three months ended September 30, 1999:
Total revenue for the quarter ended September 30, 1999 increased 32%, or $389
million, over the prior year's comparable quarter. The increase was primarily
attributable to growth in software product revenue resulting from an increase in
the volume of sales of the Company's existing products, as well as acquired
products from Platinum, and professional services. There continues to be
acceptance of the Company's enterprise licensing plans, which offer clients
increased flexibility, and Unicenter TNG (The Next Generation), a family of
integrated business solutions for monitoring and administering systems
management across multi-platform environments. Product revenue for the September
quarter increased 30%, or $286 million, over last year's September quarter. In
April 1999, the Company introduced the Millennium License, a perpetual MIPS
based license with added flexibility in usage and pricing. Professional services
revenue from the Company's consulting services business and educational programs
grew by 109% or $73 million over the prior year's comparable period. The Company
intends to continue to increase the level of professional services provided to
clients through internal growth as well as acquisitions of services companies.
Maintenance revenue increased 16%, or $30 million, over last year's comparable
quarter. Additional maintenance revenue from prior year license arrangements, as
well as Platinum licenses, was partially offset by the ongoing trend of site
consolidations and expanding client/server revenues, which yield lower
maintenance.
<TABLE>
<CAPTION>
Product/ Professional
Quarter Ended Maintenance Services Total
------------- ----------- ------------ ---------
<S> <C> <C> <C>
September 30, 1999 $ 1,465 $ 140 $ 1,605
September 30, 1998 1,149 67 1,216
</TABLE>
Total North American revenue for the second quarter grew 42% over the prior
year's second quarter. This resulted from continued growth in client/server
product sales and professional services and the widespread acceptance of the
Company's enterprise pricing options. North American sales represented 69% of
revenue for the September 1999 quarter compared to 64% of revenue for the
September 1998 quarter. The strengthening of the US dollar against most
currencies negatively affected international revenue by approximately $19
million in the current quarter.
<TABLE>
<CAPTION>
Quarter Ended North America International Total
------------- ------------- ------------- ---------
<S> <C> <C> <C>
September 30, 1999 $ 1,101 $ 504 $ 1,605
September 30, 1998 773 443 1,216
</TABLE>
Price changes did not have a material impact in this quarter or the prior year's
comparable quarter.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six months ended September 30, 1999:
On a year to date basis, total revenue increased 25%, or $564 million, from the
prior year. The increase was primarily attributable to growth in software
product revenue from existing and acquired products as well as professional
services. Year to date product and professional services revenue increased 21%
and 120%, or $378 and $141 million, respectively, over the prior year. Unicenter
TNG revenue accounted for over 23% of total revenue year to date. Maintenance
revenue increased 12%, or $45 million, over last year's comparable period.
<TABLE>
<CAPTION>
Product/ Professional
Six Months Ended Maintenance Services Total
---------------- ----------- ------------ ---------
<S> <C> <C> <C>
September 30, 1999 $ 2,568 $ 259 $ 2,827
September 30, 1998 2,145 118 2,263
</TABLE>
Total North American revenue for the six months ended September 30, 1999 grew
30% over the prior year's comparable period. On a year to date basis, North
American sales represented 69% of revenue for fiscal year 2000 and 66% of
revenue for fiscal year 1999. On a year to date basis, international revenue
increased by $111 million, or 15%, over the prior year. In addition, the effect
of exchange rates on the US dollar versus foreign currencies decreased revenue
by $39 million for the current year.
<TABLE>
<CAPTION>
Six Months Ended North America International Total
---------------- ------------- ------------- ---------
<S> <C> <C> <C>
September 30, 1999 $ 1,950 $ 877 $ 2,827
September 30, 1998 1,497 766 2,263
</TABLE>
Price changes did not have a material impact year to date in fiscal year 2000 or
in the comparable period in fiscal year 1999.
Costs and Expenses
For the three months ended September 30, 1999:
Selling, marketing and administrative expenses as a percentage of total revenue
for the second quarter decreased to 37% from 39% the prior year. The decrease
was largely attributable to efficiencies obtained by eliminating redundant
headcount and overhead expenses as a result of the Platinum integration. This
was partially offset by an increase in personnel costs related to an overall
increase in headcount resulting from professional services company acquisitions.
Net research and development expenditures increased $38 million, or 37%, for the
second quarter compared to last year's second quarter. There was continued
emphasis on adapting and enhancing products for the distributed processing
environment, in particular Unicenter TNG, Jasmine ii, Neugents, the Enterprise
and Workgroup Solutions, as well as broadening of the Company's e-commerce
product offerings, and additional expense related to development efforts of
products obtained through the acquisition of Platinum. Commissions and royalties
as a percentage of revenue were 5% for both the September 1999 and 1998
quarters. Depreciation and amortization expense in the second quarter increased
$77 million from the comparable quarter in the prior year. The increase was
primarily due to the additional amortization of purchased intangibles associated
with the acquisition of Platinum marginally offset by the scheduled reductions
in the amortization associated with past acquisitions. Net interest expense
increased $68 million, or 234%, for the second quarter compared to last year's
second quarter. The additional interest
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
expense was related to the increase in average debt outstanding associated with
borrowings incurred to fund the Platinum acquisition in the first quarter of
fiscal year 2000 and other smaller acquisitions in the current and prior fiscal
years.
For the six months ended September 30, 1999:
On a year to date basis, selling, marketing and administrative expenses as a
percentage of total revenue decreased to 40% from 42% the prior year. This
decrease was largely attributable to deferring non-essential expenditures in the
first quarter pending completion of the Platinum acquisition and efficiencies
obtained by eliminating redundant headcount and overhead expenses in the second
quarter as a result of the Platinum integration. Net research and development
expenditures increased $59 million, or 29%, year to date. Consistent with the
first quarter, continued emphasis on adapting and enhancing products for the
distributed processing environment, as well as broadening of the Company's
e-commerce product offerings, and development of technology and products
obtained through the acquisition of Platinum were largely responsible for the
increase. Commissions and royalties as a percentage of revenue were 5% year to
date for both fiscal years 2000 and 1999. On a year to date basis, depreciation
and amortization expense increased by $108 million from the prior year. The
increase was primarily due to the additional amortization of purchased
intangibles associated with the acquisition of Platinum marginally offset by the
scheduled reductions in the amortization associated with prior acquisitions. Net
interest expense increased $88 million, or 149%, year to date from last year's
comparable period as a result of the increase in average debt outstanding
associated with the Platinum acquisition in the first quarter of fiscal year
2000 and other acquisitions during the fiscal year ended March 31, 1999.
Operating Margins
The pretax income of $535 million for the second quarter of fiscal year 2000 is
an increase of 14% , or $65 million, over the second quarter in the prior year.
On a year to date basis, the pretax loss was $97 million, reflecting the $646
million charge for in-process research and development relating to the
acquisition of Platinum. Net income in the September quarter was $334 million,
an increase of $40 million, or 14%, over the September 1998 quarter. The year to
date net income, excluding the in-process research and development charge, was
$549 million, an increase of $60 million, or 12% , over last year's net income,
excluding the one-time after tax charge of $675 million associated with the
vesting of 20.25 million shares under the 1995 Plan. The Company's consolidated
effective tax rate for both comparable quarters and year to date, excluding the
in-process research and development charge, was 37.5% .
Operations
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 Company's combined third and fourth quarter
revenue has been greater than the first half of the year, as these two quarters
coincide with clients' calendar year-end budget periods and culmination of the
Company's annual sales plan. This historically higher second half revenue has
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, particularly
due to the acquisition of Platinum during the June 1999 quarter.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Under the 1998 Incentive Award Plan, a total of 4 million Phantom Shares were
available for grant to certain of the Company's employees from time to time
through March 31, 2008. Each Phantom Share is equivalent to one share of the
Company's Common Stock. Vesting is contingent upon attainment of specific
criteria including an annual Target Closing Price ("Price") which is based on
the Company's closing price of its Common Stock on the New York Stock Exchange
for the ten trading days up to and including March 31, 2000. If this Price is
met on March 31, 2000, the Company will be required to record for the quarter
ended March 31, 2000, a non-cash charge associated with any grants which vest
during the current fiscal year. At this time, since the Price is undetermined,
the amount of any such charge is unknown.
Risks and Uncertainties
The Company's products are designed to improve the productivity and efficiency
of its clients' information processing resources. Accordingly, in a recessionary
environment, the Company's 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 Company's operations.
As we approach January 1, 2000, clients will be faced with heightened
distractions as they prepare for the year 2000 date change for computer
programs. This, combined with the significant percentage of the Company's
quarterly sales consummated in the last few days of the quarter, may affect
operating results for the quarter ended December 31, 1999.
The Company's future operating results may also be affected by a number of other
factors including, but not limited to: uncertainties relative to global economic
conditions; the adequacy of the Company's internal administrative systems to
efficiently process transactions, store, and retrieve data subsequent to the
year 2000; the Company's increasing reliance on Unicenter TNG 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 Company's ability to continue to update its business application
products to conform with the new common European currency known as the "Euro";
the Company's 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 Company's
products; the Company's ability to manage fixed and variable expense growth
relative to revenue growth; the Company's ability to recruit and retain
qualified personnel; and the Company's ability to effectively integrate acquired
products and operations. There may be additional uncertainties during the coming
quarters as the Company completes the ongoing product integration and
restructuring of Platinum's operations and clients evaluate such plans.
In-Process Research and Development
In the first quarter of fiscal year 2000, there was an after tax charge of $646
million for in-process technology relating to the Platinum acquisition,
approximately 15 percent of the aggregate purchase price. There was no acquired
in-process technology charge in fiscal year 1999. Acquired in-process research
and development ("in-process R&D") charges relate to acquisitions of software
companies accounted for under the purchase method, in which a portion of the
purchase price is allocated to acquired in-process technology and expensed
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
immediately since the technological feasibility of the research and development
projects have not yet been achieved and are believed to have no alternative
future use. An independent valuation was performed and used as an aid in
determining the fair value of the identifiable assets and in allocating the
purchase price among the acquired assets, including the portion of the purchase
price attributed to in-process R&D.
The "Income Approach" was utilized for the valuation analysis. This approach
focuses on the income producing capability of the asset and was obtained through
on-site interviews with management, review of data provided by the Company and
the acquired companies, and analysis of relevant market sizes, growth factors,
and expected trends in technology. The steps followed in applying this approach
included estimating the expected cash flow over its life and converting these
cash flows to present value. Discounting the net cash flows back to their
present value was based on a risk adjusted discount rate. The rate used in
discounting the net cash flows from the in-process R&D ranged from 20 to 23
percent. This discount, higher than the Company's, is due to the uncertainties
surrounding the successful development of in-process R&D. The projects, on
average, are approximately 80 percent complete. The Company believes the
discount rate is appropriate given the level of risk of unsuccessful completion
of the technology after evaluating the stage of each project reviewed.
The Platinum projects currently under development consist primarily of
application development, database and enterprise management tools, and data
warehousing solutions. If these projects are not successfully developed, the
revenue and profitability of the Company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may become
impaired. Consistent with original projections, the Company expects to begin to
benefit from the purchased in-process R&D in the second half of fiscal year
2000. Management believes that the assumptions used in the purchased in-process
R&D valuation reasonably estimate the future benefits. There can be no assurance
that in future periods actual results will not deviate from current estimates.
Year 2000
The Company has designed and tested substantially all of its recent product
offerings to be Year 2000 compliant. These products have met rigorous compliance
criteria and have undergone extensive review to detect any Year 2000 failures.
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/products. The Company continues to update and test
its product offerings. In general, these Year 2000 compliance efforts have been
part of the Company's ongoing software development process. As such, incremental
costs are not deemed material and have been included in net research and
development expenses. The Year 2000 readiness of the Company's customers varies,
and the Company continues to actively encourage its customers to prepare their
own systems, making available a broad array of product service and educational
offerings. These offerings have been made available to all clients and
prospects. It is possible that the Company may experience increased expense
levels addressing migration issues for such customers. There can be no
assurances that the Company's compliant products do not contain undetected
problems associated with Year 2000 compliance. Although the Company believes
that its license agreements provide it with protection against liability, the
Company cannot predict whether or to what extent any legal claims will be
brought, or whether the Company will suffer any potential liability as a result
of any such adverse consequences to its customers.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company recognizes the significance of the Year 2000 issue as it relates to
its internal systems including IT and non-IT systems, and understands that the
impact extends beyond traditional hardware and software to automated facility
systems and third party suppliers. The Company has established a comprehensive
four-step plan: (1) assessment; (2) remediation; (3) testing; and (4)
implementation, with dedicated project managers to address Year 2000 issues.
With regard to internal administrative and financial systems, the Company has
completed most conversion and testing efforts, with extended system integration
testing and contingency planning projects scheduled for the remainder of 1999.
For its facility-related systems such as telephone, voicemail, and security, the
Company has conducted internal assessment audits and confirmed Year 2000
readiness with its vendors. The Company has substantially completed Year 2000
readiness preparations and will continue comprehensive testing throughout
calendar 1999. As part of the contingency planning efforts, the Company has
created alternative strategies, where necessary, if significant exposures were
identified up to and including the Company's computer systems being rendered
inoperable. The contingency plan addresses these issues including temporary
relocation of employees, manual workarounds, and the use of Company-owned
generators and cellular phones. The total cost of preparing internal systems' to
be Year 2000 compliant is not expected to be material to the Company's
operations, liquidity, or capital resources. Total known expenditures, excluding
personnel costs of existing staff, related to internal systems Year 2000
readiness is expected to be approximately $30 million, with the vast majority of
it paid to date. Such expenditures commenced in 1996. Additionally, the Company
is considering a plan that would increase staff expenditures for the period
following January 1, 2000 to assist clients with any date conversion issues. It
is estimated, if implemented, the plan would result in approximately $6 million
of additional expenditures during the quarter ended March 31, 2000. The Company
believes that, although the risk of operational disruption from systems failures
due to the Year 2000 is minimal, 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 or interruptions in electrical
power or other third-party infrastructure services.
Demand for certain of the Company's products may be generated by customers who
are replacing or upgrading computer systems to accommodate the Year 2000 date
change. As a result, demand for some of the Company's products may diminish as
the Year 2000 arrives, which could negatively impact the Company's revenue
growth rate. Additionally, because the Company believes that some of its
customers are allocating a substantial portion of their calendar year 1999 IT
budgets to Year 2000 compliance, sales of certain of the Company's traditional
product offerings may be adversely affected through the end of fiscal year 2000.
Liquidity and capital resources
During the second quarter, the Company's cash, cash equivalents and marketable
securities decreased approximately $63 million from the June 30, 1999 balance.
Cash generated from operations for the quarter ended September 30, 1999 was $345
million, an increase of $26 million over the September 30, 1998 quarter.
Interest paid related to the increased borrowings associated with the Platinum
acquisition and higher taxes paid in the current fiscal year's second quarter
reduced cash from operations by approximately $58 million. Excluding these two
items, cash from operations increased 26% over the prior year's second quarter.
On a year to date basis, the Company's cash, cash equivalents, and marketable
securities decreased approximately $180 million from the March 31, 1999 balance.
Cash from operations was $672 million year to date. Cash generated from
operations for the comparable period last year, excluding a $318 million
withholding tax payment relating to the 1995 Plan, totaled $549 million. The
increase of $123 million, or 22%, was primarily attributable to higher net
income and accelerated cash collection of trade accounts receivable.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's bank credit facilities consist of a $1.5 billion 364-day revolving
credit facility, a $1 billion 4-year revolving credit facility, and a $2 billion
4-year term loan. Interest charged is based on the London InterBank Offered Rate
("LIBOR") subject to a margin based on a bank credit facility ratings grid. The
Company is required to maintain certain financial ratios. At September 30, 1999,
a total of $3.595 billion was drawn under these facilities.
The Company also utilizes other sources of liquidity in its capital structure.
On April 24, 1998, the Company issued $1.75 billion of unsecured Senior Notes.
Amounts borrowed, rates and maturities for each issue were $575 million at 6
1/4% due April 15, 2003, $825 million at 6 3/8% due April 15, 2005 and $350
million at 6 1/2% due April 15, 2008. Proceeds were used to repay borrowings
from bank credit facilities and for general corporate purposes. The issuance of
these notes allowed the Company to extend the maturity of its debt, commit to an
attractive fixed rate of interest and broaden the Company's sources of
liquidity. Debt ratings for the Company's senior unsecured notes and its bank
credit facilities are Baa1 and BBB+ from Moody's Investor Services and Standard
& Poor's, respectively. The Company also has $256 million of 6.77% Senior Notes
outstanding at September 30, 1999.
The Company maintains an 85 million pound-sterling (approximately US$140)
denominated credit facility established to finance construction of its new
European Headquarters. Approximately US$106 million was outstanding under this
facility at September 30, 1999. This facility is subject to interest primarily
at the prevailing LIBOR subject to a fixed spread, which is dependent on the
achievement of certain financial ratios. The Company is also required to
maintain certain financial conditions. Additionally, the Company has
approximately US$30 million available under unsecured and uncommitted
multicurrency lines of credit established to meet any short-term working capital
needs for subsidiaries operating outside the U.S.
During the quarter ended September 30, 1999, the Company repurchased
substantially all of Platinum's outstanding 6.25% convertible subordinated notes
due 2002 in accordance with a repurchase offer. In addition, nearly all of
Platinum's outstanding 6.75% convertible notes due 2001 have been converted to
Platinum shares and tendered to the Company for the $29.25 per share purchase
price.
During the quarter ended September 30, 1999, the Company did not purchase any
shares under its various open market Common Stock repurchase programs. The
cumulative total number of shares purchased is approximately 150 million shares.
The remaining number of shares authorized for repurchase is approximately 50
million.
In addition to the expansion efforts at its U.S. headquarters in Islandia, N.Y.,
capital resource requirements at September 30, 1999 consisted of lease
obligations for office space, computer equipment, mortgage or loan obligations,
and amounts due as a result of product and company acquisitions. It is expected
that existing cash, cash equivalents, marketable securities, the availability of
borrowings under credit lines, as well as cash provided from operations, will be
sufficient to meet ongoing cash requirements.
<PAGE>
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's exposure to market rate risk for changes in interest rates relate
primarily to the Company's investment portfolio and issuance of debt. The
Company has not used derivative financial instruments in its investment
portfolio. The Company has a prescribed methodology whereby it invests its
excess cash in debt instruments of government agencies and high quality
corporate issuers (Standard & Poor's single "A" rating and higher). To further
mitigate risk, the vast majority of the securities have a maturity date within
one year. Holdings of any one issuer excluding the U.S. Government shall not
exceed 10%, and the portfolio is reviewed on a periodic basis and adjusted in
the event that the credit rating of a security held in the portfolio has
deteriorated.
At September 30, 1999, the Company's outstanding debt approximated $5.7 billion
with approximately $2 billion of fixed rate obligations. If market rates
decline, the Company runs the risk that the related required payments on the
fixed rate debt will exceed those based on the current market rate. On an annual
basis, each 25 basis point decrease in interest rates would increase the value
of these instruments by approximately $5 million. Each 25 basis point increase
or decrease in the level of interest rates would have approximately $9 million
annual impact on variable rate debt interest based on the balances of such debt
at September 30, 1999.
There have been no material changes in the way the Company conducts its
worldwide business, foreign exchange risk management strategy, or investments in
marketable equity securities, thus overall foreign currency exchange and equity
price risk remains unchanged from the description in the Company's Form 10-K for
the year ended March 31, 1999.
<PAGE>
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 Company's stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Company's 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").
The defendants moved to dismiss the Shareholder Action. In addition, a number of
derivative actions alleging facts similar to those alleged in the Shareholder
Action were brought in the NY Federal Court. An additional derivative action,
alleging that the Company issued 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 Company's
directors at that time were named as defendants. These derivative actions have
been consolidated into a single action (the "Derivative Action") in the NY
Federal Court. Another derivative action was filed in the Chancery Court in
Delaware (the "Delaware Action") also alleging that more shares were issued than
were authorized under the 1995 Plan. The Company and its directors, who are
parties to the Delaware Action, 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.
The Company, various subsidiaries, and certain current and former officers have
been named as defendants in other various claims and lawsuits arising in the
normal course of business. The Company believes that the facts do not support
the plaintiffs' claims, and intends to vigorously contest each of them.
Litigation that was brought against the Company and its investment banker in
connection with the Company's tender offer for Computer Sciences Corporation in
February 1998 was dismissed by the United States District Court for the Central
District of California. There will be no appeal of that dismissal.
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
(a) Annual meeting of Stockholders held on August 25, 1999.
(b) The Stockholders elected Directors for the ensuing year as follows:
<TABLE>
<CAPTION>
Affirmative Authority
Name Votes Withheld
---------------------- -------------- -------------
<S> <C> <C>
Russell M. Artzt 475,999,582 5,359,538
Alfonse M. D'Amato 473,488,068 7,871,052
Willem F.P. de Vogel 459,532,140 21,826,980
Irving Goldstein 476,009,779 5,349,341
Richard A. Grasso 476,008,631 5,350,489
Shirley Strum Kenny 476,016,800 5,342,320
Sanjay Kumar 475,904,079 5,455,041
Roel Pieper 474,201,601 7,157,519
Charles B. Wang 474,018,273 7,340,847
</TABLE>
(c) The Stockholders voted to adopt the Year 2000 Employee Stock Purchase Plan
as follows:
Affirmative 413,829,214
Negative Votes 21,736,503
Abstentions 1,623,520
(d) The Stockholders voted to ratify the appointment of KPMG LLP as the
Company's independent auditors for the fiscal year ending March 31, 2000 as
follows:
Affirmative 477,656,686
Negative Votes 2,565,902
Abstentions 1,136,532
(e) The Stockholders did not adopt a stockholder proposal relating to executive
compensation as follows:
Affirmative 19,527,192
Negative Votes 413,557,425
Abstentions 4,085,220
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K:
The Registrant filed a Report on Form 8-K dated July 2, 1999
reporting an event under Item 4.
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 2, 1999 By: /s/Sanjay Kumar
-------------------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: November 2, 1999 By: /s/Ira Zar
-------------------------------
Ira Zar
Sr. Vice President - Finance
(Chief Financial and Accounting
Officer)
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