UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
May 28, 1999
--------------------------------
(Date of Earliest Event Reported)
Computer Associates International, Inc.
------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-9247 13-2857434
- ---------------------------- ------------ ----------------
(State or Other Jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.
One Computer Associates Plaza, Islandia, New York 11749
------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 342-5224
--------------
<PAGE>
The undersigned Registrant hereby amends the following items, financial
statements, exhibits, or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on June 14, 1999,
as set forth in the pages attached hereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The independent auditors' report and the following consolidated
financial statements of PLATINUM are attached:
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to consolidated financial statements.
<PAGE>
The following unaudited interim consolidated financial statements
of PLATINUM are incorporated by reference to PLATINUM's Form 10-Q
as of and for the three months ended March 31, 1999 as filed with
the Securities and Exchange Commission on May 14, 1999:
Consolidated Balance Sheet as of March 31, 1999.
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998.
Consolidated Statements of Comprehensive Income (Loss) for the
three months ended March 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.
Notes to consolidated financial statements.
(b) Pro Forma Financial Information.
The following unaudited pro forma consolidated financial
statements of the Company and PLATINUM are attached:
Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1999.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended March 31, 1999.
Notes to unaudited pro forma condensed combined financial
statements.
<PAGE>
(c) Exhibits
The following exhibits are filed with this Form 8-K/A or
incorporated by reference as set forth below:
15 Acknowledgment of Independent Certified Public
Accountants regarding Independent Auditors' Review
Report.
23.1 Consent of KPMG LLP with respect to PLATINUM's financial
statements.
23.2 Consent of Arthur Andersen LLP with respect to Mastering,
Inc.'s financial statements.
23.3 Consent of Ernst & Young LLP with respect to Logic Works,
Inc.'s financial statements.
23.4 Consent of Luboshitz, Kasierer & Co. with respect to
Memco Software, Ltd.'s financial statements.
99.1 Report of Arthur Andersen LLP on Mastering, Inc.'s
financial statements, incorporated by reference to
Exhibit 99.1 to PLATINUM's Annual Report on Form 10-K for
the year ended December 31, 1998 (the "1998 10-K").
99.2 Report of Ernst & Young LLP on Logic Works, Inc.'s
financial statements, incorporated by reference to
Exhibit 99.2 to the 1998 10-K.
99.3 Report of Luboshitz, Kasierer & Co. on Memco Software,
Ltd.'s financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Computer Associates International, Inc.
Dated: June 18, 1999 By: /s/ Ira Zar
---------------
Ira Zar
Senior Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
15 Acknowledgment of Independent Certified Public Accountants regarding
Independent Auditors' Review Report.
23.1 Consent of KPMG LLP with respect to PLATINUM's financial statements.
23.2 Consent of Arthur Andersen LLP with respect to Mastering, Inc.'s
financial statements.
23.3 Consent of Ernst & Young LLP with respect to Logic Works, Inc.'s
financial statements.
23.4 Consent of Luboshitz, Kasierer & Co. with respect to Memco Software,
Ltd.'s financial statements.
99.3 Report of Luboshitz, Kasierer & Co. on Memco Software, Ltd.'s
financial statements.
Exhibit 15
ACKNOWLEDGMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REGARDING INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
PLATINUM technology International, inc.:
With respect to the registration statements on Form S-8 and Form S-3 of PLATINUM
technology International, inc., we acknowledge our awareness of the use therein
of our report dated May 14, 1999 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
/s/ KPMG LLP
Chicago, Illinois
June 11, 1999
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
PLATINUM technology International, inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-61581, 333-57307, 333-03284, 33-85798, 33-41248, 33-96762, 333-00454,
333-20897, 333-45131, 333-57311, 333-75323) on Form S-8, (Nos. 333-45133,
333-77003) on Form S-3 and (Nos. 333-71637, 33-94410, 333-75311) on Form S-4 of
PLATINUM technology International, inc. of our report dated March 29, 1999,
relating to the consolidated balance sheets of PLATINUM technology
International, inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998.
/s/ KPMG LLP
Chicago, Illinois
June 11, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 8-K (expected to be filed by Computer Associates
International, Inc. on June 14, 1999) of our report dated January 19, 1998, for
Mastering, Inc. included in PLATINUM technology International, inc.'s 1998 Form
10-K and to all references to our Firm included in this Form 8-K.
/s/ Arthur Andersen LLP
Denver, Colorado
June 11, 1999
Exhibit 23.3
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-41248, Form S-8 No. 33-85798, Form S-8 No. 33-96762, Form S-8
No. 333-00454, Form S-8 No. 333-03284, Form S-8 No. 333-20897, Form S-8
No. 333-61581, Form S-8 No. 333-57307, Form S-8 No. 333-45131, Form S-8
No. 333-57311, Form S-8 No. 333-75323, Form S-3 No. 333-45133, Form S-3
No. 333-77003, Form S-4 No. 33-94410, Form S-4 No. 333-71637 and Form S-4
No. 333-75311) of PLATINUM technology International, inc. of our report dated
February 10, 1998 except for note 14, as to which the date is March 14, 1999,
with respect to the consolidated financial statements of Logic Works, Inc.
for the years ended December 31, 1997 and 1996, incorporated by reference in
this Current Report (Form 8-K)of Computer Associates International, Inc.
/s/ Ernst & Young LLP
MetroPark, New Jersey
June 11, 1999
Exhibit 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Memco Software Ltd.:
We consent to the incorporation by reference in the Form 8-K of PLATINUM
technology International, inc. of our report dated March 25, 1999, relating to
the consolidated balance sheets of Memco Software Ltd. as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998.
/s/ Luboshitz, Kasierer & Co.
LUBOSHITZ, KASIERER & CO.
Member Firm of Arthur Andersen
Tel-Aviv, Israel
June 11, 1999
Exhibit 99.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders Of
MEMCO SOFTWARE LTD.
We have audited the accompanying consolidated balance sheets of MEMCO SOFTWARE
LTD. As of December 31, 1997 and 1998, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel and in the United States including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1997 and 1998, and the results of its operations, and
its cash flows for each of the years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ Luboshitz, Kasierer & Co.
Luboshitz, Kasierer & Co.
Member Firm of Arthur Andersen
Tel-Aviv, March 25, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PLATINUM technology International, inc.:
We have audited the accompanying consolidated balance sheets of PLATINUM
technology International, inc. and subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Mastering, Inc. and Logic Works, Inc.,
wholly-owned subsidiaries, which statements reflect total assets constituting 13
percent in 1997, and total revenues constituting 12 percent and 12 percent in
1997 and 1996, respectively, of the related consolidated totals. We also did not
audit the financial statements of Memco Software, Ltd., a wholly-owned
subsidiary, which statements reflect total assets constituting 8 percent in 1998
and 8 percent in 1997, and total revenues constituting 4 percent, 4 percent and
3 percent in 1998, 1997 and 1996, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts for
Mastering, Inc., Logic Works, Inc. and Memco Software, Ltd., is based solely on
the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PLATINUM technology International,
inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
March 29, 1999
<PAGE>
<TABLE>
<CAPTION>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
As of December 31,
------------------
1998 1997
--------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 226,252 $ 241,804
Short-term investment securities..................... 79,241 97,386
Trade accounts receivable, net of allowances
of $5,715 and $4,902................................ 306,751 237,862
Installment accounts receivable, net of allowances..
of $526 and $878.................................... 45,568 30,043
Accrued interest and other current assets............ 47,634 35,929
Refundable income taxes.............................. 787 753
--------- ---------
Total current assets............................. 706,233 643,777
--------- ---------
Non-current investment securities........................ 36,041 46,256
Property and equipment, net.............................. 103,150 94,693
Purchased and developed software, net.................... 183,775 117,213
Excess of cost over net assets acquired, net of
accumulated amortization of $27,270 and $15,975.......... 90,131 52,759
Non-current installment receivables, net of allowances
of $1,374 and $1,616..................................... 68,210 21,912
Other assets............................................. 28,019 41,354
--------- ---------
Total assets..................................... $1,215,559 $1,017,964
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Acquisition-related payables......................... $ 33,245 $ 15,717
Income taxes payable................................. 7,888 4,165
Accounts payable..................................... 37,837 24,324
Accrued commissions and bonuses...................... 21,928 16,237
Accrued royalties.................................... 13,182 4,571
Accrued restructuring costs.......................... 2,390 7,391
Other accrued liabilities............................ 80,702 61,140
Current maturities of long-term obligations.......... 1,392 1,649
Deferred revenue..................................... 166,880 128,680
--------- ---------
Total current liabilities........................ 365,444 263,874
--------- ---------
Acquisition-related payables............................. 6,388 18,320
Deferred revenue......................................... 95,959 61,847
Deferred rent............................................ 6,762 6,197
Accrued restructuring costs.............................. 5,285 21,930
Deferred income taxes.................................... 5,261 --
Long-term obligations, net of current maturities......... 267,685 268,065
--------- ---------
Total liabilities................................ 752,784 640,233
--------- ---------
Stockholders' equity:
Class II preferred stock, $.01 par value; authorized
10,000 shares, issued and outstanding 1,768 shares
in 1998............................................. 18 --
Subscribed Class II preferred stock, $.01 par
value; 1,768 shares subscribed in 1997.............. -- 18
Common stock, $.001 par value; authorized 180,000
shares, issued and outstanding 100,599 and 92,031... 101 92
Paid-in capital...................................... 903,412 754,043
Accumulated deficit.................................. (432,619) (365,204)
Deferred compensation................................ -- (102)
Accumulated other comprehensive loss................. (3,948) (4,616)
Treasury stock....................................... (4,189) (6,500)
---------- ---------
Total stockholders' equity....................... 462,775 377,731
---------- ----------
Total liabilities and stockholders' equity....... $1,215,559 $1,017,964
========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Software products................... $ 560,060 $ 433,131 $ 298,431
Maintenance......................... 176,246 141,870 115,214
Professional services............... 254,534 189,154 150,184
---------- ---------- ----------
Total revenues................. 990,840 764,155 563,829
---------- ---------- ----------
Costs and expenses:
Professional services............... 235,914 170,847 145,443
Product development and support..... 255,069 210,650 174,002
Sales and marketing................. 339,920 274,250 222,710
General and administrative.......... 66,517 53,153 43,736
Amortization of excess cost over
net assets acquired................ 14,105 6,360 5,317
Special general and administrative
charges............................ 10,982 13,513 1,978
Restructuring charges............... (10,964) 55,829 16,312
Merger costs........................ 40,065 8,927 5,782
Acquired in-process technology...... 69,471 67,904 49,451
---------- ---------- ----------
Total costs and expenses....... 1,021,079 861,433 664,731
---------- ---------- ----------
Operating loss........................... (30,239) (97,278) (100,902)
Other income (expense), net.............. (651) 2,304 8,357
---------- ---------- ----------
Loss from continuing operations before
income taxes............................ (30,890) (94,974) (92,545)
Income tax expense (benefit)............. 32,618 19,347 (8,679)
---------- ---------- ----------
Net loss from continuing operations...... (63,508) (114,321) (83,866)
Discontinued operations:
Loss from discontinued operations,
net of tax benefit of $1,196
and $2,721........................ -- (1,858) (3,610)
Gain on disposal, net of tax
expense of $394 and $40........... -- 833 198
---------- ---------- ----------
Total discontinued operations.. -- (1,025) (3,412)
---------- ---------- ----------
Net loss................................. $ (63,508) $(115,346) $ (87,278)
========== ========== ==========
Basic and diluted earnings per share:
Net loss from continuing operations. $ (0.65) $ (1.28) $ (1.04)
Discontinued operations............. -- (0.01) (0.04)
---------- ---------- ----------
Net loss............................ $ (0.65) $ (1.29) $ (1.08)
========== ========== ==========
Shares used in computing per share
amounts............................. 97,115 89,438 80,675
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net loss................................. $ (63,508) $(115,346) $ (87,278)
Other comprehensive income (loss):
Foreign currency translation
adjustment........................... 856 (3,786) (2,094)
---------- ---------- ----------
Unrealized holding gains (losses) on
marketable securities:
Unrealized holding gains (losses)
arising during the period, net of
tax expense (benefit) of $(125),
$161 and $20 during 1998, 1997
and 1996, respectively............ (188) 241 30
Less reclassification adjustment
for gains included in net loss,
net of tax expense of $0, $17
and $13 during 1998, 1997 and
1996, respectively................ -- (27) (19)
---------- ---------- ----------
Change in unrealized holding
gains (losses) for the period.. (188) 214 11
---------- ---------- ----------
Comprehensive loss....................... $(62,840) $(118,918) $(89,361)
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------- --------------- --------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock:
Balance at beginning
of year................ 1,768 $ 18 -- $ -- -- $ --
Preferred stock
subscribed............. (1,768) (18) 1,768 18 -- --
Issuance of preferred
stock.................. 1,768 18 -- -- -- --
------ ------- ------ ------- ------ ------
Balance at end of year.. 1,768 $ 18 1,768 $ 18 -- --
====== ======= ====== ======= ====== ======
Common stock:
Balance at beginning
of year.............. 92,031 $ 92 87,316 87 $75,646 76
Exercise of stock
options.............. 3,344 3 1,872 2 892 1
Issuance of common
stock under Stock
Purchase Plan........ 1,585 2 973 1 282 --
Issuance of common
stock................ 3,637 4 1,869 2 10,496 10
Conversion of
subordinated notes... 2 -- 1 -- -- --
------- ------- ------ ------- ------ -------
Balance at end of year 100,599 $ 101 92,031 $ 92 87,316 $ 87
======= ======= ====== ======= ====== =======
Paid-in capital:
Balance at beginning
of year.............. $754,043 $658,972 $504,953
Exercise of stock
options.............. 36,350 11,807 4,152
Income tax benefit
related to stock
options...... -- 3,233 1,297
Issuance of common
stock under Stock
Purchase Plan 24,358 12,503 2,791
Issuance of common
stock................ 88,774 25,695 145,914
Preferred stock
subscribed........... (41,848) 41,848 --
Issuance of
preferred stock...... 41,848 -- --
Amortization of
shelf registration
costs......... (149) (25) (135)
Conversion of
subordinated notes... 36 10 --
--------- ---------- --------
Balance at end of year $903,412 $ 754,043 $ 658,972
========= ========== ========
Accumulated deficit:
Balance at beginning
of year.............. $(365,204) $ (249,798) $(161,419)
Net loss.............. (63,508) (115,346) (87,278)
Adjustment for
immaterial pooled
businesses........... (3,522) 1,014 45
Other................. -- -- (1,006)
Adjustment to
conform fiscal
years of pooled
businesses........... (385) (1,074) (140)
--------- --------- --------
Balance at end
of year.............. $(432,619) $ (365,204) $(249,798)
========= ========= =========
Deferred compensation:
Balance at beginning
of year.............. $ (102) $ (298) $ (641)
Amortization.......... 102 196 343
--------- --------- --------
Balance at end of year $ -- $ (102) $ (298)
========= ========= =========
Unrealized holding gains
(losses) on marketable
securities:
Balance at
beginning of year.... $ 231 $ 17 $ 6
Change in unrealized
holding gains,
net of tax........... (188) 214 11
--------- --------- --------
Balance at end of year $ 43 $ 231 $ 17
========= ========= =========
Foreign currency
translation adjustment:
Balance at
beginning of year.... $ (4,847) $ (1,061) $ 1,033
Translation
adjustment........... 856 (3,786) (2,094)
--------- --------- --------
Balance at end of year $ (3,991) $ (4,847) $ (1,061)
========= ========= =========
Treasury stock:
Balance at
beginning of year.... $ (6,500) $ (8,382) $ (8,765)
Reissuance of
treasury stock....... 2,311 1,882 383
--------- --------- --------
Balance at end of year $ (4,189) $ (6,500) $ (8,382)
========= ========= =========
Total stockholders'
equity................. $462,775 $ 377,731 $ 399,537
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $ (63,508) $(115,346) $ (87,278)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization.... 89,274 62,749 43,741
Acquired in-process technology... 69,471 67,904 49,451
Write-off of fixed assets,
capitalized software and
other intangible assets
in conjunction with
restructuring plan.............. -- 18,197 3,440
Recovery related to restructuring
liability....................... (10,964) -- --
Gain on sale of discontinued
operations...................... -- (6,709) --
Unrealized holding gains on
marketable equity securities.... (57) 1,277 (923)
Realized net gain on sales of
investment securities........... (476) (44) (32)
Write-off of capitalized software
in connection with product
stabilization and mergers....... -- -- 654
Noncash compensation............. 102 296 764
Sales of trading securities......... 13,918 9,489 --
Changes in assets and liabilities,
net of acquisitions:
Trade and installment receivables (130,892) (66,204) (72,560)
Deferred income taxes............ 20,718 10,602 (20,595)
Accrued interest and other
current assets.................. (10,397) (10,890) (3,077)
Accounts payable and accrued
liabilities..................... 54,815 37,680 6,055
Deferred revenue................. 71,284 56,199 63,718
Income taxes payable............. 3,570 3,573 1,390
Other............................ (2,204) (12,858) 4,449
-------- -------- --------
Net cash provided by (used
in) operating activities.. 104,654 55,915 (10,803)
-------- -------- --------
Cash flows from investing activities:
Purchases of investment securities (271,904) (140,363) (55,188)
Sales of available-for-sale
securities....................... 44,884 15,789 43,763
Maturities of investment
securities....................... 255,758 24,383 6,968
Purchases of property and
equipment........................ (45,452) (39,580) (45,993)
Proceeds from sale of property
and equipment.................... 185 -- --
Proceeds from the sale of
discontinued operations.......... -- 17,500 --
Purchased and developed software.. (90,894) (63,781) (42,354)
Payments for acquisitions......... (67,429) (19,338) (18,095)
Other............................. (1,796) (1,800) (4,239)
-------- -------- --------
Net cash used in investing
activities............... (176,648) (207,190) (115,138)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs ... -- -- 49,973
Proceeds from issuance of
convertible notes, net of
issuance costs.................. -- 144,967 110,783
Proceeds from exercise of
stock options and Stock
Purchase Plan................... 60,687 24,313 53,456
Proceeds from borrowings......... -- -- 1,465
Payments on borrowings........... (3,720) (5,317) (11,471)
Other............................ (140) (487) (1,109)
-------- -------- --------
Net cash provided by
financing activities.... 56,827 163,476 203,097
-------- -------- --------
Adjustment to conform fiscal years
of pooled businesses................ (385) (1,074) (140)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents................ (15,552) 11,127 77,016
Cash and cash equivalents at
beginning of year................... 241,804 230,677 153,661
-------- -------- --------
Cash and cash equivalents at
end of year........................ $ 226,252 $ 241,804 $ 230,677
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
PLATINUM technology International, inc. and its subsidiaries (collectively,
the "Company" or "PLATINUM") develop, market and support software products, and
provide related professional services, that help organizations manage and
improve their information technology ("IT") infrastructures, which consist of
data, systems and applications. The Company's products and services help IT
departments, primarily in large and data-intensive organizations, minimize risk,
improve service levels and leverage information to make better business
decisions. The Company's products typically perform fundamental functions such
as automating operations, maintaining the operating efficiency of systems and
applications and ensuring data access and integrity. The Company markets and
supports its products and services principally through its own sales
organization, including an international network of wholly-owned subsidiaries.
Throughout 1998, the Company's software segment was organized into four business
units consisting of database management, systems management, application
infrastructure management, and data warehousing and decision support.
Use of Estimates
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, the Company's management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions are eliminated
in consolidation.
Revenue Recognition
Revenues from software product sales of perpetual and fixed-term license
agreements are recognized upon product delivery and customer acceptance, when
all significant contractual obligations are satisfied and the collection of the
resulting receivables is reasonably assured. Software product sales under
extended payment terms are discounted to present value. Revenues from
maintenance fees implicit in software product sales or separately priced
maintenance agreements are recognized on a straight-line basis over the
maintenance period.
Professional service revenues are derived from the Company's consulting
services business and educational programs. These revenues are comprised of both
time and material contracts and fixed-price contracts. Time and material
contract revenues are recognized as services are performed. Fixed-price contract
revenues are recognized based on the percentage-of-completion method.
On January 1, 1998, the Company adopted AICPA Statement of Position ("SOP")
97-2, "Software Revenue Recognition," which specifies the criteria that must be
met for recognizing revenues from software sales. The adoption of SOP 97-2 in
1998 has not had a material impact on the Company's financial position or
results of operations.
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents and Investment Securities
Cash equivalents are comprised of highly liquid investments with original
maturities of three months or less. Investment securities consist primarily of
corporate bonds with original maturities of less than one year, mortgage-backed
and other asset-backed securities with original maturities generally ranging
from three to thirty years, and marketable equity securities. The Company
classifies its investment securities as either available-for-sale or trading and
reports them at fair value. The consolidated financial statements reflect
investment securities classified as held-to-maturity which were acquired through
the Company's acquisition of Mastering, Inc. ("Mastering"), as discussed in Note
2.
Available-for-sale securities represent those securities that do not meet
the classification of held-to-maturity and are not actively traded. Trading
securities represent those securities which the Company intends to buy or sell
in the near term for the purpose of generating profits on increases in market
values. For available-for-sale securities, unrealized holding gains and losses,
net of income taxes, are reported as a separate component of stockholders'
equity. For trading securities, unrealized holding gains and losses are
reflected in pre-tax earnings. For securities transferred from
available-for-sale to the trading classification, any unrealized holding gains
or losses at the date of transfer are recognized in pre-tax earnings
immediately.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives, generally three to
seven years, of the various classes of property and equipment. Amortization of
leasehold improvements is computed over the shorter of the lease term or the
estimated useful life of the asset.
Purchased and Developed Software
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs associated
with the planning and designing phase of software development, including coding
and testing activities necessary to establish technological feasibility, are
classified as product development and expensed as incurred. Once technological
feasibility has been determined, additional costs incurred in development,
including coding, testing and documentation, are capitalized.
Amortization of purchased and developed software is provided on a
product-by-product basis over the estimated economic life of the software,
generally four years, using the straight-line method. This method generally
results in greater amortization expense per year than the method based on the
ratio of current year gross product revenue to current and anticipated future
gross product revenue. Amortization commences when a product is available for
general release to customers. Unamortized capitalized costs determined to be in
excess of the net realizable value of a product are expensed at the date of such
determination.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line
basis over the expected period to be benefited, generally seven to 15 years.
Adjustments to the carrying value of excess of cost over net assets acquired are
made if the sum of expected future net cash flows from the business acquired is
less than book value.
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period of
enactment.
Fair Value of Financial Instruments and Long-Lived Assets
The Company has reviewed the following financial instruments and determined
that their fair values approximated their carrying values as of December 31,
1998 and 1997: cash and cash equivalents; trade and installment receivables;
accrued interest and other current assets; refundable income taxes;
acquisition-related payables; accounts payable and other accrued liabilities;
and long-term obligations, excluding convertible subordinated notes. Investment
securities are discussed in Note 3, and convertible subordinated notes are
discussed in Note 12.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
under which the Company has reviewed long-lived assets and certain intangible
assets and determined that their carrying values as of December 31, 1998 are
recoverable in future periods.
Earnings Per Share
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which established new methods for computing and presenting earnings
per share ("EPS") and replaced the presentation of primary and fully-diluted EPS
with basic ("Basic") and diluted EPS. Basic earnings per share is based on the
weighted average number of shares outstanding and excludes the dilutive effect
of unexercised common stock equivalents. Diluted earnings per share is based on
the weighted average number of shares outstanding and includes the dilutive
effect of unexercised common stock equivalents. Because the Company reported a
net loss for the years ended December 31, 1998, 1997 and 1996, per share amounts
have been presented under the Basic method only.
Had the Company reported net income for the years ended December 31, 1998,
1997 and 1996, the weighted average number of shares outstanding would have
potentially been diluted by the following common equivalent securities (not
including the effects of applying the treasury stock method to outstanding stock
options or the if-converted method to convertible securities):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Stock options................... 24,490,000 17,271,000 15,147,000
Convertible subordinated
notes (November 1996).......... 8,240,000 8,243,000 962,000
Convertible subordinated
notes (December 1997).......... 4,161,000 231,000 --
Preferred stock (January 1998).. 1,705,000 -- --
---------- ---------- ----------
38,596,000 25,745,000 16,109,000
========== ========== ==========
</TABLE>
Additionally, net income applicable to common stockholders for the years
ended December 31, 1998, 1997 and 1996 would have been increased by adding back
interest expense, net of income taxes, related to the convertible subordinated
notes of $11,994,000, $5,870,000 and $501,000, respectively.
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries, except for foreign subsidiaries whose primary operations are
conducted in the United States, are measured using the local currency as the
functional currency. Assets and liabilities are translated into U.S. dollars
using current exchange rates as of the balance sheet date. Revenues and expenses
are translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statement of
operations.
Derivative Financial Instruments
In the ordinary course of business, the Company enters into forward
exchange contracts to minimize the short-term impact of foreign currency
fluctuations on assets and liabilities denominated in currencies other than the
functional currency of the reporting entity. All foreign exchange forward
contracts designated and effective as hedges of firm commitments are treated as
hedges.
Forward exchange contracts are reported at fair value within short-term
investment securities. Fair values of forward exchange contracts are determined
using published rates. Gains and losses on the forward exchange contracts are
included in other income and expense and offset foreign exchange gains and
losses from the revaluation of intercompany balances denominated in currencies
other than the functional currency of the reporting entity. Realized and
unrealized holding gains and losses on the forward exchange contracts are
reported within operating activities in the statement of cash flows.
Stock-Based Compensation
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize the compensation
expense associated with the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and provide pro forma disclosures as if the fair
value method defined in SFAS No. 123 had been applied. The Company has elected
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. The Company sells installment receivables to third
party finance companies in the normal course of business. During 1998, all such
transactions were accounted for as sales in accordance with SFAS No. 125.
Supplemental Cash Flow Disclosure
Income tax refunds received by the Company amounted to $445,000, $524,000
and $307,000 in 1998, 1997 and 1996, respectively. Cash paid for income taxes in
1998, 1997 and 1996 was $1,619,000, $3,379,000 and $3,819,000, respectively.
Cash paid for interest in 1998, 1997 and 1996 was $18,206,000, $8,826,000 and
$1,247,000, respectively.
<PAGE>
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
2. Acquisitions
Poolings of Interests
On February 8, 1996, the Company acquired all of the outstanding capital
stock of Prodea Software Corporation ("Prodea"), a leading provider of data
warehousing and business intelligence tools, in exchange for 2,126,913 shares of
the Company's Common Stock, $.001 par value ("Common Stock"), which had a market
value based upon the trading price of the Common Stock on the Nasdaq National
Market ("Market Value") of approximately $36,000,000 at the time of the
acquisition. In addition, the Company assumed stock options which converted into
options to purchase 212,427 shares of Common Stock.
On March 26, 1996, the Company acquired all of the outstanding capital
stock of Paradigm Systems Corporation ("Paradigm"), a leading provider of
information technology consulting services, in exchange for 762,503 shares of
Common Stock, which had a Market Value of approximately $12,800,000 at the time
of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 87,912 shares of Common Stock.
On March 29, 1996, the Company acquired all of the outstanding capital
stock of Axis Systems International, Inc. ("Axis"), a leading provider of
information technology consulting services, in exchange for 319,926 shares of
Common Stock, which had a Market Value of approximately $6,300,000 at the time
of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 59,986 shares of Common Stock.
On January 31, 1997, the Company acquired all of the outstanding capital
stock of Australian Technology Resources Pty Limited ("ATR"), a leading provider
of information technology consulting services, in exchange for 313,784 shares of
Common Stock, which had a Market Value of approximately $5,000,000 at the time
of the acquisition.
On February 28, 1997, the Company acquired all of the outstanding capital
stock of I&S Informationstechnik and Services GmbH ("I&S"), a leading provider
of information technology consulting services, in exchange for 1,089,867 shares
of Common Stock, which had a Market Value of approximately $17,200,000 at the
time of the acquisition.
On April 21, 1998, the Company acquired all of the outstanding capital
stock of Mastering, a leading provider of information technology training, in
exchange for 6,497,094 shares of Common Stock, which had a Market Value of
approximately $168,100,000 at the time of the acquisition. In addition, the
Company assumed stock options which converted into options to purchase 2,193,219
shares of Common Stock.
On May 12, 1998, the Company acquired all of the outstanding capital stock
of Learmonth and Burchett Management Systems Plc ("LBMS"), a leading provider of
process management solutions, in exchange for 2,775,897 shares of Common Stock,
which had a Market Value of approximately $71,900,000 at the time of the
acquisition. In addition, the Company exchanged options to purchase 430,737
shares of Common Stock for outstanding LBMS stock options.
<PAGE>
On May 28, 1998, the Company acquired all of the outstanding capital stock
of Logic Works, Inc. ("Logic Works"), a leading provider of data modeling tools,
in exchange for 7,466,981 shares of Common Stock, which had a Market Value of
approximately $198,342,000 at the time of the acquisition. In addition, the
Company assumed stock options which converted into options to purchase 1,160,609
shares of Common Stock.
On March 29, 1999, the Company acquired all of the outstanding ordinary
shares of Memco Software, Ltd. ("Memco"), a leading provider of information
security software, in exchange for 13,751,923 shares of the Company's Common
Stock, which had a market value (based upon the trading price of the Common
Stock on the Nasdaq National Market at the close of business on the most recent
trading day prior to the date of the acquisition) of approximately $135,800,000.
In addition, the Company assumed stock options which converted into options to
purchase 3,328,112 shares of the Company's Common Stock.
Each of the aforementioned transactions was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements have been
restated as if the combining companies had been combined for all periods
presented. Merger costs relating to the acquisitions consummated in 1998, 1997
and 1996 amounted to $40,065,000, $8,927,000 and $5,782,000, respectively, of
which $15,147,000 was included in other accrued liabilities at December 31, 1998
and $4,281,000 was included in other accrued liabilities at December 31, 1997.
These costs included investment banking and other professional fees, write-downs
of certain assets, employee severance payments, costs of closing excess office
facilities and various other expenses.
The following information reconciles total revenues and net loss of the
Company as previously reported in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 with the amounts presented in the accompanying
consolidated statements of operations for the years ended December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------- -------------------
Net income Net income
Revenues Net loss Revenues (loss) Revenue (loss)
-------- -------- -------- ---------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
PLATINUM(1)......$968,206 $ (2,468) $738,880 $(106,128) $553,484 $(87,194)
Memco............ 36,634 (41,235) 30,591 9,076 15,312 3,384
Intercompany
eliminations(2). (14,000) (19,805) (5,316) (18,294) (4,967) (3,468)
-------- -------- -------- -------- -------- --------
Total.......$990,840 $(63,508) $764,155 $(115,346) $563,829 $(87,278)
======== ========= ======== ========= ======== =========
<FN>
(1) Represents the historical results of the Company without considering the
effect of the Memco pooling of interests consummated during 1999. All
merger costs are reflected in the historical results of the Company.
<FN>
(2) The intercompany eliminations reflect adjustments to eliminate the effects
of intercompany transactions between the Company and Memco, as well as the
earnings derived from the Company's intercorporate investment in Memco
ordinary shares.
</TABLE>
The consolidated statement of operations for the year ended December 31,
1997 includes LBMS' operating results for the twelve months ended January 31,
1998. The consolidated statement of operations for the year ended December 31,
1996 includes LBMS' operating results for the twelve months ended April 30,
1997. Due to non-conforming reporting periods of the Company and LBMS, LBMS'
operating results for the three months ended April 30, 1997, consisting of
revenues of $6,188,000 and net income of $1,074,000, have been included in both
the 1997 and 1996 consolidated statements of operations of the Company.
<PAGE>
The consolidated statement of operations for the year ended December 31,
1996 includes ATR's operating results for the twelve months ended December 31,
1996. The consolidated statement of operations for the year ended December 31,
1995 includes ATR's operating results for the twelve months ended June 30, 1996.
Due to non-conforming reporting periods of the Company and ATR, ATR's operating
results for the six months ended June 30, 1996, consisting of revenues of
$5,061,000 and net income of $140,000, have been included in both the 1996 and
1995 consolidated statements of operations of the Company.
During 1996, the Company consummated an immaterial acquisition accounted
for as a pooling of interests. The Company did not restate the consolidated
financial statements to reflect the results of this entity for the periods
preceding the acquisition. As a result, the retained earnings of this entity
were recorded as of the acquisition date, causing a $45,000 reduction to the
Company's accumulated deficit in 1996. This adjustment is reflected in the
consolidated statements of stockholders' equity.
During 1997, the Company consummated an immaterial acquisition accounted
for as a pooling of interests. The Company acquired all of the outstanding
capital stock of Vayda Consulting, Inc. ("Vayda"), a leading provider of
information technology consulting services, in exchange for 580,231 shares of
Common Stock, which had a Market Value of approximately $15,300,000 at the time
of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 67,937 shares of Common Stock. The Company
did not restate the consolidated financial statements to reflect the results of
Vayda for the periods preceding the acquisition. As a result, the retained
earnings of Vayda were recorded as of the acquisition date, causing a $1,014,000
reduction to the Company's accumulated deficit in 1997. This adjustment is
reflected in the consolidated statement of stockholders' equity.
During the second quarter of 1998, the Company consummated an immaterial
acquisition accounted for as a pooling of interests. The Company acquired all of
the outstanding capital stock of Vivid Studios Inc. ("Vivid"), a leading
developer of internet commerce web sites, in exchange for 204,173 shares of
Common Stock, which had a Market Value of approximately $5,400,000 at the time
of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 77,267 shares of Common Stock. The Company
did not restate the consolidated financial statements to reflect the results of
Vivid for the periods preceding the acquisition. As a result, the retained
earnings of Vivid were recorded as of the acquisition date, causing a $3,522,000
addition to the Company's accumulated deficit in 1998. This adjustment is
reflected in the consolidated statements of stockholders' equity.
Purchase Transactions
The Company has also made a number of acquisitions that have been accounted
for under the purchase method. Accordingly, purchase prices have been allocated
to identifiable tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values. Amounts allocated to acquired in-process
technology have been expensed at the time of acquisition. Excess of cost over
net assets acquired is amortized on a straight-line basis over the expected
period to be benefited, generally seven to 15 years. The consolidated statements
of operations reflect the results of operations of the purchased companies since
the effective dates of the acquisitions.
To determine the fair market value of the acquired in-process technology,
the Company considered the three traditional approaches of value: the cost
approach, the market approach and the income approach. The Company relied
primarily on the income approach, whereupon fair market value is a function of
the future revenues expected to be generated by an asset, net of all allocable
expenses and charges for the use of contributory assets. The future net revenue
stream is discounted to present value based upon the specific level of risk
associated with achieving the forecasted asset earnings. The income approach
focuses on the income producing capability of the acquired assets and best
represents the present value of the future economic benefits expected to be
derived from these assets.
<PAGE>
The Company determined that the acquired in-process technologies had not
reached technological feasibility based on the status of design and development
activities that required further refinement and testing. The development
activities required to complete the acquired in-process technologies included
additional coding, cross-platform porting and validation, quality assurance
procedures and customer beta testing.
The acquired technologies represent unique and emerging technologies, the
application of which is limited to the Company's IT infrastructure strategy.
Accordingly, these acquired technologies have no alternative future use other
than the use for which the technologies were designed.
Effective January 1996, the Company acquired all of the outstanding capital
stock of Advanced Systems Technologies, Inc. ("AST"), a leading developer of
performance management tools, in exchange for approximately $445,000 in cash
plus 344,640 shares of Common Stock, which had a Market Value of approximately
$5,800,000 at the time of the acquisition.
Effective July 1996, the Company acquired all of the outstanding capital
stock of Software Alternatives, Inc. (d/b/a System Software Alternatives)
("Software Alternatives"), a leading provider of production scheduling software,
for approximately $1,900,000. Also effective July 1996, the Company acquired all
of the outstanding capital stock of Grateful Data, Inc. (d/b/a TransCentury Data
Systems) ("Grateful Data"), a Year 2000 solution provider, for $100,000 in cash
plus 333,333 shares of Common Stock, which had a Market Value of approximately
$4,000,000 at the time of the acquisition.
Effective December 1996, the Company acquired all of the outstanding
capital stock of VREAM, Inc. ("VREAM"), a leading provider of virtual reality
software for the World Wide Web and other interactive environments, in exchange
for 760,383 shares of Common Stock, which had a Market Value of approximately
$10,300,000 at the time of the acquisition. In addition, the Company assumed
stock options which converted into options to purchase 70,257 shares of Common
Stock.
During 1996, the Company also acquired certain software technologies for an
aggregate purchase price of approximately $3,513,000.
Internationally, effective December 1996, the Company acquired
substantially all of the assets of the Access Manager business unit of the High
Performance Systems division of International Computers Limited ("Access
Manager"), a leading provider of single-sign-on security computer software for
enterprise computing technology, in exchange for 2,286,222 shares of Common
Stock, which had a Market Value of approximately $30,000,000 at the time of the
acquisition.
Effective February 1997, the Company acquired all of the outstanding
capital stock of GEJAC, Inc. ("GEJAC"), a leading provider of UNIX and NT
charge-back software, in exchange for 412,801 shares of Common Stock, which had
a Market Value of approximately $6,800,000 at the time of the acquisition.
Internationally, effective October 1997, the Company acquired all of the
outstanding capital stock of ProMetrics Group Limited ("ProMetrics"), a leading
provider of productivity management software, in exchange for approximately
$8,000,000 in cash plus 364,396 shares of Common Stock, which had a Market Value
of approximately $9,500,000 at the time of the acquisition, plus contingent
consideration of approximately $11,000,000, as specified in the acquisition
agreement. The Company's issuance of Common Stock was substantially used to
retire approximately $7,000,000 of assumed debt under the acquisition agreement.
<PAGE>
On December 23, 1997, the Company and Intel Corporation ("Intel") entered
into certain agreements providing for the sale and license to the Company by
Intel of certain product technologies and the payment to the Company by Intel of
certain cash consideration. In exchange, the Company agreed to issue to Intel
1,768,421 shares of the Company's Class II Series B Preferred Stock ("Preferred
Stock"), which had a Market Value of approximately $42,000,000 on the date of
the agreement, and to distribute certain products manufactured by Intel.
Additionally, the Company licensed certain product technologies to Intel.
During 1997, the Company also acquired certain other software technologies
for an aggregate purchase price of approximately $6,800,000.
In May 1998, Memco (acquired by the Company on March 29, 1999) acquired all
of the shares of Network Information Technology, Inc. ("NIT"), a developer of an
internet security application aimed at Unix and Windows NT environments, in
exchange for 686,734 shares of Common Stock, which had a Market Value of
approximately $28,000,000 at the time of the acquisition.
In June 1998, Memco (acquired by the Company on March 29, 1999) acquired
all of the shares of Abirnet Ltd. ("Abirnet"), a developer of network security
applications, in exchange for 523,681 shares of Common Stock, which had a Market
Value of approximately $16,000,000 at the time of the acquisition, and
approximately $12,000,000 in cash.
In June 1998, the Company acquired all the outstanding common stock of
Geneva Software, Inc. ("Geneva Software"), a leading provider of network
management tools, in exchange for 920,615 shares of Common Stock, which had a
Market Value of approximately $21,700,000 at the time of the acquisition.
In June 1998, the Company acquired all the outstanding capital stock of
Systems Management Inc. ("SMS"), a provider of mainframe asset management and
cost modeling tools, in exchange for approximately $5,500,000.
In June 1998, the Company acquired all the outstanding capital stock of
ICON Computing, Inc. ("ICON"), a provider of modeling technologies, in exchange
for 142,570 shares of Common Stock, which had a Market Value of approximately
$5,900,000 at the time of the acquisition.
In June 1998, the Company acquired all the assets of Ergondata Do Brasil
LTDA and Senior Consultores Associados LTDA, (collectively "Brazil
Acquisitions"), providers of consultancy services relating to the installation
and maintenance of specialized computer systems, in exchange for 138,632 shares
of Common Stock, which had a market value of approximately $3,600,000 at the
time of the acquisition, and approximately $300,000, plus contingent
consideration of approximately $3,100,000, as specified in the acquisition
agreement.
In October 1998, the Company purchased substantially all the assets of
OpenDirectory Pty Limited and OpenDirectory, Inc. (collectively
"OpenDirectory"), providers of enterprise-wide directory service and software
solutions, for approximately $25,000,000. The Company may be required to make
additional payments of up to $10,000,000 over a period of less than two years,
contingent upon the operating results of OpenDirectory during this period.
During 1998, the Company also acquired eight other software businesses and
product technologies, in transactions accounted for as purchases, for an
aggregate purchase price of approximately $16,600,000.
<PAGE>
The following summary presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method during
1998.
<TABLE>
<CAPTION>
In-process
research
Purchased and Purchase
Company name software development Goodwill Other price (1)
- ------------ -------- ------------- - ---------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Geneva Software........ $ 1,303 $ 13,989(2) $ 6,992(2) $ (276) $ 22,008
SMS.................... 327 4,379 826 207 5,739
ICON................... -- 5,300 630 150 6,080
Brazil Acquisitions.... -- -- 4,592 33 4,625
OpenDirectory.......... 10,258 10,130 4,329 79 24,796
Abirnet................ 750 17,433 10,350 -- 28,533
NIT.................... 1,000 14,120 12,902 -- 28,022
Others................. 2,274 4,120 10,657 (227) 16,824
------- ---------- ------- ------- ---------
$15,912 $ 69,471 $ 51,278 $ (34) $136,627
======= ========== ======== ======= =========
<FN>
(1) Purchase prices include costs associated with the acquisition.
<FN>
(2) During the fourth quarter of 1998, the Company changed its estimate of
allocating purchase price and reduced its acquired in-process technology
expense by $4,827,000 and increased goodwill by the same amount.
</TABLE>
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions accounted for as purchases had occurred at the
beginning of each period. This summary is provided for informational purposes
only. It does not necessarily reflect the actual results that would have
occurred had the acquisitions been made as of those dates or of results that may
occur in the future.
<TABLE>
<CAPTION>
1998 1997
--------- ----------
(in thousands, except
per share data)
<S> <C> <C>
Revenues.............. $999,028 $774,442
Net loss.............. (64,874) (121,446)
Net loss per share.... (0.65) (1.32)
</TABLE>
The Company estimates aggregate payments for acquisition-related payables
in connection with the acquisitions described above to be $33,245,000,
$3,280,000 and $3,108,000 for the years ended December 31, 1999, 2000 and 2001,
respectively. At December 31, 1998 and 1997, $4,229,000 and $6,590,000, relating
to merger costs in connection with the acquisitions described above, were
included in other accrued liabilities. These costs included investment banking
and other professional fees, write-downs of certain assets, employee severance
payments, costs of closing excess office facilities and various other expenses.
The Company may be required to make additional payments in future years to
various former owners of acquired businesses based upon the attainment of
certain operating results by such businesses. The amount of these payments was
not determinable at December 31, 1998. Additional payments will be charged to
excess of cost over net assets acquired, compensation expense or recorded as an
adjustment to the respective purchase price in the periods in which such
payments are determinable.
<PAGE>
3. Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and aggregate fair value of investment securities as of December
31, 1998 were as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------
Amortized Gross Gross
cost unrealized unrealized Fair
holding holding value
gains losses
--------- ---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Current:
Available-for-sale--
U.S. Government securities
and agencies................... $ 1,010 $ -- $ (6) $ 1,004
State and municipal bonds....... 225 -- (20) 205
Corporate bonds................. 40,848 -- (162) 40,686
Marketable equity securities.... 3,677 45 (196) 3,526
Other........................... 33,820 -- -- 33,820
-------- -------- ------- --------
$ 79,580 $ 45 $ (384) $ 79,241
======== ======== ======= ========
Non-current:
Available-for-sale--
U.S. Government securities
and agencies.................. $ 2,031 $ -- $ (2) $ 2,029
State and municipal bonds...... 403 36 -- 439
Corporate bonds................ 9,039 -- (145) 8,894
Mortgage-backed securities..... 8,868 7 (53) 8,822
Other.......................... 15,850 22 (15) 15,857
-------- -------- ------- --------
$ 36,191 $ 65 $ (215) $ 36,041
======== ======== ======= ========
</TABLE>
<PAGE>
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and aggregate fair value of investment securities as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------
Amortized Gross Gross
cost unrealized unrealized Fair
holding holding value
gains losses
--------- ---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Current:
Available-for-sale--
U.S. Government securities
and agencies.................. $ 9,395 $ 25 $ -- $ 9,420
State and municipal bonds...... 10,294 16 (36) 10,274
Corporate bonds................ 15,208 26 (7) 15,227
Marketable equity securities... 435 -- -- 435
Other.......................... 51,827 -- -- 51,827
-------- -------- ------- --------
87,159 67 (43) 87,183
-------- -------- ------- --------
Trading securities--
Marketable equity securities. 1,075 -- (351) 724
Held-to-maturity--
U.S. Government securities
and agencies................ 9,479 15 -- 9,494
-------- -------- ------- ---------
$ 97,713 $ 82 $ (394) $ 97,401
======== ======== ======== =========
Non-current:
Available-for-sale--
State and municipal bonds.... $ 25,498 $ 55 $ -- $ 25,553
Held-to-maturity--
U.S. Government securities
and agencies................ 19,928 33 -- 19,961
Other........................ 775 -- -- 775
-------- -------- ------- ---------
$ 46,201 $ 88 $ -- $ 46,289
======== ======== ======== =========
</TABLE>
The contractual maturities of debt securities at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Fair value
-------------
(in thousands)
<S> <C>
Due within one year...................... $ 56,895
Due after one year through five years.... 22,403
Due after five years..................... 12,763
----------
$ 92,061
==========
</TABLE>
The Company did not sell available-for-sale securities during 1998. Using
the specific identification method, the gross realized gains and gross realized
losses on the sale of available-for-sale securities were approximately $44,000
and $0 for the year ended December 31, 1997 and $32,000 and $0, respectively,
for the year ended December 31, 1996. For the year ended December 31, 1998, the
Company sold investments classified as trading securities. Gross realized gains
and gross realized losses related to these sales were $476,000 and $0,
respectively.
During 1998, the Company transferred its trading securities in the amount
of $770,000 to available-for-sale because the Company no longer had the intent
to sell such securities in the near future. The Company sold a portion of its
trading securities during 1997 and consequently reclassified the corresponding
unrealized gains to realized gains.
<PAGE>
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Land.......................................... $ 1,450 $ 1,450
Real Estate................................... 98 98
Buildings..................................... 1,705 --
Furniture and fixtures........................ 28,470 36,531
Computers and software........................ 84,287 77,685
Transportation................................ 12,505 12,038
Leasehold improvements........................ 36,756 28,810
---------- ----------
165,271 156,612
Less accumulated depreciation and amortization 62,121 61,919
---------- ----------
$103,150 $ 94,693
========== ==========
</TABLE>
5. Purchased and Developed Software
Purchased and developed software consists of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Purchased software................ $ 59,335 $ 48,156
Software development costs........ 203,343 141,835
---------- ----------
262,678 189,991
Less accumulated amortization..... 78,903 72,778
---------- ----------
$ 183,775 $ 117,213
========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, $90,894,000,
$62,504,000 and $38,555,000, respectively, of software development costs were
capitalized. The Company recognized amortization expense applicable to
internally developed capitalized software of $30,551,000, $21,361,000 and
$11,309,000 during 1998, 1997 and 1996, respectively. The Company recognized
amortization expense applicable to purchased software of $11,798,000, $9,588,000
and $6,497,000 during 1998, 1997 and 1996, respectively. During 1998, the
Company retired $29,386,000 in software development costs and related
accumulated amortization. During 1997, the Company wrote-off $10,214,000 of
capitalized software development costs and $1,450,000 of purchased software
related to the restructuring plan executed in May 1997.
<PAGE>
6. Installment Accounts Receivable
Installment accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Current installment receivables......... $ 52,498 $ 42,753
Allowance for uncollectible amounts..... (526) (878)
Deferred maintenance fees............... (2,717) (10,124)
Unamortized discounts................... (3,687) (1,708)
---------- ----------
$ 45,568 $ 30,043
========== ==========
Non-current installment receivables..... $103,577 $ 58,889
Allowance for uncollectible amounts..... (1,374) (1,616)
Deferred maintenance fees............... (33,993) (27,603)
Unamortized discounts................... -- (7,758)
---------- ----------
$ 68,210 $ 21,912
========== ==========
</TABLE>
Installment accounts receivable represent amounts collectible on long-term
financing arrangements and include fees for product licenses, upgrades and
maintenance, sometimes also bundled with professional services contracts.
Installment receivables are generally financed over three to five years and are
recorded net of unamortized discounts, deferred maintenance fees and allowances
for uncollectible amounts.
The Company sells a significant portion of its installment receivables to
third parties. When these receivables are sold, the Company reduces the gross
installment receivable balance. Additionally, the Company reclassifies the
deferred maintenance to an obligation, which was previously reflected as a
reduction of the related installment receivable balance. The deferred
maintenance is recognized ratably into income over the term of the maintenance
agreement.
Proceeds from the sale of installment receivables for 1998, 1997 and 1996
were approximately $319,782,000, $206,916,000 and $129,328,000, respectively.
There were no accounts receivable sold with recourse for the years ended
December 31, 1998 and 1997. As of December 31, 1998 and 1997, there were no
potential recourse obligations for accounts receivable sold with recourse
previous to 1997.
The Company has an agreement with a third party that provides for potential
recourse obligations in the form of a loss pool based on the performance of the
related accounts receivable portfolio. Based on the terms of that agreement,
potential recourse obligations at December 31, 1998 were approximately
$20,000,000. Based on the credit ratings of the underlying obligors to the
accounts receivable and the performance history of the accounts receivable
portfolio, the Company has assessed the exposure related to these recourse
obligations and does not expect the potential liability to have a material
adverse effect on the Company's future results of operations.
7. Employee Benefit Plans
The Company has various defined contribution retirement plans (401(k) and
profit sharing) for qualified employees. Employer contributions made under the
plans totaled $4,766,000, $1,846,000 and $1,189,000 in 1998, 1997 and 1996,
respectively.
<PAGE>
8. Lines of Credit
At December 31, 1998, the Company had an unsecured bank line of credit for
an aggregate of $65,000,000, under which borrowings bear interest at rates
ranging from approximately LIBOR plus 1.25% to the bank's prime rate. This line
of credit is subject to limitations based upon certain financial covenants. At
December 31, 1998, there were no borrowings outstanding under this line of
credit. Additionally, the Company has a line of credit with a Japanese bank for
approximately $2,152,000 (based upon current exchange rates), under which
borrowings bear interest at a rate of 2.125%. As of December 31, 1998, the
Company had outstanding borrowings of approximately $1,197,000 under this line
of credit.
At December 31, 1998, the Company had aggregate letters of credit
outstanding for approximately $6,383,000, with expiration dates ranging from
February 1999 to April 2000. These letters of credit reduce the balance
available under the lines of credit.
9. Stock Options and Employee Stock Purchase Plan
As of December 31, 1998, the Company had seven stock option plans, which
are described below, as well as several plans that have been assumed pursuant to
acquisitions. The Company applies APB Opinion No. 25 in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans and its employee stock purchase plan (the "Stock Purchase Plan").
Had compensation cost for the Company's stock option plans and the Stock
Purchase Plan been determined consistent with SFAS No. 123, the Company's net
loss and net loss per share would have been the pro forma amounts indicated
below for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C>
Net loss:
As reported..... $ (63,508) $(115,346) $(87,278)
Pro forma....... (91,967) (129,518) (95,581)
Net loss per share
As reported..... $ (0.65) $ (1.29) $ (1.08)
Pro forma....... (0.95) (1.45) (1.18)
</TABLE>
Under SFAS No. 123, the pro forma compensation expense related to the
Company's stock option plans and Stock Purchase Plan, before effects for income
taxes, was approximately $47,850,000, $23,828,000 and $13,885,000 in 1998, 1997
and 1996, respectively.
Excluding stock option plans assumed pursuant to acquisitions, the Company
has seven stock option plans ("Company Plans"). The Employee Incentive
Compensation Plan, 1994 Stock Incentive Plan, 1991 Option Plan, 1989 Option Plan
and the 1998 Broad Based Option Plan provide for the granting of options to
employees for up to an aggregate of 36,160,000 shares. The Chief Executive
Option Plan provides for the granting of options for up to 1,600,000 shares to
the Company's Chief Executive Officer and President. Under the Directors' Option
Plan, the Company may grant options for up to 500,000 shares to non-employee
directors.
In general, the options granted under the Company Plans, excluding the
Directors' Option Plan, during 1998, 1997 and 1996, have similar provisions.
Under these plans, the Company has granted both non-qualified and incentive
stock options, with the exception of the 1998 Broad Based Plan which granted
only non-qualified stock options. Options granted under the Company Plans,
excluding the Directors' Option Plan, have an exercise price equal to the
closing market price of the Company's stock on the date of grant, have a legal
life of ten years, and typically vest in equal annual installments over a
four-year period beginning one year from the date of grant. Certain options
granted prior to 1995 have a legal life of fifteen years. The specific
provisions of any grant are determined by the Compensation Committee of the
Board of Directors or another designated committee.
Under the Directors' Option Plan, only non-qualified options have been
granted. These options have an exercise price equal to the closing market price
of the Company's stock on the date of grant and have a legal life of ten years.
The options granted in 1995 under this plan vested immediately, while those
granted in 1996, 1997 and 1998 vest annually over a three-year period beginning
one year from the date of grant.
As discussed in Note 2, the Company has assumed various option grants
related to certain acquisitions. The assumption of these option grants resulted
in the deemed issuance by the Company of options for 5,891,362, 2,406,569 and
2,219,177 shares in 1998, 1997 and 1996, respectively. The options assumed
reflect outstanding options at the time of acquisition. The provisions of the
assumed options are generally the same as those provided for in the original
option agreements.
In 1996, the Company began offering the Stock Purchase Plan to its
employees who work more than 20 hours per week. Under this plan, the Company is
authorized to issue up to 5,000,000 shares (excluding shares assumed to be
issued pursuant to acquisitions) of Common Stock. Under terms of the Stock
Purchase Plan and current policies of the administrative committee, employees
may elect each year to withhold between one and 50 percent of their cash
compensation through regular payroll deductions to purchase Common Stock,
subject to Internal Revenue Service limitations. The purchase price of the stock
is 85 percent of the lower of the price at the grant date, which is the
beginning of the plan year (March 1, or September 1 for employees with a start
date between March 1 and August 31) or the exercise date, which is the end of
each plan quarter (February 28, May 31, August 31 and November 30). As of
December 31, 1998, approximately 59% of eligible employees were participating in
the Stock Purchase Plan. Under the Stock Purchase Plan, the Company sold
1,585,766, 985,755 and 281,725 shares to employees in 1998, 1997 and 1996,
respectively (including amounts relating to acquired companies).
The fair value of the stock option grants is estimated using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions used for stock option grants in 1998, 1997 and 1996, respectively:
weighted average option price, which equals the fair market value at date of
grant, of $19.86, $14.99 and $14.23; expected dividend yields of 0% for all
years; expected volatility of 64%, 61% and 55%; risk-free interest rates of
4.66%, 5.66% and 6.37%; and an expected life of five years for all years. The
fair value of the employees' purchase rights pursuant to the Stock Purchase Plan
are estimated using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used for purchase rights granted in 1998, 1997 and
1996, respectively: average fair market value of $22.67, $13.75 and $10.75;
average option price of $15.36, $11.69 and $9.14; expected dividend yield of 0%
for each year; expected volatility of 64%, 61% and 55%; average risk-free
interest rate of 4.69%, 5.52% and 5.42%; and expected life of three months for
each year.
Stock option plan activity during the years ended December 31, 1998, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Fixed Options Shares price Shares price Shares price
- -------------- ---------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning
of year....... 17,271,094 $13.30 15,147,172 $11.95 12,467,736 $10.71
Granted........ 11,676,184 19.86 5,893,817 14.99 5,242,640 14.23
Exercised...... (3,343,662) 11.73 (2,113,328) 11.32 (1,657,312) 11.16
Canceled....... (1,114,036) 15.59 (1,656,567) 9.49 (905,891) 9.61
----------- ----------- -----------
Outstanding at
end of year... 24,489,580 16.54 17,271,094 13.30 15,147,173 11.95
=========== ========== ==========
Options
exercisable at
year-end...... 9,232,723 7,298,672 6,891,404
=========== ========== ==========
Weighted-average
fair value of
options granted
during the year $ 12.34 $ 10.12 $ 7.50
</TABLE>
<PAGE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------- --------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
Exercise prices of shares life price of shares price
------------------ --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.0025--$10.7500 3,592,342 6.14 $ 7.23 2,417,147 $ 7.24
$10.8750--$13.6250 4,978,617 7.11 $ 12.79 2,546,535 $ 12.78
$13.7000--$17.1306 5,739,097 8.41 $ 14.66 2,448,461 $ 14.80
$17.2000--$21.5311 5,129,496 8.56 $ 19.49 1,444,554 $ 18.85
$21.5625--$36.4026 5,050,028 9.20 $ 24.50 376,026 $ 28.39
---------- ---------
24,489,580 8.00 $ 16.34 9,232,723 $ 13.45
========== =========
</TABLE>
10. Preferred Stock
On December 23, 1997, the Company agreed, pursuant to a stock purchase
agreement, to issue to Intel 1,768,421 shares of its Preferred Stock, which had
a fair market value of approximately $42,000,000 on the date of subscription, in
exchange for certain product technologies and other intangible assets. The
shares of Preferred Stock were subscribed for as of December 31, 1997 and
subsequently issued on January 14, 1998.
The holders of the Preferred Stock have the option to convert, at any time,
each share of Preferred Stock into one share of Common Stock. Each share of
Preferred Stock will automatically convert into one share of Common Stock upon
the transfer by any holder of Preferred Stock in a non-permitted transfer. In
the event of a liquidation of the Company, the holders of the Preferred Stock
are entitled to receive $23.75 per share plus the amount of any declared but
unpaid dividends. The conversion and liquidation terms are subject to adjustment
based upon subsequent changes in equity interests.
As of December 31, 1998, the Company had reserved 1,768,421 shares of its
authorized Common Stock to be issued upon conversion of the Preferred Stock.
11. Income Taxes
Income (loss) from continuing operations before income taxes for the years
ended December 31, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
U.S................... $(38,009) $(112,681) $(73,844)
Non-U.S............... 7,119 17,707 (18,701)
--------- ---------- ---------
Total............ $(30,890) $ (94,974) $(92,545)
========= ========== =========
</TABLE>
<PAGE>
Income tax expense (benefit) from continuing operations for the years ended
December 31, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................ $ -- $ -- $ 2,635
State.............................. 1,041 1,159 336
Foreign............................ 3,994 2,309 1,987
Deferred:
Federal............................ 25,193 22,048 (9,458)
State.............................. 2,390 (3,539) (4,179)
Foreign............................ -- (2,630) --
---------- ---------- --------
$32,618 $19,347 $(8,679)
========== ========== ========
</TABLE>
The reconciliation of income taxes computed using the Federal statutory
rate of 35% to the income tax provision is as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Income tax computed at statutory rate...... $(10,811) $(33,242) $(32,391)
State income taxes, net of Federal
tax expense (benefit)..................... 3,205 (5,540) (5,260)
Research and experimentation credits....... (3,540) (3,882) (1,720)
Foreign tax credit......................... (181) (117) (59)
Foreign taxes.............................. 965 1,271 751
Foreign sales corporation.................. (1,553) (557) (1,036)
Municipal bond interest.................... (967) (998) (289)
Nondeductible merger and acquisition costs. 25,847 10,683 8,695
Change in valuation allowance.............. 7,750 43,365 18,490
Losses with no tax benefit to subsidiaries. 8,653 5,009 2,422
Nondeductible withholding taxes............ 1,094 -- --
Other...................................... 2,156 3,355 1,718
-------- -------- ---------
Effective tax.............................. $ 32,618 $ 19,347 $ (8,679)
======== ======== =========
</TABLE>
<PAGE>
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred revenue.............................. $ 9,138 $ 5,895
Allowance for doubtful accounts............... 1,558 670
Net operating loss carryforwards.............. 135,058 125,005
Foreign net operating losses.................. 2,630 2,630
General business, AMT and state tax credits... 9,927 13,981
Foreign tax credits........................... 647 952
Accrued expenses and reserves................. 8,961 13,031
Rent abatement................................ 2,726 2,471
Other......................................... 12,482 8,806
-------- --------
Total gross deferred tax assets.......... 183,127 173,441
Less valuation allowance...................... (121,683) (113,933)
Net deferred tax assets.................. 61,444 59,508
-------- --------
Deferred tax liabilities:
Capitalized software, net..................... 61,252 36,420
Installment sales............................. -- 819
Other......................................... -- 1,502
-------- --------
Total gross deferred tax liabilities..... 61,252 38,741
-------- ---------
Net deferred tax assets.................. $ 192 $ 20,767
======== =========
</TABLE>
The net change in the valuation allowance during 1998, 1997 and 1996 was an
increase of $7,750,000, $43,365,000 and $18,490,000, respectively.
The Company has reduced gross deferred tax assets by a valuation allowance
to reflect the estimated amount of deferred tax assets which will, more likely
than not, be realized. The net deferred tax asset at December 31, 1998 reflects
management's estimate of the amount that will be realized as a result of future
profitability. The amount of the deferred tax asset considered realizable could
be reduced if estimates of future taxable income are reduced.
At December 31, 1998, the Company had approximately $350,270,000 of net
operating loss carryforwards and $10,574,000 of tax credit carryforwards, which
are available to reduce future Federal income taxes, if any. The net operating
loss carryforwards expire between 2004 and 2018. The tax credit carryforwards
expire between 2002 and 2018. The Company's ability to utilize the net operating
loss carryforwards and available tax credits may be limited due to changes in
ownership as a result of business combinations.
12. Convertible Subordinated Notes
In November 1996, the Company issued $115,000,000 of convertible
subordinated notes (the "1996 Notes") due November 15, 2001, bearing interest at
6.75% annually. Interest is payable semi-annually on May 15 and November 15. The
holders of the Notes have the option to convert them into shares of Common
Stock, at any time prior to maturity, at a conversion price of $13.95 per share.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time during the twelve-month period commencing November 15, 1999 at 102.7%
of their principal amount and during the twelve-month period commencing November
15, 2000 at 101.35% of their principal amount. During 1998 and 1997, $36,000 and
$10,000, respectively, of the 1996 Notes were converted to Common Stock. As of
December 31, 1998, $114,954,000 of the 1996 Notes were outstanding.
<PAGE>
The Company estimated the fair value of the 1996 Notes as of December 31,
1998 and 1997 at approximately $170,132,000 and $236,879,000, respectively,
based upon their trading price on the Nasdaq SmallCap Market on that date.
In December 1997, the Company issued $150,000,000 of convertible
subordinated notes (the "1997 Notes") due December 15, 2002, bearing interest at
6.25% annually. Interest is payable semi-annually on June 15 and December 15,
commencing June 15, 1998. The holders of the 1997 Notes have the option to
convert them into shares of Common Stock, at any time prior to maturity, at a
conversion price of $36.05 per share. The 1997 Notes are redeemable at the
option of the Company, in whole or in part, at any time during the twelve-month
period commencing December 15, 2000 at 102.5% of their principal amount and
during the twelve-month period commencing December 15, 2001 at 101.25% of their
principal amount. As of December 31, 1998, $150,000,000 of the 1997 Notes were
outstanding.
The Company estimated the fair value of the 1997 Notes as of December 31,
1998 and 1997 at approximately $131,820,000 and $159,375,000, respectively,
based upon their bid price in the convertible debentures market on that date.
For the years ended December 31, 1999, 2000, 2001 and 2002, aggregate
annual maturities of the 1996 Notes and the 1997 Notes are $0, $0, $114,954,000
and $150,000,000, respectively.
13. Restructuring
In August 1996, the Company's wholly-owned subsidiary, LBMS (acquired as of
May 12, 1998), executed a plan to restructure its operations. During the second
half of 1996, LBMS recorded a restructuring charge of $14,109,000, net of
$3,512,000 in sublease rentals and recoveries from the sale of a product line.
The restructuring charge was comprised primarily of abandoned lease costs,
severance and other personnel costs and write-offs of excess equipment and other
assets. During 1997, LBMS recorded a restructuring benefit of $1,490,000 related
to sublease rental activity. This benefit was offset against the Company's
restructuring charge recorded in 1997, as discussed below.
In the fourth quarter of 1996, the Company's wholly-owned subsidiary, Logic
Works (acquired as of May 28, 1998), implemented a restructuring plan to
streamline its operations by reducing its workforce, consolidating and
reorganizing certain operations and writing off certain fixed assets and other
impaired assets. The plan included the closing and moving of several offices and
the termination of approximately 25 employees across all departments. Logic
Works recorded a charge of $2,203,000 relating to this restructuring.
In May 1997, the Company executed a restructuring plan to consolidate its
sales, marketing, business development and product development operations to
achieve cost efficiencies through the elimination of redundant functions. These
redundancies resulted primarily from businesses acquired over the previous three
years. The Company also realigned its business units and inside sales force to
redirect focus on its strongest product lines and better integrate the efforts
of certain product development teams. As part of the plan, the Company reduced
its worldwide work force by approximately 10%, eliminating approximately 400
positions primarily in the areas of product development and support, marketing
and inside sales and, to a lesser extent, professional services and
administration.
<PAGE>
The Company recorded a restructuring charge of $57,319,000 during the
second quarter of 1997 related to the restructuring plan. The restructuring
charge included the following expenses: facility-related costs, including a
reserve for estimated lease obligations associated with the closing of office
facilities; write-offs of excess equipment, furniture and fixtures; write-offs
of capitalized software costs and other intangible assets related to the
termination of development efforts for certain discontinued products, as well as
penalties for the cancellation of distributorship agreements for such products;
and severance and other employee-related costs of the terminated staff.
During 1998, the Company recognized a restructuring benefit of $10,964,000
related to the Company's occupation of previously vacated facilities and the
relief of obligations under cancelled lease agreements, as well as sublease
rental activity. This restructuring benefit represents the recovery of certain
restructuring charges recorded by the Company in the second quarter of 1997, as
discussed above.
The following table summarizes the Company's restructuring activity for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Intangible
assets
and
penalties
Severance for Property
Excess and cancelled and
facilities benefits agreements equipment Total
------------ --------- ---------- --------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total accrued restructuring
costs at December 31, 1996. $10,963
=======
1997 restructuring charges:
Cash-related charges.... $22,542 $10,364 $ 3,236 $ -- $36,142
Non-cash charges........ -- -- 16,177 3,510 19,687
-------- -------- -------- -------- -------
$22,542 $10,364 $19,413 $ 3,510 $55,829
======== ======== ======== ======== =======
Payments made in 1997....... (17,784)
Write-offs taken in 1997.... (19,687)
-------
Total accrued restructuring
costs at December 31, 1997. 29,321
Less current portion........ 7,391
--------
Long-term accrued
restructuring costs........ $21,930
========
Total accrued restructuring
costs at December 31, 1997. $29,321
Payments made in 1998....... (10,682)
Recoveries incurred in 1998. (10,964)
--------
Total accrued restructuring
costs at December 31, 1998. 7,675
Less current portion....... 2,390
--------
Long-term accrued
restructuring costs........ $ 5,285
========
</TABLE>
14. Derivative Financial Instruments
The Company conducts business on a global basis in numerous major
international currencies and is, therefore, exposed to adverse movements in
foreign currency exchange rates. The Company has established a foreign currency
hedging program utilizing forward foreign exchange contracts to reduce certain
currency exposures. These contracts hedge exposures associated with
nonfunctional currency assets and liabilities denominated in Japanese,
Australian, Canadian, numerous Asian and various European currencies. At the
present time, the Company hedges only those currency exposures associated with
certain nonfunctional currency assets and liabilities resulting from
intercompany balances and does not generally hedge anticipated foreign currency
cash flows. The Company does not enter into forward exchange contracts for
trading purposes.
<PAGE>
Gains and losses on the foreign currency forward exchange contracts are
included in other income and offset foreign exchange gains and losses from the
revaluation of intercompany balances denominated in currencies other than the
functional currency of the reporting entity. The Company's forward contracts
generally have original maturities of one month.
The table below provides information as of December 31, 1998 about the
Company's foreign currency forward exchange contracts, including notional values
of outstanding forward contracts purchased and sold and the unrealized gains or
losses recorded for each contract.
<TABLE>
<CAPTION>
Notional Unrealized
value Notional gains
purchased value sold (losses)
----------- ------------ ----------
(in thousands)
<S> <C> <C> <C>
European currencies..... $ 6,565 $(16,774) $ (69)
Asian currencies........ 890 (3,028) 13
Japanese Yen............ -- (3,306) 23
Australian Dollar....... -- (1,811) (5)
Canadian Dollar......... 318 -- 2
--------- --------- -------
Total.............. $ 7,773 $(24,919) $ (36)
========= ========= =======
</TABLE>
While the notional or contract amounts of the Company's forward exchange
contracts provide one measure of the volume of these transactions, they do not
represent the Company's full exposure to credit risk. The Company faces
additional risks if the banking counterparties are unable to meet the terms of
the agreements. The Company has established policies to minimize such risks and
will only execute forward exchange contracts with major financial institutions.
The Company has assessed the potential exposure related to default by such
institutions to be minimal.
15. Commitments and Contingencies
Operating Leases
The Company leases office space and certain computer and telecommunications
equipment under long-term lease agreements expiring through the year 2013. Total
future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Amount
-------------
(in thousands)
<S> <C>
1999............... $ 58,184
2000............... 44,666
2001............... 34,469
2002............... 28,001
2003............... 15,203
Thereafter......... 59,621
----------
Total... $ 240,144
==========
</TABLE>
Future minimum lease payments have not been reduced by minimum sublease
rentals of $4,433,000 due in the future under noncancelable subleases. Total
rent expense under all operating leases, net of insignificant sublease rental
income, amounted to $37,448,000, $36,445,000 and $26,763,000 in 1998, 1997 and
1996, respectively.
<PAGE>
Litigation
The Company is subject to certain legal proceedings and claims that have
arisen in the ordinary course of business and have not been fully adjudicated.
Management currently believes the ultimate outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial position.
Other
Memco, a wholly-owned subsidiary of the Company (acquired as of March 29,
1999), received participation payments from the Government of Israel through the
Misistry of Industry and Trade--the Office of the Chief Scientist in connection
with its software development. Cumulative participation payments received
totaled $4,620,000, including $2,038,000 in 1998, $1,030,000 in 1997 and
$744,000 in 1996. In return for the participation, Memco is committed to pay
royalties at a rate of 3% to 5% of sales of the developed product, up to 100% of
the amount of grantes received. Memco has paid cumulative royalties in the
amount of $2,419,000, including $1,021,000 in 1998, $901,000 in 1997 and
$458,000 in 1996.
16. Other Income (Expense), Net
Other income (expense), net, for the years ended December 31, 1998, 1997
and 1996 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
(in thousands)
<S> <C> <C> <C>
Interest income................................ $ 17,339 $ 12,619 $ 10,032
Interest expense............................... (18,072) (9,537) (2,295)
Foreign exchange gains (losses)................ (458) 597 (301)
Net realized gains on sales of investments..... 476 44 32
Unrealized gains (losses) on marketable equity
securities.................................. 57 (1,277) 923
Other.......................................... 7 (142) (34)
---------- --------- ---------
$ (651) $ 2,304 $ 8,357
========== ========= ========
</TABLE>
17. Segment and Geographic Information
The Company has two reportable segments consisting of software and
professional services. The software segment develops, markets, and supports
software products. The professional services segment provides professional
services related to such software products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Certain expenses of the Company, including special general
and administrative charges, restructuring charges, merger costs, and acquired
in-process technology, are not allocated to individual segments. The Company
does not allocate total assets to its segments.
<PAGE>
The following table presents information about the Company's industry
segments for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Professional
Software Services Unallocated Total
--------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
1998
Revenues..................... $ 736,306 $ 254,534 $ -- $ 990,840
Amortization of excess cost
over net assets acquired.... (14,105) -- -- (14,105)
Other costs and expenses..... (661,506) (235,914) (109,554) (1,006,974)
---------- --------- ---------- ------------
Operating income (loss)...... $ 60,695 $ 18,620 $(109,554) $ (30,239)
========== ========= =========== ============
1997
Revenues..................... $ 575,001 $189,154 $ -- $ 764,155
Amortization of excess cost
over net assets acquired.... (6,360) -- -- (6,360)
Other costs and expenses..... (538,053) (170,847) (146,173) (855,073)
---------- --------- ---------- ------------
Operating income (loss)...... $ 30,588 $ 18,307 $(146,173) $ (97,278)
========== ========= =========== ============
1996
Revenues..................... $ 413,645 $150,184 $ -- $ 563,829
Amortization of excess cost
over net assets acquired.... (5,317) -- -- (5,317)
Other costs and expenses..... (440,448) (145,443) (73,523) (659,414)
---------- --------- ---------- ------------
Operating income (loss)...... $ (32,120) $ 4,741 $ (73,523) $ (100,902)
========== ========= =========== ============
</TABLE>
The following table presents information about the Company by geographic
area for the years ended December 31, 1998, 1997 and 1996. Export sales and
certain income and expense items are reported in the geographic area where the
final sale is made rather than where the transaction originates.
<TABLE>
<CAPTION>
Domestic Europe Other Total
---------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
1998
Revenues.................. $713,342 $184,266 $ 93,232 $ 990,840
Operating income (loss)... (91,249) 39,324 21,686 (30,239)
Identifiable assets....... 981,953 137,891 95,715 1,215,559
1997
Revenues.................. 573,078 127,438 63,639 764,155
Operating income (loss)... (114,985) 4,934 12,773 (97,278)
Identifiable assets....... 848,006 108,541 61,417 1,017,964
1996
Revenues.................. 409,096 104,633 50,100 563,829
Operating loss............ (82,201) (13,938) (4,763) (100,902)
Identifiable assets....... 644,883 85,288 36,932 767,103
</TABLE>
The revenues and operating income (loss) amounts above exclude the effect
of intercompany royalties. The domestic operating losses in 1998, 1997 and 1996
include all merger costs, restructuring charges and acquired in-process
technology charges.
No single customer accounted for 10% or more of total revenues in 1998,
1997 or 1996.
<PAGE>
18. Discontinued Operations
On July 29, 1997, Mastering, a wholly-owned subsidiary of the Company
(acquired as of April 21, 1998), announced its intention to dispose of its
outdoor media business segment. On September 16, 1997, Mastering sold the assets
of its outdoor media business segment for approximately $4,000,000 in cash and
approximately $600,000 in notes receivable, resulting in a pre-tax gain of
approximately $1,100,000. Mastering approved the disposition of the outdoor
media business segment, including a plan for Mastering to identify potential
buyers, on May 17, 1997. As a result, the segment is accounted for as a
discontinued operation in the consolidated financial statements for all periods
presented, with a measurement date of May 17, 1997.
The following table presents approximate revenues and net income (loss) for
the outdoor media business segment for the period of January 1, 1997 to
September 16, 1997 and the year ended December 31, 1996:
<TABLE>
<CAPTION>
January 1, 1997 For the Year Ended
to September 16, 1997 December 31, 1996
--------------------- -------------------
(in thousands)
<S> <C> <C>
Revenues............. $ 2,100 $ 3,900
Net income (loss).... (200) 500
</TABLE>
Included in the net loss for the period of January 1, 1997 to September 16,
1997 is approximately $200,000 of costs related to the sale of the segment. The
net loss for the period of May 18, 1997 to September 16, 1997 was approximately
$800,000.
On July 29, 1997, Mastering announced its intention to dispose of its
interactive business segment. On September 26, 1997, Mastering sold the assets
of its interactive business segment for $13,500,000 in cash and the right to
future payments contingent on the segment's future earnings, resulting in a
pre-tax gain of approximately $5,600,000. As result of this transaction, the
interactive business segment is accounted for as a discontinued operation in the
consolidated financial statements for all periods presented, with a measurement
date of July 28, 1997.
The following table presents approximate revenues and net loss for the
interactive business segment for the period of January 1, 1997 to September 26,
1997 and the year ended December 31, 1996:
<TABLE>
<CAPTION>
January 1, 1997 For the Year Ended
to September 26, 1997 December 31, 1996
--------------------- -------------------
(in thousands)
<S> <C> <C>
Revenues..... $ 13,000 $ 14,300
Net loss..... (5,100) (4,100)
</TABLE>
Included in the net loss for the period of January 1, 1997 to September 26,
1997 is approximately $1,500,000 of costs related to the organizational
realignment and the sale of the interactive business segment. The net loss for
the period of July 29, 1997 to September 26, 1997 was approximately $2,600,000.
<PAGE>
Mastering sold the following assets and was relieved of the following
liabilities related to the outdoor media and interactive business segments at
their respective sale dates (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Assets:
Current assets
Accounts receivable, net.............. $ 3,938
Other current assets.................. 2,345
------
Total current assets............. 6,283
------
Property, plant and equipment, net.... 5,711
Goodwill and other assets, net........ 3,389
------
Total assets..................... 15,383
------
Liabilities:
Current liabilities
Accounts payable...................... 778
Accrued liabilities................... 1,764
Other current liabilities............. 1,148
-------
Total current liabilities........ 3,690
-------
Non-current liabilities............... 277
-------
Total liabilities................ 3,967
-------
Net assets sold............................ $11,416
=======
</TABLE>
19. Subsequent Events
Effective January 1, 1999, the Company reorganized its legal structure into
a holding company structure, under which the operations of the Company are
conducted through direct and indirect wholly-owned subsidiaries. Certain of
these subsidiaries, including PLATINUM technology IP, inc. and PLATINUM
technology, inc. (collectively, the "Obligor Subsidiaries") commenced
substantive operations. The corporate structural changes were made to reflect
the Company's global focus and to provide greater operational flexibility, as
well as allow for more efficient tax planning in the future. The Obligor
Subsidiaries were established with de minimis capitalizations from the Company
as of December 31, 1998. The Obligor Subsidiaries are joint and several obligors
on the 1996 Notes and the 1997 Notes previously issued by the Company. There are
currently no significant restrictions on the Company's ability to obtain funds
from the Obligor Subsidiaries.
On February 22, 1999, the Company announced a restructuring plan to
streamline operations, increase profitability, and deliver greater value to
customers and shareholders. The Company believes that this restructuring plan
will yield approximately $90 million (unaudited) in annual savings and
significantly increase operating margins. As a result of these actions, the
Company expects to incur a one-time charge of approximately $90 to $110 million
(unaudited) in the first quarter of 1999.
On March 29, 1999, the Company and Computer Associates International, Inc.
("CA") announced the execution of a merger agreement pursuant to which CA has
agreed to acquire the Company through a cash tender offer. Under the terms of
the merger agreement, a wholly-owned subsidiary of CA will offer to purchase all
outstanding shares of the Company's Common Stock for $29.25 per share.
Consummation of the tender offer is subject to certain conditions, including the
condition that at least a majority of the outstanding shares of the Company's
Common Stock be tendered and not withdrawn. Consummation of the tender offer is
also subject to the expiration or termination of any applicable antitrust
waiting period. Following completion of the tender offer and subject to certain
conditions, the Company will merge into the subsidiary of CA, with the Company
surviving as a wholly-owned subsidiary of CA. The transactions are currently
expected to be completed in mid-1999.
<PAGE>
Computer Associates International, Inc.
Pro Forma Condensed Combined Financial Statements
(Unaudited)
The unaudited pro forma condensed combined balance sheet as of March
31, 1999 gives effect to the merger as if it had occurred on March 31, 1999. The
unaudited pro forma condensed combined statement of operations for the year
ended March 31, 1999 gives effect to the merger as if it had occurred on April
1, 1998. The unaudited pro forma information is based on the historical
financial statements of the Registrant and PLATINUM giving effect to the
transaction under the purchase method of accounting as well as assumptions and
adjustments as indicated in the Notes below.
The Registrant has a fiscal year end of March 31 while PLATINUM has a
fiscal year end of December 31. The operations of the Registrant for the year
ended March 31, 1999 have been combined with PLATINUM's operations for the
twelve months ended March 31, 1999. PLATINUM's financial statements for the
twelve months ended March 31, 1999 have been derived by combining PLATINUM's
results of operations for the nine months ended December 31, 1998 and for the
three months ended March 31, 1999.
The estimated charge of $644 million resulting from purchased research
and development costs has been reflected as a reduction of stockholders' equity
in the pro forma condensed balance sheet as of March 31, 1999. This same charge
has been excluded from the pro forma condensed statement of operations for the
year ended March 31, 1999 since the charge is non-recurring and directly related
to the acquisition.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the financial position or operating results that would have been achieved had
the transaction been in effect during the periods presented and should not be
construed as representative of future operations.
<PAGE>
Pro Forma Condensed Combined Balance Sheet
of Computer Associates International, Inc.
as of March 31, 1999
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
(A)
Historical Historical Pro Forma Pro Forma
Registrant PLATINUM Adjustments Results
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 399 $ 207 $ 606
Marketable securities 137 30 167
Trade and installment
accounts receivable, net 2,021 260 2,281
Other current assets 74 38 112
-----------------------------------------------
Total current assets 2,631 535 3,166
-----------------------------------------------
Non-current installment
accounts receivable, net 2,844 47 2,891
Property and equipment, net 598 100 698
Purchased software products,
net 221 166 $ 804 (B) 1,191
Excess of cost over
net assets acquired, net 1,623 77 2,459 (B) 4,159
Other assets 153 83 236
-----------------------------------------------
Total assets $8,070 $1,008 $3,263 $12,341
===============================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Loans payable and current
portion of long-term debt 492 4 1,500 (C) $1,996
Income taxes payable 312 7 319
Other current liabilities 1,059 374 505 (D) 1,938
-----------------------------------------------
Total current liabilities 1,863 385 2,005 4,253
-----------------------------------------------
Long-term debt, net of
current portion 2,032 269 2,041 (C) 4,342
Deferred income taxes 1,034 --- 63 (B) 1,097
Deferred maintenance revenue 412 94 506
Other non-current liabilities --- 58 58
-----------------------------------------------
Total liabilities 5,341 806 4,109 10,256
-----------------------------------------------
Total stockholders' equity 2,729 202 (846)(B) 2,085
-----------------------------------------------
Total liabilities and
stockholders' equity $8,070 $1,008 $3,263 $12,341
===============================================
<FN>
See Notes to Pro Forma Condensed Combined Financial Statements.
</TABLE>
<PAGE>
Pro Forma Condensed Combined Statement of Operations
of Computer Associates International, Inc.
as of March 31, 1999
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
(A)
Historical Historical Pro Forma Pro Forma
Registrant PLATINUM Adjustments Results
<S> <C> <C> <C> <C>
Revenue:
Product revenue and other
related income $4,511 $784 $5,295
Maintenance fees 742 184 926
-------------------------------------------
Total revenue 5,253 968 6,221
Costs and expenses:
Selling, marketing and
administrative 2,038 592 2,630
Product development and
enhancements 423 197 620
Commissions and royalties 263 98 361
Depreciation and
amortization 325 93 279(E) 697
Interest expense, net 123 2 230(F) 355
Purchased research and
development --- 69 69
One-time charges 1,071(G) 241(H) (20)(I) 1,292
-------------------------------------------
Total costs
and expenses 4,243 1,292 489 6,024
-------------------------------------------
Income (loss) before
income taxes 1,010 (324) (489) 197
Income tax expense
(benefit) 384 7 (128)(J) 263
-------------------------------------------
Net income (loss) $626 ($331) ($361) ($66)
===========================================
Basic earnings (loss) per share $1.15 ($0.12)
===========================================
Basic weighted average
shares used in computation 545 545
Diluted earnings (loss)per share $1.11 ($0.12)
===========================================
Diluted weighted average
shares used in computation 562 545
<FN>
See Notes to Pro Forma Condensed Combined Financial Statements.
</TABLE>
<PAGE>
Computer Associates International, Inc.
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
(A) Certain reclassifications were made to conform PLATINUM's
categorizations to those of the Registrant.
(B) Estimated valuation adjustments of PLATINUM's assets and liabilities
resulting from the preliminary allocation of the purchase price,
elimination of stockholders' equity and the anticipated $644 million
after-tax charge taken at the time of the acquisition for purchased
research and development costs related to acquired technology that has
not reached the working model stage and has no alternative future use.
(C) Represents anticipated borrowings to fund the acquisition. Total
borrowings include $1,500 million in current maturities and the
remaining in non-current maturities. Borrowings currently bear an
annual interest rate of approximately 6.5%.
(D) Estimated accrued expenses associated with the change of control,
termination of leases, and other acquisition related reserves.
(E) Represents one year of amortization expense of capitalized purchased
software and excess of cost over net assets acquired. Amortization of
purchased software is expected to occur ratably over a seven-year
period. Amortization of the excess of cost over net assets acquired is
expected to occur ratably over a fifteen-year period.
(F) Represents one year of interest expense at 6.5%. Annual interest
expense before taxes for the year ended March 31, 1999 would change by
approximately $4.4 million for each 1/8% change in the interest rate of
the debt.
(G) Represents a $1,071 million one-time charge related to the Registrant's
1995 Stock Plan.
(H) Represents a $125 million expense for restructuring charges, $64
million expense for merger costs and $52 million expense for other
one-time charges.
(I) Represents the elimination of a $20 million fee charged to PLATINUM by
the Registrant during initial negotiation of the acquisition. PLATINUM
expensed this fee as incurred.
(J) Represents the estimated tax effect of the pro forma adjustments
(exclusive of the $20 million adjustment for which no historical tax
benefit was recognized and exclusive of the goodwill amortization which
is not tax-deductible) at an estimated effective tax rate of 37%.
