UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_X_ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
or
___ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended from _____ to _____
Commission File Number 1-9247
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Computer Associates Plaza
Islandia, New York 11749
(Address of principal executive offices) (Zip Code)
(631) 342-5224
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock as of November 13, 2000
par value $.10 per share 580,584,485
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
September 30 and March 31, 2000............................. 1
Consolidated Condensed Statements of Operations -
Three Months Ended September 30, 2000 and 1999.............. 2
Consolidated Condensed Statements of Operations -
Six Months Ended September 30, 2000 and 1999................ 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 2000 and 1999................ 4
Notes to Consolidated Condensed Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk....... 16
PART II. Other Information:
Item 1. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 18
Item 6. Exhibits and Reports on Form 8-K............................ 19
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
----------- --------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 368 $ 1,307
Marketable securities 86 80
Trade and installment accounts receivable, net 2,059 2,175
Other current assets 158 430
------ ------
TOTAL CURRENT ASSETS 2,671 3,992
Installment accounts receivable, due after one year,net 3,864 3,812
Property and equipment, net 822 829
Purchased software products, net 2,519 2,598
Goodwill and other intangible assets, net 5,881 6,032
Other assets 222 230
------ ------
TOTAL ASSETS $15,979 $17,493
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 1,319 $ 919
Other current liabilities 1,518 2,085
Long-term debt 3,676 4,527
Deferred income taxes 2,266 2,365
Deferred maintenance revenue 500 560
Stockholders' equity 6,700 7,037
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,979 $17,493
====== ======
<FN>
See Notes to Consolidated Condensed Financial Statements
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
2000 1999
------ ------
<S> <C> <C>
License and other $1,117 $1,110
Maintenance fees 274 215
Professional services 154 140
------ ------
NET REVENUE
(Contract value: $1,681 and $1,605) 1,545 1,465
Costs and expenses:
Selling, general and administrative 645 457
Product development and enhancements 179 141
Commissions and royalties 85 79
Depreciation and amortization 279 156
------ ------
TOTAL OPERATING COSTS 1,188 833
Income before other expenses 357 632
Interest expense, net 89 97
------ ------
Income before income taxes 268 535
Provision for income taxes 130 201
------ ------
NET INCOME $ 138 $ 334
====== ======
BASIC EARNINGS PER SHARE $ .24 $ .62
====== ======
Basic weighted average shares used in computation 585 538
DILUTED EARNINGS PER SHARE $ .23 $ .60
====== ======
Diluted weighted average shares used in computation 592 555
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
2000 1999
------ ------
<S> <C> <C>
License and other $1,855 $1,852
Maintenance fees 532 411
Professional services 295 259
------ ------
NET REVENUE
(Contract value: $2,959 and $2,827) 2,682 2,522
Costs and expenses:
Selling, general and administrative 1,325 826
Product development and enhancements 349 262
Commissions and royalties 150 139
Depreciation and amortization 552 270
Purchased research and development - 646
1995 Stock Plan (184) -
------ ------
TOTAL OPERATING COSTS 2,192 2,143
Income before other expenses 490 379
Interest expense, net 177 147
------ ------
Income before income taxes 313 232
Provision for income taxes 152 329
------ ------
NET INCOME (LOSS) $ 161 $ (97)
====== ======
BASIC EARNINGS (LOSS) PER SHARE $ .27 $(.18)
====== ======
Basic weighted average shares used in computation 588 537
DILUTED EARNINGS (LOSS) PER SHARE $ .27 $(.18)
====== ======
Diluted weighted average shares used in computation 599 537 *
<FN>
* Common stock equivalents are not included since they would be antidilutive.
</FN>
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
2000 1999
----- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 161 $ (97)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 552 270
Provision for deferred income taxes 183 44
Charge for purchased research and development - 646
Compensation (gain) expense related to stock and pension plans (146) 27
Increase in noncurrent installment accounts receivable, net (130) (461)
Decrease in deferred maintenance revenue (48) (34)
Changes in other operating assets and liabilities, excluding
effects of acquisitions (300) 277
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 272 672
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marking rights
and intangibles, net of cash acquired (164) (3,550)
Settlement of purchase accounting liabilities (326) (528)
Purchases of property and equipment, net (41) (93)
(Purchases) sales of marketable securities, net (7) 121
Capitalized development costs (23) (16)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (561) (4,066)
FINANCING ACTIVITIES:
Debt (repayments) borrowings, net (410) 3,227
Dividends paid (24) (21)
Exercise of common stock options 37 39
Purchases of treasury stock (245) -
----- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (642) 3,245
DECREASE IN CASH AND CASH EQUIVALENTS BEFORE
EFFECT OF EXCHANGE RATE CHANGES ON CASH (931) (149)
Effect of exchange rate changes on cash (8) 2
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (939) (147)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,307 399
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 368 $ 252
===== =====
<FN>
See notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. Operating results for the six months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in Computer Associates
International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form
10-K for the fiscal year ended March 31, 2000.
Cash Dividends: In May 2000, the Company's Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
July 12, 2000 to stockholders of record on June 23, 2000.
Statements of Cash Flows: For the six months ended September 30, 2000 and 1999,
interest payments were $171 million and $111 million respectively, and income
taxes paid were $190 million and $149 million, respectively.
Net Earnings (Loss) Per Share: Basic earnings (loss) per share is computed using
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed using the weighted-average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of shares issuable upon the exercise of stock options (using the
treasury stock method).
<TABLE>
<CAPTION>
(in millions, except per share amounts)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) $138 $334 $161 $(97)
==== ==== ==== =====
Diluted Earnings (Loss) Per Share
-----------------------------------
Weighted average shares outstanding
and common share equivalents 592 555 599 537*
Diluted Earnings (Loss) Per Share $.23 $.60 $.27 $(.18)
==== ==== ==== =====
Diluted Share Computation:
Average common shares outstanding 585 538 588 537
Average common share equivalents 7 17 11 -
---- ---- ---- -----
Weighted average shares outstanding
and common share equivalents 592 555 599 537*
==== ==== ==== =====
<FN>
* Common share equivalents are not included since they would be antidilutive.
If the six months ended September 30, 1999 had resulted in net income, the
weighted average shares outstanding and common share equivalents would have
been 554 million.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
Comprehensive Income: Comprehensive income (loss) includes foreign currency
translation adjustments and unrealized gains and losses on the Company's
available-for-sale securities. The components of comprehensive income (loss),
net of related tax, for the three month and six month periods ended September
30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
(in millions)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $138 $334 $161 $(97)
Foreign currency translation adjustment (71) 38 (85) 2
Reclassification adjustment
included in net loss - - - (9)
---- ---- ---- ----
Total comprehensive income (loss) $67 $372 $76 $(104)
==== ==== ==== ====
</TABLE>
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2
"Software Revenue Recognition," as amended in 1998 by SOP 98-4 and further
amended more recently by SOP 98-9, which is effective for transactions entered
into in fiscal years beginning after March 15, 1999. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions, requiring deferral of part or all of the revenue related
to a specific contract depending on the existence of vendor-specific objective
evidence and the ability to allocate the total contract value to all elements
within the contract. Effective for the quarter ended June 30, 1999, the Company
implemented the guidelines of these SOPs. In December 1999, the SEC issued Staff
Accounting Bulletin ("SAB") No. 101. This SAB provides further guidance on
revenue recognition and is effective for the Company beginning in the fourth
quarter of fiscal 2001. Management has evaluated the SAB to ensure that the
Company is in compliance. Based on the current interpretations, there should not
be a material impact on the Company's consolidated results of operations and
financial position. As a result of a change in the business model, as further
discussed in the MD&A and Form 8-K filed on October 25, 2000, beginning in the
quarter ending December 31, 2000, the Company will recognize revenue on software
transactions ratably over the contract term, for transactions conforming to such
business model.
Segment Disclosure: The Company is principally engaged in the design,
development, marketing, licensing, and support of integrated computer software
products operating on a diverse range of hardware platforms and operating
systems. Accordingly, the Company considers itself to be operating in a single
industry segment. The Company's chief operating decision maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenue, by geographic region, for purposes of assessing
financial performance and making operating decisions.
In the current quarter, the Company entered into an enterprise license agreement
with a long time customer. That agreement represented approximately 13.7% of the
Company's quarterly contract value. The Company enters into sizeable agreements
quarterly. The total contract value of the five largest license agreements in
the current fiscal quarter was less than that of the prior year's comparable
quarter.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
NOTE B - ACQUISITIONS
On March 31, 2000, the Company acquired Sterling Software, Inc. ("Sterling") and
merged one of its wholly owned subsidiaries into Sterling, at which time
Sterling became a wholly owned subsidiary of the Company. The shareholders of
Sterling received 0.5634 shares of the Company's common stock for each share of
Sterling common stock. The Company issued approximately 46.8 million shares of
common stock with an approximate fair value of $3.3 billion. Sterling was a
developer and provider of systems management, business intelligence, and
application development software products and services, as well as a supplier of
specialized information technology services for sectors of the federal
government.
On May 28, 1999, the Company acquired the common stock and the options to
acquire the common stock of PLATINUM technology International, inc. ("PLATINUM")
in a cash transaction of approximately $3.6 billion, which was paid from
drawings under the Company's $4.5 billion credit agreements. PLATINUM was
engaged in providing software products in the areas of database management,
eCommerce, application infrastructure management, decision support, data
warehousing, and knowledge management, as well as year 2000 reengineering and
other consulting services.
The following table reflects unaudited pro forma combined results of the
operations of the Company, Sterling, and PLATINUM on the basis that the
acquisitions had taken place at the beginning of fiscal year 2000:
<TABLE>
<CAPTION>
(in millions, except per share amounts)
For the Three Months For the Six Months
Ended Sept. 30, 1999 Ended Sept. 30, 1999
-------------------- --------------------
<S> <C> <C>
Contract value $1,835 $3,377
Net revenue 1,695 3,072
Net income (loss) 208 (364)
Basic earnings (loss) per share $ .36 $ (.62)
Shares used in computation 585 584
Diluted earnings (loss) per share $ .35 $ (.62)
Shares used in computation 602 584 *
<FN>
*common share equivalents are not included since their effect would be
antidilutive.
</FN>
</TABLE>
In management's opinion, the pro forma combined results of operations are not
indicative of the actual results that would have occurred had the acquisition
been consummated at the beginning of fiscal year 2000 or of future operations of
the combined entities under the ownership and operation of the Company.
At March 31, 2000, the Company estimated future liabilities in connection with
acquisitions to be $768 million. These included compensation-related liabilities
($392 million) and other acquisition-related expenditures including duplicate
facilities ($376 million). For the six months ended September 30, 2000,
reductions totaling $326 million were made against these reserves, including
compensation related payments of $292 million and $34 million relating to
duplicate facility and other settlements. The remaining balance is included in
the "Other current liabilities" line item on the accompanying Consolidated
Condensed Balance Sheet.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
The Company acquired several other consulting businesses and product
technologies in addition to the ones described above, which, either individually
or collectively, are not material to the financial statements taken as a whole.
The excess of cost over net assets acquired is being amortized on a
straight-line basis over the expected period to be benefited. The Consolidated
Condensed Statements of Operations reflect the results of operations of the
companies since the effective dates of the purchases.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the Company's future prospects are
"forward looking statements" under the federal securities laws. There can be no
assurances that future results will be achieved and actual results could differ
materially from forecasts and estimates. Important factors that could cause
actual results to differ materially are discussed below in the section "Results
of Operations."
RESULTS OF OPERATIONS
Revenue:
For the three months ended September 30, 2000:
Net revenue for the quarter ended September 30, 2000 increased 5%, or $80
million, and total contract value increased 5%, or $76 million, over the prior
year's comparable quarter. The increase was primarily attributable to growth in
maintenance and professional services revenue. License revenue was negatively
impacted by clients who continue to await the introduction of the next
generation of mainframe computers due to be generally released in the December
2000/January 2001 timeframe. Maintenance revenue increased 27%, or $59 million,
over last year's comparable quarter. The increase was a result of additional
maintenance revenue from PLATINUM and Sterling licenses, as well as from prior
year license arrangements. License fees benefited from higher distributed
platform product fees, offset by a decrease in OS/390 product licenses. The
distributed platform revenue accounted for approximately 55% of the Company's
overall contract value for the second quarter, led by Unicenter TNG (The Next
Generation), a family of integrated business solutions for monitoring and
administering systems management across multi-platform environments.
Professional services revenue from consulting and education programs grew by
10%, or $14 million, over last year's comparable quarter. The growth was the
result of the added service personnel from the Sterling acquisition, marginally
offset by curtailed services associated with non-CA products. Future
professional services revenues will be negatively impacted by the Company's
divestiture in October 2000 of Sterling Software's Federal Systems Group, a
provider of professional services to governmental agencies.
<TABLE>
<CAPTION>
Product/ Professional
Quarter Ended Maintenance Services
------------- ----------- ------------
<S> <C> <C>
September 30, 2000 $1,391 $154
September 30, 1999 1,325 140
</TABLE>
Total North American net revenue for the second quarter grew 9%, or $92 million,
over the prior year's second quarter. This resulted from continued growth in
distributed platform sales, maintenance, and professional services, offset by
lower OS/390 product sales. North American sales represented 70% and 68% of net
revenue for the September 2000 and September 1999 quarters, respectively. The
strengthening of the U.S. dollar against most currencies negatively affected
international revenue by approximately $37 million in the current quarter.
<TABLE>
<CAPTION>
North
Quarter Ended America International
------------- ----------- -------------
<S> <C> <C>
September 30, 2000 $1,082 $463
September 30, 1999 990 475
</TABLE>
Price changes did not have a material impact in this quarter or the prior year's
comparable quarter.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On October 25, 2000, the Company announced a new business model that will allow
customers to vary their software mix as their business needs change, providing
customers with the freedom to use a variety of software products during the
licensed period. The terms of these new arrangements, and the payments due
thereon, will be structured such that product revenue will generally be
recognized ratably over the term of the license. Customers will benefit from
these new arrangements by finding more flexibility in licensing the Company's
software products, gaining an improved, cost-effective way of doing business,
mapping the growth of their technology to the growth of their business, and
allowing their costs to be more predictable. The new business model will improve
the visibility of the Company's revenue stream and will reduce the uncertainty
of quarterly revenue due to the recognition of contracts on a ratable, rather
than on a one-time basis.
The new business model will impact the Company's reported revenue. The Company's
reported revenue will decline in the second half as compared to the first six
months of the current fiscal year and will result in a reported net loss for the
third and fourth fiscal quarters. Under the new model, only a portion of the
revenue will be recognized during the quarter the product is shipped, creating
residual value that will be recognized over the term of the arrangement.
Formally, the Company recognized license revenue in the quarter an agreement was
consummated. A contract entered into in connection with the new business model
will result in less current-quarter recognized revenue than under the former
model, although the Company's total recognized revenue over the life of the
contract will remain the same.
For the six months ended September 30, 2000:
On a year to date basis, net revenue increased 6%, or $160 million, and total
contract value increased 5%, or $132 million, from the corresponding year ago
period. License revenue was negatively affected in both the June and September
2000 quarters by clients who did not commit to software license purchases due to
their concerns over the pending release of the next generation of mainframe
computers. The increase in net revenue was primarily attributable to growth in
maintenance and professional services fees. Year to date maintenance and
professional services revenue increased 29% and 14%, or $121 and $36 million,
respectively, over the prior year, while year to date license fees remained
unchanged over the corresponding period a year ago.
<TABLE>
<CAPTION>
Product/ Professional
Six Months Ended Maintenance Services
---------------- ----------- ------------
<S> <C> <C>
September 30, 2000 $2,387 $295
September 30, 1999 2,263 259
</TABLE>
Total North American net revenue for the six months ended September 30, 2000
grew 11%, or $179 million, over the prior year's comparable period. On a year to
date basis, North American sales represented 70% and 67% of total net revenue
for fiscal years 2001 and 2000, respectively. On a year to date basis,
international revenue decreased by $19 million, or 2%, over the prior year. This
decrease was primarily a result of the effect of exchange rates on the US dollar
versus foreign currencies, which decreased revenue by approximately $57 million
for the current year and weaker year over year European performance, partially
offset by increased revenue in Asia.
<TABLE>
<CAPTION>
North
Six Months Ended America International
------------- ----------- -------------
<S> <C> <C>
September 30, 2000 $1,866 $816
September 30, 1999 1,687 835
</TABLE>
Price changes did not have a material impact year to date in fiscal year 2001 or
in the comparable period in fiscal year 2000.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Costs and Expenses
For the three months ended September 30, 2000:
Selling, general and administrative expenses as a percentage of net revenue for
the second quarter increased to 42% from 31% in the prior year. The increase was
largely attributable to a higher fixed expense structure, principally the result
of added costs from the acquisition of Sterling, as well as greater spending on
marketing associated with a new advertising campaign. Net research and
development expenditures increased $38 million, or 27%, for the second quarter
compared to last year's second quarter. There was continued emphasis on adapting
and enhancing products for the distributed processing environment, in particular
Unicenter TNG, Jasmine ii, Neugents, the Enterprise and Workgroup Solutions, as
well as broadening of the Company's e-commerce product offerings, and additional
expense related to development efforts of products obtained through the
acquisition of Sterling. Commissions and royalties as a percentage of revenue
were approximately 5% for both the September 2000 and 1999 quarters.
Depreciation and amortization expense in the second quarter increased $123
million from the comparable quarter in the prior year. The increase was
primarily due to the additional amortization of purchased intangibles associated
with the acquisition of Sterling, marginally offset by the scheduled reductions
in the amortization associated with past acquisitions. Net interest expense
decreased $8 million, or 8%, for the second quarter compared to last year's
second quarter. The reduction in interest expense was related to a decrease in
average debt outstanding, partially offset by an increase in the average
interest rate.
For the six months ended September 30, 2000:
On a year to date basis, selling, general and administrative expenses as a
percentage of net revenue increased to 49% from 33% in the prior year. This
increase was largely attributable to a greater fixed expense structure,
principally the result of added personnel costs from the acquisition of
Sterling, as well as a $31 million write-off associated with the bankruptcy of
Inacom Corporation in the first quarter of this fiscal year. Net research and
development expenditures increased $87 million, or 33%, over the prior year.
Continued emphasis on adapting and enhancing products for the distributed
processing environment, as well as broadening of the Company's e-commerce
product offerings, and development of technology and products obtained through
the acquisitions of PLATINUM and Sterling were largely responsible for the
increase. Commissions and royalties as a percentage of revenue were 6% year to
date for both fiscal years 2001 and 2000. On a year to date basis, depreciation
and amortization expense increased by $282 million from the prior year. The
increase was primarily due to the additional amortization of purchased
intangibles associated with the acquisition of PLATINUM and Sterling, marginally
offset by the scheduled reductions in the amortization associated with prior
acquisitions. Net interest expense increased $30 million, or 20%, from last
year's comparable period as a result of an increase in average debt outstanding
associated with the acquisition of PLATINUM in the first quarter of fiscal year
2000 and a marginal increase in the average interest rate.
Operating Margins
For the second quarter of fiscal 2001, pretax income was $268 million compared
with $535 million in the prior year. On a year to date basis, pretax income was
$313 million, including the $184 million gain arising from the settlement of the
derivative litigation associated with stock awards pursuant to the Company's
1995 Key Employee Stock Ownership Plan, partially offset by a $31 million
write-off associated with the bankruptcy of Inacom Corp. ("special items"),
compared with $232 million in the same period a year ago, inclusive of a
one-
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
time charge of $646 million for in-process research and development relating to
the acquisition of PLATINUM. Net income in the September quarter was $138
million, a decrease of $196 million over the September 1999 quarter of $334
million. The year to date net income of $82 million, excluding special items, a
decrease of $467 million over last year's net income of $549 million, was
primarily related to a higher fixed cost structure as a result of acquisitions,
an inability to finalize a number of OS/390 contracts, and an increase in the
Company's effective tax rate. The Company's consolidated effective tax rate was
48.5% for both the quarter and year to date periods ended September 30, 2000 and
37.5% for both the quarter and year to date periods ended September 30, 1999.
The increase in the Company's effective tax rate was a result of increased
non-deductible amortization of purchased intangibles relating to the Sterling
and PLATINUM acquisitions.
Risks and Uncertainties
The Company's products are designed to improve the productivity and efficiency
of clients' information processing resources. However, a general or regional
slowdown in the national or world economy could adversely affect the Company's
operations. Additionally, further deterioration of the exchange rate of foreign
currencies against the U.S. dollar may continue to affect adversely the
Company's ability to increase its revenue within those markets.
As the Company grows, it is increasingly dependent upon large dollar enterprise
transactions with individual clients. There can be no assurances that
transactions of this nature will occur in subsequent periods.
The Company has introduced a new business model which should provide greater
flexibility to clients as well as improved visibility into future operating
performance of the Company. With the change in the business model, the Company
has implemented and will continue to implement new business practices. The
introduction of these new business practices will negatively affect the
performance of the Company. In addition, there are risks associated with the
transition to the new model. Included among these risks are that the transition
may take longer than originally planned, that circumstances may occur that
affect adversely the ability to conduct the transition smoothly, and that
unforeseen events may occur that will negatively affect future performance.
The Company's future operating results may also be affected by a number of other
factors, including but not limited to: a significant percentage of the Company's
quarterly sales being finalized in the last few days of the period making
financial forecasts difficult; the risks associated with changes in the
Company's business model; the risks associated with changes in the way in which
the Company accounts for license revenue; instability resulting from changes to
the Company's business model; increased competition from entrenched vendors; the
emergence of new competitive initiatives resulting from rapid technological
advances; changes in pricing in the market; the risks associated with new
product introductions, as well as the uncertainty of marketplace acceptance of
these new or enhanced products from either the Company or its competitors; risks
associated with the entry into new markets at lower profit margins, such as
professional services; the risks associated with integrating newly acquired
businesses and technologies; risks associated with reorganizations of the sales
force; delays in product delivery; reliance on mainframe capacity growth; the
ability to recruit and retain qualified personnel; business conditions in the
distributed and mainframe software and hardware markets; the strength of the
Company's distribution channels; uncertainty and volatility associated with
Internet and eBusiness related activities; the ability to update the Company's
product offerings to conform with new governmental rules; use of software patent
rights to attempt to limit competition; fluctuations in foreign currency
exchange rates and interest rates; the volatility of the international
marketplace; uncertainties relative
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to global economic conditions; the Company's reliance on a single family of
products for a material portion of its sales; the effect of new accounting
pronouncements and interpretations on the Company's revenue recognition
practices; the Company's ability to manage fixed and variable expense growth
relative to revenue growth; and other risks described in the Company's filings
with the Securities and Exchange Commission.
In-Process Research and Development
In the fourth quarter of fiscal year 2000, the Company acquired Sterling in a
stock-for-stock exchange valued at approximately $4.1 billion. In the first
quarter of fiscal year 2000, the Company acquired PLATINUM for approximately
$4.3 billion in cash and assumed liabilities. Acquired in-process research and
development ("IPR&D") charges relate to acquisitions of software companies
accounted for under the purchase method, in which a portion of the purchase
price is allocated to acquired in-process technology and is expensed immediately
since the technological feasibility of the research and development projects has
not yet been achieved and is believed to have no alternative future use.
Independent valuations of Sterling and PLATINUM were performed and used as an
aid in determining the fair value of the identifiable intangible assets and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to IPR&D, which was $150 million and $646
million for Sterling and PLATINUM, respectively. Assets were identified through
on-site interviews with management and a review of data provided by the Company
and discussions with the acquired companies' management concerning the acquired
assets, technologies in development, costs necessary to complete the IPR&D,
historical financial performance, estimates of future performance, market
potential, and the assumptions underlying these estimates.
The "Income Approach" was utilized for the valuation analysis of IPR&D for both
Sterling and PLATINUM. This approach focuses on the income-producing capability
of the asset, which was determined through review of data provided by both the
acquired companies and independent sources and through analysis of relevant
market sizes, growth factors, and expected trends in technology. The steps
followed in applying this approach included estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value using a rate of return commensurate with the
relative risk levels.
The ongoing development projects at Sterling at the time of the purchase were
comprised primarily of application development and information management,
business intelligence, network management, and storage management tools and
solutions. The acquired projects included add-on features, tools and
next-generation versions of COOL, VISION, EUREKA, SAMS(TM), and SOLVE(R) product
families. At the time of acquisition, it was estimated that, on average, 68% of
the development effort had been completed and the remaining development effort
would take approximately 14 months to complete, with a cost of approximately $9
million.
The ongoing development projects at PLATINUM at the time of the purchase were
comprised primarily of application development, database and enterprise
management tools, and data warehousing solutions. The acquired projects included
add-on features, tools and next generation versions of DB2 Solutions(TM),
ProVision(TM), Security, Advantage(TM) application development, end-to-end data
warehousing, and Internet infrastructure product families. At the time of
acquisition, it was estimated that, on average, 68% of the development effort
had been completed and the remaining development effort would take approximately
12 months to complete, with a cost of approximately $41 million.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The resulting net cash flows from Sterling and PLATINUM projects were based on
management's estimates of product revenues, cost of goods sold, operating
expenses, R&D costs, and income taxes from such projects. The revenue
projections used to value the IPR&D were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introductions by the Company and its competitors.
The rate used in discounting the net cash flows from the IPR&D approximated 20%
for both Sterling and PLATINUM. These discount rates, higher than that of the
Company's cost of capital, are due to the uncertainties surrounding the
successful development of IPR&D. The efforts required to develop the in-process
technology of the acquired companies into commercially viable products
principally relate to the completion of planning, designing, prototyping, and
testing functions that are necessary to establish that the software produced
will meet its design specifications, including technical performance, features,
and function requirements. The Company has reviewed its projections of revenue
and estimated costs of completion and has compared these projections with
results through September 30, 2000. To date, in the aggregate, the projections
have not varied materially from original forecasts.
If these projects do not continue to be successfully developed, the revenue and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
Results will also be subject to uncertain market events and risks that are
beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction by competitors.
Management believes that the assumptions used in the purchased IPR&D valuation
reasonably estimate the future benefits. There can be no assurances that in
future periods actual results will not deviate from current estimates.
Liquidity and capital resources
Cash, cash equivalents and marketable securities were $454 million at September
30, 2000, a decrease of $237 million from the June 30, 2000 balance of $691
million. Cash on hand in June and generated from operations during the quarter
was primarily used to fund stock repurchases of $225 million in addition to
various acquisition-related activities. Cash generated from operations for the
quarter was $125 million, a decrease of $221 million from the prior year's cash
from operations of $346 million. The decrease was attributable to lower net
income (excluding special charges) due to increased headcount and related
expenses resulting from the Sterling acquisition as well as the collection of
several large balances in the prior year's corresponding quarter.
The Company's bank credit facilities consist of a $1.3 billion 364-day revolving
credit facility, a $1 billion four-year revolving credit facility, and a $2
billion four-year term loan. At September 30, 2000, $2.25 billion remained
outstanding under the four-year revolving credit and term loan agreements at
various interest rates. These rates are determined based on a ratings grid,
which applies a margin to the prevailing London InterBank Offered Rate
("LIBOR"). In addition, the Company established a $1 billion US Commercial Paper
("CP") program in the first quarter of this year to refinance some of this debt
at more attractive interest levels. At September 30, 2000, $596 million was
outstanding under the CP program.
During the quarter, the Company refinanced the existing pound-sterling
denominated credit facility that had been established to finance construction of
its European World Headquarters in the United Kingdom. The replacement facility
is a 75 million pound-sterling term loan that matures on August 14, 2001. At
September 30, 2000 the term loan was fully drawn.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company also utilizes other financial markets in order to maintain its broad
sources of liquidity. In fiscal 1999, $1.75 billion of unsecured Senior Notes
were issued in a transaction governed by Rule 144A of the Securities Act of
1933. Amounts borrowed, rates and maturities for each issue were $575 million at
6 1/4% due April 15, 2003, $825 million at 6 3/8% due April 15, 2005 and $350
million at 6 1/2% due April 15, 2008. At September 30, 2000, $192 million was
outstanding under the Company's 6.77% Senior Notes. These Notes call for annual
repayment of $64 million each April until final maturity in 2003.
Unsecured and uncommitted multi-currency lines of credit are available to meet
any short-term working capital needs for subsidiaries operating outside the U.S.
These lines total US $56 million, of which $21 million was drawn at September
30, 2000.
Debt ratings for the Company's senior unsecured notes and its bank credit
facilities are BBB+ and Baa1 from Standard & Poor's and Moody's Investor
Services, respectively. The Company's Commercial Paper program is rated A-2 from
Standard & Poor's and P-2 from Moody's.
At September 30, 2000, the cumulative number of shares purchased under the
Company's various open market Common Stock repurchase programs, including over 8
million shares purchased in the current fiscal year, was 159 million. The
remaining number of shares authorized for repurchase is approximately 41
million.
In addition to expansion efforts at its U.S. headquarters in Islandia, NY,
capital resource requirements at September 30, 2000 consisted of lease
obligations for office space, computer equipment, mortgage or loan obligations
and amounts due as a result of product and company acquisitions. It is expected
that existing cash, cash equivalents, marketable securities, the availability of
borrowings under credit lines and cash provided from operations will be
sufficient to meet ongoing cash requirements.
On October 31, 2000, the Company completed the sale of Sterling Software's
Federal Systems Group, a provider of professional services to governmental
agencies. The Company received a one-time payment of approximately $150 million
for the sale of this unit.
The Company expects its long standing history of providing extended payment
terms to continue under the new business model, and thus the Company does not
anticipate an adverse effect on its future cash flow.
<PAGE>
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio, debt, and installment accounts
receivable. The Company has a prescribed methodology whereby it invests its
excess cash in debt instruments of government agencies and high quality
corporate issuers (Standard & Poor's single "A" rating and higher). To mitigate
risk, many of the securities have a maturity date within one year, and holdings
of any one issuer excluding the U.S. Government do not exceed 10% of the
portfolio. Periodically, the portfolio is reviewed and adjusted if the credit
rating of a security held has deteriorated. The Company does not utilize
derivative financial instruments.
The Company maintains a blend of both fixed and floating rate debt instruments.
At September 30, 2000, the Company's outstanding debt approximated $5.0 billion,
with approximately $2.0 billion in fixed rate obligations. If market rates were
to decline, the Company could be required to make payments on the fixed rate
debt that would exceed those based on current market rates. Each 25 basis point
decrease in interest rates would have an associated annual opportunity cost of
approximately $5 million. Each 25 basis point increase or decrease in interest
rates would have an approximately $7.5 million annual effect on variable rate
debt interest based on the balances of such debt at September 30, 2000.
The Company offers financing arrangements with installment payment terms in
connection with its software solution sales. The aggregate contract value
includes an imputed interest element, which can vary with the interest rate
environment. Each 25 basis point increase in interest rates would have an
associated annual opportunity cost of approximately $15 million.
There have been no material changes in the Company's worldwide foreign exchange
risk management strategy or investment methodology regarding marketable equity
securities, and as such, the descriptions under the captions "Foreign Currency
Exchange Risk" and "Equity Price Risk" remain unchanged from those included in
the Company's Form 10-K for the year ended March 31, 2000.
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Company's stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Company's future financial performance. These cases have
been consolidated into a single action (the "Shareholder Action") in the United
States District Court for the Eastern District of New York ("NY Federal Court").
The NY Federal Court has denied the defendants' motion to dismiss the
Shareholder Action, and the parties currently are engaged in discovery. Although
the ultimate outcome and liability, if any, cannot be determined, management,
after consultation and review with counsel, believes that the facts in the
Shareholder Action do not support the plaintiffs' claims and that the Company
and its officers and directors have meritorious defenses.
In addition, three derivative actions alleging misleading statements and
omissions similar to those alleged in the Shareholder Action were brought in the
NY Federal Court on behalf of the Company against a majority of the Company's
directors. An additional derivative action on behalf of the Company, alleging
that the Company issued 14.25 million more shares than were authorized under the
1995 Key Employee Stock Ownership Plan (the "1995 Plan"), also was filed in the
NY Federal Court. These derivative actions have been consolidated into a single
action (the "Derivative Action") in the NY Federal Court. The Derivative Action
has been stayed. Lastly, a derivative action on behalf of the Company was filed
in the Chancery Court in Delaware (the "Delaware Action") alleging that 9.5
million more shares were issued to the three 1995 Plan participants than were
authorized under the 1995 Plan. The Company and its directors who are parties to
the Derivative Action and the Delaware Action have announced that an agreement
has been reached to settle the Delaware Action and the Derivative Action. Under
the terms of the proposed settlement, which is subject to dismissal of related
claims by the NY Federal Court, the 1995 Plan participants will return 4.5
million shares of Computer Associates stock to the Company. The Chancery Court
in Delaware has approved the settlement and the parties are awaiting dismissal
by the NY Federal Court.
The Company, various subsidiaries, and certain current and former officers have
been named as defendants in other various claims and lawsuits arising in the
normal course of business. The Company believes that the facts do not support
the plaintiffs' claims and intends to vigorously contest each of them.
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
(a) Annual meeting of Stockholders held on August 30, 2000.
(b) The Stockholders elected Directors for the ensuing year as follows:
<TABLE>
<CAPTION>
Affirmative Authority
Name Votes Withheld
----------------------- ----------- ----------
<S> <C> <C>
Charles B. Wang 508,919,827 11,954,443
Sanjay Kumar 508,786,803 12,087,467
Russell M. Artzt 509,197,300 11,676,970
Alfonse M. D'Amato 508,903,373 11,990,897
Willem F.P. de Vogel 509,422,215 11,452,055
Richard A. Grasso 509,411,803 11,462,467
Shirley Strum Kenny 509,407,101 11,467,169
Roel Pieper 509,442,505 11,431,765
</TABLE>
(c) The Stockholders voted to ratify the appointment of KPMG LLP as the
Company's independent auditors for the fiscal year ending March 31, 2001 as
follows:
<TABLE>
<S> <C>
Affirmative Votes 392,319,692
Negative Votes 124,095,206
Abstentions 4,459,372
</TABLE>
(d) The Stockholders did not adopt a stockholder proposal relating to employee
benefits as follows:
<TABLE>
<S> <C>
Affirmative Votes 8,160,999
Negative Votes 431,157,654
Abstentions 26,740,162
</TABLE>
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K:
The Registrant filed a Report on Form 8-K dated July 5, 2000 reporting an
event under Item 5 and 7.
The Registrant filed a Report on Form 8-K dated August 8, 2000 reporting an
event under Item 5 and 7.
The Registrant filed a Report on Form 8-K dated September 21, 2000
reporting an event under Item 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: November 14, 2000 By: /s/Sanjay Kumar
------------------------
Sanjay Kumar, President and Chief
Executive Officer
Dated: November 14, 2000 By: /s/Ira Zar
------------------------
Ira Zar, Executive Vice President and
Principal Financial and Accounting Officer
