UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_X_ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 August 2, 2000
par value $.10 per share 590,969,506
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
June 30, 2000 and March 31, 2000............................. 1
Consolidated Statements of Operations -
Three Months Ended June 30, 2000 and 1999.................... 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended June 30, 2000 and 1999.................... 3
Notes to Consolidated Condensed Financial Statements......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk....... 14
PART II. Other Information:
Item 1. Legal Proceedings............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 16
<PAGE>
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
June 30, March 31,
2000 2000
----------- --------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 612 $ 1,307
Marketable securities 79 80
Trade and installment accounts receivable, net 1,712 2,175
Other current assets 175 430
------ ------
TOTAL CURRENT ASSETS 2,578 3,992
Installment accounts receivable, net, due after one year 3,822 3,812
Property and equipment 832 829
Purchased software products 2,584 2,598
Goodwill and other intangible assets 6,022 6,032
Other assets 226 230
------ ------
TOTAL ASSETS $16,064 $17,493
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 1,218 $ 919
Other current liabilities 1,467 2,085
Long-term debt 3,781 4,527
Deferred income taxes 2,242 2,365
Deferred maintenance revenue 504 560
Stockholders' equity 6,852 7,037
------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $16,064 $17,493
====== ======
<FN>
See Notes to Consolidated Condensed Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
For the Three Months
Ended June 30,
2000 1999
----- -----
<S> <C> <C>
License and other $ 738 $ 742
Maintenance fees 258 196
Professional services 141 119
----- -----
NET REVENUE
(Contract value: $1,278 and $1,222) 1,137 1,057
Costs and expenses:
Selling, general and administrative 680 369
Product development and enhancements 170 121
Commissions and royalties 65 61
Depreciation and amortization 273 114
Purchased research and development - 646
1995 stock plan (184) -
----- -----
TOTAL OPERATING COSTS 1,004 1,311
Income(loss) before other expenses 133 (254)
Interest expense, net 88 50
----- -----
Income(loss) before income taxes 45 (304)
Income taxes 22 128
----- -----
NET INCOME(LOSS) $ 23 $(432)
===== =====
BASIC EARNINGS(LOSS) PER SHARE $ .04 $(.80)
===== =====
Basic weighted average shares used in computation 590 537
DILUTED EARNINGS (LOSS) PER SHARE $ .04 $(.80)
===== =====
Diluted weighted average shares used in computation 606 537*
<FN>
* Common share equivalents are not included since they would be antidilutive.
</FN>
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
For the Three Months
Ended June 30,
2000 1999
----- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 23 $ (432)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 273 114
Provision for deferred income taxes 142 15
Charge for purchased research and development - 646
Compensation (gain) expense related to stock and pension plans (146) 20
Increase in noncurrent installment accounts receivable (32) (149)
Decrease in deferred maintenance revenue (52) (33)
Changes in other operating assets and liabilities, excluding
effects of acquisitions (61) 145
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 147 326
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing rights
and intangibles, net of cash acquired (104) (3,094)
Settlement of purchase accounting liabilities (297) (396)
Purchases of property and equipment (29) (24)
Sales of current marketable securities - 86
Capitalized development costs and other (11) (7)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (441) (3,435)
FINANCING ACTIVITIES:
Debt (repayments) borrowings, net (410) 2,977
Exercise of common stock options and other 24 14
Purchases of treasury stock (11) -
----- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (397) 2,991
DECREASE IN CASH AND CASH EQUIVALENTS BEFORE
EFFECT OF EXCHANGE RATE CHANGES ON CASH (691) (118)
Effect of exchange rate changes on cash (4) -
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (695) (118)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,307 399
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 612 $ 281
===== =====
<FN>
See notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
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 three months ended June 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.
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 data)
For the Three Months
Ended June 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ 23 $(432)
==== =====
Diluted Earnings (Loss) Per Share
-------------------------------------------
Weighted average shares outstanding
and common share equivalents 606 537*
Diluted Earnings (Loss) Per Share $.04 $(.80)
==== =====
Diluted Share Computation:
Average common shares outstanding 590 537
Average common share equivalents - net 16 -
---- -----
Weighted average shares outstanding
and common share equivalents 606 537*
==== =====
<FN>
* Common share equivalents are not included since they would be antidilutive.
If the quarter ended June 30, 1999 had resulted in net income, the weighted
average shares outstanding and common share equivalents would have been 552
million.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 three months ended June 30, 2000 and 1999,
interest payments were $123 million and $78 million respectively, and income
taxes paid were $166 million and $106 million, respectively.
Comprehensive Income: Comprehensive income (loss) includes foreign currency
translation adjustments and unrealized gains or losses on the Company's
available-for-sale securities. The components of comprehensive income (loss),
net of related tax, for the three-month period ended June 30, 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
(in millions)
For the Three Months
Ended June 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ 23 $(432)
Foreign currency translation adjustment (14) (35)
Reclassification adjustment for gain
included in net loss - (9)
---- ----
Total comprehensive income (loss) $9 $(476)
==== ====
</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. Based on the current interpretation,
there was no material impact on the overall maintenance deferral; however, as
additional implementation guidelines become available, there may be
unanticipated changes in the Company's revenue recognition practices including,
but not limited to, changes in the period over which revenue is recognized such
as recognition of revenue over the contract term. The future implementation
guidelines and interpretations may also require the Company to further change
its business practices in order to continue to recognize a substantial portion
of its software revenue when the product is delivered. These changes may extend
sales cycles, increase administrative costs, or otherwise adversely affect
existing operations and results of operations. 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 is currently in the process of evaluating the
SAB to ensure the Company is in compliance and reviewing the impact the SAB may
have on the Company's consolidated results of operations and financial position.
As additional guidance becomes available, the Company may be required to change
the period over which revenue is recognized, which may have a negative impact on
the Company's prospective reported revenue.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
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. The Company has no
individual customers which constitute a significant concentration.
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, PLATINUM, and Sterling on the basis that the
acquisitions had taken place at the beginning of fiscal year 2000:
<TABLE>
<CAPTION>
For the Quarter
Ended June 30, 1999
------------------
(in millions, except
per share amounts)
<S> <C>
Contract value $1,542
Net revenue 1,377
Net loss (722)
Basic loss per share $(1.24)
Shares used in computation 583
Diluted loss per share $(1.24)
Shares used in computation 583*
<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 acquisitions
been consummated at the beginning of fiscal year 2000 or of future operations of
the combined entities under the ownership and operation of the Company.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
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). In the quarter ended June 30, 2000, reductions
totaling $297 million were made against these reserves, including compensation
related payments of $277 million and duplicate facility and other settlements of
$20 million. The remaining balance is included in the "Other current
liabilities" line item on the accompanying Consolidated Balance Sheet.
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.
NOTE C - 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN
On June 22, 2000, the Delaware Court of Chancery approved a settlement arising
from stock awards made to three executives in June 1998 pursuant to the
Company's 1995 Key Employee Stock Ownership Plan. Under the terms of the
settlement the executives will return 4.5 million shares of the Company's stock,
of which 3.6 million shares will be retained by the Company and the remaining
balance will be used to pay the legal fees related to the settlement. This
settlement resulted in a net non-cash gain of $184 million.
<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:
Total contract value for the quarter ended June 30, 2000 increased 5%, or $56
million, over the prior year's comparable quarter. Net revenue increased 8%, or
$80 million, for the quarter. The increase was primarily attributable to higher
maintenance and professional services revenue. License fees benefited from
higher distributed platform product fees, offset by a decrease in OS/390
licenses. An approximate 20% reduction in European net revenue and the inability
to finalize a number of OS/390 contracts that were expected to close in the
final days of the quarter negatively impacted the quarter's results. The
distributed platform revenue accounted for approximately 53% of the Company's
overall contract value for the first 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 educational programs grew by
18%, or $22 million, over the prior year's comparable period. The growth was the
result of the added service personnel from the Sterling acquisition, marginally
offset by curtailed services associated with non-CA products. Maintenance
revenue increased 32%, or $62 million, over last year's comparable quarter. The
increase was primarily a result of additional maintenance revenue from PLATINUM
and Sterling licenses as well as prior year license arrangements.
<TABLE>
<CAPTION>
Product/
Quarter Ended Maintenance Services
------------- ----------- --------
<S> <C> <C>
June 30, 2000 $996 $141
June 30, 1999 938 119
</TABLE>
Total North American net revenue for the first quarter grew 12% over the prior
year's first quarter. This resulted from higher distributed platform sales,
maintenance, and professional services, offset by lower OS/390 software sales.
North American sales represented 69% and 66% of revenue for the June 2000 and
June 1999 quarters, respectively. The strengthening of the U.S. dollar against
most currencies negatively affected international revenue by approximately $19
million.
<TABLE>
<CAPTION>
North
Quarter Ended America International
------------- ----------- -------------
<S> <C> <C>
June 30, 2000 $784 $353
June 30, 1999 697 360
</TABLE>
Price changes did not have a material impact in this quarter or the prior year's
first quarter.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Costs and Expenses:
Selling, general and administrative expenses as a percentage of net revenue for
the first quarter increased to 60% from 35% the prior year. The increase was
largely attributable to a higher fixed expense structure, principally the result
of added personnel costs from the recent acquisition of Sterling, as well as a
$31 million write-off associated with the bankruptcy of Inacom Corporation. Net
research and development expenditures increased $49 million, or 40%, for the
first quarter compared to last year's first quarter. There was continued
emphasis on adapting and enhancing products for the distributed platform
environment, in particular Unicenter TNG, Jasmine ii, Neugents, as well as the
broadening of the Company's eCommerce product offerings, and additional expenses
relating to the development efforts of products obtained through the
acquisitions of PLATINUM and Sterling. Commissions and royalties as a percentage
of net revenue were 6% for the quarters ended June 2000 and 1999. Depreciation
and amortization expense in the first quarter increased $159 million from the
comparable quarter in the prior year. The increase was primarily attributable to
the additional amortization of purchased intangibles associated with the
acquisition of Sterling and, to a lesser extent, PLATINUM (acquired on May 28,
1999), marginally offset by the scheduled reductions in the amortization
associated with past acquisitions. Net interest expense increased $38 million,
or 76%, for the first quarter compared to last year's first quarter as a result
of an increase in average debt outstanding, primarily associated with the
acquisition of PLATINUM. In June 2000, the Company recorded a special net gain
of $184 million related to the settlement of the derivative litigation arising
out of stock awards made to three Company executives in June 1998 pursuant to
the Company's 1995 Key Employee Stock Ownership Plan. The terms of the
settlement provide for the executives to return a portion of their shares to the
Company. In June 1999, a $646 million in-process research and development
("IPR&D") charge related to the acquisition of PLATINUM was recorded.
Operating Margins:
The Company generated pretax income of $45 million for the first quarter of
fiscal year 2001, inclusive of special items totaling a net gain of $153
million, compared with a pretax loss in the same period a year ago of $304
million, inclusive of a one-time charge of $646 million for in-process research
and development relating to the acquisition of PLATINUM. Lower European sales
and the inability to finalize a number of OS/390 contracts at quarter end led to
a net loss excluding special items of $55 million in the June quarter, compared
to net income of $214 million a year ago. The Company's consolidated effective
tax rate was 48.5% and 37.5% for the quarters ended June 2000 and 1999,
respectively. The increase in the Company's effective tax rate for the quarter
ended June 2000 was a result of increased non-deductible amortization of
purchased intangibles relating to the Sterling and PLATINUM acquisitions.
Operations:
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes higher
discretionary expense levels in relation to projected revenue for the first half
of the year. Historically, the Company's combined third and fourth quarter
revenue has been greater than that of the first half of the year, as these two
quarters coincide with clients' calendar year-end budget periods and the
culmination of the Company's annual sales plan. This historically higher second
half revenue has resulted in significantly higher profit margins since total
expenses have not increased in proportion to revenue. However, past financial
performance should not be considered to be a reliable indicator of future
performance.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 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. The size and magnitude of such
transactions have increased over time. There can be no assurances that
transactions of this nature will occur in subsequent periods.
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 especially difficult, which could create a substantial risk
of variances with the actual results; risks associated with changes to the
OS/390 platform for which the Company depends upon a material amount of revenue;
the continued risks of potential litigation arising from the Year 2000 date
change for computer programs; 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 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
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, AdvantageTM 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.
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 June 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.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and capital resources:
The Company's cash, cash equivalents, and marketable securities decreased
approximately $696 million from the March 31, 2000 balance of $1,387 million to
$691 million at June 30, 2000. Cash from operations and cash on hand at March
31, 2000 were used primarily to repay over $400 million in outstanding debt, as
well as to fund severance and other costs related to the acquisition of
Sterling. Cash generated from operations for the quarters ended June 30, 2000
and 1999 was $147 million and $326 million, respectively. In the current
quarter, cash from operations was negatively impacted by higher interest and tax
payments, as well as lower net income (excluding special charges), due to
increased headcount and related expenses resulting from the Sterling and
PLATINUM acquisitions.
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. During the quarter, the Company repaid all
outstanding borrowings under its $1.5 billion 364-day agreement and the facility
was reduced to $1.3 billion at its renewal in May 2000. At June 30, 2000, $2.55
billion remained outstanding under the four-year revolving credit and term loan
agreements at various interest rates. Interest is determined based on a ratings
grid, which applies a margin to the prevailing London InterBank Offered Rate
("LIBOR").
In an effort to reduce interest costs in a rising-rate environment, the Company
began issuing Commercial Paper ("CP") in June of this year. The $1.3 billion
364-day revolver supports the CP program as a backstop facility. The program,
rated A-2 by Standard & Poor's and P-2 by Moody's Investors Services, provides
for maximum issuance of up to $1 billion in Commercial Paper Notes with
maturities not to exceed 270 days. The CP Notes are exempt from registration
under section 4(2) of the Securities and Exchange Act of 1933. At June 30, 2000,
$296 million in CP Notes were outstanding bearing interest rates of
approximately 6.85%.
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 under the Securities Act of
1933. Amounts borrowed, rates and maturities for each issue were $575 million at
6.25% due April 15, 2003, $825 million at 6.38% due April 15, 2005 and $350
million at 6.50% due April 15, 2008. During the current quarter, the Company
also repaid $64 million under the Company's 6.77% Senior Notes, a private
placement with $192 million outstanding at June 30, 2000. These Notes call for
annual repayment of $64 million each April until final maturity in 2003. In
addition, the Company maintains an 85 million pound sterling denominated credit
facility established to finance construction of its European World Headquarters
at Ditton Park in the United Kingdom. Approximately U.S. $130 million was
outstanding under this facility at June 30, 2000. The maturity of this debt has
been extended into the second fiscal quarter as the Company evaluates several
financing alternatives for the property.
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 U.S. $53 million, of which $18 million was drawn at June 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.
At June 30, 2000, the cumulative number of shares purchased under the Company's
various open market Common Stock repurchase programs was 150.7 million. The
remaining number of shares authorized for repurchase was approximately 49.3
million, of which 2.5 million has been purchased since June 30, 2000.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to expansion efforts at its U.S. headquarters in Islandia, New York,
capital resource requirements at June 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.
<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 June 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 $8 million annual effect on variable rate debt
interest based on the balances of such debt at June 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 $14 million.
There have been no material changes in the Company's worldwide business model,
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 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 April 5, 2000 to
report an event under Item 5 and 7.
The Registrant filed a Report on Form 8-K dated July 6, 2000 to report
an event under Item 5 and 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: August 3, 2000 By: /s/Sanjay Kumar
---------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: August 3, 2000 By: /s/Ira Zar
---------------
Ira Zar, Executive Vice President and
Principal Financial and Accounting Officer
