UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 December 31, 1999
or
___ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended from _____ to _____
Commission File Number 1-9247
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Computer Associates Plaza
Islandia, New York 11749
(Address of principal executive offices) (Zip Code)
(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 February 7, 2000
par value $.10 per share 541,972,678
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
December 31, 1999 and March 31, 1999............... 1
Consolidated Condensed Statements of Operations -
Three Months Ended December 31, 1999 and 1998...... 2
Consolidated Condensed Statements of Operations -
Nine Months Ended December 31, 1999 and 1998....... 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended December 31, 1999 and 1998....... 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
PART II. Other Information:
Item 1. Legal Proceedings.................................. 17
Item 2. Exhibits and Reports on Form 8-K................... 18
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 294 $ 399
Marketable securities 96 137
Trade and installment accounts receivable 2,016 2,021
Inventories and other current assets 88 74
------- -------
TOTAL CURRENT ASSETS 2,494 2,631
Installment accounts receivable, due after one year 3,680 2,844
Property and equipment 744 598
Purchased software products 1,130 221
Excess of cost over net assets acquired 3,971 1,623
Investments and other noncurrent assets 213 153
------- ------
TOTAL ASSETS $12,232 $8,070
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 932 $ 492
Other current liabilities 1,924 1,371
Long-term debt 4,765 2,032
Deferred income taxes 1,096 1,034
Deferred maintenance revenue 457 412
Stockholders' equity 3,058 2,729
------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $12,232 $8,070
======= ======
<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 December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Product revenue and other related income $ 1,585 $ 1,176
Maintenance fees 227 185
-------- --------
TOTAL REVENUE 1,812 1,361
Costs and expenses:
Selling, marketing and administrative 674 510
Product development and enhancements 150 105
Commissions and royalties 89 68
Depreciation and amortization 160 78
Interest expense - net 97 33
-------- --------
TOTAL COSTS AND EXPENSES 1,170 794
-------- --------
Income before income taxes 642 567
Provision for income taxes 241 212
-------- --------
NET INCOME $ 401 $ 355
BASIC EARNINGS PER SHARE $ .74 $ .66
-------- --------
Basic weighted average shares used in
computation 540 538
DILUTED EARNINGS PER SHARE $ .72 $ .64
-------- --------
Diluted weighted average shares used in
computation 559 554
<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 Nine Months
Ended December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Product revenue and other related income $ 4,002 $ 3,073
Maintenance fees 638 551
-------- --------
TOTAL REVENUE 4,640 3,624
Costs and expenses:
Selling, marketing and administrative 1,805 1,454
Product development and enhancements 412 307
Commissions and royalties 229 183
Depreciation and amortization 430 241
Interest expense - net 244 91
Purchased research and development 646 -
1995 Stock Plan charge - 1,071
-------- --------
TOTAL COSTS AND EXPENSES 3,766 3,347
Income before income taxes 874 277
Provision for income taxes 570 109
-------- --------
NET INCOME $ 304 $ 168
BASIC EARNINGS PER SHARE $ .56 $ .31
-------- --------
Basic weighted average shares used in
computation 538 548
DILUTED EARNINGS PER SHARE $ .55 $ .30
-------- --------
Diluted weighted average shares used in
computation 555 565
<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 Nine Months
Ended December 31,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 304 $ 168
Adjustments to reconcile net income to net
cash provided by operating activities,
excluding effects of acquisitions:
Depreciation and amortization 430 241
Provision for deferred income taxes 76 100
Charge for purchased research and
development 646 -
Compensation expense related to stock
and pension plans 28 776
Increase in noncurrent installment accounts
receivable (909) (415)
Increase (decrease) in deferred maintenance
revenue 5 (31)
Gain on sale of property and equipment - (14)
Changes in other operating assets and
liabilities 254 (127)
-------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 834 698
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software,
marketing rights and intangibles (4,139) (217)
Purchase of property and equipment (119) (142)
Proceeds from sale of property and equipment - 38
Decrease (increase) in current marketable
securities 127 (47)
Capitalized software development costs (25) (21)
-------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (4,156) (389)
FINANCING ACTIVITIES:
Debt borrowings - net 3,163 567
Dividends paid (21) (23)
Exercise of common stock options/other 81 31
Purchases of treasury stock - (920)
-------------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,223 (345)
DECREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (99) (36)
Effect of exchange rate changes on cash (6) 4
-------------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (105) (32)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 399 251
-------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 294 $ 219
============== ============
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. Operating results for the nine months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in Computer Associates
International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form
10-K for the fiscal year ended March 31, 1999.
Cash Dividends: In December 1999, the Company's Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
January 10, 2000 to stockholders of record on December 22, 1999.
Statements of Cash Flows: For the nine months ended December 31, 1999 and 1998,
interest payments were $243 million and $98 million respectively, and income
taxes paid were $246 million and $171 million, respectively.
Net Income per Share: Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum
of the weighted-average number of common shares outstanding for the period, plus
the assumed exercise of all dilutive securities, such as stock options.
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 401 $ 355 $ 304 $ 168
======== ======== ======== ========
Diluted Earnings Per Share
- -------------------------------------
Weighted average shares outstanding
and common share equivalents 559 554 555 565
Diluted Earnings Per Share $ .72 $ .64 $ .55 $ .30
======== ======== ======== ========
Diluted Share Computation:
Average common shares outstanding 540 538 538 548
Average common share
equivalents 19 16 17 17
-------- -------- -------- --------
Weighted average shares outstanding
and common share equivalents 559 554 555 565
======== ======== ======== ========
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
Comprehensive Income: Financial Accounting Standard ("FAS") No. 130, "Reporting
Comprehensive Income" establishes new rules for reporting and displaying
comprehensive income and its components; however, the adoption has no impact on
the Company's net income or shareholders' equity. Comprehensive income includes
foreign currency translation adjustments and unrealized gains or losses on the
Company's available-for-sale securities which, prior to adoption, were reported
separately in shareholders' equity. The components of comprehensive income, net
of related tax, for the three month and nine month periods ended December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(In millions)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 401 $ 355 $ 304 $ 168
Foreign currency translation
adjustment (44) (5) (42) 29
Reclassification adjustment included
in net income (9)
-------- -------- -------- --------
Total comprehensive income $ 357 $ 350 $ 253 $ 197
======== ======== ======== ========
</TABLE>
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2
"Software Revenue Recognition," as amended in 1998 by SOP 98-4 and further
amended by SOP 98-9, which is effective for transactions entered into in fiscal
years beginning after March 15, 1999. These SOPs provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions, requiring deferral of part or all of the revenue related to a
specific contract depending on the existence of vendor specific objective
evidence and the ability to allocate the total contract value to all elements
within the contract. Effective for the quarter ended June 30, 1999, the Company
implemented the guidelines of SOP 98-9, with no material impact on its overall
maintenance deferral. The Company believes that its maintenance deferral is
consistent with current interpretations; however, as additional implementation
guidelines become available, there may be unanticipated changes in the Company's
revenue recognition practices including, but not limited to, changes in the
period over which revenue is recognized up to and including recognition of
revenue over the contract term. Any future implementation guidelines and
interpretations may also require the Company to further change its business
practices in order to continue to recognize a substantial portion of its
software revenue when the product is delivered. These changes may extend sales
cycles, increase administrative costs, or otherwise adversely affect existing
operations and results of operations. The Company also continues to evaluate its
pricing models to ensure that it remains competitive in an evolving marketplace.
As such, there are no assurances that a change in the Company's pricing model
will not impact its ability to recognize a substantial portion of its software
revenue when the product is delivered.
Segment Disclosure: During fiscal year 1999, the Company adopted FAS No. 131,
"Disclosures about Segments and Related Information" which establishes standards
for reporting operating segments and disclosures about products and services,
geographic areas, and major customers. The Company operates as a single segment
providing integrated computer software solutions. The Company has no individual
customers which constitute a significant concentration. See Management's
Discussion and Analysis of Financial Condition and Results of Operations for
additional information.
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
NOTE B - ACQUISITIONS
On May 28, 1999, the Company acquired approximately 98% of the issued and
outstanding shares of common stock of Platinum technology International, inc.
("Platinum"), and on June 29, 1999, merged one of its wholly owned subsidiaries
into Platinum at which time Platinum became a wholly owned subsidiary of the
Company. The aggregate purchase price, including assumed liabilities, of
approximately $4.2 billion was paid, or will be paid, from drawings under the
Company's $4.5 billion credit agreements. Platinum was engaged in providing
software products in the areas of database management, e-commerce, application
infrastructure management, decision support, data warehousing, and knowledge
management, as well as Year 2000 reengineering and other consulting services.
The Company recorded a $646 million charge against earnings for the write-off of
purchased Platinum research and development technology that had not reached the
working model stage and has no alternative future use. Had this charge not been
taken during the quarter ended June 30, 1999, net income for the nine months
ended December 31, 1999 would have been $950 million, or $1.71 per share on a
diluted basis.
The following table reflects pro-forma combined results of operations of the
Company and Platinum on the basis that the acquisition of Platinum had taken
place at the beginning of the fiscal year for all periods presented:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,812 $ 1,679 $ 4,750 $ 4,422
Net income (loss) 401 327 241 (42)
Diluted earnings (loss) per share $ .72 $ .59 $ .43 $ (.08)
Shares used in computation 559 554 555 548
</TABLE>
The following table reflects pro-forma combined results of operations of the
Company and Platinum on the basis that the acquisition of Platinum had taken
place at the beginning of the fiscal year for all periods presented. All special
charges, including the purchased research and development charge for Platinum in
fiscal year 2000 of $646 million, the non-cash asset writedown of $37 million
recorded in fiscal year 2000, the one-time charge of $1,071 million relating to
the 1995 Key Employee Stock Ownership Plan (the "1995 Plan") recorded in fiscal
year 1999, and all special charges recorded by Platinum in fiscal year 1999 have
been excluded from all periods presented:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,812 $ 1,679 $ 4,750 $ 4,422
Net income 425 331 910 702
Diluted earnings per share $ .76 $ .60 $ 1.64 $ 1.24
Shares used in computation 559 554 555 565
</TABLE>
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
NOTE B - ACQUISITIONS (CONTINUED)
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.
On March 9, 1999, the Company acquired more than 98% of the issued and
outstanding shares of common stock of Computer Management Sciences, Inc.
("CMSI"), and on March 19, 1999, merged one of its wholly owned subsidiaries
into CMSI at which time CMSI became a wholly owned subsidiary of the Company.
The aggregate purchase price of approximately $400 million was funded from
drawings under the Company's credit agreements and cash from operations. CMSI
was engaged in providing custom developed information technology solutions to a
Fortune 1000 client base. The acquisition was accounted for as a purchase.
During fiscal years 2000 and 1999, the Company acquired a number of other
consulting businesses and product technologies in addition to the ones described
above which, either individually or collectively, are not material. The
acquisitions were all accounted for as purchases. The excess of cost over net
assets acquired is amortized on a straight-line basis over the expected period
to be benefited. The Consolidated Condensed Statements of Operations reflect the
results of operations of the companies since the effective dates of the
purchases.
NOTE C - ASSET WRITEDOWN
In the quarter ended December 31, 1999, the Company recorded a pre-tax
impairment charge of approximately $37 million associated with an other than
temporary decline in the fair value of $50 million of securities of CHS
Electronics, Inc. purchased in the quarter ended June 1999. Such charge is
included in selling, marketing, and administrative expenses in the accompanying
Consolidated Condensed Statement of Operations.
<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 December 31, 1999:
Total revenue for the quarter ended December 31, 1999 increased 33%, or $451
million, over the prior year's comparable quarter. Excluding an approximate $37
million negative foreign exchange impact, total revenue increased 36% to $1.85
billion. The product revenue achievement and growth over the prior year's
comparable quarter were primarily attributable to demand for the Company's
enterprise licensing plans, offering clients increased flexibility; the addition
of Platinum products; and demand for Unicenter TNG (The Next Generation), a
family of integrated business solutions for monitoring and administering systems
management across multi-platform environments. These factors accounted for the
increase in product revenue of approximately $360 million in the third quarter.
Since the beginning of the fiscal year, the Company introduced the Millennium
License, a perpetual MIPS based license with added flexibility in usage and
pricing as well as enterprise licensing with separate optional maintenance.
Acquisitions of services companies, including Platinum's services operations, as
well as internal growth, increased professional services revenue by 64% or $49
million over the prior year's comparable period. Professional Services revenue
is reflected in the "Product revenue and other related income" line of the
Company's Statement of Operations. Maintenance revenue increased 23%, or $42
million, over last year's comparable quarter. Additional maintenance revenue
from prior year license arrangements, as well as from Platinum licenses, was
partially offset by the ongoing trend of site consolidations and expanding
distributed platform revenues, which yield lower maintenance revenue.
<TABLE>
<CAPTION>
(In millions)
Product/ Professional
Quarter Ended Maintenance Services Total
------------- ----------- ------------ ---------
<S> <C> <C> <C>
December 31, 1999 $ 1,686 $ 126 $ 1,812
December 31, 1998 1,284 77 1,361
</TABLE>
Professional Services revenue for the quarter ended December 31, 1999 was
negatively impacted by the Company's use of consultants to supplement its
technical resources during and after the changeover of the date to the year
2000. The consultants were positioned at large client sites without charge to
the client, to assist with any potential difficulties attributable to the date
change. Such activities were conducted by the Company during the last five days
of 1999, and the first five days of 2000.
Total North American revenue for the third quarter grew 41% over the prior
year's third quarter. This resulted from continued growth in distributed
platform product sales, OS/390 solutions, the addition of Platinum products, and
professional services. North American sales represented 68% of revenue for the
December 1999 quarter compared to 64% of revenue for the December 1998 quarter.
The European market, the Company's
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
largest outside of North America, was marginally higher in the current quarter,
with growth in the Asia/Pacific market contributing more than half of the $95
million increase over the prior year's comparable quarter.
<TABLE>
<CAPTION>
(In millions)
Quarter Ended North America International Total
------------- ------------- ------------- ---------
<S> <C> <C> <C>
December 31, 1999 $ 1,232 $ 580 $ 1,812
December 31, 1998 876 485 1,361
</TABLE>
Price changes did not have a material impact in this quarter or the prior year's
comparable quarter.
For the nine months ended December 31, 1999:
On a year to date basis, total revenue increased 28%, or $1,016 million, from
the comparable period in the prior year. The increase was primarily attributable
to growth in distributed platform product revenue and the addition of Platinum
products, which accounted for 50% of the Company's overall year to date revenue,
as well as growth in professional services revenue. Year to date distributed
platform and professional services revenue increased 35% and 97%, or $597 and
$190 million, respectively, over the prior year. Maintenance revenue increased
16%, or $87 million, over last year's comparable period.
<TABLE>
<CAPTION>
(In millions)
Product/ Professional
Nine Months Ended Maintenance Services Total
---------------- ----------- ------------ ---------
<S> <C> <C> <C>
December 31, 1999 $ 4,255 $ 385 $ 4,640
December 31, 1998 3,429 195 3,624
</TABLE>
Total North American revenue for the nine months ended December 31, 1999 grew
34% over the prior year's comparable period. On a year to date basis, North
American sales represented 69% of revenue for fiscal year 2000 and 65% of
revenue for fiscal year 1999. On a year to date basis, international revenue
increased by $207 million, or 17%, over the prior year. In addition, the effect
of exchange rates on the US dollar versus foreign currencies decreased revenue
by $76 million for the current year. Excluding the exchange impact,
international revenue increased by $283 million, or 23% over the prior year. The
growth in international revenue was supported by the Asia/Pacific operations,
which contributed more than half of the $207 million increase this fiscal year
compared to the prior fiscal year.
<TABLE>
<CAPTION>
(In millions)
Nine Months Ended North America International Total
---------------- ------------- ------------- ---------
<S> <C> <C> <C>
December 31, 1999 $ 3,182 $ 1,458 $ 4,640
December 31, 1998 2,373 1,251 3,624
</TABLE>
Price changes did not have a material impact year to date in fiscal year 2000 or
in the comparable period in fiscal year 1999.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Costs and Expenses
For the three months ended December 31, 1999:
Selling, marketing and administrative expenses as a percentage of total revenue
for the third quarter, excluding the asset writedown of $37 million, decreased
to 35% from 37% the prior year. The decrease was largely attributable to
efficiencies realized by eliminating redundant headcount and overhead expenses
as a result of the Platinum integration. This was partially offset by an
increase in personnel costs related to an overall increase in headcount
resulting from the expansion of the Company's Field Services Group (professional
services technical resources), as well as higher spending on marketing
associated with a new television campaign which commenced in the quarter ended
December 31, 1999. Net research and development expenditures increased $45
million, or 43%, for the third quarter compared to last year's third 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 expenses related to
development efforts of products obtained through the acquisition of Platinum.
Commissions and royalties as a percentage of revenue were 5% for both the
December 1999 and 1998 quarters. Depreciation and amortization expense in the
third quarter increased $82 million from the comparable quarter in the prior
year. The increase was primarily due to the additional amortization of purchased
intangibles associated with the acquisition of Platinum marginally offset by the
scheduled reductions in the amortization associated with past acquisitions. Net
interest expense increased $64 million for the third quarter compared to last
year's third quarter. The additional interest expense was related to the
increase in average debt outstanding associated with borrowings incurred to fund
the Platinum acquisition in the first quarter of fiscal year 2000 and other
smaller acquisitions in the current and prior fiscal years.
For the nine months ended December 31, 1999:
On a year to date basis, selling, marketing and administrative expenses as a
percentage of total revenue, excluding the asset writedown in the current
quarter, decreased to 38% from 40% the prior year. This decrease was largely
attributable to efficiencies obtained by eliminating redundant headcount and
overhead expenses as a result of the Platinum integration. Net research and
development expenditures increased $105 million, or 34%, year to date. The
increase was primarily attributable to continued emphasis on adapting and
enhancing products for the distributed processing environment, as well as a
broadening of the Company's e-commerce product offerings, and development of
technology and products obtained through the acquisition of Platinum.
Commissions and royalties as a percentage of revenue were 5% year to date for
both fiscal years 2000 and 1999. On a year to date basis, depreciation and
amortization expense increased by $189 million from the prior year. The increase
was primarily due to the additional amortization of purchased intangibles
associated with the acquisition of Platinum marginally offset by the scheduled
reductions in the amortization associated with prior acquisitions. Net interest
expense increased $153 million, or 168%, year to date from last year's
comparable period as a result of the increase in average debt outstanding
associated with the Platinum acquisition in the first quarter of fiscal year
2000 and other acquisitions during the fiscal year ended March 31, 1999.
Operating Margins
The pretax income of $642 million for the third quarter of fiscal year 2000 is
an increase of 13%, or $75 million, over the third quarter in the prior year.
Excluding the $37 million asset writedown, pretax income was $679 million, a 20%
increase over the prior year's third quarter. The year to date pretax income was
$874
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
million, reflecting the $646 million charge for in-process research and
development relating to the acquisition of Platinum, and the $37 million asset
writedown. Net income in the December 1999 quarter was $401 million, an increase
of $46 million, or 13%, over the December 1998 quarter. Year to date net income,
excluding the in-process research and development charge and asset writedown,
was $973 million, an increase of $130 million, or 15%, over last year's net
income, excluding the one-time after tax charge of $675 million associated with
the vesting of 20.25 million shares under the 1995 Plan. The Company's
consolidated effective tax rate for both comparable quarters and year to date,
excluding the in-process research and development charge, was 37.5%. The current
year's effective tax rate remains unchanged. The addition of non-deductible
intangibles from the acquisition of Platinum was offset by a shift in the mix of
domestic and foreign income.
Operations
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes higher
discretionary expense levels in relation to projected revenue for the first half
of the year.
Historically, the Company's combined third and fourth quarter revenue has been
greater than the first half of the year, as these two quarters coincide with
clients' calendar year-end budget periods and culmination of the Company's
annual sales plan. This historically higher second half revenue has resulted in
significantly higher profit margins since total expenses have not increased in
proportion to revenue. However, past financial performance should not be
considered to be a reliable indicator of future performance, particularly due to
the acquisition of Platinum during the June 1999 quarter.
Under the 1998 Incentive Award Plan (the "1998 Plan"), a total of 4 million
Phantom Shares, as defined by the 1998 Plan, were available for grant to certain
of the Company's employees from time to time through March 31, 2008. As of
December 31, 1999, there are approximately 1.8 million Phantom Shares
outstanding. Each Phantom Share is equivalent to one share of the Company's
Common Stock. Vesting is contingent upon attainment of specific criteria,
including an annual Target Closing Price ("Price") for the Company's Common
Stock, and the participant's continued employment. The Price is based on the
average closing price of the Company's Common Stock on the New York Stock
Exchange for the ten trading days up to and including March 31 of each fiscal
year. If this Price is met on March 31, 2000, the Company will recognize a
non-cash charge over the employment period. At this time, since the Price is
undetermined, the amount of any such charge is unknown.
Risks and Uncertainties
The Company's products are designed to improve the productivity and efficiency
of its clients' information processing resources. Accordingly, in a recessionary
environment, the Company's products are often a reasonable economic alternative
to customers faced with the prospect of incurring expenditures to increase their
existing information processing resources. However, a general or regional
slowdown in the world economy could adversely affect the Company's operations.
Additionally, further deterioration of the exchange rate of foreign currencies
against the US 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 are no assurances that comparable
transactions will occur in subsequent periods.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's future operating results may also be affected by a number of other
factors, including but not limited to: the significant percentage of CA's
quarterly sales consummated in the last few days of the quarter making financial
predictions especially difficult and raising a substantial risk of variance in
actual results; the 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 or changes in pricing in the market;
the risks associated with new product introductions as well as the uncertainty
of customer acceptance of these new or enhanced products from either CA or its
competition; 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; delays in product delivery; reliance
on mainframe capacity growth; the ability to recruit and retain qualified
personnel; business conditions in the client/server and mainframe software and
hardware markets; uncertainty and volatility associated with Internet and
eBusiness related activities; 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; and other risks described in
the Company's filings with the Securities and Exchange Commission.
In-Process Research and Development
In the first quarter of fiscal year 2000, there was an after tax charge of $646
million for in-process technology relating to the Platinum acquisition,
approximately 15 percent of the aggregate purchase price. There was no acquired
in-process technology charge in fiscal year 1999. Acquired in-process research
and development ("in- process R&D") charges relate to acquisitions of software
companies accounted for under the purchase method, in which a portion of the
purchase price is allocated to acquired in-process technology and expensed
immediately since the technological feasibility of the research and development
projects have not yet been achieved and are believed to have no alternative
future use. An independent valuation was performed and used as an aid in
determining the fair value of the identifiable assets and in allocating the
purchase price among the acquired assets, including the portion of the purchase
price attributed to in-process R&D.
The "Income Approach" was utilized for the valuation analysis. This approach
focuses on the income producing capability of the asset and was obtained through
on-site interviews with management, review of data provided by the Company and
the acquired companies, and analysis of relevant market sizes, growth factors,
and expected trends in technology. The steps followed in applying this approach
included estimating the expected cash flow over its life and converting these
cash flows to present value. Discounting the net cash flows back to their
present value was based on a risk adjusted discount rate. The rate used in
discounting the net cash flows from the in-process R&D ranged from 20 to 23
percent. This discount, higher than the Company's, is due to the uncertainties
surrounding the successful development of in-process R&D. The projects, on
average, were approximately 80 percent complete. The Company believes the
discount rate is appropriate given the level of risk of unsuccessful completion
of the technology after evaluating the stage of each project reviewed.
The Platinum projects currently under development consist primarily of
application development, database and enterprise management tools, and data
warehousing solutions. If these projects are not successfully developed, the
revenue and profitability of the Company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may become
impaired. Consistent with original projections, the Company's benefit from the
purchased in-process R&D in the current fiscal quarter was marginal. The Company
expects the benefit to increase over the next several quarters. Management
believes that the assumptions used in the purchased in-process R&D valuation
reasonably estimate the future benefits. There can be no assurance that in
future periods actual results will not deviate from current estimates.
<PAGE>
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000
As of the date of this filing, the Company has not incurred any significant
business disruptions nor product interruptions as a result of the Year 2000 date
change. While no such occurrence has developed to date, Year 2000 issues may not
become apparent as of this date, and therefore there is no assurance that the
company will not experience future disruptions.
The Company has designed and tested substantially all of its recent product
offerings to be Year 2000 compliant. These products have met rigorous compliance
criteria and have undergone extensive review to detect any Year 2000 failures.
The Company has publicly identified any products that have not been and will not
be updated to be Year 2000 compliant and has been encouraging clients using
these products to migrate to compliant versions/products. In general, these Year
2000 compliance efforts have been part of the Company's ongoing software
development process. As such, incremental costs are not deemed material and have
been included in net research and development expenses. The Year 2000 readiness
of the Company's customers varies, and the Company continues to actively
encourage its customers to prepare their own systems, making available a broad
array of product, service, and educational offerings. These offerings have been
made available to all clients and prospects. It is possible that the Company may
experience increased expense levels addressing migration issues for such
customers. There can be no assurances that the Company's compliant products do
not contain undetected problems associated with Year 2000 compliance. Although
the Company believes that its license agreements provide it with protection
against liability, the Company cannot predict whether, or to what extent, any
legal claims will be brought, or whether the Company will suffer any potential
liability as a result of any adverse consequences to its customers.
The Company has recognized the significance of the Year 2000 issue as it relates
to its internal systems including IT and non-IT systems, and understands that
the impact extends beyond traditional hardware and software to automated
facility systems and third party suppliers. The Company established a
comprehensive four-step plan: (1) assessment; (2) remediation; (3) testing; and
(4) implementation, with dedicated project managers to address Year 2000 issues.
With regard to internal administrative and financial systems, the Company
completed conversion and testing efforts. For its facility-related systems such
as telephone, voicemail, and security, the Company conducted internal assessment
audits and confirmed Year 2000 readiness with its vendors. As part of the
contingency planning efforts, the Company created alternative strategies, where
necessary, if significant exposures were identified up to and including the
Company's computer systems being rendered inoperable. The contingency plan
addressed these issues including temporary relocation of employees, manual
workarounds, and the use of Company-owned generators and cellular phones. The
total cost of preparing internal systems to be Year 2000 compliant has not been
and is not expected to be material to the Company's operations, liquidity, or
capital resources. Total known expenditures, excluding personnel costs of
existing staff, related to internal systems' Year 2000 readiness was
approximately $30 million. Such expenditures commenced in 1996. Additionally,
the Company adopted a Millennium Watch plan whereby clients around the world
were provided with 24 hour onsite and in-house technical support from December
27, 1999 through January 7, 2000. In addition, the Company extended the
schedules of the internal administrative and facility related staff to support
the infrastructure during the Millennium Watch. It is estimated that the plan
has resulted in approximately $8 million of additional expenditures over the
period.
Demand for certain of the Company's products was generated by customers who were
replacing or upgrading computer systems to accommodate the Year 2000 date
change. With the arrival of Year 2000, demand for some of the Company's products
may diminish, which could negatively impact the Company's revenue growth rate.
Additionally, because the Company believes that some of its customers were
allocating a substantial portion of their 1999 IT budgets to Year 2000
compliance, sales of certain of the Company's traditional product offerings may
be adversely affected through the end of fiscal year 2000.
<PAGE>
Item 2:
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and capital resources
Liquidity and capital resources:
The Company's cash, cash equivalents and marketable securities increased
approximately $34 million from the September 30, 1999 balance of $356 million to
$390 million at December 31, 1999. Cash generated from operations for the
quarter was $163 million. On a year to date basis, cash from operations was $834
million as compared with $698 million for the prior comparable fiscal period.
The current year was negatively impacted by $220 million of higher taxes and
interest paid versus the prior year. The prior year was negatively impacted by a
$318 million withholding tax payment related to the 1995 Plan. The Company
continues to offer financing alternatives to its clients. The Company has
increased the use of financing arrangements, which negatively impacted the cash
generated from operations. Such financing, which the Company views as a
competitive advantage, has been widely accepted by clients who have elected the
use of this alternative.
The Company's bank credit facilities consist of a $1.5 billion 364-day revolving
credit facility, a $1 billion 4-year revolving credit facility, and a $2 billion
4-year term loan. Interest charged is based on the London InterBank Offered Rate
("LIBOR") subject to a margin based on a bank credit facility ratings grid. The
Company is required to maintain certain financial ratios. At December 31, 1999,
a total of $3.5 billion was drawn under these facilities.
The company also utilizes other sources of liquidity in its capital structure.
On April 24, 1998, the Company issued $1.75 billion of unsecured senior notes.
Amounts borrowed, rates and maturities for each issue were $575 million at 6
1/4% due April 15, 2003, $825 million at 6 3/8% due April 15, 2005 and $350
million at 6 1/2% due April 15, 2008. Proceeds were used to repay borrowings
from bank credit facilities and for general corporate purposes. The issuance of
these notes allowed the Company to extend the maturity of its debt, commit to an
attractive fixed rate of interest and broaden the Company's sources of
liquidity. Debt ratings for the Company's senior unsecured notes and its bank
credit facilities are Baa1 and BBB+ from Moody's Investor Services and Standard
& Poor's, respectively. The Company also has $256 million of 6.77% senior notes
outstanding at December 31, 1999.
The Company maintains an 85 million pound-sterling denominated credit facility
(approximately US$137 million) established to finance construction of its new
European Headquarters. Approximately US$122 million was outstanding under this
facility at December 31, 1999. This facility is subject to interest primarily at
the prevailing LIBOR subject to a fixed spread, which is dependent on the
achievement of certain financial ratios. The Company is also required to
maintain certain financial conditions. Additionally, the Company has
approximately US$40 million of unsecured and uncommitted multicurrency lines of
credit established to meet any short-term working capital needs for subsidiaries
operating outside the U.S. During the quarter ended December 31, 1999, the
Company did not purchase any shares under its various open market Common Stock
repurchase programs. The cumulative total number of shares purchased is
approximately 150 million shares. The remaining number of shares authorized for
repurchase is approximately 50 million. In addition to expansion efforts at its
U.S. headquarters in Islandia, N.Y., capital resource requirements at December
31, 1999 consisted of lease obligations for office space, computer equipment,
mortgage or loan obligations and amounts due as a result of product and company
acquisitions. It is expected that existing cash, cash equivalents, marketable
securities, the availability of borrowings under credit lines, the availability
of financing alternatives in the capital markets, and cash provided from
operations will be sufficient to meet ongoing cash requirements.
<PAGE>
Item 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Exposure to market rate risk for changes in interest rates relate primarily to
the Company's investment portfolio and its floating rate debt. On the investment
side, the Company has a prescribed methodology whereby it invests its excess
cash in debt instruments of government agencies and high quality corporate
issuers (Standard & Poor's single "A" rating and higher). To further mitigate
risk, the vast majority of the securities have a maturity date within one year.
Holdings of any one issuer excluding the U.S. government shall not exceed 10%,
and the portfolio is reviewed on a periodic basis and adjusted in the event that
the credit rating of a security held has deteriorated. The Company has not used
derivative financial instruments in its investment portfolio.
At December 31, 1999, the Company's outstanding debt approximated $5.6 billion
with approximately $2 billion of fixed rate obligations. If market rates
decline, the Company runs the risk that the related required payments on the
fixed rate debt will exceed those based on the current market rate. On an annual
basis, each 25 basis point decrease in interest rates would increase the value
of these instruments by approximately $5 million. Each 25 basis point increase
or decrease in the level of interest rates would have approximately $9 million
annual impact on variable rate debt interest based on the balances of such debt
at December 31, 1999. In order to mitigate these risks, the Company maintains
both fixed and floating rate debt instruments.
There have been no material changes in the way the Company conducts its
worldwide business, foreign exchange risk management strategy, or investments in
marketable equity securities, thus overall foreign currency exchange and equity
price risk remains unchanged from the description in the Company's Form 10-K for
the year ended March 31, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1:
LEGAL PROCEEDINGS
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Company's stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Company's future financial performance. These cases have
been consolidated into a single action (the "Shareholder Action") in the United
States District Court for the Eastern District of New York ("NY Federal Court").
Defendant's motion to dismiss was denied and discovery in the Shareholder Action
has recently commenced. In addition, a number of derivative actions alleging
facts similar to those alleged in the Shareholder Action were brought in the NY
Federal Court. An additional derivative action, alleging that the Company issued
more shares than were authorized under the 1995 Key Employee Stock Ownership
Plan (the "1995 Plan"), was also filed in the NY Federal Court. In all but one
of these derivative actions, all of the Company's directors at that time were
named as defendants. These derivative actions have been consolidated into a
single action (the "Derivative Action") in the NY Federal Court. Another
derivative action was filed in the Chancery Court in Delaware (the "Delaware
Action") also alleging that more shares were issued than were authorized under
the 1995 Plan. In a decision dated November 8, 1999, the Chancery Court held
that 9.5 million of the shares issued under the Plan, as well as all dividends
and other financial benefits derived from the shares, should be returned to the
Company. The Company and its directors, who are parties to the Delaware Action,
as well as one of the Plaintiffs, have cross-appealed the Court's decision. The
Court's order has been stayed pending outcome of the appeal. Although the
ultimate outcome and liability, if any, cannot be determined in each of the
actions, management, after consultation and review with counsel, believes that
the facts in each of the actions do not support the plaintiffs' claims and that
the Company and its officers and directors have meritorious defenses.
The Company, various subsidiaries, and certain current and former officers have
been named as defendants in other various claims and lawsuits arising in the
normal course of business. The Company believes that the facts do not support
the plaintiffs' claims, and intends to vigorously contest each of them.
<PAGE>
Item 2:
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 November 22, 1999
reporting an event under Item 5.
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: February 11, 2000 By: /s/Sanjay Kumar
--------------------------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: February 11, 2000 By: /s/Ira Zar
--------------------------------------
Ira Zar
Sr. Vice President - Finance
(Chief Financial and Accounting Officer)
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