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 December 31, 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 February 5, 2001
par value $.10 per share 576,278,645
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
December 31 and March 31, 2000.............................. 1
Consolidated Condensed Statements of Operations -
Three Months Ended December 31, 2000 and 1999............... 2
Consolidated Condensed Statements of Operations -
Nine Months Ended December 31, 2000 and 1999................ 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended December 31, 2000 and 1999................ 4
Notes to Consolidated Condensed Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk....... 18
PART II. Other Information:
Item 1. Legal Proceedings........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 20
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
December 31, March 31,
2000 2000
----------- --------
(unaudited)
ASSETS:
Cash and cash equivalents $ 461 $ 1,307
Marketable securities 86 80
Trade and installment accounts receivable, net 1,772 2,175
Other current assets 138 430
------ ------
TOTAL CURRENT ASSETS 2,457 3,992
Installment accounts receivable, due after one year,net 3,536 3,812
Property and equipment, net 827 829
Purchased software products, net 2,418 2,598
Goodwill and other intangible assets, net 5,576 6,032
Other assets 232 230
------ ------
TOTAL ASSETS $15,046 $17,493
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 1,045 $ 919
Other current liabilities 1,422 2,085
Long-term debt 3,675 4,527
Deferred income taxes 2,197 2,365
Deferred maintenance revenue 486 560
Stockholders' equity 6,221 7,037
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,046 $17,493
====== ======
<FN>
See Notes to Consolidated Condensed Financial Statements
</FN>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
For the Three Months
Ended December 31,
2000 1999
------ ------
Product and other $ 663 $1,548
Professional services 120 126
------ ------
REVENUE 783 1,674
Costs and expenses:
Selling, general and administrative 624 536
Product development and enhancements 172 150
Commissions and royalties 88 89
Depreciation and amortization 279 160
------ ------
TOTAL OPERATING COSTS 1,163 935
(Loss) income before other expenses (380) 739
Interest expense, net 88 97
------ ------
(Loss) income before income taxes (468) 642
(Benefit) provision for income taxes (126) 241
------ ------
NET (LOSS) INCOME $ (342) $ 401
====== ======
BASIC (LOSS) EARNINGS PER SHARE $ (.59) $ .74
====== ======
Basic weighted average shares used in computation 577 540
DILUTED (LOSS) EARNINGS PER SHARE $ (.59) $ .72
====== ======
Diluted weighted average shares used in computation 577* 559
<FN>
*Common share equivalents are not included since they would be antidilutive.
</FN>
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
For the Nine Months
Ended December 31,
2000 1999
------ ------
Product and other $3,050 $3,812
Professional services 415 385
------ ------
REVENUE 3,465 4,197
Costs and expenses:
Selling, general and administrative 1,949 1,362
Product development and enhancements 521 412
Commissions and royalties 238 229
Depreciation and amortization 831 430
Purchased research and development - 646
1995 Stock Plan (184) -
------ ------
TOTAL OPERATING COSTS 3,355 3,079
Income before other expenses 110 1,118
Interest expense, net 265 244
------ ------
(Loss) income before income taxes (155) 874
Provision for income taxes 26 570
------ ------
NET (LOSS) INCOME $ (181) $ 304
====== ======
BASIC (LOSS) EARNINGS PER SHARE $ (.31) $ .56
====== ======
Basic weighted average shares used in computation 584 538
DILUTED (LOSS) EARNINGS PER SHARE $ (.31) $ .55
====== ======
Diluted weighted average shares used in computation 584* 555
<FN>
* Common share equivalents are not included since they would be antidilutive.
</FN>
<FN>
See Notes to Consolidated Condensed Financial Statements.
</FN>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
For the Nine Months
Ended December 31,
2000 1999
----- -----
OPERATING ACTIVITIES:
Net (loss) income $(181) $ 304
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 831 430
Provision for deferred income taxes 117 76
Charge for purchased research and development - 646
Compensation (gain) expense related to stock and pension plans (146) 28
Decrease (increase) in noncurrent installment accounts
receivable, net 221 (909)
(Decrease) increase in deferred maintenance revenue (66) 5
Changes in other operating assets and liabilities, excluding
effects of acquisitions (42) 254
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 734 834
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marking rights
and intangibles, net of cash acquired (178) (3,647)
Settlement of purchase accounting liabilities (351) (492)
Dispositions of businesses 158 -
Purchases of property and equipment, net (86) (119)
(Purchases) sales of marketable securities, net (7) 127
Capitalized development costs (36) (25)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (500) (4,156)
FINANCING ACTIVITIES:
Debt (repayments) borrowings, net (688) 3,163
Dividends paid (24) (21)
Exercise of common stock options 45 81
Purchases of treasury stock (406) -
----- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,073) 3,223
DECREASE IN CASH AND CASH EQUIVALENTS BEFORE
EFFECT OF EXCHANGE RATE CHANGES ON CASH (839) (99)
Effect of exchange rate changes on cash (7) (6)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (846) (105)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,307 399
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 461 $ 294
===== =====
<FN>
See notes to Consolidated Financial Statements.
</FN>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. Operating results for the nine months ended December 31, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in Computer Associates
International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form
10-K for the fiscal year ended March 31, 2000.
Cash Dividends: In December 2000, the Company's Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
January 10, 2001 to stockholders of record on December 22, 2000.
Statements of Cash Flows: For the nine months ended December 31, 2000 and 1999,
interest payments were $292 million and $243 million respectively, and income
taxes paid were $201 million and $246 million, respectively.
Reclassifications: Certain prior balances have been reclassified to conform with
the current period presentation.
Comprehensive (Loss) Income: Comprehensive (loss) income includes foreign
currency translation adjustments and unrealized gains and losses on the
Company's available-for-sale securities. The components of comprehensive (loss)
income , net of related tax, for the three month and nine month periods ended
December 31, 2000 and 1999 are as follows:
(in millions)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
2000 1999 2000 1999
------ ---- ------ ----
Net (loss) income $(342) $401 $(181) $304
Foreign currency translation adjustment 33 (44) (51) (42)
Reclassification adjustment
included in net income - - - (9)
------ ---- ------ ----
Total comprehensive (loss) income $(309) $357 $(232) $253
====== ==== ====== ====
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(unaudited)
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 share equivalents outstanding during the period. Common share equivalents
consist of shares issuable upon the exercise of stock options (using the
treasury stock method).
(in millions, except per share amounts)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Net (Loss) Income $(342) $ 401 $(181) $ 304
====== ===== ====== =====
Diluted (Loss) Earnings Per Share
- -----------------------------------
Weighted average shares outstanding
and common share equivalents 577* 559 584* 555
Diluted (Loss) Earnings Per Share $(.59) $ .72 $(.31) $ .55
====== ===== ====== =====
Diluted Share Computation:
Average common shares outstanding 577 540 584 538
Average common share equivalents - 19 - 17
------ ----- ------ -----
Weighted average shares outstanding
and common share equivalents 577* 559 584* 555
====== ===== ====== =====
<FN>
* Common share equivalents are not included since they would be antidilutive. If
the three and nine month periods ended December 31, 2000 had resulted in net
income, the weighted average shares outstanding and common share equivalents
would have been 584 and 594 million for each period, respectively. Certain of
the Company's stock options were excluded from the calculation of diluted
earnings per share because they were antidulutive, but these options could be
dilutive in the future
</FN>
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 for
software transactions, requiring deferral of part or all of the revenue related
to a specific contract depending on the existence of vendor-specific objective
evidence and the ability to allocate the total contract value to all elements
within the contract. Effective for the quarter ended June 30, 1999, the Company
implemented the guidelines of these SOPs. In December 1999, the SEC issued Staff
Accounting Bulletin ("SAB") No. 101. This SAB provides further guidance on
revenue recognition and is effective for the Company beginning in the fourth
quarter of fiscal 2001. Management has evaluated the SAB to ensure that the
Company is in compliance. Based on the current interpretations, there should not
be a material impact on the Company's consolidated results of operations and
financial position. As a result of a change in the business model effective for
the quarter ended December 31, 2000, as further discussed in the MD&A and Form
8-K filed on October 25, 2000, the Company now recognizes revenue on software
transactions conforming to such business model ratably over the contract term.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(unaudited)
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.
NOTE B - ACQUISITIONS
On March 31, 2000, the Company acquired Sterling Software, Inc. ("Sterling") and
merged one of its wholly owned subsidiaries into Sterling, at which time
Sterling became a wholly owned subsidiary of the Company. The shareholders of
Sterling received 0.5634 shares of the Company's common stock for each share of
Sterling common stock. The Company issued approximately 46.8 million shares of
common stock with an approximate fair value of $3.3 billion. Sterling was a
developer and provider of systems management, business intelligence, and
application development software products and services, as well as a supplier of
specialized information technology services for sectors of the federal
government.
On May 28, 1999, the Company acquired the common stock and the options to
acquire the common stock of PLATINUM technology International, inc. ("PLATINUM")
in a cash transaction of approximately $3.6 billion, which was paid from
drawings under the Company's $4.5 billion credit agreements. PLATINUM was
engaged in providing software products in the areas of database management,
eCommerce, application infrastructure management, decision support, data
warehousing, and knowledge management, as well as year 2000 reengineering and
other consulting services.
The following table reflects unaudited pro forma combined results of the
operations of the Company, Sterling, and PLATINUM on the basis that the
acquisitions had taken place at the beginning of fiscal year 2000:
(in millions, except per share amounts)
For the Three Months For the Nine Months
Ended Dec. 31, 1999 Ended Dec. 31, 1999
-------------------- --------------------
Revenue $1,881 $4,953
Net income (loss) 364 (1)
Basic earnings (loss) per share $ 0.62 $ 0.00
Shares used in computation 587 585
Diluted earnings (loss) per share $ 0.60 $ 0.00
Shares used in computation 606 585 *
<FN>
*common share equivalents are not included since their effect would be
antidilutive.
</FN>
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.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(unaudited)
At March 31, 2000, the Company estimated future liabilities in connection with
acquisitions to be $768 million. These included compensation-related liabilities
($392 million) and other acquisition-related expenditures including duplicate
facilities ($376 million). For the nine months ended December 31, 2000,
reductions totaling $351 million were made against these reserves, including
compensation related payments of $301 million and $50 million relating to
duplicate facility and other settlements. The remaining balance is included in
the "Other current liabilities" line item on the accompanying Consolidated
Condensed Balance Sheet.
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.
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 Item 2, "Results of
Operations."
RESULTS OF OPERATIONS
Revenue:
For the three months ended December 31, 2000:
Revenue for the quarter ended December 31, 2000 decreased 53%, or $891 million,
from the prior year's comparable quarter. The decrease was a result of the
company's transition to a new business model during the third quarter of fiscal
2001 whereby clients are granted flexible contractual terms and conditions with
the result that product revenue from such contracts is recognized prospectively
over the term of the contracts. The new model allows customers to vary their
software mix as their business needs change and provides them with the freedom
to use a variety of software products during the licensed period. The terms of
these new arrangements are structured such that product revenue is generally
recognized ratably over the term of the license. Customers will benefit from
these new arrangements by finding more flexibility in licensing the Company's
software products, gaining an improved, cost-effective way of doing business,
mapping the growth of their technology to the growth of their business, and
allowing their costs to be more predictable. The new business model will improve
the visibility of the Company's revenue stream and will reduce the uncertainty
of quarterly revenue since revenue will be recognized ratably, rather than on a
one-time basis. In the first quarter of the transition, approximately $140
million in revenue was recognized at contract signing for contracts conforming
to the Company's prior business model.
(in millions)
Product/ Professional
Quarter Ended Other Services
------------- ----------- ------------
December 31, 2000 $ 663 $120
December 31, 1999 1,548 126
North American revenue for the third quarter decreased 57%, or $666 million,
over the prior year's third quarter, a result of the Company's transition to the
new business model. North American revenue represented 63% and 69% of revenue
for the December 2000 and December 1999 quarters, respectively.
(in millions)
North
Quarter Ended America International
------------- ----------- -------------
December 31, 2000 $ 493 $290
December 31, 1999 1,159 515
Price changes did not have a material impact in this quarter or the prior year's
comparable quarter.
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine months ended December 31, 2000:
Revenue on a year to date basis decreased 17%, or $732 million, from the
corresponding period a year ago. This decrease was attributable primarily to the
Company's transition to the new business model and softening demand experienced
from clients who did not commit to software license purchases due to their
concerns over the pending release of the next generation of mainframe computers.
(in millions)
Product/ Professional
Nine Months Ended Other Services
----------------- ----------- ------------
December 31, 2000 $3,050 $415
December 31, 1999 3,812 385
North American revenue for the nine months ended December 31, 2000 decreased
17%, or 487 million, from the prior year's comparable period. On a year to date
basis, North American revenue represented 68% of total revenue for both fiscal
years 2001 and 2000. On a year to date basis, international revenue decreased by
$245 million, or 18%, over the prior year. This decrease was primarily a result
of the Company's transition to the new business model, the effect of exchange
rates on the US dollar versus foreign currencies, and weaker year over year
European performance, partially offset by improved performance in Asia.
(in millions)
North
Nine Months Ended America International
----------------- ----------- -------------
December 31, 2000 $2,359 $1,106
December 31, 1999 2,846 1,351
Price changes did not have a material impact year to date in fiscal year 2001 or
in the comparable period in fiscal year 2000.
Costs and Expenses
For the three months ended December 31, 2000:
Selling, general and administrative expenses for the third quarter increased $88
million, or 16%. The increase was largely attributable to the Company's higher
fixed expense structure, principally the result of added costs from the
acquisition of Sterling, as well as greater spending on marketing associated
with a new advertising campaign. Net product development and enhancement
expenditures increased $22 million, or 15%, 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 (The Next Generation), Jasmine ii, Neugents, as well as broadening
of the Company's e-commerce product offerings, and additional expense related to
development efforts of products obtained through the acquisition of Sterling.
Commission and royalties remained consistent, in terms of dollars, when compared
with last year's third quarter. Depreciation and amortization expense in the
third quarter increased $119 million from the comparable quarter in the prior
year. The increase was due primarily to the additional amortization of purchased
intangibles associated with the acquisition of Sterling,
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
marginally offset by the scheduled reductions in the amortization associated
with past acquisitions. Net interest expense decreased $9 million, or 9%, for
the third quarter compared to last year's third quarter. The reduction in
interest expense was related to a decrease in average debt outstanding,
partially offset by an increase in the average interest rate.
For the nine months ended December 31, 2000:
On a year to date basis, selling, general and administrative expenses increased
$587 million, or 43%. The increase was a result of a greater fixed expense
structure, principally the result of added personnel costs from the acquisitions
of PLATINUM (two additional months of expense in the current fiscal year) and
Sterling, as well as an increase in marketing expenditures associated with the
rollout of the new marketing campaign. Net product development and enhancement
expenditures increased $109 million, or 26%, over the prior year. Continued
emphasis on adapting and enhancing products for the distributed processing
environment, as well as broadening of the Company's e-commerce product offerings
and development of technology and products obtained through the acquisitions of
PLATINUM and Sterling were largely responsible for the increase. Commissions and
royalties increased $9 million, or 4%, and represent a greater percentage of
reported revenue for the nine months ended December 31, 2000 as compared with
the prior year. On a year to date basis, depreciation and amortization expense
increased by $401 million from the prior year. The increase was due primarily to
the additional amortization of purchased intangibles associated with the
acquisition of PLATINUM and Sterling, marginally offset by the scheduled
reductions in the amortization associated with prior acquisitions. Net interest
expense increased $21 million, or 9%, from last year's comparable period as a
result of an increase in average debt outstanding associated with the
acquisition of PLATINUM in the first quarter of fiscal year 2000 and a marginal
increase in the average interest rate.
Operating Margins
For the third quarter of fiscal 2001, the pretax loss was $468 million as
compared with the pretax income of $642 million in the prior year's comprable
quarter. On a year to date basis, the pretax loss was $155 million, including a
$184 million gain arising from the settlement of the derivative litigation
associated with stock awards pursuant to the Company's 1995 Key Employee Stock
Ownership Plan, partially offset by a $31 million write-off associated with the
bankruptcy of Inacom Corp., compared with the pretax income of $874 million in
the same period a year ago, inclusive of special items of $646 million for
in-process research and development relating to the acquisition of PLATINUM and
$37 million related to an asset write-down in the investment of CHS Electronics.
The net loss in the December 2000 quarter was $342 million as compared with the
net income in the December 1999 quarter of $401 million. The year to date net
loss of $260 million, excluding special items, as compared with the prior year's
net income of $973 million, excluding special items, was primarily related to a
reduction in revenue from the Company's transition to the new business model in
the quarter ended December 2000, as well as to a higher fixed cost structure as
a result of acquisitions.
PRO FORMA PRO RATA RESULTS OF OPERATIONS
To enhance comparability of financial results, the discussion of financial
results is supplemented with separate pro forma pro rata financial information
presented below in order to give effect to the purchase of PLATINUM and Sterling
as if they had occurred on April 1, 1998 and as if the Company, PLATINUM, and
Sterling were under the new business model since their inception. While these
results may not be indicative of operations
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
had these acquisitions actually occurred on that date and had the Company
historically been operating under the new business model, they provide a more
meaningful basis for comparison.
Revenue:
For the three months ended December 31, 2000:
Pro forma pro rata revenue increased 5%, or $72 million, from $1.332 billion for
the quarter ended December 31, 1999 to $1.404 billion for the quarter ended
December 31, 2000. Product and other revenue increased 13%, or $144 million,
over last year's comparable quarter. The increase was attributable primarily to
the ratable recognition of revenue on contracts entered into during the prior
twelve month period that previously were deferred as residual value. Pro forma
pro rata revenue benefited from a 29% increase in distributed platform product
fees and a marginal increase in OS/390 product revenue. The distributed platform
revenue accounted for approximately 42% of the Company's pro forma pro rata
revenue for the third quarter, led by Unicenter TNG , a family of integrated
business solutions for monitoring and administering systems management across
multi-platform environments. Professional services revenue from consulting and
education programs decreased 38%, or $72 million, which was primarily the result
of the previously announced divestiture of Sterling's Federal Systems Group, a
provider of professional services to governmental agencies, during October 2000
and curtailed services associated with non-CA products. The Company plans on
furthering its focus on services in support of its product business, which may
result in further declines in services revenue.
(in millions)
Product/ Professional
Quarter Ended Other Services
------------- ----------- ------------
December 31, 2000 $1,284 $120
December 31, 1999 1,140 192
North American pro forma pro rata revenue for the third quarter grew 14%, or
$111 million, over the prior year's third quarter. This resulted from continued
growth in distributed platform sales. North American pro forma pro rata revenue
represented 63% and 59% of revenue for the December 2000 and December 1999
quarters, respectively.
(in millions)
North
Quarter Ended America International
------------- ----------- -------------
December 31, 2000 $891 $513
December 31, 1999 780 552
Price changes did not have a material impact in this quarter or the prior year's
comparable quarter.
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine months ended December 31, 2000:
Pro forma pro rata revenue on a year to date basis increased 7%, or $259
million, from the corresponding period a year ago. Consistent with the current
quarter, the increase was attributable to the ratable recognition of revenue on
contracts transacted during the prior twelve month period, partially offset by a
reduction in professional services revenue, which was primarily the result of
the divestiture of Sterling's professional services provider to governmental
agencies, the Federal Systems Group, and the Company's decision to reduce
services associated with non-CA products.
(in millions)
Product/ Professional
Nine Months Ended Other Services
----------------- ----------- ------------
December 31, 2000 $3,710 $415
December 31, 1999 3,283 583
North American pro forma pro rata revenue for the nine months ended December 31,
2000 grew 16%, or $356 million, over the prior year's comparable period. On a
year to date basis, North American pro forma pro rata revenue represented 64%
and 59% of total revenue for fiscal years 2001 and 2000, respectively. On a year
to date basis, international pro forma pro rata revenue decreased by $97
million, or 6%, over the prior year. This decrease was primarily a result of the
effect of exchange rates on the US dollar versus foreign currencies and weaker
European performance, partially offset by improved performance in Asia.
(in millions)
North
Nine Months Ended America International
----------------- ----------- -------------
December 31, 2000 $2,623 $1,502
December 31, 1999 2,267 1,599
Price changes did not have a material impact year to date in fiscal year 2001 or
in the comparable period in fiscal year 2000.
Operating Margins
For the third quarter of fiscal 2001, pro forma pro rata net income excluding
acquisition amortization and special items was $247 million, an increase of $54
million or 28% over the comparable quarter a year ago. On a year to date basis,
pro forma pro rata net income, excluding acquisition amortization and special
items, was $677 million compared with $580 million for the nine months ended
December 1999, an increase of $97 million, or 17%. The increase was largely
attributable to efficiencies obtained by eliminating redundant headcount and
overhead expenses as a result of the PLATINUM and Sterling integrations.
Excluding acquisition amortization, the Company's effective tax rate was 37.5%
for the quarter and year to date periods ended December 2000 and 1999.
Item 2:
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 national or 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 adversely the Company's
ability to increase its revenue within those markets.
As the Company grows, it is dependent upon large dollar enterprise transactions
with individual clients. There can be no assurances that transactions of this
nature will occur in subsequent periods.
The Company has introduced a new business model which should provide greater
flexibility to clients as well as improved visibility into future operating
performance of the Company. With the change in the business model, the Company
has implemented and will continue to implement new business practices. The
introduction of these new business practices will negatively affect the
financial performance of the Company in the near term. In addition, there are
risks associated with the transition to the new model. Included among these
risks are that the transition may take longer than originally planned, that
circumstances may occur that affect adversely the ability to conduct the
transition smoothly, and that unforeseen events may occur that will negatively
affect future performance. Introduction of the new business model will result in
substantially lower revenue achievement for the year ending March 31, 2001, as
well as a reported loss for the same period. Since revenue primarily will be
recognized ratably over future periods and costs are expensed as incurred, it is
not anticipated that the Company will report a profit from operations (excluding
acquisition amortization) until the second half of fiscal year 2003.
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 consummated in the last few days of the quarter making financial
predictions especially difficult and raising a substantial risk of variance in
actual results; changes in industry accounting guidance; the risks associated
with changes in the company's business model; the risks associated with changes
in the way in which the company accounts for license revenue; the difficulties
of compiling pro forma financial information, given acquisitions over time;
instability resulting from changes to the company's business model; 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 the Company or its competition; risks
associated with the entry into new markets such as professional services; the
risks associated with integrating newly acquired businesses and technologies;
increasing dependency on large dollar licensing transactions; delays in product
delivery; reliance on mainframe capacity growth; the ability to recruit and
retain qualified personnel; business conditions in the distributed systems 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;
uncertainties relative to global economic conditions; and other risks described
in filings with the Securities and Exchange Commission.
The Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN-PROCESS RESEARCH AND DEVELOPMENT
In the fourth quarter of fiscal year 2000, the Company acquired Sterling in a
stock-for-stock exchange valued at approximately $4.1 billion. In the first
quarter of fiscal year 2000, the Company acquired PLATINUM for approximately
$4.3 billion in cash and assumed liabilities. Acquired in-process research and
development ("IPR&D") charges relate to acquisitions of software companies
accounted for under the purchase method, in which a portion of the purchase
price is allocated to acquired in-process technology and is expensed immediately
since the technological feasibility of the research and development projects has
not yet been achieved and is believed to have no alternative future use.
Independent valuations of Sterling and PLATINUM were performed and used as an
aid in determining the fair value of the identifiable intangible assets and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to IPR&D, which was $150 million and $646
million for Sterling and PLATINUM, respectively. Assets were identified through
on-site interviews with management and a review of data provided by the Company
and discussions with the acquired companies' management concerning the acquired
assets, technologies in development, costs necessary to complete the IPR&D,
historical financial performance, estimates of future performance, market
potential, and the assumptions underlying these estimates.
The "Income Approach" was utilized for the valuation analysis of IPR&D for both
Sterling and PLATINUM. This approach focuses on the income-producing capability
of the asset, which was determined through review of data provided by both the
acquired companies and independent sources and through analysis of relevant
market sizes, growth factors, and expected trends in technology. The steps
followed in applying this approach included estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value using a rate of return commensurate with the
relative risk levels.
The ongoing development projects at Sterling at the time of the purchase were
comprised primarily of application development and information management,
business intelligence, network management, and storage management tools and
solutions. The acquired projects included add-on features, tools and
next-generation versions of COOL, VISION, EUREKA, SAMS,TM and SOLVE(R) product
families. At the time of acquisition, it was estimated that, on average, 68% of
the development effort had been completed and the remaining development effort
would take approximately 14 months to complete, with a cost of approximately $9
million.
The ongoing development projects at PLATINUM at the time of the purchase were
comprised primarily of application development, database and enterprise
management tools, and data warehousing solutions. The acquired projects included
add-on features, tools and next generation versions of DB2 Solutions,TM
ProVision,TM Security, 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
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 functional requirements. The Company has reviewed its projections of revenue
and estimated costs of completion and has compared these projections with
results through December 31, 2000. To date, in the aggregate, the projections
have not varied materially from original forecasts.
If these projects do not continue to be successfully developed, the revenue and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
Results will also be subject to uncertain market events and risks that are
beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction by competitors.
Management believes that the assumptions used in the purchased IPR&D valuation
reasonably estimate the future benefits. There can be no assurances that in
future periods actual results will not deviate from current estimates.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $547 million at
December 31, 2000, an increase of $93 million from the September 30, 2000
balance of $454 million. Cash on hand in September, cash generated from
operations during the quarter and $150 million received from the divestiture of
Sterling's Federal Systems Group, was used largely to fund $278 million of debt
repayments, stock repurchases of $161 million, and to a lesser extent various
acquisition-related activities. Cash generated from operations for the quarter
was $462 million, an increase of $300 million over the $162 million generated in
the prior year's comparable quarter. Cash generated from operations was
positively impacted by the collection of accounts receivable balances and a
reduction in the payment of taxes paid during the current quarter as compared
with last year, partially offset by a higher expense structure, principally the
result of the Sterling acquisition.
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, a $2 billion
four-year term loan, and a 75 million pound-sterling denominated 364-day term
loan. At December 31, 2000, $2.140 billion remained outstanding under the
four-year revolving credit and term loan agreements and approximately US $124
million was outstanding under the pound-sterling term loan at various interest
rates. These rates are determined based on a ratings grid, which applies a
margin to the prevailing London InterBank Offered Rate ("LIBOR"). In addition,
the Company established a $1 billion US Commercial Paper ("CP") program in the
first quarter of this fiscal year to refinance some of its debt at more
attractive interest levels. At December 31, 2000, $430 million was outstanding
under the CP program.
In January 2001, the Company renegotiated the debt covenants on its bank lines
of credit to better reflect operations under the Company's new business model.
The change in the underlying metrics of the covenants is not expected to
materially change the Company's borrowing capacity.
The Company also utilizes other financial markets in order to maintain its broad
sources of liquidity. In fiscal 1999, $1.75 billion of unsecured Senior Notes
were issued in a transaction governed by Rule 144A of the Securities Act of
1933. Amounts borrowed, rates and maturities for each issue were $575 million at
6 1/4%
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
due April 15, 2003, $825 million at 6 3/8% due April 15, 2005 and $350 million
at 6 1/2% due April 15, 2008. At December 31, 2000, $192 million was outstanding
under the Company's 6.77% Senior Notes. These Notes call for annual repayment of
$64 million each April until final maturity in 2003.
Unsecured and uncommitted multicurrency lines of credit are available to meet
any short-term working capital needs for subsidiaries operating outside the US.
These lines total US $56 million, of which $20 million was drawn at December 31,
2000.
Debt ratings for the Company's senior unsecured notes and its bank credit
facilities are BBB+ and Baa1 from Standard & Poor's and Moody's Investor
Services, respectively. The Company's Commercial Paper program is rated A-2 from
Standard & Poor's and P-2 from Moody's.
At December 31, 2000, the cumulative number of shares purchased under the
Company's various open market Common Stock repurchase programs, including over
14 million shares purchased in the current fiscal year, was 165 million. The
remaining number of shares authorized for repurchase is approximately 35
million.
In addition to expansion efforts at its US headquarters in Islandia, NY, capital
resource requirements at December 31, 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.
The Company expects its long-standing history of providing extended payment
terms to customers to continue under the new business model.
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 US 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 December 31, 2000, the Company's outstanding debt approximated $4.7 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 $6.75 million annual effect on variable rate
debt interest based on the balances of such debt at December 31, 2000.
The Company offers financing arrangements with installment payment terms in
connection with its software solution sales. The aggregate contract value
includes an imputed interest element, which can vary with the interest rate
environment. Each 25 basis point increase in interest rates would have an
associated annual opportunity cost of approximately $15 million.
There have been no material changes in the Company's worldwide foreign exchange
risk management strategy or investment methodology regarding marketable equity
securities, and as such, the descriptions under the captions "Foreign Currency
Exchange Risk" and "Equity Price Risk" remain unchanged from those included in
the Company's Form 10-K for the year ended March 31, 2000.
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 returned 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.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
99(i) First Amendment to the Amended and Restated Credit Agreement dated
May 24, 2000
99(ii) First Amendment to the Amended and Restated Credit Agreement dated
May 26, 1999
(b) Reports on Form 8-K:
The Registrant filed a Report on Form 8-K dated October 4, 2000 reporting
an event under Item 5 and 7.
The Registrant filed a Report on Form 8-K dated October 25, 2000 reporting
an event under Item 5 and 7.
The Registrant filed a Report on Form 8-K dated November 6, 2000 reporting
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: February 6, 2001 By: /s/Sanjay Kumar
------------------------
Sanjay Kumar, President and Chief
Executive Officer
Dated: February 6, 2001 By: /s/Ira Zar
------------------------
Ira Zar, Executive Vice President and
Principal Financial and Accounting Officer