UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
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 0-10180
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 11788-7000
(Address of principal executive offices) (Zip Code)
(516) 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 October 29, 1996
par value $.10 per share 364,799,220
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
September 30, 1996 and March 31, 1996 1
Consolidated Statements of Income -
Three Months Ended September 30, 1996 and 1995 2
Consolidated Statements of Income -
Six Months Ended September 30, 1996 and 1995 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 1996 and 1995 4
Notes to Consolidated Condensed Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 11
1
Item 1:
Part I. FINANCIAL INFORMATION
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
September 30 March 31,
1996 1996
----------- ---------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 116 $ 97
Marketable securities 85 104
Trade and installment accounts receivable - net 1,129 1,182
Inventories and other current assets 63 65
------- -------
TOTAL CURRENT ASSETS 1,393 1,448
Installment accounts receivable, due after one 2,042 1,701
Property and equipment - net 422 420
Purchased software products - net 440 580
Excess of cost over net assets acquired - net 767 786
Investments and other noncurrent assets 78 81
------- -------
TOTAL ASSETS $5,142 $5,016
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable - banks $ 495 $ 495
Other current liabilities 999 1,006
Long-term debt 740 945
Deferred income taxes 794 721
Deferred maintenance revenue 301 367
Stockholders' equity 1,813 1,482
------- -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,142 $5,016
======= =======
<FN>
See Notes to Consolidated Condensed Financial Statements
2
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
For the Three Months
Ended September 30,
---------------------
1996 1995
Product revenue and other related income $ 800 $ 630
Maintenance fees 190 182
------ ------
TOTAL REVENUE 990 812
Costs and expenses:
Selling, marketing and administrative 383 313
Product development and enhancements 76 67
Commissions and royalties 50 41
Depreciation and amortization 106 101
Interest expense - net 21 17
Purchased research and development 1,303
------ ------
TOTAL COSTS AND EXPENSES 636 1,842
------ ------
Income (loss) before income taxes 354 (1,030)
Provision for income tax expense (benefit) 131 (393)
------ ------
NET INCOME (LOSS) $ 223 $ (637)
------ ------
NET INCOME (LOSS) PER COMMON SHARE * $ 0.59 $(1.76)
------ ------
Weighted average common shares used in
computation* 380 362
<FN>
* Shares and per share amounts adjusted for three-for-two stock splits
effective June 19, 1996 and August 21, 1995.
<FN>
See Notes to Consolidated Condensed Financial Statements.
3
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
For the Six Months
Ended September 30,
-------------------
1996 1995
---- ----
Product revenue and other related income $ 1,403 $ 1,027
Maintenance fees 379 363
------- -------
TOTAL REVENUE 1,782 1,390
Costs and expenses:
Selling, marketing and administrative 725 590
Product development and enhancements 151 128
Commissions and royalties 91 67
Depreciation and amortization 226 172
Interest expense - net 44 19
Purchased research and development 1,303
------ ------
TOTAL COSTS AND EXPENSES 1,237 2,279
------ ------
Income (loss) before income taxes 545 (889)
Provision for income tax expense (benefit) 202 (340)
------ ------
NET INCOME (LOSS) $ 343 $ (549)
------ ------
NET INCOME (LOSS) PER COMMON SHARE * $ 0.90 $(1.52)
------ ------
Weighted average common shares used in
computation* 380 362
<FN>
* Shares and per share amounts adjusted for three-for-two stock splits
effective June 19, 1996 and August 21, 1995.
<FN>
See Notes to Consolidated Condensed Financial Statements.
4
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
For the Six Months
Ended September 30,
-------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 343 $(549)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 226 172
Provision for deferred income taxes 93 (437)
Charge for purchased research and development 1,303
Increase in noncurrent installment
accounts receivable - (353) (230)
(Decrease) increase in deferred
maintenance revenue (65) 1
Changes in other operating assets and
liabilities, excludes effects of acquisitions 26 (73)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 270 187
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software,
marketing rights and intangibles (25) (1,686)
Purchase of property and equipment (8) (12)
Decrease in current marketable securities 20 56
Capitalized development costs (8) (7)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (21) (1,649)
FINANCING ACTIVITIES:
Borrowings and repayments - net (202) 1,451
Dividends paid (17) (16)
Exercise of common stock options/other 11 12
Purchases of treasury stock (21) (22)
------ ------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (229) 1,425
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH 20 (37)
Effect of exchange rate changes on cash (1) (2)
------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19 (39)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 97 117
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 116 $ 78
====== =======
<FN>
See notes to Consolidated Financial Statements.
5
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the six months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending March
31, 1997. 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, 1996.
Cash Dividends: In May 1996, the Company's Board of Directors declared
its regular, semi-annual cash dividend of $.07 per share. The dividend
was paid on July 9, 1996 to stockholders of record on June 10, 1996,
prior to the Company's three-for-two stock split effective June 19,
1996.
Net Income per Share: Net income per share of Common Stock is computed
by dividing net income by the weighted average number of common shares
and any dilutive common share equivalents outstanding. Common share
equivalents for the three and six month periods ended September 30,
1995 were excluded because of their anti-dilutive effect. Fully diluted
net income per share is the same or not materially different from net
income per share.
Stock Split: On May 30, 1996 the Company declared a three-for-two
stock split in the form of a stock dividend, distributed July 15, 1996
to stockholders of record as of June 19, 1996. Shares and
per share amounts have been adjusted to reflect this stock split as well
as the previous three-for-two stock split effective August 21, 1995.
Statements of Cash Flows: For the six months ended September 30, 1996
and 1995, interest payments were $30 million and $20 million,
respectively, and income taxes paid were $119 million and $64
million, respectively.
6
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE B -- ACQUISITIONS
On August 1, 1995, the Company acquired 98% of the issued and
outstanding shares of Common Stock of Legent Corporation ("Legent"), and
on November 6, 1995 merged Legent into one of its wholly owned
subsidiaries. The aggregate purchase price of approximately $1.8
billion was funded from drawings under the Company's $2 billion credit
agreement dated July 24, 1995. Legent was engaged in the design,
development, marketing, and support of a broad range of computer
software products for the management of information systems used to
manage mainframe, midrange, server, workstation and PC systems deployed
throughout a business enterprise. The acquisition was accounted for as
a purchase. The results of Legent's operations have been combined with
those of the Company since the date of acquisition.
The Company recorded an $808 million after tax charge against earnings
for the write-off of purchased Legent research and development
technology that had not reached the working model stage and has no
alternative future use.
The following table reflects pro forma combined results of operations
(unaudited) of the Company and Legent on the basis that the acquisition
had taken place and the related after tax charge, noted above, was
recorded at the beginning of fiscal year 1996:
(In millions, except per share amounts)
For the Six Months For the Three Months
Ended September 30, Ended September 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenue $ 1,802 $ 1,476 $ 990 $ 834
Net income 355 (772) 223 165
Net income per common share $ 0.93 $ (2.14) $.0.59 $ 0.43
Shares used in computation 380 361 380 380
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
1996 or of future operations of the combined entities under the
ownership and operation of the Company.
7
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE C -- THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN
Under the 1995 Key Employee Stock Employee Ownership Plan (the "1995
Plan") the Stock Option and Compensation Committee of the Board of
Directors (the "Committee") is authorized to grant, subject to the
attainment of certain Common Stock price objectives, up to 13,500,000
shares of the Company's restricted Common Stock to three key executives.
The Committee has initially reserved 4,500,000 shares of Common Stock
("Initial Grant") and may grant up to an additional 9,000,000 shares
(the "Additional Grants") based on achievement of certain target
price levels for the Company's Common Stock. In January 1996, 900,000
shares of Common Stock reserved under the Initial Grant vested, subject
to the continued employment of the key executives. Accordingly, the
Company began accruing the compensation expense associated with the
900,000 shares over the employment period ending March 31, 2000. At
September 30, 1996, 5,400,000 shares of the Additional Grants had been
reserved under the 1995 Plan, and 3,600,000 shares were available for
future grants based on stock price performance. The Initial Grant and
Additional Grants are non-transferable, are subject to risk of
forfeiture through March 31, 2000 and are further subject to
significant limitations on transfer during the seven years following
vesting.
All references to the number of shares available and reserved for grant
have been adjusted to reflect three-for -two stock splits effective June
19, 1996 and August 21, 1995.
NOTE D -- SUBSEQUENT EVENT
On October 11, 1996, the Company announced that Tse-tsehese-staetse,
Inc., the Company's wholly owned merger subsidiary, commenced a tender
offer for all of the outstanding shares of Cheyenne Software, Inc.
("Cheyenne") common stock at a price of $30.50 per share, net to the
seller in cash. The offer is being made pursuant to the Agreement and
Plan of Merger dated as of October 7, 1996 among Tse-tsehese-staetse,
Inc. and Cheyenne. It is conditioned, among other things, upon a number
of shares being tendered and not withdrawn such that, upon consummation
of the offer, the Company and its affiliates will beneficially own in
the aggregate not less than the majority of the shares on a
fully diluted basis. The offer will expire at 12:00 midnight, New York
City time, on Friday, November 8, 1996, unless the offer is extended.
The Board of Directors of Cheyenne has unanimously approved the offer
and the Merger Agreement and has unanimously recommended that the
stockholders of Cheyenne accept the offer.
8
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 "Operations".
RESULTS OF OPERATIONS
Revenue:
Total revenue for the quarter ended September 30, 1996 increased by
22%, or $178 million, over the prior year's comparable quarter. The
increase reflects the Company's offering of attractive enterprise
pricing options, as well as the continued growth of licensing fees from
the Company's expanding client/server products. The inclusion in the
current period of revenues associated with the Legent products for three
months compared to two months of Legent activity in the prior year's
comparable quarter contributed slightly to the revenue growth. Revenue
in North America exhibited strong growth representing 62% of the revenue
in the September 1996 quarter compared to 52% of revenue in the
September 1995 quarter. International revenue for the quarter
decreased by $19 million over the comparable quarter last year due
primarily to unfavorable foreign exchange rates and strong international
results last year which benefited disproportionately from the Legent
acquisition. Maintenance revenues increased $8 million, or 4%, primarily
due to the acquisition of the Legent client base, partially offset by
the ongoing trend of site consolidations and expanding client/server
revenues which yield lower maintenance. Price changes did not have a
material impact in either quarter.
Costs and Expenses:
Selling, marketing and administrative expenses as a percentage of total
revenue for the September 1996 quarter increased to 39% from 38% for
the September 1995 quarter. The modest percentage increase reflects
increased promotional expenditures, specifically charges associated with
CA-World, a week long, company wide user conference held in the month of
August. Net research and development expenditures increased $9 million,
or 12%, over the September 1995 quarter. The addition of Legent product
development personnel, continued emphasis on adapting products for the
client/server environment and broadening of Internet/Intranet product
offerings were largely responsible for the increase. Commissions and
royalties as a percentage of revenue were 5% for both the September 1996
and 1995 quarters. Depreciation and amortization expense increased $5
million in the September 1996 quarter over the September 1995 quarter,
primarily due to the additional purchased software product amortization
associated with the Legent acquisition. In the September 1996 quarter,
net interest expense increased by $4 million over the September 1995
quarter as a result of the higher average debt levels associated with
borrowings used to finance the Legent acquisition.
9
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Margins:
Net income for the September 1996 quarter was $223 million, or $.59 per
share compared to a net loss of $637 million, or $1.76 per share in the
September 1995 quarter. The net loss for the September 1995 quarter was
entirely attributable to the $808 million after tax charge for the
write-off of Legent purchased research and development technology that
had not reached the working model stage and had no alternative future
use. Excluding the after tax charge, net income for the September
1996 quarter increased $52 million, or 30% compared to the September
1995 quarter's adjusted net income of $171 million. The Company's
consolidated effective tax rate for the September 1996 quarter decreased
to 37%, slightly less than the prior year's effective tax rate of 37.5%.
Operations:
The Company's products are designed to improve the productivity and
efficiency of its clients' data 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 data processing
resources. However, a general or global slowdown in the world economy
could adversely affect the Company's 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 revenues have been greater than the
first half of the year, as these two quarters coincide with the clients'
calendar year budget periods and the culmination of the Company's annual
sales plan. Historically, higher second half revenues have 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.
The Company's future operating results may be affected by a number of
other factors, including, but not limited to: uncertainties relative to
economic conditions; market acceptance of competing technologies; the
availability and cost of new solutions; the Company's ability to
successfully manage the transition from deriving a majority of its
revenue from mainframe products to offering lower, individually priced
client/server solutions; the strength of its distribution channels; the
Company's ability to manage fixed and variable expense growth relative
to revenue growth; and the Company's ability to effectively integrate
acquired products and operations.
10
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's cash, cash equivalents and
marketable securities balance increased by approximately $2 million from
the balance at June 30, 1996. During the quarter, bank debt repayments
of $105 million, dividend payments of $17 million and Company stock
purchases of $10 million were funded by cash generated from operations
of $143 million.
On July 11, 1996, the Company restructured its $2 billion revolving
credit line into a $700 million 364 day facility and a $1.3 billion 5
year facility. Borrowing costs and facility fees are based upon
the achievement of certain financial ratios. At September 30, 1996, in
addition to the $320 million outstanding under its 6.77% Senior Notes,
$870 million remained outstanding under the $2 billion facility. The
outstanding revolving debt on September 30, 1996 carried an interest
rate of the London Interbank Offered Rate ("LIBOR") plus 20.5 basis
points.
The total number of shares purchased under the Company's various open
market Common Stock repurchase programs was approximately 71.3 million
as of September 30, 1996. In July 1996, the Company's Board of
Directors authorized the repurchase of an additional 18.75 million
shares. This brought the total shares available for repurchase at
September 30, 1996 to approximately 37.4 million. All share amounts
reflect both the August 1995 and the June 1996 3-for-2 stock splits.
On October 11, 1996, the Company commenced a tender offer for all the
issued and outstanding shares of Cheyenne Software, Inc. ("Cheyenne") at
$30.50 per share. The transaction, pending regulatory approval and
expiration of the tender offer, is valued at approximately $1.2 billion.
The Company plans to fund the purchase price through existing cash, cash
equivalents and marketable securities balances as well as the existing
credit facilities.
The Company's other capital resource requirements as of September 30,
1996 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, short term marketable securities, the
availability of borrowings under committed and uncommitted credit
lines, as well as cash provided from operations, will be sufficient to
meet ongoing cash requirements.
11
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Annual Meeting of Stockholders held on August 14 , 1996
(b) The Stockholders notice to fix the number of Directors at
seven and elected Directors for the ensuing year as
follows:
Affirmative Authority
Name Votes Withheld
-------------- --------------- ----------
Russell M. Artz 213,594,713 261,247
Willem F.P. de Vogel 213,655,600 200,360
Irving Goldstein 213,653,064 202,896
Richard A. Grasso 213,656,294 199,666
Shirley Strum Kenny 213,643,655 212,305
Sanjay Kumar 213,582,201 273,759
Charles B. Wang 213,597,743 258,017
(c) The Stockholders voted to approve an amendment to the
Company's Restated Certificate of Incorporation, as amended,
to increase the number of shares of its authorized Common
Stock, par value $.10 per share, from 500,000,000 to
1,100,000,000:
Affirmative Votes 175,359,078
Negative Votes 37,351,428
Abstentions 270,585
(d) The Stockholders voted to approve the 1996 Deferred Stock
Plan for Non-Employee Directors:
Affirmative Votes 207,648,870
Negative Votes 5,728,007
Abstentions 479,083
(e) The Stockholders voted to ratify the appointment of Ernst &
Young LLP as the Company's independent auditors for the
fiscal year ending March 31, 1997:
Affirmative Votes 213,520,176
Negative Votes 152,024
Abstentions 183,760
12
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
3.(i)(a) Restated Certificate of Incorporation, dated
October 23, 1981.
3.(i)(b) Certificate of Amendment of the Restated
Certificate of Incorporation, dated May 10,
1983.
3.(i)(c) Certificate of Amendment of the Restated
Certificate of Incorporation, dated
September 18, 1985.
3.(i)(d) Certificate of Amendment of the Restated
Certificate of Incorporation, dated August 19,
1987.
3.(i)(e) Certificate of Amendment of the Restated
Certificate of Incorporation, dated August 24,
1989.
3.(i)(f) Certificate of Amendment of the Restated
Certificate of Incorporation, dated August 23,
1996.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: November 1, 1996 By: /s/Sanjay Kumar
------------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: November 1, 1996 By: /s/ Peter Schwartz
------------------------
Peter Schwartz
Sr. Vice President - Finance
(Chief Financial and
Accounting Officer)