UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
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 July 24, 1997
par value $.10 per share 363,931,464
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
June 30, 1997 and March 31, 1997 1
Consolidated Statements of Income -
Three Months Ended June 30, 1997 and 1996 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended June 30, 1997 and 1996 3
Notes to Consolidated Condensed Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 10
1
Item 1:
Part I. FINANCIAL INFORMATION
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
June 30, March 31,
1997 1997
-------- ---------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 132 $ 143
Marketable securities 57 56
Trade and installment accounts receivable 1,314 1,514
Inventories and other current assets 60 67
-------- --------
TOTAL CURRENT ASSETS 1,563 1,780
Installment accounts receivable,
due after one 2,275 2,200
Property and equipment 437 438
Purchased software products 380 440
Excess of cost over net assets acquired 1,149 1,159
Investments and other noncurrent assets 75 67
-------- --------
TOTAL ASSETS $ 5,879 $ 6,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable - banks $ 540 $ 540
Other current liabilities 1,018 1,187
Long-term debt 1,494 1,663
Deferred income taxes 866 853
Deferred maintenance revenue 313 338
Stockholders' equity 1,648 1,503
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,879 $ 6,084
<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 June 30,
--------------------
1997 1996
------- -------
Product revenue and other related income $ 712 $ 603
Maintenance fees 179 189
------- -------
TOTAL REVENUE 891 792
Costs and expenses:
Selling, marketing and administrative 381 342
Product development and enhancements 89 75
Commissions and royalties 45 42
Depreciation and amortization 95 120
Interest expense - net 32 23
------- -------
TOTAL COSTS AND EXPENSES 642 602
------- -------
Income before income taxes 249 190
Provision for income taxes 93 70
------- -------
NET INCOME $ 156 $ 120
NET INCOME PER COMMON SHARE $ 0.42 $ 0.32
Weighted average common shares used in
computation 375 379
<FN>
See Notes to Consolidated Condensed Financial Statements.
3
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
For the Three Months
Ended June 30,
--------------------
1997 1996
------- -------
Net income $ 156 $ 120
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 95 120
Provision for deferred income taxes 37 31
Increase in noncurrent installment
accounts receivable (101) (151)
Decrease in deferred maintenance revenue (23) (53)
Changes in other operating assets and
liabilities, excludes effects of
acquisitions 13 60
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 177 127
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software,
marketing rights and intangibles (6) (19)
Purchase of property and equipment (15) (2)
(Increase) decrease in current marketable
securities (1) 2
Capitalized development costs (6) (4)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (28) (23)
FINANCING ACTIVITIES:
Repayment of borrowings - net (167) (95)
Exercise of common stock options/other 18 7
Purchases of treasury stock (10) (11)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (159) (99)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (10) 5
Effect of exchange rate changes on cash (1) (1)
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11) 4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 143 97
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 132 $ 101
======= =======
<FN>
See notes to Consolidated Financial Statements.
4
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
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 three months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the year ending March 31, 1998.
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, 1997.
Cash Dividends: In May 1997, the Company's Board of Directors declared
its regular, semi-annual cash dividend of $.05 per share. The dividend
was paid on July 7, 1997 to stockholders of record on June 20, 1997.
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. Fully diluted
net income per share is the same or not materially different from net
income per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," which is required to be adopted for both interim and annual
financial statements for periods ending after December 15, 1997. At
that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods.
SFAS No. 128 will require the Company to present "basic" and "diluted"
earnings per share (EPS) on the face of the income statement. The
computation of "basic" EPS replaces primary EPS. If the Company had
implemented SFAS No. 128 during this quarter, it would have reported
basic EPS of $.43 and $.33 for the quarters ended June 30, 1997 and
1996, respectively. Diluted EPS would have been $.41 and $.32 for the
respective quarters.
Statements of Cash Flows: For the three months ended June 30, 1997 and
1996, interest payments were $45 million and $20 million, respectively,
and income taxes paid were $121 million and $94 million, respectively.
5
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
On November 11, 1996, the Company acquired 98% of the issued and
outstanding shares of Common Stock of Cheyenne Software, Inc.
("Cheyenne"), and on December 2, 1996 merged into Cheyenne one of its
wholly owned subsidiaries. The aggregate purchase price of approximately
$1.2 billion was funded from drawings under the Company's $2 billion
credit agreements. Cheyenne was engaged in the design, development,
marketing, and support of storage, management, security and
communications software for desktops and distributed enterprise
networks. The acquisition was accounted for as a purchase. The results
of Cheyenne's operations have been combined with those of the Company
since the date of acquisition.
The Company recorded a $598 million after-tax charge against earnings
for the write-off of purchased Cheyenne research and development
technology that had not reached the working model stage and has no
alternative future use. Research and development charges are generally
based upon a discounted cash flow analysis.
The following table reflects pro forma combined results of operations
(unaudited) of the Company and Cheyenne 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 1997:
(in millions, except per share amounts)
For the Three Months
Ended June 30, 1996
--------------------
Revenue $ 841
Net (loss) (496)
Net (loss) per common share $ (1.36)
Shares used in computation 364
In management's opinion, the pro forma combined results of operations
are not indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of fiscal year 1997
or of future operations of the combined companies under the ownership
and operation of the Company.
6
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE C - THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN
Under the 1995 Key Employee Stock Ownership Plan (the "1995 Plan") a
total of 13.5 million restricted shares were available for grant to
three key executives. In January 1996, nine hundred thousand shares
vested under the initial grant of 4.5 million shares, subject to the
continued employment of the key executives through March 31, 2000.
Accordingly, the Company began accruing the compensation expense
associated with these nine hundred thousand shares over the employment
period. Additional grants of nine million shares are available under
the 1995 Plan and have been reserved pending the achievement of certain
price targets. The additional grants and the unvested portion of the
initial grant are subject to risk of forfeiture through March 31, 2000,
and further subject to significant limitations on transfer during the
seven years following vesting.
7
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 June 30, 1997 increased by 12% over
the prior year's comparable quarter. The increase reflects the
favorable demand for the Company's products coupled with widespread and
enthusiastic acceptance of the Company's enterprise pricing options.
Revenues from client/server products, particularly the Unicenter product
group, now broadened by Unicenter TNG (The Next Generation), the newest
release of the systems management platform increased at a substantially
higher rate than from other platforms. The Company's independent
Business Units ("iBUs"), in particular the Cheyenne Software division
contributed marginally to the revenue increase. International revenue
decreased by 8% for the June 1997 quarter compared to the June 1996
quarter. The decrease is due to strengthening of the US dollar against
most currencies and modest sales in Europe. Maintenance revenues
decreased $10 million, or 5%, primarily due to the ongoing trend in 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 were 43% for both the June 1997 and June 1996 quarters. Net
research and development expenditures increased $14 million, or 18%,
over the June 1996 quarter. The addition of Cheyenne product
development personnel, continued emphasis on adapting products for the
client/server environment and broadening of the Company's
Internet/Intranet product offerings were largely responsible for the
increase. Commissions and royalties as a percentage of revenue was 5%
for both the June 1997 and 1996 quarters. Depreciation and amortization
expense decreased $25 million in the June 1997 quarter from the June
1996 quarter. The decrease was primarily due to completion of the
amortization associated with the On-Line Software International, Inc.
and Pansophic Systems, Incorporated acquisitions, as well as the
scheduled reduction in the level of amortization associated with The ASK
Group, Inc. and Legent Corporation acquisitions. This decrease was only
partially offset by the additional accelerated purchased software
relating to the Cheyenne Software, Inc. acquisition. In the June 1997
quarter, net interest expense increased by $9 million over the June 1996
quarter as a result of higher debt levels associated with borrowings
used to finance the Cheyenne acquisition.
8
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Margins:
The pre-tax income of $249 million for the June 1997 quarter represents
an increase of 31%, or $59 million, over the June 1996 quarter pre-tax
of $190 million. As a percentage of total revenue, pre-tax income for
the June 1997 quarter was 28%, an increase of four percentage points
over the quarter ending June 1996. The Company's consolidated effective
tax rate was 37.5% for the June 1997 quarter compared with 37% for the
prior year comparable quarter.
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 regional 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. These 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
global economic conditions; market acceptance of competing technologies;
the availability and cost of new solutions; delays in delivery of new
products or features; the Company's ability to successfully maintain or
increase market share in its core business while expanding its product
base into other markets; 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.
9
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities for the
quarter ended June 30, 1997 decreased by approximately $10 million from
the March 31, 1997 fiscal year end balance. Cash generated from
operations of $177 million for the quarter ended June 30, 1997, up 39%
from the prior year's first quarter, was primarily used for bank debt
repayments of $165 million.
The Company replaced its $1.3 billion five year credit facility and its
$.7 billion 364 day credit facility with a $1.5 billion five year credit
facility and a $1.1 billion 364 day facility, both dated June 30, 1997.
Amounts outstanding under the old agreements were repaid with drawings
under the new facilities. Borrowing costs and facility fees are based
upon the achievement of certain financial ratios. At June 30, 1997,
$1,675 million was outstanding under the Company's credit facilities and
$320 million remains outstanding under the Company's 6.77% Senior Notes.
The cumulative total of purchases under the Company's open market Common
Stock repurchase programs were approximately 78.3 million shares as of
June 30, 1997, including .2 million for the most recently ended quarter.
The total shares available for repurchase at June 30, 1997 is
approximately 30.5 million. These amounts reflect both the August 1995
and the June 1996 three for two stock splits.
The Company's capital resource requirements as of June 30, 1997
consisted of lease obligations for office space, computer equipment,
mortgage or loan obligations and amounts due as a result of product and
company acquisitions. In addition, the Company is proceeding with a
project to purchase land and construct a building in the United Kingdom
for approximately $150 million. 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.
10
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
(1) $1,500,000,000 Amended and Restated Credit
Agreement dated as of June 30, 1997.
(2) $1,100,000,000 Credit Agreement, dated as of
June 30, 1997.
(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: July 31, 1997 By:/s/ Sanjay Kumar
---------------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: July 31, 1997 By:/s/ Peter Schwartz
----------------------------
Peter Schwartz
Sr. Vice President - Finance
(Chief Financial and
Accounting Officer)