UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended from _____ to _____
Commission File Number 1-9247
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
One Computer Associates Plaza
Islandia, New York 11749
(Address of principal executive offices) (Zip Code)
(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 August 2, 1999
par value $.10 per share 537,527,246
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
June 30, 1999 and March 31, 1999............................. 1
Consolidated Statements of Income -
Three Months Ended June 30, 1999 and 1998.................... 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended June 30, 1999 and 1998.................... 3
Notes to Consolidated Condensed Financial Statement.......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk....... 13
PART II. Other Information:
Item 1. Legal Proceedings............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 15
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
June 30 March 31,
1999 1999
---------- ---------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 281 $ 399
Marketable securities 138 137
Trade and installment accounts receivable 1,711 2,021
Inventories and other current assets 105 74
------ ------
TOTAL CURRENT ASSETS 2,235 2,631
Installment accounts receivable, due after one year 2,945 2,844
Property and equipment 705 598
Purchased software products 1,273 221
Excess of cost over net assets acquired 4,020 1,623
Investments and other noncurrent assets 254 153
------- ------
TOTAL ASSETS $11,432 $8,070
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans payable and current portion of long-term debt $ 880 $ 492
Other current liabilities 1,980 1,371
Long-term debt 4,842 2,032
Deferred income taxes 1,043 1,034
Deferred maintenance revenue 412 412
Stockholders' equity 2,275 2,729
------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $11,432 $8,070
======= ======
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
For the Three Months
Ended June 30,
-------------------
1999 1998
------- -------
Product revenue and other related income $1,026 $ 866
Maintenance fees 196 181
------- -------
TOTAL REVENUE 1,222 1,047
Costs and expenses:
Selling, marketing and administrative 534 471
Product development and enhancements 121 100
Commissions and royalties 61 52
Depreciation and amortization 114 83
Interest expense - net 50 30
Purchased research and development 646 -
1995 Stock Plan charge - 1,071
------- -------
TOTAL COSTS AND EXPENSES 1,526 1,807
------- -------
Loss before income taxes (304) (760)
Provision (benefit) for income taxes 128 (279)
------- -------
NET LOSS $(432) $(481)
------- -------
BASIC LOSS PER SHARE $(.80) $(.87)
------- -------
Basic weighted average shares used in
computation 537 552
DILUTED LOSS PER SHARE $(.80) $(.87)
------- -------
Diluted weighted average shares used
in computation* 537 552
<FN>
* Common stock equivalents are not included since they would be antidilutive
<FN>
See Notes to Consolidated Condensed Financial Statements
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
For the Three Months
Ended June 30,
-------------------
1999 1998
------- -------
OPERATING ACTIVITIES:
Net loss $ (432) $ (481)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 114 83
Provision for deferred income taxes 15 23
Charge for purchased research and development 646 -
Compensation expense related to stock and pension plans 20 771
Increase in noncurrent installment accounts receivable (149) (99)
Decrease in deferred maintenance revenue (33) (34)
Changes in other operating assets and liabilities,
excludes effects of acquisitions 145 (351)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 326 (88)
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing
rights and intangibles (3,490) (10)
Purchase of property and equipment (24) (14)
Decrease (increase) in current marketable securities 86 (220)
Capitalized development costs (7) (7)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,435) (251)
FINANCING ACTIVITIES:
Debt borrowings - net 2,977 541
Exercise of common stock options/other 14 17
Purchases of treasury stock - (2)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,991 556
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (118) 217
Effect of exchange rate changes on cash - (1)
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (118) 216
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 399 251
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $281 $467
======= =======
<FN>
See notes to Consolidated Financial Statements.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in Computer Associates International,
Inc.'s (the "Registrant" or the "Company") Annual Report on Form 10-K for the
fiscal year ended March 31, 1999.
Cash Dividends: In May 1999, the Company's Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
July 19, 1999 to stockholders of record on June 29, 1999.
Statements of Cash Flows: For the three months ended June 30, 1999 and 1998,
interest payments were $78 million and $25 million respectively, and income
taxes paid were $106 million and $135 million, respectively.
Net Income per Share: Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum
of the weighted-average number of common shares outstanding for the period, plus
the assumed exercise of all dilutive securities, such as stock options.
(In millions, except per share amounts)
For the Three Months
Ended June 30,
----------------
1999 1998
------- -------
Net Loss $(432) $(481)
======= =======
Diluted Earnings Per Share
- ---------------------------------
Weighted average shares outstanding
and common share equivalents * 537 552
Diluted Earnings Per Share $(.80) $(.87)
======= =======
Diluted Share Computation:
Average common shares outstanding 537 552
Average common share equivalents - -
------- -------
Weighted average shares outstanding
and common share equivalents * 537 552
======= =======
<FN>
* Common share equivalents are not included since they would be antidilutive. If
the quarter's ended June 30, 1999 and 1998 resulted in a net income, the
weighted average shares outstanding and common share equivalents would have
been 552 million and 573 million, repectively.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
Comprehensive Income: Financial Accounting Standard ("FAS") No. 130, "Reporting
Comprehensive Income" establishes new rules for reporting and displaying
comprehensive income and its components; however, the adoption has no impact on
the Company's net income or shareholders' equity. "Comprehensive Income"
includes foreign currency translation adjustments and unrealized gains or losses
on the Company's available-for-sale securities which prior to adoption were
reported separately in shareholders' equity. The components of comprehensive
income, net of related tax, for the three month period ended June 30, 1999 and
1998 are as follows:
(In millions)
For the Three Months
Ended June 30,
------------------
1999 1998
------- -------
Net loss $(432) $(481)
Foreign currency translation adjustment (35) 2
Reclassification adjustment for gain
included in net loss (9) -
------- -------
Total comprehensive loss $(476) $(479)
======= =======
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2
"Software Revenue Recognition," as amended in 1998 by SOP 98-4 and further
amended more recently by SOP 98-9, which is effective for transactions entered
into in fiscal years beginning after March 15, 1999. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions, requiring deferral of part or all of the revenue related
to a specific contract depending on the existence of vendor specific objective
evidence and the ability to allocate the total contract value to all elements
within the contract. Effective for the quarter ended June 30, 1999, the Company
implemented the guidelines of SOP 98-9, with no material impact on its overall
maintenance deferral. The Company believes that its maintenance deferral is
consistent with current interpretations; however, as additional implementation
guidelines become available, there may be unanticipated changes in the Company's
revenue recognition practices including, but not limited to, changes in the
period over which revenue is recognized up to and including recognition of
revenue over the contract term. Any future implementation guidelines and
interpretations may also require the Company to further change its business
practices in order to continue to recognize a substantial portion of its
software revenue when the product is delivered. These changes may extend sales
cycles, increase administrative costs, or otherwise adversely affect existing
operations and results of operations.
Segment Disclosure: During fiscal year 1999, the Company adopted Financial
Accounting Standard ("FAS") No. 131, "Disclosures about Segments and Related
Information" which establishes standards for reporting operating segments and
disclosures about products and services, geographic areas, and major customers.
The Company operates as a single segment providing integrated computer software
solutions. The Company has no individual customers that are significant enough
to be deemed a segment. See Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE B - ACQUISITIONS
On May 28,1999, the Company acquired approximately 98% of the issued and
outstanding shares of common stock of Platinum technology International, inc.
Platinum), and on June 29, 1999, merged one of its wholly owned subsidiaries
into Platinum. The aggregate purchase price, including assumed liabilities, of
approximately $4.2 billion was paid, or will be paid, from drawings under the
Company's $4.5 billion credit agreements. Platinum was engaged in providing
software products, consulting services systems, database management, e-commerce,
application infrastructure management, decision support, data warehousing,
knowledge management, and Year 2000 reengineering.
The Company recorded a $646 million after tax charge against earnings for the
write-off of purchased Platinum research and development technology that had not
reached the working model stage and has no alternative future use. Had this
charge not been taken during the quarter ended June 30, 1999, net income would
have been $214 million, or $.39 per share on a diluted basis.
The following table reflects pro-forma combined results of operations
(unaudited) of the Company and Platinum on the basis that the acquisition of
Platinum had taken place at the beginning of the fiscal year for all periods
presented:
(In millions, except per share amounts)
For the Three Months
Ended June 30,
----------------
1999 1998
------- -------
Revenue $1,332 $1,274
Net income (495) (621)
Diluted earnings per share $ (.92) $(1.13)
Shares used in computation 537 552
The following table reflects pro-forma combined results of operations
(unaudited) of the Company and Platinum on the basis that the acquisition of
Platinum had taken place at the beginning of the fiscal year for all periods
presented. All special charges, including the purchased research and development
charge for Platinum in fiscal year 2000 of $646 million, the one-time charge of
$1,071 million relating to the 1995 Key Employee Stock Ownership Plan (the" 1995
Plan") recorded in fiscal year 1999, and all special charges recorded by
Platinum in fiscal year 1999 have been excluded from all periods presented:
(In millions, except per share amounts)
For the Three Months
Ended June 30,
----------------
1999 1998
------- -------
Revenue $1,332 $1,274
Net income 151 117
Diluted earnings per share $ .27 $ .20
Shares used in computation 552 573
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
JUNE 30, 1999
NOTE B - ACQUISITIONS (CONTINUED)
On March 9, 1999, the Company acquired more than 98% of the issued and
outstanding shares of common stock of Computer Management Sciences, Inc.
("CMSI"), and on March 19, 1999, merged into CMSI one of its wholly-owned
subsidiaries. The aggregate purchase price of approximately $400 million was
funded from drawings under the Company's credit agreements and cash from
operations. CMSI was engaged in providing custom developed information
technology solutions to a Fortune 1000 client base. The acquisition was
accounted for as a purchase.
During fiscal year 1999, the Company acquired a number of other consulting
businesses and product technologies in addition to the one described above
which, either individually or collectively, are not material. The acquisitions
were all accounted for as purchases. The excess of cost over net assets acquired
is amortized on a straight-line basis over the expected period to be benefited.
The consolidated statements of operations reflect the results of operations of
the companies since the effective dates of the purchase.
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the company's future prospects are
"forward looking statements" under the federal securities laws. There can be no
assurances that future results will be achieved and actual results could differ
materially from forecasts and estimates. Important factors that could cause
actual results to differ materially are discussed below in the section "Results
of Operations".
RESULTS OF OPERATIONS
Revenue:
Total revenue for the quarter ended June 30, 1999 increased 17%, or $175
million, over the prior year's comparable quarter. The increase was primarily
attributable to growth in client/server revenue, professional services, and
acquired products from Platinum. Client/server revenue accounted for
approximately 49% of the Company's overall revenue for the first quarter, led by
Unicenter TNG (The Next Generation), a family of integrated business solutions
for monitoring and administering systems management across multi-platform
environments. In April 1999, the Company introduced the Millenium License, a
perpetual MIPS based license with added flexibility in usage and pricing.
Professional services revenue from the Company's consulting services business
and educational programs grew by 133% or $68 million over the prior year's
comparable period. The Company intends to continue to increase the level of
professional services provided to clients through internal growth as well as
acquisitions of services companies. Maintenance revenue increased 8%, or $15
million, over last year's comparable quarter. Additional maintenance revenue
from prior year license arrangements, as well as Platinum licenses, was
partially offset by the ongoing trend of site consolidations and expanding
client/server revenues, which yield lower maintenance.
Professional
Quarter Ended Product/Maintenance Services Total
------------- ------------------- ------------ ----------
June 30, 1999 $1,103 $119 $1,222
June 30, 1998 996 51 1,047
Total North American revenue for the first quarter grew 17% over the prior
year's first quarter. This resulted from continued growth in client/server
product sales and professional services offset by marginally lower mainframe
software sales. North American sales represented 69% of revenue for both the
June 1999 and 1998 quarters. The strengthening of the US dollar against most
currencies negatively affected international revenue by approximately $20
million.
Quarter Ended North America International Total
------------- ------------- ------------- -------
June 30, 1999 $849 $373 $1,222
June 30, 1998 724 323 1,047
Price changes did not have a material impact in this quarter or the prior year's
first quarter.
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Costs and Expenses:
Selling, marketing and administrative expenses as a percentage of total revenue
for the first quarter decreased to 44% from 45% the prior year. The decrease was
largely attributable to deferring nonessential expenditures in the current
quarter until the completion of the Platinum acquisition. This was partially
offset by an increase in personnel costs related to an overall increase in
headcount in June 1999 resulting from the Platinum acquisition. Net research and
development expenditures increased $21 million, or 21%, for the first quarter
compared to last year's first quarter. There was continued emphasis on adapting
and enhancing products for the client/server environment, in particular
Unicenter TNG, Jasmine, Neugents, the Enterprise and Workgroup Solutions, as
well as broadening of the Company's e-commerce product offerings, and a partial
quarter of development on technology and products obtained through the
acquisition of Platinum. Commissions and royalties as a percentage of revenue
were 5% for both the June 1999 and 1998 quarters. Depreciation and amortization
expense in the first quarter increased $31 million from the comparable quarter
in the prior year. The increase was primarily due to the additional amortization
of purchased intangibles associated with the acquisition of Platinum marginally
offset by the scheduled reductions in the amortization associated with The ASK
Group, Inc., Legent Corporation, and Cheyenne Software, Inc. acquisitions. Total
amortization of acquired companies intangibles increased from $67 million from
last year's first fiscal quarter to $92 million this year. Net interest expense
increased $20 million, or 67%, for the first quarter compared to last year's
first quarter. The additional interest expense related to the increase in
average debt outstanding associated with the acquisition of Platinum in the
quarter ended June 30, 1999 and other acquisitions during the fiscal year ended
March 31, 1999.
Operating Margins:
The pretax loss of $304 million for the first quarter of fiscal year 2000 was
attributable to the $646 million charge for in-process research and development
relating to the acquisition of Platinum. Net income in the June 1999 quarter,
excluding the charge, was $214 million, an increase of $20 million, or 10% ,
over the June 1998 quarter's net income of $194 million, excluding the one-time
after tax charge of $675 million associated with the vesting of 20.25 million
shares under the 1995 Plan. The Company's consolidated effective tax rate for
both comparable fiscal quarters, excluding special charges, was 37.5% .
Operations:
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes higher
discretionary expense levels in relation to projected revenue for the first half
of the year. Historically, the Company's combined third and fourth quarter
revenue has been greater than the first half of the year, as these two quarters
coincide with clients' calendar year end budget periods and culmination of the
Company's annual sales plan. This historically higher second half revenue has
resulted in significantly higher profit margins since total expenses have not
increased in proportion to revenue. However, past financial performance should
not be considered to be a reliable indicator of future performance, particularly
due to the acquisition of Platinum during the June 1999 quarter.
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Risks and Uncertainties:
The Company's products are designed to improve the productivity and efficiency
of its clients' information processing resources. Accordingly, in a recessionary
environment, the Company's products are often a reasonable economic alternative
to customers faced with the prospect of incurring expenditures to increase their
existing information processing resources. However, a general or regional
slowdown in the world economy could adversely affect the Company's operations.
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; the adequacy of the Company's internal administrative
systems to efficiently process transactions, store, and retrieve data subsequent
to the year 2000; the Company's increasing reliance on a single family of
products for a material portion of its sales; 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 continue to update its
business application products to conform with the new common European currency
known as the "Euro"; 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 ability either
internally or through third-party service providers to support client
implementation of the Company's products; the Company's ability to manage fixed
and variable expense growth relative to revenue growth; the Company's ability to
recruit and retain qualified personnel; and the Company's ability to effectively
integrate acquired products and operations.
With the acquisition of Platinum during the first quarter of fiscal year 2000,
there can be no assurances that the distractions and uncertainty caused by the
acquisition will not have a negative effect on the Company's revenue and net
income as it completes the integration and restructuring of Platinum's
operations during the quarter ending September 30, 1999. There may be additional
uncertainties during the coming quarters as product integration plans are
announced and clients evaluate such plans.
In-Process Research and Development:
In the first quarter of fiscal year 2000, there was an after tax charge of $646
million for in-process technology relating to the Platinum acquisition,
approximately 15 percent of the aggregate purchase price. There was no acquired
in-process technology charge in fiscal year 1999 or 1998. Acquired in-process
research and development ("in-process R&D") charges relate to acquisitions of
software companies accounted for under the purchase method, in which a portion
of the purchase price is allocated to acquired in-process technology and
expensed immediately since the technological feasibility of the research and
development projects have not yet been achieved and are believed to have no
alternative future use. An independent valuation was performed and used as an
aid in determining the fair value of the identifiable assets and in allocating
the purchase price among the acquired assets, including the portion of the
purchase price attributed to in-process R&D.
The "Income Approach" was utilized for the valuation analysis. This approach
focuses on the income producing capability of the asset and was obtained through
on-site interviews with management, review of data provided by the Company and
the acquired companies, and analysis of relevant market sizes, growth factors,
and expected trends in technology. The steps followed in applying this approach
included estimating the expected cash flow over its life and converting these
cash flows to present value. Discounting the net cash flows back to their
present value was based on the weighted average cost of capital. The rate used
in discounting the net cash flows from the in-process R&D ranged from 20 to 23
percent. This discount, higher than the Company's, is due to the uncertainties
surrounding the successful development of in-process R&D.
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The projects, on average, are approximately 80 percent complete. The Company
believes the discount rate is appropriate given the level of risk of
unsuccessful completion of the technology after evaluating the stage of each
project reviewed.
The Platinum projects currently under development consist primarily of
application development, database and enterprise management tools, and
data warehousing solutions. If these projects are not successfully developed,the
revenue and profitability of the Company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may become
impaired. The Company should begin to benefit from the purchased in-process R&D
in the second half of fiscal year 2000. Management believes that the assumptions
used in the purchased in-process R&D valuation reasonably estimate the future
benefits. There can be no assurance that in future periods actual results will
not deviate from current estimates.
Year 2000:
The Company has designed and tested substantially all of its recent product
offerings to be Year 2000 compliant. These products have met rigorous compliance
criteria and have undergone extensive review to detect any Year 2000 failures.
The Company has publicly identified any products that will not be updated to be
Year 2000 compliant and has been encouraging clients using these products to
migrate to compliant versions/products. The Company continues to update and test
its product offerings. In general, these Year 2000 compliance efforts have been
part of the Company's ongoing software development process. As such, incremental
costs are not deemed material and have been included in net research and
development expenses. The Year 2000 readiness of the Company's customers varies,
and the Company continues to actively encourage its customers to prepare their
own systems, making available a broad array of product service and educational
offerings. These offerings have been made available to all clients and
prospects. It is possible that the Company may experience increased expense
levels addressing migration issues for such customers. There can be no
assurances that the Company's compliant products do not contain undetected
problems associated with Year 2000 compliance. Although the Company believes
that its license agreements provide it with protection against liability, the
Company cannot predict whether or to what extent any legal claims will be
brought, or whether the Company will suffer any potential liability as a result
of any such adverse consequences to its customers.
The Company recognizes the significance of the Year 2000 issue as it relates to
its internal systems including IT and non-IT systems, and understands that the
impact extends beyond traditional hardware and software to automated facility
systems and third party suppliers. The Company has established a comprehensive
four-step plan: (1) assessment; (2) remediation; (3) testing; and (4)
implementation, with dedicated project managers to address Year 2000 issues.
With regard to internal administrative and financial systems, the Company has
completed most conversion and testing efforts, with extended system integration
testing and contingency planning projects scheduled throughout 1999. For its
facility-related systems such as telephone, voicemail, and security, the Company
has conducted internal assessment audits and has sent questionnaires to vendors
and service providers to confirm Year 2000 readiness. The Company has
substantially completed Year 2000 readiness preparations and will continue
comprehensive testing throughout calendar 1999. As part of the contingency
planning efforts, the Company has created alternative strategies, when
necessary, if significant exposures were identified up to and including the
Company's computer systems being rendered inoperable. The contingency plan
addresses these issues including temporary relocation of employees, manual
workarounds, and the use of Company-owned generators and cellular phones. The
total cost of preparing internal systems to be Year 2000 compliant is not
expected to be material to the Company's operations, liquidity, or capital
resources. Total expenditures, excluding personnel costs of existing staff,
related to internal
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
systems Year 2000 readiness is expected to be less than $30 million, with the
vast majority of it paid to date. Such expenses commenced in 1996 and are
projected to continue throughout calendar year 1999. The Company believes that,
although the risk of operational disruption from systems failures due to the
Year 2000 is minimal, there can be no assurances that the Company will not
experience significant unanticipated negative performance and/or flaws in the
technology used in its internal systems or interruptions in electrical power or
other third-party infrastructure services.
Demand for certain of the Company's products may be generated by customers who
are replacing or upgrading computer systems to accommodate the Year 2000 date
change. As a result, demand for some of the Company's products may diminish as
the Year 2000 arrives, which could negatively impact the Company's revenue
growth rate. Additionally, because the Company believes that some of its
customers are allocating a substantial portion of their calendar year 1999 IT
budgets to Year 2000 compliance, sales of certain of the Company's traditional
product offerings may be adversely affected through the end of fiscal year 2000.
Liquidity and capital resources:
During the first quarter, the Company's cash, cash equivalents, and marketable
securities decreased approximately $118 million from the March 31, 1999 balance.
Cash generated from operations for the quarter ended June 30, 1999 was $326
million, an increase of approximately 42% when compared to the prior year's
first quarter, excluding the $318 million tax payment made in lieu of shares
granted to certain executives under the 1995 Plan. This increase was primarily
attributable to higher net incomebefore special charges and accelerated cash
collection of trade accounts receivable.
In June 1999, the Company replaced its two revolving credit agreements totaling
$2.6 billion with three new agreements totaling $4.5 billion in order to pay for
acquisition costs related to the tender offer for the outstanding shares of
Platinum. The new financing arrangements consist of a $1.5 billion 364-day
revolving credit facility, a $1 billion 4-year revolving credit facility, and a
$2 billion 4-year term loan. Interest is based on the London InterBank Offered
Rate ("LIBOR") subject to a margin determined by a bank credit facility ratings
grid. The Company is required to maintain certain financial ratios. At June 30,
1999, a total of $3.375 billion, all drawn in June 1999, was outstanding under
these facilities.
In addition to its bank credit facilities, the company has utilized other
sources of liquidity to achieve its strategic objectives. On April 24, 1998, the
Company issued $1.75 billion of unsecured Senior Notes. Amounts borrowed, rates,
and maturities for each issue were $575 million at 6 1/4% due April 15, 2003,
$825 million at 6 3/8% due April 15, 2005, and $350 million at 6 1/2% due April
15, 2008, respectively. Proceeds were used to repay borrowings under the
Company's then $2.6 billion revolving credit facilities and for general
corporate purposes. The issuance of these notes allowed the Company to extend
the maturity of its debt, commit to an attractive fixed rate of interest, and
broaden the Company's sources of liquidity. Debt ratings for the Company's
senior unsecured notes and its bank credit facilities are Baa1 and BBB+ from
Moody's Investor Services and Standard & Poor's, respectively. During the
quarter ended June 30, 1999, the Company repaid $64 million under the Company's
6.77% Senior Notes as provided for in the notes, leaving $256 million
outstanding. These 6.77% Senior Notes call for annual repayments of $64 million
until April 2003.
The Company also maintains an 85 million pound-sterling denominated credit
facility established to finance construction of its new European World
Headquarters. Approximately 60 million pound-sterling, or US$95 million was
outstanding under this facility at June 30, 1999. This facility is subject to
interest primarily at LIBOR, subject to a fixed spread, which is dependent on
Item 2: (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
the achievement of certain financial ratios. The Company is also required to
maintain certain financial conditions. Additionally, the Company has
approximately US$30 million available under unsecured and uncommitted
multicurrency lines of credit established to meet any short-term working capital
needs for subsidiaries operating outside the U.S.
The Company had $150 million of Platinum's 6.25% convertible subordinated notes
due 2002 and $26 million of Platinum's 6.75% convertible notes due 2001
outstanding at June 30, 1999. In July 1999, the Company repurchased or redeemed
virtually all of the notes in accordance with a repurchase offer .
During the quarter ended June 30, 1999, the Company did not purchase any shares
under its various open market Common Stock repurchase programs. The cumulative
total number of shares purchased is approximately 150 million shares. The
remaining number of shares authorized for repurchase is approximately 50
million.
In addition to the construction of the U.K. headquarters and expansion efforts
at its U.S. headquarters in Islandia, N.Y., capital resource requirements at
June 30, 1999 consisted of lease obligations for office space, computer
equipment, mortgage or loan obligations and amounts due as a result of product
and company acquisitions. It is expected that existing cash, cash equivalents,
marketable securities, the availability of borrowings under credit lines, as
well as cash provided from operations, will be sufficient to meet ongoing cash
requirements.
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 and issuance of debt. The
Company has not used derivative financial instruments in its investment
portfolio. The Company has a prescribed methodology whereby it invests its
excess cash in debt instruments of government agencies and high quality
corporate issuers (Standard & Poor's single "A" rating and higher). To further
mitigate risk, the vast majority of the securities have a maturity date within
one year. Holdings of any one issuer excluding the U.S. Government shall not
exceed 10%, and the portfolio is reviewed on a periodic basis and adjusted in
the event that the credit rating of a security held in the portfolio has
deteriorated.
At June 30, 1999, the Company's outstanding debt approximated $5.7 billion, an
overall increase of $3.2 billion from March 31,1999, with approximately $2.2
billion of fixed rate obligations. If market rates decline, the Company runs the
risk that the related required payments on the fixed rate debt will exceed those
based on the current market rate. On an annual basis, each 25 basis point
decrease in interest rates would increase the value of these instruments by
approximately $6 million. Each 25 basis point increase or decrease in the level
of interest rates would have approximately $9 million annual impact on variable
rate debt interest based on the balances of such debt at June 30, 1999.
There have been no material changes in the way the Company conducts its
worldwide business, foreign exchange risk management strategy, or investments in
marketable equity securities, thus overall Foreign Currency Exchange and Equity
Price Risk remains unchanged from the description in the Company's Form 10-K for
the year ended March 31, 1999.
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 defendants moved to dismiss the Shareholder Action. In addition, three
derivative actions alleging similar facts were brought in the NY Federal Court.
An additional derivative action, alleging that the Company issued more shares
than were authorized under the 1995 Key Employee Stock Ownership Plan (the "1995
Plan"), was also filed in the NY Federal Court. In all but one of these
derivative actions, all of the Company's directors at that time were named as
defendants. These derivative actions have been consolidated into a single action
(the "Derivative Action") in the NY Federal Court. Another derivative action was
filed in the Chancery Court in Delaware (the "Delaware Action") also alleging
that more shares were issued than were authorized under the 1995 Plan. The
Company and its directors, who are parties to the Delaware Action, have filed a
motion to dismiss the Delaware Action, and the plaintiff has moved for summary
judgment. Although the ultimate outcome and liability, if any, cannot be
determined, management, after consultation and review with counsel, believes
that the facts in each of the actions do not support the plaintiffs' claims and
that the Company and its officers and directors have meritorious defenses.
The Company, various subsidiaries, and certain current and former officers have
been named as defendants in other various claims and lawsuits arising in the
normal course of business. The Company believes that the facts do not support
the plaintiffs' claims, and intends to vigorously contest each of them.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger dated as of March 29, 1999 among
the Registrant, HardMetal, Inc. and Platinum technology
International, inc. (Previously filed as Exhibit 99(c)(1) to
the Registrant's Tender Offer Statement on Schedule 14D-1
filed April 2, 1999 and incorporated herein by reference).
4.1 Second Supplemental Indenture dated as of June 29, 1999 among
Platinum technology International, inc. and American National
Bank and Trust Company of Chicago, as Trustee.
4.2 Second Supplemental Indenture dated as of June 29, 1999 among
Platinum technology International, inc. and American National
Bank and Trust Company of Chicago, as Trustee.
10.1 Credit Agreement dated as of May 26, 1999 among the
Registrant, the Banks which are parties thereto and Credit
Suisse First Boston as agent, with respect to $3 billion Term
and Revolving Loan (previously filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated May 28, 1999 and
incorporated herein by reference).
10.2 Credit Agreement dated as of May 26, 1999 among the
Registrant, the Banks which are parties thereto and Credit
Suisse First Boston, as agent, with respect to $1.5 billion
364 day Revolving Loan (previously filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K dated May 28, 1999
and incorporated herein by reference).
(b) Reports on Form 8-K:
The Registrant filed a Report on Form 8-K dated May 28, 1999
reporting an event under Item 2. An amendment to the foregoing
report on Form 8-K/A providing financial statements and pro-forma
financial information in accordance with item 7(a) and (b) was
filed on June 18, 1999.
The Registrant filed a Report on Form 8-K dated June 29, 1999 to
report an event under Item 4.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: August 6, 1999 By:/s/Sanjay Kumar
Sanjay Kumar, President
and Chief Operating Officer
Dated: August 6, 1999 By:/s/Ira Zar
Ira Zar
Sr. Vice President-Finance
(Chief Financial and
Accounting Officer)