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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Identification
incorporation or organization) Number)
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)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Class) (Exchange on which registered)
Common Stock, par value $.10 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
6 1/4% Convertible Subordinated Debentures of On-Line Software
International, Inc.
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
___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III to this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant:
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as at May 21, 1997 was $13,700,598,860 based on a total
of 263,473,055 shares held by non-affiliates and the closing price on
the New York Stock Exchange on that date which was $52.
Number of shares of stock outstanding at May 21, 1997:
362,086,976 shares of Common Stock, par value $.10 per share.
Documents Incorporated by Reference:
Part III - Proxy Statement to be issued in conjunction with Registrant's
Annual Stockholders' Meeting.
2
PART I
Item 1. Business
(a) General Development of Business
Computer Associates International, Inc. (the "Company" or
"Registrant") was incorporated in Delaware in 1974. In December 1981,
the Company completed its initial public offering of Common Stock. The
Company's Common Stock is traded on the New York Stock Exchange under
the symbol "CA".
The Company supplies an extensive array of systems management,
information management, and business management software products for
use on a variety of hardware platforms. Because of its independence from
hardware manufacturers, the Company has been able to offer products for
use on most of the existing major operating systems. The Company's
products operate on over 40 different desktop, midrange and mainframe
operating systems and platforms.
The Company's portfolio of products has expanded significantly by
employing a tripartite strategy comprised of the introduction of
internally developed products, strategic alliances coupled with a series
of company and product acquisitions, and integration of the two.
In June 1994, the Company acquired The ASK Group, Inc. ("ASK"). ASK
was primarily engaged in developing, marketing and selling relational
database management systems, data access and connectivity products,
manufacturing and financial software applications and application
development tools designed for use in client/server environments. The
acquisition was accounted for using the purchase method of accounting.
In August 1995, the Company acquired Legent Corporation ("Legent").
Legent provides a broad range of computer software products for the
management of information systems across several platforms and
operating systems. The acquisition was accounted for using the purchase
method of accounting.
In April 1996, the Company announced a restructuring with respect to
its business applications solutions. Organized around the concept of
self-contained operational units, the Company formed several new
"independent Business Units" ("iBUs"). These iBUs are responsible for
development, marketing, sales and support of their respective product
areas. At the same time, in order to better maintain its commitment to
delivering quality technical support for its clients throughout the
world, the Company formed a technical services group, known as RaDFO
(Research and Development Field Organization). This group serves as
the bridge between the Company's sales and development organizations and
provides the highest quality technical assistance and guidance to
clients.
In November 1996, the Company acquired Cheyenne Software, Inc.
("Cheyenne"). Cheyenne is operated as a division of the Company.
Cheyenne develops software solutions for NetWare, Windows NT, UNIX,
Macintosh, OS/2, Windows 3.1, and Windows 95 operating systems. This
acquisition was accounted for using the purchase method of accounting.
See Note 2 of Notes to Consolidated Financial Statements for
additional information concerning acquisitions.
(b) Financial Information About Industry Segments
The Company's business is in a single industry segment-the design,
development, marketing, licensing and support of integrated computer
software products operating on an equally diverse range of hardware
platforms and operating systems.
See Note 4 of Notes to Consolidated Financial Statements for financial
data pertaining to geographic areas.
(c) Narrative Description of Business
General
The Company designs, develops, markets and supports standardized
computer software products for use with a broad range of desktop,
midrange and mainframe computers from many different hardware
manufacturers including, among others, IBM, Hewlett-Packard Company
("HP"), DIGITAL Equipment Corp. ("DEC"), Sun Microsystems Inc. ("Sun"),
Data General Corp. ("DG"), Tandem Computers Inc. and Compaq Computer
Corp.
A computer system, running the most powerful mainframe or the
ubiquitous desktop, consists of hardware and software. Hardware is the
physical computer or central processing unit as well as peripheral
equipment such as disk and tape data storage devices, printers and
terminals. Software products are the programs, or sets of instructions,
which tell the hardware what to do and how to respond to specific
user requests.
The Company continues to follow its approach of designing and
developing new software technology solutions, acquiring software
technology that is complementary to existing products and integrating
internally developed products with acquired software.
3
Products
The Company offers over 500 business enterprise systems management,
information management, and business application solutions to a broad
spectrum of organizations. Operating alone or in concert under the
Company's layered development architecture, CA90s(r): Computing
Architecture For The 90s, these products provide common solutions across
multiple operating systems and hardware platforms. Using CA90s, the
Company's developers create modular software designed to be continually
and consistently improved. This pragmatic approach protects clients'
investments by using scalar, evolutionary change rather than
revolutionary disruption and waste. The Company's systems, application
development, and database management software help clients migrate to
client/server computing or build new client/server systems. The
Company's integrated distributed systems management solutions manage
this complex environment. Full-function client/server business
applications simplify customization to unique business needs.
The Company's products include a broad range of standardized systems
management software products, which enable clients to use their total
data processing resources-hardware, software, and personnel-more
efficiently. Many of the Company's products provide tools to measure and
improve computer hardware and software performance and programmer
productivity. The Company provides products that effectively manage the
complex, heterogeneous systems upon which businesses depend. The
Company's solutions enable clients to use the latest technologies while
preserving their substantial investments in hardware, software, and
staff expertise.
During the past fiscal year, the Company began full-scale delivery of
Unicenter(r) TNG (The Next GenerationTM), the newest release of its
systems management platform, Unicenter. Unicenter(r) TNGTM is an object-
oriented solution that enables organizations to visualize and control
their entire information technology infrastructure-including
applications, databases, systems and networks-from a business
perspective. This technology establishes a link between an
organization's information technology resources and its business
policies. Through Unicenter TNG, an organization can define its business
policies, map these policies to particular resource management
requirements, and then monitor resources for their support of specific
business processes. The flexible Business Process ViewsTM can be
customized to deliver information based on specific roles, locations,
resources, and any other dimensions of control. To visualize the complex
interactions and interdependencies of an enterprise's entire distributed
environment, Unicenter TNG features a Real World InterfaceTM that
incorporates 3-D animation and elements of virtual reality.
Through the Cheyenne acquisition, the Company added to its product
offerings a wide array of storage management, security, and
communications products. These include the ARCserve(r) family of network
backup software, InocuLAN(r), Cheyenne(r) HSM, JETserveTM and
FAXserveTM. As a result of an alliance with DEC, CA and DEC will
collaborate on future product development for enterprise
management solutions, including tighter integration of Unicenter TNG
with POLYCENTERTM capabilities. Through its subsidiary, InfrescoTM
Corporation, the Company announced the availability of OPALTM 2.0. Using
an intuitive business multimedia user interface, OPAL integrates
existing enterprise class applications into a client solution that runs
anywhere.
With the Internet growing by 15 percent each month, it has emerged as
the de facto communications platform. Recognizing the growth of the
Internet as a platform for business computing, the Company announced a
comprehensive set of products and services to help organizations create,
manage and promote Web sites. These will be available through its
NetHavenTM division. The Company also announced the availability of CA
Discovery 2000TM. This is a combination of software and services to help
reduce the costs associated with Year 2000 processing.
Prices for the Company's products vary depending upon the type of
license agreement, operating environment and platform chosen by the
client. See "Narrative Description of Business-Licensing."
Sales and Marketing
The Company distributes, markets and supports its products on a
worldwide basis with its own employees and a network of independent
value-added resellers, distributors and dealers. The Company has
approximately 4,600 sales and sales support personnel engaged in
promoting the licensing of the Company's products.
In North America, the Company operates primarily through a single
sales force responsible for sales, marketing and service of the
Company's non-business application solutions. Several iBUs are
responsible for the sales and marketing activities of business
application solutions. A separate Global Accounts group provides
additional service to large clients, particularly facilities
managers. Facilities managers deliver data processing services using the
Company's products to those companies that wish to "outsource" their
computer processing requirements.
The Company also operates through wholly owned subsidiaries located in
42 countries outside North America. Each of these subsidiaries is
structured as an autonomous entity and markets all or most of the
Company's products in its respective territory. In addition, the
Company's products are marketed by independent distributors in those
areas of the world where it does not have a direct presence. Revenue
from independent distributors accounted for approximately 1% of the
Company's fiscal 1997 revenue.
4
The Company considers that it has established marketing and
distribution channels in most areas of the world where the number of
computer installations warrants the establishment of such channels. For
fiscal year 1997 approximately 40% of the Company's revenue was derived
from business outside North America. The percentages for revenue outside
North America for fiscal year 1996 and 1995 were approximately 50% and
49%, respectively. Western Europe is the Company's most important
foreign market. The Company believes that its operations outside the
United States are located in countries which are politically stable, and
that such operations are not exposed to any special or unusual risks.
See Note 4 of Notes to Consolidated Financial Statements for further
information concerning the Company's foreign operations.
The Company's marketing and marketing services groups produce
substantially all of the user documentation for its products, as well as
promotional brochures, advertising and other business solicitation
materials. The duties of these groups include the writing of the
requisite materials, editing, typesetting, photocomposition and
printing.
Licensing
The Company does not sell or transfer title to its products to its
clients. The products are licensed on a "right to use" basis pursuant to
license agreements. Such licenses generally require that the client use
the product only for its internal purposes at its own computer
installation. In addition, the Company offers license agreements to
facilities managers enabling them to use the Company's software in
conjunction with their outsourcing business. Under certain
circumstances, the Company will also license, on a non-exclusive
basis, clients and other third parties as resellers of certain of the
Company's products. The Company is encouraging value-added resellers
("VARs") to actively market the Company's products. VARs bundle the
Company's products along with specialized consulting services to provide
clients with a complete solution. Such VARs generally service a
particular market or sector and provide enhanced user-specific
solutions.
The Company offers several types of mainframe licenses. Under the
first, the client agrees to pay a one-time fee and an annual usage and
maintenance fee. The annual usage and maintenance fees typically range
from 9% to 20% of the then prevailing one-time fee for the product.
Payment of the usage and maintenance fee entitles the client to receive
technical support for the product from the Company and to receive all
enhancements and improvements (other than optional features subject to a
separate charge) to the product developed by the Company during the
period covered. A second alternative is the term license under which
the client agrees to pay a fixed fee and in return receives the right to
use the product for a specified term ranging from one month to three
years. Upon expiration of this period, a term license must be renewed
for continued use of the product, and the then prevailing term license
fee paid. Maintenance and support is included in the term license fee.
The Company offers a third alternative which combines elements of the
other licensing options in that the client pays an initial licensing fee
and a periodic license fee including maintenance to continue using the
product. The Company also offers licenses for products and groups of
products based on the size of an enterprise's computing power as
measured in MIPS-millions of instructions per second. Usage of software
programs under the enterprise-wide licensing options may be
expanded to subsidiaries and other related entities on a national or
worldwide basis, regardless of the number, size and location of the data
centers or central processing units ("CPUs") in use. Under this option,
the client is free to reallocate hardware or modify user configurations
without incremental costs. One-time license fees under the first
alternative range between $1,500 and $1,200,000, and three-year term
license fees range between $1,000 and $805,000. Pricing under
enterprise-wide licensing options is dependent on contracted levels of
usage.
The Company's midrange and UNIX-based software products are licensed
to end users on a CPU basis, number of concurrent users basis, or based
on the size of the enterprise in terms of computing power, as
measured in Power Units. Maintenance and support services, primarily
provided through telephone contact with employees of the Company, may be
purchased for an additional fee.
The Company's micro software products are licensed to end users upon
payment of a fixed fee. Suggested license fees range between $100 and
$4,500 per copy, dependent upon the product and number of users
licensed. The Company also offers site licenses on micro software
products providing pricing advantages based on the number of copies
licensed. Maintenance is also available on a site-license basis under
terms and conditions similar to those for mainframe software licenses.
Product revenue for licenses is recognized upon delivery of the
product to the client. Usage and maintenance fees are recognized ratably
over the term of the agreement. Where the client has elected to
pay the license fees in monthly or annual installments, the present
value of the license fee is recognized as product revenue upon delivery
of the product. Maintenance is unbundled from the selling price and
ratably recognized over the term of the agreement. See Note 1 of Notes
to Consolidated Financial Statements for further discussion of revenue
recognition policies.
Under its standard form of license agreements, the Company warrants
that its products will perform in accordance with specifications
published in the product documentation.
5
Competition and Risks
The computer software business is highly competitive. There are many
companies, including DEC, HP, IBM, Sun, and other large computer
manufacturers, which have substantially greater resources, as well as
the ability to develop and market software programs similar to and
competitive with the products offered by the Company. Competitive
products are also offered by numerous independent software companies,
which specialize in specific aspects of the highly fragmented software
industry. Some are the leading developers and vendors in their own
specialized markets.
IBM, DEC, HP and Sun are by far the largest suppliers of systems
software, and are the manufacturers of the computer hardware systems
used by most of the Company's clients. From time to time, these hardware
manufacturers have modified or introduced new operating systems, systems
software and computer hardware. Such products could incorporate features
which are currently performed by the Company's products or could require
modification of the Company's products to maintain their compatibility
with these companies' hardware or software. Although the Company has to
date been able to adapt its products and its business to changes
introduced by hardware manufacturers, there can be no assurance that it
will be able to do so in the future.
Historically, licensees using proprietary operating systems were
furnished with "source code" which makes the operating system generally
understandable to programmers, or "object code" which directly
controls the hardware, and other technical documentation. Since the
availability of source code facilitated the development of systems and
applications software which must interface with the operating systems,
independent software vendors such as the Company were able to develop
compatible software. IBM and other hardware vendors have a policy of
restricting the use or availability of the source code for some of its
operating systems. To date, this policy has not had any effect on the
Company. However, such restrictions may in the future result in higher
research and development costs for the Company in connection with the
enhancement and modification of existing products and the development of
new products. Although the Company does not expect such restrictions
will have an adverse effect on its products, there can be no
assurance that such restrictions or other restrictions will not have a
material adverse effect on the Company's business.
The Company anticipates ongoing use of microcode or firmware provided
by hardware manufacturers. Microcode and firmware are basically software
programs in hardware form, and therefore are less flexible than pure
software. The Company believes that these technical advances will not
have a significant impact on the Company's operations and that its
products will remain compatible with any such changes. However, there
can be no assurance that future technological developments will not have
an adverse impact on the Company's operations.
Although no company competes with the Company across its entire
software product line or a significant portion thereof, the Company
considers at least 75 firms to be directly competitive with one or more
of the Company's systems software packages. In database management
systems, graphics and applications software for the desktop, midrange
and mainframe environments, there are hundreds of companies, whose
primary business focus is on at least one but not all of these
solutions. Certain of these companies have substantially larger
operations than the Company's in these specific niches. Many companies,
large and small, use their own technical personnel to develop programs
similar to those of the Company; these may rightly be seen as
competitors of the Company. The Company believes that the most important
considerations for potential purchasers of software packages are:
product capabilities; ease of installation and use; dependability and
quality of technical support; documentation and training; the experience
and financial stability of the vendor; integration of the product line;
and, to a lesser extent, price. Price is a stronger factor in the
client/server and microcomputer marketplace.
The Company's future operating results may be affected by a number of
factors, including, but not limited to: uncertainties relative to global
economic conditions; market acceptance of competing technologies; the
availability and cost of new solutions; its ability to successfully
maintain or increase market share in its core business while expanding
its product base into other markets; its ability to recruit and retain
qualified personnel; the strength of its distribution channels; its
ability to effectively manage fixed and variable expense growth relative
to revenue growth; possible disruptions resulting from organizational
changes; and its ability to effectively integrate acquired products and
operations.
Product Protection
The products of the Company are treated as trade secrets and
confidential information. The Company relies for protection upon its
contractual agreements with clients as well as its own security systems
and confidentiality procedures. In addition to obtaining patent
protection for new technology, the Company protects its products and
their documentation and other written materials under copyright law. The
Company also obtains trademark protection for its various product names.
6
Clients
No individual client accounted for a material portion of the Company's
revenue during any of the past three fiscal years. Since the bulk of the
Company's software is used with relatively expensive computer hardware,
most of its revenue are derived from companies which have the resources
to make a substantial commitment to data processing and their computer
installations. Most of the world's major companies use one or more of
the Company's software packages. The Company's software products are
generally used in a broad range of industries, businesses and
applications. The Company's clients include manufacturers, financial
service providers, banks, insurance companies, educational institutions,
hospitals, and government agencies. The Company's products are also sold
to and through microcomputer distributors and value-added resellers.
Product Development
The history of the computer industry has seen rapid changes in
hardware and software technology. The Company must maintain the
usefulness of its products as well as modify and enhance its products to
accommodate changes to, and to ensure compatibility with, hardware and
software.
To date, the Company has been able to adapt its products to such
changes and, as described more fully in "Narrative Description Of
Business-Products," the Company believes that it will be able to do so
in the future. Computer software vendors must also continually ensure
that their products meet the needs of clients in the ever-changing
marketplace. Accordingly, the Company has the policy of continually
enhancing, improving, adapting and adding new features to its products,
as well as developing additional products. The Company offers a
facility, CA-Uniservice, for many of its software products whereby
problem diagnosis, program "fixes" and other mainframe services can be
provided online between the client's installation and the support
facilities of the Company. CA-TCCSM (Total Client Care), another
facility, provides a major extension to existing support services of the
Company by offering access to the Company's client support database. In
addition, the Company offers support services online via the Internet.
These services have contributed to the Company's ability to provide
maintenance more efficiently.
Product development work is primarily done at the Company's facilities
in Alameda, California; San Diego, California; Santa Clara, California;
Maitland, Florida; Chicago, Illinois; Andover, Massachusetts;
Marlborough, Massachusetts; Westwood, Massachusetts; Mount Laurel, New
Jersey; Princeton, New Jersey; Islandia, New York; Lake Success, New
York; Columbus, Ohio; Pittsburgh, Pennsylvania; Dallas, Texas; Herndon,
Virginia; and Bellevue, Washington. The Company also performs product
development in Sydney, Australia; Vienna, Austria; Brussels, Belgium;
Vancouver, Canada; Slough, England; Paris, France; Darmstadt, Germany;
Tel Aviv, Israel; and Milan, Italy. For its fiscal years ended March 31,
1997, 1996, and 1995, product development costs charged to operations
were $318 million, $285 million, and $233 million, respectively. In
fiscal years 1997, 1996, and 1995, the Company capitalized $18 million,
$16 million, and $16 million, respectively, of internally developed
software costs.
Certain of the Company's products were acquired from other companies
and individuals. The Company continues to seek synergistic companies,
products and partnerships. The purchase price of acquired products is
capitalized and amortized over a period not exceeding five years.
Employees
As of March 31, 1997, the Company had approximately 9,850 employees of
whom approximately 1,600 were located at its headquarters facilities in
Islandia, New York; approximately 4,400 were located at other offices in
the United States, and approximately 3,850 were located at its offices
in foreign countries. Of the total employees, approximately 3,050 were
engaged in product development efforts and 4,600 were engaged in sales
and sales support functions. The Company believes its employee relations
are excellent.
(d) Financial Information About Foreign and Domestic Operations and
Export Revenue
See Note 4 of Notes to Consolidated Financial Statements for financial
data pertaining to the geographic distribution of the Company's
operations.
Item 2. Properties
The principal properties of the Company are geographically distributed
to meet sales and operating requirements. All of the properties of the
Company are considered to be both suitable and adequate to meet current
operating requirements.
The Company leases approximately 60 office facilities throughout the
United States, and approximately 95 office facilities outside the United
States. Expiration dates on material leases range from fiscal 1998 to
2021.
The Company owns a 700,000 square-foot headquarters in Islandia, New
York. The Company's subsidiary in Germany owns two buildings totaling
approximately 120,000 square feet. The Company also owns various office
facilities in the United States ranging from 50,000 to 250,000 square
feet. The Company has announced plans to build a significant facility in
the United Kingdom.
7
The Company owns various computer, telecommunications and electronic
equipment. It also leases IBM, DEC, HP, and DG computers located at the
Company's facilities in Islandia, New York; Princeton, New Jersey; San
Diego, California; and Chicago, Illinois. This equipment is used for the
Company's internal product development, for technical support efforts
and for administrative purposes. In addition, each of the Company's
subsidiaries outside the U.S. leases certain computer hardware
enabling them to communicate with all other offices of the Company
through a dedicated worldwide network. The Company considers its
computer and other equipment to be adequate for its needs. See Note 7 of
Notes to Consolidated Financial Statements for information concerning
lease obligations.
Item 3. Legal Proceedings
The Company, various subsidiaries and certain current and former
officers have been named as defendants in 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 4. Submission of Matters to Vote of Security Holders
None.
Executive Officers of the Registrant
The name, age, present position, and business experience of all
executive officers of the Company as of May 22, 1997 are listed below:
Name Age Position
Charles B. Wang (1) 52 Chairman, Chief Executive Officer
and Director
Sanjay Kumar (1) 35 President, Chief Operating Officer
and Director
Russell M. Artzt (1) 50 Executive Vice President-Research
and Development and Director
Charles P. McWade 52 Senior Vice President-Finance
Peter A. Schwartz 53 Senior Vice President-Finance and
Chief Financial Officer
Ira Zar 35 Senior Vice President and Treasurer
Michael A. McElroy 52 Vice President and Secretary
(1) Member of the Executive Committee
Mr. Charles B. Wang has been Chief Executive Officer and a Director of
the Company since June 1976 and Chairman of the Board since April 1980.
Mr. Kumar joined the Company with the acquisition of UCCEL in August
1987. He was elected President, Chief Operating Officer and a Director
effective January 1994, having previously served as Executive Vice
President-Operations from January 1993 to December 1993, and Senior Vice
President-Planning from April 1989 to December 1992.
Mr. Artzt has been with the Company since June 1976. He has been
Executive Vice President-Research and Development of the Company since
April 1987 and a Director of the Company since November 1980.
Mr. McWade has been Senior Vice President-Finance of the Company since
April 1990, having served in various financial positions including
Treasurer from April 1988 to March 1994. Mr. McWade joined the
Company in October 1983.
Mr. Schwartz has been Senior Vice President-Finance and Chief
Financial Officer of the Company since April 1987. He has served in
various financial roles since joining the Company in July 1983.
Mr. Zar was elected Senior Vice President and Treasurer effective
April 1994, having previously served as Vice President-Finance since
April 1990. Mr. Zar joined the Company in June 1982.
Mr. McElroy was elected Secretary of the Company effective January
1997, and has been a Vice President of the Company since April 1989. He
joined the Company in January 1988 and served as Secretary from April
1988 through April 1991.
The officers are appointed annually and serve at the discretion of the
Board of Directors.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is listed on the New York Stock Exchange.
The following table sets forth, for the quarters indicated, the
quarterly high and low closing prices on the New York Stock Exchange.
Fiscal 1997 Fiscal 1996
High Low High Low
Fourth Quarter $ 49.00 $ 38.13 $ 50.58 $ 35.25
Third Quarter $ 67.25 $ 48.75 $ 45.25 $ 25.08
Second Quarter $ 63.13 $ 40.50 $ 33.89 $ 27.17
First Quarter $ 54.08 $ 44.00 $ 32.45 $ 24.78
On March 31, 1997, the closing price for the Company's Common Stock on
the New York Stock Exchange was $ 38.88. The Company currently has
approximately 8,500 record stockholders.
The Company has paid cash dividends in July and January of each year
since July 1990 and intends to continue that policy. The Company's most
recent dividend, paid in January 1997, was $ .05 per share.
References to prices per share have been adjusted to reflect three-
for-two stock splits effective August 21, 1995 and June 19, 1996.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and related notes
included elsewhere in this Annual Report on Form 10-K.
Year Ended March 31,
------------------------------------------
INCOME STATEMENT DATA 1997(1) 1996(2) 1995(3) 1994 1993
------------------------------------------
(in millions, except per share amounts)
Revenue $4,040 $3,505 $2,623 $2,148 $1,841
Net income (loss) 366 (56) 432 401 246
- - Per common share(4) $ .97 $ (.16) $ 1.14 $ 1.04 $ .64
Dividends declared per
common share(4) .097 .091 .089 .062 .045
March 31,
------------------------------------------
BALANCE SHEET DATA 1997(1) 1996(2) 1995(3) 1994 1993
------------------------------------------
(in millions)
Cash from operations $ 790 $ 619 $ 489 $ 480 $ 416
Working capital(deficiency) 53 (53) 300 451 341
Total assets 6,084 5,016 3,269 2,492 2,349
Long-term debt
(less current maturities) 1,663 945 50 71 167
Stockholders' equity 1,503 1,482 1,578 1,243 1,055
(1) Includes an after-tax write-off of $598 million related to the
acquisition of Cheyenne Software, Inc. in November 1996. See Note 2 of
Notes to Consolidated Financial Statements for additional information.
(2) Includes an after-tax write-off of $808 million related to the
acquisition of Legent Corporation in August 1995. See Note 2 of Notes to
Consolidated Financial Statements for additional information.
(3) Includes an after-tax write-off of $154 million related to the
acquisition of The ASK Group, Inc. in June 1994.
(4) Adjusted to reflect three-for-two stock splits effective August 21,
1995 and June 19, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Annual Report on Form 10-K contains certain forward-looking
statements and information relating to the Company that are based on the
beliefs and assumptions made by the Company's management as well as
information currently available to management. When used in this
document, the words "anticipate," "believe," "estimate," and "expect"
and similar expressions, are intended to identify forward-looking
statements. Such statements reflect the current views of the Company
with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated or expected. The Company does
not intend to update these forward-looking statements.
9
Fiscal Year 1997
Total revenue for fiscal year 1997 was $4.0 billion, an increase of
15% over the $3.5 billion recorded in fiscal year 1996. This increase
reflects the expanded demand for the Company's products, particularly
its Unicenter family. The Cheyenne division's desktop and local area
network products acquired in November 1996 contributed marginally to the
increase. Revenue in North America increased 40% for fiscal year 1997
due to strong acceptance of the Company's client/server software
solutions and the ongoing increases in client computing capacity needs
(as measured in MIPS). International revenue decreased 9% in fiscal year
1997 compared with fiscal year 1996. This was caused by a combination of
operational difficulties in refocusing the European sales and marketing
resources from mainframe to client/server sales opportunities,
exacerbated by economic conditions including a weakening of the local
currencies against the U.S. Dollar. Maintenance revenue increased 2%, or
$11 million in fiscal year 1997. This increase is due in part to the
addition of a full year of Legent maintenance revenue, partially offset
by the ongoing trend of site consolidations, and escalating
client/server revenue which generate lower maintenance revenue. Foreign
exchange rate movements negatively affected total revenue in fiscal year
1997 by approximately $43 million or slightly more than 1%. Price
changes did not have a material impact in either year.
Selling, marketing and administrative expenses for fiscal year 1997
decreased to 36% of revenue from 39% in fiscal year 1996. This reduction
is a function of the continued corporate-wide effort to reduce fixed
and administrative costs as well as operating efficiencies realized from
integration of the Cheyenne and Legent acquisitions. In fiscal year
1997, new product research and development expenditures increased
$33 million, or 12%. The continued emphasis on adapting products for
client/server environments and the addition of Cheyenne development
personnel were largely responsible for this increase. Commissions and
royalties were approximately 5% of total revenue for both fiscal year
1997 and 1996. Depreciation and amortization expense increased $20
million, or 5% in fiscal year 1997 over fiscal year 1996. This rise is
largely the result of an additional $31 million associated with the
Cheyenne acquisition partially offset by decreased amortization from
previous acquisitions. For fiscal year 1997 net interest expense was
$102 million, an increase of $31 million over fiscal year 1996. The
increase is attributable to the higher debt levels associated with
borrowings used to finance the Cheyenne acquisition.
The charge of $598 million in fiscal year 1997 is a write-off of
purchased research and development technology that had not reached the
working model stage and has no alternative future use. Fiscal year
1997 had a pre-tax profit of $932 million compared to the pre-tax loss
of $100 million in fiscal year 1996. The pre-tax amounts for both fiscal
years 1997 and 1996 include research and development charges relating to
the acquisitions of Cheyenne and Legent of $598 million and $1,303
million, respectively. Excluding these charges, pre-tax income for
fiscal year 1997 was $1,530 million compared to $1,203 million in fiscal
year 1996, an increase of $327 million, or 27%. The Company has changed
its accounting in fiscal year 1997 for deferred taxes on purchased
research and development. See Note 1 to Notes to Consolidated Financial
Statements. The consolidated effective tax rate, excluding the research
and development charges for fiscal year 1997 was 37% versus 37.5% in
fiscal year 1996. Including the aforementioned purchased research and
development charge, net income for fiscal year 1997 was $366 million
compared to a net loss of $56 million for fiscal year 1996. Without
these charges in fiscal years 1997 and 1996, net income was $964
million, or $2.54 per share, and $752, or $1.99 per share, respectively.
Fiscal Year 1996
Total revenue for fiscal year 1996 of $3.5 billion increased 34% over
the $2.6 billion recorded in fiscal year 1995. The increase reflects
continued demand for less restrictive enterprise licensing pricing
options, as well as the continued growth of licensing fees for the
Company's client/server products. In addition, the inclusion of Legent
mainframe and client/server products acquired in August 1995 contributed
to revenue growth. International revenue increased 34% during fiscal
year 1996. Relatively stable economic conditions and continued expansion
of foreign markets, especially relating to Legent products were largely
responsible for this growth. Maintenance revenue was essentially
unchanged; increasing 1% or $10 million primarily due to the acquisition
of the Legent client base, partially offset by the ongoing trend of site
consolidations as well as expanding client/server revenue which yield
lower maintenance. Foreign exchange rate movements, had a positive
impact on revenue comparisons with fiscal year 1995 of approximately 1%.
Price changes did not have a material impact in either year.
Selling, marketing and administrative expenses for fiscal year 1996
decreased to 39% of revenue from 40% in fiscal year 1995. This
percentage reduction reflects higher revenue achievement without a
proportionate increase in total fixed and administrative costs as well
as operating efficiencies realized from the acquisitions of Legent and
ASK. Net research and development expenditures increased $53 million, or
23%, for fiscal year 1996 over the prior fiscal period. The addition of
Legent product and development personnel, the expanded emphasis on
adapting products for the client/server environment and introduction
of Internet/Intranet products were largely responsible for this
increase. Commissions and royalties approximated 5% of revenue for both
fiscal year 1996 and 1995. Depreciation and amortization expense
increased 57%, or $147 million in fiscal year 1996 over fiscal year
1995, primarily as a result of additional and accelerated purchased
software amortization associated with the Legent acquisition.
10
Approximately $150 million of additional amortization expense during
fiscal 1996 was directly attributable to the Legent acquisition. Net
interest expense for fiscal year 1996 was $71 million, an increase
of approximately $63 million over fiscal year 1995, reflecting the
higher debt levels associated with borrowings used to finance the Legent
acquisition.
A pre-tax purchased research and development charge of $1,303 million
is included in fiscal year 1996 total expenses. A pre-tax charge of $249
million for purchased research and development relating to the
ASK acquisition is included in fiscal year 1995 total expenses. The
charge represents a write-off of purchased research and development
technology that had not reached the working model stage and had no
alternative future use. Fiscal year 1996 had a pre-tax loss of $100
million compared to the $697 million pre-tax income in fiscal year 1995.
The pre-tax amounts for both fiscal years 1996 and 1995 include
charges relative to the acquisitions of Legent and ASK, respectively.
Excluding the fiscal year 1996 Legent charge of $1,303 million and
fiscal year 1995 ASK charge of $249 million, pre-tax income for fiscal
year 1996 was $1,203 million compared to $946 million in fiscal year
1995, an increase of $257 million, or 27%. The consolidated effective
tax rate for fiscal year 1996 reflects a tax benefit of 44%. Without the
effect of the Legent charge, the consolidated effective tax rate would
have been 37.5% in fiscal 1996 versus 38% in fiscal 1995. Fiscal year
1996 had a net loss of $56 million, including the previously
mentioned charge. Excluding the aforementioned charges in fiscal 1996
and 1995, net income was $752 million compared to $586 million in fiscal
year 1995. This $166 million increase over fiscal year 1995 was
a 28% improvement. Net income per share excluding both charges was $1.99
in 1996 compared to $1.55 for 1995, also an increase of 28%.
The Company's foreign subsidiaries operate as distributors for the
products of the Company. As such, the subsidiaries pay royalties to the
Company on revenue generated from the licensing of products. After
payment of such royalties, these foreign subsidiaries had net income of
$265 million, $225 million, and $155 million, in fiscal years 1997,
1996, and 1995, respectively. See Note 4 of Notes to Consolidated
Financial Statements.
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.
Selected Unaudited Quarterly Information
(in millions, except per share amounts)
-------------------------------------------
1997 Quarterly Results June 30 Sept. 30 Dec.31(1) Mar.31 Total(1)
-------------------------------------------
Revenue $ 792 $ 990 $ 1,053 $ 1,205 $ 4,040
Percent of total revenue 20% 24% 26% 30% 100%
Net income (loss) 120 223 (313) 336 366
- - Per common share(3) $ .32 $ .59 $ (.86) $ .90 $ .97
--------------------------------------------
1996 Quarterly Results June 30 Sept.30 Dec.31(1) Mar.31 Total(1)
--------------------------------------------
Revenue $ 578 $ 812 $ 1,004 $ 1,111 $ 3,505
Percent of total revenue 16% 23% 29% 32% 100%
Net income (loss) 89 (637) 227 265 (56)
- - Per common share(3) $ .23 $(1.76) $ .60 $ .70 $ (.16)
(1) Includes an after-tax write-off of $598 million related to the
acquisition of Cheyenne Software, Inc. in November 1996. See Note 2 of
Notes to Consolidated Financial Statements for additional information.
(2) Includes an after-tax write-off of $808 million related to the
acquisition of Legent Corporation in August 1995. See Note 2 of Notes to
Consolidated Financial Statements for additional information.
(3) Adjusted to reflect three-for-two stock splits effective August 21,
1995 and June 19, 1996.
The Company has historically reported lower profit margins for 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 revenue for the first half of the year. Historically, the Company's
combined third and fourth quarter revenue have been greater than the
first half of the year, as these two quarters coincide with clients'
calendar year budget periods and the culmination of the Company's annual
sales plan. These historically higher second half revenue 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.
11
The Company's future operating results may be affected by a number of
factors, including, but not limited to: uncertainties relative to global
economic conditions; market acceptance of competing technologies; the
availability and cost of new solutions; its ability to successfully
maintain or increase market share in core businesses while expanding its
product base into other markets; the strength of its distribution
channels; its ability to effectively manage fixed and variable expense
growth relative to revenue growth; and its ability to effectively
integrate acquired products and operations.
There have been no special marketing programs by the Company which
have had a material effect on the revenue or net income of any given
quarterly period.
Foreign Currency Exchange
Uncertainty in world economies and the expectations for higher U.S.
interest rates caused a gradual strengthening of the U.S. Dollar during
fiscal year 1997. Approximately 40% of the Company's total revenue in
fiscal year 1997, 50% in fiscal year 1996 and 49% in fiscal year 1995,
was derived from sales outside of North America. The net income effect
of foreign currency exchange rate fluctuations versus the U.S. Dollar on
international revenue is largely offset to the extent expenses of the
Company's international operations are incurred and paid for in the same
currencies as those of its revenue. During fiscal 1997, the net income
effect of foreign exchange losses was approximately $7 million. A
foreign currency translation adjustment of $74 million was charged to
Stockholders' Equity in fiscal year 1997. As part of its risk
management strategy, the Company did not enter into any foreign exchange
derivative transactions during fiscal years 1997 and 1996.
Liquidity and Capital Resources
In April 1996, the Company restructured a portion of its debt by
completing a $320 million private placement of debt. The private
placement offered the Company to lock in favorable interest rates while
extending the maturity of its debt.
In July 1996, the Company restructured its $2 billion 5-year reducing
revolving credit facility into a $700 million 364-day revolving credit
agreement and a $1.3 billion 5-year revolving credit agreement. Under
both credit agreements, borrowings are subject to interest primarily at
the prevailing London Interbank Rate ("LIBOR") plus a fixed spread
dependent on the achievement of certain financial ratios. The
agreements call for a facility fee and are also dependent on the
achievement of certain financial ratios. The Company must also maintain
certain financial conditions under the agreements. Additionally, the
Company has $24 million of unsecured and uncommitted multicurrency lines
of credit available. These multicurrency facilities were established to
meet any short-term working capital requirements for subsidiaries
principally outside the United States. Peak borrowing under these
financing arrangements were $1,850 million during fiscal 1997, and the
weighted average interest rate for these borrowing was 5.8%. Peak
borrowing under credit facilities during fiscal 1996 were $1,845 million
and the weighted average interest rate for those borrowings was 6.5%. At
March 31, 1997, approximately $1,845 million was outstanding under these
credit arrangements.
Cash from operations for the year ended March 31, 1997 increased by
$171 million, or 28%, over the prior fiscal year. The increase was
primarily due to higher net income. Accounts receivable balances
increased during fiscal 1997, as the Company continues to use
installment payment plans as a competitive advantage during the sales
process. Clients show an increased willingness to finance their
licensing fees. The Company has chosen to maintain its own financing
plans instead of using third parties, such as banks or financial
institutions, to arrange client financing. Cash generated from
operations and the proceeds from the sale of marketable securities were
used, in part, to purchase over $300 million of treasury stock during
the fiscal year. The balance of the cash generated from operations was
used to partially repay debt drawn to fund the Company's November 1996
$1.2 billion purchase of Cheyenne.
The Company's capital resource commitment as of March 31, 1997,
consisted of lease obligations for office facilities, computer
equipment, a mortgage obligation, and amounts due from the acquisition
of products and companies. In addition, the Company is proceeding with a
project to purchase land and a building for approximately $150 million
in the United Kingdom. The Company intends to meet its existing
and planned commitments from its available funds and credit facilities.
See Notes 6 and 7 of Notes to Consolidated Financial Statements for
details concerning commitments.
The Company believes that the foregoing sources of liquidity, plus
existing cash and marketable securities of $199 million as of March 31,
1997, are adequate for its foreseeable needs.
During fiscal 1997, the Company announced that it increased the
authorized amount of shares to be repurchased by 18.8 million bringing
the total authorized under the Company's various repurchase programs to
108.8 million shares. Approximately 7 million shares were repurchased
during fiscal 1997, bringing the total repurchased under the various
plans to 78 million. Approximately 30 million shares remain authorized
for repurchase. All references to share amounts have been adjusted for
three-for-two stock splits effective August 21, 1995 and June 19, 1996.
12
Item 8. Financial Statements and Supplementary Data
The Financial Statements of the Company are listed in the Index to
Financial Statements filed as part of this Form 10-K.
The Supplementary Data specified by Item 302 of Regulation S-K as it
relates to selected quarterly data is included in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Information on the effects of changing prices is not
required.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year for information concerning
directors and to Part I, page 7, of this Annual Report on Form 10-K for
information concerning executive officers under the caption "Executive
Officers of the Registrant."
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year for information concerning
executive compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year for information concerning
security ownership of each person known by the Company to own
beneficially more than 5% of the Company's outstanding shares of Common
Stock, of each director of the Company and all executive officers and
directors as a group.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year for information concerning
certain relationships and related transactions.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K
(a) (1) The Registrant's financial statements together with a separate
table of contents are annexed hereto.
(2) Financial Statement Schedules are listed in the separate
table of contents annexed hereto.
(3) Exhibits.
REGULATION S-K
EXHIBIT NUMBER
- --------------
3(i)(a) Restated Certificate of Previously filed as Exhibit 3.1
Incorporation. to the Company's Registration
Statement on Form S-1(Registration
No. 2-74618) and incorporated herein
by reference.
3(i)(b) Certificate of Amendment Previously filed as Exhibit 3.2 to
of the Restated the Company's Registration
Certificate of Statement on Form S-1 (Registration
Incorporation. No. 2-84239) and Incorporated herein
by reference.
13
REGULATION S-K
EXHIBIT NUMBER
- --------------
3(i)(c) Certificate of Amendment Previously filed on Form 8 dated
of the Restated January 22, 1986 to Form 10-Q for
Certificate of fiscal quarter ended September 30,
Incorporation. 1985, and incorporated herein by
reference.
3(i)(d) Certificate of Amendment Previously filed as Exhibit 3(d) to
of the Restated the Company's Annual Report on Form
Certificate of 10-K for the fiscal year ended March
Incorporation. 31, 1988 (File No. 0-10180) and
incorporated herein by reference.
3(i)(e) Certificate of Amendment Previously filed as Exhibit 3(e) to
of the Restated the Company's Annual Report on Form
Certificate of 10-K for the fiscal year ended March
Incorporation. 31, 1990 (File No. 0-10180) and
incorporated herein by reference.
3(i)(f) Certificate of Amendment Previously filed as Exhibit 3(i)(f)
of the Restated to the Company's Form 10-Q for the
Certificate of fiscal quarter ended September 30,
Amendment. 1996 (File No. 0-10180) and
incorporated herein by reference.
3(ii) By-Laws. Previously filed as an Exhibit to
the Company's Form 10-Q for fiscal
quarter ended September 30, 1993
(File No. 0-10180) and incorporated
herein by reference.
4(a) Indenture dated as of Previously filed as Exhibit 4.1 to
March 1, 1987 between On-Line Software International,
On-Line Software Inc.'s Registration Statement on
International, Inc. and Form S-2 (No. 33-12488) and
Manufacturers Hanover incorporated herein by reference.
Trust Company with
respect to the 6 1/4%
Convertible Subordinated
Debentures due 2002 of
the Company's wholly
owned subsidiary.
4(b) Supplemental Indenture Previously filed as Exhibit A to the
dated as of September Company's Annual Report on Form 10-K
25,1991 between On-Line for the fiscal year ended March 31,
Software International, 1992 (File No. 0-10180) and
Inc. and Manufacturers incorporated herein by reference.
Hanover Trust Company
with respect to the 6 1/4%
Convertible Subordinated
Debentures due 2002 of the
Company's wholly owned
subsidiary.
4(c) Certificate of Previously filed as Exhibit 3 to the
Designation of Series One Company's Current Report on Form 8-K
Junior Participating dated June 18, 1991 and incorporated
Preferred Stock, Class herein by reference.
A of the Company.
14
REGULATION S-K
EXHIBIT NUMBER
- --------------
4(d) Rights Agreement dated as Previously filed as Exhibit 4 to the
of June 18, 1991 between Company's Current Report on Form 8-K
the Company and dated June 18, 1991 and
Manufacturers Hanover incorporated herein by reference.
Trust Company.
4(e) Amendment No.1 dated May Previously filed as Exhibit C to the
17, 1995 to Rights Company's Annual Report on Form 10-K
Agreement dated as of for the fiscal year ended March 31,
June 18, 1991. 1995 (File No. 0-10180) and
incorporated herein by reference.
10(a) 1981 Incentive Stock Previously filed as Exhibit 10.5 to
Option Plan. the Company's Registration Statement
on Form S-1 (Registration 2-74618)
and incorporated herein by reference.
10(b) 1987 Non-Statutory Stock Previously filed as Appendix C to
Option Plan. the Company's definitive Proxy
Statement dated July 1, 1987 and
incorporated herein by reference.
10(c) Amendment No. 1 to the Previously filed as Exhibit C to the
1987 Non-Statutory Stock Company's Annual Report on Form 10-K
Option Plan dated for the fiscal year ended March 31,
October 20, 1993. 1994 and incorporated herein by
reference.
10(d) 1991 Stock Incentive Plan Previously filed as Exhibit A to the
,as amended by Amendment Company's definitive Proxy Statement
No. 1 thereto. dated July 11, 1991 and incorporated
herein by reference.
10(e) Amendment No. 2 to the Previously filed as Exhibit D to the
1991 Stock Incentive Plan Company's Annual Report on Form 10-K
dated October 20, 1993. for the fiscal year ended March 31,
1994 and incorporated herein by
reference.
10(f) Amendment No. 3 to the Previously filed as Exhibit C to the
1991 Stock Incentive Plan Company's Annual Report on Form 10-K
dated August 9, 1995. for the fiscal year ended March 31,
1996 and incorporated herein by
reference.
10(g) 1993 Stock Option Plan Previously filed as Annex 1 to the
for Non-Employee Company's definitive Proxy Statement
Directors. dated July 7, 1993 and incorporated
herein by reference.
15
REGULATION S-K
EXHIBIT NUMBER
- --------------
10(h) Amendment No. 1 to the Previously filed as Exhibit E to the
1993 Stock Option Plan Company's Annual Report on Form 10-K
for Non-Employee for the fiscal year ended March 31,
Directors dated October 1994 and incorporated herein by
20, 1993. reference.
10(i) 1994 Annual Incentive Previously filed as Exhibit A to the
Compensation Plan. Company's definitive Proxy Statement
dated July 8, 1994 and incorporated
herein by reference.
10(j) Amendment No. 1 to the Previously filed as Exhibit A to the
1994 Annual Incentive Company's definitive Proxy Statement
Compensation Plan dated dated July 7, 1995 and incorporated
August 9, 1995. herein by reference.
10(k) 1995 Key Employee Stock Previously filed as Exhibit B to the
Ownership Plan. Company's definitive Proxy Statement
dated July 7, 1995 and incorporated
herein by reference.
10(l) Amended and Restated Previously filed as Exhibit 1
Credit Agreement dated to the Company's Form 10-Q for fiscal
July 3, 1996 among the quarter ended June 30, 1996 (File No.
Company, various banks 0-10180) and incorporated herein by
and financial reference.
institutions and Credit
Suisse, as agent.
10(m) Credit Agreement, dated Previously filed as Exhibit 2
July 3, 1996, among the to the Company's Form 10-Q for the
Company, various banks fiscal quarter ended June 30, 1996
and financial titutions (File No.0-10180) and incorporated
institutions and Credit herein by reference.
Suisse, as agent.
10(n) Note Purchase Agreement Previously filed as Exhibit D
dated as of April 1,1996. to the Company's Annual Report on
Form 10-K for the fiscal year ended
March 31, 1996 and incorporated
herein by reference.
10(o) 1996 Deferred Stock Plan Previously filed as Exhibit A
for Non-Employee to the Company's definitive Proxy
Directors. Statement dated July 8, 1996 and
incorporated herein by reference.
21 Subsidiaries of the Filed herewith.
Registrant.
23 Consent of Ernst & Young Filed herewith.
LLP.
16
(b) Reports on Form 8-K.
There were no current reports on Form 8-K filed during the fiscal
quarter ended March 31, 1996.
(c) Exhibits: See Index to Exhibits.
(d) Financial Statement Schedules: The response to this portion of Item
14 is submitted as a separate section of this report.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of
1933, as amended, the undersigned Registrant hereby undertakes as set
forth in the following paragraph, which undertaking shall be
incorporated by reference into Registrant's Registration Statements on
Form S-8 Nos. 333-19071 (filed December 31, 1996), 33-64377 (filed
November 17, 1995), 33-53915 (filed May 31, 1994), 33-53572(filed
October 22, 1992), 33-34607 (filed April 27, 1990), 33-18322 (filed
December 4, 1987), 33-20797 (filed December 19, 1988), 2-92355 (filed
July 23, 1984), 2-87495 (filed October 28, 1983) and 2-79751 (filed
October 6, 1982).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ CHARLES B. WANG
-------------------------------------
Charles B. Wang
Chairman
Chief Executive Officer
By /s/ PETER A. SCHWARTZ
-------------------------------------
Peter A. Schwartz
Senior Vice President-Finance
Principal Financial and Accounting Officer
Dated: May 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated:
Name Title
---------- ----------
/s/ CHARLES B. WANG Chairman
------------------------------- and Director
Charles B. Wang
/s/ SANJAY KUMAR Director
-------------------------------
Sanjay Kumar
/s/ RUSSELL M. ARTZT Director
-------------------------------
Russell M. Artzt
/s/ WILLEM F.P. de VOGEL Director
--------------------------------
Willem F.P. de Vogel
/s/ IRVING GOLDSTEIN Director
--------------------------------
Irving Goldstein
/s/ RICHARD A. GRASSO Director
--------------------------------
Richard A. Grasso
/s/ SHIRLEY STRUM KENNY Director
--------------------------------
Shirley Strum Kenny
Dated: May 23, 1997
18
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
ISLANDIA, NEW YORK
-----------------------------------------
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
------------------------------------------
YEAR ENDED MARCH 31, 1997
Page
The following consolidated financial statements of Computer
Associates International, Inc. and subsidiaries are included
in Item 8:
Report of Independent Auditors 19
Consolidated Balance Sheets-March 31, 1997 and 1996 20
Consolidated Statements of Operations-Years Ended
March 31, 1997, 1996, and 1995 22
Consolidated Statements of Stockholders' Equity-Years
Ended March 31, 1997, 1996, and 1995 23
Consolidated Statements of Cash Flows-Years Ended March 31,
1997, 1996, and 1995 24
Notes to Consolidated Financial Statements 25
The following consolidated financial statement schedule of Computer
Associates International, Inc. and subsidiaries is included in Item
14(d):
Schedule II-Valuation and Qualifying Accounts 35
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
19
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Computer Associates International, Inc.
We have audited the accompanying consolidated balance sheets of
Computer Associates International, Inc. and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended March 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and the schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Computer Associates International, Inc. and
subsidiaries at March 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in
fiscal year 1997, the Company changed its method of accounting for
deferred income taxes relating to in-process research and development
acquired in purchase business combinations.
ERNST & YOUNG LLP
New York, New York
May 23, 1997
20
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
1997 1996
--------- ---------
(Dollars in millions)
CURRENT ASSETS
Cash and cash equivalents $ 143 $ 97
Marketable securities 56 105
Trade and installment accounts receivable 1,514 1,182
Other current assets 67 64
--------- ---------
TOTAL CURRENT ASSETS 1,780 1,448
INSTALLMENT ACCOUNTS RECEIVABLE,
due after one year 2,200 1,701
PROPERTY AND EQUIPMENT
Land and buildings 349 317
Equipment, furniture and improvements 438 403
--------- ---------
787 720
Allowance for depreciation and amortization 349 300
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 438 420
PURCHASED SOFTWARE PRODUCTS, net of accumulated
amortization of $1,079 and $786 440 580
EXCESS OF COST OVER NET ASSETS ACQUIRED, net of
accumulated amortization of $139 and $84 1,159 786
OTHER ASSETS 67 81
--------- ---------
TOTAL ASSETS $ 6,084 $ 5,016
========= =========
See Notes to Consolidated Financial Statements.
21
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
LIABILITIES AND STOCKHOLDERS'' EQUITY 1997 1996
--------- ---------
(Dollars in millions)
CURRENT LIABILITIES
Loans payable and current portion of
long-term debt $ 548 $ 499
Accounts payable 124 101
Salaries, wages and commissions 140 119
Accrued expenses and other liabilities 324 340
Taxes, other than income taxes 66 66
Federal, state and foreign income taxes payable 265 229
Deferred income taxes 260 147
--------- ---------
TOTAL CURRENT LIABILITIES 1,727 1,501
LONG-TERM DEBT, net of current portion 1,663 945
DEFERRED INCOME TAXES 853 721
DEFERRED MAINTENANCE REVENUE 338 367
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, 1,100,000,000 shares
authorized, 420,614,834* shares issued 42 42
Additional paid-in capital 518 503
Retained earnings 1,757 1,426
Equity adjustment (27) 41
Treasury stock, at cost-58,645,259 shares for
1997 and 57,305,279* shares for 1996 (787) (530)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,503 1,482
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,084 $ 5,016
========= =========
*Share amounts adjusted for three-for-two stock splits effective August
21, 1995 and June 19, 1996.
See Notes to Consolidated Financial Statements.
22
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
1997 1996 1995
------- ------- -------
(In millions, except per share amounts)
Product revenue and other related income $ 3,300 $ 2,776 $ 1,903
Maintenance fees 740 729 720
------- ------- -------
TOTAL REVENUE 4,040 3,505 2,623
Costs and Expenses:
Selling, marketing and administrative 1,465 1,368 1,051
Product development and enhancements 318 285 233
Commissions and royalties 201 174 127
Depreciation and amortization 424 404 258
Interest expense, net 102 71 8
Purchased research and development 598 1,303 249
------- ------- -------
TOTAL COSTS AND EXPENSES 3,108 3,605 1,926
------- ------- -------
Income (loss) before income taxes 932 (100) 697
Income taxes (benefit) 566 (44) 265
------- ------- -------
NET INCOME (LOSS) $ 366 $ (56) $ 432
======= ======= =======
NET INCOME (LOSS) PER COMMON SHARE $ .97 $ (.16) $ 1.14
======= ======= =======
Weighted average common shares
used in computation 379 362* 378*
*Share amounts adjusted for three-for-two stock splits effective August
21, 1995 and June 19, 1996.
See Notes to Consolidated Financial Statements.
23
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Common Paid-In Retained Equity Treasury Stockholders'
Stock(2) Capital(2) Earnings Adjustment Stock Equity
-------- ---------- -------- ---------- -------- -------------
(Dollars in millions)
Balance at March 31, 1994 $ 42 $ 495 $ 1,116 $ (16) $ (394) $ 1,243
Net income 432 432
Dividends declared
($.089 per share)(2) (32) (32)
Exercise of Common Stock
options and other (1) 23 22
401(k) discretionary contribution 6 7 13
Translation adjustment in 1995 76 76
Net change attributable to
unrealized loss on marketable
securities (3) (3)
Purchases of treasury stock (173) (173)
-------- ----------- -------- ---------- -------- ------------
Balance at March 31, 1995 42 500 1,516 57 (537) 1,578
Net loss (56) (56)
Dividends declared
($.091 per share)(2) (34) (34)
Exercise of Common Stock
options and other (7) 7 32 32
401(k) discretionary contribution 10 5 15
Translation adjustment in 1996 (25) (25)
Net change attributable to
unrealized gain on marketable
securities 2 2
Purchases of treasury stock (30) (30)
-------- ----------- -------- ---------- -------- ------------
Balance at March 31, 1996 42 503 1,426 41 (530) 1,482
Net income 366 366
Dividends declared
($.097 per share)(2) (35) (35)
Exercise of Common Stock
options and other 2 7 57 66
401(k) discretionary contribution 13 3 16
Translation adjustment in 1997 (74) (74)
Net change attributable to
unrealized loss on
marketable securities (1) (1)
Purchases of treasury stock (317) (317)
-------- ----------- -------- ---------- -------- ------------
Balance at March 31, 1997 $ 42 $ 518 $ 1,757 $ (27) (1) $ (787) $1,503
======== =========== ======== ========== ======== ============
(1) Represents foreign currency translation adjustment of $(40) million
and $13 million of restricted stock.
(2) Amounts adjusted for three-for-two stock splits effective August 21,
1995 and June 19, 1996.
See Notes to Consolidated Financial Statements.
24
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1997 1996 1995
------- ------- ------
(Dollars in millions)
OPERATING ACTIVITIES:
Net income (loss) $ 366 $ (56) $ 432
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 424 404 258
Provision for deferred income taxes (benefit) 221 (290) 42
Charge for purchased research and development 598 1,303 249
Increase in noncurrent installment accounts receivable, net (575) (590) (357)
Increase (decrease) in deferred maintenance revenue (23) 37 (5)
Foreign currency transaction (gain) loss-before taxes 11 (2) 1
Changes in other operating assets and liabilities,
net of effects of acquisitions:
Increase in trade and installment receivables (341) (262) (59)
Other changes in operating assets and liabilities 109 75 (72)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 790 619 489
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing rights
and intangibles (1,191) (1,787) (430)
Purchases of property and equipment (53) (21) (35)
Purchases of marketable securities (51) (54) (146)
Sales of marketable securities 99 136 194
Increase in capitalized development costs and other (18) (16) (16)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,214) (1,742) (433)
FINANCING ACTIVITIES:
Dividends (35) (34) (32)
Purchases of treasury stock (317) (30) (173)
Proceeds from borrowings 1,480 1,720 522
Repayments of borrowings (710) (570) (417)
Exercise of common stock options and other 53 22 15
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 471 1,108 (85)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS BEFORE EFFECT OF EXCHANGE
RATE CHANGES ON CASH 47 (15) (29)
Effect of exchange rate changes on cash (1) (5) 13
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 46 (20) (16)
CASH AND CASH EQUIVALENTS-
BEGINNING OF YEAR 97 117 133
------- ------- -------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 143 $ 97 $ 117
See Notes to Consolidated Financial Statements.
25
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Description of Business: Computer Associates International, Inc. and
subsidiaries (the "Company") designs, develops, markets and supports a
wide range of integrated computer software products.
Principles of Consolidation: Significant intercompany items and
transactions have been eliminated in consolidation. The Company has
various investments which it accounts for under the equity method of
accounting. These investments are not significant either individually or
when considered collectively. The Company's net gain or loss for such
investments is reflected in selling, marketing and administrative
expense.
Basis of Revenue Recognition: Product license fee revenue is recognized
after both acceptance by the client and delivery of the product.
Maintenance revenue, whether bundled with product license or priced
separately, is recognized ratably over the maintenance period. Accounts
receivable resulting from product sales with extended payment terms are
discounted to present value using the rate which approximates the
Company's cost of funds. The amounts of the discount credited to
operations for the years ended March 31, 1997, 1996, and 1995 were
$271 million, $215 million, and $161 million, respectively.
Marketable Securities: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.
The Company has evaluated its investment policies consistent with
Financial Accounting Standards Board Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("FASB 115"), and
determined that all of its investment securities are to be classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in Stockholders'
Equity under the caption Equity Adjustment. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.
Property and Equipment: Land, buildings, equipment, furniture, and
improvements are stated at cost. Depreciation and amortization are
provided over the estimated useful lives of the assets by the straight-
line method. Building and improvements are generally estimated to have
30-40 year lives and the remaining property and equipment are estimated
to have 5-7 year lives.
Intangibles: Excess of costs over net assets acquired is being amortized
by the straight-line method over 20 years. Cost of purchased software
and acquired rights to market software products, and software
development costs (costs incurred after development of a working model
or a detailed program design) are capitalized and amortized by the
straight-line method over five years or based on the product's useful
economic life, commencing with product release. Unamortized capitalized
development costs included in other assets at March 31, 1997 and 1996
were $54 million and $53 million, respectively. Amortization of
capitalized development costs was $17 million, $19 million, and $22
million for the fiscal years ended March 31, 1997, 1996, and 1995,
respectively.
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 for fiscal 1997, 1996, and 1995 is not materially
different from net income per share. The number of common shares used
for computing net loss per common share in fiscal 1996 does not include
any common share equivalents because the effect would have been
antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earning per Share," which is required to be adopted
on December 31, 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. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock plans will be
excluded. The impact is expected to result in an increase in primary
earnings for the year ended March 31, 1997 of $ .04 per share. The
impact of Statement 128 in the calculation of fully diluted earnings per
share is not expected to be material.
26
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 - Significant Accounting Policies (Continued)
Share and per share amounts have been adjusted to reflect three-for-two
stock splits effective August 21, 1995 and June 19, 1996.
Statement of Cash Flows: Interest payments for the years ended March 31,
1997, 1996, and 1995 were $89 million, $76 million, and $23 million,
respectively. Income taxes paid for these fiscal years were $300
million, $144 million, and $227 million, respectively.
Translation of Foreign Currencies: In translating financial statements
of foreign subsidiaries, all assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. All revenue,
costs and expenses are translated using an average exchange rate. Net
income (loss) includes exchange (losses) gains of approximately $(7)
million in 1997, $1 million in 1996, and $(1) million in 1995.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates
are based on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual results.
New Accounting Pronouncements: During fiscal 1997, the Company has
adopted the disclosure only provisions of Statement of Financial
Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of FAS No. 123, the
Company applies APB 25 and related interpretations in accounting for its
stock based plans.
Emerging Issues Task Force No. 96-7, "Accounting for Deferred Taxes on
In-Process Research and Development Activities Acquired in a Purchase
Business Combination," became effective on May 23, 1996. As provided
therein, deferred taxes will no longer be provided on the initial
differences between the amounts assigned to in-process research and
development costs acquired in a business purchase combination for
financial reporting and tax purposes, and in-process research and
development will be charged to expense on a gross basis at acquisition.
The effect of this change was to decrease net income by $221 million, or
$.58 per share, in fiscal year 1997 as a result of not providing a
deferred tax benefit.
Note 2 - Acquisitions
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. Had this charge not been
taken during the quarter ended December 31, 1996, net income and net
income per share for the year ended March 31, 1997 would have been $964
million, or $2.54 per share.
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 into Legent 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 as of 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. Had this charge not been taken, net income for
the fiscal year ended March 31, 1996 would have been $752 million, or
$1.99 per share.
27
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 2 - Acquisitions (Continued)
The following table reflects pro forma combined results of operations of
the Company, Legent and Cheyenne on the basis that the acquisitions had
taken place at the beginning of fiscal year 1996. The after-tax charge
of $598 million in fiscal year 1997 related to the acquisition of
Cheyenne was recorded at the beginning of the fiscal year for each of
the periods presented. The after-tax charges in fiscal year 1996 of
$808 million related to the Legent acquisition is reflected in only the
fiscal year 1996 results of operations:
Year Ended March 31,
1997 1996
------ ------
(Amounts in millions, except per share amounts)
Revenue $ 4,175 $ 3,789
Net income (loss) 322 (775)
Net income (loss) per Common Share $ .85 $ (2.14)
Shares used in computation* 379 362
The following table reflects pro forma combined results of operations of
the Company, Legent and Cheyenne on the basis that the acquisitions had
taken place at the beginning of fiscal year 1996 and excludes the effect
of the after-tax charges of $598 million for Cheyenne and $808 million
for Legent:
Year Ended March 31,
1997 1996
------ ------
(Amounts in millions, except per share amounts)
Revenue $ 4,175 $ 3,789
Net loss 920 631
Net loss per Common Share $ 2.43 $ 1.67
Shares used in computation* 379 378
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 1996
or of future operations of the combined companies under the ownership
and operation of the Company.
*Adjusted for three-for-two stock splits effective August 21, 1995 and
June 19, 1996.
28
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 3 - Investments
The following is a summary of cash equivalents and marketable securities
classified as "available-for-sale"
securities as required by FASB 115:
Gross Estimated
Unrealized Fair
Cost Gains Value
------ ------------- ------------
(Dollars in millions)
March 31, 1997:
Debt securities $ 56 $ 56
March 31, 1996:
Debt securities $ 104 $ 1 $ 105
==== ==== ====
For years ended March 31, 1997 and 1996, no debt securities were deemed
to be Cash and Cash Equivalents.
The gross realized gains on sales of available-for-sale securities
totaled $1 million for the years ended March 31, 1997 and 1996. There
were no gross realized gains for the year ended March 31, 1995. There
were no gross realized losses for the years ended March 31, 1997 and
1996 and a gross realized loss of $2 million for the year ended March
31, 1995. No unrealized gains or losses existed at March 31, 1997 and an
unrealized gain of $1 million existed at March 31, 1996.
The amortized cost and estimated fair value based on published closing
prices of debt securities at March 31, 1997, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to
prepay obligations without prepayment penalties.
March 31, 1997
Estimated
Fair
Cost Value
------ -----------
Available-for-Sale: (Dollars in millions)
Due in one year or less $ 21 $ 21
Due one through three years 18 18
Due in three through five years 17 17
---- ----
$ 56 $ 56
29
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 4 - Geographic Area Information & Foreign Operations
United States Foreign (a) Eliminations Total
--------------- ------------ ------------ --------
(Dollars in millions)
March 31, 1997:
Revenue:
To unaffiliated customers $ 2,315 $ 1,725 $ 4,040
Between geographic areas (b) 335 $ (335)
---------- ----------- ---------- ----------
Total Revenue 2,650 1,725 (335) 4,040
Net income 101 265 366
Identifiable assets 4,584 2,014 (514) 6,084
Total liabilities 3,791 1,304 (514) 4,581
March 31, 1996:
Revenue:
To unaffiliated customers $ 1,678 $ 1,827 $ 3,505
Between geographic areas (b) 403 $ (403)
---------- ----------- ---------- ----------
Total Revenue 2,081 1,827 (403) 3,505
Net (loss) income (281) 225 (56)
Identifiable assets 3,709 1,897 (590) 5,016
Total liabilities 2,767 1,357 (590) 3,534
March 31, 1995:
Revenue:
To unaffiliated customers $ 1,263 $ 1,360 $ 2,623
Between geographic areas (b) 290 $ (290)
---------- ----------- ---------- ----------
Total Revenue 1,553 1,360 (290) 2,623
Net income 277 155 432
Identifiable assets 2,305 1,470 (506) 3,269
Total liabilities 1,124 1,073 (506) 1,691
(a) The Company operates wholly owned subsidiaries in 43 foreign countries, including Canada, Middle
East, Africa, Europe (22), South America (6) and the Pacific Rim (12).
(b) Represents royalties from foreign subsidiaries generally determined as a percentage of certain
amounts invoiced to customers.
For the years ended March 31, 1997, 1996, and 1995, $36 million, $39 million, and $43 million,
respectively, of export sales to unaffiliated customers are included in United States revenue.
30
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 5 - Trade and Installment Accounts Receivable
Trade and installment accounts receivable consist of the following:
March 31,
1997 1996
------- ------
(Dollars in millions)
Current receivables $ 2,220 $ 1,809
Less: Allowance for uncollectible amounts (191) (160)
Unamortized discount and maintenance fees (515) (467)
-------- --------
$ 1,514 $ 1,182
======== ========
Non-current receivables $ 3,244 $ 2,705
Less: Allowance for uncollectible amounts (36) (22)
Unamortized discount and maintenance fees (1,008) (982)
-------- --------
$ 2,200 $ 1,701
======== ========
The provisions for uncollectible amounts for the years ended March 31,
1997, 1996 and 1995 were $110 million, $71 million, and $89 million,
respectively, and are included in selling, marketing and administrative
expenses.
Note 6 - Debt
In fiscal year 1997, the Company renegotiated its $2 billion reducing
credit facility into a $2 billion unsecured facility consisting of a
$1.3 billion 5-year revolving credit agreement and a $.7 billion 364-day
revolving credit agreement. The credit facility provides for the
maintenance of certain financial ratios and restrictions on the amount
of cash dividends that may be declared. Interest under the facility is
generally at the prevailing London Interbank Rate (LIBOR) plus a spread
based on the Company's achievement of certain ratios. Commitment fees
are also due under each agreement. At March 31, 1997, the Company was
paying interest at approximately 6%. The amount outstanding under this
credit facility at March 31, 1997 was $1,840 million.
In fiscal year 1996, the Company had a $2 billion unsecured 5-year
reducing revolving credit facility with a group of banks. This facility
has been superseded by the $2 billion facility above. The amount
outstanding under this credit facility at March 31, 1996 was $1,390
million.
During April 1996, the Company completed the private placement of $320
million of unsecured senior debt due 2003. The debt has a fixed rate of
interest of 6.77% which is payable semi-annually. Proceeds
from this private placement were used to repay outstanding debt. The
private placement enabled the Company to extend the maturity of its
debt, commit to a fixed rate of interest and broaden the Company's
source of liquidity.
Unsecured and uncommitted multicurrency credit facilities of $24 million
are also available to meet any short-term working capital requirements
and can be drawn upon, up to a predefined limit, by most subsidiaries.
Under these multicurrency facilities, approximately $5 million was drawn
at March 31, 1997 and $3 million was drawn at March 31, 1996.
The Company also has various other debt obligations outstanding at March
31, 1997 and 1996. These fixed rate debt obligations carry annual
interest rates ranging from 6% to 7 1/2%.
The Company conducts an ongoing review of its debt balances as part of
its risk management strategy. To date, the Company has not entered into
any form of derivative transactions related to its debt instruments. The
fair market value of long-term debt approximates its carrying value.
The maturities of long-term debt outstanding for the five fiscal years
are as follows: 1998-$548 million; 1999-$2 million; 2000-$69 million;
2001-$69 million; and 2002-$1,369 million.
Interest expense for the years ended March 31, 1997, 1996, and 1995 was
$104 million, $81 million, and $24 million, respectively, and is netted
with interest income.
31
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 7 - Commitments and Contingencies
The Company leases real estate and certain data processing and other
equipment with lease terms expiring through 2021. The leases are
operating leases and generally provide for renewal options and
additional rental based on escalation in operating expenses and real
estate taxes. The Company has no material capital leases. The Company
has announced plans to build a facility in the United Kingdom.
Rental expense under operating leases for the years ended March 31,
1997, 1996, and 1995 was $132 million, $165 million, and $108 million,
respectively. Future minimum lease payments are: 1998-$95 million; 1999-
$71 million; 2000-$55 million; 2001-$43 million; 2002-$33 million; and
thereafter-$99 million.
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of marketable securities
and accounts receivable. The Company's marketable securities consist
primarily of high quality debt securities with limited exposure to any
single instrument. The Company's accounts receivable balances have
limited exposure to concentration of credit risk due to the diverse
client base and geographic areas covered by operations.
The Company, various subsidiaries and certain current and former
officers have been named as defendants in 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.
Note 8 - Income Taxes
The amounts of income (loss) before income taxes attributable to
domestic and foreign operations are as
follows:
Year Ended March 31,
1997 1996 1995
------ ------ ------
(Dollars in millions)
Domestic $ 520 $ (464) $ 430
Foreign 412 364 267
------ ------ ------
$ 932 $ (100) $ 697
====== ===== ======
The provision for income taxes (benefit) consists of the following:
Year Ended March 31,
1997 1996 1995
------ ------ ------
(Dollars in millions)
Current:
Federal $ 256 $ 160 $ 166
State 38 30 23
Foreign 51 56 34
------ ------ ------
345 246 223
====== ====== ======
Deferred:
Federal 106 (337) (47)
State 19 (36) 10
Foreign 96 83 79
------ ------ ------
221 (290) 42
====== ====== ======
Total:
Federal 362 (177) 119
State 57 (6) 33
Foreign 147 139 113
------ ------ ------
$ 566 $ (44) $ 265
====== ====== ======
32
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Note 8 - Income Taxes (Continued)
Under Financial Accounting Standards Board Statement No. 109, deferred
income taxes have been provided for the differences between financial
statement and tax basis of assets and liabilities. The cumulative impact
of temporary differences, primarily due to the modified accrual basis
(approximately 83% in 1997 and 88% in 1996 of total deferred income
taxes), purchase accounting adjustments (approximately 8% in 1997 and
16% in 1996), net capitalized development costs (approximately 2% in
1997 and 1996) and receivable reserves (a deferred tax asset of
approximately 3% in 1997 and 4% in 1996) is shown on the Consolidated
Balance Sheets under the captions "Deferred Income Taxes."
The provision for income taxes (benefit) is reconciled to the tax
provision computed at the federal statutory rate as follows:
Year Ended March 31,
1997 1996 1995
------ ------ ------
(Dollars in millions)
Statutory rate $ 326 $ (35) $ 244
State taxes, net of
federal tax effect 37 (4) 22
Purchased research and development 209
Other, net (6) (5) (1)
------ ------ ------
$ 566 $ (44) $ 265
Note 9 - Stock Plans
The Company has a 1981 Incentive Stock Option Plan (the "1981 Plan")
pursuant to which options to purchase up to 18 million shares of Common
Stock of the Company were available for grant to employees (including
officers of the Company). The 1981 Plan expired on October 23, 1991.
Therefore, from and after that date no new options can be granted under
the 1981 Plan. Pursuant to the 1981 Plan, the exercise price could not
be less than the Fair Market Value ("FMV") of each share at the date of
grant. Options granted thereunder may be exercised in annual increments
commencing one year after the date of grant and become fully exercisable
after the expiration of five years. All options expire ten years from
date of grant unless otherwise terminated. All of the 1 million options
which are outstanding under the 1981 Plan were exercisable at March 31,
1997 at $3.33-$6.14 per share.
The Company has a 1987 Non-Statutory Stock Option Plan (the "1987
Plan") pursuant to which options to purchase up to 11.3 million shares
of Common Stock of the Company may be granted to select officers and key
employees of the Company. Pursuant to the 1987 Plan, the exercise price
shall not be less than the FMV of each share at the date of the grant.
The option period shall not exceed 12 years. Each option may be
exercised only in accordance with a vesting schedule established by the
Stock Option and Compensation Committee. As of March 31, 1997, 20,250
shares of the Company's Common Stock were available for future grants.
5.5 million of the 6.1 million options which are outstanding under the
1987 Plan were exercisable as of that date. These options are
exercisable at $3.33-$6.39 per share.
The Company's 1991 Stock Incentive Plan (the "1991 Plan") provides
that stock appreciation rights and/or options, both qualified and non-
statutory, to purchase up to 45 million shares of Common Stock of
the Company may be granted to employees (including officers of the
Company) under conditions similar to the 1981 Plan. As of March 31,
1997, no stock appreciation rights have been granted under this plan and
24.4 million options have been granted. At March 31, 1997, 3.9 million
of the 19.6 million options which are outstanding under the 1991 Plan
were exercisable. These options are exercisable at $5.00-$61.31
per share.
The 1993 Stock Option Plan for Non-Employee Directors (the "1993
Plan") provides for non-statutory options to purchase up to a total of
225,000 shares of Common Stock of the Company to be available for
grant to each member of the Board of Directors who is not otherwise an
employee of the Company. Pursuant to the 1993 Plan, the exercise price
shall be the FMV of the shares covered by the option at the date of
grant. The option period shall not exceed ten years, and each option may
be exercised in whole or in part on the first anniversary date of its
grant. As of March 31, 1997, 81,000 options have been granted under this
plan. 45,000 of the 63,000 options which are outstanding under the 1993
Plan were exercisable as of that date. These options are exercisable at
$11.39-$56.75 per share.
33
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 - Stock Plans (Continued)
The following table summarizes the activity under these plans (shares in
millions):
1997 1996 1995
----------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------ ------- -------
Beginning of year 27.5 $13.07 25.9 $ 8.28 23.3 $ 6.32
Granted 6.2 47.26 6.2 29.01 6.1 14.00
Exercised (5.3) 10.07 (3.4) 5.97 (2.8) 4.73
Terminated (1.6) 24.93 (1.2) 12.32 (0.7) 6.93
------- ------- -------
End of year 26.8 20.94 27.5 13.07 25.9 8.28
Options exercisable
at end of year 10.5 $ 10.59 9.8 $ 5.74 9.2 $ 5.30
The following table summarizes information about these plans at March
31, 1997 (shares in millions):
Options Outstanding Options Exercisable
--------------------------------- ------------------------
- ------------
Weighted-
Average Weighted
Range of Remaining Average Weighted
Exercise Contractual Exercise Average
Prices Shares Life Price Shares Exercise Price
- ---------- -------- ------------- ---------- --------- --------------
$ 3.33 - $10.00 8.2 5.1 years $ 5.21 7.0 $ 5.01
$10.01 - $20.00 8.0 6.6 years 12.67 2.1 12.56
$20.01 - $30.00 5.6 8.0 years 28.64 0.7 27.18
$30.01 - $40.00 0.1 4.5 years 35.06 0.1 35.06
$40.01 - $50.00 0.5 5.2 years 43.75 0.5 43.75
$50.01 - $61.31 4.4 9.1 years 52.62 0.1 57.49
------ -----
26.8 10.5
Under the 1995 Key Employee Stock Ownership Plan ("1995 Plan"), 13.5
million restricted shares are available for grant to three key
executives. An initial grant of 4.5 million restricted shares was made
to the executives at inception of the 1995 Plan. In January 1996, based
on the achievement of a price target for the Company's common stock, .9
million shares of the initial grant vested, subject to continued
employment of the executives through March 31, 2000. Accordingly, the
Company began accruing compensation expense associated with the .9
million shares over the employment period. Annual compensation expense
of $7 million has been charged against income for each of the years
ended March 31, 1997 and 1996. Additional grants of the remaining 9
million shares available under the 1995 Plan have been reserved pending
the achievement of the certain price targets. These 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.
34
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 - Stock Plans (Continued)
If the Company had elected to recognize compensation expense based on
the fair value of stock plans as prescribed by FAS No. 123, net income
(loss) and net income (loss) per share would have been reduced to
the pro forma amounts in the table below:
1997 1996
------ ------
(Amounts in millions, except per share amounts)
Net income (loss)-as reported $ 366 $ (56)
Net income (loss)-pro forma 301 (94)
Net income (loss) per share-as reported $ .97 $(.16)
Net income (loss) per share-pro forma .79 (.26)
The weighted-average fair value at date of grant for options granted in
1997 and 1996 were $29.00 and $15.79, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-
Scholes option pricing model. The following assumptions were used for
option grants in 1997 and 1996, respectively; dividend yield of .19% and
.34%; expected volatility factors of .50; risk-free interest rates of
6.5% and an expected life of six years. The compensation expense and pro
forma net income (loss) may not be indicative of amounts to be included
in future periods.
All references to the number of shares under option and option prices
have been adjusted to reflect three-for-two stock splits effective
August 21, 1995 and June 19, 1996.
Note 10 - Profit Sharing Plan
The Company maintains a profit sharing plan, the Computer Associates
Savings Harvest Plan ("CASH Plan"), for the benefit of employees of the
Company. The CASH Plan is intended to be a qualified plan under Section
401(a) of the Internal Revenue Code of 1986 (the "Code") and contains a
qualified cash or deferred arrangement as described under Section 401(k)
of the Code. Pursuant to the CASH Plan, eligible participants may elect
to contribute a percentage of their annual gross salary. Matching
contributions to the CASH Plan for the years ended March 31, 1997, 1996,
and 1995 were $5 million, $5 million, and $4 million, respectively. In
addition, the Company may make discretionary contributions to the CASH
Plan. Discretionary contributions to the CASH Plan for the years ended
March 31, 1997, 1996 and 1995 were $17 million, $17 million and $16
million, respectively.
Note 11 - Rights Plan
Each outstanding share of the Company's Common Stock carries a stock
purchase right issued under the Company's Rights Agreement, dated June
18, 1991 and amended May 17, 1995 (the "Rights Agreement"). Under
certain circumstances, each right may be exercised to purchase one one-
thousandth of a share of Series One Junior Participating Preferred
Stock, Class A, for $300. Under certain circumstances, following (i) the
acquisition of 20% or more of the Company's outstanding Common Stock by
an Acquiring Person (as defined in the Rights Agreement), (ii) the
commencement of a tender offer or exchange offer which would result in a
person or group owning 20% or more of the Company's outstanding common
stock or (iii) the determination by the Company's Board of Directors and
a majority of the Disinterested Directors (as defined in the Rights
Agreement) that a 15% stockholder is an Adverse Person (as defined in
the Rights Agreement), each right (other than rights held by an
Acquiring Person or Adverse Person) may be exercised to purchase common
stock of the Company or a successor company with a market value of twice
the $300 exercise price. The rights, which are redeemable by the Company
at one cent per right, expire in June 2001.
35
SCHEDULE II
COMPUTER ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts(a) Deductions(b) of period
- -------------- --------- ---------- ----------- ------------- ---------
(Dollars in millions)
Reserves and allowances
deducted from assets to
which they apply:
Allowance for uncollectible amounts
Year ended March 31, 1997 $ 182 $ 110 $ 13 $ 78 $ 227
Year ended March 31, 1996 $ 182 $ 71 $ 5 $ 76 $ 182
Year ended March 31, 1995 $ 146 $ 89 $ 7 $ 60 $ 182
(a) Reserves of acquired companies.
(b) Write-offs of amounts against allowance provided.