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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, 1998
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
(Registrants 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 registrants 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 19, 1998 was $20,528,427,331 based on a
total of 363,334,997 shares held by non-affiliates and the closing price
on the New York Stock Exchange on that date which was $56.50.
Number of shares of stock outstanding at May 19, 1998:
546,623,630 shares of Common Stock, par value $.10 per share.
Documents Incorporated by Reference:
Part III - Proxy Statement to be issued in conjunction with Registrants
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 Companys Common Stock is
traded on the New York Stock Exchange under the symbol CA.
The Company supplies an extensive array of enterprise management,
information management, and business application software products for
use on a variety of hardware platforms. Because of its independence from
hardware manufacturers, the Company provides clients with integrated
solutions which are platform neutral. The Company supplies products which
can be used on all major hardware platforms, operating systems, and
application development environments.
The Companys product philosophy of internally developing products, such
as Unicenter TNGTM and OpalTM, the acquisition of key technology, the
integration of the two, and strategic alliances with over 40 business
partners has been tested and proven over time.
In June 1994, the Company acquired The ASK Group, Inc. (ASK). ASK was
primarily engaged in developing, marketing, and selling relational
database management systems, including Ingres, various data access and
connectivity products, as well as manufacturing and financial software
applications 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
provided a broad range of computer software products for managing
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. Organizing 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 banking, financial, and manufacturing
application offerings. In order to emphasize its commitment to delivering
quality technical support to its clients throughout the world, the
Company concentrated its technical services in a group known as GTDS
(Global Technology Delivery Services). This group serves as the bridge
between the Companys sales and development organizations, providing high-
level technical assistance and guidance to clients.
In November 1996, the Company acquired Cheyenne Software, Inc.
(Cheyenne). Cheyenne developed 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 Companys business is in a single industry segment the design,
development, marketing, licensing and support of integrated computer
software products operating on a 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, licenses 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,
Sun Microsystems Inc. (Sun), Data General Corp. (DG) and Compaq Computer
Corporation (including the Digital Equipment and Tandem Computer
Companies).
A computer system, ranging from the most powerful mainframe to 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 is the program, or set of instructions, which tell
the hardware what to do and how to respond to specific user requests.
The Company continues to pursue 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. The Companys service philosophy is
similarly marked by a commitment to the development of a dedicated
internal service staff, the acquisition of third-party service
organizations, the integration of the two, and long-standing alliances
with leading service providers.
3
Products
The Company offers over 500 enterprise systems management, information
management, and business applications solutions to a broad spectrum of
organizations. Built upon a common infrastructure, these products provide
solutions across multiple operating systems and hardware platforms. The
Companys standardized business software products enable clients to use
their total data processing resources hardware, software, and personnel
more efficiently. Many of the Companys 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 Companys
solutions enable clients to use the latest technologies while preserving
their substantial investments in hardware, software and staff expertise.
By employing a common infra-structure, the Companys 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
Companys software architecture is specifically designed to help clients
migrate to client/server computing or build new client/server systems.
The Companys integrated distributed systems management solutions manage
this complex environment. Full-function client/server business
applications simplify customization to meet unique business needs on a
combination of platforms.
During fiscal year 1998, the Company commenced full-scale delivery of
JasmineTM. Jasmine is a true object database with an integrated
development environment and a robust multi-platform deployment facility.
Its object-oriented database engine provides the foundation to store,
manage, and maintain multimedia and business objects. The Jasmine Studio
feature provides a complete multimedia authoring and application
development environment, allowing clients to build multimedia
applications without the need to write complex programs. Jasmine also
features tools for designing and debugging sophisticated applications.
The Jasmine execution environment allows Jasmine applications to run in
standalone mode or as a plug-in to an Internet Web browser.
Since its introduction in fiscal year 1997, Unicenter TNG TM (The Next
Generation)TM has become the industrys de facto standard for enterprise
management software. In fiscal year 1998, the Company continued to extend
the features and functionality of Unicenter TNG. Unicenter TNG is an
object-oriented solution that enables organizations to visualize and
control their entire information technology infra-structure including
applications, databases, systems and networks from a business
perspective. This technology establishes a link between an organizations
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 the
information based on specific roles, locations, resources, and any other
dimensions of control. To visualize the complex interactions and
interdependencies of an enterprises entire distributed environment,
Unicenter TNG employs a Real World InterfaceTM that incorporates 3-D
animation and elements of virtual reality.
With the release of Opal 2.0 as part of its information management
solutions, clients can exploit new technologies, including HTML, Java and
ActiveX, while leveraging existing technologies. Opal enables clients to
modernize legacy applications without mounting expensive full-scale
development efforts. Opal provides access to mainframe legacy
applications as well as other information sources through an advanced
graphical user interface, employing multimedia, animation, sound, and
video. Opal applications can be deployed on client/server systems as well
as on the Web.
In response to client concerns regarding the Year 2000, the Company
expanded its offerings in this area with the introduction of CA-
Fix/2000TM. CA-Fix/2000 is a COBOL-Intelligent, automated date correction
tool that helps ensure a thorough and speedy conversion of COBOL batch
and CICS applications. Its use reduces the manual effort required to
achieve Year 2000 compliance. It consists of three phases: Discover,
Find, and Fix. In the Discover phase, CA-Fix/2000 examines an application
to identify missing routines. During the Find phase, CA-Fix/2000 uses
application-wide data flow analysis to locate all likely date fields. In
the Fix phase, CA-Fix/2000 connects all source and copybooks with the
application, applying connections to each date field in accordance with
user requirements. CA-Fix/2000 is a component of CA Discovery 2000TM, an
integrated end-to-end solution which transitions legacy applications into
the 21st century.
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 5,300 sales and sales support personnel engaged in
promoting the licensing of the Companys products.
In North America, the Company operates primarily through Direct and
Indirect sales forces responsible for sales, marketing and service of the
Companys 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 Companys products to those companies
that prefer to outsource their computer processing operations.
4
The Company also operates through wholly owned subsidiaries located in 43
countries outside North America. Each of these subsidiaries is structured
as an autonomous entity and markets all or most of the Companys products
in its respective territory. In addition, the Companys 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 less than 1% of the Companys fiscal 1998 revenue.
The Companys 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 Companys 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 Companys products. The
Company is encouraging value-added resellers (VARs) to actively market
the Companys products. VARs often bundle the Companys products 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 software licenses. Under the standard
license form, 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 continue
to use, and to receive technical support for the product, as well as
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 significant number of the Companys clients
elect to license the Companys products under a variety of installment
payment options. These plans incorporate license, usage and
maintenance fees into annual or monthly payments ranging from one to ten
years. The Company also offers licenses for products and groups of
products based on the size of an enterprises computing power as measured
in MIPS millions of instructions per second. Under this option, the
client is free to reallocate hardware or modify user configurations
without incremental costs.
Similar licensing alternatives are available for the Companys midrange
and UNIX-based software products. Most of the Companys client/server
products, including Ingres and Unicenter TNG are licensed on a power unit
basis. Client/server products sold through third-party VARs,
distributors and dealers are generally subject to distribution licensing
agreements and end-user shrink wrap licenses. The Companys micro software
products are licensed to end users upon payment of a fixed fee.
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 agreement, the Company warrants that
its products will perform in accordance with specifications published in
the product documentation.
Competition and Risks
The computer software business is highly competitive. It is marked by
rapid, substantial technological change as well as the steady emergence
of new companies and products. In addition, it is affected by such issues
as the Year 2000 date change and the introduction by the European
Monetary Union of the Euro, a new currency which seeks to replace certain
country currencies. There are many companies, including IBM, Sun, HP,
Compaq, 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, like Microsoft, Oracle Corporation,
and SAP AG, are the leading developers and vendors in their specialized
markets.
IBM, HP, Sun, and Compaq are by far the largest suppliers of systems
software, and are the manufacturers of the computer hardware systems used
by most of the Companys clients. Historically, these hardware
manufacturers have modified or introduced new operating systems, systems
software, and computer hardware. Such new products could in the future
incorporate features which are currently performed by the Companys
products or could require substantial modification of the Companys
products to maintain 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.
5
In the past, 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 and market
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 a material 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 the Companys existing products and
the development of new products. Although the Company does not expect
such restrictions will have this effect on its products, there can be no
assurance that such restrictions or other restrictions will not have a
material adverse effect on the Companys 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 such continued use will not have a
significant impact on the Companys operations and that its products will
remain compatible with any changes to such code. However, there can be no
assurance that future technological developments will not have an adverse
impact on the Companys 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
Companys systems software packages. In database management, 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 Companys 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.
Moreover, as the client/server market continues to expand and develop,
competitors could be expected to form strategic alliances or acquire
other companies to increase their presence in this market.
The Companys future operating results may be adversely affected by a
number of factors, including, but not limited to: its responsiveness to
client needs; successful implementation of newly introduced products;
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 either internally or through third-
party service providers to support client implementation of the Companys
products; 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. There can be no assurance that the Companys
products will continue to compete favorably or that it will be successful
in the face of increasing competition from new and existing competitors.
Year 2000
The millennium date change poses a challenge for software companies since
many existing computer hardware and software systems may not support
four-digit dates. This can result in errors in calculating date
information and in system failures. The Company has designed the current
versions of most of its existing programs to be Year 2000 compliant.
There can be no assurances that there will not be claims asserted against
it for damages for business interruption from products that were not Year
2000 ready. The Company has taken appropriate measures to prepare its
internal systems for the Year 2000 and is not aware of any material
operational issues or costs involved with this action. While the Company
does not believe that matters relating to the Year 2000 would have a
material impact on its business, financial condition or results of
operation, it is uncertain whether or to what extent the Company may be
affected by such matters.
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, their
documentation, and other written materials under copyright law. The
Company also obtains trademark protection for its various product names.
The Company from time to time receives notices from third parties
claiming infringement by the Companys products of third-party proprietary
rights. The Company expects that software will be subject to such claims
more frequently as the number of products and competitors in the Companys
industry grows and the functionality of products overlap. Such claims
could result in litigation, which can be costly, or licensing
arrangements on terms not favorable to the Company, including the payment
of royalties to third parties. The Companys business could be affected by
such litigation and licensing arrangements and by its ability to develop
substitute technology.
6
Clients
No individual client accounted for a material portion of the Companys
revenue during any of the past three fiscal years. Since the majority of
the Companys software is used with relatively expensive com-
puter hardware, most of its revenue is derived from companies which have
the resources to make a substantial commitment to data processing and
their computer installations. The majority of the worlds major companies
use one or more of the Companys software packages. The Companys software
products are generally used in a broad range of industries, businesses
and applications. The Companys clients include manufacturers, financial
service providers, banks, insurance companies, educational institutions,
hospitals, and government agencies. The Companys 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 for many of
its software products whereby problem diagnosis, program fixes and other
mainframe services can be provided online between the clients
installation and the support facilities of the Company. Another service,
CA-TCCSM (Total Client Care)SM, provides a major extension to existing
support services of the Company by offering access to the Companys client
support database. In addition, the Company offers support services online
via the Internet. These services have contributed to the Companys ability
to provide maintenance more efficiently.
Product development work is primarily done at the Companys facilities in
Alameda, California; San Diego, California; Santa Clara, California;
Maitland, Florida; Chicago, Illinois; Andover, Massachusetts;
Marlborough, Massachusetts; Mount Laurel, New Jersey; Princeton, New
Jersey; Islandia, 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, 1998, 1997, and 1996, product development and
enhancements charged to operations were $369 million, $318 million, and
$285 million, respectively. In fiscal years 1998, 1997, and 1996, the
Company capitalized $23 million, $18 million, and $16 million,
respectively, of internally developed software costs.
Certain of the Companys 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 the useful life of such purchase or a
period not exceeding five years.
Employees
As of March 31, 1998, the Company had approximately 11,400 employees of
whom approximately 2,250 were located at its headquarters facilities in
Islandia, New York; approximately 4,700 were located at other offices in
the United States, and approximately 4,450 were located at its offices in
foreign countries. Of the total employees, approximately 3,700 were
engaged in product development efforts and 5,300 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 Companys
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 50 office facilities throughout the
United States, and approximately 95 office facilities outside the United
States. Expiration dates on material leases range from fiscal 1999 to
2021.
The Company owns a 700,000 square-foot headquarters in Islandia, New
York. The Companys 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 begun construction of 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
Companys facilities in Islandia, New York; Princeton, New Jersey; San
Diego, California; and Chicago, Illinois. This equipment is used for the
Companys internal product development, for technical support efforts and
for administrative purposes. In addition, each of the Companys
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 19, 1998 are listed below:
Name Age Position
Charles B. Wang (1) 53 Chairman, Chief Executive Officer and
Director
Sanjay Kumar (1) 36 President, Chief Operating Officer and
Director
Russell M. Artzt (1) 51 Executive Vice President Research and
Development and Director
Charles P. McWade 53 Senior Vice President Business Development
Peter A. Schwartz 54 Senior Vice President Finance and Chief
Financial Officer
Ira Zar 36 Senior Vice President Finance
Michael A. McElroy 53 Vice President and Secretary
Lisa Savino 32 Vice President and Treasurer
(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 Business Development of the
Company since April 1998, having previously 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 has been Senior Vice President Finance since November 1997,
having previously served as Senior Vice President and Treasurer from
April 1994 to October 1997, and 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.
Ms. Savino was elected Vice President and Treasurer effective November
1997, having previously served as Assistant Treasurer since April 1995.
Ms. Savino joined the Company in May 1990.
The officers are appointed annually and serve at the discretion of the
Board of Directors.
8
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder
Matters
The Companys 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 Year 1998 Fiscal Year 1997
High Low High Low
Fourth Quarter $ 58.06 $ 45.44 $ 32.67 $ 25.42
Third Quarter $ 56.94 $ 45.83 $ 44.83 $ 32.50
Second Quarter $ 48.88 $ 36.13 $ 42.09 $ 27.00
First Quarter $ 38.92 $ 25.33 $ 36.05 $ 29.33
On March 31, 1998, the closing price for the Companys Common Stock
on the New York Stock Exchange was $ 57.75. The Company currently has
approximately 10,000 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 Companys most
recent dividend, paid in January 1998, was $ .04 per share.
References to prices per share have been adjusted to reflect three-
for-two stock splits effective June 19, 1996 and November 5, 1997.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with
Managements 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 1998(1) 1997(2) 1996(3) 1995(4) 1994
------------------------------------------
(in millions, except per share amounts)
Revenue $4,719 $4,040 $3,505 $2,623 $2,148
Net income (loss) 1,169 366 (56) 432 401
- - Basic earnings (loss)
- - Per common share (5) $ 2.14 $ .67 $ (.10) $ .80 $ .72
- - Diluted earnings (loss)
- - Per common share (5) 2.06 .64 (.10) .76 .69
Dividends declared
Per common share(5) .073 .065 .061 .059 .041
March 31,
------------------------------------------
BALANCE SHEET DATA 1998(1) 1997(2) 1996(3) 1995(4) 1994
------------------------------------------
(in millions)
Cash from operations $ 1,040 $ 790 $ 619 $ 489 $ 480
Working capital(deficiency) 379 53 (53) 300 451
Total assets 6,706 6,084 5,016 3,269 2,492
Long-term debt
(less current maturities) 1,027 1,663 945 50 71
Stockholders' equity 2,481 1,503 1,482 1,578 1,243
(1) Includes an after-tax charge of $21 million related to the Companys
unsuccessful tender offer for Computer Sciences Corporation.
(2) 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.
(3) 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.
(4) Includes an after-tax write-off of $154 million related to the
acquisition of The ASK Group, Inc. in June 1994.
(5) Adjusted to reflect three-for-two stock splits effective August 21,
1995, June 19, 1996 and November 5, 1997.
Item 7. Managements 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 Companys management as well as
information currently available to management. When used in this
document, the words anticipate, believe, estimate, 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 1998
Total revenue for fiscal year 1998 was $4.7 billion, an increase of 17%
over the $4.0 billion recorded in fiscal year 1997. The growth is
attributable to greater revenue derived from licensing fees on the
midrange platforms as well as a modest increase in mainframe product
revenue related to the continued demand for less restrictive enterprise
licensing pricing options. The client/server business, including CA
Arcserve R , Ingres, and Unicenter, showed strong growth, increasing 44%
over fiscal year 1997. Unicenter TNG (The Next Generation), a family of
integrated business solutions for monitoring and administering computer
systems across platform environments, accounted for 23% of the Companys
overall revenue. Total North American revenue increased 28% for fiscal
year 1998 as a result of strong acceptance of the Companys client/server
software solutions and enterprise pricing options. International revenue
remained unchanged in fiscal year 1998 compared with fiscal year 1997 due
partially to a strengthening of the U.S. Dollar against most currencies.
This unfavorable foreign exchange environment decreased international
revenue by $124 million when compared to fiscal year 1997. Maintenance
revenue declined 1%, or $7 million in fiscal year 1998. This decrease
reflects the Companys expanded client/server licensing which has
generated lower maintenance revenues and the ongoing trend of site
consolidations. Price changes did not have a material impact in either
year.
Selling, marketing, and administrative expenses for fiscal year 1998
increased to 37% of revenue compared to 36% in fiscal year 1997. The
increase represents an investment by the Company in additional service
and support personnel, as well as major promotional events, including the
product launch for Jasmine, a pure object database solution, and the
Unicenter TNGTM FrameworkTM release. In fiscal year 1998, new and
existing product enhancement, research and development expenditures
increased $51 million, or 16%. Continued emphasis on adapting and
enhancing products for the client/server environment, in particular
Unicenter TNG and Jasmine, a full fiscal year of Cheyenne product
development personnel costs and broadening of the Companys
Internet/Intranet product offerings were largely responsible for the
increase. Commissions and royalties were approximately 5% of total
revenue for both fiscal year 1998 and 1997. Depreciation and amortization
expense decreased $75 million, or 18% in fiscal year 1998 over fiscal
year 1997. The decrease was primarily due to completion of the
amortization associated with the On-Line Software International, Inc. and
Pansophic Systems, Inc. acquisitions, as well as the scheduled reduction
in amortization associated with The ASK Group, Inc. and Legent
Corporation acquisitions. This decrease was partially offset by a full
year of purchased software amortization related to the Cheyenne Software,
Inc. acquisition. For fiscal year 1998, net interest expense was $143
million, an increase of $41 million over fiscal year 1997. The increase
is attributable to non-recurring financing charges associated with the
unsuccessful Computer Sciences Corporation tender offer and higher debt
levels associated with the Cheyenne acquisition. Fiscal year 1998 pre-tax
profit was $1.87 billion compared to $932 million in fiscal year 1997.
The pre-tax amount for fiscal year 1997 includes an after-tax charge of
$598 million relating to the acquisition of Cheyenne for a write-off of
purchased research and development technology (R&D) that had not reached
the working model stage and had no alternative future use. Net income per
share in fiscal year 1998, excluding the Computer Sciences Corporation
pre-tax charge of $34 million, would have been $2.10 per share on a
diluted basis, a 24% increase over fiscal year 1997 net income of $1.69
per share, excluding the Cheyenne purchased R&D charge of $598 million.
The consolidated effective tax rate for fiscal year 1998, was 37.6%
versus 37% in fiscal year 1997 (excluding the research and development
charge).
A total of 20.25 million restricted shares were made available for grant
to three key executives under the 1995 Key Employee Stock Ownership Plan
(the 1995 Stock Plan) approved by the stockholders at the August 1995
Annual Meeting. An initial grant of 6.75 million restricted shares was
made to the executives at inception of the 1995 Stock Plan. In January
1996, based on the achievement of a price target for the Companys common
stock, 1.35 million shares (20%) of the initial grant vested, subject to
continued employment of the executives through March 31, 2000.
Accordingly, the Company began recognizing compensation expense
associated with the 1.35 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, 1998, 1997, and 1996. Additional
grants of the remaining 13.5 million shares available under the 1995
Stock Plan were made based on the achievement of 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.
If the closing price of the Companys stock on the New York Stock Exchange
exceeds $53.33 for 60 trading days within any twelve-month period, all
20.25 million shares under the 1995 Stock Plan will vest immediately, and
will no longer be subject to forfeiture. A one-time pre-tax charge of
approximately $1.2 billion will be recorded in the period in which the
sixtieth trading day occurs. As of May 19, 1998, the closing price of the
Companys common stock had exceeded $53.33 for 58 trading days beginning
October 21, 1997.
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 Companys products, particularly its
Unicenter family. The Cheyenne 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 Companys 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
10
with fiscal year 1996. This was caused by a combination of operational
difficulties experienced in refocusing the European sales and marketing
resources from mainframe to client/server sales opportunities exacerbated
by local 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,
net new product and enhancement research and development expenditures
increased $33 million, or 12%. The continued emphasis on adapting
products for the 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.
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 a write-off of purchased research
and development technology that had not reached the working model stage
and has no alternative future use 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 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 would
have been $964 million, or $1.69 per share (diluted), and $752, or $1.32
per share (diluted), respectively.
Selected Unaudited Quarterly Information on a diluted basis
(in millions, except per share amounts)
1998 Quarterly Results
June 30 Sept. 30 Dec. 31 Mar. 31(1) Total
Revenue $ 891 $1,122 $1,239 $1,467 $4,719
Percent of
total revenue 19% 24% 26% 31% 100%
Net income 156 272 340 401 1,169
Basic earnings
per share(3) $ .29 $ .49 $ .62 $ .74 $ 2.14
Diluted earnings
per share(3) $ .28 $ .48 $ .60 $ .71 $ 2.06
1997 Quarterly Results
June 30 Sept. 30 Dec. 31(2) Mar. 31 Total
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
Basic earnings
(loss) per share(3) $ .22 $ .40 $(.57) $ .62 $ .67
Diluted earnings
(loss) per share(3) $ .21 $ .39 $(.57) $ .60 $ .64
(1) Includes an after-tax charge of $21 million related to the Companys
unsuccessful tender offer for Computer Sciences Corporation.
(2) 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.
(3) Adjusted to reflect three-for-two stock split effective June 19,
1996 and November 5, 1997.
The Company has traditionally reported lower profit margins in the first
two quarters of each fiscal year than those experienced in the third and
fourth quarters. As part of the annual budget process, management
establishes higher discretionary expense levels in relation to projected
revenue for the first half of the year. Historically, the Companys
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 culmination of the Companys 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 Companys products are designed to improve the productivity and
efficiency of its clients information processing resources. Accordingly,
in a recessionary environment, the Companys products are often a
reasonable economic alternative to customers faced with the prospect of
incurring expenditures to increase their existing information processing
resources. However, a general or regional slowdown in the world economy
could adversely affect the Companys operations.
The Companys future operating results may be affected by a number of
other factors, including, but not limited to: uncertainties relative to
global economic conditions; the adequacy of the Companys internal
administrative systems to efficiently process transactions, store and
retrieve data subsequent to the year 2000; the Companys increasing
reliance on a single family of products for a material portion of its
sales; market acceptance of competing technologies; the availability and
cost of new solutions; delays in delivery of new products or features;
the Companys ability to update its business application products to
conform with the new, common European currency known as the Euro; the
Companys ability to successfully maintain or increase market share in its
core business while expanding its product base into other markets; the
strength of its distribution channels; the ability either internally or
through third-party service providers to support client implementation of
the Companys products; the Companys ability to manage fixed and variable
expense growth relative to revenue growth; and the Companys ability to
effectively integrate acquired products and operations.
The Company may experience further uncertainties and unanticipated costs
regarding Year 2000 compliance of its products. The Company has designed
the current version of the vast majority of its product offerings to be
Year 2000 compliant. However, there is currently a small minority of its
product offerings that have not been updated to Year 2000 compliance
specifications. The Company is making its best efforts to address this
issue and will continue to update and test its products for Year 2000
compliance. The Company has publicly identified any products that will
not be updated to be Year 2000 compliant and has been encouraging clients
using these products to migrate to compliant versions or products. There
can be no assurance that all the Companys products will be Year 2000
compliant prior to January 1, 2000 nor can there be assurances that the
Companys currently compliant products do not contain undetected problems
associated with Year 2000 compliance. Such problems may negatively affect
future operating results.
The Company recognizes the significance of the Year 2000 problem as it
relates to its internal systems. It has an overall plan and a systematic
process in place to make its internal financial and administrative
systems Year 2000-ready within the next 12 to 18 months. The cost of this
exercise is not viewed to have a material effect on the Companys results
of operations or liquidity. Contingency plans have also been developed
such that any failure to convert will not adversely affect overall
performance.
Foreign Currency Exchange
Continued uncertainty in world economies and currency markets caused an
additional strengthening of the U.S. Dollar during fiscal year 1998.
Approximately 34% of the Companys total revenue in fiscal year 1998, 40%
in fiscal year 1997, and 50% in fiscal year 1996, was derived from sales
outside of North America. Western Europe is the Companys most important
foreign market. The Company believes that its operations outside the U.S.
are located in countries which are politically and economically stable,
with the possible exception of financial volatility in certain Asian
markets. 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 Companys international operations
are incurred and paid for in the same currencies as those of its revenue.
During fiscal year 1998, the net income effect of foreign exchange
transaction losses was approximately $9 million. A foreign currency
translation adjustment of $84 million was charged to Stockholders Equity
in fiscal year 1998. As part of its risk management strategy and
consistent with prior years, the Company did not enter into any foreign
exchange derivative transactions during fiscal year 1998.
Liquidity and Capital Resources
The Companys cash, cash equivalents, and marketable securities of $310
million at March 31, 1998 increased by approximately $111 million from
the prior fiscal year. Cash generated from operations totaled $1,040
million for the fiscal year ended March 31, 1998, a 32% increase over the
prior year. The increase was driven by higher net income. Accounts
receivable balances increased during fiscal 1998, as customers continued
to demonstrate a preference for financing their licensing fees. The
Company offers installment payment plans as a competitive advantage
during the sales process. The Company used cash generated from operations
primarily for bank debt repayments of $630 million and for treasury stock
purchases of $163 million.
At March 31, 1998, the cumulative number of shares purchased under the
Companys various open market Common Stock repurchase programs was
approximately 121 million shares, including approximately 3.7 million
shares for the year just ended. The remaining number of shares authorized
for repurchase under these programs at March 31, 1998 is approximately 42
million. All references to number of shares reflect the November 1997
three-for-two stock split.
The Company employs a variety of financial alternatives to build a
capital structure capable of supporting its strategic objectives. On June
30, 1997, the Company replaced its existing credit facilities with a $1.1
billion 364-day revolving credit facility and a $1.5 billion five-year
revolving credit facility. In the quarter ended December 31, 1997, the
Company started construction of its European headquarters in the United
12
Kingdom. On February 24, 1998, Quick Access Inc., (a wholly owned
subsidiary) entered into an 85 million pound sterling (approximately U.S.
$142 million) 364-day revolving credit facility to finance this
construction. Under all of the above credit facilities, borrowings are
subject to interest primarily at the prevailing London InterBank Offered
Rate (LIBOR) subject to a fixed spread which is dependent on the
achievement of certain financial ratios. The Company is also required to
maintain certain financial conditions.
Peak borrowings under these facilities during fiscal year 1998 totaled
$2,070 million. At March 31, 1998, $1,233 million was outstanding under
these credit facilities. In addition, $320 million remains outstanding
under the Companys 6.77% Senior Notes. The weighted average interest
rate for these borrowings was 6.31%. The Company also maintains $24
million of unsecured and uncommitted multicurrency lines of credit. These
facilities were established to meet any short-term working capital
requirements for subsidiaries located outside the U.S.
In addition to the construction of the U.K. headquarters, capital
resource requirements as of March 31, 1998 consisted of lease obligations
for office space, computer equipment, mortgage or loan obligations, and
amounts due as a result of product and company acquisitions. It is
expected that existing cash, cash equivalents, short-term marketable
securities, the availability of borrowings under credit lines, as well as
cash provided from operations, will be sufficient to meet ongoing cash
requirements. Refer to Notes 6 and 7 of Notes to Consolidated Financial
Statements for details concerning commitments.
On April 24, 1998, the Company issued $1.75 billion of unsecured Senior
Notes. Amounts borrowed, rates and maturities for each issue were $575
million at 6-1/4% due April 15, 2003, $825 million at 6-3/8% due April
15, 2005 and $350 million at 6-1/2% due April 15, 2008. Proceeds were
used to repay borrowings under the Companys revolving credit facilities
and for general corporate purposes. These Senior Notes enabled the
Company to extend the maturity of its debt, commit to an attractive fixed
rate of interest and broaden the Companys sources of liquidity. Debt
ratings for the Companys senior unsecured notes and its bank credit
facilities are Baa1 and A- from Moodys Investor Services and Standard &
Poors, respectively.
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. Managements
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 Registrants definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrants 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 Registrants definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrants fiscal year for information concerning
executive compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrants definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrants fiscal year for information concerning
security ownership of each person known by the Company to own
beneficially more than 5% of the Companys 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 Registrants definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after
the end of the Registrants fiscal year for information concerning certain
relationships and related transactions.
13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) (1) The Registrants 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) Restated Certificate of Previously filed as Exhibit 3.1
Incorporation, as (a)(f) to the Companys 10-Q for
amended. the fiscal quarter ended September
30, 1996 and incorporated herein
by reference.
3(ii) By-Laws. Previously filed as Exhibit to the
Companys Form 10-Q for the fiscal
quarter ended September 30, 1993 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 Companys 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
Companys wholly owned
subsidiary.
4(c) Certificate of Previously filed as Exhibit 3 to the
Designation of Series One Companys Current Report on Form 8-K
Junior Participating dated June 18, 1991 and incorporated
Preferred Stock, Class herein by reference.
A of the Company.
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 and incorporated herein
by reference.
14
4(f) Indenture, with respect Filed herewith.
To the Companys $1.75
Billion Senior Notes
Dated April 24, 1998
Between the Company and
The Chase Manhattan Bank,
as Trustee.
4(g) Registration Rights Filed herewith.
Agreement between the
Company and the initial
Purchasers of the
Senior Notes.
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 1 to the
,as amended. Companys Form 10-Q for the fiscal
quarter ended September 30, 1997 and
incorporated herein by reference.
10(e) 1993 Stock Option Plan Previously filed as Annex 1 to the
for Non-Employee Companys definitive Proxy State-
Directors. Ment dated July 7, 1993 and
incorporated herein by reference.
10(f) Amendment No. 1 to the Previously filed as Exhibit E to the
1993 Stock Option Plan Companys Annual Report on Form 10-K
for Non-Employee for the fiscal year ended March
Directors dated October 31, 1994 and incorporated herein
20, 1993. By reference.
10(g) 1994 Annual Incentive Previously filed as Exhibit A to the
Compensation Plan, as Companys definitive Proxy Statement
Amended. dated July 7, 1995 and incorporated
herein by reference.
10(h) 1995 Key Employee Stock Previously filed as Exhibit B to the
Ownership Plan. Companys definitive Proxy State-
ment dated July 7, 1995 and
incorporated herein by reference.
15
10(i) Amended and Restated Previously filed as Exhibit 1 to
$1.5 billion the Companys Form 10-Q for the
Credit Agreement dated fiscal quarter ended June 30, 1997
as of June 30, 1997 and incorporated herein by reference.
among the Company
various banks and
financial institutions
and Credit Suisse, as
agent.
10(j) Amended and Restated Previously filed as Exhibit 2
$1.1 billion to the Companys Form 10-Q for
Credit Agreement dated the fiscal quarter ended June
as of June 30, 1997 30, 1997 and incorporated
among the Companys herein by reference.
various banks and
financial institutions
and Credit Suisse, as
Agent.
10(k) Note Purchase Agreement Previously filed as Exhibit D
dated as of April 1, to the Companys Annual Report
1996. on Form 10-K for the fiscal
year ended March 31, 1996 and
incorporated herein by reference.
10(l) 1996 Deferred Stock Plan Previously filed as Exhibit D
for Non-Employee to the Companys Annual Report
Directors. on Form 10-K for the fiscal
year ended March 31, 1996 and
incorporated herein by
reference.
21 Subsidiaries of the Filed herewith.
Registrant.
23 Consent of Ernst & Young Filed herewith.
LLP.
27 Financial Data Schedule, Filed electronically only.
including Restated
Financial Data Schedule.
16
(b) Reports on Form 8-K.
The Registrant filed a Report on Form 8-K on April 23, 1998
reporting its expected revenue and earnings results for its fourth
fiscal quarter and year ended March 31, 1998.
(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 Registrants 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 19, 1998
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, Chief Executive
- -------------------- Officer, 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 19, 1998
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, 1998
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, 1998 and 1997 20
Consolidated Statements of Operations
Years Ended March 31, 1998, 1997, and 1996 22
Consolidated Statements of Stockholders
Equity Years Ended March 31, 1998, 1997, And 1996 23
Consolidated Statements of Cash Flows
Years Ended March 31, 1998, 1997, and 1996 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, 1998 and
1997, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended
March 31, 1998. 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 Companys 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, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
March 31, 1998, 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 19, 1998
20
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
1998 1997
--------- ---------
(Dollars in millions)
CURRENT ASSETS
Cash and cash equivalents $ 251 $ 143
Marketable securities 59 56
Trade and installment accounts
Receivable, net 1,859 1,514
Other current assets 86 67
--------- ---------
TOTAL CURRENT ASSETS 2,255 1,780
INSTALLMENT ACCOUNTS RECEIVABLE,
net, due after one year 2,490 2,200
PROPERTY AND EQUIPMENT
Land and buildings 357 349
Equipment, furniture and improvements 501 438
--------- ---------
858 787
Allowance for depreciation and amortization 399 349
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 459 438
PURCHASED SOFTWARE PRODUCTS, net of accumulated
amortization of $1,305 and $1,079 289 440
EXCESS OF COST OVER NET ASSETS ACQUIRED, net of
accumulated amortization of $205 and $139 1,099 1,159
OTHER ASSETS 114 67
--------- ---------
TOTAL ASSETS $ 6,706 $ 6,084
========= =========
See Notes to Consolidated Financial Statements.
21
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- ---------
(Dollars in millions)
CURRENT LIABILITIES
Loans payable and current portion of
long-term debt $ 571 $ 548
Accounts payable 153 124
Salaries, wages and commissions 157 140
Accrued expenses and other liabilities 297 324
Taxes, other than income taxes 76 66
Federal, state and foreign income taxes payable 345 265
Deferred income taxes 277 260
--------- ---------
TOTAL CURRENT LIABILITIES 1,876 1,727
LONG-TERM DEBT, net of current portion 1,027 1,663
DEFERRED INCOME TAXES 952 853
DEFERRED MAINTENANCE REVENUE 370 338
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, 1,100,000,000 shares
authorized, 630,920,576 shares issued* 63 63
Additional paid-in capital 523 497
Retained earnings 2,886 1,757
Equity adjustment (104) (27)
Treasury stock, at cost-84,869,026 shares for
1998 and 87,967,888 shares for 1997* (887) (787)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,481 1,503
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,706 $ 6,084
========= =========
*Share amounts adjusted for three-for-two stock splits effective June 19,
1996 and November 5, 1997.
See Notes to Consolidated Financial Statements.
22
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
1998 1997 1996
------- ------- -------
(In millions, except per share amounts)
Product revenue and other related income $ 3,986 $ 3,300 $ 2,776
Maintenance fees 733 740 729
------- ------- -------
TOTAL REVENUE 4,719 4,040 3,505
Costs and Expenses:
Selling, marketing and administrative 1,751 1,465 1,368
Product development and enhancements 369 318 285
Commissions and royalties 233 201 174
Depreciation and amortization 349 424 404
Interest expense, net 143 102 71
Purchased research and development - 598 1,303
------- ------- -------
TOTAL COSTS AND EXPENSES 2,845 3,108 3,605
------- ------- -------
Income (loss) before income taxes 1,874 932 (100)
Income taxes (benefit) 705 566 ( 44)
------- ------- -------
NET INCOME (LOSS) $ 1,169 $ 366 $ ( 56)
======= ======= =======
BASIC EARNINGS (LOSS) PER SHARE $ 2.14 $ .67 $ (.10)
======= ======= =======
Basic weighted average shares used
In computation* 546 546 543
DILUTED EARNINGS (LOSS) PER SHARE $ 2.06 $ .64 $ (.10)
======= ======= =======
Diluted weighted average shares
Used in computation* 566 569 543
*Share amounts adjusted for three-for-two stock splits effective
August 21, 1995, June 19, 1996 and November 5, 1997.
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, 1995 $ 63 $ 479 $ 1,516 $ 57 $ (537) $ 1,578
Net loss (56) (56)
Dividends declared
($.061 per share)(2) (34) (34)
Exercise of Common Stock
options and other (7) 7 32 32
401(k) discretionary contribution 10 5 15
Translation adjustment in 1996 (25) (25)
Net change attributable to
unrealized gain on marketable
securities 2 2
Purchases of treasury stock (30) (30)
-------- ----------- -------- ---------- -------- ------------
Balance at March 31, 1996 63 482 1,426 41 (530) 1,482
Net income 366 366
Dividends declared
($.065 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 63 497 1,757 (27) (787) 1,503
Net income 1,169 1,169
Dividends declared
($.073 per share)(2) (40) (40)
Exercise of Common Stock
options and other 18 7 59 84
401(k) discretionary contribution 8 4 12
Translation adjustment in 1998 (84) (84)
Purchases of treasury stock (163) (163)
-------- ----------- -------- ---------- -------- ------------
Balance at March 31, 1998 $ 63 $ 523 $ 2,886 $ (104)(1) $ (887) $2,481
======== =========== ======== ========== ======== ============
(1) Represents foreign currency translation adjustment of $(124) million
and $20 million of restricted
stock.
(2) Amounts adjusted for three-for-two stock splits effective
August 21, 1995 and June 19, 1996 and November 5, 1997.
See Notes to Consolidated Financial Statements.
24
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1998 1997 1996
------- ------- ------
(Dollars in millions)
OPERATING ACTIVITIES:
Net income (loss) $1,169 $ 366 $ (56)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 349 424 404
Provision for deferred income taxes (benefit) 141 221 (290)
Charge for purchased research and development 598 1,303
Compensation expense related to stock and pension plans 21 22 19
Increase in noncurrent installment accounts receivable, net (377) (575) (590)
Increase (decrease) in deferred maintenance revenue 41 (23) 37
Foreign currency transaction (gain) loss-before taxes 15 11 (2)
Changes in other operating assets and liabilities,
net of effects of acquisitions:
Increase in trade and installment receivables (409) (341) (262)
Other changes in operating assets and liabilities 90 87 56
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1040 790 619
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing rights
and intangibles (61) (1,191) (1,787)
Purchases of property and equipment (84) (53) (21)
Purchases of marketable securities (42) (51) (54)
Sales of marketable securities 39 99 136
Increase in capitalized development costs and other (23) (18) (16)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (171) (1,214) (1,742)
FINANCING ACTIVITIES:
Dividends (40) (35) (34)
Purchases of treasury stock (163) (317) (30)
Proceeds from borrowings 23 1,480 1,720
Repayments of borrowings (630) (710) (570)
Exercise of common stock options and other 62 53 22
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (748) 471 1,108
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS BEFORE EFFECT OF EXCHANGE
RATE CHANGES ON CASH 121 47 (15)
Effect of exchange rate changes on cash (13) (1) (5)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 108 46 (20)
CASH AND CASH EQUIVALENTS-
BEGINNING OF YEAR 143 97 117
------- ------- -------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 251 $ 143 $ 97
======= ======= =======
See Notes to Consolidated Financial Statement
25
Note 1 Significant Accounting Policies
Description of Business: Computer Associates International, Inc. and
subsidiaries (the Company) designs, develops, markets, licenses, 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 Companys share of investment income or
loss is included in selling, marketing and administrative expenses.
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. The amounts of the discount credited to
revenue for the years ended March 31, 1998, 1997, and 1996 were $356
million, $271 million, and $215 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 ad-justed 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 cost over net assets acquired is being amortized
by the straight-line method over 20 years. Costs of purchased software,
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 products useful economic life, commencing
with product release. Unamortized capitalized development costs included
in other assets at March 31, 1998 and 1997 were $62 million and $54
million, respectively. Amortization of capitalized development costs was
$15 million, $17 million, and $19 million for the fiscal years ended
March 31, 1998, 1997, and 1996, respectively.
Net Income per Share: The Company adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share as of December 31, 1997. SFAS No. 128 requires
the Company to present basic and diluted earnings per share (EPS) on the
face of the income statement. Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed by
dividing net income by the sum of the weighted-average number of common
shares outstanding for the period plus the assumed exercise of all
dilutive securities, such as stock options. Diluted earnings per share
for the periods presented is not materially different from Net Income per
share reported under Accounting Principles Board Opinion No. 15.
26
Note 1 Significant Accounting Policies (Continued)
Year Ended March 31,
1998 1997 1996
(In millions, except per share amounts)
Net income (loss) $1,169 $366 $ (56)
Diluted Earnings Per Share*
Weighted average shares
outstanding and,common
share equivalents 566 569 543(1)
------ ----- -----
Diluted Earnings Per Share $ 2.06 $.64 $(.10)
------ ----- -----
Diluted Share Computation:
Average common shares outstanding 546 546 543(1)
Average options outstanding net 19 22
1995 Stock Plan average shares
outstanding net 1 1
------ ----- -----
Weighted average shares outstanding and,
common share equivalents 566 569 543(1)
====== ====== ======
(1) For the year ended March 31, 1996, the Company reported a net loss.
Common share equivalents are anti-dilutive and are, therefore, not
reported.
*Share and per share amounts adjusted to reflect three-for-two stock
splits effective August 21, 1995, June 19, 1996, and November 5, 1997.
Statement of Cash Flows: Interest payments for the years ended March 31,
1998, 1997, and 1996 were $157 million, $89 million, and $76 million,
respectively. Income taxes paid for these fiscal years were $470 million,
$300 million, and $144 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 gains (losses) of approximately $(9) million in 1998,
$(7) million in 1997, and $1 million in 1996.
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 managements knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual results.
New Accounting Pronouncements: In October 1997, the Accounting Standards
Executive Committee issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended in March 1998 by Statement of Position
98-4. These SOPs provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and
are effective for the Companys transactions entered into subsequent to
March 31, 1998. Definitive, detailed implementation guidelines for the
new standards have not been issued. This guidance could lead to
unanticipated changes in the Companys operational and revenue accounting
practices. Such changes may affect sales or revenue recognition
practices, increase administrative costs, and otherwise adversely modify
existing operations.
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.
27
The effect of this change was to decrease net income by $221 million, or
$.39 per share on a diluted basis, 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 Companys $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 Cheyennes 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 had 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 diluted earnings per
share for the year ended March 31, 1997 would have been $964 million, or
$1.69 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 Companys $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 Legents
operations have been combined with those of the Company since the date of
the 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 diluted
earnings per share of $1.32.
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 charges
of $598 million and $808 million related to the Cheyenne and Legent
acquisitions are reflected in only the fiscal year 1996 pro forma
combined results of operations:
Year Ended March 31,
1998(1) 1997 1996
(Amounts in millions, except per share amounts)
Revenue $ 4,719 $ 4,175 $ 3,789
Net income (loss) 1,169 920 (775)
Basic earnings(loss) per share $ 2.14 $ 1.68 $ (1.43)
Shares used in computation* 546 546 543
Diluted earnings (loss)per share $ 2.06 $ 1.62 $ (1.43)
Shares used in computation* 566 569 543
(1) There were no significant acquisitions in fiscal year 1998. Fiscal
year 1998 results include full year operations of the Company,Legent and
Cheyenne and are presented for comparison purposes only.
*Adjusted for three-for-two stock splits effective August 21, 1995,
June 19, 1996, and November 5, 1997.
In managements 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.
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, 1998:
Debt securities $ 59 $ 59
March 31, 1997:
Debt securities $ 56 $ 56
March 31, 1996:
Debt securities $ 104 $1 $ 105
==== ==== =====
For years ended March 31, 1998, 1997, and 1996, no debt securities were
deemed to be Cash and Cash Equivalents.
The gross and net realized gains on sales of available-for-sale
securities totaled $3 million for the years ended March 31, 1998, and $1
million each for the years ended March 31, 1997 and 1996. No unrealized
gains or losses existed at March 31, 1998 and an unrealized gain of $1
million existed at March 31, 1997.
The amortized cost and estimated fair value based on published closing
prices of debt securities at March 31, 1998, 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, 1998
Estimated
Fair
Cost Value
------ -----------
Available-for-Sale: (Dollars in millions)
Due in one year or less $ 9 $ 9
Due one through three years 29 29
Due in three through five years 11 11
Due after five years 10 10
---- ----
$ 59 $ 59
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, 1998:
Revenue:
To unaffiliated customers $ 2,994 $ 1,725 $ 4,719
Between geographic areas (b) 373 $ (373)
---------- ----------- ---------- ----------
Total Revenue 3,367 1,725 (373) 4,719
Net income 990 179 1,169
Identifiable assets 5,326 1,874 (494) 6,706
Total liabilities 3,373 1,346 (494) 4,225
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
(a) The Company operates wholly owned subsidiaries in Canada and 42
foreign countries located in the 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, 1998, 1997, and 1996, $14 million, $36
million, and $39 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,
1998 1997
------- ------
(Dollars in millions)
Current receivables $ 2,655 $ 2,220
Less: Allowance for uncollectible amounts (210) (191)
Unamortized discount and maintenance fees (586) (515)
-------- --------
$ 1,859 $ 1,514
======== ========
Non-current receivables $ 3,719 $ 3,244
Less: Allowance for uncollectible amounts (36) (36)
Unamortized discount and maintenance fees (1,193) (1,008)
-------- --------
$ 2,490 $ 2,200
======== ========
The provisions for uncollectible amounts for the years ended March 31,
1998, 1997 and 1996 were $71 million, $110 million, and $71 million,
respectively, and are included in selling, marketing and administrative
expenses.
Note 6 Debt
In fiscal year 1998, the Company replaced $2 billion of its unsecured
credit facilities with a $1.1 billion 364-day credit facility and a $1.5
billion five-year revolving credit facility. These credit facilities
provide for interest at the prevailing London InterBank Offered Rate
(LIBOR) plus a margin, and require the Company to maintain certain
financial ratios. Interest margins and committment fees are based upon
the Companys achievement of certain financial ratios. At March 31, 1998
and March 31, 1997, $1,210 million and $1,840 million, respectively, was
outstanding under the credit facilities then available. The effective
pre-tax interest rate at March 31, 1998 was approximately 6%.
On February 24, 1998, Quick Access Inc., (a wholly owned subsidiary of
the Company) entered into an 85 million pounds sterling (approximately
U.S. $142 million) 364-day revolving credit facility to finance the
construction of a European headquarters in the United Kingdom. The
facility requires the Company to maintain certain financial conditions,
and borrowing costs and fees are based upon achievement of certain
financial ratios. The credit facilitys interest is calculated at the
prevailing LIBOR for pounds sterling plus a margin. At March 31, 1998,
$14 million pounds sterling (approximately U.S. $23 million) was
outstanding under this credit facility with an interest rate of
approximately 7.8%.
At March 31, 1998 and 1997, the Company had $320 million of unsecured
Senior Notes outstanding at a fixed rate of interest of 6.77%. The final
maturity of this debt (less required amortization) is due in the year
2003.
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 $3 million and $5
million was drawn at March 31, 1998 and 1997, respectively.
At March 31, 1998 and 1997, the Company had various other fixed rate debt
obligations outstanding carrying annual interest rates ranging from 6% to
7-1/2% totaling approximately $42 million and $46 million, respectively.
The Company conducts an ongoing review of its capital structure and debt
obligations 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 next five fiscal
years are as follows: 1999-$571 million, 2000-$738 million, 2001-$69
million, 2002-$80 million, and 2003-$65 million.
Interest expense for the years ended March 31, 1998, 1997, and 1996 was
$147 million, $104 million, and $81 million, respectively.
On April 24, 1998, the Company issued $1.75 billion of unsecured Senior
Notes in a transaction governed by Rule 144A under the Securities Act of
1933. The Company intends to promptly register the Notes with the
Securities and Exchange Commission. $575 million of the Notes are due
2003, $825 million of the Notes are due 2005, and $350 million of the
Notes are due 2008. The 2003 Notes pay interest at 6-1/4%, the 2005 Notes
pay interest at 6-3/8%, and the 2008 Notes pay interest at 6-1/2%. All
interest is paid semiannually. The proceeds were used to repay all
indebtedness outstanding under the Companys $1.1 billion and $1.5 billion
credit facilities and for other general corporate purposes.
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 begun construction of a facility in the United Kingdom with an
estimated total cost of $142 million.
Rental expense under operating leases for the years ended March 31,
1998, 1997, and 1996 was $140 million, $132 million, and $165 million,
respectively. Future minimum lease payments are: 1999-$89 million; 2000-
$71 million; 2001-$56 million; 2002-$42 million; 2003-$35 million; and
thereafter-$101 million.
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of marketable securities
and accounts receivable. The Companys marketable securities consist
primarily of high quality debt securities with limited exposure to any
single instrument. The Companys 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,
1998 1997 1996
------ ------ ------
(Dollars in millions)
Domestic $1,611 $ 520 $ (464)
Foreign 263 412 364
------ ------ ------
$1,874 $ 932 $ (100)
====== ===== ======
The provision for income taxes (benefit) consists of the following:
Year Ended March 31,
1998 1997 1996
------ ------ ------
(Dollars in millions)
Current:
Federal $ 446 $ 256 $ 160
State 44 38 30
Foreign 74 51 56
------ ------ ------
564 345 246
====== ====== ======
Deferred:
Federal 119 106 (337)
State 12 19 ( 36)
Foreign 10 96 83
------ ------ ------
141 221 (290)
====== ====== ======
Total:
Federal 565 362 (177)
State 56 57 (6)
Foreign 84 147 139
------ ------ ------
$ 705 $ 566 $ (44)
====== ====== ======
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 $1.2 billion in 1998 and $.9 billion in 1997) 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,
1998 1997 1996
------ ------ ------
(Dollars in millions)
Statutory rate $ 656 $ 326 $ (35)
State taxes, net of
federal tax effect 36 37 (4)
Purchased research and development 209
Other, net 13 (6) (5)
------ ------ ------
$ 705 $ 566 $ (44)
Note 9 - Stock Plans
The Company has a 1981 Incentive Stock Option Plan (the 1981 Plan)
pursuant to which options to purchase up to 27 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 800,000 options
which are outstanding under the 1981 Plan were exercisable at March 31,
1998 at $2.22-$4.09 per share.
The Company has a 1987 Non-Statutory Stock Option Plan (the 1987
Plan) pursuant to which options to purchase up to 17 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, 1998, 30,375
shares of the Companys Common Stock were available for future grants.
All of the 7.9 million options which are outstanding under the 1987 Plan
were exercisable as of that date. These options are exercisable at $2.22-
$4.26 per share.
The Companys 1991 Stock Incentive Plan (the 1991 Plan) provides
that stock appreciation rights and/or options, both qualified and non-
statutory, to purchase up to 67.5 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,
1998, no stock appreciation rights have been granted under this plan and
45.4 million options have been granted. At March 31, 1998, 7.9 million
of the 33.8 million options which are outstanding under the 1991 Plan
were exercisable. These options are exercisable at $3.33-$47.25
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
337,500 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, 141,750 options have been granted under this
plan. 74,250 of the 94,500 options which are outstanding under the 1993
Plan were exercisable as of that date. These options are exercisable at
$7.59-$43.08 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):
1998 1997 1996
----------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------ ------- -------
Beginning of year 40.2 $13.96 41.2 $ 8.71 38.8 $ 5.52
Granted 8.9 37.58 9.3 31.51 9.3 19.34
Exercised (5.8) 10.46 (7.9) 6.71 (5.1) 3.98
Terminated (.7) 15.82 (2.4) 16.62 (1.8) 8.21
------- ------- -------
End of year 42.6 19.36 40.2 13.96 41.2 8.71
Options exercisable
at end of year 16.7 $ 7.84 15.8 $ 7.06 14.7 $ 3.83
The following table summarizes information about these plans at March
31, 1998 (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
- ---------- -------- ------------- ---------- --------- --------------
$ 2.22 -$10.00 19.8 4.9 years $ 6.04 14.2 $ 5.04
$10.01 -$20.00 7.3 7.1 years 19.16 1.7 18.89
$20.01 -$30.00 4.9 9.0 years 29.27 .1 25.85
$30.01 -$40.00 6.5 8.1 years 34.97 .7 34.59
$40.01 -$47.25 4.1 9.9 years 47.14 40.88
------ -----
42.6 16.7
Under the 1995 Key Employee Stock Ownership Plan (1995 Stock Plan), 20.25
million restricted shares are available for grant to three key
executives. An initial grant of 6.75 million restricted shares was made
to the executives at inception of the 1995 Stock Plan. In January 1996,
based on the achievement of a price target for the Companys common stock,
1.35 million shares of the initial grant vested, subject to continued
employment of the executives through March 31, 2000. Accordingly, the
Company began recognizing compensation expense associated with the 1.35
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, 1998,1997 and 1996. Additional grants of the remaining 13.5
million shares available under the 1995 Stock 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.
If the closing price of the Companys stock on the New York Stock Exchange
exceeds $53.33 for 60 trading days within any twelve-month period, all
20.25 million shares under the 1995 Stock Plan will vest immediately, and
will no longer be subject to forfeiture. A one-time charge of
approximately $1.2 billion will be recorded in the period in which the
sixtieth trading day occurs. As of May 19, 1998, the closing price of the
Companys common stock had exceeded $53.33 for 58 trading days beginning
October 21, 1997.
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:
Year ended March 31,
1998 1997 1996
------ ------ ------
(Amounts in millions, except per share amounts)
Net income (loss)-as reported $1169 $ 366 $ (56)
Net income (loss)-pro forma 1085 301 (94)
Basic earnings (loss)
per share $2.14 $ .67 $(.10)
Basic earnings (loss)
per share-pro forma 1.99 .55 (.18)
Diluted earnings (loss)
per share $2.06 $ .64 $(.10)
Diluted earnings (loss)
per share-pro forma 1.94 .54 (.18)
The weighted-average fair value at date of grant for options granted in
1997 and 1996 were $20.44, $19.34, $10.52, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model. The following weighted average assumptions
were used for option grants in 1998,1997 and 1996, respectively; dividend
yield of .22%,.19% and .34%; expected volatility factors of .50; risk-
free interest rates of 6.2%,6.5% and 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, June 19, 1996 and November 5, 1997.
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 each of the years ended March 31,
1998, 1997, and 1996 were $5 million. In addition, the Company may make
discretionary contributions to the CASH Plan. Discretionary contributions
to the CASH Plan for each of the years ended March 31, 1998, 1997, and
1996 approximated $17 million.
Note 11 Rights Plan
Each outstanding share of the Companys Common Stock carries a stock
purchase right issued under the Companys 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 Companys 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 Companys outstanding common stock or (iii) the
determination by the Companys 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, 1998 $ 227 $ 71 $ 2 $ 54 $ 246
Year ended March 31, 1997 $ 182 $ 110 $ 13 $ 78 $ 227
Year ended March 31, 1996 $ 182 $ 71 $ 5 $ 76 $ 182
(a) Reserves of acquired companies.
(b) Write-offs of amounts against allowance provided.