Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9247
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Computer Associates Plaza, Islandia, New York 11749
(Address of principal executive offices) (Zip Code)
(516) 342-5224
(Registrant's telephone number, including area code)
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:
61/4% Convertible Subordinated Debentures of On-Line Software International,Inc.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes _X__ No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: The aggregate market value of the voting stock held by
non-affiliates of the Registrant as at May 26, 1999 was $17,394,543,586 based on
a total of 384,409,803 shares held by non-affiliates and the closing price on
the New York Stock Exchange on that date which was $45.25.
Number of shares of stock outstanding at May 26, 1999: 536,329,140 shares of
Common Stock, par value $.10 per share.
Documents Incorporated by Reference:
Part III - Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.
PART I
Item 1. Business
(a) General Development of Business
Computer Associates International, Inc. (the "Company", "Registrant" or "CA")
was incorporated in Delaware in 1974. In December 1981, CA completed its initial
public offering of Common Stock. The Company's Common Stock is traded on
the New York Stock Exchange under the symbol "CA".
CA 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. CA
supplies products which can be used on all major hardware platforms, operating
systems, and application development environments.
CA's product philosophy of internally developing products, such as Unicenter
TNG(R), Jasmine(R), 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 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 business units. These
business units 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 Company's sales
and development organizations, providing high-level technical assistance and
guidance to clients.
In November 1996, CA 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.
In March 1999, CA acquired Computer Management Sciences, Inc. ("CMSI"). CMSI
custom developed information technology solutions. CMSI specialized in Internet
development, business process re-engineering, strategy planning, evolutionary
downsizing, rapid application development, object-oriented databases, vendor
software evaluation, and other key technology areas. 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.
Additionally, in March 1999, the Company executed a merger agreement to acquire
Platinum technology International, inc. ("Platinum") for $29.25 per share.
Platinum is engaged in the design, development, marketing and support of
database tools and utilities, tools for enterprise management, data warehousing,
as well as providing a wide range of professional services. The acquisition,
when consummated, will be accounted for using the purchase method of accounting.
See Note 12 of Notes to Consolidated Financial Statements for additional
information concerning the Platinum acquisition.
(b) Financial Information About Industry Segments
CA's global business is principally 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
CA 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.
CA 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 Company's 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
CA 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 Company's standardized business
software products enable clients to use their total data processing
resources--hardware, software, and personnel--more efficiently. Many of the
Company's products provide tools to measure and improve computer hardware and
software performance and programmer productivity. The Company provides products
that effectively manage the complex, heterogeneous systems upon which businesses
depend. CA's solutions enable clients to use the latest technologies while
preserving their substantial investments in hardware, software, and staff
expertise. By employing a common infrastructure, the Company's developers create
modular software designed to be continually and consistently improved. This
pragmatic approach protects clients' investments by using scalar, evolutionary
change rather than revolutionary disruption and waste. CA's software
architecture is specifically designed to help clients migrate to client/server
computing or build new client/server systems. The Company's integrated
distributed systems management solutions manage this complex environment.
Full-function client/server business applications simplify customization to meet
unique business needs on a combination of platforms.
Since its introduction in fiscal year 1997, Unicenter TNG(R) (The Next
Generation)TM has become the industry's de facto standard for enterprise
management software. In fiscal year 1999, CA 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 infrastructure--including applications, databases, systems, and
networks--from a business perspective. This technology establishes a link
between an organization's information technology resources and its business
policies. Through Unicenter TNG, an organization can define its business
policies, map these policies to particular resource management requirements, and
then monitor resources for their support of specific business processes. The
flexible Business Process ViewsTM can be customized to deliver the information
based on specific roles, locations, resources, and any other dimensions of
control. To visualize the complex interactions and interdependencies of an
enterprise's entire distributed environment, Unicenter TNG employs a Real World
InterfaceTM that incorporates 3-D animation and elements of virtual reality.
During fiscal year 1999, the Company announced full-scale delivery of
NeugentsTM. Neugents, which represent a revolutionary neural network technology,
are intelligent software agents that persist throughout various computing
environments to recognize certain patterns and record the resulting transition
states. Neugents enable an entirely new generation of business applications that
can not only analyze conditions in business markets and technical environments,
but also predict changes in those conditions and suggest courses of action to
capitalize on opportunities and/or avoid potential problems. When employed with
Unicenter TNG, Neugents can proactively prevent performance and availability
problems with a level of precision and rigor unattainable by conventional trend
and resource analysis solutions.
The Company continued full-scale delivery of Jasmine. 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. Jasmine 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.
CA introduced its Enterprise Edition products during fiscal year 1999, all of
which are based on Unicenter TNG technology. The Enterprise Edition offering
includes products in the areas of Security, Software Delivery, Help Desk, Asset
Management, Network, Storage, and Web/e-Commerce. CA also introduced its
Workgroup Editions which include standalone management products on a small scale
for computing environments of up to 250 users per server. These products are
simple to install and easy to use.
Professional Services
During fiscal year 1999, the Company formed a professional
services organization known as Global Professional ServicesTM ("GPS") to expand
the Company's offerings on behalf of clients and partners around the world. GPS
offers a broad spectrum of services ranging from consulting to implementation to
comprehensive outsourcing and custom developing leading-edge IT solutions. The
Company acquired a number of professional service companies during the fiscal
year, including Computer Management Sciences, Inc., Realogic, Inc., and LDA
Systems, Inc., which strengthened GPS. As of March 31, 1999, GPS had 3,350
employees. GPS offers services in support of, and independent of the Company's
products. These services can improve implementation and deployment of the
Company's products which the Company believes will lead to universal customer
satisfaction and greater follow-on sales.
Sales and Marketing
CA distributes, markets, and supports its products on a worldwide basis with its
own employees and a network of independent value-added resellers, distributors,
and dealers. The Company has approximately 4,400 sales and sales support
personnel engaged in promoting the licensing of the Company's products.
In North America, the Company operates primarily through Direct and Indirect
sales forces responsible for sales, marketing, and service of the Company's
non-business
4
application solutions. Several application business units are responsible for
the sales and marketing activities of business application solutions. A
separate Global Accounts group provides additional service to large clients,
particularly facilities managers. Facilities managers deliver data processing
services using the Company's products to those companies that prefer to
"outsource" their computer processing operations.
The Company also operates through wholly owned subsidiaries located in 42
countries outside North America. Each of these subsidiaries is structured as an
autonomous entity, and markets all or most of the Company's products in its
respective territory. In addition, the Company's products are marketed by
independent distributors in those areas of the world where it does not have a
direct presence. Revenue from independent distributors accounted for less than
1% of the Company's fiscal 1999 revenue.
The Company's marketing and marketing services groups produce substantially all
of the user documentation for its products, as well as promotional brochures,
advertising, and other business solicitation materials. The duties of these
groups include the writing of the requisite materials, editing, typesetting,
photocomposition, and printing.
Licensing
CA does not sell or transfer title to its products to its clients. The products
are licensed on a "right to use" basis pursuant to license agreements. Such
licenses generally require that the client use the product only for its internal
purposes at its own computer installation. In addition, the Company offers
license agreements to facilities managers enabling them to use the Company's
software in conjunction with their outsourcing business. Under certain
circumstances, the Company will also license, on a non-exclusive basis, clients
and other third parties as resellers of certain of the Company's products. The
Company is encouraging value-added resellers ("VARs") to actively market the
Company's products. VARs often bundle the Company's 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.
CA 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 Company's clients
elect to license the Company's products under a variety of installment payment
options. These plans incorporate license and 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 enterprise's 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 CA's midrange and UNIX-based software
products. Most of the Company's client/server products, including Ingres(R) and
Unicenter TNG are licensed on a power unit basis. These licenses are typically
perpetual in nature whereby the client has the option to elect maintenance
(technical support and product enhancements) on an annual 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 Company's 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 Economic and Monetary
Union of the Euro. 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
Company's clients. Historically, these hardware manufacturers have modified or
introduced new operating systems, systems software, and computer hardware. Such
5
new products could in the future incorporate features which are currently
performed by the Company's products or could require substantial modification of
the Company's 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.
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 Company's 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 Company's business.
The Company anticipates ongoing use of microcode or firmware provided by
hardware manufacturers. Microcode and firmware are basically software programs
in hardware form, and therefore are less flexible than pure software. The
Company believes that such continued use will not have a significant impact on
the Company's 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 Company's
operations.
Although no company competes with the Company across its entire software product
line or a significant portion thereof, the Company considers at least 75 firms
to be directly competitive with one or more of the Company's systems software
packages. In database management, graphics and applications software for the
desktop, midrange, and mainframe environments, there are hundreds of companies,
whose primary business focus is on at least one but not all of these solutions.
Certain of these companies have substantially larger operations than the
Company's in these specific niches. Many companies, large and small, use their
own technical personnel to develop programs similar to those of the Company;
these may rightly be seen as competitors of the Company. The Company believes
that the most important considerations for potential purchasers of software
packages are: product capabilities; ease of installation and use; dependability
and quality of technical support; documentation and training; the experience and
financial stability of the vendor; integration of the product line; and, to a
lesser extent, price. Price is a stronger factor in the client/server and
microcomputer marketplace. 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 Company's 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 Company's
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 Company's products will continue
to compete favorably or that it will be successful in the face of increasing
competition from new and existing competitors.
Product Protection
The products of the Company are treated as trade secrets and confidential
information. CA 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. CA from time to time receives notices from third parties claiming
infringement by the Company's 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 Company's 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. CA's business could be
affected by such litigation and licensing arrangements and by its ability to
develop substitute technology.
Clients
No individual client accounted for a material portion of the Company's revenue
during any of the past three fiscal years. Since the majority of the Company's
software is used with relatively expensive computer hardware, most of its
revenue is derived from companies which have the resources to make a substantial
6
commitment to data processing and their computer installations. The majority of
the world's major companies use one or more of the Company's software packages.
The Company's software products are generally used in a broad range of
industries, businesses, and applications. The Company's clients include
manufacturers, financial service providers, banks, insurance companies,
educational institutions, hospitals, and government agencies. The Company's
products are also sold to and through microcomputer distributors and VARs.
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 client's 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 Company's client support database. In addition, the Company
offers support services online via the Internet through its Web Track facility.
These services have contributed to the Company's ability to provide maintenance
more efficiently.
Product development work is primarily done at the Company's facilities in
Alameda, California; San Diego, California; San Jose, 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, 1999, 1998, and 1997, product development and enhancements
charged to operations were $423 million, $369 million, and $318 million,
respectively. In fiscal years 1999, 1998, and 1997, the Company capitalized $29
million, $23 million, and $18 million, respectively, of internally developed
software costs.
Certain of the Company's products were acquired from other companies and
individuals. The Company continues to seek synergistic companies, products and
partnerships. The purchase price of acquired products (i.e., purchased software)
is capitalized and amortized over the useful life of such purchase or a period
not exceeding five years.
Employees
As of March 31, 1999, the Company had approximately 14,650 employees of whom
approximately 2,550 were located at its headquarters facility in Islandia, New
York; approximately 6,750 were located at other offices in the United States,
and approximately 5,350 were located at its offices in foreign countries. Of the
total employees, approximately 4,250 were engaged in product development
efforts, 3,350 were engaged in professional services functions, and 4,400 were
engaged in sales and sales support functions. The Company believes its employee
relations are excellent.
(d)Financial Information About Foreign and Domestic Operations and Export
Revenue
See Note 4 of Notes to Consolidated Financial Statements for financial data
pertaining to the geographic distribution of the Company's operations.
Item 2. Properties
The principal properties of the Company are geographically distributed to meet
sales and operating requirements. All of the properties of the Company are
considered to be both suitable and adequate to meet current operating
requirements.
The Company leases approximately 100 office facilities throughout the United
States, and approximately 95 office facilities outside the United States.
Expiration dates on material leases range from fiscal years 2000 to 2021.
The Company owns an 850,000 square-foot Corporate Headquarters in Islandia, New
York. The Company's subsidiary in Germany owns two buildings totaling
approximately 120,000 square feet. The Company also owns various office
facilities in the United States ranging from 7,000 to 250,000 square feet. The
Company is currently constructing a 250,000 square-foot European Headquarters in
the United Kingdom, with an expected completion date of October 1999.
The Company owns various computer, telecommunications, and electronic equipment.
It also leases IBM, DEC, HP, Sun, EMC, and DG computers located at the Company's
facilities in Islandia, New York; Princeton, New Jersey; San Diego, California;
and Chicago, Illinois. This equipment is used for the Company's internal product
development, for technical support efforts and for administrative purposes. 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.
7
Item 3. Legal Proceedings
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Company's stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Company's future financial performance. These cases have
been consolidated into a single action (the "Shareholder Action") in the United
States District Court for the Eastern District of New York ("NY Federal Court").
The defendants moved to dismiss the Shareholder Action. In addition, three
derivative actions alleging similar facts were brought in the NY Federal Court.
An additional derivative action, alleging that the Company issued 14.25
million more shares than were authorized under the 1995 Key Employee Stock
Ownership Plan (the "1995 Plan"), was also filed in the NY Federal Court. In
all but one of these derivative actions, all of the Company's directors
at that time were named as defendants. These derivative actions have been
consolidated into a single action (the "Derivative Action") in the NY Federal
Court. The Derivative Action has been stayed. Lastly, a derivative action was
filed in the Chancery Court in Delaware (the "Delaware Action") alleging
that 9.5 million more shares were issued than were authorized under the
1995 Plan. The Company and its directors, who are parties to the Delaware
Action, have filed a motion to dismiss the Delaware Action, and the plaintiff
has moved for summary judgment. Although the ultimate outcome and liability, if
any, cannot be determined, management, after consultation and review with
counsel, believes that the facts in each of the actions do not support the
plaintiffs' claims and that the Company and its officers and directors have
meritorious defenses.
The Company, various subsidaries, and certain current and former officers have
been named as defendants in other various claims and lawsuits arising in
the normal course of business. The Company believes that the facts do not
support the plaintiffs' claims, and intends to vigorously contest each of them.
Item 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 26, 1999 are listed below:
Name Age Position
Charles B. Wang (1) 54 Chairman, Chief Executive Officer, and
Director
Sanjay Kumar (1) 37 President, Chief Operating Officer,and
Director
Russell M. Artzt (1) 52 Executive Vice President--Research and
Development, and Director
Charles P.McWade 54 Senior Vice President--Business Development
Ira Zar 37 Senior Vice President--Finance and Chief
Financial Officer
Michael A. McElroy 54 Vice President and Secretary
Lisa Savino 33 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. Zar has been Senior Vice President and Chief Financial Officer since June
1998. He has served in various financial roles, including Treasurer from April
1994 to November 1997, since joining 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 Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the New York Stock Exchange. The
following table sets forth, for the quarters indicated, the quarterly high and
low closing prices on the New York Stock Exchange.
Fiscal Year 1999 Fiscal Year 1998
---------------- ----------------
High Low High Low
Fourth Quarter $51.50 $32.88 $58.06 $45.44
Third Quarter $45.94 $31.44 $56.94 $45.83
Second Quarter $61.00 $27.00 $48.88 $36.13
First Quarter $61.13 $50.94 $38.92 $25.33
On March 31, 1999, the closing price for the Company's Common Stock on the New
York Stock Exchange was $35.56. 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 Company's most recent
dividend, paid in January 1999, was $.04 per share.
References to prices per share have been adjusted to reflect a three-for-two
stock split effective November 5, 1997.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes included elsewhere in this Annual
Report on Form 10-K.
Year Ended March 31,
--------------------------------------------
INCOME STATEMENT DATA 1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
--------------------------------------------
(in millions, except per share amounts)
Revenue $5,253 $4,719 $4,040 $3,505 $2,623
Net income (loss) 626 1,169 366 (56) 432
- - Basic earnings (loss) per common share(6) $ 1.15 $ 2.14 $ .67 $(.10) $ .80
- - Diluted earnings (loss) per common share(6) 1.11 2.06 .64 (.10) .76
Dividends declared per common share(6) .080 .073 .065 .061 .059
March 31,
--------------------------------------------
BALANCE SHEET AND OTHER DATA 1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
--------------------------------------------
(in millions)
Cash from operations . $ 1,267 $1,040 $ 790 $ 619 $ 489
Working capital (deficiency) 768 379 53 (53) 300
Total assets 8,070 6,706 6,084 5,016 3,269
Long-term debt (less current maturities) 2,032 1,027 1,663 945 50
Stockholders' equity 2,729 2,481 1,503 1,482 1,578
(1) Includes an after tax charge of $675 million related to the 1995 Key
Employee Stock Ownership Plan.
(2) Includes an after-tax charge of $21
million related to the Company's unsuccessful tender offer for Computer
Sciences Corporation.
(3) 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.
(4) Includes an after-tax write-off of $808 million related to the acquisition of Legent Corporation in August 1995.
(5) Includes an after-tax write-off of $154 million related to the acquisition of The ASK Group, Inc. in June 1994.
(6) Adjusted to reflect the three-for-two stock splits effective August 21, 1995, June 19, 1996, and November
5, 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Annual Report on Form 10-K contains certain forward-looking statements and
information relating to the Company that are based on the beliefs and
assumptions made by the Company's management as well as information currently
available to management. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, or expected. The Company does not intend to update these
forward-looking statements.
9
Fiscal Year 1999
The Company's fiscal year 1999 revenue of $5.3 billion increased 11% over the
$4.7 billion in fiscal year 1998. The growth is primarily attributable to
greater revenue from product licensing fees, the continued demand for less
restrictive enterprise licensing pricing options, and an emphasis placed on
professional services. Unicenter TNG(R) (The Next Generation)TM, a
family of integrated business solutions for monitoring and administering
systems management across multi-platform environments accounted for
approximately 25% of the Company's overall revenue. Professional services
revenue from the Company's consulting services business and educational
programs for fiscal year 1999 grew by 89%, or $136 million over fiscal year
1998, to $288 million. The growth is primarily attributable to an
increase in billable consultants. The Company intends to increase the level
of professional services provided to clients through internal growth,
acquisitions of services companies, as well as increasing its ratio of billable
hours to total hours worked ("utilization"). Maintenance revenue, which is
deferred and ratably recognized over the term of the agreement increased 1%,
or $9 million in fiscal year 1999. Additional maintenance revenue from prior
year license arrangements was partially offset by the ongoing trend of site
consolidations and expanding client/server revenue sold by VARs, which yield
lower maintenance. Total North American revenue increased 10% and
international revenue increased 14% for fiscal year 1999 as a result of strong
acceptance of the Company's client/server software solutions. North America
further benefited from professional services growth. The strengthening
of the U.S. dollar decreased international revenue by $44 million when compare
to fiscal year 1998. Price changes did not have a material impact in either
year.
Selling, marketing, and administrative expenses for fiscal year 1999 increased
to 39% of revenue compared to 37% in fiscal year 1998. The increase was
largely attributable to an overall increase in personnel expense. The Company
is continuing its ongoing effort to expand its Global Professional ServicesTM
division and worldwide sales organization. Marketing costs related to new
product introductions including the Enterprise Edition and Workgroup
Solutions also contributed to the increase. The Enterprise Edition products are
the Company's state-of-the-art mid-market solutions addressing security, network
management, asset management, application development, information management,
and e-commerce. The Workgroup Editions provide the same solutions as the
Enterprise Editions with a focus on smaller computing environments. In fiscal
year 1999, new and existing product enhancement research and development
expenditures increased $54 million, or 15%. Continued emphasis on adapting and
enhancing products for the client/server environment, in particular Unicenter
TNG, Jasmine(R), OpalTM, the Enterprise and Workgroup Solutions, as well as
broadening of the Company's Internet/intranet product offerings were largely
responsible for the increase. Commissions and royalties were approximately 5% of
total revenue for both fiscal year 1999 and 1998. Depreciation and amortization
expense decreased $24 million, or 7% in fiscal year 1999 over fiscal year 1998.
The decrease was primarily due to the scheduled reduction in the amortization
associated with The ASK Group, Inc., Legent Corporation, and Cheyenne Software,
Inc. acquisitions, partially offset by the amortization associated with fiscal
year 1999 acquisitions. For fiscal year 1999, net interest expense was $123
million, a decrease of $20 million over fiscal year 1998. Excluding the one-time
charge associated with the Computer Sciences Corporation ("CSC") tender in
fiscal year 1998, net interest expense in fiscal year 1999 increased $10 million
over fiscal year 1998. The increase is attributable to an increase in average
debt outstanding of approximately $500 million, offset by an increase to
interest income related to cash proceeds from the April 1998 Senior Note
issuance. Fiscal year 1999 pre-tax profit excluding the one-time charge of
$1,071 million relating to the vesting of 20.25 million shares under the 1995
Key Employee Stock Ownership Plan was $2.08 billion compared to $1.87 billion in
fiscal year 1998. Net income per share in fiscal year 1999 was $1.11 per share
on a diluted basis. Excluding the charge, net income per share in fiscal year
1999 would have been $2.31, a 12% increase over fiscal year 1998 net income of
$2.06 per share. The consolidated effective tax rate for fiscal year 1999,
excluding the charge, and for fiscal year 1998 was approximately 37.5%.
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
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 Plan. In January 1996, based on the achievement of a price
target for the Company's 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 accruing compensation expense
associated with the 1.35 million shares over the employment period. Annual
compensation expense of $7 million was 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 Plan were made based on the
achievement of certain price targets. These additional grants and the unvested
portion of the initial grant vested in May 1998 and are further subject to
significant limitations on transfer during the seven years following vesting.
The vesting occurred after the closing price of the Company's stock on the New
York Stock Exchange exceeded $53.33 for 60 trading days within a twelve-month
period. A one-time charge of $1,071 million was recorded in the first quarter of
fiscal year 1999.
10
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. 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 Company's overall revenue. Total North American revenue increased 28% for
fiscal year 1998 as a result of strong acceptance of the Company's 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 Company's expanded
client/server licensing which generates lower maintenance revenue 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 TNG(R)
FrameworkTM release. In fiscal year 1998, new and existing product enhancement
and 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 Company's
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, was $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 approximated 37.5%
and 37% in fiscal years 1998 and 1997, respectively.
Selected Unaudited Quarterly Information
(in millions, except per share amounts)
- --------------------------------------------------------------------------------------------
1999 Quarterly Results June 30(1) Sept.30 Dec.31 Mar.31 Total
- --------------------------------------------------------------------------------------------
Revenue $1,047 $1,216 $1,361 $1,629 $5,253
Percent of total revenue 20% 23% 26% 31% 100%
Net (loss)income $ (481) $ 294 $ 355 $ 458 $ 626
- - Basic (loss) earnings per share(3) (.87) .53 .66 .85 1.15
- - Diluted (loss) earnings per share(3) (.87) .52 .64 .83 1.11
1998 Quarterly Results June 30 Sept.30 Dec. 31 Mar. 31(2) 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
(1) Includes an after-tax charge of $675 million related to the 1995 Key
Employee Stock Ownership Plan.
(2) Includes an after-tax charge of $21 million related to the Company's unsuccessful tender offer for Computer
Sciences Corporation.
(3) Adjusted to reflect a three-for-two stock split effective November 5, 1997.
11
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes higher
discretionary expense levels in relation to projected revenue for the first half
of the year. Historically, the Company's combined third and fourth quarter
revenue has been greater than the first half of the year, as these two quarters
coincide with clients' calendar year budget periods and culmination of the
Company's annual sales plan. This historically higher second half revenue has
resulted in significantly higher profit margins since total expenses have not
increased in proportion to revenue. However, past financial performance should
not be considered to be a reliable indicator of future performance.
The Company's products are designed to improve the productivity and efficiency
of its clients' information processing resources. Accordingly, in a
recessionary environment, the Company's products are often a reasonable
economic alternative to customers faced with the prospect of incurring
expenditures to increase their existing information processing resources.
However, a general or regional slowdown in the world economy could adversely
affect the Company's operations.
The Company's future operating results may be affected by a number of other
factors, including, but not limited to: uncertainties relative to global
economic conditions; the adequacy of the Company's internal administrative
systems to efficiently process transactions, store, and retrieve data subsequent
to the year 2000; the Company's increasing reliance on a single family of
products for a material portion of its sales; market acceptance of competing
technologies; the availability and cost of new solutions; delays in delivery of
new products or features; the Company's ability to update its business
application products to conform with the new, common European currency known as
the "Euro"; the Company's ability to successfully maintain or increase market
share in its core business while expanding its product base into other markets;
the strength of its distribution channels; the ability either internally or
through third-party service providers to support client implementation of the
Company's products; the Company's ability to manage fixed and variable expense
growth relative to revenue growth; the Company's ability to recruit and retain
qualified personnel; the Company's ability to effectively integrate acquired
products and operations.
With the acquisition of Platinum technology International, inc. ("Platinum")
during the first quarter of fiscal year 2000, there can be no assurances that
the distractions and uncertainty caused by the acquisition will not have a
negative effect on the Company's revenue and net income as it completes
the integration and restructuring of Platinum's operations.
In-Process Research and Development
There were no acquired in-process technology charges in fiscal years 1999 and
1998, and an after-tax write-off of $598 million in 1997 related to the Cheyenne
acquisition. Acquired in-process research and development ("in-process R&D")
charges relate to acquisitions of software companies accounted for under the
purchase method, in which a portion of the purchase price is allocated to
acquired in-process technology and expensed immediately since the technological
feasibility of the research and development projects have not yet been achieved
and was believed to have no alternative future use. An independent valuation was
performed and used as an aid in determining the fair value of the identifiable
assets and in allocating the purchase price among the acquired assets, including
the portion of the purchase price attributed to in-process R&D. The "Income
Approach" was utilized for the valuation analysis. This approach focuses on the
income producing capability of the asset and was obtained through on-site
interviews with management, review of data provided by the Company and Cheyenne,
and analysis of relevant market sizes, growth factors, and expected trends in
technology. The steps followed in applying this approach included estimating the
expected cash flow over its life and converting these cash flows to present
value through discounting. The discounting process uses a rate of return which
accounts for the time value of money and investment risk factors. For Cheyenne,
future cash flows were projected over six years and discounted using a discount
rate of approximately 20%. The Company believes the discount rate is appropriate
given the level of risk of unsuccessful completion of the technology. Cheyenne
products consist of network data storage, security, and communications software
across numerous standalone, as well as heterogeneous computer environments.
Between November 1996 and March 1999, the majority of the R&D costs to complete
the projects have been incurred. The company has been benefiting from the
acquired projects for approximately two years. The Company has reviewed its
projections of revenue and estimated costs of completion and has compared these
projections with results through March 31, 1999. To date, in the aggregate, the
projects have not varied materially from original projections.
Year 2000
The Company has designed and tested substantially all of its recent product
offerings to be Year 2000 compliant. These products have met rigorous compliance
criteria and have undergone extensive review to detect any Year 2000 failures.
The Company has publicly identified any products that will not be updated to be
Year 2000 compliant and has been encouraging clients using these products to
migrate to compliant versions/products. The Company continues to update and test
its product offerings. In general, these Year 2000 compliance efforts have been
part of the Company's ongoing software development process. As such, incremental
costs are not deemed material and have been included in net research and
development expenses. The Year 2000 readiness of the Company's customers varies,
and the Company continues to actively encourage its customers to prepare their
own systems making available a broad array of product service and educational
12
offerings. These offerings are available on the CA Year 2000 Home Page at
http://www.cai.com/2000. It is possible that the Company may experience
increased expense levels addressing migration issues for such customers. There
can be no assurances that the Company's compliant products do not contain
undetected problems associated with Year 2000 compliance. Although the Company
believes that its license agreements provide it with protection against
liability, the Company cannot predict whether or to what extent any legal claims
will be brought, or whether the Company will suffer any potential liability as
a result of any such adverse consequences to its customers.
The Company recognizes the significance of the Year 2000 issue as it relates to
its internal systems including IT and non-IT systems, and understands that the
impact extends beyond traditional hardware and software to automated facility
systems and third party suppliers. The Company has established a comprehensive
four-step plan: (1) assessment; (2) remediation; (3) testing; and (4)
implementation, with dedicated project managers to address Year 2000 issues.
With regard to internal administrative and financial systems, the Company has
completed most conversion and testing efforts, with extended system integration
testing and contingency planning projects scheduled throughout 1999. For its
facility-related systems (telephone, voicemail, security, and so on), the
Company has conducted internal assessment audits and has sent questionnaires to
vendors and service providers to confirm Year 2000 readiness. The Company
expects substantial completion of Year 2000 readiness preparations by mid 1999
and to continue comprehensive testing throughout calendar 1999. As part of the
contingency planning efforts, the Company has created alternative strategies,
when necessary, if significant exposures were identified up to and including the
Company's computer systems being rendered inoperable. The contingency plan
addresses these issues including temporary relocation of employees, manual
workarounds, and the use of Company-owned generators and cellular phones. The
total cost of preparing internal systems to be Year 2000 compliant is not
expected to be material to the Company's operations, liquidity, or capital
resources. Total expenditures, excluding personnel costs of existing staff,
related to internal systems Year 2000 readiness is expected to be less than $30
million, with the vast majority of it paid to date. Such expenses commenced in
1996 and are projected to continue throughout calendar year 1999. The Company
believes that, although the risk of operational disruption from systems failures
due to the Year 2000 is minimal, there can be no assurances that the Company
will not experience significant unanticipated negative performance and/or flaws
in the technology used in its internal systems or interruptions in electrical
power or other third-party infrastructure services.
Demand for certain of the Company's products may be generated by customers who
are replacing or upgrading computer systems to accommodate the Year 2000 date
change. As a result, demand for some of the Company's products may diminish as
the Year 2000 arrives, which could negatively impact the Company's revenue
growth rate. Additionally, because the Company believes that some of its
customers are allocating a substantial portion of their 1999 IT budgets to Year
2000 compliance, sales of certain of the Company's traditional product offerings
may be adversely affected through the end of fiscal year 2000.
Foreign Currency Exchange
Continued uncertainty in world economies and currency markets caused an
additional strengthening of the U.S. dollar during fiscal year 1999.
Approximately 35% of the Company's total revenue in fiscal year 1999, 34% in
fiscal year 1998, and 40% in fiscal year 1997, was derived from sales outside of
North America. Western Europe is the Company's 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 and Latin American 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 Company's international operations are incurred and paid for in the same
currencies as those of its revenue. During fiscal year 1999, the net income
effect of foreign exchange transaction losses was approximately $7 million. A
foreign currency translation adjustment of $84 million was charged to
Stockholders' Equity in fiscal year 1999. 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 1999.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities at March 31, 1999 totaled $536
million, an increase of $226 million from the prior fiscal year. Cash generated
from operations for the year ended March 31, 1999 was $1,267 million, including
a $318 million withholding tax payment made in lieu of shares granted to certain
executives under the 1995 Key Employee Stock Ownership Plan (the "1995 Plan").
Year-to-date cash generated from operations, excluding the withholding tax
payment, totaled $1,585 million, an increase of 52% from the prior year. This
increase is attributable to higher income before the one-time charge, net of tax
benefit, recorded in the first quarter of fiscal year 1999 related to the 1995
Plan. In addition, the Company has paid less interest year-to-date as a result
of the refinancing of its capital structure by repaying its bank revolver with
proceeds from the April 24, 1998 issuance of $1.75 billion of registered
unsecured Senior Notes. Interest on the notes is paid semiannually; interest
under the revolver was generally paid monthly. The Company used the cash from
operations primarily for acquisitions, treasury stock purchases, and debt
reduction.
13
The Company has established a capital structure that enables it to achieve its
strategic objectives by utilizing a number of different financial markets. 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 Company's revolving credit facilities and for general corporate
purposes. The issuance of these notes allowed the Company to extend the maturity
of its debt, commit to an attractive fixed rate of interest, and broaden the
Company's sources of liquidity. Debt ratings for the Company's unsecured Senior
Notes and its bank credit facilities are Baa1 and A- from Moody's Investor
Services and Standard & Poor's, respectively. Standard and Poor's has indicated
that as a result of the acquisition of Platinum, it intends to lower the
Company's rating to BBB+. In addition, $320 million remains outstanding under
the Company's 6.77% Senior Notes.
The Company has a $1.5 billion five-year and a $1.1 billion 364-day revolving
credit line established in June 1997, of which $325 million was drawn at March
31, 1999. A wholly-owned subsidiary of the Company also maintains an 85 million
pound-sterling denominated credit facility established to finance construction
of its new European Headquarters. Approximately 49 million pound-sterling
(approximately US$81 million) was outstanding under this facility at fiscal
year ended March 31, 1999. These bank credit facilities 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. The
Company also has approximately US$30 million available under unsecured and
uncommitted multicurrency lines of credit established to meet any short-term
working capital needs for subsidiaries operating outside the U.S. Peak
borrowings under all debt facilities during fiscal year 1999 totaled
approximately $2.5 billion with a weighted average interest rate of 6.4%.
The Company has secured $4.5 billion of committed bank financing to pay for
acquisition costs related to the tender offer for the outstanding shares of
Platinum. Refer to Note 12 for details concerning the offer to purchase. The new
financing arrangements consist of a $1.5 billion 364-day revolving credit
facility, a $1 billion four year revolving credit facility, and a $2 billion
four year term loan. Interest charged will be LIBOR subject to a margin based
on a bank credit facility ratings grid. The Company will be required to
maintain certain financial ratios. A condition precedent to closing the
$4.5 billion facilities will be the termination of the $1.5 and $1.1 billion
revolving credit facilities.
In addition to the construction of the European Headquarters in the U.K. and
expansion efforts at its U.S. Headquarters in Islandia, N.Y., capital resource
requirements as of March 31, 1999 consisted of lease obligations for office
space, computer equipment, mortgage or loan obligations, and amounts due as a
result of product and company acquisitions. An additional $3.5 billion will be
required to finance the acquisition of Platinum. It is expected that existing
cash, cash equivalents, marketable securities, the availability of borrowings
under credit lines, as well as cash provided from operations, will be sufficient
to meet ongoing cash requirements. Refer to Notes 6 and 7 of Notes to
Consolidated Financial Statements for details concerning commitments.
During fiscal year 1999, the Company purchased approximately 30 million common
shares under its various open market Common Stock repurchase programs, bringing
the cumulative total number of shares purchased to approximately 150 million
shares. The remaining number of shares authorized for repurchase is
approximately 50 million.
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio and issuance of debt. The
Company has not used derivative financial instruments in its investment
portfolio. The Company has a prescribed methodology whereby it invests its
excess cash in debt instruments of government agencies and high quality
corporate issuers (Standard & Poor's single "A" rating and higher). To further
mitigate risk, the vast majority of the securities have a maturity date within
one year. Holdings of any one issuer excluding the U.S. Government shall not
exceed 10%, and the portfolio is reviewed on a periodic basis and adjusted in
the event that the credit rating of a security held in the portfolio has
deteriorated.
At March 31, 1999, the Company's outstanding debt approximated $2.5 billion with
approximately $2.1 billion of fixed rate obligations. If market rates decline,
the Company runs the risk that the related required payments on the fixed rate
debt will exceed those based on the current market rate. On an annual basis,
each 25 basis point decrease in interest rates would increase the value of these
instruments by approximately $5 million. Each 25 basis point increase or
decrease in the level of interest rates would have approximately $1 million
effect on variable rate debt interest based on the balances of such debt at
March 31, 1999.
14
Foreign Currency Exchange Risk
The Company conducts business on a worldwide basis through subsidiaries in 42
countries. The Company is therefore exposed to movement in currency exchange
rates. As part of its risk management strategy and consistent with prior years,
the Company did not enter into any foreign exchange derivative transactions. In
addition, the Company manages its level of exposure by denominating
international sales and payment of related expense in the foreign subsidiaries
local currency. A one percent decline in all foreign currencies against the U.S.
dollar will have an approximate $6 million effect on the Company's net income.
Equity Price Risk
The Company has a minimal investment in the marketable equity securities of
publicly-traded companies. These investments, as of March 31, 1999, were
considered available-for-sale, with any unrealized gains or losses deferred as a
component of stockholders' equity. It is not customary for the Company to make
investments in equity securities as part of its investment strategy.
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 and are incorporated herein by
reference.
The Supplementary Data specified by Item 302 of Regulation S-K as it relates to
selected quarterly data is included in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Information on the
effects of changing prices is not required.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning directors, which information
is incorporated herein by reference, and to Part I, page 7 of this Annual Report
on Form 10-K for information concerning executive officers under the caption
"Executive Officers of the Registrant."
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning executive compensation,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning security ownership of each
person known by the Company to own beneficially more than 5% of the Company's
outstanding shares of Common Stock, of each director of the Company and all
executive officers and directors as a group, which information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning certain relationships and
related transactions, which information is incorporated herein by reference.
15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1)The Registrant's financial statements together with a separate table of
contents are annexed hereto.
(2)Financial Statement Schedules are listed in the separate table of contents
annexed hereto.
(3)Exhibits.
Regulation S-K
Exhibit Number
2.1 Agreement and Plan of Merger Previously filed as Exhibit 99 (c)(1)
dated as of March 29, 1999 among to the Registrant's Tender Offer
the Registrant, HardMetal, Inc. and Statement on Schedule 14D-1 filed
Platinum technology International, April 2, 1999, and incorporated
inc. herein by reference.
3.1 Restated Certificate of Previously filed as an
Incorporation. Exhibit to the Company's 10-Q for the
fiscal quarter ended December 31,
1998 and incorporated herein by
reference.
3.2 By-Laws. Previously filed as an Exhibit to the
Company's Form 10-Q for the fiscal
quarter ended December 31, 1998 and
incorporated herein by reference.
4.1 Indenture dated as of March 1, 1987 Previously filed as Exhibit 4.1 to
between On-Line Software On-Line Software International,
International,Inc.and Manufacturers Inc.'s Registration Statement
Hanover Trust Company with respect on Form S-2 (No. 33-12488)and
to the 61/4% Convertible Subordinated incorporated herein by reference.
Debentures due 2002 of the Company's
wholly-owned subsidiary.
4.2 Supplemental Indenture dated as of Previously filed as Exhibit A to the
September 25, 1991 between On-Line Company's Annual Report on Form 10-K
Software International, Inc. and for the fiscal year ended March 31,
Manufacturers Hanover Trust Company 1992 (File No. 0-10180) and
with respect to the 61/4% Convertible incorporated herein by reference.
Subordinated Debentures due 2002
of the Company's wholly-owned
subsidiary.
4.3 Certificate of Designation of Series Previously filed as Exhibit 3 to the
One Junior Participating Preferred Company's Current Report on Form
Stock, Class A of the Company. 8-K dated June 18, 1991 and
incorporated herein by reference.
4.4 Rights Agreement dated as of Previously filed as Exhibit 4 to the
June 18,1991 between the Company and Company's Current Report on Form
Manufacturers Hanover Trust Company. 8-K dated June 18, 1991 and
incorporated herein by reference.
4.5 Amendment No. 1 dated May 17, Previously filed as Exhibit C to
1995 to Rights Agreement dated as the Company's Annual Report on
of June 18, 1991. Form 10-K for the fiscal year ended
March 31, 1995 and incorporated
herein by reference.
16
Regulation S-K
Exhibit Number
- --------------
4.6 Indenture with respect to the Previously filed as Exhibit4(f)to the
Company's $1.75 billion Senior Company's Annual Report on Form 10-K
Notes, dated April 24,1998 between for the fiscal year ended March 31,
the Company and The Chase 1998 and incorporated herein by
Manhattan Bank, as Trustee. reference.
10.1 1981 Incentive Stock Option Plan. Previously filed as Exhibit 10.5 to
the Company's Registration Statement
on Form S-1 (Registration 2-74618)
and incorporated herein by reference.
10.2 1987 Non-Statutory Stock Option Plan. Previously filed as Appendix C to
the Company's definitive Proxy
Statement dated July 1, 1987 and
incorporated herein by reference.
10.3 Amendment No. 1 to the 1987 Non- Previously filed as Exhibit C to the
Statutory Stock Option Plan dated Compan's Annual Report on Form
October 20, 1993. 10-K for the fiscal year ended March
31, 1994 and incorporated herein by
reference.
10.4 1991 Stock Incentive Plan, as Previously filed as Exhibit 1 to the
amended. Company's Form 10-Q for the fiscal
quarter ended September 30, 1997
and incorporated herein by reference.
10.5 1993 Stock Option Plan for Non- Previously filed as Annex 1 to the
Employee Directors. Company's definitive Proxy Statement
dated July 7, 1993 and incorporated
herein by reference.
10.6 Amendment No. 1 to the 1993 Stock Previously filed as Exhibit E to the
Option Plan for Non-Employee Company's Annual Report on Form
Directors dated October 20, 1993. 10-K for the fiscal year ended March
31, 1994 and incorporated herein
by reference.
10.7 1994 Annual Incentive Compensation Previously filed as Exhibit A to the
Plan, as amended. Company's definitive Proxy Statement
dated July 7, 1995 and incorporated
herein by reference.
10.8 1995 Key Employee Stock Ownership Previously filed as Exhibit B to the
Plan. Company's definitive Proxy Statement
dated July 7, 1995 and incorporated
herein by reference.
17
10.9 Amended and Restated $1.5 billion Previously filed as Exhibit 1 to the
Credit Agreement dated as of June Company's Form 10-Q for the fiscal
30, 1997 among the Company, various quarter ended June 30, 1997 and
banks and financial institutions, incorporated herein by reference.
and Credit Suisse, as agent.
10.10 Amended and Restated $1.1 billion Previously filed as Exhibit 2 to
Credit Agreement dated as of the Company's Form 10-Q for the
June 30, 1997 among the Company's fiscal quarter ended June 30,1997
various banks and financial and incorporated herein by reference.
institutions, and Credit Suisse,
as agent.
10.11 1996 Deferred Stock Plan for Previously filed as Exhibit D to the
Non-Employee Directors. Company's Annual Report on Form 10-K
for the fiscal year ended March 31,
1996 and incorporated herein by
reference.
10.12 Amendment No. 1 to the 1996 Previously filed on Exhibit A
Deferred Stock Plan for to the Company's Proxy Statement
Non-Employee Directors. dated July 6, 1998 and incorporated
herein by reference.
10.13 1998 Incentive Award Plan. Previously filed on Exhibit B to the
Company's Proxy Statement dated July
6, 1998 and incorporated herein by
reference.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Ernst & Young LLP. Filed herewith.
27 Financial Data Schedules. Filed electronically only.
18
(b) Reports on Form 8-K.
None.
(c) Exhibits: See Index to Exhibits.
(d) Financial Statement Schedules: The response to this portion of
Item 14 is submitted as a separate section of this report.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990)under the Securities Act
of 1933, as amended, the undersigned Registrant hereby undertakes as
set forth in the following paragraph, which undertaking shall be
incorporated by reference into Registrant's Registration Statements on
Form S-8 Nos. 333-62055 (filed August 21, 1998), 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.
19
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/ IRA H. ZAR
----------------------------------
Ira H. Zar
Senior Vice President
Principal Financial and
Accounting Officer
Dated: May 26, 1999
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
/s/ ROEL PIEPER Director
------------------------
Roel Pieper
Dated: May 26, 1999
20
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, 1999
Page
The following consolidated financial statements of Computer Associates
International, Inc. and subsidiaries are included in Item 8:
Report of Independent Auditors 21
Consolidated Balance Sheets--March 31, 1999 and 1998 22
Consolidated Statements of Operations--Years Ended March 31, 1999,
1998, and 1997 24
Consolidated Statements of Stockholders' Equity--Years Ended
March 31,1999, 1998, and 1997 25
Consolidated Statements of Cash Flows--Years Ended March 31, 1999,
1998, and 1997 26
Notes to Consolidated Financial Statements 27
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 38
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.
21
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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Computer Associates International, Inc. and subsidiaries at March 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended March 31, 1999, 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.
ERNST & YOUNG LLP
New York, New York
May 26, 1999
22
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
ASSETS 1999 1998
---- ----
(Dollars in millions)
CURRENT ASSETS
Cash and cash equivalents $ 399 $ 251
Marketable securities 137 59
Trade and installment accounts receivable, net 2,021 1,859
Other current assets 74 86
----- -----
TOTAL CURRENT ASSETS 2,631 2,255
INSTALLMENT ACCOUNTS RECEIVABLE, net, due after one year 2,844 2,490
PROPERTY AND EQUIPMENT
Land and buildings 468 357
Equipment, furniture, and improvements 571 501
----- -----
1,039 858
Allowance for depreciation and amortization 441 399
----- -----
TOTAL PROPERTY AND EQUIPMENT 598 459
PURCHASED SOFTWARE PRODUCTS, net of accumulated
amortization of $1,476 and $1,305 221 289
EXCESS OF COST OVER NET ASSETS ACQUIRED, net of
accumulated amortization of $281 and $205 1,623 1,099
OTHER ASSETS 153 114
----- -----
TOTAL ASSETS $ 8,070 $ 6,706
===== =====
See Notes to Consolidated Financial Statements.
23
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
(Dollars in millions)
CURRENT LIABILITIES
Loans payable and current portion of long-term debt $ 492 $ 571
Accounts payable 153 153
Salaries, wages, and commissions 193 157
Accrued expenses and other liabilities 338 297
Taxes, other than income taxes 95 76
Federal, state, and foreign income taxes payable 312 345
Deferred income taxes 280 277
---- ----
TOTAL CURRENT LIABILITIES 1,863 1,876
LONG-TERM DEBT, net of current portion 2,032 1,027
DEFERRED INCOME TAXES 1,034 952
DEFERRED MAINTENANCE REVENUE 412 370
STOCKHOLDERS' EQUITY
Common Stock, $.10 par value, 1,100,000,000 shares authorized,
630,920,576 shares issued* 63 63
Additional paid-in capital 1,141 523
Retained earnings 3,468 2,886
Accumulated other comprehensive loss (180) (104)
Treasury stock, at cost--95,217,954 shares for 1999 and
84,869,026 shares for 1998* (1,763) (887)
---- ----
TOTAL STOCKHOLDERS' EQUITY 2,729 2,481
---- ----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,070 $ 6,706
===== =====
*Share amounts adjusted for a three-for-two stock split effective November 5, 1997.
See Notes to Consolidated Financial Statements.
24
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions, except per share amounts)
Product revenue and other related income $4,511 $3,986 $3,300
Maintenance fees 742 733 740
----- ----- -----
TOTAL REVENUE 5,253 4,719 4,040
Costs and Expenses:
Selling, marketing, and administrative 2,038 1,751 1,465
Product development and enhancements 423 369 318
Commissions and royalties 263 233 201
Depreciation and amortization 325 349 424
Interest expense, net 123 143 102
Purchased research and development - - 598
1995 Stock Plan charge 1,071 - -
----- ----- -----
TOTAL COSTS AND EXPENSES 4,243 2,845 3,108
Income before income taxes 1,010 1,874 932
Income taxes 384 705 566
----- ----- -----
NET INCOME $ 626 $1,169 $ 366
===== ===== =====
BASIC EARNINGS PER SHARE $ 1.15 $ 2.14 $ .67
===== ===== =====
Basic weighted-average shares
used in computation* 545 546 546
DILUTED EARNINGS PER SHARE $ 1.11 $ 2.06 $ .64
===== ===== =====
Diluted weighted-average shares
used in computation* 562 566 569
*Share amounts adjusted for the three-for-two stock splits effective June 19,
1996 and November 5, 1997.
See Notes to Consolidated Financial Statements.
25
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Stock(1) Capital(1) Earnings Income (Loss) Stock Equity
------- --------- -------- ------------- ------- ----------
(Dollars in millions)
Balance at March 31, 1996 $63 $482 $1,426 $41 $(530) $1,482
Net income 366 366
Dividends declared
($.065 per share)(1) (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
($.073 per share)(1) (40) (40)
Exercise of Common Stock
options and other 18 7 59 84
401(k) discretionary contribution 8 4 12
Translation adjustment
in 1998 (84) (84)
Purchases of treasury
stock (163) (163)
----- ----- ----- ----- ----- -----
Balance at March 31, 1998 63 523 2,886 (104) (887) 2,481
Net income 626 626
Dividends declared
($.080 per share) (44) (44)
Exercise of Common Stock
options and other 604 8 211 823
401(k) discretionary contribution 14 3 17
Translation adjustment
in 1999 (84) (84)
Purchases of treasury
stock (1,090) (1,090)
----- ----- ----- ----- ----- -----
Balance at March 31, 1999 $63 $1,141 $3,468 $(180) $ (1,763) $2,729
(1)Amounts adjusted for the three-for-two stock splits effective June 19, 1996 and November 5, 1997.
See Notes to Consolidated Financial Statements.
26
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
OPERATING ACTIVITIES:
Net income $ 626 $ 1,169 $ 366
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 325 349 424
Provision for deferred income taxes 107 141 221
Charge for purchased research and development - - 598
Compensation expense related to stock and pension plans 778 21 22
Increase in noncurrent
installment accounts receivable,net (422) (377) (575)
Increase (decrease) in deferred maintenance revenue 43 41 (23)
Foreign currency transaction loss--before taxes 11 15 11
Gain on sale of property and equipment (14) - -
Changes in other operating assets and liabilities,
net of effects of acquisitions:
Increase in trade and installment receivables (169) (409) (341)
Other changes in operating assets and liabilities (18) 90 87
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,267 1,040 790
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software,
marketing rights, and intangibles (667) (61) (1,191)
Purchases of property and equipment (222) (84) (53)
Proceeds from sale of property and equipment 38 - -
Purchases of marketable securities (2,703) (42) (51)
Sales of marketable securities 2,639 39 99
Increase in capitalized development costs and other (29) (23) (18)
----- ----- -----
NET CASH USED IN INVESTING ACTIVITIES (944) (171) (1,214)
FINANCING ACTIVITIES:
Dividends (44) (40) (35)
Purchases of treasury stock (1,090) (163) (317)
Proceeds from borrowings 2,141 23 1,480
Repayments of borrowings (1,216) (630) (710)
Exercise of common stock options and other 38 62 53
----- ----- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (171) (748) 471
INCREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE
RATE CHANGES ON CASH 152 121 47
Effect of exchange rate changes on cash (4) (13) (1)
----- ----- -----
INCREASE IN CASH AND
CASH EQUIVALENTS 148 108 46
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 251 143 97
----- ----- -----
CASH AND CASH EQUIVALENTS--END OF YEAR $ 399 $ 251 $ 143
===== ===== =====
See Notes to Consolidated Financial Statements.
27
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Significant Accounting Policies
Description of Business: Computer Associates International, Inc. and
subsidiaries (the "Company") designs, develops, markets, licenses, and supports
a wide range of integrated computer software solutions.
Principles of Consolidation: Significant intercompany items and
transactions have been eliminated in consolidation. The Company has various
investments which it accounts for under the equity method of accounting.
These investments are not significant either individually or when considered
collectively. The Company's 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 acceptance by the client, delivery of the product,
and when the collection of the resulting receivables is reasonably assured.
Maintenance revenue, whether bundled with product license or priced separately,
is recognized ratably over the maintenance period. Maintenance agreements with
clients are typically one year in duration unless sold with the initial license
in which case, the maintenance term generally coincides with the license term.
The Company experiences maintenance renewal rates in excess of 85%. 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, 1999, 1998, and 1997 were $408 million, $356 million,
and $271 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 Other Comprehensive Income (Loss). The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
Property and Equipment: Land, buildings, equipment, furniture, and improvements
are stated at cost. Depreciation and amortization are provided over the
estimated useful lives of the assets by the straight-line method. Building and
improvements are generally estimated to have 30-40 year lives and the remaining
property and equipment are estimated to have 5-7 year lives.
Intangibles: Excess of cost over net assets acquired is being amortized by the
straight-line method over the expected period of benefit, between 10 and 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 product's useful economic
life, commencing with product release. Unamortized capitalized development costs
included in other assets at March 31, 1999 and 1998 were $72 million and $62
million, respectively. Amortization of capitalized development costs was $18
million, $15 million, and $17 million for the fiscal years ended March 31, 1999,
1998, and 1997, respectively.
Net Income per Share: Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing net income by
the sum of the weighted-average number of common shares outstanding for the
period plus the assumed exercise of all dilutive securities, such as stock
options.
28
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 -- Significant Accounting Policies (Continued)
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions, except per share amounts)
Net income $ 626 $ 1,169 $ 366
Diluted Earnings Per Share*
Weighted-average shares outstanding and
common share equivalents 562 566 569
---- ---- ----
Diluted Earnings Per Share $1.11 $ 2.06 $ .64
Diluted Share Computation:
Weighted-average common shares outstanding 545 546 546
Weighted-average stock options outstanding-net 17 20 23
---- ---- ----
Weighted-average shares outstanding and
common share equivalents 562 566 569
==== ==== ====
*Share and per share amounts adjusted to reflect the three-for-two stock splits
effective June 19, 1996 and November 5, 1997.
Statement of Cash Flows: Interest payments for the years ended March 31, 1999,
1998, and 1997 were $107 million, $157 million, and $89 million, respectively.
Income taxes paid for these fiscal years were $280 million, $470 million,
and $300 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 includes
exchange losses of approximately $7 million in 1999, $9 million in 1998, and $7
million in 1997.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
New Accounting Pronouncements
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2
"Software Revenue Recognition," as amended in 1998 by SOP 98-4 and further
amended more recently by SOP 98-9, which is effective for transactions entered
into in fiscal years beginning after March 15, 1999. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions, requiring deferral of part or all of the revenue
related to a specific contract depending on the existence of vendor specific
objective evidence and the ability to allocate the total contract value to all
elements within the contract. Effective for the quarter ending June 30, 1999 the
Company will implement the guidelines of these SOPs. Based on the current
interpretation, the Company does not believe there will be a material impact on
its overall maintenance deferral; however, as additional implementation
guidelines become available, there may be unanticipated changes in the Company's
revenue recognition practices including, but not limited to, changes in the
period over which revenue is recognized up to and including recognition of
revenue over the contract term. The future implementation guidelines and
interpretations may also require the Company to further change its business
practices in order to continue to recognize a substantial portion of its
software revenue when the product is delivered. These changes may extend sales
cycles, increase administrative costs, or otherwise adversely effect existing
operations and results of operations.
29
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 -- Significant Accounting Policies (Continued)
Segment Disclosure: During fiscal year 1999, the Company adopted
Financial Accounting Standards ("FAS") No.131, "Disclosures about Segments and
Related Information" which establishes standards for reporting operating
segments and disclosures about products and services, geographic areas and major
customers. The Company operates as a single segment providing integrated
computer software solutions. See Note 4 for Geographic Area Information. The
Company has no individual customers that are significant enough to be deemed a
segment.
Comprehensive Income: During fiscal year 1999, the Company adopted FAS No.130,
"Reporting Comprehensive Income." FAS No.130 establishes new rules for
reporting and displaying comprehensive income and its components; however, the
adoption has no impact on the Company's net income or stockholders' equity.
"Comprehensive Income" includes foreign currency translation adjustments and
unrealized gains or losses on the Company's available-for-sale securities which
prior to adoption were reported separately in stockholders' equity.
The components of comprehensive income, net of applicable tax, for the years
ended March 31, 1999, 1998, and 1997, are as follows:
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
Net Income $626 $1,169 $366
Foreign Currency Translation Losses (84) (84) (74)
Unrealized Gain (Loss) on Equity Securities(1) 8 -- (1)
---- ----- ----
Total Comprehensive Income $550 $1,085 $291
(1) Net of a $5 million and $(1) million tax effect in 1999 and 1997,
respectively.
Note 2 -- Acquisitions
On March 9, 1999, the Company acquired more than 98% of the issued and
outstanding shares of common stock of Computer Management Sciences, Inc.
("CMSI"), and on March 19, 1999, merged into CMSI one of its wholly-owned
subsidiaries. The aggregate purchase price of approximately $400 million was
funded from drawings under the Company's $2.6 billion credit agreements and
cash from operations. CMSI was engaged in providing custom developed
information technology solutions to a Fortune 1000 client base. The
acquisition was accounted for as a purchase.
During fiscal year 1999, the Company acquired a number of other consulting
businesses and product technologies in addition to the one described above
which,either individually or collectively, are not material. The acquisitions
were all accounted for as purchases. The excess of cost over net assets
acquired is amortized on a straight-line basis over the expected period to be
benefitted. The consolidated statements of operations reflect the results of
operations of the companies since the effective dates of the purchase.
On November 11, 1996, the Company acquired 98% of the issued and outstanding
shares of common stock of Cheyenne Software, Inc. ("Cheyenne"), and on December
2, 1996 merged into Cheyenne one of its wholly owned subsidiaries. The aggregate
purchase price of approximately $1.2 billion was funded from drawings under the
Company's $2 billion credit agreements in effect at the time. Cheyenne was
engaged in the design, development, marketing, and support of storage,
management, security, and communications software for desktops and distributed
enterprise networks. The acquisition was accounted for as a purchase. The
results of Cheyenne's operations have been combined with those of the Company
since the date of acquisition.
The Company recorded a $598 million after-tax charge against earnings for the
write-off of purchased Cheyenne research and development technology that had not
reached the working model stage and 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.
30
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 2 -- Acquisitions (Continued)
The following table reflects pro forma combined results of operations of the
Company and Cheyenne on the basis that the acquisition had taken place at the
beginning of fiscal year 1997 and excludes the after-tax charge of $598 million
related to the Cheyenne acquisition. The pro forma effect of all subsequent
acquisitions is not material to the Company's results of operations.
Year Ended March 31,
1999(1) 1998(1) 1997
---- ---- ----
(Dollars in millions, except per share amounts)
Revenue $5,253 $4,719 $4,175
Net income 626 1,169 920
Basic earnings per share $ 1.15 $ 2.14 $ 1.68
Shares used in computation* 545 546 546
Diluted earnings per share $ 1.11 $ 2.06 $ 1.62
Shares used in computation* 562 566 569
(1) There were no significant acquisitions in fiscal years 1999 and 1998. Fiscal
years 1999 and 1998 results include full-year operations of the Company and
Cheyenne, and are presented for comparison purposes only.
*Adjusted for the three-for-two stock splits effective June 19, 1996 and
November 5, 1997.
In management's opinion, the pro forma combined results of operations are not
indicative of the actual results that would have occurred had the acquisitions
been consummated at the beginning of fiscal year 1997, or of future operations
of the combined companies under the ownership and operation of the Company.
Note3--Investments
The following is a summary of marketable securities classified as
"available-for-sale" securities as required by FASB 115:
Year Ended March 31,
1999 1998 1997
---- ---- ----
Debt/Equity Securities: (Dollars in millions)
Cost $124 $59 $56
Gross Unrealized Gains 13 - -
---- ---- ----
Estimated Fair Value $137 $59 $56
Gross and net realized gains on sales of available-for-sale securities totaled
$1 million, $3 million, and $1 million for the years ended March 31, 1999, 1998,
and 1997, respectively.
The amortized cost and estimated fair value based on published closing prices
of securities at March 31, 1999, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
March 31, 1999
Estimated
Fair
Cost Value
------ --------
Available-for-Sale: (Dollars in millions)
Due in one year or less $ 72 $ 85
Due one through three years 30 30
Due in three through five years 12 12
Due after five years 10 10
----- -----
$ 124 $ 137
===== =====
31
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 4 -- Geographic Area Information and Foreign Operations
United States Europe (a) Other (a) Eliminations Total
------------- --------- -------- ------------ -----
(Dollars in millions)
March 31, 1999:
Revenue:
To unaffiliated customers $3,262 $1,272 $719 - $5,253
Between geographic areas (b) 451 - - $(451) -
----- ----- ----- ----- -----
Total Revenue 3,713 1,272 719 (451) 5,253
Net income 450 102 74 - 626
Identifiable assets 6,835 1,112 610 (487) 8,070
Total liabilities 4,474 909 445 (487) 5,341
March 31, 1998:
Revenue:
To unaffiliated customers $2,994 $1,104 $621 - $4,719
Between geographic areas (b) 373 - - $(373) -
----- ----- ----- ----- -----
Total Revenue 3,367 1,104 621 (373) 4,719
Net income 990 82 97 - 1,169
Identifiable assets 5,326 1,375 499 (494) 6,706
Total liabilities 3,373 986 360 (494) 4,225
March 31, 1997:
Revenue:
To unaffiliated customers $2,315 $1,226 $499 - $4,040
Between geographic areas (b) 335 - - $(335) -
----- ----- ----- ----- -----
Total Revenue 2,650 1,226 499 (335) 4,040
Net income 101 170 95 - 366
Identifiable assets 4,584 1,594 420 (514) 6,084
Total liabilities 3,791 1,040 264 (514) 4,581
(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, 1999, 1998, and 1997, $4 million, $14 million, and
$36 million, respectively, of export sales to unaffiliated customers are
included in United States revenue.
32
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,
1999 1998
---- ----
(Dollars in millions)
Current receivables $3,153 $2,655
Less: Allowance for uncollectible amounts (204) (210)
Unamortized discounts (463) (240)
Deferred maintenance fees (465) (346)
------- -------
$2,021 $1,859
======= =======
Non-current receivables $4,565 $3,719
Less: Allowance for uncollectible amounts (60) (36)
Unamortized discounts (735) (457)
Deferred maintenance fees (926) (736)
------- -------
$2,844 $2,490
======= =======
Installment accounts receivable represent amounts collectible on long-term
financing arrangements and include fees for product licenses, upgrades, and
maintenance, sometimes also bundled with professional services contracts.
Installment receivables are generally financed over three to five years and are
recorded net of unamortized discounts, deferred maintenance fees and allowances
for uncollectible amounts.
The provisions for uncollectible amounts for the years ended March 31, 1999,
1998, and 1997 were $75 million, $71 million, and $110 million, respectively,
and are included in selling, marketing and administrative expenses.
Note 6 - Debt
At March 31, 1999, the Company had $325 million in short-term debt outstanding
under its $1.5 billion five-year and $1.1 billion 364-day credit facilities.
The outstanding amount under these facilities at March 31, 1998 was $1.21
billion. The credit facilities provide for interest at the prevailing London
Interbank Rate ("LIBOR") plus a margin and require the Company to maintain
certain financial ratios. Interest margins and commitment fees are based
upon the Company's achievement of certain financial ratios. The effective
pre-tax interest rate at March 31, 1999 was approximately 5.2%.
On February 23, 1999, Quick Access Inc., (a wholly owned subsidiary of the
Company)renewed its 85 million pounds sterling 364-day revolving credit
facility. This facility is being used 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
facility's interest is calculated at the prevailing LIBOR rate for
pound-sterling plus a margin. At March 31, 1999 and 1998, 49 million
pounds sterling (approximately US$81 million) and 14 million pounds sterling
(approximately US$23 million) was outstanding under this credit facility with
an interest rate of 6.1% and 7.8%, 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 has registered 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. This Senior
Note issuance enabled the Company to extend the maturity of its debt, commit
to an attractive fixed rate of interest, and broaden the Company's sources of
liquidity. Proceeds were used to pay down bank debt, treasury stock purchases,
acquisitions, and for general corporate purposes.
At March 31, 1999 and 1998, 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 $30 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 was drawn at both March 31,
1999 and 1998.
33
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 6 -- Debt (Continued)
At March 31, 1999 and 1998 the Company had various other fixed rate debt
obligations outstanding carrying annual interest rates ranging from 6% to
7-1/2% totaling approximately $52 million and $42 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: 2000-$492 million, 2001-$85 million, 2002-$80 million, 2003-$65
million, and 2004-$639 million.
Interest expense for the years ended March 31, 1999, 1998, and 1997, was $154
million, $147 million and $104 million,respectively.
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 is currently constructing a facility in the
United Kingdom with an estimated total cost of $142 million of which $81
million has already been paid as of March 31,1999.
Rental expense under operating leases for the years ended March 31, 1999,
1998, and 1997 was $135 million, $140 million, and $132 million, respectively.
Future minimum lease payments are: 2000--$77 million; 2001--$55 million;
2002--$45 million; 2003--$33 million; 2004--$37 million; and thereafter--$79
million.
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of marketable securities and
accounts receivable. The Company's marketable securities consist primarily of
high quality securities with limited exposure to any single instrument. The
Company's accounts receivable balances have limited exposure to concentration of
credit risk due to the diverse client base and geographic areas covered by
operations.
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Company's stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Company's future financial performance. These cases have
been consolidated into a single action (the "Shareholder Action") in the United
States District Court for the Eastern District of New York ("NY Federal Court").
The defendants moved to dismiss the Shareholder Action. In addition, three
derivative actions alleging similar facts were brought in the NY Federal Court.
An additional derivative action, alleging that the Company issued 14.25
million more shares than were authorized under the 1995 Key Employee Stock
Ownership Plan (the "1995 Plan"), was also filed in the NY Federal Court. In
all but one of these derivative actions, all of the Company's directors
at that time were named as defendants. These derivative actions have been
consolidated into a single action (the "Derivative Action") in the NY Federal
Court. The Derivative Action has been stayed. Lastly, a derivative action was
filed in the Chancery Court in Delaware (the "Delaware Action") alleging
that 9.5 million more shares were issued than were authorized under the
1995 Plan. The Company and its directors, who are parties to the Delaware
Action, have filed a motion to dismiss the Delaware Action, and the plaintiff
has moved for summary judgment. Although the ultimate outcome and liability, if
any, cannot be determined, management, after consultation and review with
counsel, believes that the facts in each of the actions do not support the
plaintiffs' claims and that the Company and its officers and directors have
meritorious defenses.
The Company, various subsidiaries and certain current and former officers
have been named as defendants in 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.
34
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8 -- Income Taxes
The amounts of income before income taxes attributable to domestic and foreign
operations are as follows:
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
Domestic $ 748 $1,611 $ 520
Foreign 262 263 412
------ ------ -----
$1,010 $1,874 $ 932
====== ====== =====
The provision for income taxes consists of the following:
Year Ended March 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
Current:
Federal $171 $446 $256
State 17 44 38
Foreign 89 74 51
----- ----- -----
277 564 345
----- ----- -----
Deferred:
Federal 106 119 106
State 4 12 19
Foreign (3) 10 96
----- ----- -----
107 141 221
----- ----- -----
Total:
Federal 277 565 362
State 21 56 57
Foreign 86 84 147
----- ----- -----
$384 $705 $566
===== ===== =====
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 $1.3 billion in 1999
and $1.2 billion in 1998) 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,
1999 1998 1997
---- ---- ----
(Dollars in millions)
Statutory rate $353 $656 $326
State taxes, net of federal tax effect 14 36 37
Purchased research and development -- -- 209
Other, net 17 13 (6)
---- ---- ----
$384 $705 $566
==== ==== ====
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 500,000 options which
are outstanding under the 1981 Plan were exercisable at March 31, 1999 at
$2.22-$3.67 per share.
35
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 -- Stock Plans (Continued)
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,
1999, 30,375 shares of the Company's Common Stock were available for future
grants. All of the 7.1 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 Company's 1991 Stock Incentive Plan (the "1991 Plan") provides that stock
appreciation rights and/or options, both qualified and non-statutory, to
purchase up to 67.5 million shares of Common Stock of the Company may begranted
to employees (including officers of the Company) under conditions similar to the
1981 Plan. As of March 31, 1999, no stock appreciation rights have been granted
under this plan and 50.1 million options have been granted. At March 31, 1999,
11.6 million of the 33.3 million options which are outstanding under the 1991
Plan were exercisable. These options are exercisable at $4.26-$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, 1999, 162,000 options have been granted under
this plan. 95,000 of the 115,000 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.
The following table summarizes the activity under these plans (shares in
millions):
1999 1998 1997
------------------- ---------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ ------ ------ -------
Beginning of year 42.6 $19.36 40.2 $13.96 41.2 $ 8.71
Granted 4.7 36.56 8.9 37.58 9.3 31.51
Exercised (3.9) 9.60 (5.8) 10.46 (7.9) 6.71
Terminated (2.4) 29.32 (.7) 15.82 (2.4) 16.62
----- ----- -----
End of year 41.0 21.67 42.6 19.36 40.2 13.96
Options exercisable
at end of year 19.3 $10.85 16.7 $ 7.84 15.8 $ 7.06
The following table summarizes information about these plans at March 31, 1999
(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 16.3 3.9 years $ 5.97 14.4 $ 5.55
$10.01 - $20.00 6.8 6.1 years 19.16 2.9 19.02
$20.01 - $30.00 4.1 8.0 years 29.27 .4 28.78
$30.01 - $40.00 9.7 8.3 years 35.74 1.2 34.92
$40.01 - $47.25 4.1 8.9 years 47.16 .4 46.86
---- ----
41.0 19.3
36
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 -- Stock Plans (Continued)
Under the 1995 Key Employee Stock Ownership Plan (the "1995 Plan") a total of
20.25 million restricted shares were 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 Plan. In January 1996, based on the
achievement of a price target for the Company's 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 Plan were
made based on the achievement of certain price targets. These additional grants
and the unvested portion of the initial grant vested in May 1998 and are further
subject to significant limitations on transfer during the seven years following
vesting. The vesting occurred after the closing price of the Company's stock on
the New York Stock Exchange exceeded $53.33 for 60 trading days within a
twelve-month period. A one time charge of $1,071 million was recorded in the
first quarter of fiscal year 1999.
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 and net
income per share would have been adjusted to the proforma amounts in the table
below:
Year Ended March 31,
1999(1) 1998 1997
----- ---- ----
(Dollars in millions, except per share amounts)
Net income--as reported $ 626 $ 1,169 $ 366
Net income--pro forma . 1,128 1,085 301
Basic earnings per share $ 1.15 $ 2.14 $ .67
Basic earnings per share--pro forma 2.07 1.99 .55
Diluted earnings per share $ 1.11 $ 2.06 $ .64
Diluted earnings per share--pro forma 2.06 1.94 .54
(1) Includes the effect of the 1995 Plan charge under FAS No. 123.
The weighted-average fair value at date of grant for options granted in 1999,
1998, and 1997 were $19.04, $20.44, and $19.34 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 1999, 1998, and 1997 respectively; dividend yields of .22%,
.22%, and .19%; expected volatility factors of .50; risk-free interest rates of
4.5%, 6.2%, and 6.5% and an expected life of six years. The compensation expense
and pro forma net income may not be indicative of amounts to be included in
future periods.
All references to the number of shares and share prices have been adjusted to
reflect the three-for-two stock splits effective 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
the year ended March 31, 1999 were approximately $6 million and for each
of the years ended March 31, 1998 and 1997 were approximately $5 million.
In addition, the Company may make discretionary contributions to the CASH Plan.
Discretionary contributions to the CASH Plan for the year ended March 31, 1999
were approximately $20 million, and for each of the years ended March 31,
1998 and 1997 approximated $17 million.
Note 11 -- Rights Plan
Each outstanding share of the Company's Common Stock carries a stock
purchase right issued under the Company's Rights Agreement, dated June 18, 1991
and amended May 17, 1995 (the "Rights Agreement"). Under certain circumstances,
each right may be exercised to purchase one one-thousandth of a share of Series
One Junior Participating Preferred Stock, Class A, for $300. Under certain
circumstances, following (i) the acquisition of 20% or more of the Company's
outstanding Common Stock by an Acquiring Person (as defined in the Rights
Agreement), (ii) the commencement of a tender offer or exchange offer which
would result in a person or group owning 20% or more of the Company's
37
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 11 -- Rights Plan (Continued)
outstanding common stock or (iii) the determination by the Company's Board of
Directors and a majority of the Disinterested Directors (as defined in the
Rights Agreement)that a 15% stockholder is an Adverse Person (as defined in the
Rights Agreement), each right (other than rights held by an Acquiring Person or
Adverse Person) may be exercised to purchase common stock of the Company or a
successor company with a market value of twice the $300 exercise price. The
rights, which are redeemable by the Company at one cent per right, expire in
June 2001.
Note 12 -- Subsequent Events
On March 29, 1999, the Company and Platinum technology International inc.
("Platinum") announced the execution of a merger agreement pursuant to which the
Company has agreed to acquire Platinum through a cash tender offer. Under the
terms of the merger agreement, a wholly owned subsidiary of the company will
offer to purchase all outstanding shares, approximately 102 million, of
Platinum's stock for $29.25 per share. Consummation of the tender offer is
subject to certain conditions, including the condition that at least a majority
of the outstanding shares of Platinum's Common Stock be tendered and not
withdrawn, as well as the condition that all required regulatory approvals are
received. On May 25, 1999, the Company reached an agreement with the U.S.
Department of Justice allowing the Company to complete the acquisition. The
agreement will result in the sale of six Platinum mainframe products under the
supervision of a court-appointed trustee. The transaction is expected to be
completed and the shares tendered to be paid for during the first week of June
1999. The Company has secured $4.5 billion of bank financing to fund the
tender offer and related acquisition costs. It is anticipated that a charge
will be taken at time of acquisition for in-process research and development.
There will be disruptions resulting from integration of the sales, development
and marketing organizations of Platinum with those of the Company. In addition,
there was considerable distraction during the first quarter of fiscal year 2000
associated with anticpated changes from the expected integration.
38
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, 1999 $246 $ 75 $ 2 $59 $264
Year ended March 31, 1998 $227 $ 71 $ 2 $54 $246
Year ended March 31, 1997 $182 $110 $ 13 $78 $227
(a) Reserves of acquired companies.
(b) Write-offs of amounts against allowance provided.