-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qz+LG/x3pbVCyoJBcsQ1hfMe3Rbio9Mz/E8ww9ivl31ifLCg40svngmg7E0PUUP3 foRyyZsGDrPDU9FlBRi+nw== 0000356028-99-000024.txt : 19990624 0000356028-99-000024.hdr.sgml : 19990624 ACCESSION NUMBER: 0000356028-99-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER ASSOCIATES INTERNATIONAL INC CENTRAL INDEX KEY: 0000356028 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 132857434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09247 FILM NUMBER: 99637861 BUSINESS ADDRESS: STREET 1: ONE COMPUTER ASSOCIATES PLAZA CITY: ISLANDIA STATE: NY ZIP: 11788 BUSINESS PHONE: 5163425224 10-K 1 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.
EX-21 2
Exhibit A Subsidiaries of the Registrant Name of Subsidiary Jurisdiction of Incorporation ACCPAC(R) International, Inc. Delaware AI Ware, Inc. Ohio Computer Associates Caribbean, Inc. Puerto Rico C.A. Computer Associates GmbH Germany C.A. Computer Associates Israel Ltd. Israel C.A. Computer Associates S.A. Spain Computer Associates India PVT. Limited India C.A. Islandia Realty, Inc. New York CA Management, Inc. Delaware CA Real Estate, Inc. Delaware CA Research, Inc. Delaware Computer Associates Services, Inc. Delaware Computer Associates Think, Inc. Delaware Cheyenne Software, Inc. Delaware Computer Associates AG Switzerland Computer Associates Canada Company Canada Computer Associates CIS Ltd. Russia Computer Associates de Argentina S.A. Argentina Computer Associates do Brasil Ltda. Brazil Computer Associates de Chile S.A. Chile Computer Associates de Colombia S.A. Colombia Computer Associates de Mexico, S.A. de C.V. Mexico Computer Associates de Venezuela, C.A. Venezuela Computer Associates Finland OY Finland Computer Associates, Inc. Delaware Computer Associates International (China) Co. Ltd. China Computer Associates International GmbH Austria Computer Associates CZ, s.r.o. The Czech Republic Computer Associates International Limited Hong Kong Computer Associates Japan, Ltd. Japan Computer Associates Korea Ltd. Korea Computer Associates Ltd. Sti. Turkey Computer Associates (M) Sdn. Bhd. Malaysia Computer Associates Middle East WLL Bahrain Computer Associates Norway A/S Norway Computer Associates (N.Z.) Ltd. New Zealand Computer Associates Plc United Kingdom Computer Associates Products Nederland B.V. The Netherlands Computer Associates Pte. Ltd. Singapore Computer Associates Pty. Ltd. Australia Computer Associates Real Estate BV Netherlands Computer Associates S.A. Belgium Computer Associates S.A. France Computer Associates Scandinavia A/S Denmark Computer Associates Africa (Pty.) Ltd. South Africa Computer Associates S.p.A. Italy Computer Associates Sp. z o.o. Poland Computer Associates Sucursal en Portugal Portugal Computer Associates Sweden AB Sweden Computer Associates Taiwan Ltd. Taiwan Computer Associates (Thailand) Co. Ltd. Thailand Ingres Corporation Delaware Legent Corporation Delaware Philippine Computer Associates International, Inc. Philippines Quick Access, Inc. Delaware Computer Management Sciences, Inc Florida LDA Systems, Inc. Ohio Realogic, Inc. Ohio Viewpoint Digital, Inc. Delaware All of the subsidiaries, other than ACCPAC International, Inc., are 100%-owned by the Registrant or by a wholly owned subsidiary of the Registrant other than directors' qualifying shares which are held in trust for the Registrant or for such wholly owned subsidiary.
EX-23 3 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-62055 pertaining to the 1998 Sales Compensation Plan and the 1998 Employee Stock Purchase Plan; Form S-8 No. 333-19071 pertaining to the Cheyenne Software, Inc. 1987 Non-Qualified Stock Option Plan and the Cheyenne Software, Inc. 1992 Stock Option Plan for Outside Directors; Form S-8 No. 33-53915 pertaining to the Computer Associates International, Inc. 1993 Non-Employee Director Stock Option Plan; Form S-8 Nos. 33-64377 and 33-53572 pertaining to the Computer Associates International, Inc. 1991 Stock Incentive Plan; Form S-4, No. 33-30347, and Form S-8 Nos. 33-34607, 33-18322, 2-92355, 2-87495 and 2-79751 pertaining to the 1981 Incentive Stock Option Plan, Non-Statutory Stock Option Plan and Affiliated Plans; and Form S-8 No 33-20797 pertaining to the Computer Associates Savings Harvest Plan) of Computer Associates International, Inc. and subsidiaries and related prospectuses of our report dated May 26, 1999, with respect to the consolidated financial statements and schedule of Computer Associates International, Inc. included in its Annual Report on Form 10-K for the year ended March 31, 1999, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP New York, New York May 26, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 399 137 2021 0 74 2631 1039 441 8070 1863 2032 0 0 63 2729 8070 4511 5253 0 4243 0 0 123 1010 384 626 0 0 0 626 1.15 1.11
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