UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period ended from _____ to _____ Commission File Number 0-10180 Computer Associates International, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2857434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Computer Associates Plaza Islandia, New York 11788-7000 (Address of principal executive offices) (Zip Code) (516) 342-5224 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Title of Class Shares Outstanding Common Stock as of October 29, 1996 par value $.10 per share 364,799,220
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES INDEX PART I. Financial Information: Page No. Item 1. Consolidated Condensed Balance Sheets - September 30, 1996 and March 31, 1996 1 Consolidated Statements of Income - Three Months Ended September 30, 1996 and 1995 2 Consolidated Statements of Income - Six Months Ended September 30, 1996 and 1995 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended September 30, 1996 and 1995 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. Other Information: Item 6. Exhibits and Reports on Form 8-K 11
1 <TABLE> Item 1: Part I. FINANCIAL INFORMATION COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In millions) <CAPTION> September 30 March 31, 1996 1996 ----------- --------- (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents $ 116 $ 97 Marketable securities 85 104 Trade and installment accounts receivable - net 1,129 1,182 Inventories and other current assets 63 65 ------- ------- TOTAL CURRENT ASSETS 1,393 1,448 Installment accounts receivable, due after one 2,042 1,701 Property and equipment - net 422 420 Purchased software products - net 440 580 Excess of cost over net assets acquired - net 767 786 Investments and other noncurrent assets 78 81 ------- ------- TOTAL ASSETS $5,142 $5,016 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY: Loans payable - banks $ 495 $ 495 Other current liabilities 999 1,006 Long-term debt 740 945 Deferred income taxes 794 721 Deferred maintenance revenue 301 367 Stockholders' equity 1,813 1,482 ------- ------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,142 $5,016 ======= ======= <FN> See Notes to Consolidated Condensed Financial Statements </TABLE>
2 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In millions, except per share amounts) <CAPTION> For the Three Months Ended September 30, --------------------- 1996 1995 <S> <C> <C> Product revenue and other related income $ 800 $ 630 Maintenance fees 190 182 ------ ------ TOTAL REVENUE 990 812 Costs and expenses: Selling, marketing and administrative 383 313 Product development and enhancements 76 67 Commissions and royalties 50 41 Depreciation and amortization 106 101 Interest expense - net 21 17 Purchased research and development 1,303 ------ ------ TOTAL COSTS AND EXPENSES 636 1,842 ------ ------ Income (loss) before income taxes 354 (1,030) Provision for income tax expense (benefit) 131 (393) ------ ------ NET INCOME (LOSS) $ 223 $ (637) ------ ------ NET INCOME (LOSS) PER COMMON SHARE * $ 0.59 $(1.76) ------ ------ Weighted average common shares used in computation* 380 362 <FN> * Shares and per share amounts adjusted for three-for-two stock splits effective June 19, 1996 and August 21, 1995. <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE>
3 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In millions, except per share amounts) <CAPTION> For the Six Months Ended September 30, ------------------- 1996 1995 ---- ---- <S> <C> <C> Product revenue and other related income $ 1,403 $ 1,027 Maintenance fees 379 363 ------- ------- TOTAL REVENUE 1,782 1,390 Costs and expenses: Selling, marketing and administrative 725 590 Product development and enhancements 151 128 Commissions and royalties 91 67 Depreciation and amortization 226 172 Interest expense - net 44 19 Purchased research and development 1,303 ------ ------ TOTAL COSTS AND EXPENSES 1,237 2,279 ------ ------ Income (loss) before income taxes 545 (889) Provision for income tax expense (benefit) 202 (340) ------ ------ NET INCOME (LOSS) $ 343 $ (549) ------ ------ NET INCOME (LOSS) PER COMMON SHARE * $ 0.90 $(1.52) ------ ------ Weighted average common shares used in computation* 380 362 <FN> * Shares and per share amounts adjusted for three-for-two stock splits effective June 19, 1996 and August 21, 1995. <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE>
4 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) <CAPTION> For the Six Months Ended September 30, ------------------- 1996 1995 ---- ---- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ 343 $(549) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 226 172 Provision for deferred income taxes 93 (437) Charge for purchased research and development 1,303 Increase in noncurrent installment accounts receivable - (353) (230) (Decrease) increase in deferred maintenance revenue (65) 1 Changes in other operating assets and liabilities, excludes effects of acquisitions 26 (73) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 270 187 INVESTING ACTIVITIES: Acquisitions, primarily purchased software, marketing rights and intangibles (25) (1,686) Purchase of property and equipment (8) (12) Decrease in current marketable securities 20 56 Capitalized development costs (8) (7) ------ ------ NET CASH USED IN INVESTING ACTIVITIES (21) (1,649) FINANCING ACTIVITIES: Borrowings and repayments - net (202) 1,451 Dividends paid (17) (16) Exercise of common stock options/other 11 12 Purchases of treasury stock (21) (22) ------ ------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (229) 1,425 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH 20 (37) Effect of exchange rate changes on cash (1) (2) ------ ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19 (39) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 97 117 ------ ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 116 $ 78 ====== ======= <FN> See notes to Consolidated Financial Statements. </TABLE>
5 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in Computer Associates International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form 10-K for the fiscal year ended March 31, 1996. Cash Dividends: In May 1996, the Company's Board of Directors declared its regular, semi-annual cash dividend of $.07 per share. The dividend was paid on July 9, 1996 to stockholders of record on June 10, 1996, prior to the Company's three-for-two stock split effective June 19, 1996. Net Income per Share: Net income per share of Common Stock is computed by dividing net income by the weighted average number of common shares and any dilutive common share equivalents outstanding. Common share equivalents for the three and six month periods ended September 30, 1995 were excluded because of their anti-dilutive effect. Fully diluted net income per share is the same or not materially different from net income per share. Stock Split: On May 30, 1996 the Company declared a three-for-two stock split in the form of a stock dividend, distributed July 15, 1996 to stockholders of record as of June 19, 1996. Shares and per share amounts have been adjusted to reflect this stock split as well as the previous three-for-two stock split effective August 21, 1995. Statements of Cash Flows: For the six months ended September 30, 1996 and 1995, interest payments were $30 million and $20 million, respectively, and income taxes paid were $119 million and $64 million, respectively.
6 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE B -- ACQUISITIONS On August 1, 1995, the Company acquired 98% of the issued and outstanding shares of Common Stock of Legent Corporation ("Legent"), and on November 6, 1995 merged Legent into one of its wholly owned subsidiaries. The aggregate purchase price of approximately $1.8 billion was funded from drawings under the Company's $2 billion credit agreement dated July 24, 1995. Legent was engaged in the design, development, marketing, and support of a broad range of computer software products for the management of information systems used to manage mainframe, midrange, server, workstation and PC systems deployed throughout a business enterprise. The acquisition was accounted for as a purchase. The results of Legent's operations have been combined with those of the Company since the date of acquisition. The Company recorded an $808 million after tax charge against earnings for the write-off of purchased Legent research and development technology that had not reached the working model stage and has no alternative future use. The following table reflects pro forma combined results of operations (unaudited) of the Company and Legent on the basis that the acquisition had taken place and the related after tax charge, noted above, was recorded at the beginning of fiscal year 1996: <TABLE> (In millions, except per share amounts) <CAPTION> For the Six Months For the Three Months Ended September 30, Ended September 30, ------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenue $ 1,802 $ 1,476 $ 990 $ 834 Net income 355 (772) 223 165 Net income per common share $ 0.93 $ (2.14) $.0.59 $ 0.43 Shares used in computation 380 361 380 380 </TABLE> In management's opinion, the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal year 1996 or of future operations of the combined entities under the ownership and operation of the Company.
7 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE C -- THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN Under the 1995 Key Employee Stock Employee Ownership Plan (the "1995 Plan") the Stock Option and Compensation Committee of the Board of Directors (the "Committee") is authorized to grant, subject to the attainment of certain Common Stock price objectives, up to 13,500,000 shares of the Company's restricted Common Stock to three key executives. The Committee has initially reserved 4,500,000 shares of Common Stock ("Initial Grant") and may grant up to an additional 9,000,000 shares (the "Additional Grants") based on achievement of certain target price levels for the Company's Common Stock. In January 1996, 900,000 shares of Common Stock reserved under the Initial Grant vested, subject to the continued employment of the key executives. Accordingly, the Company began accruing the compensation expense associated with the 900,000 shares over the employment period ending March 31, 2000. At September 30, 1996, 5,400,000 shares of the Additional Grants had been reserved under the 1995 Plan, and 3,600,000 shares were available for future grants based on stock price performance. The Initial Grant and Additional Grants are non-transferable, are subject to risk of forfeiture through March 31, 2000 and are further subject to significant limitations on transfer during the seven years following vesting. All references to the number of shares available and reserved for grant have been adjusted to reflect three-for -two stock splits effective June 19, 1996 and August 21, 1995. NOTE D -- SUBSEQUENT EVENT On October 11, 1996, the Company announced that Tse-tsehese-staetse, Inc., the Company's wholly owned merger subsidiary, commenced a tender offer for all of the outstanding shares of Cheyenne Software, Inc. ("Cheyenne") common stock at a price of $30.50 per share, net to the seller in cash. The offer is being made pursuant to the Agreement and Plan of Merger dated as of October 7, 1996 among Tse-tsehese-staetse, Inc. and Cheyenne. It is conditioned, among other things, upon a number of shares being tendered and not withdrawn such that, upon consummation of the offer, the Company and its affiliates will beneficially own in the aggregate not less than the majority of the shares on a fully diluted basis. The offer will expire at 12:00 midnight, New York City time, on Friday, November 8, 1996, unless the offer is extended. The Board of Directors of Cheyenne has unanimously approved the offer and the Merger Agreement and has unanimously recommended that the stockholders of Cheyenne accept the offer.
8 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Form 10-Q concerning the company's future prospects are "forward looking statements" under the federal securities laws. There can be no assurances that future results will be achieved and actual results could differ materially from forecasts and estimates. Important factors that could cause actual results to differ materially are discussed below in the section "Operations". RESULTS OF OPERATIONS Revenue: Total revenue for the quarter ended September 30, 1996 increased by 22%, or $178 million, over the prior year's comparable quarter. The increase reflects the Company's offering of attractive enterprise pricing options, as well as the continued growth of licensing fees from the Company's expanding client/server products. The inclusion in the current period of revenues associated with the Legent products for three months compared to two months of Legent activity in the prior year's comparable quarter contributed slightly to the revenue growth. Revenue in North America exhibited strong growth representing 62% of the revenue in the September 1996 quarter compared to 52% of revenue in the September 1995 quarter. International revenue for the quarter decreased by $19 million over the comparable quarter last year due primarily to unfavorable foreign exchange rates and strong international results last year which benefited disproportionately from the Legent acquisition. Maintenance revenues increased $8 million, or 4%, primarily due to the acquisition of the Legent client base, partially offset by the ongoing trend of site consolidations and expanding client/server revenues which yield lower maintenance. Price changes did not have a material impact in either quarter. Costs and Expenses: Selling, marketing and administrative expenses as a percentage of total revenue for the September 1996 quarter increased to 39% from 38% for the September 1995 quarter. The modest percentage increase reflects increased promotional expenditures, specifically charges associated with CA-World, a week long, company wide user conference held in the month of August. Net research and development expenditures increased $9 million, or 12%, over the September 1995 quarter. The addition of Legent product development personnel, continued emphasis on adapting products for the client/server environment and broadening of Internet/Intranet product offerings were largely responsible for the increase. Commissions and royalties as a percentage of revenue were 5% for both the September 1996 and 1995 quarters. Depreciation and amortization expense increased $5 million in the September 1996 quarter over the September 1995 quarter, primarily due to the additional purchased software product amortization associated with the Legent acquisition. In the September 1996 quarter, net interest expense increased by $4 million over the September 1995 quarter as a result of the higher average debt levels associated with borrowings used to finance the Legent acquisition.
9 Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Margins: Net income for the September 1996 quarter was $223 million, or $.59 per share compared to a net loss of $637 million, or $1.76 per share in the September 1995 quarter. The net loss for the September 1995 quarter was entirely attributable to the $808 million after tax charge for the write-off of Legent purchased research and development technology that had not reached the working model stage and had no alternative future use. Excluding the after tax charge, net income for the September 1996 quarter increased $52 million, or 30% compared to the September 1995 quarter's adjusted net income of $171 million. The Company's consolidated effective tax rate for the September 1996 quarter decreased to 37%, slightly less than the prior year's effective tax rate of 37.5%. Operations: The Company's products are designed to improve the productivity and efficiency of its clients' data processing resources. Accordingly, in a recessionary environment, the Company's products are often a reasonable economic alternative to customers faced with the prospect of incurring expenditures to increase their existing data processing resources. However, a general or global slowdown in the world economy could adversely affect the Company's operations. 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 revenues have been greater than the first half of the year, as these two quarters coincide with the clients' calendar year budget periods and the culmination of the Company's annual sales plan. Historically, higher second half revenues have resulted in significantly higher profit margins since total expenses have not increased in proportion to revenue. However, past financial performance should not be considered to be a reliable indicator of future performance. The Company's future operating results may be affected by a number of other factors, including, but not limited to: uncertainties relative to economic conditions; market acceptance of competing technologies; the availability and cost of new solutions; the Company's ability to successfully manage the transition from deriving a majority of its revenue from mainframe products to offering lower, individually priced client/server solutions; the strength of its distribution channels; the Company's ability to manage fixed and variable expense growth relative to revenue growth; and the Company's ability to effectively integrate acquired products and operations.
10 Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company's cash, cash equivalents and marketable securities balance increased by approximately $2 million from the balance at June 30, 1996. During the quarter, bank debt repayments of $105 million, dividend payments of $17 million and Company stock purchases of $10 million were funded by cash generated from operations of $143 million. On July 11, 1996, the Company restructured its $2 billion revolving credit line into a $700 million 364 day facility and a $1.3 billion 5 year facility. Borrowing costs and facility fees are based upon the achievement of certain financial ratios. At September 30, 1996, in addition to the $320 million outstanding under its 6.77% Senior Notes, $870 million remained outstanding under the $2 billion facility. The outstanding revolving debt on September 30, 1996 carried an interest rate of the London Interbank Offered Rate ("LIBOR") plus 20.5 basis points. The total number of shares purchased under the Company's various open market Common Stock repurchase programs was approximately 71.3 million as of September 30, 1996. In July 1996, the Company's Board of Directors authorized the repurchase of an additional 18.75 million shares. This brought the total shares available for repurchase at September 30, 1996 to approximately 37.4 million. All share amounts reflect both the August 1995 and the June 1996 3-for-2 stock splits. On October 11, 1996, the Company commenced a tender offer for all the issued and outstanding shares of Cheyenne Software, Inc. ("Cheyenne") at $30.50 per share. The transaction, pending regulatory approval and expiration of the tender offer, is valued at approximately $1.2 billion. The Company plans to fund the purchase price through existing cash, cash equivalents and marketable securities balances as well as the existing credit facilities. The Company's other capital resource requirements as of September 30, 1996 consisted of lease obligations for office space, computer equipment, mortgage or loan obligations and amounts due as a result of product and company acquisitions. It is expected that existing cash, cash equivalents, short term marketable securities, the availability of borrowings under committed and uncommitted credit lines, as well as cash provided from operations, will be sufficient to meet ongoing cash requirements.
11 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Annual Meeting of Stockholders held on August 14 , 1996 (b) The Stockholders notice to fix the number of Directors at seven and elected Directors for the ensuing year as follows: <TABLE> <CAPTION> Affirmative Authority Name Votes Withheld -------------- --------------- ---------- <S> <C> <C> Russell M. Artz 213,594,713 261,247 Willem F.P. de Vogel 213,655,600 200,360 Irving Goldstein 213,653,064 202,896 Richard A. Grasso 213,656,294 199,666 Shirley Strum Kenny 213,643,655 212,305 Sanjay Kumar 213,582,201 273,759 Charles B. Wang 213,597,743 258,017 </TABLE> (c) The Stockholders voted to approve an amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of shares of its authorized Common Stock, par value $.10 per share, from 500,000,000 to 1,100,000,000: <TABLE> <CAPTION> <S> <C> Affirmative Votes 175,359,078 Negative Votes 37,351,428 Abstentions 270,585 </TABLE> (d) The Stockholders voted to approve the 1996 Deferred Stock Plan for Non-Employee Directors: <TABLE> <CAPTION> <S> <C> Affirmative Votes 207,648,870 Negative Votes 5,728,007 Abstentions 479,083 </TABLE> (e) The Stockholders voted to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending March 31, 1997: <TABLE> <CAPTION> <S> <C> Affirmative Votes 213,520,176 Negative Votes 152,024 Abstentions 183,760 </TABLE>
12 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. 3.(i)(a) Restated Certificate of Incorporation, dated October 23, 1981. 3.(i)(b) Certificate of Amendment of the Restated Certificate of Incorporation, dated May 10, 1983. 3.(i)(c) Certificate of Amendment of the Restated Certificate of Incorporation, dated September 18, 1985. 3.(i)(d) Certificate of Amendment of the Restated Certificate of Incorporation, dated August 19, 1987. 3.(i)(e) Certificate of Amendment of the Restated Certificate of Incorporation, dated August 24, 1989. 3.(i)(f) Certificate of Amendment of the Restated Certificate of Incorporation, dated August 23, 1996. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPUTER ASSOCIATES INTERNATIONAL, INC. Dated: November 1, 1996 By: /s/Sanjay Kumar ------------------------ Sanjay Kumar, President and Chief Operating Officer Dated: November 1, 1996 By: /s/ Peter Schwartz ------------------------ Peter Schwartz Sr. Vice President - Finance (Chief Financial and Accounting Officer)