Item 1. Business (a) General Development of Business Computer Associates International, Inc. (the "Company" or "Registrant") was incorporated in Delaware in 1974 and commenced business in June 1976. In December 1981, the Company completed its initial public offering of Common Stock. The Company's Common Stock is traded on the New York Stock Exchange under the symbol "CA". In the early years of its existence, the Company supplied systems software for IBM mainframe computers, primarily those using the VSE operating system. Since then the Company's line of products has grown to parallel the expansion of the software industry itself. Through the introduction of new internally developed products, strategic alliances and co-development projects as well as a series of company and product acquisitions, the Company has significantly increased the breadth of its product portfolio. Today, the Company supplies an extensive array of systems products, database management systems, business and consumer applications products for use on a variety of platforms ranging from mainframes to personal computers. Because of its independence from hardware manufacturers, the Company has been able to offer products for use not only on all the IBM operating systems (MVS, VSE, VM and OS/2), but also for use on many other operating systems, such as VMS from Digital Equipment Corporation ("DEC"), UNIX from such manufacturers as Hewlett-Packard ("HP") and Sequent and MS-DOS and Windows from Microsoft. The Company's products operate on over 30 different operating systems and platforms. During fiscal 1992, the Company acquired Pansophic Systems, Incorporated ("Pansophic"), On-Line Software International, Inc. ("On-Line") and substantially all the assets of Access Technology, Inc. ("Access"), as well as a number of smaller companies and individual products. Pansophic, On-Line, Access and the other smaller acquisitions were accounted for by the purchase method of accounting. On May 19, 1994, the Company announced that it had entered into a definitive agreement with The ASK Group, Inc. ("ASK") providing for the Company's acquisition of ASK through a cash tender offer. ASK provides database and manufacturing software solutions primarily for client/server environments. See Note 12 of Notes to Consolidated Financial Statements.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company's business has been in a single industry segment--the design, development, marketing and support of integrated computer software products. See Note 3 of Notes to Consolidated Financial Statements for financial data pertaining to geographic areas.
(c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL The Company designs, develops, markets and supports standardized computer software products for use with a broad range of mainframe, midrange and desktop computers from many different hardware manufacturers including IBM, Hewlett-Packard, Amdahl, Data General ("DG"), DEC, Sun, Tandem, Compaq and Apple, among others. Whether the most powerful mainframe or the ubiquitous small business workstation, a computer system consists of hardware and software. Hardware is the computer or central processing unit together with peripheral equipment such as disk and tape data storage devices, printers and terminals. Software consists of programs or instructions which tell the hardware what to do and how to respond to specific user requests.
PRODUCTS The Company designs, develops, markets and supports a broad range of standardized software products which enable clients to more efficiently utilize their data processing resources--hardware, software and personnel--by providing tools to measure and improve computer hardware and software performance and programmer productivity. The Company also designs, develops, markets and supports database management, business applications and graphics software for mainframe, midrange and desktop computers from a variety of vendors including IBM, DEC, HP, Amdahl, DG, Sun, Sequent, Tandem, Compaq and Apple. Because data processing resources are a significant investment for most users of medium and large-scale computer systems, managing these resources, increasing their efficiency, and leveraging information technology into new areas of business can result in substantial savings for the client. Many of these products can be used with little or no modification irrespective of the business or applications for which such a computer system is used. In each of the past three fiscal years, no single product accounted for 10% or more of the Company's revenue. In recognition of the increasing "downsizing" or "rightsizing" trend, where powerful desktop computers--alone or networked--are able to do work formerly done only on larger computers, the Company has formed many joint development partnerships operating under our standardized development architecture, CA90s(r). The goal of these alliances is to port the Company's successful systems management applications to a range of different platforms and operating systems. The first of this series was the fiscal 1993 introduction of CA-UNICENTER(r) for HP-UX running on Hewlett-Packard HP Series 9000/800 hardware. By the end of fiscal 1994, the Company was marketing versions of CA-UNICENTER for use on several client/server platforms. Similarly, many of the Company's most successful DOS-based micro applications have been enhanced to provide upwardly compatible applications on more powerful workstations using such operating systems as Microsoft's Windows, Novell's NetWare and IBM's OS/2. Fiscal 1994 also witnessed the introduction of two products for home use, Kiplinger's(TM) CA-Simply Money(TM) personal finance software, and CA-Simply Tax(TM), a product for income tax preparation. Prices for the Company's products vary depending upon the type of license agreement chosen by the client. See "Narrative Description of Business-Licensing."
SALES AND MARKETING The Company distributes, markets, and supports its products on a worldwide basis primarily with its own employees. The Company has approximately 3,400 sales and sales support personnel engaged in promoting the licensing of the Company's products by its clients. In North America, the Company operates through a single sales force responsible for sales, marketing and service of the Company's software products. A separate National Accounts group provides additional service to large clients, including end users and facilities managers. Facilities managers provide data processing services to those companies that wish to "outsource" their computer processing requirements. The Company also operates through wholly owned subsidiaries located in 28 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 many areas of the world where it does not have a direct presence. Revenue from independent distributors accounted for approximately 2% of the Company's fiscal 1994 revenues. The Company considers that it has established marketing and distribution channels in most areas of the world where the number of computer installations warrants the establishment of such channels. For fiscal year 1994 approximately 46%, for fiscal year 1993 approximately 50% and, for fiscal year 1992 approximately 52%, of the Company's revenue was derived from business outside North America. Western Europe is the Company's most important foreign market. The Company believes that its operations outside the United States are located in countries which are politically stable and that such operations are not exposed to any special or unusual risks. See Note 3 of Notes to Consolidated Financial Statements for further information concerning the Company's foreign operations. The Company's marketing and marketing services groups produce substantially all of the user documentation for its products, as well as promotional brochures, advertising and other business solicitation materials. The duties of these groups include the writing of the materials, editing, typesetting, photocomposition and printing.
LICENSING The Company does not sell or transfer title to its products to clients. The products are licensed on a "right to use" basis pursuant to license agreements. Such licenses generally require that the customer use the product only for its internal purposes at its own computer installation and, with respect to mainframe software, are non-transferable. The Company offers several types of mainframe software licenses. Under the first, the client agrees to pay a one-time fee and an annual usage and maintenance fee. The annual usage and maintenance fees typically range from 12% to 20% of the then-prevailing one-time fee for the product. Payment of the usage and maintenance fee entitles the client to receive technical support for the product from the Company and to receive all enhancements and improvements (other than optional features subject to a separate charge) to the product developed by the Company during the annual period covered. A second alternative is the term license under which the client agrees to pay a fixed fee and in return receives the right to use the product for a specified term ranging from one month to three years. Upon expiration of this period, a term license must be renewed for continued use of the product, and the then prevailing term license fee paid. Maintenance is included in the term license fee. The Company offers a third alternative which combines
elements of the other licensing options in that the client pays an initial licensing fee and a periodic license fee including maintenance to continue using the product. During fiscal 1993 and 1994, the Company introduced new licensing payment options based on the size of the enterprise in terms of the computing power as measured in MIPS--millions of instructions per second. Usage of software programs under the enterprise-wide licensing options may be expanded to subsidiaries and other related entities on a national or worldwide basis, regardless of the number, size and location of the data centers or central processing units ("CPUs") in use. In addition, under this option, the client is free to reallocate hardware or modify user configurations without incremental costs. 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, and maintenance is unbundled from the selling price and ratably recognized over the term of the agreement. One-time license fees under the first alternative range between $1,540 and $1,150,000, and three-year term license fees range between $1,030 and $770,000. Pricing under enterprise-wide licensing options is dependent on usage. See Note 1 of Notes to Consolidated Financial Statements for disclosure of its revenue recognition policies. The Company's micro and UNIX-based software products are licensed to end users upon payment of a fixed fee. Suggested license fees range between $20 and $570,000, dependent upon the number of users licensed or the size of the enterprise in terms of computing power as measured in MIPS. The licenses are version-specific and permanent in nature. Maintenance and support services, primarily provided through telephone contact with employees of the Company, may be purchased for an additional fee. The Company also offers site licenses on micro software products providing pricing advantages based on the number of copies licensed. Maintenance is also available on a site-license basis under similar terms and conditions as mainframe software licenses. Under its standard form of license agreements, the Company warrants that its products will perform in accordance with specifications published in the product documentation. COMPETITION The computer software business is highly competitive. There are many companies, including IBM, DEC, HP, and other large computer manufacturers, which have substantially greater resources, as well as the ability to develop and market software programs similar to and competitive with the products offered by the Company. Competitive products are also offered by numerous independent software companies, which specialize in specific aspects of the highly fragmented software industry. Some are the leading developers and vendors in their own specialized markets. IBM, DEC and HP are by far the largest suppliers of systems software and are the manufacturers of the computer hardware systems used by most of the Company's clients. From time to time, these hardware manufacturers have modified or introduced new operating systems, systems software and computer hardware. Such products could incorporate features which are currently performed by the Company's products or could require modification of the Company's products to maintain their compatibility with these companies' hardware or software. Although the Company has to date been able to adapt its products and its business to changes introduced by hardware manufacturers, there can be no assurance that it will be able to do so in the future. Historically, clients using proprietary operating systems were furnished with "source code" which makes the operating system generally understandable to programmers, "object code" which directly controls the hardware, and other technical documentation. Since the availability of source code facilitated the development of systems and applications software which must interface with the operating systems, independent software vendors such as the Company were able to develop compatible software. IBM has a policy of restricting the use or availability of the source code for some of its operating systems. To date, this policy has not had any effect on the Company. However, such restrictions may in the future result in higher research and development costs for the Company in connection with the enhancement and modification of existing products and the development of new products. Although the Company does not expect such restrictions will have an adverse effect on its products, there can be no assurance that such restrictions or other restrictions will not have a material adverse effect on the Company's business. The Company anticipates increased use of microcode or firmware provided by hardware manufacturers. Microcode and firmware are basically software programs in hardware form, and therefore are less flexible than pure software. The Company believes that these technical advances will not have a significant impact on the Company's operations and that its products will remain compatible with any such changes. However, there can be no assurance that future technological developments will not have an adverse impact on the Company's operations.
Although no company competes with the Company across its entire software product line or a significant portion thereof, the Company considers at least 75 firms to be directly competitive with one or more of the Company's systems software packages. In the areas of database management systems, graphics and applications software for the micro, workstation, midrange and mainframe environments, there are hundreds of companies, the primary business of which is focused on at least one but not all of these areas. Certain of these companies have substantially larger operations than the Company's in these specific areas. 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 capability; ease of installation and use; reliability 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.
PRODUCT PROTECTION The products of the Company are treated as trade secrets and confidential information. The Company relies for protection upon the contractual agreements with clients and its own security systems and confidentiality procedures. The Company also protects its products and their documentation and other written materials under copyright law. The Company obtains trademark protection for its various product names.
CLIENTS No individual client accounted for a material portion of the Company's revenue during any of the past three fiscal years. Since the Company's mainframe packages are used with relatively expensive computer hardware, most of its revenues are derived from companies which have the resources to make a substantial commitment to data processing and their computer installations. Most of the world's major companies use one or more of the Company's software packages. The Company's software products are generally used in a broad range of industries, businesses and applications. The Company's clients include manufacturers, banks, insurance companies, educational institutions, retail microcomputer distributors, value-added resellers, government agencies and individual personal computer users.
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 the Company believes that it will be able to do so in the future. Computer software vendors must also continually ensure that their products meet the needs of clients in the ever-changing marketplace. Accordingly, the Company has the policy of continually enhancing, improving, adapting and adding new features to its products, as well as developing additional products. The Company offers a facility, CA-UNISERVICE(r), for many of its software products whereby problem diagnosis, program 'fixes' and other mainframe services can be provided online between the customer's installation and the support facilities of the Company. CA-TCC(SM): Total Client Care, another facility, provides a major extension to existing support services of the Company by offering free access to the Company's client support database. Product development work is primarily done at the Company's facilities in San Diego, California; San Jose, California; Chicago, Illinois; Andover, Massachusetts; Westwood, Massachusetts; Mount Laurel, New Jersey; Princeton, New Jersey; Islandia, New York; Dallas, Texas; and Reston, Virginia. The Company also performs product development in Sydney, Australia; Vienna, Austria; Brussels, Belgium; Vancouver, Canada; Slough, England; Paris, France; Darmstadt, Germany; Dublin, Ireland; Tel Aviv, Israel; and Milan, Italy. For its fiscal years ended March 31, 1994, 1993 and 1992, product development costs charged to operations were $211,273,000, $207,365,000 and $190,324,000, respectively. In fiscal years 1994, 1993 and 1992, the Company capitalized $15,471,000, $18,149,000 and $23,582,000, respectively, of internally developed software costs. Certain of the Company's products were acquired from others. The Company continues to seek synergistic companies, products and partnerships. The purchase price of acquired products is capitalized and amortized over a period of five years.
EMPLOYEES As of March 31, 1994, the Company had over 6,900 employees of whom approximately 1,300 were located at its facilities in Islandia, New York; 3,150 were located at other offices in the United States, and 2,450 were located at its offices in foreign countries. Of the total employees, approximately 1,800 were engaged in product development efforts and 3,400 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 3 of Notes to Consolidated Financial Statements for financial data pertaining to the geographic distribution of the Company's operations.
ITEM 2.
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 55 office facilities throughout the United States, and approximately 62 office facilities outside the United States. Expiration dates on material leases range from fiscal 1995 to 2004. The Company's 675,000 square-foot headquarters in Islandia, New York, is owned by Islandia Centre Associates ("ICA"), the Company's 98% owned general partnership that purchased the 64-acre site and developed the facility. During fiscal 1994, the Company used cash, its revolving credit facility and a two-year unsecured term loan to repay all of the outstanding debt under the $175 million building credit financing. See Note 5 of Notes to Consolidated Financial Statements for information concerning indebtedness. The Company's subsidiary in Germany owns two buildings totaling approximately 120,000 square feet. The Company also owns 54,000 and 214,000 square-foot office facilities in Austin, Texas and Princeton, New Jersey, respectively. The Company owns various computer, telecommunications and electronic equipment. It also leases IBM, DEC, HP and DG computers located at the Company's facilities in Islandia, New York; Princeton, New Jersey; San Diego, California; and Chicago, Illinois. This equipment is used for the Company's internal product development, for technical support efforts and for administrative purposes. In addition, each of the Company's subsidiaries outside the U.S. leases certain computer hardware enabling them to communicate with all other offices of the Company through a dedicated worldwide network. The Company considers its computer and other equipment to be adequate for its needs. See Note 6 of Notes to Consolidated Financial Statements for information concerning lease obligations. ITEM 3.
ITEM 3. LEGAL PROCEEDINGS The Company, various subsidiaries and certain current and former officers and directors have been named as defendants in civil lawsuits alleging a number of separate violations of federal securities laws. The Company believes that the facts do not support the plaintiffs' claims and intends to vigorously contest each of them. The Company was a defendant and counterclaim plaintiff in a suit brought by Electronic Data Systems Corporation ("EDS") on January 9, 1992 in the United States District Court for the Northern District of Texas, Dallas Division, in which the parties alleged among other things: breaches of licensing agreements, misuse of copyright, interference with business relationships, fraud and violations of the antitrust laws. The parties settled the dispute on May 17, 1994, and on May 19, 1994, the Court entered an order dismissing the case with prejudice. At the time of the settlement, EDS signed a long-term licensing agreement. See Note 7 of Notes to Consolidated Financial Statements.
ITEM 4.
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 27, 1994 are listed below:
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, Senior Vice President-- Planning from April 1989 to December 1992, Vice President--Planning from November 1988 to March 1989 and Vice President--Research and Development effective April 1988. 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. From February 1983 to March 1987, Mr. Artzt was the Company's Senior Vice President--Development. Mr. Mazur was elected Executive Vice President--Sales effective April 1990, having previously served as President--Financial and Micro Products Group from April 1989 to March 1990, President--Information Products Division from October 1988 to March 1989, President--Europe Products Division from April 1987 to September 1988. Mr. Mazur joined the Company in September 1980. Mr. Frease was elected Secretary of the Company effective May 1991, and he has been a Senior Vice President of the Company since April 1985. He joined the Company in November 1983 and served as Secretary from that date through March 1988. Mr. Schwartz has been Senior Vice President--Finance and Chief Financial Officer of the Company since April 1987. He has served in various financial roles since joining the Company in July 1983. Mr. Zar was elected Senior Vice President and Treasurer effective April 1994, having previously served as Vice President--Finance since April 1990 and Assistant Vice President from April 1987 to March 1990. Mr. Zar joined the Company in June 1982. The officers are appointed annually and serve at the discretion of the Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
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.
On March 31, 1994, the closing price for the Company's Common Stock on the New York Stock Exchange was 30 7/8. The Company currently has approximately 10,000 record stockholders. On May 26, 1994, the Company declared its regular, semi-annual cash dividend. The Company also increased the semi-annual dividend from $.07 to $.10 per share at that time. The Company has paid cash dividends in July and January of each year since July 1990.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA The information set forth below gives effect to the restatement for the adoption in 1992 of AICPA Statement of Position 91-1, Software Revenue Recognition. It 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total revenues for fiscal year 1994 of $2.1 billion increased 17% over $1.8 billion for fiscal year 1993. Product revenues increased by 24% over the prior year's level. The increase in product revenue was primarily attributable to higher licensing fees on the mainframe and midrange platforms, and market acceptance of the Company's leading UNIX-based product, CA-UNICENTER, which is currently operational on several different platforms. Enterprise Licensing alternatives and less restrictive pricing options affording clients licensing flexibility also contributed to revenue growth, particularly for mainframe systems products. International revenues increased by 6% during fiscal year 1994. This increase, less than the 29% achieved by domestic operations, was adversely affected by foreign currency exchange rates and local economic conditions during 1994, as well as the later introduction of our UNIX-based offerings. Maintenance revenues in fiscal year 1994 increased 3%, or $21 million. Maintenance revenues continue to be negatively impacted by site consolidations which offset most of the incremental maintenance attributable to new licensing arrangements. Price changes did not have a material impact in either year. Selling, marketing and administrative expenses were 47% of revenue for fiscal year 1994, four percentage points less than the 51% experienced for fiscal 1993. The lower percentage for fiscal year 1994 reflects higher revenue achievement without a proportionate increase in operating and administrative costs. Fiscal year 1994 realized a full year of facilities cost savings associated with the Company's refinancing of its headquarters building which was completed in the latter half of fiscal year 1993, as well as lower personnel costs. Net product and development expenditures increased marginally for fiscal year 1994 over the prior year period. The minimal increase was primarily due to operating efficiencies and benefits inherent in the Company's CA90s developmental architecture. Commissions and royalties were unchanged at 5% of revenue for fiscal years 1994 and 1993. Commissions attributable to the increased product revenue were offset by the shift from direct marketing specialists to client service representatives. The latter's compensation is more heavily weighted to a fixed base salary than that of the marketing specialists. Depreciation and amortization expense, although relatively unchanged in absolute amount for fiscal years 1994 and 1993, the net of reduced amortization due to the expiration of the five year amortization period related to the Applied Data Research, Inc. ("ADR") acquisition offset by the reassessment of the current carrying value of certain other purchased software products. Net interest expense for fiscal year 1994 was $1.8 million, approximately $2.7 million less than net interest expense of $4.5 million in fiscal year 1993. The lower net expense was the result of higher average cash and marketable securities balances, lower average debt levels outstanding and lower borrowing costs. The higher debt levels for fiscal year 1993 were primarily the result of debt used to finance the Company's corporate headquarters building. Pre-tax income increased in fiscal year 1994 by $243 million, or from 21% to 29% when expressed as a percentage of total revenue. After-tax margins similarly improved in fiscal 1994 to 19% from 13%. These improvements were the result of the significant revenue increase without a corresponding increase in costs for reasons noted above. The consolidated fiscal year 1994 effective tax rate of 36% remained unchanged from fiscal year 1993. Full year net income and net income per share both increased by 63%. Total revenue for fiscal year 1993 of $1.8 billion increased 22% over $1.5 billion for fiscal year 1992. Product revenue increased by 27% over the prior year's level. The growth was attributable to higher licensing fee revenue across most platforms. In addition, products acquired during fiscal year 1992 benefitted from the Company's wider distribution channels for all of fiscal year 1993. In fiscal years 1992 and 1993, the Company began promoting its offerings on platforms other than that of IBM's mainframe MVS, VM and VSE platforms. UNIX-based products introduced during the last half of fiscal year 1993 received significant client and marketplace interest. During the latter part of fiscal year 1993, an Enterprise Licensing alternative was introduced to numerous clients. Enterprise Licensing, a less restrictive pricing approach, affords clients the opportunity to license products for use throughout their enterprise without the restrictions and upgrade costs of tier pricing. Although significant interest was shown in both UNIX-based products and Enterprise Licensing, neither had a material incremental impact on revenue during fiscal year 1993. Maintenance revenue increased primarily as a result of the commencement of maintenance from additional licenses added in prior periods. Price changes did not have a material impact in either year. Total international revenues grew in excess of 15% by exploiting the Company's expanded presence outside North America, and the introduction of new product offerings in locations where the Company was already well known. The slightly lower international growth rate than that of the prior year reflects the ongoing economic turmoil and currency dislocations experienced during fiscal year 1993, particularly in Western Europe, the Company's largest market outside North America.
Selling, marketing and administrative expenses were 51% of revenue for fiscal year 1993 as opposed to 54% for fiscal year 1992. The lower percentage for fiscal year 1993 reflects the higher revenue achievement without a proportionate increase in fixed operating and administrative costs. Contributing to the improved percentage, fiscal year 1993 facilities costs declined as a result of the Company's refinancing of its headquarters' building. Management continues to emphasize expense control as a means of enhancing profitability. Net product and development expenditures increased by $17 million in fiscal year 1993 over the prior year, but declined from 13% to 11% when expressed as a percent of revenue. This decline reflects the operating efficiencies realized from prior company acquisitions and the benefits inherent in the Company's CA90s development architecture. These efficiencies are allowing the Company to not only enhance its existing products, but also invest in the development of products for the workstation and personal computer environments without significantly impacting profitability. Commissions and royalties were unchanged at 5% of revenue for fiscal years 1993 and 1992. Depreciation and amortization increased by $51 million in fiscal year 1993 versus fiscal year 1992 primarily due to the effect of a full year's amortization of the intangible assets related to companies acquired during fiscal year 1992, and additions to purchased software products during fiscal year 1993. Also contributing to the higher amortization expense in fiscal year 1993 was higher amortization of capitalized development costs resulting from the introduction of new products to the marketplace. Additional depreciation expense was incurred during fiscal year 1993 due to the aforementioned headquarters' building purchase. Net interest expense for fiscal year 1993 of $4.5 million, $10.5 million lower than in fiscal year 1992, was the direct result of lower average cash balances and higher average debt levels outstanding. The higher debt levels were primarily used to purchase the Company's corporate headquarters building. Pre-tax income increased in fiscal year 1993 by $117 million, or from 18% to 21% as a percent of revenue. After tax margins similarly improved in fiscal 1993 to 13% from 11% as a result of the changes noted above, and to a much lesser extent, a lower consolidated effective tax rate. The consolidated effective tax rate for fiscal year 1993 declined to 36% from 39% in fiscal year 1992. The decline was principally the result of using foreign tax credits. Net income per share increased by 57%. A reduction of 4% in the average shares outstanding during fiscal year 1993 contributed to this improvement. The Company's foreign subsidiaries operate as distributors for the products of the Company. As such, the subsidiaries pay royalties to the Company on revenue generated from the licensing of products. After payment of such royalties, these foreign subsidiaries had net income of $108,001,000, $74,841,000 and $59,321,000 in fiscal years 1994, 1993 and 1992, respectively. See Note 3 of Notes to Consolidated Financial Statements. The Company's products are designed to improve the productivity and efficiency of its clients' data processing resources. Accordingly, in a recessionary environment, the Company's products are often a reasonable economic alternative to customers faced with the prospect of incurring expenditures to increase their existing data processing resources. However, a general or global slowdown in the world economy could adversely affect the Company's operations.
- - --------------------------------------------------------------------------
The Company has traditionally reported lower profit margins for the first two quarters of each fiscal year than those experienced in the third and fourth quarters. As part of the annual budget process, management establishes higher discretionary expense levels in relation to revenue for the first half of the year. Historically, the Company's combined third and fourth quarter 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. These 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 factors, including but not limited to: uncertainties relative to global economic conditions; industry factors; the availability and cost of new products; the Company's ability to develop, manufacture, and license its products profitably; the Company's ability to successfully increase its market share in its core business while expanding its product base into other markets; the strength of its distribution channels; and the Company's ability to effectively manage expense growth relative to revenue growth. There have been no special marketing programs by the Company which have had a material effect on the revenue or net income of any given quarterly period.
FOREIGN CURRENCY EXCHANGE Approximately 46% of the Company's total revenue in fiscal year 1994, 50% in fiscal year 1993 and 52% in fiscal year 1992, was derived from sales outside of North America. The net income effect of foreign currency exchange rate fluctuations versus the U.S. Dollar on international revenues 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 revenues. Economic uncertainty in major European markets caused a gradual strengthening of the U.S. Dollar during fiscal year 1994. The Company has mitigated its exposure to foreign currency translation adjustments by substantially offsetting assets denominated in foreign currencies with foreign currency liabilities. A foreign currency translation adjustment of $8 million was charged to Stockholders' Equity in fiscal year 1994. During fiscal 1994 the net income effect of foreign exchange losses was $7 million.
LIQUIDITY AND CAPITAL RESOURCES The Company's ability to generate adequate cash to meet its needs is provided by cash flow from operations and available credit facilities. The Company increased its cash generated from operations by over $64 million during fiscal year 1994 primarily as a function of increased net income. Increases in current accounts receivable balances resulting from higher, particularly fourth quarter, fiscal year 1994 revenue were partially offset by higher taxes payable resulting from the improved net income levels, as well as higher accounts payable and accrued expense balances. Common Stock repurchases of $205 million and net long-term debt repayments of $108 million were significant uses of cash during fiscal 1994. The Company's cash flow is also affected by the mix of plans (initial license fee, annual and monthly payment options) selected by its clients and, to a lesser extent, by the mix of term versus one-time fee licenses. In 1994, the Company completed a multi-currency credit facility for its domestic and foreign subsidiaries denominated in U.S. and foreign currencies in the aggregate of $12 million. The facility was established to meet any short-term working capital requirements. In addition, the Company has a credit facility with a group of banks that permits the Company to borrow up to $250 million. Most borrowings under this agreement are subject to the London interbank rate ("LIBOR") plus 3/8%. The agreement calls for the maintenance of certain financial conditions and ratios. During fiscal year 1994, peak borrowings under these facilities were $50 million. The weighted average interest rate for these borrowings during the year was 4.6%. The comparable interest rate for borrowings during fiscal year 1993 was 4.9%, and peak borrowings were $200 million. At March 31, 1994, approximately $50 million was outstanding under these credit arrangements. During fiscal 1994, the Company restructured debt related to its Islandia, NY corporate headquarters by repaying all outstanding amounts under its four-year $175 million term loan facility. As part of this restructuring, the Company borrowed $51 million under a two-year term loan repayable in quarterly installments. Borrowings on the debt generally carry an interest rate of LIBOR plus 3/8%. In addition, in March 1994, the Company retired all outstanding UCCEL 7 1/4% Subordinated Debentures approximating $6 million.
The Company believes that these sources of liquidity, plus existing cash and cash equivalents and current marketable securities balances of $368 million as of March 31, 1994, are adequate for its foreseeable operating needs. The Company completed the repurchase of 15 million shares under an August 1990 Common Stock Repurchase Program. In July 1992, the Company announced its intention to repurchase an additional 15 million shares of Common Stock. On May 12, 1993, the Board of Directors increased this authorization to a total of 25 million shares for general corporate purposes. Through May 26, 1994, the Company purchased 13.5 million shares under this program. The Company's capital resource commitments as of March 31, 1994, consisted of lease obligations for office space, computer equipment, a mortgage obligation and amounts due resulting from the acquisitions of products and companies. The Company intends to meet its capital resource commitments from its available funds. No significant commitments exist for future capital expenditures. See Notes 5, 6, 7 and 12 of Notes to Consolidated Financial Statements for details concerning commitments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Company are listed in the Index to Financial Statements filed as part of this Form 10-K. The Supplementary Data specified by Item 302 of Regulation S-K as it relates to selected quarterly data is included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Information on the effects of changing prices is not required.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning directors and to Part I, page 7, of this Annual Report on Form 10-K for information concerning executive officers under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning executive compensation.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning security ownership of each person known by the Company to own beneficially more than 5% of the Company's outstanding shares of Common Stock, of each director of the Company and all executive officers and directors as a group.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning certain relationships and related transactions. PART IV ITEM 14.
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
(b)Reports on Form 8-K. There were no current reports on Form 8-K filed during the fiscal quarter ended March 31, 1994. (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. 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.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
By /s/ CHARLES B. WANG ----------------------------------- Charles B. Wang Chairman Chief Executive Officer
By /s/ PETER A. SCHWARTZ ---------------------------------- Peter A. Schwartz Senior Vice President-Finance Principal Financial and Accounting Officer
Dated: May 27, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
Name Title ------ -------
/s/ CHARLES B. WANG Chairman -------------------------- and Director Charles B. Wang /s/ SANJAY KUMAR Director -------------------------- Sanjay Kumar
/s/ RUSSELL M. ARTZT Director -------------------------- Russell M. Artzt
/s/ IRVING GOLDSTEIN Director -------------------------- Irving Goldstein
/s/ RICHARD A. GRASSO Director -------------------------- Richard A. Grasso
/s/ EDWARD C. LORD Director -------------------------- Edward C. Lord, III
/s/ GARY E. MARTINELLI Director -------------------------- Gary E. Martinelli
/s/ WILLEM F. P. de VOGEL Director --------------------------- Willem F. P. de Vogel
Dated: May 27, 1994
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, 1994
Page
The following consolidated financial statements of Computer Associates International, Inc. and subsidiaries are included in Item 8:
Report of Independent Auditors 18 Consolidated Statements of Income-Years Ended March 31, 1994, 1993 and 1992 19
Consolidated Balance Sheets-March 31, 1994 and 1993 20
Consolidated Statements of Stockholders' Equity-Years Ended March 31, 1994, 1993 and 1992 22 Consolidated Statements of Cash Flows-Years Ended March 31, 1994, 1993 and 1992 23 Notes to Consolidated Financial Statements 24
The following consolidated financial statement schedules of Computer Associates International, Inc. and subsidiaries are included in Item 14(d):
Schedule VIII-Valuation and Qualifying Accounts 32
Schedule X-Supplementary Income Statement Information 33
With the exception of Schedule IX, 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. The information required in Schedule IX has been incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations.
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, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG New York, New York May 26, 1994
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements are those of Computer Associates International, Inc. and subsidiaries (the "Company"). Significant intercompany items and transactions have been eliminated in consolidation. The Company has various investments which it accounts for under the equity method of accounting. These investments are not significant either individually or when considered collectively. The Company's net activity for such investments is reflected in selling, marketing and administrative expense.
Basis of Revenue Recognition: Product license fee revenue is recognized after both acceptance by the client and delivery of the product. Maintenance revenue, whether bundled with product license or priced separately, is recognized ratably over the maintenance period. Accounts receivable resulting from product sales with extended payment terms are discounted to present value using the rate which approximates the Company's cost of funds. The amounts of the discount credited to operations for the years ended March 31, 1994, 1993 and 1992 were $121,200,000, $109,985,000 and $90,077,000, 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 adopted early implementation of Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FASB 115"). The Company has evaluated its investment policies and determined that all of its investment securities are to be classified as available-for-sale.Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption Equity Adjustment. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.
Property and Equipment: Land, buildings, computer equipment, furniture, fixtures and equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided over the estimated useful lives of the assets by the straight-line method.
Intangibles: Excess of costs over net assets acquired are being amortized by the straight-line method over 20 years. Cost of purchased software and acquired rights to market software products, and software development costs (costs incurred after development of a working model or a detailed program design) are capitalized and amortized by the straight-line method over five years or the product's useful economic life, whichever is less, commencing with product release. During fiscal year 1994, approximately $17 million was charged to depreciation and amortization expense as a result of a reassessment of the current carrying value of certain of the Company's purchased software products. Unamortized capitalized development costs included in other assets at March 31, 1994 and 1993 were $62,154,000 and $61,331,000, respectively. Amortization of capitalized development costs was $14,502,000, $15,969,000 and $11,985,000 for the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
Net income per share: Net income per share of Common Stock is computed by dividing net income by the weighted average number of common shares and any dilutive common share equivalents outstanding. Fully diluted net income per share for fiscal 1994, 1993 and 1992 is not materially different from net income per share.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statement of Cash Flows: Interest payments for the years ended March 31, 1994, 1993 and 1992 were $13,190,000, $12,537,000 and $8,716,000, respectively. Income taxes paid for these fiscal years were $139,260,000, $60,715,000 and $28,787,000, 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 $6,669,000 in 1994, $7,053,000 in 1993 and $4,366,000 in 1992.
NOTE 2 - INVESTMENTS
The following is a summary of cash equivalents and current marketable securities classified as "available-for-sale" securities as required by FASB 115:
Of the Total Debt Securities shown above, Cash and Cash Equivalents include other debt securities with a Cost of $40,461,000, Gross Unrealized Gains of $29,000 and Estimated Fair Value of $40,490,000.
Fiscal 1994 gross realized gains on sales of available-for-sale securities totaled $67,000, and gross realized losses totaled $27,000. The net adjustment for unrealized holding gains on available-for-sale securities included in stockholders' equity totaled $640,000.
The amortized cost and estimated fair value of debt securities at March 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 3 - GEOGRAPHIC AREA INFORMATION AND FOREIGN OPERATIONS
For the years ended March 31, 1994, 1993 and 1992, $42,578,000, $40,967,000 and $30,020,000, respectively, of export sales to unaffiliated customers are included in United States revenue.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - TRADE AND INSTALLMENT ACCOUNTS RECEIVABLE
Trade and installment accounts receivable consist of the following:
NOTE 5 - DEBT
The largest component of the debt obligations is a two year, $51 million unsecured term loan with $45 million outstanding at March 31, 1994. This debt is subject to interest primarily at the prevailing London interbank rate plus 3/8% and is payable in quarterly installments. The Company's fixed rate debt obligations carry annual interest rates ranging from 6 1/4% to 7 1/2%. The fair market value of long-term debt approximates its carrying value. The carrying value of assets pledged against long-term debt was $54 million and $205 million in 1994 and 1993, respectively.
The Company has an agreement with a group of banks, renewable annually, to provide up to $250 million of unsecured financing, subject to interest primarily at the prevailing London interbank rate plus 3/8%. At March 31, 1994 and 1993, $50 million and $25 million, respectively, were outstanding under this arrangement. The Company has entered into a $12 million unsecured multi-currency credit facility. The facility was established to meet any short-term working capital requirements and can be drawn upon, up to a predefined limited, by most subsidiaries. There were no amounts drawn at March 31, 1994.
The maturities of long-term debt outstanding for the five fiscal years noted are as follows: 1995-$28,175,000; 1996-$22,371,000; 1997-$3,131,000; 1998- $3,669,000; and 1999-$4,159,000.
Interest expense for the years ended March 31, 1994, 1993 and 1992 was $13,145,000, $16,873,000, and $9,755,000, respectively, and is netted with interest income.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - LEASES
The Company leases real estate and certain data processing and other equipment with lease terms expiring through 2004. 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 had no material capital leases at March 31, 1994.
Rental expense under operating leases for the years ended March 31, 1994, 1993 and 1992 was $89,829,000, $121,939,000 and $123,744,000, respectively. Future minimum lease payments are: 1995-$70,764,000; 1996-$52,916,000; 1997- $38,016,000; 1998-$31,901,000; 1999-$18,703,000; and thereafter-$59,592,000.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company, various subsidiaries and certain current and former officers and directors have been named as defendants in several civil lawsuits alleging a number of separate violations of federal securities laws. The Company believes that the facts do not support the plaintiffs' claims and intends to vigorously contest each of them.
The Company was a defendant and counterclaim plaintiff in a suit brought by Electronic Data Systems Corporation ("EDS") on January 9, 1992 in the United States District Court for the Northern District of Texas, Dallas Division in which the parties alleged among other things: breaches of licensing agreements, misuse of copyright, interference with business relationships, fraud and violations of the antitrust laws. The parties settled the dispute on May 17, 1994 and on May 19, 1994 the Court entered an order dismissing the case with prejudice. At the time of the settlement EDS signed a long-term licensing agreement.
NOTE 8 - INCOME TAXES
The amounts of income before income taxes attributable to domestic and foreign operations are as follows:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
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 82% in 1994 and 60% in 1993 of total deferred income taxes), purchase accounting adjustments (approximately 23% in 1994 and 40% in 1993), net capitalized development costs (approximately 6% in 1994 and 7% in 1993) and receivable reserves ( a deferred tax asset of approximately 10% in 1994 and 12% in 1993) is shown on the Consolidated Balance Sheets under the captions "Deferred Income Taxes." The provision for income taxes is reconciled to the tax provision computed at the federal statutory rate as follows:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - EMPLOYEE INCENTIVE STOCK OPTION PLAN AND NON-QUALIFIED STOCK OPTION PLAN
The Company has a 1981 Incentive Stock Option Plan (the "1981 Plan") pursuant to which options to purchase up to 8,000,000 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 of each share at the date of grant. The option period could not exceed ten years. 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. Options for 934,887 of 2,078,106 outstanding under the 1981 Plan were exercisable at March 31, 1994 at $2.06 - - - $13.82 per share.
The Company has a 1987 Non-Statutory Stock Option Plan (the "1987 Plan") pursuant to which options to purchase up to 5,000,000 shares of Common Stock of the Company may be granted to select salaried officers and key employees of the Company. Pursuant to the 1987 Plan the exercise price shall not be less than the fair market value of each share at the date of the grant. The option period shall not exceed twelve years. Each option may be exercised only in accordance with a vesting schedule established by the Company's Stock Option Committee. As of March 31, 1994, 9,000 shares of the Company's Common Stock were available for future grants. 2,694,250 of the 4,779,250 options which are outstanding under the 1987 Plan were exercisable as of that date. These options are exercisable at $7.50 - $14.38 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 10,000,000 shares of Common Stock of the Company may be granted to employees (including officers of the Company) under conditions similar to the 1981 Plan. As of March 31,1994, no stock appreciation rights have been granted under this plan and 3,458,724 options have been granted. 86,444 of the 3,358,058 options which are outstanding under the 1991 Plan were exercisable at that date. These options are exercisable at $11.25 - $25.63 per share.
The 1993 Stock Option Plan for Non-Employee Directors (the "1993 Plan") provides for non-statutory options to purchase up to 100,000 shares of Common Stock of the Company to be available for grant to each member of the Board of Directors who is not otherwise an employee of the Company. Pursuant to the 1993 Plan, the exercise price shall be the fair market value of the shares covered by the option at the date of grant. The option period shall not exceed 10 years and each option may be exercised in whole or in part on the first anniversary date of its grant. As of March 31, 1994, 8,000 options have been granted under this plan.
The following table summarizes the activity under these plans:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - PROFIT SHARING PLAN The Company maintains a profit sharing plan, the Computer Associates Savings Harvest Plan ("CASH Plan"), for the benefit of employees of the Company. The CASH Plan is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code of 1986 (the "Code") and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Code. Pursuant to the CASH Plan, eligible participants may elect to contribute a percentage of their annual gross salary. Matching contributions to the CASH Plan for the years ended March 31, 1994, 1993 and 1992 were $3,738,000, $3,473,000 and $2,955,000, respectively. In addition, the Company may make discretionary contributions to the CASH Plan. Discretionary contributions to the CASH Plan for the years ended March 31, 1994, 1993 and 1992 were $13,953,000, $14,103,000 and $7,165,000, respectively.
NOTE 11 - RIGHTS PLAN
Each outstanding share of the Company's common stock carries a stock purchase right issued under the Company's Rights Agreement, dated June 18, 1991 (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 $35. Under certain circumstances, following (i) the acquisition of 20% or more of the Company's outstanding common stock by an Acquiring Person (as defined in the Rights Agreement), (ii) the commencement of a tender offer or exchange offer which would result in a person or group owning 20% or more of the Company's outstanding common stock or (iii) the determination by the Company's Board of Directors and a majority of the Disinterested Directors (as defined in the Rights Agreement) that a 15% stockholder is an Adverse Person (as defined in the Rights Agreement), each right (other than rights held by an Acquiring Person or Adverse Person) may be exercised to purchase common stock of the Company or a successor company with a market value of twice the $35 exercise price. The rights, which are redeemable by the Company at one cent per right, expire in June 2001.
NOTE 12 - SUBSEQUENT EVENT
On May 19, 1994 the Company entered into a definitive agreement providing for the acquisition of The ASK Group, Inc. ("ASK") through a cash tender offer for all of the approximately 23 million common shares outstanding at $13.25 per share. The agreement has been unanimously approved by the Board of Directors of ASK and the Company. The agreement is conditioned upon a majority of the shares being tendered and all regulatory approvals being granted. The acquisition is expected to be completed by late June 1994 and will be financed from the Company's existing cash, cash equivalents, marketable securities and $250 million credit facility. The acquisition will be accounted for as a purchase transaction.