UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 29, 2006
(Date of earliest event reported)
 
CA, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation)
     
1-9247   13-2857434
(Commission File Number)   (IRS Employer Identification No.)
     
One CA Plaza    
Islandia, New York   11749
(Address of Principal Executive Offices)   (Zip Code)
(631) 342-6000
(Registrant’s Telephone Number, Including Area Code)
Not applicable
 
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


 

Item 2.02. Unaudited Results of Operations and Financial Condition.
     On June 29, 2006, CA, Inc. (“CA” or the “Company”) issued a press release announcing its preliminary unaudited results for the fiscal quarter and fiscal year ended March 31, 2006. A copy of the press release is attached as Exhibit 99.1 hereto and is incorporated herein by reference.
     As announced in the press release, the Company is furnishing business and preliminary unaudited financial information for the fiscal year ended March 31, 2006, attached as Exhibit 99.2 and incorporated herein by reference. The Company announced that it is delaying the filing of its Annual Report on Form 10-K beyond its extended due date of June 29, 2006 as a result of two matters which have arisen during the completion of its annual audit.
     Based upon a preliminary internal review of the Company’s prior policies and procedures with respect to the granting of stock options from fiscal year 1997 to the present related to its stock option plans in effect during this period, including a review of its underlying option grants, the Company believes that in fiscal years prior to fiscal year 2002, the Company did not communicate stock option grants to individual employees in a timely manner. In fiscal years 1997 through 2001, the Company experienced delays of up to approximately two years from the date that employee stock option grants were approved by the Compensation and Human Resource Committee of the Company’s Board of Directors (the “Committee”), to the date such stock options were communicated to individual employees. These delays could result in the need to recognize additional non-cash stock-based compensation expense over the vesting periods related to such grants. The Company has not yet completed its analysis of the amount to be recognized or any income tax effects, but estimates the pre-tax amounts relating to fiscal year 2005 and 2006 to be less than $20 million per year and the amounts relating to fiscal years 2002 through 2004 to be in the range of $40 million to $100 million per year on a pre-tax basis. The impact for periods prior to fiscal year 2002 relating to stock option grants beginning in fiscal year 1997 is expected to be in excess of $200 million on a pre-tax basis. The Company believes that this revision will not affect revenue or cash provided by operating activities. The Company has not undertaken a review of stock option grants prior to fiscal 1997. The Company’s internal review is ongoing and not complete as of the date of this Current Report on Form 8-K, and accordingly the information in Exhibit 99.2 is subject to change, which could be material, as the review proceeds.
     In addition, based upon a continuing review of certain software license contract renewals in prior fiscal periods, the Company estimates that it has understated subscription revenue recorded in years prior to fiscal year 2006, in an aggregate amount of approximately $40 million. These adjustments will result in corresponding reductions to subscription revenue in future periods through approximately 2011. This continuing review of our software license contracts and the possible adjustments to our subscription revenue will represent a further adjustment to the amounts previously restated in October 2005.
     As a result of these items, the Company believes it is likely (although it has not yet concluded) that it will need to restate its previously reported results for periods presented herein to include the impact of additional stock based compensation expense and to reflect additional subscription revenue as described above. The results presented below should therefore be considered preliminary and may be subject to additional adjustments which could be material.
     Importantly, the Company believes that neither of these two accounting matters affects its existing contracts with customers and does not affect cash flow from operations or the reported amounts of assets and liabilities with the exception that income taxes payable may be affected with respect to the stock option matter.
     The Company is obligated under the Deferred Prosecution Agreement it entered into with the U.S. Attorney’s Office for the Eastern District of New York and the Final Consent Judgment entered into with the Securities and Exchange Commission to comply with the rules of the Securities and Exchange Commission, including those related to the filing of periodic reports. In light of the internal control issues relating to sales commissions, income tax provisions, its internal control environment and other factors, the Company expects that the term of the Independent Examiner may be extended beyond September 30, 2006. The Company has not received any formal notification. While this Current Report is not a substitute for the required filing of our Annual Report on Form 10-K (the “Form 10-K”), which is due today, the Company is unable to file the Form 10-K until it has completed the pending review described above.
     THE UNAUDITED FINANCIAL INFORMATION IN EXHIBITS 99.1 AND 99.2, INCLUDING INFORMATION ABOUT REVENUE, DEFERRED SUBSCRIPTION VALUE, TOTAL EXPENSES, NET INCOME, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY, AS WELL AS COMPARISONS OF THESE AMOUNTS AND RELATED TRENDS BETWEEN PERIODS, ARE SUBJECT TO CHANGE WHEN THE COMPANY HAS COMPLETED THE REVIEW DESCRIBED ABOVE. THESE CHANGES ARE LIKELY TO AFFECT THE UNAUDITED FINANCIAL INFORMATION INCLUDED IN EXHIBITS 99.1 AND 99.2 AND SOME OF THESE EFFECTS MAY BE MATERIAL. CONSEQUENTLY, SUBJECT TO COMPLETION OF THE REVIEW DESCRIBED ABOVE AND THE YEAR-END AUDIT PROCESS, THE COMPANY MAY CONCLUDE THAT ITS PREVIOUSLY FILED FINANCIAL STATEMENTS AND RELATED FINANCIAL INFORMATION FOR THE PERIODS PRESENTED HEREIN, INCLUDING ANY SUCH INFORMATION INCLUDED IN EXHIBITS 99.1 AND 99.2, SHOULD NOT BE RELIED UPON. THE INFORMATION INCLUDED IN EXHIBITS 99.1 AND 99.2 DOES NOT REFLECT ANY OF THE DEVELOPMENTS RELATING TO THE OPTION GRANTS OR THE REVENUE RECOGNITION ISSUES RELATING TO CONTRACT RENEWALS.
     BECAUSE OF THE PENDING REVIEW, THE COMPANY IS NOT IN A POSITION TO TIMELY FILE ITS FORM 10-K WITH THE SEC. NEVERTHELESS, THE COMPANY BELIEVES IT SHOULD PROVIDE INVESTORS WITH INFORMATION THAT IS CURRENTLY AVAILABLE AND HAS FURNISHED EXHIBIT 99.2 FOR THIS PURPOSE. WHILE EXHIBIT 99.2 INCLUDES INFORMATION OF THE KIND CALLED FOR BY FORM 10-K, EXHIBIT 99.2 DOES NOT COMPLY WITH THE REQUIREMENTS OF THAT FORM OR RELATED SEC RULES BECAUSE IT OMITS CERTAIN REQUIRED INFORMATION AND THE INFORMATION IT DOES CONTAIN IS UNAUDITED AND SUBJECT TO CHANGE AS NOTED ABOVE. AMONG OTHER THINGS, THE COMPANY’S INDEPENDENT AUDITORS HAVE NOT EXPRESSED ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON THE INFORMATION IN EXHIBIT 99.2, AND EXHIBIT 99.2 CONTAINS NO AUDIT REPORT ON THE FINANCIAL STATEMENTS FOR FISCAL YEARS 2006, 2005 AND 2004 OR AUDIT REPORT ON MANAGEMENT'S ASSESSMENT AND OPINION ON THE EFFECTIVENESS OF THE COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING. IN ADDITION, EXHIBIT 99.2 DOES NOT CONTAIN THE CERTIFICATIONS OF THE

 


 

CHIEF EXECUTIVE OFFICER OR THE CHIEF FINANCIAL OFFICER REQUIRED TO BE INCLUDED BY THE SARBANES-OXLEY ACT OF 2002 IN REPORTS ON FORM 10-K. MOREOVER, EXHIBIT 99.2 CONTAINS THE UNAUDITED FINANCIAL INFORMATION THAT IS LIKELY TO CHANGE AS REVIEW AND AUDIT PROCESS ARE COMPLETED. IN PARTICULAR, INFORMATION ABOUT REVENUE, TOTAL EXPENSES, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY, AS WELL AS PERIOD-TO-PERIOD COMPARISONS OF THOSE AMOUNTS AND RELATED TRENDS, FOR ALL PERIODS ARE LIKELY TO BE AFFECTED BY THE REVIEW OF THE OPTIONS GRANTING PRACTICES AND THE CONTRACT RENEWALS, AND THE POTENTIAL RESTATEMENTS, DESCRIBED IN THIS CURRENT REPORT. EXHIBIT 99.2 IS NOT A SUBSTITUTE FOR THE DISCLOSURE REQUIRED IN THE FORM 10-K.
     THE COMPANY WILL ATTEMPT TO FILE ITS FORM 10-K AS SOON AS IT HAS SUFFICIENT CERTAINTY AS TO THE IMPACT OF THESE MATTERS ON ITS FINANCIAL STATEMENTS. IN ADDITION, WHILE THE COMPANY BELIEVES THAT THE UNAUDITED FINANCIAL INFORMATION INCLUDED IN EXHIBIT 99.2 HAS BEEN PREPARED IN ACCORDANCE WITH THE ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (GAAP) EXCEPT FOR THE UNCERTAINTIES FOR THE ABOVE NOTED ITEMS, THE COMPANY CAN GIVE NO ASSURANCES THAT ALL ADJUSTMENTS ARE FINAL AND THAT ALL ADJUSTMENTS NECESSARY TO PRESENT ITS FINANCIAL INFORMATION IN ACCORDANCE WITH GAAP HAVE BEEN IDENTIFIED. THE COMPLETION OF THE COMPANY’S YEAR-END CLOSING PROCEDURES AND THE ANNUAL AUDIT COULD RESULT IN ADJUSTMENTS TO THE AMOUNTS REPORTED IN THE FINANCIAL INFORMATION IN EXHIBITS 99.1 AND 99.2. THEREFORE, ALL RESULTS REPORTED IN THESE EXHIBITS SHOULD BE CONSIDERED PRELIMINARY UNTIL THE COMPANY FILES ITS ANNUAL REPORT ON FORM 10-K FOR THE 2006 FISCAL YEAR
Stock Options
     Given the stock option issues facing public companies, particularly in the technology sector, the Company commenced an internal review with an outside consultant into its historical stock option practices from fiscal year 1997 to the present under its stock option plans in effect during this period. Among other things, the Company is reviewing its underlying option grant documentation and procedures. The Company’s internal review has not been completed at this date.
     Prior to fiscal year 2002, the Committee generally approved grants to executives and other employees receiving options, the terms of which were generally set on the date that the Committee acted, including the exercise price, vesting schedule and term. However, in a number of cases, these approvals involved pools of options that were not allocated to specific individuals at the time of such approvals. It also appears that communication of these grants to individual employees was not made until some time after the Committee acted, including in some cases up to two years after such Committee action. In almost all cases, this earlier date had an exercise price that was lower than the market price of the Company’s common stock on the date the award was formally communicated to employees. These grants were made primarily to non-executive employees and this grant practice was changed after fiscal year 2001. The current practice is that a grant is communicated promptly after it is approved by the Committee.
     The Company treated the date of the action by the Committee as the accounting measurement date for determining stock-based compensation expense. However, the Company has determined that the proper accounting measurement date for stock option awards that were not communicated timely to an employee, even for periods before 2002, should have been the date the grant was communicated to an employee, not the date the Committee approved the grant.
     The Company’s internal review is ongoing and therefore its preliminary estimate of stock-based compensation could change. Once the Company’s internal review is completed, it will conclude in what periods the stock-based compensation charges should be recorded. Based on the current estimate of the stock-based compensation charge, the Company believes that a restatement of prior period financial information may be required and the Company may conclude that it will report a material weakness in its financial controls relating to this matter. As stated above, the Company has not concluded its review of this matter and further adjustments may be necessary.
     In conjunction with this review, the Company is also evaluating whether any previously deducted compensation related to exercised stock options may be non-deductible under Section 162(m) of the Internal Revenue Code. In that event, the Company may be required to pay additional taxes and interest associated with previous compensation deductions in connection with such exercised stock options and it may lose additional deductions in future periods. The Company currently estimates that the amount of any lost tax deductions claimed on previously filed income tax returns will not be material to its consolidated results of operations or financial position, although the Company has not finalized its assessment of this matter.
Revenue Recognition
     As discussed in its Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, the Company recognizes revenue ratably on a monthly basis over the term of the subscription license agreement. When a contract is renewed prior to the expiration of the existing license term, the Company recognizes all future revenue for the arrangement ratably over the new license term. The Company has determined that for a relatively few contracts where there have been multiple early renewals of arrangements being recognized on a ratable basis, that it has been systematically understating revenue over the remaining terms of the earlier arrangements and overstating revenue over the renewal term. The Company corrected this treatment for renewals entered into in fiscal year 2006, and had believed that the impact on prior years was not significant. However, during its final revenue recognition review for fiscal year 2006, the Company began to quantify the impact associated with this accounting treatment for prior year renewals. The Company estimates that these prior year accounting errors resulted in the understatement of revenue for fiscal years 2005 and 2004 in the aggregate amount of approximately $40 million. These adjustments will result in corresponding reductions to subscription revenue in future periods through approximately 2011. The Company believes that the correction of this error will likely require a restatement and the Company may conclude that it will report a material weakness in its financial controls relating to this matter. As stated above, the Company has not concluded its review of this matter as of the date of this Current Report on Form 8-K and further adjustments may be necessary.

 


 

Item 5.04. Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans.
     As previously reported on its Current Report on Form 8-K filed on June 13, 2006, the Company suspended its ability to sell shares of its common stock to its employees under its Savings Harvest Plan (the “Plan”), from 4:00 p.m. (ET) on Wednesday, June 14, 2006 through 5:30 p.m. (ET) on Thursday, June 29, 2006 (the “Suspension Period”). The Company is now extending the Suspension Period through 5:30 p.m. (ET) on Friday, July 28, 2006 (the “Extended Suspension Period”). During the Extended Suspension Period, directors and executive officers of the Company will not be permitted to purchase or sell any shares of Company stock (unless, as required by law, certain conditions are met). These restrictions are required by Section 306 of the Sarbanes-Oxley Act of 2002. On June 29, 2006, the Company gave notice of the Extended Suspension Period to its directors and executive officers, a copy of which is filed as Exhibit 99.2 hereto.
     The Company previously imposed the Suspension Period because it deferred filing the Form 10-K for the fiscal year ended March 31, 2006, which would otherwise have been due on June 14, 2006, for up to 15 calendar days to June 29, 2006, as permitted by Rule 12b-25 of the Securities Exchange Act of 1934. The Company is imposing the Extended Suspension Period because it will not file the Form 10-K by June 29, 2006. As a result, the Company will not use its existing registration statement under the Securities Act of 1933 to offer and sell Plan interests or the Company’s common stock to employees until it has filed the Form 10-K with the Securities and Exchange Commission.
Item 7.01. Regulation FD Disclosure.
     On June 29, 2006, the Company issued a press release announcing that the Board of Directors authorized a $2 billion common stock repurchase plan for fiscal year 2007. The repurchase plan will replace the program announced in March 2006 which called for regular repurchases in the open market of up to $600 million in common stock during the 2007 fiscal year. The new plan will not be implemented until the Company files the Form 10-K. A copy of the press release is attached as Exhibit 99.4 and is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
     
Exhibit No.   Description
Exhibit 99.1
  Press release dated June 29, 2006, relating to CA’s financial results.
Exhibit 99.2
  Business and preliminary unaudited financial information.
Exhibit 99.3
  Notice to Directors and Executive Officers of CA, Inc.
Exhibit 99.4
  Press release dated June 29, 2006, announcing common stock repurchase plan.

 


 

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 hereunto duly authorized.
         
  CA, INC.
 
 
Date: June 29, 2006  By:   /s/ Kenneth V. Handal    
    Kenneth V. Handal   
    Executive Vice President, General Counsel and Corporate Secretary   
 

 

 

CA FILES FORM 8-K CONTAINING PRELIMINARY UNAUDITED
FISCAL YEAR 2006 FINANCIAL INFORMATION
Company Will Hold Webcast at 5 p.m. ET
ISLANDIA, N.Y., June 29, 2006 — CA (NYSE:CA), one of the world’s largest management software companies, today filed a Current Report on Form 8-K with the Securities and Exchange Commission (SEC) containing business and preliminary unaudited financial information for the full fiscal year ended March 31, 2006.
The Company announced that it is delaying the filing of its Annual Report on Form 10-K beyond its extended due date of June 29, 2006, as a result of two matters which have arisen during the completion of its annual audit. Based upon a preliminary internal review of the Company’s prior policies and procedures with respect to the granting of stock options from fiscal year 1997 to present related to its stock option plans in effect during this period—including a review of its underlying options grants—the Company believes that in fiscal years prior to 2002, the Company did not communicate stock option grants to individual employees in a timely manner.
In fiscal years 1997 through 2001, the Company experienced delays of as much as two years from the date that employee stock options were approved by the Company’s Board of Directors to the date such stock option grants were communicated to individual employees. These delays could result in the need to recognize additional non-cash stock compensation expense over the vesting periods related to such grants. The Company has not yet completed its analysis of the amounts to be recognized or any income tax effect, but estimates the pre-tax amounts relating to fiscal years 2005 and 2006 to be less than $20 million per year, and the amounts relating to fiscal years 2002 through 2004 to be in the range of $40 million to $100 million per year on a pre-tax basis. The impact for periods prior to fiscal year 2002 relating to stock option grants beginning in fiscal 1997 is expected to be in excess of $200 million on a pre-tax basis. The Company has not undertaken a review of stock option grants prior to fiscal 1997.
In addition, based upon a continuing review of certain software license contract renewals in prior fiscal periods, the Company estimates that it has understated subscription revenue recorded in years preceding fiscal 2006, in an aggregate amount of approximately $40 million. These adjustments will result in corresponding reductions to subscription revenue in future periods through approximately 2011. This continuing review of software license contracts and the possible adjustments to subscription revenue represent a further adjustment to the amounts previously restated in October 2005.
As a result of these items, the Company believes it is likely—although it has not yet concluded—that it will need to restate its previously reported results to include the impact of additional stock based compensation expense to reflect additional subscription revenue as described above, and to report additional material weaknesses.
Importantly, neither of these two accounting matters affects CA’s existing contracts with customers and does not affect cash flow from operations.

 


 

The completion of the Company’s Form 10-K could result in adjustments to the amounts reported in this release. Therefore, all results reported in this release should be considered preliminary until CA files its Form 10-K for the 2006 fiscal year.
Preliminary Unaudited Financial Information
                                                 
(in millions,                                    
except share data)   Q4FY06     Q4FY05     Change     FY06     FY05     Change  
Revenue
  $ 947     $ 917       3 %   $ 3,776     $ 3,560       6 %
GAAP (LPS)/EPS from Continuing Operations
    ($0.06 )   $ 0.03       n/m     $ 0.23       ($0.01 )     n/m  
(Loss)/ Income from continuing operations
    ($36 )   $ 16       n/m     $ 136       ($2 )     n/m  
Non-GAAP Operating EPS*
  $ 0.14     $ 0.20       (30 %)   $ 0.81     $ 0.80       1 %
*Operating earnings per share is a non-GAAP financial measure, as noted in the discussion of non-GAAP results below. A reconciliation of GAAP income from continuing operations to non-GAAP operating income is included in the tables following this press release.
“We are disappointed that we cannot file our 10-K to meet the extended deadline and that we continue to find problems associated with CA’s past. However, delaying the filing is our only option until we understand the full impact of the legacy stock option issue and any potential financial adjustments,” said John Swainson, CA president and chief executive officer. “These issues are about our past, and not our future, and we continue to focus on building the Company.
“In fiscal 2006, CA was affected by a number of operational issues that had a negative impact on our results. We’ve identified the problems and are taking actions to rectify them. We are and will continue to hold people accountable,” Swainson continued. “Our focus in fiscal 2007 is on superior execution and achieving industry best-of-breed benchmarks for every aspect of our operation. We made great progress in fiscal year 2006 in redefining our technology vision and customer value proposition and in aligning the Company to deliver on that vision. None of our competitors has all the tools to bring this vision to life. I am confident we are in the right market and have the right products and the right strategy to help our customers manage and secure their increasingly complex IT environments.”
Preliminary Unaudited Fourth Quarter and Full-Year Results
Revenue for the fourth quarter was $947 million, an increase of 3 percent over the prior period. For the full year, revenue was $3.776 billion, up 6 percent over fiscal year 2005. CA attributed a significant portion of the lower-than-anticipated total revenue in the fourth quarter to the speed of the accounting transition of revenue from recent acquisitions. In this change, revenue previously recognized in a perpetual model moved to CA’s ratable model, where revenue is recognized monthly over the life of the contract. This revenue has been deferred and will be recognized in future periods.

 


 

Subscription revenue for the fourth quarter was $713 million, an increase of 7 percent over the prior period. For the fiscal year, subscription revenue was $2.817 billion, an increase of 11 percent over the prior year.
Total product and services bookings in the fourth quarter were $1.192 billion, and for the full year, bookings were $3.381 billion. This represents a year-over-year decline of 29 percent for the fourth quarter and 19 percent for the full year. The fourth quarter and full-year decline in bookings was due primarily to the anticipated decrease in early renewal of license agreements resulting from the transition in fiscal year 2006 away from a total bookings-based compensation structure. In addition, CA signed contract extensions with two customers in the fourth quarter of 2005 that added approximately $400 million to bookings in that period. The Company said it expects bookings will be higher in fiscal 2007.
Total expenses for the fourth quarter were $997 million compared with $854 million in the prior year period. The increase was primarily due to higher selling, general and administrative (SG&A) expenses—including costs associated with recent acquisitions—higher restructuring costs and higher than anticipated commissions and royalty expenses, which were partially offset by reductions in variable compensation plans including management bonuses and other discretionary items.
For the full year, expenses were $3.663 billion compared with $3.558 billion in fiscal 2005. In addition to the above-mentioned expenses, the full year also was affected by higher costs associated with marketing initiatives as well as increases in Sarbanes-Oxley consulting costs and investments in the Company’s new ERP system.
The Company reported commissions, royalties and bonuses for the fiscal year of $387 million, which includes approximately $70 million more in sales commissions than it had anticipated at the outset of the fourth quarter.
In connection with the increase in commission expense, the Company said it intends to restate its financial statements for the third quarter and expects to report in its Form 10-K a material weakness, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, in its policies and procedures relating to the estimation, recording and monitoring of sales commissions and related accruals. CA determined approximately $31 million of additional commission expense should have been recognized in its third fiscal quarter. In its preliminary report, the Company said the restatement will have a negative impact of $0.03 on GAAP and non-GAAP earnings per share in the third quarter. The restatement will not have an impact on full-year earnings per share or cash flow from operations.
The Company recorded a GAAP loss from continuing operations of $36 million for the fourth quarter, or ($0.06) per diluted common share, compared to income of $16 million, or $0.03 per diluted common share, in the prior year period. In addition to the factors stated above, the fourth quarter results were adversely affected by the negative impact of $36 million of additional taxes associated with the repatriation of cash from foreign subsidiaries. The Company said it expects to report in its Form 10-K a material weakness in its policies and procedures relating to the identification, analysis, documentation and communication of non-routine tax matters. For the full year, GAAP income from continuing operations was $136

 


 

million, or $0.23 per diluted common share, compared to a loss of $2 million, or ($0.01) per diluted common share in fiscal year 2005.
The Company recorded non-GAAP income from continuing operations of $84 million for the fourth quarter, or $0.14 per diluted common share, compared to $129 million, or $0.20 per diluted common share a year earlier. For the full year, non-GAAP income from continuing operations was $490 million, or $0.81 per diluted common share, compared to $513 million, or $0.80 per diluted common share, reported in fiscal year 2005.
CA also has identified a third material weakness regarding its overall control environment over financial reporting due to a lack of effective communication policies and procedures. The Company said the ineffective control environment contributed to the material weaknesses stated above.
For the fourth quarter, CA reported $566 million in cash flow from operations, compared to $738 million reported in the prior year period. On a comparable basis, fourth quarter non-GAAP adjusted cash flow from operations was $648 million (adjusted for the third and final $75 million payment to the Restitution Fund and $7 million in restructuring payments), versus $552 million reported in the prior year (adjusted for a $191 million tax benefit and $5 million in restructuring payments).
For the full year, cash flow from operations was $1.380 billion, compared to $1.527 billion in the prior period. On a comparable basis, non-GAAP adjusted cash flow from operations for the full year (adjusted for $150 million in payments to the Restitution Fund and $22 million in restructuring payments) was $1.552 billion, compared to $1.327 billion (adjusted for a $300 million tax benefit, a $75 million payment to the Restitution Fund and $25 million in restructuring payments) reported in fiscal year 2005.
Full-year and fourth quarter growth in cash flow from operations was affected positively by a number of factors including a significant increase over the prior year in the number of customers who paid full contract value at the time of signing rather than over the life of the contract. Additionally, full-year results were benefited by lower tax payments and a decrease of receivable cycles and an increase of payable cycles. The Company anticipates cash flow generated from operations to decline in fiscal 2007 due to an expected $200 million increase in tax payments, higher disbursements associated with a reduction in its account payable balances, and a 401(k) contribution payment that in the past would have been made in March 2006, but is now being made in fiscal year 2007. These reductions in cash flow from operations will be partially offset by the fact that CA has completed its payments to the Restitution Fund.
Billings for the fourth quarter were $1.649 billion, an increase of 9 percent over the prior year period. Billings for the full fiscal year were $4.585 billion, an increase of 5 percent over the similar period last year. Billings growth was primarily attributed to the sale of acquisition-related products and accelerated customer payments. Excluding these items, billings would have been slightly down for the year.
Capital Structure

 


 

The balance of cash, cash equivalents and marketable securities at March 31, 2006, was $1.865 billion. With $1.811 billion in total debt outstanding, the Company has a net cash position of approximately $54 million.
During the quarter, the Company repurchased approximately 8 million shares of its common stock at an aggregate cost of approximately $223 million. Over the course of fiscal year 2006, CA repurchased approximately 21 million shares of its stock at an aggregate cost of approximately $590 million.
CA also announced today that its Board of Directors has authorized a new stock repurchase plan that enables the Company to buy $2 billion of its common stock during the current fiscal year. The plan will not be implemented until after the Company has filed its Form 10-K. CA currently is exploring various options to best execute the stock repurchases and expects it will be financed through a combination of cash on hand and bank financing (see separate news release).
Deferred Prosecution Agreement
CA indicated that it is obligated under the Deferred Prosecution Agreement (DPA) and the related SEC Consent Judgment to comply with SEC rules including those related to the filing of periodic reports. As noted above, CA will not file its Form 10-K by the deadline of June 29, 2006.
The Company also indicated that in light of the internal control issues relating to sales commissions, income tax provisions, its internal control environment and other factors, it expects that the term of the Independent Examiner may be extended beyond September 30, 2006. The Company added that it has not received any formal notification.
“Successfully meeting the terms of the DPA is a mandated priority,” Swainson said. “We fully support and will work diligently with the Independent Examiner to address all the outstanding requirements of the DPA.”
Outlook for Fiscal Year 2007
The following annual outlook is based on current expectations and represents “forward-looking statements” (as defined below).
                         
                    %  
            FY06     Increase(Decreases)  
(in millions, except share data)   FY07     unaudited     over FY06  
Revenue
  $ 3,900     $ 3,776       3 %
GAAP EPS from Continuing Operations
  $ 0.44     $ 0.23       91 %
GAAP Cash Flow from Operations
  $ 1,300     $ 1,380       (6 %)
Non-GAAP Operating EPS*
  $ 0.83     $ 0.81       2 %
*Operating earnings per share is a non-GAAP financial measure, as noted in the discussion of non-GAAP results below. A reconciliation of GAAP income from continuing operations to non-GAAP operating income is included in the tables following this press release.
The Company added that its annual outlook for 2007 has not been adjusted to reflect the $2 billion repurchase plan. This outlook also assumes that the Company will take steps to achieve certain cost savings. These steps may have related non-operating costs that would have a negative effect on GAAP earnings per share. The

 


 

Company has not yet identified these savings or quantified their potential impact on GAAP earnings per share, and it is possible that GAAP earnings per share could be lower than the amount included in this outlook.
The Company said going forward, it will no longer provide quarterly guidance. However, because of the proximity to the close of the first quarter of fiscal year 2007 on June 30, 2006, CA indicated that first quarter revenue and non-GAAP operating earnings per share will be down sequentially. As noted above, the timing shift of 401(k) contribution payments, the increased commission payments and the decrease in days payable will adversely affect cash flow from operations in the first quarter. The Company expects performance to improve over the course of the year to achieve the fiscal year 2007 targets.
“CA is in a period of continuing operational transformation as we execute and build upon the changes we implemented during fiscal year 2006,” said Michael Christenson, CA’s chief operating officer. “We are working to ensure we are as efficient as possible and effectively managing our cost structure. At the same time, we are realigning our worldwide sales organization to provide more value to customers, expanding our development capabilities abroad, implementing our ERP system to drive greater efficiencies and productivity, and concentrating on growing the products we have acquired to achieve a return on those investments.”
Webcast
This press release and the accompanying tables should be read in conjunction with additional content that is available on the Company’s website, including a supplemental financial package and related slide presentation, as well as a webcast that the Company will host at 5 p.m. ET today to discuss its unaudited fourth quarter and full-year 2006 results. The webcast will be archived on the website. Individuals can access the webcast, as well as this press release and supplemental financial information, at http://ca.com/invest or listen to the call at (800) 729-6829. The international participant number is (706) 679-5227.
About CA
CA (NYSE:CA), one of the world’s largest information technology (IT) management software companies, unifies and simplifies the management of enterprise-wide IT. Founded in 1976, CA is headquartered in Islandia, N.Y., and serves customers in more than 140 countries. For more information, please visit http://ca.com.
Non-GAAP Financial Measures
This press release includes financial measures for per share earnings and cash flows that exclude the impact of certain items and therefore have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP). Non-GAAP “operating” earnings per share excludes the following items: non-cash amortization of acquired technology and other intangibles, in process research and development charges, the government investigation and class settlement charges, restructuring and other charges, and the tax resulting from the repatriation of approximately $584 million of foreign cash and interest on dilutive convertible bonds (the convertible shares, rather than the interest, are more dilutive, thus the interest is added back and the shares increased to calculate non-GAAP operating earnings).

 


 

Non-GAAP taxes are provided based on the estimated effective annual non-GAAP tax rate. Non-GAAP adjusted cash flow excludes the following items: Restitution Fund payments, restructuring payments, and the impact of certain non-recurring tax payments or tax benefits. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. By excluding these items, non-GAAP financial measures facilitate management’s internal comparisons to the Company’s historical operating results and cash flows, to competitors’ operating results and cash flows, and to estimates made by securities analysts. Management uses these non-GAAP financial measures internally to evaluate its performance and they are key variables in determining management incentive compensation. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making. In addition, the Company has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this press release to their most directly comparable GAAP financial measures, which are attached to this press release.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this communication (such as statements containing the words “believes,” “plans,” “anticipates,” “expects,” “estimates” and similar expressions) constitute “forward-looking statements.” A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the risks and uncertainties associated with the CA deferred prosecution agreement with the United States Attorney’s Office of the Eastern District, including that CA could be subject to criminal prosecution or civil penalties if it violates this agreement; the risks and uncertainties associated with the agreement that CA entered into with the Securities and Exchange Commission (“SEC”), including that CA may be subject to criminal prosecution or substantial civil penalties and fines if it violates this agreement; civil litigation arising out of the matters that are the subject of the Department of Justice and the SEC investigations, including shareholder derivative litigation; changes to the compensation plan of CA’s sales organization may lead to outcomes that are not anticipated or intended as they are implemented, and the commissions plans for fiscal year 2007, while revised, continue to be reviewed; CA may not adequately manage and evolve its financial reporting and managerial systems and processes, including the successful implementation of its enterprise resource planning software; CA may encounter difficulty in successfully integrating acquired companies and products into its existing businesses; CA is subject to intense competition in product and service offerings and pricing and increased competition is expected in the future; if CA’s products do not remain compatible with ever-changing operating environments, CA could lose customers and the demand for CA’s products and services could decrease; certain software that CA uses in daily operations is licensed from third parties and thus may not be available to CA in the future, which has the potential to delay product development and production; CA’s credit ratings have been downgraded and could be downgraded further which would require CA to pay additional interest under its credit agreement and could adversely

 


 

affect CA’s ability to borrow; CA has a significant amount of debt; the failure to protect CA’s intellectual property rights would weaken its competitive position; CA may become dependent upon large transactions; general economic conditions may lead CA’s customers to delay or forgo technology upgrades; the market for some or all of CA’s key product areas may not grow; third parties could claim that CA’s products infringe their intellectual property rights; fluctuations in foreign currencies could result in translation losses; and the other factors described in CA’s current report on form 8-K. CA assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.
###
Copyright © 2006 CA. All Rights Reserved. One CA Plaza, Islandia, N.Y. 11749. All trademarks, trade names, service marks, and logos referenced herein belong to their respective companies.
         
Contacts:
  Dan Kaferle   Olivia Bellingham
 
  Public Relations   Investor Relations
 
  (631) 342-2111   (631) 342-4687
 
  daniel.kaferle@ca.com   olivia.bellingham@ca.com

 


 

Table 1
CA, INC.
Consolidated Statements of Operations

(in millions, except per share amounts)
(unaudited)
                                 
    Three Months Ended     Fiscal Year Ended  
    March 31,     March 31,  
    2006     2005     2006     2005  
Revenue:
                               
Subscription revenue
  $ 713     $ 669     $ 2,817     $ 2,544  
Maintenance
    102       109       430       441  
Software fees and other
    34       58       163       254  
Financing fees
    7       15       45       77  
Professional services
    91       66       321       244  
 
                       
Total revenue
    947       917       3,776       3,560  
 
                               
Operating Expenses:
                               
Amortization of capitalized software costs
    114       112       449       447  
Cost of professional services
    78       62       272       229  
Selling, general and administrative
    418       341       1,593       1,346  
Product development and enhancements
    175       180       696       704  
Commissions, royalties and bonuses
    139       113       387       339  
Depreciation and amortization of other intangible assets
    39       33       134       130  
Other expenses (gains), net (1)
    2       (14 )     (15 )     (5 )
Restructuring and other
    22             88       28  
Charge for in-process research and development costs
                18        
Shareholder litigation and government investigation settlements
                      234  
 
                       
Total expenses before interest and taxes
    987       827       3,622       3,452  
 
                               
(Loss) income from continuing operations before interest and taxes
    (40 )     90       154       108  
Interest expense, net
    10       27       41       106  
 
                       
(Loss) income from continuing operations before taxes
    (50 )     63       113       2  
Tax (benefit) expense (2)
    (14 )     47       (23 )     4  
 
                       
(Loss) income from continuing operations
    (36 )     16       136       (2 )
Income (loss) from discontinued operations, net of income taxes
                3       (2 )
 
                       
 
                               
Net (loss) income
  $ (36 )   $ 16     $ 139     $ (4 )
 
                       
Basic (Loss) Income Per Share:
                               
(Loss) income from continuing operations
  $ (0.06 )   $ 0.03     $ 0.23     $ (0.01 )
Income (loss) from discontinued operations
                0.01        
 
                       
Net (loss) income
  $ (0.06 )   $ 0.03     $ 0.24     $ (0.01 )
 
                       
Basic weighted-average shares used in computation
    575       589       581       588  
 
                               
Diluted (Loss) Income Per Share:
                               
(Loss) income from continuing operations (3)
  $ (0.06 )   $ 0.03     $ 0.23     $ (0.01 )
Income (loss) from discontinued operations
                0.01        
 
                       
Net (loss) income (3)
  $ (0.06 )   $ 0.03     $ 0.24     $ (0.01 )
 
                       
Diluted weighted-average shares used in computation(3)
    575       591       608       588  
 
 
(1)   Fiscal year ended March 31, 2006 includes an approximate $7 million pre-tax gain on the divestiture of Ingres.
 
(2)   The fourth quarter of fiscal 2006 includes a tax charge of approximately $36 million associated with the repatriation of international cash which was partly offset by the foreign tax credits. The tax benefit for fiscal year 2006 includes approximately $51 million from the recognition of certain foreign tax credits, $18 million arising from international stock based compensation deductions and $66 million arising from foreign export benefits and other international tax rate benefits. Partially offsetting these benefits was a charge of approximately $60 million related to additional tax contingencies. The fourth quarter of fiscal 2005 and fiscal year 2005 include a tax charge of $55 million associated with the repatriation of international cash which was partially offset by a foreign export benefit refund received in the second quarter of approximately $26 million associated with prior fiscal years.
 
(3)   Net income and the number of shares used in the computation of diluted GAAP EPS for the fiscal year ended March 31, 2006 have been adjusted to reflect the dilutive impact of the Company’s 1.625 percent Convertible Senior Notes.

 


 

Table 2
CA, INC.
Consolidated Condensed Balance Sheets

(in millions)
(unaudited)
                 
    March 31,     March 31,  
    2006     2005 (1)  
Cash and marketable securities
  $ 1,865     $ 3,125  
Trade and installment A/R, net
    432       721  
Federal and state income taxes receivable
          55  
Deferred income taxes
    256       126  
Other current assets
    50       102  
 
           
Total current assets
    2,603       4,129  
 
               
Installment A/R, due after one year, net
    449       595  
Property and equipment, net
    634       622  
Purchased software products, net
    461       726  
Goodwill, net
    5,308       4,544  
Deferred income taxes
    130       130  
Other noncurrent assets, net
    790       536  
 
           
Total assets
  $ 10,375     $ 11,282  
 
           
 
               
Current portion of long-term debt and loans payable
  $ 1     $ 826  
Government investigation settlement
    2       153  
Deferred subscription revenue (collected)-current
    1,517       1,407  
Deferred maintenance revenue
    250       270  
Other current liabilities
    1,604       1,361  
 
           
Total current liabilities
    3,374       4,017  
Long-term debt, net of current portion
    1,810       1,810  
Deferred income taxes
    46       187  
Deferred subscription revenue (collected)-noncurrent
    448       273  
Other noncurrent liabilities
    77       53  
 
           
Total liabilities
    5,755       6,340  
Stockholders’ equity
    4,620       4,942  
 
           
Total liabilities and stockholders’ equity
  $ 10,375     $ 11,282  
 
           
 
(1)   Certain balances have been reclassified to conform with current period presentation.

 


 

Table 3
CA, INC.
Quarterly Condensed Statements of Cash Flows

(in millions)
(unaudited)
                                 
    Three Months Ended     Fiscal Year Ended  
    March 31,     March 31,  
    2006     2005 (1)     2006     2005(1)  
OPERATING ACTIVITIES:
                               
Net (loss) income
  $ (36 )   $ 16     $ 139     $ (4 )
Income (loss) from discontinued operations, net of taxes
                3       (2 )
 
                       
(Loss) income from continuing operations
    (36 )     16       136       (2 )
 
                               
Adjustments to reconcile (loss) income from continuing operations to net cash provided by operating activities:
                               
Depreciation and amortization
    153       145       583       577  
Provision for deferred income taxes
    (82 )     19       (344 )     (196 )
Non-cash compensation expense related to stock and pension plans
    3       27       96       104  
Loss (Gain) on asset divestitures
    1             (7 )      
Shareholder litigation settlement
                        16  
Foreign currency transaction loss (gain)
    1       2       (9 )     8  
Non-cash charge for in-process research and development
                18        
Changes in other operating assets and liabilities:
                               
Decrease in noncurrent installment A/R, net
    43       89       164       210  
Increase (decrease) in deferred subscription revenue (collected) — noncurrent
    174       44       179       (8 )
Increase (decrease) in deferred maintenance revenue
    7       34       (20 )     (27 )
Decrease in trade and current installment A/R, net
    38       80       270       379  
Increase in deferred subscription revenue (collected) — current
    264       223       149       164  
Increase in taxes payable, net
    21       57       91       165  
Restitution fund, net
    (75 )           (150 )     143  
Restructuring and other, net
    15       (5 )     56       3  
(Decrease) Increase in A/P, accrued expense and other
    (40 )     (115 )     101       (141 )
Changes in other operating assets and liabilities
    79       122       67       132  
 
                       
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES
    566       738       1,380       1,527  
 
                               
INVESTING ACTIVITIES:
                               
Acquisitions, primarily goodwill, purchased software, and other intangible assets, net of cash acquired
    (331 )     (11 )     (1,011 )     (469 )
Settlements of purchase accounting liabilities
    (7 )     (5 )     (37 )     (21 )
Purchases of property and equipment, net
    (32 )     (27 )     (143 )     (69 )
Proceeds from sale of property and equipment
    36             77       14  
Sales (purchases) of marketable securities, net
    43       101       344       (116 )
Increase (decrease) in restricted cash
    10       (7 )     7       (9 )
Capitalized software development costs and other
    (19 )     (23 )     (84 )     (70 )
 
                       
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    (300 )     28       (847 )     (740 )
 
                               
FINANCING ACTIVITIES:
                               
Debt (repayments) borrowings, net
    (1 )     (1 )     (912 )     996  
Dividends paid
    (23 )     (24 )     (93 )     (47 )
Debt issuance fees
                      (12 )
Exercise of common stock options and other
    22       18       127       99  
Exercise of call spread options
          (673 )           (673 )
Purchases of treasury stock
    (223 )     (150 )     (590 )     (161 )
 
                       
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (225 )     (830 )     (1,468 )     202  
 
                               
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH
    41       (64 )     (935 )     989  
Effect of exchange rate changes on cash
    28       (32 )     (63 )     47  
 
                       
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    69       (96 )     (998 )     1,036  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    1,762       2,925       2,829       1,793  
 
                       
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,831     $ 2,829     $ 1,831     $ 2,829  
 
                       
 
(1)   Certain balances have been reclassified to conform with current period presentation.

 


 

Table 4
CA, INC.
Reconciliation of GAAP Results to Net Operating Income

(in millions, except per share data)
(unaudited)
                                 
    Three Months Ended     Fiscal Year Ended  
    March 31,     March 31,  
    2006     2005     2006     2005  
Total Revenue
  $ 947     $ 917     $ 3,776     $ 3,560  
Total Expenses
    997       854       3,663       3,558  
 
                       
(Loss) income before income taxes
    (50 )     63       113       2  
 
                               
Non-GAAP adjustments:
                               
 
                               
Purchased software amortization
    101       101       401       406  
Intangibles amortization
    14       10       51       40  
Acquisition IPR&D
                18        
Restructuring and other(1)
    22             88       28  
Restitution fund charge
                      218  
Shareholder Litigation
                      16  
 
                       
Total Non-GAAP adjustments
    137       111       558       708  
 
                               
Operating income before interest and taxes
    87       174       671       710  
 
                               
Interest on dilutive convertible Bonds
    2       10       8       41  
 
                       
Operating income before taxes
    89       184       679       751  
Income tax provision (2)
    5       55       189       238  
 
                       
Net operating income (3)
  $ 84     $ 129     $ 490     $ 513  
 
                       
Diluted operating EPS (3)
  $ 0.14     $ 0.20     $ 0.81     $ 0.80  
 
                       
# of Shares Used (3)
    602       637       608       640  
 
(1)   The fourth quarter of fiscal 2006 and fiscal year 2006 include restructuring charges of $18 million and $72 million, respectively and other charges of $4 million and $16 million, respectively. Fiscal year 2005 includes restructuring charges of $28 million.
 
(2)   Non-GAAP taxes are provided based on the estimated effective annual non-GAAP tax rate. The fourth quarter of fiscal 2006 included approximately $25 million of foreign tax credits.
 
(3)   Net operating income and the number of shares used in the computation of diluted operating EPS for the three months and fiscal years ended March 31, 2006 and 2005 have been adjusted to reflect the dilutive impact of the Company’s 1.625 percent Convertible Senior Notes. The number of shares for the three months and fiscal year ended March 31, 2005 also includes the dilutive impact of the Company’s 5 percent Convertible Senior Notes.
Refer to the discussion of Non-GAAP measures included in the accompanying press release for additional information.

 


 

Table 5
CA, INC.
Reconciliation of GAAP Results to Operating Results

(in millions, except per share data)
(unaudited)
                         
    Three Months Ended     Fiscal Year Ended     Fiscal Year Ending  
    March 31, 2006     March 31, 2006     March 31, 2007(1)  
(Loss) income from continuing operations
  $ (0.06 )   $ 0.23     $ 0.44  
 
                 
Non-GAAP adjustments, net of taxes
 
                 
Acquisition amortization
    0.11       0.47       0.37  
Acquisition IPR&D
    0.00       0.02       0.00  
Repatriation related taxes
    0.06       0.00       0.00  
Restructuring and other charges
    0.03       0.09       0.02  
 
                 
Non-GAAP Diluted operating EPS
  $ 0.14     $ 0.81     $ 0.83  
 
                 
Refer to the discussion of Non-GAAP measures included in the accompanying press release for additional information.
(1) The Company added that its annual outlook for 2007 has not been adjusted to reflect the $2 billion repurchase plan. This outlook also assumes that the Company will take steps to achieve certain cost savings. These steps may have related non-operating costs that would have a negative effect on GAAP earnings per share. The Company has not yet identified these savings or quantified their potential impact on GAAP earnings per share, and it is possible that GAAP earnings per share could be lower than the amount included in this outlook.


 

Table 6
CA, INC.
Reconciliation of GAAP Cash Flow from Operations to Adjusted Cash Flow from Operations

(in millions)
(unaudited)
                 
    FY2006     FY2005  
Cash flow from operations
  $ 1,380     $ 1,527  
 
           
 
               
Benefit from tax law change
          (300 )
Restitution fund
    150       75  
Restructuring
    22       25  
 
           
Adjusted cash flow from operations
  $ 1,552     $ 1,327  
 
           
Refer to the discussion of Non-GAAP measures included in the accompanying press release for additional information.

 

 

EXPLANATORY NOTE
 
The Company is furnishing business and preliminary unaudited financial information for the fiscal year ended March 31, 2006. The Company announced that it is delaying the filing of its Annual Report on Form 10-K beyond its extended due date of June 29, 2006 as a result of two matters which have arisen during the completion of its annual audit.
 
Based upon a preliminary internal review of the Company’s prior policies and procedures with respect to the granting of stock options from fiscal year 1997 to the present related to its stock option plans in effect during this period, including a review of its underlying option grants, the Company believes that in fiscal years prior to fiscal year 2002, the Company did not communicate stock option grants to individual employees in a timely manner. In fiscal years 1997 through 2001, the Company experienced delays of up to approximately two years from the date that employee stock options were approved by the Compensation and Human Resource Committee of the Company’s Board of Directors (the “Committee”), to the date such stock option grants were communicated to individual employees. These delays could result in the need to recognize additional non-cash stock-based compensation expense over the vesting periods related to such grants. The Company has not yet completed its analysis of the amount to be recognized or any income tax effects, but estimates the pre-tax amounts relating to fiscal year 2005 and 2006 to be less than $20 million per year and the amounts relating to fiscal years 2002 through 2004 to be in the range of $40 million to $100 million per year on a pre-tax basis. The impact for periods prior to fiscal year 2002 relating to stock option grants beginning in fiscal year 1997 is expected to be in excess of $200 million on a pre-tax basis. The Company believes that this revision will not affect revenue or cash provided by operating activities. The Company has not undertaken a review of stock option grants prior to fiscal 1997. The Company’s internal review is ongoing and not complete as of the date hereof, and accordingly the information set forth below is subject to change, which could be material, as the review proceeds.
 
In addition, based upon a continuing review of certain software license contract renewals in prior fiscal periods, the Company estimates that it has understated subscription revenue recorded in years prior to fiscal year 2006, in an aggregate amount of approximately $40 million. These adjustments will result in corresponding reductions to subscription revenue in future periods through approximately 2011. This continuing review of our software license contracts and the possible adjustments to our subscription revenue will represent a further adjustment to the amounts previously restated in October 2005.
 
As a result of these items, the Company believes it is likely (although it has not yet concluded) that it will need to restate its previously reported results for periods presented herein to include the impact of additional stock based compensation expense and to reflect additional subscription revenue as described above. The results presented below should therefore be considered preliminary and may be subject to additional adjustments which could be material.
 
Importantly, the Company believes that neither of these two accounting matters affects its existing contracts with customers and does not affect cash flow from operations.
 
The Company is also obligated under the Deferred Prosecution Agreement it entered into with the U.S. Attorney’s Office for the Eastern District of New York and the Final Consent Judgment entered into with the Securities and Exchange Commission to comply with the rules of the Securities and Exchange Commission, including those related to the filing of periodic reports. In light of the internal control issues relating to sales commissions, income tax provisions, its internal control environment and other factors, the Company expects that the term of the Independent Examiner may be extended beyond September 30, 2006. The Company has not received any formal notification. While this Current Report is not a substitute for the required filing of our Annual Report on Form 10-K (the “Form 10-K”), which is due today, the Company is unable to file the Form 10-K until it has completed the pending review described above.
 
THE UNAUDITED FINANCIAL INFORMATION SET FORTH BELOW, INCLUDING INFORMATION ABOUT REVENUE, DEFERRED SUBSCRIPTION VALUE, TOTAL EXPENSES, NET INCOME, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY, AS WELL AS COMPARISONS OF THESE AMOUNTS AND RELATED TRENDS BETWEEN PERIODS, ARE SUBJECT TO CHANGE WHEN THE COMPANY HAS COMPLETED THE REVIEW DESCRIBED ABOVE. THESE CHANGES ARE LIKELY TO AFFECT THE


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UNAUDITED FINANCIAL INFORMATION SET FORTH BELOW AND SOME OF THESE EFFECTS MAY BE MATERIAL. CONSEQUENTLY, SUBJECT TO COMPLETION OF THE REVIEW DESCRIBED ABOVE AND THE YEAR-END AUDIT PROCESS, THE COMPANY MAY CONCLUDE THAT ITS PREVIOUSLY FILED FINANCIAL STATEMENTS AND RELATED FINANCIAL INFORMATION FOR THE PERIODS PRESENTED HEREIN, INCLUDING ANY SUCH INFORMATION SET FORTH BELOW, SHOULD NOT BE RELIED UPON. THE INFORMATION SET FORTH BELOW DOES NOT REFLECT ANY OF THE DEVELOPMENTS RELATING TO THE OPTION GRANTS OR THE REVENUE RECOGNITION ISSUES RELATED TO CONTRACT RENEWALS.
 
BECAUSE OF THE PENDING REVIEW, THE COMPANY IS NOT IN A POSITION TO TIMELY FILE THE FORM 10-K WITH THE SEC. NEVERTHELESS, THE COMPANY BELIEVES IT SHOULD PROVIDE INVESTORS WITH INFORMATION THAT IS CURRENTLY AVAILABLE AND HAS FURNISHED THE INFORMATION BELOW FOR THIS PURPOSE. WHILE THIS EXHIBIT INCLUDES INFORMATION OF THE KIND CALLED FOR BY FORM 10-K, THIS EXHIBIT DOES NOT COMPLY WITH THE REQUIREMENTS OF THAT FORM OR RELATED SEC RULES BECAUSE IT OMITS CERTAIN REQUIRED INFORMATION AND THE INFORMATION IT DOES CONTAIN IS UNAUDITED AND SUBJECT TO CHANGE AS NOTED ABOVE. AMONG OTHER THINGS, THE COMPANY’S INDEPENDENT AUDITORS HAVE NOT EXPRESSED ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON THE INFORMATION SET FORTH BELOW CONTAINS NO AUDIT REPORT ON THE FINANCIAL STATEMENTS FOR FISCAL YEARS 2006, 2005 AND 2004 OR AUDIT REPORT ON MANAGEMENT’S ASSESSMENT AND OPINION ON THE EFFECTIVENESS OF THE COMPANY’S INTERNAL CONTROL OVER FINANCIAL REPORTING. IN ADDITION, THIS EXHIBIT DOES NOT CONTAIN THE CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER OR THE CHIEF FINANCIAL OFFICER REQUIRED TO BE INCLUDED BY THE SARBANES-OXLEY ACT OF 2002 IN REPORTS ON FORM 10-K. MOREOVER, THIS EXHIBIT CONTAINS THE UNAUDITED FINANCIAL INFORMATION THAT IS LIKELY TO CHANGE AS REVIEW AND AUDIT PROCESS ARE COMPLETED. IN PARTICULAR, INFORMATION ABOUT REVENUE, TOTAL EXPENSES, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY, AS WELL AS PERIOD-TO-PERIOD COMPARISONS OF THOSE AMOUNTS AND RELATED TRENDS, FOR ALL PERIODS ARE LIKELY TO BE AFFECTED BY THE REVIEW OF THE OPTIONS GRANTING PRACTICES AND THE CONTRACT RENEWALS, AND THE POTENTIAL RESTATEMENTS, DESCRIBED IN THIS CURRENT REPORT. THIS EXHIBIT IS NOT A SUBSTITUTE FOR THE DISCLOSURE REQUIRED IN THE FORM 10-K.
 
THE COMPANY WILL ATTEMPT TO FILE ITS FORM 10-K AS SOON AS IT HAS SUFFICIENT CERTAINTY AS TO THE IMPACT OF THESE MATTERS ON ITS FINANCIAL STATEMENTS. IN ADDITION, WHILE THE COMPANY BELIEVES THAT THE UNAUDITED FINANCIAL INFORMATION INCLUDED IN THIS EXHIBIT HAS BEEN PREPARED IN ACCORDANCE WITH THE ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (GAAP) EXCEPT FOR THE UNCERTAINTIES FOR THE ABOVE NOTED ITEMS, THE COMPANY CAN GIVE NO ASSURANCES THAT ALL ADJUSTMENTS ARE FINAL AND THAT ALL ADJUSTMENTS NECESSARY TO PRESENT ITS FINANCIAL INFORMATION IN ACCORDANCE WITH GAAP HAVE BEEN IDENTIFIED. THE COMPLETION OF THE COMPANY’S YEAR-END CLOSING PROCEDURES AND THE ANNUAL AUDIT COULD RESULT IN ADJUSTMENTS TO THE AMOUNTS REPORTED IN THE FINANCIAL INFORMATION SET FORTH BELOW. THEREFORE, ALL RESULTS REPORTED IN THESE EXHIBITS SHOULD BE CONSIDERED PRELIMINARY UNTIL THE COMPANY FILES ITS ANNUAL REPORT ON FORM 10-K FOR THE 2006 FISCAL YEAR.
 
Stock Options
 
Given the stock option issues facing public companies, particularly in the technology sector, the Company commenced an internal review with an outside consultant into its historical stock option practices from fiscal year 1997 to the present under its stock option plans in effect during this period. Among other things, the Company is reviewing its underlying option grant documentation and procedures. The Company’s internal review has not been completed at this date.


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Prior to fiscal year 2002, the Committee generally approved grants to executives and other employees receiving options, the terms of which were generally set on the date that the Committee acted, including the exercise price, vesting schedule and term. However, in a number of cases, these approvals involved pools of options that were not allocated to specific individuals at the time of such approvals. It also appears that communication of these grants to individual employees was not made until some time after the Committee acted, including in some cases up to two years after such Committee action. In almost all cases, this earlier date had an exercise price that was lower than the market price of the Company’s common stock on the date the award was formally communicated to employees. These grants were made primarily to non-executive employees and this grant practice was changed after fiscal year 2001. The current practice is that a grant is communicated promptly after it is approved by the Committee.
 
The Company treated the date of the action by the Committee as the accounting measurement date for determining stock-based compensation expense. However, the Company has determined that the proper accounting measurement date for stock option awards that were not communicated timely to an employee, even for periods before 2002, should have been the date the grant was communicated to an employee, not the date the Committee approved the grant.
 
The Company’s internal review is ongoing and therefore its preliminary estimate of stock-based compensation could change. Once the Company’s internal review is completed, it will conclude in what periods the stock-based compensation charges should be recorded. Based on the current estimate of the stock-based compensation charge, the Company believes that a restatement of prior period financial information may be required and the Company may conclude that it will report a material weakness in its financial controls relating to this matter. As stated above, the Company has not concluded its review of this matter and further adjustments may be necessary.
 
In conjunction with this review, the Company is also evaluating whether any previously deducted compensation related to exercised stock options may be non-deductible under Section 162(m) of the Internal Revenue Code. In that event, the Company may be required to pay additional taxes and interest associated with previous compensation deductions in connection with such exercised stock options and it may lose additional deductions in future periods. The Company currently estimates that the amount of any lost tax deductions claimed on previously filed income tax returns will not be material to its consolidated results of operations or financial position, although the Company has not finalized its assessment of this matter.
 
Revenue Recognition
 
As discussed in its Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, the Company recognizes revenue ratably on a monthly basis over the term of the subscription license agreement. When a contract is renewed prior to the expiration of the existing license term, the Company recognizes all future revenue for the arrangement ratably over the new license term. The Company has determined that for a relatively few contracts where there have been multiple early renewals of arrangements being recognized on a ratable basis, that it has been systematically understating revenue over the remaining terms of the earlier arrangements and overstating revenue over the renewal term. The Company corrected this treatment for renewals entered into in fiscal year 2006, and had believed that the impact on prior years was not significant. However, during its final revenue recognition review for fiscal year 2006, the Company began to quantify the impact associated with this accounting treatment for prior year renewals. The Company estimates that these prior year accounting errors resulted in the understatement of revenue for fiscal years 2005 and 2004 in the aggregate amount of approximately $40 million. These adjustments will result in corresponding reductions to subscription revenue in future periods through approximately 2011. The Company believes that the correction of this error will likely require a restatement and the Company may conclude that it will report a material weakness in its financial controls relating to this matter. As stated above, the Company has not concluded its review of this matter as of the date of this Current Report on Form 8-K and further adjustments may be necessary.
 
This report (“Exhibit”) contains certain forward-looking information relating to CA, Inc. (the “Company,” “Registrant,” “CA,” “we,” “our,” or “us”), formerly known as Computer Associates International Inc., that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Exhibit, the words “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify forward-looking information. Such information includes, for example, the


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statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7, but also appears in other parts of this Exhibit. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described under the caption “Risk Factors” in Part 1 Item 1A and elsewhere in this Exhibit. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Exhibit as anticipated, believed, estimated, or expected. We do not intend to update these forward-looking statements.
 
The products and services mentioned in this Exhibit are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right.
 
This Exhibit also contains references to other company, brand, and product names. These company, brand, and product names are used herein for identification purposes only and may be the trademarks of their respective owners. We disclaim any responsibility for specifying which marks are owned by which companies or which organizations.
 
Restatement of Third Quarter Fiscal Year 2006 Results:
 
As previously announced in the Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on May 30, 2006, in this Exhibit we are furnishing restated financial results for the third quarter of fiscal year 2006 to reflect approximately $31 million of additional commission expense that should have been recorded in that period. The restatement reduces previously reported earnings per share for the third quarter of fiscal year 2006 by approximately $0.03 per share. This restatement does not affect previously reported third quarter total revenue and cash flow from operations or financial results for the full fiscal year.
 
We have included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Selected Quarterly Information,” the restated unaudited quarterly financial information for the quarter ended December 31, 2005.
 
The Company reported a material weakness in its financial controls as they relate to the estimation, recording and monitoring of sales commissions. Refer to Part 1, Item 9A, “Controls and Procedures”, for additional information concerning the evaluation of the Company’s internal control processes.
 
PART I
 
Item 1.   Business.
 
(a)  General Development of Business
 
Overview
 
CA, Inc. is one of the world’s largest independent providers of information technology (IT) management software. We develop, market, deliver and license software products and services that allow organizations to run, manage and automate aspects of their computing environments, or IT infrastructures, which are critical to their business.


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The Company was incorporated in Delaware in 1974, began operations in 1976, and completed an initial public offering of common stock in December 1981. Our common stock is traded on the New York Stock Exchange under the symbol “CA”.
 
We are considered an Independent Software Vendor (ISV). ISVs develop and license software products that can increase the efficiency of computer hardware platforms or operating systems sold by other vendors.
 
Our software helps our customers dynamically manage all of the people, processes, computers, networks and the range of technologies that make up their IT infrastructure. We have a broad portfolio of software products and services that span the areas of infrastructure management, security management, storage management and business service optimization. Our solutions work across all networks and systems, across distributed and mainframe environments, and across all major hardware and software platforms in use by our customers.
 
Because many organizations have increased their investments in technology over the years, their IT infrastructures are complex and security has become an increasing concern. Customers therefore place high value on software and services that can help them manage their entire IT infrastructures better and more securely.
 
Business Developments and Highlights
 
In fiscal year 2006, we took the following actions to support our business:
 
  •  We aligned our product development by software business units. The business unit structure is designed to increase our accountability to customer needs and to be more responsive to the changing dynamics of the management software marketplace. Please refer to Item 1, “Business — (c) Narrative Description of the Business — Business Unit Structure” below for more information.
 
  •  We completed several acquisitions throughout fiscal year 2006, including but not limited to the following:
 
  •  In March 2006, we completed the acquisition of Wily Technology, Inc. (Wily), a provider of enterprise application management solutions, for a total purchase price of approximately $374 million. Wily is now part of our Enterprise Systems Management business unit.
 
  •  In October 2005, we completed the acquisition of iLumin Software Services, Inc. (iLumin), a privately held provider of enterprise message management and archiving software, for a total purchase price of approximately $48 million. iLumin’s Assentor product line has been added to our Storage Management business unit.
 
  •  In July 2005, we completed the acquisition of Niku Corporation (Niku), a provider of IT management and governance solutions, for a total purchase price of approximately $345 million. Niku is now part of our Business Service Optimization business unit.
 
  •  In June 2005, we completed the acquisition of Concord Communications, Inc. (Concord), a provider of network service management software solutions, for a total purchase price of approximately $359 million. Concord’s solutions are now part of our Enterprise Systems Management business unit.
 
  •  In November 2005, we held CA World where we unveiled our Enterprise IT Management, or EITM strategy and announced 26 EITM-enabled products, including the release of Unicenter r11. This was CA’s first Unicenter upgrade in 4 years and one of CA’s biggest product launches ever.
 
  •  In July 2005, we announced a restructuring plan to more closely align our investments with strategic growth opportunities. We recorded charges of approximately $66 million in fiscal year 2006 for severance and other termination benefits and facility closures in connection with our restructuring plan, which included a workforce reduction of approximately five percent or 800 positions worldwide. The plan is expected to yield about $75 million in savings on an annualized basis, once the reductions are fully implemented. We anticipate the total restructuring plan will cost up to $85 million.
 
  •  We have increased our operations in India, primarily in product support and development. This has increased the efficiency of our support and development activities.
 
  •  During fiscal year 2006, we repurchased approximately $590 million in Company stock.


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We began the implementation of a new enterprise resource planning system which we expect will improve the efficiency of the Company’s operations and enable us to take advantage of business intelligence tools to generate the data needed to analyze our business in real-time. We have spent approximately $129 million on this project through fiscal year 2006 and expect to spend approximately $100 million in fiscal year 2007. Phase one of the implementation was completed in the first quarter of fiscal year 2007, which covered North America and Worldwide Human Resources.
 
(b)  Financial Information About Segments
 
Our global business is principally in a single industry segment — the design, development, marketing, licensing, and support of software products that can operate on a wide range of hardware platforms and operating systems. Refer to Note 4, “Segment and Geographic Information”, in the Notes to the Unaudited Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.
 
(c)  Narrative Description of the Business
 
We are one of the world’s largest providers of IT management software. We have a clear vision of how organizations can better manage all of their hardware, software, databases and applications to realize the full power of technology. We help customers close the gap between the promise of IT and what it actually delivers.
 
Our EITM strategy for managing IT helps customers unify and simplify the management of heterogeneous business processes, IT services, applications, users and assets in a secure and automated way across the enterprise. As a result, customers can reduce cost, reduce risk, improve service and better align their IT to the needs of their organization.
 
Growth Strategy
 
To build our business, we are pursuing a four-part growth strategy:
 
1. Internal Product Development
 
  •  We have 5,800 engineers globally, designing and supporting software to extend our functionality and capabilities in the network and systems management, security and storage areas, and have charged approximately $0.7 billion to operations in each of the fiscal years ended March 31, 2006, 2005, and 2004.
 
  •  Development activities are tied directly to customer needs and our five business units. Please refer to “— Business Unit Structure” below for more information.
 
2. Strengthening Channel Partner Relationships
 
  •  Channel partners are critical to our success. We need a broad base of channel partners to reach a wider range of customers. By developing strong relationships with systems integrators, distribution channel partners, value-added resellers (VARs) and original equipment manufacturers (OEMs), we extend CA technology to customers who otherwise wouldn’t have access to it.
 
  •  Distribution and OEM channel partners, referred to as “indirect” or “channel” partners, make up approximately 11% of our new deferred subscription value — a figure we believe we can grow.
 
  •  We characterize our channel partners in two ways:
 
  •  Value — These channel partners sell CA solutions that require a high level of expertise to sell. In fiscal year 2006, we launched the Enterprise Solution Provider Program to recruit, train and educate VARs on CA products and solutions. Through this program, we have authorized approximately 800 channel partners worldwide to sell CA solutions and are now extending the program to global solutions providers who sell solutions to multi-national companies.
 
  •  Volume — These channel partners, who sell CA products that don’t require the same technical expertise to sell as enterprise solutions, are primarily geared toward small to medium-sized businesses (SMBs). We are focusing on the SMB market by evolving our products to keep them current and relevant, such as our Business Protection Suite, recruiting channel partners who know this segment, and increasing our marketing efforts.


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3. International Expansion
 
  •  We are enhancing our sales infrastructure in Asia Pacific and Latin America. In February 2006, we opened our new Asia Pacific & Japan headquarters in Hong Kong.
 
  •  We are also growing our India Technology Center (in Hyderabad); tapping an important talent pool in the Czech Republic (Prague) for mainframe development; and gaining important entree into fast-growing countries such as China.
 
  •  We use our Customer Interaction Centers in Tampa, Florida, and Barcelona, Spain, as our global channel and telemarketing sales-generators.
 
4. Strategic Acquisitions
 
  •  We consider acquisitions that will support our EITM approach, extend our market position, and/or expand our geographic footprint.
 
  •  These acquisitions fill technology gaps in our portfolio, strengthen our position in core focus areas, and help round out our EITM offerings to better serve our customers. In fiscal year 2006, we completed four significant acquisitions (see Note 2, “Acquisitions, Divestitures, and Restructuring”, in the Notes to the Unaudited Consolidated Financial Statements for more information).
 
Business Unit Structure
 
We have aligned our product development into five business units. Each business unit is led by a general manager who is accountable for the management and performance of their business unit, including product development and innovation, product marketing, quality, staffing, strategic planning and execution, and customer satisfaction. Our business units are Enterprise Systems Management, Security Management, Storage Management, Business Service Optimization, and the CA Products Group. This structure allows us to become more closely aligned with our customers’ needs, drive more accountability for the performance of each software area, and to be more responsive to the changing dynamics of the IT management software marketplace. We do not presently maintain profit and loss data on a business unit basis, and therefore they are not considered business segments.
 
Enterprise Systems Management
 
Our products for Enterprise Systems Management optimize the availability and performance of IT assets and provide a complete, integrated and open solution for policy-driven, dynamic IT management. This means customers can manage their IT resources in a way that allows them to be more flexible in responding to changing business dynamics. Our comprehensive set of solutions is built on a framework of common services so the solutions work together to simplify the complexity present in medium to large enterprises, telecommunications service providers and public sector organizations.
 
Our Enterprise Systems Management products manage assets and processes across the entire IT environment including networks, servers, storage, databases, applications and desktops or client devices, on both mainframe and distributed platforms. We offer our Enterprise Systems Management solutions in the following three categories:
 
  •  Service Availability — these products monitor and optimize the health, availability and performance of the infrastructure and the technologies critical to our customer’s business operations to make sure they are always up and running.
 
  •  Resource Optimization — these products, which include configuration management, provisioning and capacity management, provision assets dynamically according to business priorities or consumption rates, and help customers make sure they maximize their IT resources.
 
  •  Process Automation — these products, which include workload automation, automate tedious or error-prone manual procedures to reduce infrastructure downtime and allow customers to redeploy their valuable IT resources in more strategic ways.


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The acquisition of Concord significantly strengthened our network management offering. The acquisition of Wily gave us an important added depth in application management. Both further augment our comprehensive Enterprise Systems Management portfolio.
 
Security Management
 
Our solutions for Security Management provide an innovative and comprehensive approach to IT security. Our products protect information assets and resources; provide appropriate system and information access to employees, customers and channel partners; and centrally manage security-related administration. We offer Security Management products in the following three categories:
 
  •  Identity and Access Management — these products empower IT organizations to manage growing internal and external user populations, secure an increasingly complex array of resources and services and comply with critical regulatory mandates.
 
  •  Threat Management — these products are designed to help customers identify and eliminate internal and external threats such as harmful computer viruses and security weaknesses associated with operating systems, databases, networks and passwords.
 
  •  Security Information Management — these products help to integrate and prioritize security information created by CA and third-party security products, enable customers to increase operational efficiencies, help ensure business continuity, help customers adhere to regulatory compliance, and mitigate risks.
 
Storage Management
 
Our Storage Management solutions simplify the protection and management of business information, data and storage resources to support business priorities. Customers use our solutions to proactively optimize storage operations and infrastructure — achieving operational efficiencies, risk mitigation, compliance, business flexibility and investment protection. We offer Storage Management solutions in the following four categories:
 
  •  Recovery Management — these solutions help customers mitigate risk and improve business continuity in a cost-effective manner by providing backup/recovery, tape and media management, and high-availability solutions.
 
  •  Resource Management — these solutions help customers achieve operational efficiency and gain business flexibility. They enable customers to identify information, data and storage resources; monitor the storage environment; classify data, information and resources based on their value to the business; and define and automate storage processes.
 
  •  Information Management — these solutions help customers address compliance issues as they pertain to message management, discovery and archive requirements, and extend the data lifecycle to align with corporate governance and business requirements.
 
  •  Mainframe — these solutions offer an integrated, intelligent enterprise-wide storage management approach enabling z/OS-centric businesses to reduce costs, mitigate risks and align business requirements with IT.
 
Our storage management and data availability solutions support networks, systems, servers, operating systems, desktops, databases, applications, arrays, and tape libraries across mainframe and distributed environments. The acquisition of iLumin strengthened our capabilities in information management.
 
Business Service Optimization
 
Our solutions for Business Service Optimization help organizations manage their IT investments. These products help translate business needs into IT requirements; provide visibility into the services being delivered and the cost of delivering those services; enable more effective management of an IT organization’s people, processes, and assets;


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and help our customers make informed decisions about issues such as investment priorities and outsourcing. We offer Business Service Optimization products in the following four categories:
 
  •  Business Process Management — these solutions help companies reduce costs and mitigate risk by achieving process efficiency and agility through automation and the understanding and management of IT and business processes and policies.
 
  •  Service Management — these solutions enable IT and business alignment by defining IT service offerings in business terms, provisioning, supporting, and allocating costs for these service offerings, improving service levels, and managing change.
 
  •  Asset Management — these solutions help organizations control costs, improve process efficiencies and maximize their return on investments by managing the technical and business aspects of hardware and software from procurement through disposal.
 
  •  IT Governance — these solutions help assure operational excellence by linking IT decisions with business objectives; providing strong financial control, optimizing IT resources and assets, and controlling software changes. The acquisition of Niku significantly strengthened our IT governance offering.
 
CA Products Group
 
In addition to our leadership offerings in the above areas, we also offer products that address other aspects of the IT environment. This diverse group of solutions includes products that deliver value throughout the IT spectrum, grouped in the following four categories.
 
  •  Database Management systems —  these solutions enable reliable management of large data and transaction volumes, exploit advances in database technology, and integrate these information stores to distributed and web-based business needs, leveraging database process integrity across the enterprise.
 
  •  Application Development systems — these solutions enable customers to build custom business applications in a variety of environments using technology-neutral business process definitions, and to test and deploy those applications across an evolving IT infrastructure.
 
  •  Enterprise Reporting and Information Management systems — these solutions enable customers to efficiently and rapidly report on and process business information.
 
  •  Other solutions — these solutions include a wide variety of tools and utilities to optimize the IT environment.
 
Office of the CTO
 
The Office of the CTO drives technology strategy across all of the business units and leads research and development for emerging technologies.
 
  •  Common Technologies — our Foundation Services and Management Database are technologies common across CA products that enable our products to work together easily and also to work with other vendors’ management software products to deliver an IT environment that is simpler, more secure, less costly to maintain, and more agile.
 
  •  Research — CA Labs drives research in advanced technologies related to management and security by performing research internally and working with major universities and standard setting bodies. Current areas of focus include securing and managing on-demand computing, grids, virtualized environments, and service-oriented architectures.
 
  •  Emerging Technology Incubator — the Office of the CTO also runs incubator projects to create and bring to market management and security solutions that enable customer adoption of new technologies. Current incubation projects focus on management of wireless networks, smart phones, and radio frequency identification technologies.


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  •  Architecture — the Office of the CTO is chartered with ensuring that all CA products are implemented according to a proven and consistent technical architecture. Consistent architecture accelerates our support for key industry advances, such as the evolution of Service Oriented Architectures and Grid Computing and Virtualization. Having unified technical architecture also promotes greater product quality and integration while lowering development costs.
 
Technological Expertise
 
Certain aspects of our products and technology are proprietary. We rely on U.S. and foreign intellectual property laws, including patent, copyright, trademark, and trade secret laws to protect our proprietary rights. As of March 31, 2006, we have received approximately 600 patents worldwide and approximately 1,900 patent applications are pending worldwide for our technology. However, the extent and duration of protection given to different types of intellectual property rights vary under different countries’ legal systems. Generally, our U.S. and foreign patents expire at various times over the next twenty years. While the durations of our patents vary, we believe that the durations of our patents are adequate. The expiration of any of our patents will not have a material adverse effect on our business. In some countries, full-scale intellectual property protection for our products and technology may be unavailable, and/or the laws of other jurisdictions may not protect our proprietary technology rights to the same extent as the laws of the United States. We also maintain contractual restrictions in our agreements with customers, employees, and others to protect our intellectual property rights. In addition, we occasionally license software and technology from third parties, including some competitors, and incorporate them into our own software products.
 
The source code for our products is protected both as trade secrets and as copyrighted works. Some of our customers are beneficiaries of a source code escrow arrangement that enables the customer to obtain a contingent, future-limited right to access our source code. If our source code is accessed, the likelihood of misappropriation or other misuse of our intellectual property may increase.
 
We are not aware that our products or technologies infringe on the proprietary rights of third parties. Third parties, however, may assert infringement claims against us with respect to our products, and any such assertion may require us to enter into royalty arrangements or result in costly and time-consuming litigation. Although we have a number of U.S. and foreign patents and pending applications that may have value to various aspects of our products and technology, we are not aware of any single patent that is essential to us or to any of our principal business product areas.
 
We continue to invest extensively in product development and enhancements. We anticipate that we will continue to adapt our software products to the rapid changes in the computer industry and will continue to enhance our products to help them remain compatible with hardware changes. We expect that we will continue to be able to improve our software products to work with the latest hardware platforms and operating systems.
 
To keep CA on top of major technological advances and to ensure our products continue to work well with those of other vendors, CA is active in every major standards organization and takes the lead in many. Further, CA was the first major software company to earn the International Organization for Standardization’s (ISO) 9001:2000 Global Certification, the ultimate ISO certification.
 
In addition, CA has built a strong global product development staff in Australia, China, the Czech Republic, France, Germany, India, Israel, Japan, the United Kingdom, and the United States. Our technological efforts around the world ensure we maintain a global perspective of customer needs while cost-effectively tapping the skills and talents of developers worldwide, and enable us to efficiently and effectively deliver support to CA customers.
 
In the United States, product development is primarily performed at our facilities in Brisbane/Redwood City, California; San Diego, California; Lisle, Illinois; Framingham, Massachusetts; Mount Laurel, New Jersey; Islandia, New York; Plano, Texas; and Herndon, Virginia.
 
For the fiscal years ended March 31, 2006, 2005 and 2004, the costs of product development and enhancements, including related support, charged to operations were $696 million, $704 million, and $693 million, respectively. In fiscal years 2006, 2005 and 2004, we capitalized costs of $84 million, $70 million, and $44 million, respectively, for internally developed software. The increase in capitalized costs for fiscal year 2006 as compared with fiscal year 2005 was principally related to an increase in capitalized development costs for our Unicenter r11 and Brightstor products.


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Customers
 
No individual customer accounted for a material portion of our revenue during any of the past three fiscal years, or a material portion of the license contract value that has not yet been earned (deferred subscription value) reported at the end of any period in the past three fiscal years. At March 31, 2006, five customers accounted for approximately 71% of our outstanding prior business model net receivables, including one customer with a license arrangement that extends through fiscal year 2012 with a net unbilled receivable balance in excess of $400 million. The majority of our software products are used with relatively expensive computer hardware. As a result, most of our revenue is generated from customers who have the ability to make substantial commitments to software and hardware implementations. Our software products are used in a broad range of industries, businesses, and applications. Our customers include manufacturers, technology companies, retailers, banks, insurance companies, other financial services providers, educational institutions, health care institutions, and governmental agencies.
 
We have a large and broad base of customers. We currently serve companies across every major industry worldwide, as well as government and educational institutions. When customers enter into a software license agreement with us, they often pay for the right to use our software for a specified period of time. When the terms of these agreements expire, the customer must either renew the license agreement or pay usage and maintenance fees, if applicable, for the right to continue to use our software and receive support. We believe that our flexible business model allows us to maintain our customer base while allowing us the opportunity to cross-sell new software products and services to them.
 
Customer Satisfaction and Support
 
Customer satisfaction is important to CA. We tie a portion of individual compensation for approximately 700 senior CA managers to our customers’ satisfaction, which we measure through independent surveys. The goal of CA Technical Support is to provide our customers with industry leading support. We support our customers in the following ways:
 
  •  CA Technical Support — staffed with a highly skilled customer response team, we manage more than 70 Technical Support centers in over 25 countries providing quality support online or over the telephone regardless of customer location or language.
 
  •  SupportConnect — to help fully meet the needs of our customers, we provide online self-service resources. More than 190,000 customers use these resources to review their account information, research technical information, open and maintain incident reports, order and download products, and much more. Automated self-service resources are convenient to our customers and are a means of controlling costs for CA.
 
  •  Support Availability Management (SAM) — supporting our customers sometimes requires a “personal touch.” This service provides our customers with access to Support Availability Managers with specialized skills in accessing information and resolving issues at a site level.
 
  •  Channel Partners Support Program — in line with CA’s drive to increase our channel partner presence and sales, we believe CA channel partners should receive one of the best technical support programs in the industry.
 
We believe that our dedicated staff, online services, segment-specific offerings, SAMs and channel partners support program not only protect and enhance customer satisfaction today but also maintain customer loyalty to grow CA in the future.
 
Business Model
 
Customers face challenges when trying to achieve their desired returns on software investments. These challenges are compounded by traditional software pricing models that often force companies to make long-term commitments for projected capacities. When these projections are inaccurate, the desired returns on investment may not be achieved. Many companies are also concerned that, due to short product life cycles for some software products, new products may become available before the end of their current software license agreement periods. In addition, some companies, particularly those in new or evolving industries, want pricing structures that are linked to the growth of their businesses to minimize the risks of overestimating capacity projections.


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We believe we can service our customers better by offering more flexible licensing terms to help our customers realize maximum value from their software investments. In October 2000, we formalized this philosophy and refer to it as our business model.
 
Our business model offers customers a wide range of purchasing and payment options. Our flexible licensing terms allow customers to license our software products for relatively short periods of time, including on a monthly basis. Through these flexible licensing agreements, customers can evaluate whether our software meets their needs before making larger commitments. As customers become more comfortable with their software investments, they typically license our software for longer terms, generally up to three years.
 
Some customers prefer to choose cost certainty and sign longer-term agreements. Under our flexible licensing terms, customers can license our software products under multi-year licenses, and most customers choose terms of one to three years, although longer terms are sometimes selected. We provide our customers with the option to change their product mix after an initial period of time to mitigate their risks. We also help customers reduce uncertainty by providing a standard pricing schedule based on simple usage tiers.
 
We also offer software licenses to customers based on the value created from our customers’ business processes by linking our pricing structure to the growth of our customers’ businesses. For example, an airline company may choose to license our software based on the number of passenger miles flown during a defined period. Although this practice is not widely utilized by our customers, we believe this metric-based approach is unique in the software industry and can provide us with a competitive advantage.
 
As a result of the flexible licensing terms we offer our customers, specifically the right to receive unspecified future upgrades for no additional fee, as well as maintenance included during the term of the license, we are required under generally accepted accounting principles in the United States of America to recognize revenue from our license agreements ratably over the license term. For a description of how ratable revenue recognition has impacted our financial results, refer to “Results of Operations” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Sales and Marketing
 
Our sales organization operates on a worldwide basis. We operate through branches and subsidiaries located in 46 countries outside the United States. Each geographic territory offers all or most of our software products. Approximately 47% of our revenue in fiscal year 2006 was from operations outside of the United States. As of March 31, 2006, we had approximately 4,900 sales and sales support personnel.
 
In addition, CA Technology Servicestm performs technology assessments, design, implementation and optimization, as well as ongoing maintenance, of our customers’ IT infrastructures. CA Technology Services leverages the best resources within CA as well as our channel partners to help customers apply the right types of activities necessary to ensure success.
 
We also distribute, market, and support our software through a network of VARs, OEMs, distributors, and resellers. As noted earlier, one of our growth strategies is to strengthen these channel partner relationships and grow our indirect sales channel. We actively encourage VARs to market our software products. VARs often combine our software products with specialized consulting services and provide enhanced user-specific solutions to a particular market or sector. Facilities managers, including CSC, EDS, and IBM, often deliver IT services using our software products to companies that prefer to outsource their IT operations.
 
Competition
 
The markets in which we compete are marked by technological change, the steady emergence of new companies and products, evolving industry standards, and changing customer needs. Competitive differentiators include, but are not limited to: performance, quality, breadth of product group, integration of products, brand name recognition, price, functionality, customer support, frequency of upgrades and updates, manageability of products, and reputation.


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We compete with many established companies in the markets we serve. Some of these companies have substantially greater financial, marketing, and technological resources, larger distribution capabilities, earlier access to customers, and greater opportunity to address customers’ various information technology requirements than we do. These factors may provide our competitors with an advantage in penetrating markets with their products. We also compete with many smaller, less established companies that may be able to focus more effectively on specific product areas or markets. Because of the breadth of our product offerings, an individual competitor does not generally compete with us across all of our product areas. Some of our key competitors include BMC, Compuware, EMC, HP, IBM, Mercury Interactive and Symantec. We believe that we have a competitive advantage in the marketplace with the breadth and quality of our product offerings; our products’ hardware independence; and the ability to offer our solutions as product modules or as integrated suites, so that customers can use them at their own pace.
 
Employees
 
The table below sets forth the approximate number of employees by location and functional area as of March 31, 2006:
 
                     
    Employees as
      Employees as
    of March 31,
      of March 31,
Location
  2006  
Functional Area
  2006
 
Corporate headquarters
    2,200     Product development and support     5,800  
            Sales and support     4,900  
Other U.S. offices
    6,200     Professional services     1,400  
            Information technology support,        
International offices
    7,600      finance, and administration     3,900  
                     
Total
    16,000     Total     16,000  
                     
 
As of March 31, 2006 and 2005, we had approximately 16,000 and 15,300 employees, respectively. The increase was due to approximately 900 employees added from acquisitions and approximately 600 employees added primarily to our product development groups in North America and India. This increase in personnel was offset by the impact of the restructuring plan announced in the second quarter of fiscal year 2006, which included a workforce reduction of approximately 800 positions worldwide. We believe our employee relations are satisfactory.
 
(d)  Financial Information About Geographic Areas
 
Refer to Note 4, “Segment and Geographic Information”, in the Notes to the Unaudited Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.
 
(e)  Available Information
 
Our website address is ca.com. All filings we make with the SEC, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments, are available for free on our website as soon as reasonably practicable after they are filed with or furnished to the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s Internet site at sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on the website in this Exhibit or other filings with the SEC, and the information contained on the website is not part of this document.
 
Our website also contains information about our initiatives in corporate governance, including: our corporate governance principles; information concerning our Board of Directors (including e-mail communication with them); our Business Practices Standard of Excellence: Our Code of Conduct (applicable to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and our directors); instructions for calling the CA Compliance and Ethics Helpline; information concerning our Board Committees, including the charters of the Audit and Compliance Committee, the Compensation and Human Resource Committee, the Corporate Governance Committee, and the Strategy Committee; information on the Deferred


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Prosecution Agreement (DPA) we entered into in September 2004 as part of our settlement to resolve government investigations into past accounting practices including our progress under governance initiatives required under the DPA; and transactions in CA securities by directors and executive officers. These documents can also be obtained in print by writing to our Executive Vice President, General Counsel, and Corporate Secretary, Kenneth V. Handal, at the Company’s world headquarters in Islandia, New York, at the address listed on the cover of this Exhibit. Refer to the Corporate Governance section in the Investors section of our website for details.
 
Item 1A.   Risk Factors.
 
Current and potential stockholders should consider carefully the risk factors described below. Any of these factors, or others, many of which are beyond our control, could negatively affect our revenue, profitability and cash flow.
 
Our operating results and revenue are subject to fluctuations caused by many economic factors associated with our industry and the markets for our products which, in turn, may individually and collectively affect our revenue, profitability and cash flow in adverse and unpredictable ways.
 
Quarterly and annual results of operations are affected by a number of factors, associated with our industry and the markets for our products, including those listed below, which in turn could adversely affect our revenue, profitability and cash flow in the future.
 
  •  Timing and impact of threat outbreaks (e.g. worms and viruses);
 
  •  The rate of adoption of new product technologies and releases of new operating systems;
 
  •  Demand for products and services;
 
  •  Length of sales cycle;
 
  •  Customer difficulty in implementation of our products;
 
  •  Magnitude of price and product and/or services competition;
 
  •  Introduction of new hardware;
 
  •  General economic conditions in countries in which customers do a substantial amount of business;
 
  •  Changes in customer budgets for hardware, software and services;
 
  •  Ability to develop and introduce new or enhanced versions of our products;
 
  •  Changes in foreign currency exchange rates;
 
  •  Ability to control costs;
 
  •  The number and terms and conditions of licensing transactions;
 
  •  Reorganizations of the sales and technical services forces;
 
  •  The results of litigation, including the government and internal investigations; and
 
  •  Ability to retain and attract qualified personnel.
 
Any of the foregoing factors, among others, may cause our operating expenses to be disproportionately high, or cause our revenue and operating results to fluctuate. As a consequence, our business, financial condition, operating results and cash flow could be adversely affected. For a discussion of certain factors that could affect our cash flow in the future, for example, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Sources and Uses of Cash.” In addition, our financial results are subject to change in light of our current review of option grant practices and the possible resulting restatements described in the Explanatory Note at the beginning of this Exhibit.


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The timing of orders from customers and channel partners may cause fluctuations in some of our key financial metrics which may impact our quarterly financial results and stock price.
 
Historically, the vast majority of our license agreements are executed in the last week of a quarter. Any failure or delay in executing new or renewed license agreements in a given quarter could cause fluctuations in some of our key financial metrics (i.e. billings or cash flow), which may have a material adverse effect on our quarterly financial results. The uneven sales pattern also makes it difficult to predict future billings and cash flow for each period and, accordingly, increases the risk of unanticipated variations in our quarterly results and financial condition. If we do not achieve our forecasted results for a particular period, our stock price could decline significantly.
 
Given the global nature of our business, economic or political events beyond our control can affect our business in unpredictable ways.
 
International revenue has historically represented a significant percentage of our total worldwide revenue. Continued success in selling our products outside the United States will depend on a variety of market and business factors, including:
 
  •  Reorganizations of the sales and technical services workforce;
 
  •  Fluctuations in foreign exchange currency rates;
 
  •  Staffing key managerial positions;
 
  •  The ability to successfully localize software products for a significant number of international markets;
 
  •  General economic conditions in foreign countries;
 
  •  Political stability; and
 
  •  Trade restrictions such as tariffs, duties or other controls affecting foreign operations.
 
Any of the foregoing factors, among others, could adversely affect our business, financial condition, operating results and cash flow.
 
We have entered into a Deferred Prosecution Agreement (DPA) with the U.S. Attorney’s Office for the Eastern District of New York (USAO) and a Final Consent Judgment with the SEC (the Consent Judgment) and if we violate either agreement we may be subject to, among other things, criminal prosecution or civil penalties which could adversely affect our credit ratings, stock price, ability to attract or retain employees and, therefore, our sales, revenue and client base.
 
Our agreements with the USAO and the SEC resolve their investigations into certain of our past accounting practices, including our revenue recognition policies and procedures, and obstruction of their investigations, provided we comply with certain continuing requirements under these agreements. We describe some of these requirements below. (For more information about our agreements with the USAO and the SEC, see Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements as well as our Current Report on Form 8-K filed on September 22, 2004.)
 
The DPA
 
If it is determined that we: deliberately gave false, incomplete or misleading information pursuant to the DPA; have committed any federal crimes subsequent to the DPA; or otherwise knowingly, intentionally and materially violated any provision of the DPA, we will be subject to prosecution for any federal criminal violation of which the USAO has knowledge. Any such prosecution may be based on information we have provided to the USAO, the SEC and other governmental agencies in connection with our cooperation under the DPA. This would include information provided because of our entry into the DPA that otherwise may not have been available to the USAO or may otherwise have been subject to privilege. Our continued cooperation with the USAO, the SEC and the Independent Examiner (see below) pursuant to the DPA and Consent Judgment may lead to the discovery of additional information regarding the conduct of the Company, including the conduct of members of former management in


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prior periods. We cannot predict the impact, if any, of any such information on our business, financial condition, results of operations and cash flow.
 
The Consent Judgment
 
Pursuant to the Consent Judgment, we are enjoined from violating a number of provisions of the federal securities laws. Any further violation of these laws could result in civil remedies, including sanctions, fines and penalties, which may be far more severe than if the violation had occurred without the Consent Judgment being in place. Additionally, if we breach the terms of the Consent Judgment, the SEC may petition the Court to vacate the Consent Judgment and restore the SEC’s original action to the active docket for all purposes. If the action were restored, the SEC could use information in the action that we have provided to the USAO, the SEC and other governmental agencies in connection with our cooperation under the Consent Judgment. This would include information provided because of our entry into the Consent Judgment that otherwise may not have been available to the SEC or may otherwise have been subject to privilege.
 
General
 
Under both the DPA and the Consent Judgment, we are obligated to undertake a number of internal reforms including but not limited to: adding new management and independent directors; establishing a Compliance Committee of the Board of Directors and an executive disclosure committee; establishing new comprehensive records management policies; taking steps to implement best practices regarding recognition of software license revenue; establishing a comprehensive compliance and ethics program; reorganizing our Finance and Internal Audit Departments; establishing a plan to improve communication with government agencies engaged in inquiries or investigations relating to the Company; enhancing our hotline for employees to report potential violations of the law or other misconduct; and agreeing to the appointment of an Independent Examiner, who is serving a term of 18 months (subject to extension by the USAO and the SEC) and is examining our practices and began issuing reports on such practices to the USAO, the SEC and our Board of Directors beginning in September 2005 and has and will continue to do so quarterly thereafter (for more information about the Independent Examiner and the potential extension of this term, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Significant Business Events”). We have taken many steps to carry out these internal reforms (for more information about our reforms, see Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements). In the short-term, we cannot gauge what impact, if any, the adoption of these reforms (including the reports of the Independent Examiner) may have on our business, financial condition, results of operations and cash flow or any diversion of management attention and employee resources from core business functions or opportunities that may result.
 
If it were determined that we breached the terms of the DPA or the Consent Judgment, we cannot predict the scope, timing or outcome of the actions that would be taken by the USAO or the SEC. These actions could include the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, which may be significant, suspensions or debarments from government product and/or services contracts, and other remedies and sanctions, any of which could lead to an adverse impact on our credit ratings and ability to obtain financing, an adverse impact on our stock price, loss of additional senior management, the inability to attract or retain key employees and the loss of customers. In addition, our employees could potentially commit illegal acts which, under the law, may be ascribed to us under certain circumstances. We cannot predict what impact, if any, these matters may have on our business, financial condition, results of operations and cash flow.
 
Moreover, under both the DPA and the Consent Judgment, we are obligated to cooperate with the government in its ongoing investigations of past conduct. While we do not anticipate any further material adjustments to our financial statements for completed periods arising from those investigations, the processes described above have not been fully completed and we may be required to take additional remedial measures. We are also obligated under the DPA to comply with SEC rules, including those related to the filing of periodic reports. As described in the Explanatory Note at the beginning of this Exhibit, we will not file our Annual Report on Form 10-K by the deadline of June 29, 2006.


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Changes to compensation of our sales organization could adversely affect our business, financial condition, operating results and cash flow.
 
We may update our compensation plans for the sales organization from time to time in order to align the sales force with the Company’s economic interests. Under the terms of the sales compensation agreements, management seeks to retain broad discretion to change or modify various aspects of the plan such as quotas or territory assignments. The ability to exercise this discretion is governed by the laws of numerous countries and states within the U.S. in which CA operates. Where CA does exercise such discretion, the changes may lead to outcomes that are not anticipated or intended and may impact our cost of doing business and/or employee morale, all of which could adversely affect our business, financial condition, operating results and cash flow. We modified our commission plans for fiscal year 2006 which led to substantial unforeseen expenses. The commission plans for fiscal year 2007, while revised, continue to be reviewed and may be subject to risks similar to those identified above. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for how changes made to the commission plan for fiscal year 2006 impacted results. Refer to Item 9A, “Controls and Procedures”, for additional information relating to the Company’s identification of a material weakness associated with sales commissions for fiscal year 2006.
 
Failure to expand our channel partner programs related to the sale of CA solutions may result in lost sales opportunities, increases in expenses and weakening in our competitive position.
 
We sell CA solutions through system integrators and value-added resellers in channel partner programs that require training and expertise to sell these solutions, and global penetration to grow these aspects of our business. The failure to expand these channel partner programs and penetrate these markets may adversely impact our success with channel partners, resulting in lost sales opportunities and an increase in expenses, as well as weaken our competitive position.
 
If we do not adequately manage and evolve our financial reporting and managerial systems and processes, including the successful implementation of our enterprise resource planning software from SAP AG, our ability to manage and grow our business may be harmed.
 
Our ability to successfully implement our business plan and comply with regulations requires effective planning and management systems and processes. We will need to continue to improve existing and implement new operational and financial systems, procedures and controls to manage our business effectively in the future. As a result, we have licensed enterprise resource planning (ERP) software from SAP AG and have begun a process to expand and upgrade our operational and financial systems. Phase one of the implementation was completed in April 2006 and included North America and worldwide human resources. Any delay in the implementation of, or disruption in the transition to, our new or enhanced systems, procedures or internal controls, could adversely affect our ability to accurately forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and records, and report financial and management information, including the filing of our quarterly or annual reports with the SEC, on a timely and accurate basis. As a result of the conversion from prior systems and processes, data integrity problems may be discovered that if not corrected could impact our business or financial results. In addition, as we add functionality to the ERP software and complete implementations in other geographic regions, new issues could arise that we have not foreseen. Such issues could adversely affect our ability to do, among other things, the following in a timely manner: provide quotes; take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, impact our ability to manage our business and negatively impact our results of operations, cash flows and stock price.
 
We may encounter difficulties in successfully integrating companies and products that we have acquired or may acquire into our existing business and, therefore, such failed integration may adversely affect our infrastructure, market presence, results of operations and stock price.
 
We have in the past and expect in the future to acquire complementary companies, products, services and technologies. The risks we may encounter include: we may find that the acquired company or assets do not further


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improve our financial and strategic position as planned; we may have difficulty integrating the operations, personnel and commission plans of the acquired business; we may have difficulty forecasting or reporting results subsequent to acquisitions; we may have difficulty retaining the technical skills needed to provide services on the acquired products; we may have difficulty incorporating the acquired technologies or products with our existing product lines; we may have product liability, customer liability or intellectual property liability associated with the sale of the acquired company’s products; our ongoing business may be disrupted by transition or integration issues; our management’s attention may be diverted from other business concerns; we may be unable to obtain timely approvals from governmental authorities under applicable competition and antitrust laws; we may have difficulty maintaining uniform standards, controls, procedures and policies; our relationships with current and new employees, customers and distributors could be impaired; the acquisition may result in increased litigation risk, including litigation from terminated employees or third parties; and our due diligence process may fail to identify significant issues with the target company’s product quality, financial disclosures, accounting practices, internal control deficiencies, including material weaknesses, product architecture, legal contingencies and other matters. These factors could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a large acquisition or number of acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options, to pay for acquisitions, existing stockholders’ interests may be diluted and earnings per share may decrease.
 
We are subject to intense competition in product and service offerings and pricing, and we expect to face increased competition in the future, which could hinder our ability to attract and retain employees and diminish demand for our products and, therefore, reduce our sales, revenue and market presence.
 
The markets for our products are intensely competitive, and we expect product and service offerings and pricing competition to increase. Some of our competitors have longer operating histories, greater name recognition, a larger installed base of customers in any particular market niche, larger technical staffs, established relationships with hardware vendors and/or greater financial, technical and marketing resources. Competitors for our various products include large technology companies. We also face competition from numerous smaller companies that specialize in specific aspects of the highly fragmented software industry and shareware authors that may develop competing products. In addition, new companies enter the market on a frequent and regular basis, offering products that compete with those offered by us. Moreover, many customers historically have developed their own products that compete with those offered by us. The competition may affect our ability to attract and retain the technical skills needed to provide services to our customers, forcing us to become more reliant on delivery of services through third parties. This, in turn, could increase operating costs and decrease our revenue, profitability and cash flow. Additionally, competition from any of these sources can result in price reductions or displacement of our products, which could have a material adverse effect on our business, financial condition, operating results and cash flow.
 
Our competitors include large vendors of hardware or operating system software. The widespread inclusion of products that perform the same or similar functions as our products bundled within computer hardware or other companies’ software products could reduce the perceived need for our products and services, or render our products obsolete and unmarketable. Furthermore, even if these incorporated products are inferior or more limited than our products, customers may elect to accept the incorporated products rather than purchase our products. In addition, the software industry is currently undergoing consolidation as software companies seek to offer more extensive suites and broader arrays of software products, as well as integrated software and hardware solutions. This consolidation may negatively impact our competitive position, which could adversely affect our business, financial condition, operating results and cash flow. Refer to Item 1, “Business — (c) Narrative Description of the Business — Competition”, for additional information.
 
Failure to adapt to technological change in a timely manner could adversely affect our revenues and earnings.
 
If we fail to keep pace with technological change in our industry, such failure would have an adverse effect on our revenues and earnings. We operate in a highly competitive industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. During the past several years, many new technological advancements and competing products entered the marketplace. The distributed systems and application management markets in which we operate are far


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more crowded and competitive than our traditional mainframe systems management markets. Our ability to compete effectively and our growth prospects depend upon many factors, including the success of our existing distributed systems products, the timely introduction and success of future software products, and the ability of our products to interoperate and perform well with existing and future leading databases and other platforms supported by our products. We have experienced long development cycles and product delays in the past, particularly with some of our distributed systems products, and expect to have delays in the future. In addition, we have incurred, and expect to continue to incur, significant research and development costs, as we introduce new products. If there are delays in new product introductions or less-than-anticipated market acceptance of these new products, we will have invested substantial resources without realizing adequate revenues in return, and our revenues and earnings could be adversely affected.
 
If our products do not remain compatible with ever-changing operating environments we could lose customers and the demand for our products and services could decrease, which would negatively impact sales and revenue.
 
IBM, HP, Sun Microsystems, EMC and Microsoft are the largest suppliers of systems and computing software and, in most cases, are the manufacturers of the computer hardware systems used by most of our customers. Historically, these operating system developers have modified or introduced new operating systems, systems software and computer hardware. Such new products could, in the future, incorporate features that perform functions currently performed by our products, or could require substantial modification of our products to maintain compatibility with these companies’ hardware or software. Although we have to date been able to adapt our products and our business to changes introduced by hardware manufacturers and system software developers, there can be no assurance that we will be able to do so in the future. Failure to adapt our products in a timely manner to such changes or customer decisions to forego the use of our products in favor of those with comparable functionality contained either in the hardware or operating system could have a material adverse effect on our business, financial condition, operating results and cash flow.
 
Certain software that we use in daily operations is licensed from third parties and thus may not be available to us in the future, which has the potential to delay product development and production and, therefore, could adversely affect our revenues and profits.
 
Some of our products contain software licensed from third parties. Some of these licenses may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. We may also choose to pay a premium price for such a license in certain circumstances where continuity of the product would outweigh the premium cost of the license. We do not consider the revenue from products using software licensed from third parties to be material. However, there can be no assurance that, at a given point of time, any of the above will not have an adverse impact on our business, financial condition, operating results and cash flow.
 
Certain software we use is from open source code sources which under certain circumstances may lead to increased costs and, therefore, decreased cash flow.
 
Some of our products contain software from open source code sources. The use of such open source code may subject us to certain conditions, including the obligation to offer our products that use open source code for no cost. We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. However, the use of such open source code may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts. We believe that the use of such open source code will not have a significant impact on our operations and that our products will be viable after any remediation efforts. However, there can be no assurance that future conditions involving such open source code will not have an adverse impact on our business, financial condition, operating results and cash flow.


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Discovery of errors in our software could adversely affect our revenues and earnings and subject us to product liability claims, which may be costly and time consuming.
 
The software products we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in current versions, new versions or enhancements of our products after commencement of commercial shipments. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our operating margins could be adversely affected. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers’ expectations. Significant technical challenges also arise with our products because our customers purchase and deploy our products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. These combinations increase our risk further because in the event of a system-wide failure, it may be difficult to determine which product is at fault; thus, we may be harmed by the failure of another supplier’s products. As a result of the foregoing, we could experience:
 
  •  Loss of or delay in revenues and loss of market share;
 
  •  Loss of customers, including the inability to do repeat business with existing key customers;
 
  •  Damage to our reputation;
 
  •  Failure to achieve market acceptance;
 
  •  Diversion of development resources;
 
  •  Increased service and warranty costs;
 
  •  Legal actions by customers against us which could, whether or not successful, increase costs and distract our management;
 
  •  Increased insurance costs; and
 
  •  Failure to successfully complete service engagements for product installations and implementations.
 
In addition, a product liability claim, whether or not successful, could be time-consuming and costly and thus could have a material adverse affect on our business, financial condition, operating results and cash flow.
 
Our credit ratings have been downgraded and could be downgraded further which would require us to pay additional interest under our credit agreement and could adversely affect our ability to borrow in the future.
 
In June 2006, both Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch) confirmed their ratings of our senior unsecured notes at Ba1 and BBB-, respectively, but changed their outlooks on the ratings from positive and stable, respectively, to negative. Our senior unsecured notes are rated BBB- by Standard & Poor’s (S&P) and the outlook is also negative.
 
Moody’s, S&P, Fitch or any other credit rating agency may further downgrade or take other negative action with respect to our credit ratings in the future. If our credit ratings are further downgraded or other negative action is taken, we would be required to, among other things, pay additional interest under our credit agreement, if it is utilized. Any downgrades could affect our ability to obtain additional financing in the future and may affect the terms of any such financing. This could have a material adverse effect on our business, financial condition, operating results and cash flow. We have not yet discussed with the ratings agencies our on-going review and potential restatements described in the Explanatory Note at the beginning of this Exhibit and we cannot determine what actions, if any, they may take in response to these actions.


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We have a significant amount of debt and failure to generate sufficient cash as our debt becomes due or to renew credit lines prior to their expiration may adversely affect our business, financial condition, operating results and cash flow.
 
As of March 31, 2006, we had approximately $1.81 billion of debt outstanding, consisting of unsecured fixed-rate senior note obligations and convertible senior notes. Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments”, for the payment schedule of our long-term debt obligations, inclusive of interest. We expect that existing cash, cash equivalents, marketable securities, cash provided from operations and our bank credit facilities will be sufficient to meet ongoing cash requirements. However, failure to generate sufficient cash as our debt becomes due or to renew credit lines prior to their expiration may adversely affect our business, financial condition, operating results and cash flow.
 
The delay in filing our Annual Report on Form 10-K could result in defaults under our financing agreements.
 
We have three indentures governing our public debt securities that require that we file with the relevant trustee the reports we are required to file with the SEC, including the Form 10-K. We have $1,810 million in outstanding debt in four separate series under these four indentures. Since the delay in filing our Form 10-K with the SEC has led to a delay in filing the Form 10-K with the relevant trustees, we are not in compliance with our reporting obligations under these indentures. As a result of our non-compliance, a trustee or the holders of at least 25% of the outstanding aggregate principal amount of the securities of any series under the indentures may provide us with a notice of default with respect to a series of debt securities. If we fail to cure the non-compliance within 90 days after receipt of that notice, then the trustee or those holders have the right to accelerate the maturity of the relevant series of debt securities. This acceleration would trigger the cross-acceleration provisions under the other series of debt securities issued under the indentures.
 
Our $1 billion credit facility, which is undrawn, requires that we provide our lenders with annual audited financial statements within 90 days after the end of our fiscal year. As a result of the delay in the completion of our audited financial statements, we are not in compliance with this financial statement delivery covenant. A restatement could also, depending on its nature and materiality, result in a breach of a representation under our credit facility. Even though our credit facility is undrawn, the agent for the lenders or the lenders could provide us with a notice of default as a result of our non-compliance, and we would have 30 days to cure the non-compliance. In the absence of a cure or a waiver, we will be unable to make drawings under our credit facility.
 
Until we file our Form 10-K, there will be limited public information available concerning our results of operations and financial condition. The delay in the filing of our Form 10-K and the potential restatement, and the related uncertainties, may also have other actual or potential adverse effects in addition to those discussed above.
 
Until we have filed our Form 10-K, there will be limited public information available concerning our results of operations and financial condition. The absence of more recent financial statements may have an adverse effect on us and on the market prices of our securities.
 
The delay in the filing of our Form 10-K and the potential restatement, and the related uncertainties, may also have other actual or potential adverse effects in addition to those discussed above, including adverse effect on the perception of the Company by existing and potential customers and suppliers and continuing adverse effect on our credit standing and on investor confidence.
 
Failure to protect our intellectual property rights would weaken our competitive position.
 
Our future success is highly dependent upon our proprietary technology, including our software. Failure to protect such technology could lead to our loss of valuable assets and competitive advantage. We protect our proprietary information through the use of patents, copyrights, trademarks, trade secret laws, confidentiality procedures and contractual provisions. Notwithstanding our efforts to protect our proprietary rights, policing unauthorized use or copying of our proprietary information is difficult. Unauthorized use or copying occurs from time to time and litigation to enforce intellectual property rights could result in significant costs and diversion of resources. Moreover, the laws of some foreign jurisdictions do not afford the same degree of protection to our proprietary


21


 

rights as do the laws of the United States. For example, we rely on “shrink-wrap” or “click-on” licenses which may be unenforceable in whole or in part in some jurisdictions in which we operate. In addition, patents we have obtained may be circumvented, challenged, invalidated or designed around by other companies. If we do not adequately protect our intellectual property for these or other reasons our business, financial condition, operating results and cash flow could be adversely affected. Refer to “Item 1, Business — (c) Narrative Description of the Business — Technological Expertise”, for additional information.
 
We may become dependent upon large transactions and the failure to close such transactions could adversely affect our business, financial condition, operating results and cash flow.
 
We have historically been dependent upon large-dollar enterprise transactions with individual customers. As a result of the flexibility afforded by our business model, we anticipate that there will be fewer of these transactions in the future. There can be no assurances, however, that we will not be reliant on large-dollar enterprise transactions in the future, and the failure to close such transactions could adversely affect our business, financial condition, operating results and cash flow.
 
Our customers’ data centers and IT environments may be subject to hacking or other breaches, harming the market perception of the effectiveness of our products.
 
If an actual or perceived breach of our customers’ network security occurs, allowing access to our customers’ data centers or other parts of their IT environments, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Because the techniques used by computer hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Alleviating any of these problems could require significant expenditures of our capital and diversion of our resources from development efforts. Additionally, these efforts could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers, adversely affecting our business, financial condition, operating results and cash flow.
 
Our software products, data centers and IT environments may be subject to hacking or other breaches, harming the market perception of the effectiveness of our products.
 
Although we believe we have sufficient controls in place to prevent intentional disruptions, we expect to be an ongoing target of attacks specifically designed to impede the performance of our products. Similarly, experienced computer programmers, or hackers, may attempt to penetrate our network security or the security of our data centers and IT environments and misappropriate proprietary information or cause interruptions of our services. If these intentionally disruptive efforts are successful, our activities could be adversely affected, our reputation and future sales could be harmed and our business, financial condition, operating results and cash flow could be adversely affected.
 
General economic conditions may lead our customers to delay or forgo technology upgrades which could adversely affect our business, financial condition, operating results and cash flow.
 
Our products are designed to improve the productivity and efficiency of our customers’ information processing resources. However, a general slowdown in the world economy or a particular region, particularly with respect to discretionary spending for software, could cause customers to delay or forgo decisions to license new products, to upgrade their existing environments or to acquire services, which could adversely affect our business, financial condition, operating results and cash flow.
 
The use of third-party microcode could negatively impact our product development.
 
We anticipate ongoing use of microcode or firmware provided by hardware manufacturers. Microcode and firmware are essentially software programs embedded in hardware and are, therefore, less flexible than other types of software. We believe that such continued use will not have a significant impact on our operations and that our products will remain compatible with any changes to such code. However, there can be no assurance that future


22


 

technological developments involving such microcode will not have an adverse impact on our business, financial condition, operating results and cash flow.
 
We may lose access to third-party operating systems which would adversely affect future product development.
 
In the past, certain of our licensees using proprietary operating systems were furnished with “source code”, which makes the operating system 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 us, were able to develop and market compatible software. Microsoft, IBM and other vendors have a policy of restricting the use or availability of the source code for some of their operating systems. To date, this policy has not had a material effect on us. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may, in the future, result in higher research and development costs for us in connection with the enhancement and modification of our existing products and the development of new products. Although we do not expect that such restrictions will have this adverse effect, there can be no assurances that such restrictions or other restrictions will not have a material adverse effect on our business, financial condition, operating results and cash flow.
 
The markets for some or all of our key product areas may not grow.
 
Our products are aligned by software business unit. Our business units consist of Enterprise Systems Management, Security Management, Storage Management, Business Service Optimization and the CA Products Group — which encompass solutions from a number of CA brands that fall outside of our core areas of systems and security management. Some or all of these areas may not grow, may decline in growth, or customers may decline or forgo use of products in some or all of these product areas. This is particularly true in newly emerging areas. A decline in sales in these product areas could result in decreased demand for our products and services, which would adversely impact our business, financial condition, operating results and cash flow.
 
Third parties could claim that our products infringe their intellectual property rights which could result in significant litigation expense or settlement with unfavorable terms that could adversely affect our business, financial condition, operating results and cash flow.
 
From time to time we receive notices from third parties claiming infringement of various forms of their intellectual property. Investigation of these claims, whether with or without merit, can be expensive and could affect development, marketing or shipment of our products. As the number of software patents issued increases, it is likely that additional claims, with or without merit, will be asserted. Defending against such claims is time-consuming and could result in significant litigation expense or settlement with unfavorable terms that could adversely affect our business, financial condition, operating results and cash flow.
 
Fluctuations in foreign currencies could result in translation losses.
 
Most of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Given the relatively long sales cycle that is typical for many of our products, foreign currency fluctuations could result in substantial changes due to the foreign currency impact upon translation of these transactions into U.S. dollars. Additionally, fluctuations of the exchange rates of foreign currencies against the U.S. dollar can affect our revenue within those markets, all of which may adversely impact our business, financial condition, operating results and cash flow.
 
Our stock price is subject to significant fluctuations.
 
Our stock price is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant license agreements, changes in earnings estimates by analysts, announcements related to accounting issues, announcements of technological innovations or new products by us or our competitors, changes in domestic and international economic and business conditions, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and


23


 

volume fluctuations that have affected the market price of many companies in industries that are similar or related to those in which we operate and that have been unrelated to the operating performance of these companies. These market fluctuations have in the past adversely affected and may continue to adversely affect the market price of our common stock, which in turn could affect the value of our stock-based compensation and our ability to retain and attract key employees.
 
Any failure by us to execute our restructuring plan successfully could result in total costs and expenses that are greater than expected.
 
In July 2005, we announced a restructuring plan to increase efficiency and productivity and to more closely align our investments with strategic growth opportunities. The plan includes a workforce reduction of approximately five percent or 800 positions worldwide as well as facility and procurement rationalization. We may have further workforce reductions or restructuring actions in the future. Risks associated with these actions and other workforce management issues include delays in implementation of anticipated workforce reductions, changes in restructuring plans that increase or decrease the number of employees affected, decreases in employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business.
 
Taxation of extraterritorial income could adversely affect our results.
 
In August 2001, a World Trade Organization (WTO) dispute panel determined that the tax provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI) constitute an export subsidy prohibited by the WTO Agreement on Subsidies and Countervailing Measures. The U.S. government appealed the panel’s decision and lost its appeal. On March 1, 2004, the European Union (EU) began imposing retaliatory tariffs on a specified list of U.S. – source goods. In order to comply with international trade rules, the American Jobs Creation Act of 2004 (the Act) repealed the current tax treatment for ETI. The Act replaces the ETI provisions with a domestic manufacturing deduction and includes transition provisions for the ETI phase-out. We are reviewing the provisions of the Act and the impact on our effective tax rate. The WTO challenged the Act, claiming that the transition relief and grandfathering provisions of the Act amounted to a continuation of the ETI export subsidy. On February 13, 2006, the Appellate Body of the WTO agreed that the Act violated international free-trade rules. As a result, the EU announced that by May 14, 2006 it would reinstate retaliatory tariffs that had been previously lifted. In order to comply with international free-trade rules, The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) repealed certain provisions of the Act found to be objectionable by the EU. In response to TIPRA, the EU announced it would withdraw the retaliatory sanctions that were to have resumed May 16, 2006.
 
Other potential tax liabilities may adversely affect our results.
 
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, a material effect on our income tax provision and net income in the period or periods in which that determination is made could result. In the fourth quarter of fiscal year 2006, we determined that we did not properly calculate certain tax charges and accordingly had to adjust such charges. As described in the Explanatory Note at the beginning of this Exhibit, we are continuing to review whether additional adjustments may be necessary in light of our current review of option grant practices. Refer to Item 9A, “Controls and Procedures”, for additional information.
 
Item 1B.   Unresolved Staff Comments.
 
None.


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Item 2.   Properties.
 
Our principal real estate properties are located in areas necessary to meet sales and operating requirements. All of the properties are considered to be both suitable and adequate to meet current and anticipated operating requirements.
 
As of March 31, 2006, we leased 112 facilities throughout the United States and 146 facilities outside the United States. Our lease obligations expire on various dates with the longest commitment extending to 2023. We believe all of our leases will be renewable at our option as they become due.
 
In the United States, we own an approximately 850,000 square foot corporate headquarters in Islandia, New York, an approximately 100,000 square foot distribution center in Central Islip, New York, as well as an approximately 15,000 square foot facility in Greensville, South Carolina. We own one facility in Germany totaling approximately 100,000 square feet, two facilities in Italy which total approximately 140,000 square feet, and an approximately 215,000 square foot European headquarters in the United Kingdom.
 
We periodically review the benefits of owning our properties. On occasion, we enter into sale-leaseback transactions and use the proceeds to fund strategic actions such as acquisitions, product development, or stock-repurchases. Depending upon the strategic importance of a particular location and management’s long-term plans, the duration of the initial lease term in sale-leaseback transactions may vary.
 
We own and lease various computer, telecommunications, electronic, and transportation equipment. We also lease mainframe and distributed computers at our facilities in Islandia, New York, and Lisle, Illinois. This equipment is used for internal product development, technical support efforts, and administrative purposes. We consider our computer and other equipment to be adequate for our current and anticipated needs. Refer to “Contractual Obligations” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for information concerning lease obligations.
 
Item 3.   Legal Proceedings.
 
Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for information regarding legal proceedings.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
 
None.


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Executive Officers of the Registrant.
 
The name, age, present position, and business experience of our executive officers as of June 29, 2006, are listed below:
 
             
Name
 
Age
 
Position
 
John A. Swainson
  52   President, Chief Executive Officer, and Director
Russell M. Artzt
  59   Executive Vice President — Products
James Bryant
  61   Executive Vice President and Chief Administrative Officer
Michael J. Christenson
  47   Executive Vice President and Chief Operating Officer
Robert G. Cirabisi
  42   Acting Chief Financial Officer, Senior Vice President and Corporate Controller
Donald Friedman
  60   Executive Vice President and Chief Marketing Officer
Andrew Goodman
  47   Executive Vice President — Worldwide Human Resources
Kenneth V. Handal
  57   Executive Vice President, General Counsel and Corporate Secretary
Gary Quinn
  45   Executive Vice President — Partner Sales
Patrick J. Gnazzo
  59   Senior Vice President, Business Practices, and Chief Compliance Officer
Una O’Neill
  36   Senior Vice President — Technology Services
Alan S. Nugent
  51   Senior Vice President and Chief Technology Officer
Mary Stravinskas
  45   Senior Vice President and Treasurer
 
Mr. Swainson has been Chief Executive Officer of the Company since February 2005 and President and Director since November 2004. From November 2004 to February 2005, he served as the Company’s Chief Executive Officer-elect. From July to November 2004, Mr. Swainson was Vice President of Worldwide Sales and Marketing of IBM Corporation’s Software Group, responsible for selling its diverse line of software products through multiple channels. From 1997 to July 2004, he was General Manager of the Application Integration and Middleware division of IBM Corporation’s Software Group, a division he started in 1997. Mr. Swainson joined the Company in November 2004.
 
Mr. Artzt has been an Executive Vice President of the Company since April 1987 and Executive Vice President of Products since 2004. From April 2002 to 2004, he served as Executive Vice President — eTrust Solutions and from 1987 to March 2002, he served as Executive Vice President — Research and Development. Mr. Artz joined the Company in June 1976.
 
Mr. Bryant has been Executive Vice President and Chief Administrative Officer of the Company since June 2006. From 2005 to June 2006, he was a member of Common Angels, a Boston-based investment group that provides funding and mentoring for high technology start-ups; from 2003 to June 2006 he was a Selectman for the Town of Hamilton, Massachusetts; and from 1994 to 2002, he served as Vice President of Finance in the Software Group at IBM. Mr Bryant joined the Company in June 2006.
 
Mr. Christenson has been Executive Vice President and Chief Operating Officer of the Company since April 2006. From February 2005 to April 2006, he served as Executive Vice President of Strategy and Business Development. Mr. Christenson retired in 2004 from Citigroup Global Markets, Inc. after a 23 year career as an investment banker where he was responsible for that company’s Global Private Equity Investment Banking, North American Regional Investment Banking, and Latin American Investment Banking. In addition, he was a member of the Operating Committee of the Global Investment Banking Division and the Investment Committee of SSB Capital Partners. Prior to these roles, he served as head of Citigroup’s Global Technology Investment Banking and Global Media Investment Banking. Mr. Christenson joined the Company in February 2005.
 
Mr. Cirabisi has been acting Chief Financial Officer since May 2006 and Senior Vice President and Corporate Controller of the Company since July 2005. From July 2004 to June 2005, he served as Senior Vice President and


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Chief Accounting Officer; from April 2002 to July 2004, he served as Vice President of Investor Relations; and from May 2000 to April 2002, he was U.S. Controller. Mr. Cirabisi joined the Company in May 2000.
 
Mr. Friedman has been Executive Vice President and Chief Marketing Officer of the Company since April 2005. From September 2001 to April 2005, he provided management and marketing consulting services to technology companies and from December 2000 through September 2001 he was President and CEO of Sheldahl Inc., a provider of interconnect products and flexible circuit board technologies. Mr. Friedman joined the Company in April 2005.
 
Mr. Goodman has been Executive Vice President of Worldwide Human Resources of the Company since July 2005. From July 2002 to July 2005, he served as Senior Vice President of Human Resources. Prior to joining the Company, Mr. Goodman was First Vice President of Global Technology Group Human Resources at Merrill Lynch & Co., Inc. Mr. Goodman joined the Company in July 2002.
 
Mr. Handal has been Executive Vice President and General Counsel of the Company since July 2004 and Corporate Secretary since April 2005. From 1996 to July 2004, Mr. Handal served as Associate General Counsel for the Altria family of companies, which includes Kraft Foods and Philip Morris. Mr. Handal joined the Company in July 2004.
 
Mr. Quinn has been Executive Vice President for Partner Sales since May 2006. From April 2005 to May 2006, he served as Executive Vice President for SMB (Small to Medium-Sized Business) and Consumer; from April 2004 to March 2005, he served as Executive Vice President of Partner Advocacy; from April 2001 to April 2004, he served as an Executive Vice President of Sales for EMEA, Latin America, and the North American Channel business; and from April 1998 to April 2001, he served as an Executive Vice President — Global Information and Administrative Services. Mr. Quinn joined the Company in December 1985.
 
Mr. Gnazzo has been Senior Vice President, Business Practices and Chief Compliance Officer of the Company since January 2005. From February 1993 through January 2005, he was Vice President, Business Practices and Chief Compliance Officer at United Technologies Corporation. Mr. Gnazzo joined the Company in January 2005.
 
Ms. O’Neill has been Senior Vice President and General Manager of CA Technology Services since April 2003. From April 2002 to April 2003, she served as Senior Vice President of Worldwide Pre-Sales and prior thereto served as a Vice President of Pre-Sales Consulting within Europe, the Middle East and Africa. Ms. O’Neill joined the Company in November 1994.
 
Mr. Nugent has been Chief Technology Officer since June 2006 and Senior Vice President and General Manager of our Enterprise Systems Management Business Unit since April 2005. From March 2002 to April 2005, he served as Senior Vice President and Chief Technology Officer of Novell, Inc., and from November 2000 to March 2002, he served as Executive Vice President, Chief Technology Officer and Chief Information Officer of Vectant, Inc., a subsidiary of the Marubeni Corporation, a provider of data and telecommunications services. Mr. Nugent joined the Company in April 2005.
 
Ms. Stravinskas has been Senior Vice President of the Company since October 2003 and Treasurer since May 2001. Ms. Stravinskas joined the Company in February 1986.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is listed on the New York Stock Exchange. The following table sets forth, for the fiscal quarters indicated, the quarterly high and low closing sales prices on the New York Stock Exchange:
 
                                 
    Fiscal Year 2006     Fiscal Year 2005  
    High     Low     High     Low  
 
Fourth Quarter
  $ 29.36     $ 26.75     $ 30.82     $ 26.42  
Third Quarter
  $ 29.45     $ 26.25     $ 31.52     $ 26.03  
Second Quarter
  $ 29.37     $ 26.24     $ 27.67     $ 22.61  
First Quarter
  $ 29.28     $ 26.80     $ 29.17     $ 25.30  
 
On March 31, 2006, the closing price for our common stock on the New York Stock Exchange was $27.21. At March 31, 2006 we had approximately 12,037 stockholders of record.
 
We have paid cash dividends each year since July 1990. For fiscal year 2005, we paid a dividend of $0.08 per share. Beginning in fiscal year 2006 we increased our annual cash dividend to $0.16 per share, which has been paid out in quarterly installments of $0.04 per share as and when declared by the Board of Directors.
 
Purchases of Equity Securities by the Issuer
 
The following table sets forth, for the months indicated, our purchases of common stock in the fourth quarter of fiscal year 2006.
 
                                 
                      Approximate
 
                Total Number
    Dollar Value
 
                of Shares
    of Shares that
 
                Purchased as
    May Yet Be
 
    Total Number
    Average
    Part of Publicly
    Purchased Under
 
    of Shares
    Price Paid
    Announced Plans
    the Plans
 
Period
  Purchased     per Share     or Programs     or Programs  
    (in thousands, except average price paid per share)  
 
January 2006
    2,169     $ 28.64       2,169     $ 171,964  
February 2006
    2,348     $ 27.23       2,348     $ 107,978  
March 2006
    3,593     $ 27.23       3,593     $ 600,000  
                                 
Total
    8,110               8,110          
                                 
 
Our corporate buyback program was originally announced in August 1990 (the 1990 Program) and has been subsequently amended by the Board of Directors from time to time to increase the number of shares of our common stock we have been authorized to repurchase. In April 2005, the Board of Directors authorized the repurchase of up to $400 million in shares of Company stock during fiscal year 2006 (the Fiscal 2006 Program), subject to the share limits imposed under the 1990 Program. Repurchases during fiscal year 2006 through October 24, 2005 were made under the Fiscal 2006 Program. Effective October 25, 2005, the Board of Directors amended the Fiscal 2006 Program to authorize us to spend up to $600 million to repurchase shares of Company stock during fiscal year 2006, representing a $200 million increase in the amount previously authorized for expenditure in fiscal year 2006 for stock repurchases (the amended Fiscal 2006 Program). As part of the approval of the amended Fiscal 2006 Program, the Board of Directors terminated the 1990 Program and resolved that the Board of Directors would henceforth express its authorization to management to repurchase shares of Company stock only in dollars, and not in shares, as had been the case under the 1990 Program.
 
In March 2006, CA announced that its Board of Directors had authorized a $600 million common stock repurchase plan for its fiscal year 2007, beginning April 1, 2006. The plan called for quarterly common stock buybacks of $150 million, which were to be made in the open market or in private transactions.


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On June 26, 2006, the Board of Directors authorized a new $2 billion common stock repurchase plan for fiscal year 2007 which will replace the prior $600 million common stock repurchase plan. Repurchases under the new plan will not be made until after the Company files its Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Until the new plan is implemented, the Company will continue to repurchase shares under the prior program.
 
Item 6.   Selected Financial Data.
 
AS DESCRIBED IN THE EXPLANATORY NOTE AT THE BEGINNING OF THIS EXHIBIT, THE UNAUDITED FINANCIAL INFORMATION SET FORTH BELOW (PARTICULARLY WITH RESPECT TO REVENUE, DEFERRED SUBSCRIPTION VALUE TOTAL EXPENSE, NET INCOME, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY) IS SUBJECT TO CHANGE DEPENDING ON THE FINDINGS OF OUR CURRENT REVIEW OF OPTION GRANT PRACTICES AND THE POTENTIAL RESTATEMENT OF OUR FINANCIAL STATEMENTS IN PRIOR PERIODS. REFER TO THE EXPLANATORY NOTE FOR IMPORTANT CAUTIONARY CONSIDERATIONS.
 
The information set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in this Exhibit.
 
                                         
    Year Ended March 31,  
    2006     2005     2004     2003     2002  
    (in millions, except per share amounts)  
 
STATEMENT OF OPERATIONS DATA
                                       
Revenue
  $  3,776     $  3,560     $  3,320     $  3,057     $  2,910  
Income (loss) from continuing operations(1)
    136       (2 )     (81 )     (340 )     (1,158 )
Basic income (loss) from continuing operations
    0.23       (0.01 )     (0.14 )     (0.60 )     (2.01 )
Diluted income (loss) from continuing operations
    0.23       (0.01 )     (0.14 )     (0.60 )     (2.01 )
Dividends declared per common share
    0.16       0.08       0.08       0.08       0.08  
 
                                         
    March 31,  
    2006     2005     2004     2003     2002  
    (in millions)  
 
BALANCE SHEET AND OTHER DATA
                                       
Cash provided by continuing operating activities
  $ 1,380     $ 1,527     $ 1,279     $ 1,310     $ 1,241  
Working (deficit) capital(2)(3)
    (771 )     112       642       (311 )     50  
Total assets(3)
    10,375       11,282       10,760       11,312       12,399  
Deferred subscription value(4)
    5,487       5,541       4,366       3,959       3,548  
Long-term debt (less current maturities)
    1,810       1,810       2,298       2,298       3,334  
Stockholders’ equity
    4,620       4,942       4,832       4,477       4,682  
 
 
(1) In fiscal year 2006, we incurred after-tax charges of approximately $54 million for restructuring and other costs and an after-tax benefit of approximately $5 million relating to the gain on the divestiture of assets that were contributed during the formation of Ingres Corp. We also incurred an after-tax charge of approximately $18 million for write-offs of in-process research and development costs due to our recent acquisitions. In fiscal year 2005, we incurred an after-tax charge of approximately $144 million related to the shareholder litigation and government investigation settlements, a tax expense charge of $55 million related to the planned repatriation of $500 million in cash under the American Jobs Creation Act of 2004, and an after-tax charge of approximately $17 million for severance and other expenses in connection with a restructuring plan. Refer to “Shareholder Litigation and Government Investigation Settlement,” “Income Taxes,” and “Restructuring Charge” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for additional information.
 
Our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” had the effect of prospectively eliminating the amortization of goodwill and certain other intangible assets beginning on April 1, 2002. Refer to Note 1, “Significant Accounting Policies — Goodwill”, in the Notes to the Unaudited Consolidated


29


 

Financial Statements for additional information. We amortized goodwill and assembled workforce for fiscal year 2002 of $458 million.
 
(2) Current liabilities include deferred subscription revenue (collected) — current of approximately $1.52 billion, $1.41 billion, $1.21 billion, $0.92 billion and $0.58 billion for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002, respectively. Also included in current liabilities is deferred maintenance revenue of approximately $0.25 billion, $0.27 billion, $0.29 billion, $0.32 billion, and $0.46 billion for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002, respectively.
 
(3) Certain prior year balances have been reclassified to conform to the current year’s presentation. Refer to Note 1, “Significant Accounting Policies — Reclassifications”, in the Notes to the Unaudited Consolidated Financial Statements for additional information.
 
(4) See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for details.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
AS DESCRIBED IN THE EXPLANATORY NOTE AT THE BEGINNING OF THIS EXHIBIT, THE UNAUDITED FINANCIAL INFORMATION SET FORTH BELOW (PARTICULARLY WITH RESPECT TO REVENUE, DEFERRED SUBSCRIPTION VALUE TOTAL EXPENSE, NET INCOME, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY AND TRENDS RELATING TO THESE ITEMS) IS SUBJECT TO CHANGE DEPENDING ON THE FINDINGS OF OUR CURRENT REVIEW OF OPTION GRANT PRACTICES AND THE POTENTIAL RESTATEMENT OF OUR FINANCIAL STATEMENTS IN PRIOR PERIODS. REFER TO THE EXPLANATORY NOTE FOR IMPORTANT CAUTIONARY CONSIDERATIONS.
 
Introduction
 
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity, and results of operations.
 
Business Overview
 
We are one of the world’s largest providers of IT management software. Our software and expertise enables customers to better manage their complex IT infrastructures across systems and networks, security and storage solutions.
 
Our technology solutions are comprehensive, integrated, real-time and open. They are not tied to any one platform, but instead make it possible for customers to manage all of the computers, networks and other technologies that comprise their computing environments. In turn, this helps customers better manage the investments they have made in IT rather than having to “rip and replace” them. As a result, customers gain flexibility. They can manage risk, manage cost, increase service and better align their IT investments with the needs of their organization.
 
We pursue a number of high-growth areas with our products, including network and systems management, security and storage. Our solutions are designed for both mainframe and distributed environments, each of which comprise about half of our revenue.
 
The CA Business Model
 
As described in greater detail in Item 1, “Business,” of this Exhibit, we license our software products directly to customers as well as through distributors, resellers, and VARs. We generate revenue from the following sources: license fees — licensing our products on a right-to-use basis; maintenance fees — providing customer technical support and product enhancements; and service fees — providing professional services such as product implementation, consulting, and education services. The timing and amount of fees recognized as revenue during a reporting period are determined individually by license agreement, based on its duration and specific terms.
 
Under our business model, we provide customers with the flexibility to license software under month-to-month licenses or to fix their costs by committing to longer-term agreements. We also permit customers to change their


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software mix as their business and technology needs change, which includes the right to receive software in the future within defined product lines for no additional fee, commonly referred to as unspecified future upgrades. As a result of the right our customers have to receive unspecified future upgrades, as well as maintenance included during the term of the license, we are required under generally accepted accounting principles in the United States of America (GAAP) to recognize revenue from our license agreements evenly on a monthly basis (also known as ratably) over the license term. We believe recognizing license revenue ratably over the term of the license agreement more accurately reflects the earnings process; we also believe that it improves the predictability of our reported revenue streams. Under agreements entered into prior to October 2000 (the prior business model), and as is common practice in the software industry, we did not offer our customers the right to receive unspecified future upgrades. As a result, for most license agreements entered into prior to October 2000, we were required under GAAP to record the present value of the license agreement as revenue at the time the license agreement was signed.
 
Under our business model, the portion of the contract value that has not yet been recognized creates what we refer to as deferred subscription value. Deferred subscription value is recognized as revenue evenly on a monthly basis over the duration of the license agreements. When recognized, this revenue is reported on the “Subscription revenue” line item on our Unaudited Consolidated Statements of Operations. If a customer pays for software prior to the recognition of revenue, the amount deferred is reported as a liability entitled “Deferred subscription revenue (collected)” on our Unaudited Consolidated Balance Sheets.
 
Not all of our active customer contracts have been transitioned to our business model, which has created what we refer to as a “Transition Period,” during which the license agreements under our prior business model come up for renewal. During this Transition Period, as customer license agreements under our prior business model are renewed under our business model, we are building deferred subscription value related to that customer, from which subscription revenue will be amortized in future periods. Total deferred subscription value, and the associated subscription revenue that comes out of it, may increase over time as we continue to renew customer contracts that were executed under the prior business model, transition acquired company contracts to our business model, sell additional products and capacity to existing customers, and enter into new contracts with new customers. The favorable impact on subscription revenue from the conversion of contracts from our old business model to our new business model will decrease over time as the transition is completed. The remaining balance of unbilled installment receivables that were previously recognized as revenue under our prior business model was $0.76 billion and $1.15 billion at March 31, 2006 and March 31, 2005, respectively.
 
While the impact of changing from up-front revenue recognition under our prior business model to our current business model resulted in the postponement of the recognition of amounts that previously would have been recognized earlier under the up-front model, we generally did not change our cost structure.
 
Under both the prior business model and our current business model, customers often pay for the right to use our software products over the term of the associated software license agreement. We refer to these payments as installment payments. While the transition to the current business model has changed the timing of revenue recognition, in most cases it has not changed the timing of how we bill and collect cash from customers. As a result, our cash generated from operations has generally not been affected by the transition to the current business model over the past several years; and we do not expect in the future any significant changes in our cash generated from operations as a result of this transition.
 
Significant Business Events
 
The Government Investigation
 
In fiscal year 2002, the United States Attorney’s Office for the Eastern Division of New York (USAO) and the staff of the Northeast Region of the Securities and Exchange Commission (SEC) commenced an investigation concerning certain of our past accounting practices, including our revenue recognition procedures in periods prior to the adoption of our business model in October 2000.
 
In September 2004, we reached agreements with the USAO and the SEC by entering into a Deferred Prosecution Agreement (DPA) with the USAO and consenting to the entry of a Final Consent Judgment in a parallel proceeding brought by the SEC in the United States District Court for the Eastern District of New York (the Federal Court). The


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Federal Court approved the DPA on September 22, 2004 and entered the Final Consent Judgment on September 28, 2004. The agreements resolved the USAO and SEC investigations into certain of our past accounting practices, including our revenue recognition policies and procedures, and obstruction of their investigations.
 
Under the DPA, the Company has agreed to establish a $225 million fund for purposes of restitution to our current and former stockholders, with $75 million paid within 30 days of the date of approval of the DPA by the Court, $75 million to be paid within one year after the approval date and $75 million to be paid within 18 months after the approval date. The Company has made all three payments as of March 31, 2006. The Company has, among other things, taken the following actions: (1) added three new independent directors to the Board of Directors; (2) established a compliance committee of the Board of Directors by amending the charter of its Audit Committee and renaming it as the Audit and Compliance Committee; (3) appointed a Chief Compliance Officer and began implementation of an enhanced compliance and ethics program; (4) reorganized the Finance and Internal Audit Departments; (5) established an executive disclosure committee chaired by the Company’s chief executive officer; and (6) enhanced the Company’s Hotline (now Helpline) and issued the Company’s “Compliance and Helpline Policy.” We issued a report on our progress under the DPA and Final Consent Judgment in the proxy statement filed with the SEC in July 2005. We will report on further progress under the DPA in our 2006 proxy statement to be filed in or about July 2006.
 
On March 16, 2005, pursuant to the DPA and Final Consent Judgment, the United States District Court issued an order appointing attorney Lee S. Richards III, Esq., of Richards Spears Kibbe & Orbe LLP, to serve as Independent Examiner. The Independent Examiner is reviewing our compliance with the DPA and Final Consent Judgment and issued his six-month report concerning his recommendations regarding best practices on September 15, 2005. On December 15, 2005, March 15, 2006 and June 15, 2006 Mr. Richards issued his first three quarterly reports concerning the Company’s compliance with the DPA. Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for additional information concerning the government investigation.
 
Internal Control Issues and Possible Extension of Independent Examiner’s Term of Appointment Under the DPA
 
As described elsewhere in this Exhibit, the Company is restating its financial results for the third quarter of fiscal year 2006 because it did not properly recognize its sales commission expense for the quarter then ended. In addition, the Company’s outside auditors determined that the Company did not properly calculate its taxes for certain non-routine tax matters in the fourth quarter and had to adjust them. As a result of these errors and other matters, the Company has identified three material weaknesses in its internal control over financial reporting, as described in Item 9A of this Exhibit.
 
Under the DPA, the Company is obligated, among other things, to take certain steps to improve internal controls and to reorganize its Finance Department. If the Company has not substantially implemented these and other required reforms for a period of at least two successive quarters before September 30, 2006, the USAO and the SEC may, in their discretion, extend the term of the Independent Examiner. In his Fourth Report dated June 15, 2006, the Independent Examiner expressed the view that, in light of the internal control issues described in Item 9A, including the fact that the Company has not yet hired a new chief financial officer, he is no longer able to conclude that the Company will be able to meet its obligation under the DPA to have improved internal controls and reorganized the Finance Department for two successive quarters prior to September 30, 2006. Consequently, the Company believes that the term of the Independent Examiner may be extended beyond September 30, 2006. Whether the USAO and the SEC will decide to extend the term or take any other action in connection with the DPA will be made by them in their discretion. The Company is continuing to review these matters to determine what further steps it should take to address the internal control issues referenced above.
 
Acquisitions and Divestitures
 
In March 2006, we acquired the common stock of Wily Technology, Inc. (Wily), a provider of enterprise application management solutions, for a total purchase price of approximately $374 million, or approximately $361 million net of acquired cash and marketable securities. Wily is a provider of enterprise application management software


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solutions that enable companies to manage their web applications and infrastructure. The acquisition of Wily extends our application management offerings.
 
In December 2005, we acquired Control F-1 Corporation (Control F-1) for a total purchase price of approximately $14 million. Control F-1 was a privately held provider of support automation solutions that automatically prevent, detect and repair end-user computer problems before they disrupt critical IT services. CA markets the Control-F1 solutions as stand-alone products and has incorporated them into our portfolio of Business Service Optimization solutions, which help customers reduce costs, improve service levels, and better align IT with the business.
 
In December 2005, we sold our wholly-owned subsidiary MultiGen-Paradigm, Inc. (MultiGen) to Parallax Capital Partners. MultiGen was a provider of real-time, end-to-end 3D solutions for visualizations, simulations and training applications used for both civilian and government purposes. As a result of the sale, we recognized a gain on the disposal of $3 million, net of taxes, which is classified in discontinued operations on the Unaudited Consolidated Statements of Operations.
 
In November 2005, we announced an agreement with Garnett & Helfrich Capital, a private equity firm, to create an independent corporate entity, Ingres Corporation. We divested our Ingres open source database unit into Ingres Corporation, in which Garnett & Helfrich Capital is the majority shareholder. As a result of this transaction, we recorded a non-cash pre-tax gain of approximately $7 million in the third quarter of fiscal year 2006.
 
In October 2005, we completed the acquisition of iLumin Software Services, Inc. (iLumin), a privately held provider of enterprise message management and archiving software, for a total purchase price of approximately $48 million. iLumin’s Assentor product line has been added to our BrightStor solutions.
 
In July 2005, we acquired Niku Corporation (Niku), a provider of information technology management and governance solutions, for a total purchase price of approximately $345 million, or approximately $282 million net of acquired cash and marketable securities. Niku’s primary software product, Clarity IT-MG, is an integrated suite that spans and strengthens the IT governance offering of our Business Service Optimization business unit to the full IT life cycle, from investment selection, to execution and delivery of initiatives, to results assessment.
 
In June 2005, we acquired Concord Communications, Inc. (Concord), a provider of network service management software solutions, for a total purchase price of approximately $359 million, or approximately $283 million net of acquired cash and marketable securities. Concord is a provider of infrastructure software principally in the areas of network health, performance, and fault management. We have made Concord’s eHealth and Spectrum software available both as independent products and as integrated components of our Unicenter product portfolio in our Enterprise Systems Management business unit. In connection with the acquisition, we assumed $86 million in 3% convertible senior notes due 2023. In accordance with the notes’ terms, we redeemed (for cash) the notes in full in July 2005.
 
In November 2004, we completed the acquisition of Netegrity, Inc. (Netegrity), a provider of business security software solutions in the area of access and identity management, for a total purchase price of approximately $455 million, or approximately $358 million net of acquired cash and marketable securities. Netegrity was a provider of business security software, principally in the areas of identity and access management, and we have made Netegrity’s identity and access management solutions available both as independent products and as integrated components of our eTrust Identity and Access Management Suite in our Security Management business unit.
 
In August 2004, we acquired PestPatrol, Inc. (PestPatrol), a privately held provider of anti-spyware and security solutions, for a total purchase price of approximately $40 million. The products acquired in this transaction were integrated into our eTrust Threat Management software product portfolio in our Security Management business unit. This portfolio protects organizations from diverse Internet dangers such as viruses, spam, and inappropriate use of the Web by employees.
 
In March 2004, we sold our approximate 90% interest in ACCPAC International, Inc. (ACCPAC). ACCPAC provided accounting, customer relationship management, human resources, warehouse management, manufacturing, electronic data interchange, and point-of-sale software for small and medium-sized businesses. Our net proceeds totaled $104 million for all of our outstanding equity interests in ACCPAC, including options and change


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of control payments for certain ACCPAC officers and managers. We received approximately $90 million of the net proceeds in fiscal year 2004 and the remainder in fiscal year 2005. As a result of the sale, we realized a gain, net of taxes, of approximately $60 million in fiscal year 2004. In the second quarter of fiscal year 2005, we recorded an adjustment to the gain of $2 million, net of tax, reducing the net gain to $58 million. The sale completed our multi-year effort to exit the business applications market.
 
Performance Indicators
 
Management uses several quantitative performance indicators to assess our financial results and condition. Each provides a measurement of the performance of our business model and how well we are executing our plan.
 
Our subscription-based business model is unique among our competitors in the software industry and particularly during the Transition Period it is difficult to compare our results for many of our performance indicators with those of our competitors. The following is a summary of the principal quantitative performance indicators that management uses to review performance:
 
                                 
                      Percent
 
For the Year ended March 31,   2006     2005     Change     Change  
    (in millions)        
 
Subscription revenue
  $ 2,817     $ 2,544     $ 273       11 %
Total revenue
  $ 3,776     $ 3,560     $ 216       6 %
Subscription revenue as a percent of total revenue
    75 %     72 %     3 %     N/A  
Deferred subscription value
  $ 5,487     $ 5,541     $ (54 )     (1 )%
New deferred subscription value (direct)
  $ 2,610     $ 3,493     $ (883 )     (25 )%
New deferred subscription value (indirect)
  $ 195     $ 144     $ 51       35 %
Weighted average license agreement duration in years (direct)
    3.03       3.10       (.07 )     (2 )%
Cash from continuing operating activities
  $ 1,380     $ 1,527     $ (144 )     (9 )%
Income (loss) from continuing operations
  $ 136     $ (2 )   $ 138       N/A  
 
                                 
                      Percent
 
As of March 31,   2006     2005     Change     Change  
    (in millions)        
 
Total cash, cash equivalents, and marketable securities
  $ 1,865     $ 3,125     $ (1,260 )     (40 )%
Total debt
  $ 1,811     $ 2,636     $ (825 )     (31 )%
 
Analyses of our performance indicators, including general trends, can be found in the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A. The performance indicators discussed below are those that we believe are unique because of our subscription-based business model.
 
Subscription Revenue — Subscription revenue is the ratable revenue recognized in a period from amounts previously recorded as deferred subscription value. If the weighted average life of our license agreements remains constant, an increase in deferred subscription value will result in an increase in subscription revenue.
 
Deferred Subscription Value — Under our business model, the portion of the license contract value that has not yet been earned creates what we refer to as deferred subscription value. As revenue is ratably recognized (evenly on a monthly basis), it is reported as “Subscription Revenue” on our Unaudited Consolidated Statements of Operations, and the deferred subscription value attributable to that contract is correspondingly reduced. When recognized as revenue, the amount is reported on the “Subscription revenue” line item in our Unaudited Consolidated Statements of Operations. If a customer pays for software prior to the recognition of revenue, the amount is reported as a liability entitled “Deferred subscription revenue (collected)” on our Unaudited Consolidated Balance Sheets. Customers do not always pay for software in equal annual installments over the life of a license agreement. The amount collected under a license agreement for the next twelve months but not yet recognized as revenue is reported as a liability entitled “Deferred subscription revenue (collected) — current” on our Unaudited Consolidated Balance Sheets. The amount paid under a license agreement for periods subsequent to the next twelve months, which will be recognized as revenue on a monthly basis only in those future years, is reported as a liability entitled “Deferred subscription revenue (collected) — noncurrent” on our Unaudited Consolidated Balance Sheets. The


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increase or decrease in current payments attributable to periods subsequent to the next twelve months is reported as an operating activity entitled “Deferred subscription revenue (collected) — noncurrent” in our Unaudited Consolidated Statements of Cash Flows.
 
Payments received in the current period that are attributable to later years of a license agreement have a positive impact in the current period on billings and cash provided by continuing operating activities. Accordingly, to the extent such payments are attributable to the later years of a license agreement, the license would provide a correspondingly reduced contribution to billings and cash from operating activities during the license’s later years.
 
New Deferred Subscription Value — New deferred subscription value represents the total incremental value (contract value) of software licenses sold in a period, which will be accounted for under our subscription model of revenue recognition. In the second quarter of fiscal year 2005, we began offering more flexible license terms to our channel partners’ end users, necessitating ratable recognition of revenue for the majority of our indirect business. Prior to July 1, 2004, such channel license revenue had been recorded up-front on a sell-through basis (when a distributor, reseller, or VAR sells the software product to its customers) and reported on the “Software fees and other” line item on the Unaudited Consolidated Statements of Operations. New deferred subscription value excludes the value associated with single-year maintenance-only license agreements, license-only indirect sales, and professional services arrangements and does not include that portion of bundled maintenance or unamortized discounts that are converted into subscription revenue upon renewal of prior business model contracts.
 
New deferred subscription value is what we expect to collect over time from our customers based upon contractual license agreements entered into during a reporting period. This amount is recognized as subscription revenue ratably over the applicable software license term. The license agreements that contribute to new deferred subscription value represent binding payment commitments by customers over periods generally up to three years. Our new deferred subscription value typically increases in each consecutive fiscal quarter, with the fourth quarter being the strongest. However, since new deferred subscription value is impacted by the volume and dollar amount of contracts coming up for renewal and the amount of early contract renewals, the change in new deferred subscription value, relative to previous periods, does not necessarily correlate to the change in billings or cash receipts, relative to previous periods. The contribution to current period revenue from new deferred subscription value from any single license agreement is relatively small, since revenue is recognized ratably over the applicable license agreement term.
 
Weighted Average License Agreement Duration in Years — The weighted average license agreement duration in years reflects the duration of all software licenses executed during a period, weighted to reflect the contract value of each individual software license. The weighted average duration is impacted by the volume and dollar amount of contracts coming up for renewal, and therefore may change from period to period and will not necessarily correlate to the prior year periods. The annual weighted average duration of 3.03 and 3.10 years for the fiscal years 2006 and 2005, respectively, were derived from the following quarterly new deferred subscription revenue amounts and quarterly weighted average durations in years from our direct business:
 
                                 
    Fiscal Year 2006     Fiscal Year 2005  
    New Deferred
    Weighted
    New Deferred
    Weighted
 
    Subscription
    Average
    Subscription
    Average
 
    Value from
    Duration
    Value from
    Duration in
 
    Direct Sales     in Years     Direct Sales     Years  
    (in millions)  
 
Fourth Quarter
  $ 969       2.89     $ 1,469       3.40  
Third Quarter
    730       3.46       845       2.95  
Second Quarter
    575       2.92       649       2.90  
First Quarter
    336       2.70       530       2.75  
                                 
    $ 2,610       3.03     $ 3,493       3.10  
                                 
 
We believe license agreement durations averaging approximately three years increase the value customers receive from our software licenses by giving customers the flexibility to vary their software mix as their needs change. We also believe this flexibility improves our customer relationships and encourages greater accountability by us to each of our customers. The increase in the weighted average durations for contracts signed in the fourth quarter of fiscal


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year 2005 and the third quarter of fiscal year 2006 is due to several individual longer-term contracts signed during those quarters (e.g., four to five years).
 
Results of Operations
 
Revenue
 
The following table presents the percentage of total revenue and the percentage of period-over-period dollar change for the revenue line items in our Unaudited Consolidated Statements of Operations for the fiscal years ended March 31, 2006, 2005, and 2004. These comparisons of financial results are not necessarily indicative of future results.
 
                                                 
    Fiscal Year 2006     Fiscal Year 2005  
          Percentage
          Percentage
 
                of
                of
 
    Percentage of
    Dollar
    Percentage of
    Dollar
 
    Total
    Change     Total
    Change  
    Revenue     2006/
    Revenue     2005/
 
    2006     2005     2005     2005     2004     2004  
 
Revenue:
                                               
Subscription revenue
    75 %     72 %     11 %     72 %     63 %     21 %
Maintenance
    11 %     12 %     (3 )%     12 %     16 %     (15 )%
Software fees and other
    4 %     7 %     (36 )%     7 %     10 %     (23 )%
Financing fees
    1 %     2 %     (42 )%     2 %     4 %     (43 )%
Professional services
    9 %     7 %     32 %     7 %     7 %     4 %
Total revenue
    100 %     100 %     6 %     100 %     100 %     7 %
 
Total Revenue
 
Total revenue for the fiscal year ended March 31, 2006 increased $216 million from the fiscal year ended March 31, 2005, to $3.78 billion. This increase was partially a result of the transition to our business model, which contributed additional subscription revenue from the prior fiscal year as we continue to add incremental subscription revenue for contracts that are renewals of prior business model contracts for which revenue was previously recognized up-front for multiple year licenses under our old business model. The increase in total revenue was also partially attributable to the sales of Concord, Niku, iLumin, and Wily products, which contributed approximately $125 million of separately identifiable revenue. It is expected that software fees and other revenue and maintenance revenue attributable to acquisitions will decline as these acquired products transition to our business model and revenue attributable to these acquired products is reported as subscription revenue. In addition, revenue for fiscal year 2006 was negatively impacted by fluctuations in foreign currency exchange rates by approximately $17 million compared with fiscal year 2005. Total revenue in fiscal year 2006 as compared with fiscal year 2005 was negatively impacted by decreases in maintenance and financing fees resulting from how these items are accounted for under our business model. The recognition of maintenance and financing fees under our business model is discussed further under “Subscription Revenue” in this MD&A. Our revenue was further negatively impacted by the fact that since the beginning of the second quarter of fiscal year 2005, revenue from certain contracts in our channel business has been, and continues to be, recorded as new deferred subscription value, which will be ratably recognized into subscription revenue in future periods compared to prior periods when the majority of such revenue was recognized on an up-front basis.
 
Total revenue for the fiscal year ended March 31, 2005 increased $240 million from the fiscal year ended March 31, 2004, to $3.56 billion. This increase was partially a result of the transition to our business model, which contributed additional subscription revenue from the prior fiscal year. The increase in total revenue was also partially attributable to the sales of Netegrity products which contributed approximately $32 million of revenue in the second half of fiscal year 2005. In addition, as our international contracts are denominated in local currencies, the strengthening of both the euro and the British pound, as well as certain other currencies, against the U.S. dollar increased our revenue by approximately $103 million.


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Subscription Revenue
 
Subscription revenue represents the portion of revenue ratably recognized on software license agreements entered into under our business model. Some of the licenses recorded between October 2000, when our business model was implemented, and the end of fiscal year 2006 continued to contribute to subscription revenue on a monthly, ratable basis. As a result, subscription revenue for fiscal year 2006 includes ratably recognized revenue from contracts recorded in fiscal year 2006, as well as contracts recorded between October 2000 and the end of fiscal year 2005, depending on contract length.
 
Subscription revenue for the fiscal year ended March 31, 2006 increased $273 million from fiscal year 2005, to $2.82 billion. This increase was predominantly due to a $118 million increase in ratably recognized revenue from the indirect business plus the increase in subscription revenue as a result of renewals of contracts whose revenue was previously recognized on an up-front basis or as part of maintenance fees under our prior business model.
 
For the fiscal years ended March 31, 2006 and 2005, we added new deferred subscription value related to our direct business of $2.61 billion and $3.49 billion, respectively. The $0.88 billion decrease in fiscal year 2006 as compared to fiscal year 2005 in new deferred subscription value was primarily due to the decrease in early contract renewals resulting from the transition away from a total bookings based compensation structure. In addition, CA signed contract extensions with two customers in the fourth quarter of fiscal year 2005 that added approximately $390 million in aggregate to new deferred subscription value in the period. We also recorded $195 million of new deferred subscription value for the fiscal year ended March 31, 2006 related to our indirect business, which increased 35% from the $144 million added in the prior fiscal year.
 
Licenses executed under our business model for our direct business had weighted average durations of 3.03 years and 3.10 years, for the fiscal years ended March 31, 2006 and 2005, respectively. Annualized new deferred subscription value represents the total value of all new software license agreements entered into during a period divided by the weighted average life of all such license agreements recorded during the same period. The annualized new deferred subscription value for the subscriptions booked in the direct business during the fiscal year 2006 decreased approximately $266 million, or 24% from the comparable prior fiscal year to approximately $861 million.
 
Subscription revenue for the fiscal year ended March 31, 2005 increased $443 million from fiscal year 2004, to $2.54 billion. For the fiscal years ended March 31, 2005 and 2004, we added new deferred subscription value related to our direct business of $3.49 billion and $2.29 billion, respectively. Licenses executed under our business model in the years ended March 31, 2005 and 2004 had weighted average durations of 3.1 and 2.8 years, respectively. Annualized deferred subscription value related to our direct business increased approximately $301 million, or 36%, for the fiscal year ended March 31, 2005 over the comparable prior fiscal year to $1.13 billion. In addition, we recorded $144 million of new deferred subscription value for the fiscal year ended March 31, 2005 related to our indirect business. Subscription revenue was further increased as a result of renewals of contracts whose revenue was previously recognized on an up-front basis or as part of maintenance fees under our prior business model.
 
Under the prior business model, maintenance revenue was separately identified and was reported on the “Maintenance” line item on the Unaudited Consolidated Statements of Operations. Under our business model, maintenance that is bundled with product sales is not separately identified in our customers’ license agreements and therefore is included within the “Subscription revenue” line item on the Unaudited Consolidated Statements of Operations. Under the prior business model, financing revenue was also separately identified on the Unaudited Consolidated Statements of Operations. Under our business model, financing fees are no longer applicable and the entire contract value is now recognized as subscription revenue over the term of the contract. The quantification of the impact that each of these factors had on the increase in subscription revenue is not determinable.
 
Maintenance
 
Maintenance revenue for the fiscal year ended March 31, 2006 decreased $11 million, or 3%, from the comparable prior year to $430 million. This decrease in maintenance revenue is a result of our transition to, and increased number of license agreements under, our business model, where maintenance revenue is bundled along with license revenue, and is reported on the “Subscription revenue” line item on the Unaudited Consolidated Statements of Operations. The combined maintenance and license revenue on these types of license agreements is recognized


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ratably on a monthly basis over the term of the agreement under our business model. We cannot quantify the impact that our transition to the new business model had on maintenance revenue since maintenance bundled with software licenses under our business model is not separately identifiable. Maintenance revenue from our indirect business declined $5 million from the comparable prior period to $54 million. Partially offsetting these declines was an increase of $49 million associated with acquisitions completed prior to March 31, 2006.
 
Maintenance revenue for the fiscal year ended March 31, 2005 decreased $79 million, or 15% from the prior year predominantly due to the transition of maintenance-only licenses to subscription licenses, partially offset by a $36 million increase in maintenance revenue from the indirect business from the comparable prior period to $59 million.
 
Software Fees and Other
 
Software fees and other revenue consist of revenue related to distribution and OEM channel partners (sometimes referred to as our “indirect” or “channel” revenue) that has been recorded on an up-front sell-through basis, revenue associated with acquisitions prior to the transition to our business model, revenue from joint ventures, royalty revenues and other revenue. Revenue related to acquisitions is initially recorded on the acquired company’s systems generally under a perpetual or up-front model, and is typically converted to our ratable model within the first fiscal year after the acquisition. As these contracts are renewed under our business model, revenue is recognized ratably on a monthly basis over the term of the agreement.
 
For the fiscal year ended March 31, 2006, software fees and other revenue decreased $91 million from the fiscal year ended March 31, 2005, to $163 million. This reduction is due to a $53 million decrease in prior business model revenue, as ratable revenue from new business model contracts was recorded as subscription revenue on the Unaudited Consolidated Statements of Operations. Additionally, we experienced a decrease in indirect revenue associated with the transition to our subscription model in July 2004 which represented a $50 million reduction from the prior year as more revenue was deferred as these indirect contracts were renewed. These decreases were offset by other revenue increases of approximately $12 million.
 
For the fiscal year ended March 31, 2005, software fees and other revenue decreased $77 million from the fiscal year ended March 31, 2004, to $254 million. This reduction is due to the decrease in indirect revenue associated with the transition to our subscription model in July 2004 which represented a $128 million reduction from the prior year as more revenues were deferred as the contracts were renewed. These decreases were partially offset by approximately $21 million of license revenue associated with the sale of Netegrity products, an approximate $10 million benefit associated with the resolution of a prior business model contract dispute in the second quarter of fiscal year 2005 and approximately $20 million due to other activities.
 
Financing Fees
 
Financing fees result from the initial discounting to present value of product sales with extended payment terms under the prior business model, which required up-front revenue recognition. This discount initially reduced the related installment accounts receivable and is referred to as “Unamortized discounts.” The related unamortized discount is amortized over the life of the applicable license agreement and is reported as financing fees. Under our business model, additional unamortized discounts are no longer recorded, since we no longer recognize revenue on an up-front basis for sales of products with extended payment terms. As expected, for fiscal years 2006 and 2005, financing fees continued to decline, reflecting a decrease of $32 million and $57 million, respectively, from the prior fiscal years to $45 million and $77 million, respectively. The decrease in financing fee revenue for both years is attributable to the discontinuance of offering license agreements under the prior business model and is expected to decline to zero over the next several years.
 
Professional Services
 
Professional services revenue for fiscal year 2006 increased $77 million from fiscal year 2005 to $321 million. The increase was primarily attributable to growth in professional service engagements relating to acquired companies of $23 million, growth in security software which utilize our Access Control and Identity Management solutions, growth in our IT Service and Asset Management engagements and project and portfolio management services.


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Professional services revenue for fiscal year 2005 increased $10 million from fiscal year 2004 to $244 million. The increase was primarily attributable to growth in security software engagements, which utilize Access Control and Identity Management solutions, as well as growth in IT Service and Asset Management solutions. The increase was also partially attributable to approximately $4 million of services revenue associated with the sale of Netegrity products. This increase in services revenue was limited due to an increase in services sold in combination with related software products of approximately $14 million, which requires that such services revenue be recognized ratably over the life of the related software contract period.
 
Total Revenue by Geography
 
The following table presents the amount of revenue earned from sales to unaffiliated customers in the United States and international regions and corresponding percentage changes for the fiscal years ended March 31, 2006, 2005 and 2004. These comparisons of financial results are not necessarily indicative of future results.
 
                                                                                 
    Fiscal Year 2006     Fiscal Year 2005  
    2006     %     2005     %     Change     2005     %     2004     %     Change  
    (in millions)  
 
United States
  $ 1,992       53     $ 1,838       52       8 %   $ 1,838       52     $ 1,755       53       5 %
International
    1,784       47       1,722       48       4 %     1,722       48       1,565       47       10 %
                                                                                 
    $ 3,776       100     $ 3,560       100       6 %   $ 3,560       100     $ 3,320       100       7 %
 
International revenue increased $62 million, or 4%, in fiscal year 2006 as compared with fiscal year 2005, primarily due to increased new deferred subscription value in prior periods associated with our European business partially offset by an unfavorable foreign exchange impact of approximately $17 million. The increase in revenue from the United States was primarily attributable to sales of products related to companies acquired during the fiscal year 2006, an increase in new deferred subscription value in prior periods as well as an increase in professional services revenue, partially offset by decreases in revenue from maintenance, finance fees and software fees and other revenues.
 
International revenue increased $157 million, or 10%, in fiscal year 2005 as compared with fiscal year 2004. The increase in international revenue was primarily attributable to a positive impact to revenue from fluctuations in foreign currency exchange rates of approximately $103 million for fiscal year 2005 over fiscal year 2004. The increase in foreign currency exchange is primarily associated with the strengthening of both the euro and the British pound versus the U.S. dollar. The increase was also a result of an increase in contract bookings in prior periods associated with our European business. The increase in revenue from the United States was primarily attributable to an increase in contract booking in prior periods as well as an increase in professional services revenue. The increase was partially offset by decreases in revenue from maintenance, finance fees and software fees and other revenues.
 
Price changes and inflation did not have a material impact in fiscal years 2006, 2005 or 2004.
 
Expenses
 
The following table presents expenses as a percentage of total revenue and the percentage of period-over-period dollar change for the expense line items in our Unaudited Consolidated Statements of Operations for the fiscal years ended March 31, 2006, 2005, and 2004. These comparisons of financial results are not necessarily indicative of future results.
 
                                                 
    Fiscal Year 2006     Fiscal Year 2005  
          Percentage
          Percentage
 
                of
                of
 
    Percentage of
    Dollar
    Percentage of
    Dollar
 
    Total
    Change     Total
    Change  
    Revenue     2006/
    Revenue     2005/
 
    2006     2005     2005     2005     2004     2004  
 
Operating expenses:
                                               
Amortization of capitalized software costs
    12 %     13 %           13 %     14 %     (3 )%
Cost of professional services
    7 %     6 %     19 %     6 %     7 %     2 %


39


 

                                                 
    Fiscal Year 2006     Fiscal Year 2005  
          Percentage
          Percentage
 
                of
                of
 
    Percentage of
    Dollar
    Percentage of
    Dollar
 
    Total
    Change     Total
    Change  
    Revenue     2006/
    Revenue     2005/
 
    2006     2005     2005     2005     2004     2004  
 
Selling, general, and administrative
    42 %     38 %     18 %     38 %     39 %     4 %
Product development and enhancements
    18 %     20 %     (1 )%     20 %     21 %     2 %
Commissions, royalties and bonuses
    10 %     10 %     14 %     10 %     8 %     27 %
Depreciation and amortization of other intangible assets
    4 %     4 %     3 %     4 %     4 %     (3 )%
Other gains/expenses, net
                            2 %     N/A  
Restructuring and other
    2 %     1 %     214 %     1 %           N/A  
Charge for in-process research and development costs
                                   
Shareholder litigation and government investigation settlements
          7 %     %     7 %     5 %     39 %
Total operating expenses
    96 %     97 %     5 %     97 %     99 %     5 %
Interest expense, net
    1 %     3 %     (61 )%     3 %     4 %     (9 )%
 
 
Note — Amounts may not add to their respective totals due to rounding.
 
Amortization of Capitalized Software Costs
 
Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs are related to new products and significant enhancements to existing software products that have reached the technological feasibility stage. Amortization of capitalized software costs for fiscal years 2006 and 2005 increased $2 million and decreased $16 million, respectively, from the prior fiscal years to $449 million and $447 million, respectively. The increase in 2006 was predominately due to the Company’s current year acquisitions. The decrease in 2005 was primarily due to certain purchased software assets becoming fully amortized in 2005. We recorded amortization of purchased software products for the fiscal years ended March 31, 2006, 2005, and 2004 of $401 million, $406 million, and $423 million, respectively. We recorded amortization of internally generated capitalized software development costs for the fiscal years ended March 31, 2006, 2005, and 2004 of $48 million, $41 million, and $40 million, respectively.
 
Cost of Professional Services
 
Cost of professional services consists primarily of the personnel-related costs associated with providing professional services and training to customers. Cost of professional services for fiscal year 2006 increased $43 million from fiscal year 2005 to $272 million, mostly due to increased sales of professional services. The improvement in professional services gross margin from 6% in fiscal year 2005 to 15% in fiscal year 2006 is attributable to a more effective utilization of professional staff and increased professional services revenue.
 
Cost of professional services for fiscal year 2005 increased $5 million from fiscal year 2004 to $229 million mostly due to increased revenue volume, partially offset by approximately $12 million of costs required to be deferred because they were sold in combination with related software products, which requires that the total estimated cost of such services be deferred and recognized ratably over the life of the related software contract period.
 
Selling, General, and Administrative (SG&A)
 
SG&A expenses for fiscal year 2006 increased $247 million from fiscal year 2005 to $1.59 billion. The increase was primarily attributable to employee and other costs associated with the Concord, Niku, iLumin, and Wily

40


 

acquisitions of approximately $98 million, increased travel, training and relocation costs of approximately $39 million, increased consulting costs of approximately $55 million related to our ERP implementation, legal fees, Sarbanes-Oxley compliance programs, and increased marketing and promotion costs of approximately $35 million mostly due to our new branding campaign and channel promotions. Partly offsetting these increases was a reduction of $15 million associated with the Company’s decision in the fourth quarter of fiscal year 2006 to forego its discretionary contribution to the Company-sponsored 401(k) plan. Through the third quarter of fiscal year 2006, the Company had accrued $12 million, all of which was reversed in the fourth quarter of fiscal year 2006, resulting in a $12 million reduction to SG&A expense in the fourth quarter of fiscal year 2006. SG&A expenses for the fiscal years ended March 31, 2006 and 2005 included approximately $62 million and $53 million of stock-based compensation expense, respectively. SG&A expenses for the fiscal years ended March 31, 2006 and 2005 included credits to the provision for doubtful accounts of approximately $18 million and $25 million, respectively. The credit in the provision for doubtful accounts is a result of the reduction in the prior business model accounts receivable. Under our business model, amounts due from customers are offset by related deferred subscription revenue, resulting in little or no carrying value on the balance sheet. In addition, under our business model, customer payments are often received in advance of revenue recognition, which results in a reduced net credit exposure. Each of these items reduces the need to provide for estimated bad debts.
 
SG&A expenses for fiscal year 2005 increased $46 million from fiscal year 2004 to $1.35 billion. The increase was primarily attributable to an increase in personnel related costs. SG&A expenses for the fiscal years ended March 31, 2005 and 2004 included approximately $53 million and $59 million, respectively, of stock-based compensation expense. In addition, in fiscal year 2005 we recorded a credit of approximately $25 million against the provision of doubtful accounts, which is lower than the credit of $53 million we recorded in fiscal year 2004. SG&A for the fiscal years ended March 31, 2005 and 2004 also included approximately $24 million and $30 million, respectively, of legal expenses related to the government investigation and, for the fiscal year ended March 31, 2005, included $31 million for consulting and other fees associated with our Sarbanes-Oxley compliance program. Further, in the fourth quarter of fiscal year 2005, we realized a gain of approximately $8 million on the sale of an investment that was included in SG&A.
 
Product Development and Enhancements
 
For fiscal year 2006, product development and enhancement expenditures, which include product support, decreased $8 million compared to fiscal year 2005 to $696 million. Product development and enhancement expenditures were approximately 18% and 20% of total revenue for fiscal years ended March 31, 2006 and 2005, respectively. During fiscal year 2006, we continued to focus on and invest in product development and enhancements for emerging technologies such as wireless, Web services and on-demand computing, as well as a broadening of our enterprise product offerings.
 
Product development and enhancement expenditures for fiscal year 2005 increased $11 million from fiscal year 2004 to $704 million. Product development and enhancement expenditures were approximately 20% and 21% of total revenue for fiscal years ended March 31, 2005 and 2004, respectively.
 
Commissions, Royalties and Bonuses
 
Commissions, royalties and bonuses for fiscal year 2006 increased $48 million from fiscal year 2005 to $387 million. Sales commission expense increased approximately $31 million over the prior year, and was approximately $70 million more than the Company had anticipated at the outset of the fourth quarter of fiscal year 2006. The increase was primarily due to a new sales commission plan for fiscal year 2006 that did not appropriately align commission payments with our overall performance. The impact of the higher sales commission expense was partially offset by lower bonus expenses in fiscal year 2006 as compared to fiscal year 2005 of approximately $8 million, primarily due to the reductions in our variable compensation programs, including management bonuses. Through the third quarter of fiscal year 2006, the Company had accrued approximately $26 million in annual bonus expense, of which approximately $10 million was reversed in the fourth quarter of 2006. We are restating our third quarter results and have identified a material weakness in financial controls as they pertained to the fiscal year 2006 commissions plan. Refer to Part 1, Item 9A, “Controls and Procedures” for additional information concerning the evaluation of the Company’s internal control processes over the recognition of commission expense. Royalties also


41


 

increased over the prior year by approximately $25 million primarily due to an increased level of royalties associated with recent acquisitions, royalties associated with the newly formed Ingres Corporation as well as higher sales of certain royalty bearing channel products.
 
Commissions, royalties and bonuses for fiscal year 2005 increased $72 million from fiscal year 2004 to $339 million. The increase was primarily due to the increase in new deferred subscription value recorded in fiscal year 2005, on which sales commissions were based, as compared with fiscal year 2004.
 
Depreciation and Amortization of Other Intangible Assets
 
Depreciation and amortization of other intangible assets for fiscal year 2006 increased $4 million from fiscal year 2005 to $134 million. The increase in depreciation and amortization of other intangible assets was a result of certain intangible assets acquired during the year, resulting from recent acquisitions.
 
Depreciation and amortization of other intangible assets for fiscal year 2005 decreased $4 million from fiscal year 2004 to $130 million. The decrease in depreciation and amortization of other intangible assets was a result of certain intangible assets from past acquisitions becoming fully amortized.
 
Other (Gains)/Expenses, Net
 
Gains and losses attributable to divestitures of fixed assets, certain foreign currency exchange rate fluctuations, and certain other infrequent events have been included in the “Other (gains)/expenses, net” line item on the Unaudited Consolidated Statements of Operations. The components of “Other (gains)/expenses, net” are as follows:
 
                         
    Year Ended March 31,  
    2006     2005     2004  
    (in millions)  
 
Gains attributable to divestitures of fixed assets
  $ (7 )   $     $ (19 )
Fluctuations in foreign currency exchange rates
    (9 )     8       41  
(Gains) expenses attributable to legal settlements
    1       (13 )     26  
Impairment of capitalized software
                4  
                         
Total
  $ (15 )   $ (5 )   $ 52  
                         
 
Restructuring and Other
 
In the second quarter of fiscal year 2006, we announced a restructuring plan designed to more closely align our investments with strategic growth opportunities, including a workforce reduction of approximately 5% or 800 positions worldwide. The plan is expected to yield about $75 million in savings on an annualized basis, once the reductions are fully implemented. We anticipate the total restructuring plan will cost up to $85 million. As of March 31, 2006, we have incurred approximately $66 million of expenses under the plan of which $45 million of these expenses remain unpaid at March 31, 2006. The remaining liability balance is included in “Accrued expenses and other current liabilities” on the Unaudited Consolidated Balance Sheets. Final payment of these amounts is dependent upon settlement with the works councils in certain international locations and our ability to negotiate lease terminations.
 
During the fiscal year ended March 31, 2006, we incurred approximately $15 million in connection with certain DPA related costs and the termination of a non-core application development professional services project (see also Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements) and other expenses. In addition, as part of its restructuring initiatives and associated review of the benefits of owning versus leasing certain properties, the Company also entered into three sale/leaseback transactions during the second half of fiscal year 2006. Two of these transactions resulted in a loss totaling approximately $7 million which was recorded under “Restructuring and other” in the Unaudited Consolidated Statements of Operations. The third sale/leaseback transaction resulted in a gain of approximately $5 million which is being recognized ratably as a reduction to rent expense over the life of the lease term.


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In the second quarter of fiscal year 2005, we announced a restructuring plan that was designed to more closely align our investments with strategic growth opportunities. The restructuring plan included a workforce reduction of approximately 5% or 750 positions worldwide, slightly lower than our original estimate of 800 positions. As of March 31, 2005, the Company had made all payments under the plan.
 
Shareholder Litigation and Government Investigation Settlement
 
In prior fiscal years, a number of stockholder class action lawsuits were initiated that alleged, among other things, that the Company made misleading statements of material fact or omitted to state material facts necessary in order to make the statements, in light of the circumstances under which they were made, not misleading in connection with the Company’s financial performance. Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for additional information concerning the shareholder litigation.
 
In August 2003, we announced the settlement of all outstanding litigation related to these actions. Under the settlement, we agreed to issue a total of up to 5.7 million shares of common stock to the shareholders represented in the three class action lawsuits, including payment of attorneys’ fees. In January 2004, approximately 1.6 million settlement shares were issued along with approximately $3.3 million to the plaintiffs’ attorneys for attorney fees and related expenses. In March 2004, approximately 0.2 million settlement shares were issued to participants and beneficiaries of the CASH Plan. On October 8, 2004, the Federal Court signed an order approving the distribution of the remaining 3.8 million settlement shares, less administrative expenses. All the remaining shareholder litigation settlement shares were issued in December 2004. Of the 3.8 million settlement shares, approximately 51,000 were used for the payment of administrative expenses in connection with the settlement, approximately 76,000 were liquidated for cash distributions to class members entitled to receive a cash distribution, and the remaining settlement shares were distributed to class members entitled to receive a distribution of shares.
 
The final shareholder litigation settlement value of approximately $174 million was calculated using the New York Stock Exchange (NYSE) closing price of our common stock on December 14, 2004, the date the settlement shares were issued, and also included certain administrative costs associated with the settlement. An initial estimate for the value of the shareholder litigation settlement was established on August 22, 2003. The chart below summarizes the NYSE closing price of our common stock and the estimated value of the shareholder litigation settlement since the initial estimate was established.
 
                 
        Shareholder
    NYSE Closing
  Litigation Settlement
    Stock Price   Estimated Value
        (in millions)
 
December 14, 2004
  $ 31.03     $ 174  
September 30, 2004
    26.30       156  
June 30, 2004
    28.06       163  
March 31, 2004
    26.86       158  
December 31, 2003
    27.34       158  
September 30, 2003
    26.11       150  
August 22, 2003
    25.00       144  
 
The shareholder litigation settlement expense for fiscal year 2005 of $16 million was a result of the increase in our stock price since March 31, 2004. The aggregate shareholder litigation settlement expense recorded was $174 million, including $158 million in fiscal year 2004. Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for additional information.
 
In September 2004, we reached agreements with the USAO and the SEC in connection with their investigations of improper recognition of revenue and related reporting practices during the period January 1, 1998 through September 30, 2000, and the actions of certain former employees to impede the investigations. Under the DPA, we agreed, among other things, to establish a restitution fund of $225 million to compensate present and former Company shareholders for losses caused by the misconduct of certain former Company executives. In connection with the DPA, we recorded a $10 million charge in the fourth quarter of fiscal year 2004 and $218 million in the second quarter of fiscal year 2005 associated with the establishment of the shareholder restitution fund and related


43


 

administrative fees. The first payment of $75 million was made during the third quarter of fiscal year 2005. The second payment of $75 million was made in the second quarter of fiscal year 2006 and the final payment of $75 million was made in the fourth quarter of fiscal year 2006. Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for additional information.
 
Interest Expense, Net
 
Interest expense, net for fiscal year 2006 decreased $65 million as compared to fiscal year 2005 to $41 million. The change was primarily due to a decrease in average debt outstanding which resulted in a $39 million decrease in interest expense, and a decrease in the average interest rate on our outstanding debt, which resulted in a $20 million decrease in interest expense. The decrease was also due to an increase in our average cash balance and an increase in interest rates on the cash balance during the fiscal year ended 2006 as compared to the fiscal year ended 2005, which resulted in an increase in interest income of approximately $6 million. Refer to the “Liquidity and Capital Resources” section of this MD&A and Note 6, “Debt”, in the Notes to the Unaudited Consolidated Financial Statements, for additional information.
 
Interest expense, net for fiscal year 2005 decreased $11 million as compared to fiscal year 2004 to $106 million. The decrease was primarily due to an increase in our average cash balance during the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004, which resulted in an increase in interest income of approximately $28 million. The decrease in interest expense was partially reduced by additional interest expense of $8 million incurred as a result of the issuance of the 2005 Senior Notes and an increase in the weighted average interest rate, which resulted in a $9 million increase in interest expense.
 
Operating Margins
 
Fiscal year 2006 pretax operating income from continuing operations was $113 million as compared to $2 million in fiscal year 2005. This improvement relates primarily to revenue growth as a result of our acquisitions, and $234 million in shareholder litigation and government investigation costs in fiscal year 2005 that did not recur in fiscal year 2006, partially offset by higher restructuring costs and higher selling, general and administrative costs and commission expenses incurred in fiscal year 2006 compared to fiscal year 2005.
 
Income Taxes
 
Our effective tax rate from continuing operations was approximately (20%), 200%, and 17% for fiscal years 2006, 2005, and 2004, respectively. Refer to Note 8, “Income Taxes”, in the Notes to the Unaudited Consolidated Financial Statements for additional information.
 
The income tax benefit recorded for the fiscal year ended March 31, 2006 includes benefits of approximately $51 million arising from the recognition of certain foreign tax credits, $18 million arising from international stock based compensation deductions and $66 million arising from foreign export benefits and other international tax rate benefits. Partially offsetting these benefits was a charge of approximately $60 million related to additional tax reserves.
 
During the fourth quarter of fiscal year 2006, we repatriated approximately $584 million from foreign subsidiaries. Total taxes related to the repatriation were approximately $55 million. The repatriation was initially planned in fiscal year 2005 in response to the favorable tax benefits afforded by the American Jobs Creation Act of 2004 (AJCA), which introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided that certain criteria were met. During fiscal year 2005, we recorded an estimate of this tax charge of $55 million based on an estimated repatriation amount up to $500 million. In the first quarter of fiscal year 2006, we recorded a benefit of approximately $36 million reflecting the Department of Treasury and Internal Revenue Service (IRS) Notice 2005-38 issued on May 10, 2005. In the fourth quarter of fiscal year 2006, the Company finalized its estimates of tax liabilities and determined that an adjustment was necessary and, accordingly, recorded an additional tax charge in the amount of $36 million. As a result of this complex tax matter, the Company has identified a material weakness in its internal controls over documenting and communicating tax planning strategies. See Item 9A, “Controls and Procedures” for additional information.


44


 

The income tax expense for the fiscal year ended March 31, 2005 includes a charge of $55 million reflecting the Company’s original estimated cost of repatriating approximately $500 million under the AJCA which was partially offset by a $26 million tax benefit attributable to a refund claim originally made for additional tax benefits associated with prior fiscal years. We received a letter from the IRS approving the claim for this refund in September 2004.
 
Selected Quarterly Information
 
Quarterly Restatement for Commissions Expense
 
In May 2006 the Company announced that it would restate its earnings for the third quarter of fiscal year 2006, because of material errors in the Company’s estimate of commission expense for the three and nine month periods ended December 31, 2005. The Company’s fiscal year 2006 sales commission plan, which was new for 2006, was designed to compensate individuals for increases in sales of new products as well as billings to customers. The 2006 plan was complex and contained provisions based on cumulative performance which increased the difficulty of estimating commission expense. In January, 2006, sales and finance management reached an understanding that certain actions would be taken based on the discretion built into the 2006 plan to reduce amounts otherwise expected to be paid to sales employees pursuant to the plan. However, sales and finance management did not document their understanding regarding the planned changes and did not follow up to ensure the changes were implemented.
 
Accordingly, the Company has determined that approximately $31 million, or $0.03 per share, of additional commission cost should have been recognized in the third quarter of fiscal year 2006. This restatement does not affect previously reported third quarter total revenue and cash flow from operations or financial results for the full fiscal year. Refer to Part I, Item 9A, “Controls and Procedures”, for additional information.
 
Selected Financial Data
(in millions, except per share data)
                 
    Nine Months Ended
    December 31, 2005
    Previously
   
    Reported(1)   Restated(2)
 
Statement of Operations:
               
Commissions, royalties and bonuses
  $ 217     $ 248  
Total expenses before interest and taxes
    2,604       2,635  
Income from continuing operations before interest and taxes
    225       194  
Income from continuing operations before income taxes
    194       163  
Income from continuing operations
    191       172  
Net income
    194       175  
Basic income from continuing operations per share
    0.32       0.29  
Basic net income per share
    0.33       0.30  
Diluted income from continuing operations per share
    0.31       0.28  
Diluted net income per share
    0.32       0.29  
 
                 
    December 31, 2005
    Previously
   
    Reported(1)   Restated(2)
 
Balance Sheet:
               
Current Liabilities:
               
Salaries, wages, and commissions
  $ 214     $ 245  
Federal, state, and foreign income taxes payable
    105       93  
Total current liabilities
    2,765       2,784  
Total liabilities
    5,180       5.199  
Stockholders’ Equity:
               
Retained earnings
    1,961       1,942  
Total stockholders’ equity
    4,877       4,858  
 


45


 

                 
    Nine Months Ended
    December 31, 2005
    Previously
   
    Reported(1)   Restated(2)
 
Statement of Cash Flow:
               
Net income
  $ 194     $ 175  
Increase in accounts payable, accrued expenses and other
    110       141  
Increase in taxes payable
    82       70  
Net cash provided by operating activities
    814       814  
 
                 
    Three Months Ended
    December 31, 2005
    Previously
   
    Reported(1)   Restated(2)
 
Statement of Operations:
               
Commissions, royalties and bonuses
  $ 87     $ 118  
Total expenses before interest and taxes
    887       918  
Income from continuing operations before interest and taxes
    80       49  
Income from continuing operations before income taxes
    68       37  
Income from continuing operations
    56       37  
Net income
    59       40  
Basic income from continuing operations per share
    0.09       0.06  
Basic net income per share
    0.10       0.07  
Diluted income from continuing operations per share
    0.09       0.06  
Diluted net income per share
    0.09       0.06  
 
(1) As presented in the Company’s Form 10-Q for the fiscal quarter ended December 31, 2005, filed on February 9, 2006.
(2) Adjusted to reflect the restatement described in the paragraph above.
 
                                         
    June 30(1)   Sept. 30(2)   Dec. 31(3)   Mar. 31(4)   Total
    (Restated)
    (in millions, except per share amounts)
 
2006 Quarterly Results
                                       
Revenue
  $ 920     $ 942     $ 967     $ 947     $ 3,776  
Percent of annual revenue
    24 %     25 %     26 %     25 %     100 %
Income (loss) from continuing operations
  $ 94     $ 41     $ 37     $ (36 )   $ 136  
Basic income (loss) from continuing operations per share
  $ 0.16     $ 0.07     $ 0.06     $ (0.06 )   $ 0.23  
Diluted income (loss) from continuing operations per share
  $ 0.15     $ 0.07     $ 0.06     $ (0.06 )   $ 0.23  
 
                                         
    June 30   Sept. 30(5)   Dec. 31(6)   Mar. 31(7)   Total
    (in millions, except per share amounts)
 
2005 Quarterly Results
                                       
Revenue
  $ 861     $ 865     $ 917     $ 917     $ 3,560  
Percent of annual revenue
    24 %     24 %     26 %     26 %     100 %
Income (loss) income from continuing operations
  $ 47     $ (96 )   $ 31     $ 16     $ (2 )
Basic income (loss) from continuing operations per share
  $ 0.08     $ (0.17 )   $ 0.05     $ 0.03     $ (0.01 )
Diluted income (loss) from continuing operations per share
  $ 0.08     $ (0.17 )   $ 0.05     $ 0.03     $ (0.01 )
 
 
(1) Includes a tax benefit of approximately $36 million reflecting the Department of Treasury and Internal Revenue Service Notice 2005-38, which permitted the utilization of additional foreign tax credits to reduce the

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estimated taxes associated with cash repatriation (Refer to “Income Taxes” within Results of Operations). Also includes a charge of approximately $4 million related to the write-off of in-process research and development costs in relation to the acquisition of Concord (refer to Note 2, Acquisitions, Divestitures and Restructuring, in the Notes to the Unaudited Consolidated Financial Statements) and an after-tax credit of approximately $2 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements).
 
(2) Includes an after-tax charge of approximately $14 million related to the write-off of in-process research and development costs in relation to the acquisition of Niku (refer to Note 2, Acquisitions, Divestitures and Restructuring, in the Notes to the Unaudited Consolidated Financial Statements), an after-tax charge of approximately $6 million in connection with certain DPA related costs and the termination of a non-core application development professional services project, an after-tax charge of approximately $23 million for severance and other expenses in connection with a restructuring plan (refer to “Shareholder Litigation and Government Investigation Settlement” and “Restructuring Charge” within Results of Operations), and an after-tax credit of approximately $6 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements).
 
(3) Includes the after-tax impact of approximately $19 million for the quarterly restatement of commission expense. Also includes an after-tax charge of approximately $2 million in connection with certain DPA related costs, an after-tax charge of approximately $9 million for severance and other expenses in connection with a restructuring plan (refer to “Shareholder Litigation and Government Investigation Settlement” and “Restructuring Charge” within Results of Operations), a tax charge of $2 million relating to the loss on a sale/leaseback transaction, an after-tax credit of approximately $2 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements), and an after-tax credit of approximately $5 million relating to the gain on the sale of assets that were contributed during the formation of Ingres Corp. (refer to Note 2, “Acquisitions, Divestitures and Restructuring”, in the Notes to the Unaudited Consolidated Financial Statements).
 
(4) Includes a tax charge of $36 million required due to the company’s finalization of its 2006 tax estimates, including its repatriation of $584 million of cash in the fourth quarter of fiscal year 2006. (Refer to “Income Taxes” within Results of Operations). Also includes an after-tax charge of approximately $3 million in connection with certain DPA related costs, an after-tax charge of approximately $9 million for severance and other expenses in connection with a restructuring plan (refer to “Shareholder Litigation and Government Investigation Settlement” and “Restructuring Charge” within Results of Operations), a tax charge of approximately $2 million relating to the loss on a sale-leaseback transaction, and after-tax credits of approximately $1 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements), $6 million due to full year reductions in variable compensation programs, and $7 million due to the Company’s decision in the fourth quarter of fiscal year 2006 to forego its discretionary contribution to the company-sponsored 401(k) plan.
 
(5) Includes an after-tax charge of approximately $130 million related to the shareholder litigation and government investigation settlements, an after-tax charge of approximately $17 million for severance and other expenses in connection with a restructuring plan (refer to “Shareholder Litigation and Government Investigation Settlement” and “Restructuring Charge” within Results of Operations), and an after-tax credit of approximately $3 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements).
 
(6) Includes an after-tax charge of approximately $6 million of cash and stock-based compensation expense associated with the appointment of our new President and CEO in November 2004 and an after-tax credit of approximately $4 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements).
 
(7) Includes a tax expense charge of $55 million related to the repatriation of $500 million in cash under the American Jobs Creation Act of 2004 (Refer to “Income Taxes” within Results of Operations), an after-tax gain of approximately $10 million related to the settlement with Quest Software Inc., and an after-tax credit of


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approximately $8 million related to a reduction in the allowance for doubtful accounts (refer to Note 5, “Trade and Installment Accounts Receivable”, in the Notes to the Unaudited Consolidated Financial Statements).
 
Liquidity and Capital Resources
 
Our cash balances, including cash equivalents, are held in numerous locations throughout the world, and a substantial portion resides outside the United States. In fiscal year 2006, the Company repatriated approximately $584 million in cash to the United States in order to avail itself of the provisions of the American Jobs Creation Act of 2004. The aggregate amount of taxes related to the repatriation was approximately $55 million.
 
Sources and Uses of Cash
 
Cash, cash equivalents and marketable securities totaled $1.87 billion on March 31, 2006, a decrease of $1.26 billion from the March 31, 2005 balance of $3.13 billion. Cash generated from continuing operations was $1.38 billion and represented the Company’s primary source of liquidity in fiscal year 2006. This cash generated was primarily used to fund acquisitions, repay debt and repurchase common shares.
 
In fiscal year 2006, cash provided by continuing operating activities was positively impacted by a decrease of receivable cycles and an increase of payable cycles. During the quarter ended September 30, 2005, the Company undertook a review of its accounts receivable and accounts payable collection/payment cycles and determined that improvements in each could be made. The improvements associated with accounts receivable were related principally to improved collection procedures, including an increased emphasis on obtaining payment of initial customer invoices at the time of contract signing. Management believes that these improvements are sustainable but any further improvements in the accounts receivable collection cycle will not materially impact liquidity in future years. The increase in accounts payable and accrued expenses of $101 million was principally related to a concerted effort to make payments to vendors on an extended basis. Management has determined that its payables cycle has exceeded an optimal level and that it should be reduced. Therefore, the Company expects a reduction in the level of days payable outstanding, which will likely have an adverse effect on future cash provided by operating activities, particularly in the first quarter of fiscal year 2007.
 
Under both the prior business model and current business model, customers generally pay for the right to use our software products over the term of the associated software license agreement. We refer to these payments as installment payments. While the transition to the current business model has changed the timing of revenue recognition, in most cases it has not changed the timing of how we bill and collect cash from customers. As a result, our cash generated from operations has generally not been affected by the transition to the current business model over the past several years. We do not expect any significant changes in our cash generated from operations as a result of this transition.
 
The timing and amount of installment payments committed under any specific license agreement is often the result of negotiations with the customer and can vary from year to year. In fiscal year 2006, our cash provided by continuing operations was positively impacted by certain arrangements under which the entire contract value or a substantial portion of the contract value was due in one single installment upon execution of the agreement, rather than being invoiced on an annual basis over the life of the contract. Upon receipt, these amounts are reflected as increases in deferred subscription revenue (collected) in the liability section of the balance sheet. Deferred subscription revenue (collected), both current and non-current, of $1.96 billion at March 31, 2006 increased approximately $280 million, compared to $1.68 billion at March 31, 2005. The increase of the non-current portion, from $273 million to $448 million, was primarily related to these types of arrangements, approximately half of which related to the fourth quarter of fiscal year 2006. As previously noted, collections of these amounts positively impact current year cash flows provided from operating activities and collections that would have been attributable to later years (i.e. the non-current portion) will not be available as a source of cash in such later years as the revenue is recognized. Although we cannot predict with certainty the amount of future license agreements that will be executed with similar payment terms, we expect the aggregate dollar value of these arrangements to decline in fiscal year 2007 as compared to fiscal year 2006.
 
The Company’s estimate of the fair value of net installment accounts receivable recorded under the prior business model approximates carrying value. Amounts due from customers under our business model are offset by deferred


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subscription value related to these license agreements, leaving no or minimal net carrying value on the balance sheet for such amounts. The fair value of such amounts may exceed this carrying value but cannot be practically assessed since there is no existing market for a pool of customer receivables with contractual commitments similar to those owned by us. The actual fair value may not be known until these amounts are sold, securitized, or collected. Although these customer license agreements commit the customer to payment under a fixed schedule, the agreements are considered executory in nature due to the ongoing commitment to provide unspecified future upgrades as part of the agreement terms.
 
Under our business model, we can estimate the total amounts to be billed and/or collected at the conclusion of a reporting period. For current business model contracts, amounts we expect to bill within the next fiscal year at March 31, 2006, declined by $0.11 billion to approximately $1.68 billion from the prior year. Amounts we expect to bill for periods after 12 months declined by $0.45 billion to $1.24 billion. These declines are due to a combination of the accelerated payments noted above and the timing of the renewal of existing contracts. The estimated amounts expected to be collected and a reconciliation of such amounts to the amounts we recorded as accounts receivable are as follows:
 
Reconciliation of Amounts to be Collected to Receivables
 
                 
    March 31,
    March 31,
 
    2006     2005  
    (in millions)  
 
Current:
               
Accounts receivable
  $ 828     $ 794  
Other receivables
    77       39  
Amounts to be billed within the next 12 months — business model
    1,680       1,794  
Amounts to be billed within the next 12 months — prior business model
    253       391  
Less: allowance for doubtful accounts
    (25 )     (35 )
                 
Net amounts expected to be collected — current
    2,813       2,983  
                 
Less:
               
Unamortized discounts
    (44 )     (62 )
Unearned maintenance
    (4 )     (23 )
Deferred subscription revenue — current, billed
    (606 )     (369 )
Deferred subscription value — current, uncollected
    (476 )     (661 )
Deferred subscription value — noncurrent, uncollected, related to current accounts receivable
    (1,204 )     (1,133 )
Unearned professional services
    (47 )     (14 )
                 
Trade and installment accounts receivable — current, net
    432       721  
                 
Non-Current:
               
Amounts to be billed beyond the next 12 months — business model
    1,236       1,698  
Amounts to be billed beyond the next 12 months — prior business model
    511       759  
Less: allowance for doubtful accounts
    (20 )     (53 )
                 
Net amounts expected to be collected — noncurrent
    1,727       2,404  
                 
Less:
               
Unamortized discounts
    (34 )     (79 )
Unearned maintenance
    (8 )     (32 )
Deferred subscription value — noncurrent, uncollected
    (1,236 )     (1,698 )
                 
Installment accounts receivable — noncurrent, net
    449       595  
                 
Total accounts receivable, net
  $ 881     $ 1,316  
                 


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    March 31,
    March 31,
 
    2006     2005  
    (in millions)  
 
Deferred Subscription Value:
               
Deferred subscription revenue (collected) — current
  $ 1,517     $ 1,407  
Deferred subscription revenue (collected) — noncurrent
    448       273  
Deferred subscription revenue current, billed
    606       369  
Deferred subscription value — current, uncollected
    476       661  
Deferred subscription value — noncurrent, uncollected, related to current accounts receivable
    1,204       1,133  
Deferred subscription value — noncurrent, uncollected
    1,236       1,698  
                 
Aggregate deferred subscription value balance
  $ 5,487     $ 5,541  
                 
 
Approximately 10% of the total deferred subscription value balance of approximately $5.49 billion at March 31, 2006 is associated with multi-year contracts signed with the U.S. Federal Government and other U.S. state and local governmental agencies that are generally subject to annual fiscal funding approval and/or may be terminated at the convenience of the government. While funding under these contracts is not assured, we do not believe any circumstances exist which might indicate that such funding will not be approved and paid in accordance with the terms of our contracts. For any contracts with governmental agencies who are first-time customers that are subject to annual fiscal funding approval, we generally do not record the deferred subscription value for the unbilled portion of the contract until the funding is approved. We also receive contracts from non-U.S. governmental agencies that contain similar provisions. The total balance of deferred subscription value related to non-U.S. governmental agencies that may be terminated at the convenience of the agencies is not material to the overall deferred subscription value balance.
 
Unbilled amounts under the Company’s business model are collectible over one to five years. As of March 31, 2006, on a cumulative basis, approximately 58%, 87%, 97%, 99% and 100% of amounts due from customers recorded under the Company’s business model come due within fiscal years ended 2007 through 2011, respectively.
 
Unbilled amounts under the prior business model are collectible over three to six years. As of March 31, 2006, on a cumulative basis, approximately 33%, 53%, 68%, 82% and 94% of amounts due from customers recorded under the prior business model come due within fiscal years ended 2007 through 2011, respectively.
 
Fiscal Year 2006 compared to Fiscal Year 2005
 
Operating Activities
 
Cash generated from continuing operating activities for fiscal year 2006 of $1.38 billion declined by approximately 10% compared to the prior year’s cash from continuing operations of $1.53 billion. The decrease in cash generated from continuing operations was the result of several factors. The Company experienced an increase of approximately $254 million in collections on accounts receivable compared to the prior year. This increase was more than offset by year over year increases in payments for taxes of approximately $195 million, incremental restitution fund payments of $75 million, and higher payments to vendors and employees of approximately $165 million. The level of payments to vendors in the current year was favorably impacted by the Company’s concerted effort to extend payment terms. In fiscal year 2006, the Company experienced an increase in accounts payable and accrued expenses of approximately $101 million, compared to the prior year which experienced a decrease of $141 million.
 
Investing Activities
 
Cash used in investing activities was approximately $847 million compared to $740 million in the prior year. The change in cash from investing activities primarily relates to $1.01 billion of cash used to fund recent acquisitions. Partly offsetting the cash used for acquisitions was $398 million in cash received from the sales of marketable securities. In addition, the Company also entered into three sale/leaseback transactions during the second half of fiscal year 2006, due to our restructuring initiatives and our associated review of the benefits of owning versus


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leasing certain properties. Total cash realized from these transactions was approximately $75 million. All of these transactions were recorded in accordance with SFAS 28, “Accounting for Sales with Leasebacks — an amendment of FASB Statement No. 13”.
 
Financing Activities
 
The primary use of cash for financing activities has been the repayment of debt and the repurchase of treasury stock, as discussed below.
 
As of March 31, 2006 and 2005, our debt arrangements consisted of the following:
 
                                 
    2006     2005  
    Maximum
    Outstanding
    Maximum
    Outstanding
 
    Available     Balance     Available     Balance  
    (in millions)  
 
Debt Arrangements
                               
2004 Revolving Credit Facility (expires December 2008)
  $ 1,000     $     $ 1,000     $  
6.375% Senior Notes due April 2005
                      825  
6.500% Senior Notes due April 2008
          350             350  
4.750% Senior Notes due December 2009
          500             500  
1.625% Convertible Senior Notes due December 2009
          460             460  
5.625% Senior Notes due December 2014
          500             500  
Other
          1             1  
                                 
Total
          $ 1,811             $ 2,636  
                                 
 
At March 31, 2006, we had $1.81 billion in debt and $1.87 billion in cash and marketable securities. Our net liquidity position was approximately $54 million.
 
Additionally, we reported restricted cash balances of $60 million and $67 million at March 31, 2006 and 2005, respectively, which were included in the “Other noncurrent assets” line item.
 
In April 2005, we repaid, as scheduled, the $825 million 6.375% Senior Notes issued during the fiscal year ended March 31, 1999 using our available cash balances (see Fiscal Year 1999 Senior Notes for details).
 
During fiscal year 2005, we issued $1 billion of senior notes and redeemed approximately $660 million in outstanding debt compared to a net debt reduction of approximately $826 million in fiscal year 2004.
 
2004 Revolving Credit Facility
 
In December 2004, we entered into a new unsecured, revolving credit facility (the 2004 Revolving Credit Facility). The maximum committed amount available under the 2004 Revolving Credit Facility is $1 billion, exclusive of incremental credit increases of up to an additional $250 million which are available subject to certain conditions and the agreement of our lenders. The 2004 Revolving Credit Facility expires December 2008 and no amount was drawn as of March 31, 2006 or March 31, 2005. Refer to Note 6, “Debt”, in the Notes to the Unaudited Consolidated Financial Statements for additional information.
 
Borrowings under the 2004 Revolving Credit Facility will bear interest at a rate dependent on our credit ratings at the time of such borrowings and will be calculated according to a base rate or a Eurocurrency rate, as the case may be, plus an applicable margin and utilization fee. Depending on our credit rating at the time of borrowing, the applicable margin can range from 0% to 0.325% for a base rate borrowing and from 0.50% to 1.325% for a Eurocurrency borrowing, and the utilization fee can range from 0.125% to 0.250%. At our current credit ratings, the applicable margin would be 0% for a base rate borrowing and 0.70% for a Eurocurrency borrowing, and the utilization fee would be 0.125%. In addition, we must pay facility fees quarterly at rates dependent on our credit ratings. The facility fees can range from 0.125% to 0.30% of the aggregate amount of each lender’s full revolving


51


 

credit commitment (without taking into account any outstanding borrowings under such commitments). At our current credit ratings, the facility fee is 0.175% of the aggregate amount of each lender’s revolving credit commitment.
 
The 2004 Revolving Credit Facility contains customary covenants for transactions of this type, including two financial covenants: (i) for the 12 months ending each quarter-end, the ratio of consolidated debt for borrowed money to consolidated cash flow, each as defined in the 2004 Revolving Credit Facility, must not exceed 3.25 for the quarter ending December 31, 2004 and 2.75 for quarters ending March 31, 2005 and thereafter; and (ii) for the 12-months ending each quarter-end, the ratio of consolidated cash flow to the sum of interest payable on, and amortization of debt discount in respect of, all consolidated debt for borrowed money, as defined in the 2004 Revolving Credit Facility, must not be less than 5.00. In addition, as a condition precedent to each borrowing made under the 2004 Revolving Credit Facility, as of the date of such borrowing, (i) no event of default shall have occurred and be continuing and (ii) we are to reaffirm that the representations and warranties made in the 2004 Revolving Credit Facility (other than the representation with respect to material adverse changes, but including the representation regarding the absence of certain material litigation) are correct.
 
Fiscal Year 1999 Senior Notes
 
In fiscal year 1999, the Company issued $1.75 billion of unsecured Senior Notes in a transaction pursuant to Rule 144A under the Securities Act of 1933 (Rule 144A). Amounts borrowed, rates, and maturities for each issue were $575 million at 6.25% due April 15, 2003, $825 million at 6.375% due April 15, 2005, and $350 million at 6.5% due April 15, 2008. In April 2005, the Company repaid the $825 million remaining balance of the 6.375% Senior Notes from available cash balances. As of March 31, 2006, $350 million of the 6.5% Senior Notes remained outstanding.
 
Fiscal Year 2005 Senior Notes
 
In November 2004, the Company issued an aggregate of $1 billion of unsecured Senior Notes (2005 Senior Notes) in a transaction pursuant to Rule 144A. The Company issued $500 million of 4.75%, 5-year notes due December 2009 and $500 million of 5.625%, 10-year notes due December 2014. The Company has the option to redeem the 2005 Senior Notes at any time, at redemption prices equal to the greater of (i) 100% of the aggregate principal amount of the notes of such series being redeemed and (ii) the present value of the principal and interest payable over the life of the 2005 Senior Notes, discounted at a rate equal to 15 basis points and 20 basis points for the 5-year notes and 10-year notes, respectively, over a comparable U.S. Treasury bond yield. The maturity of the 2005 Senior Notes may be accelerated by the holders upon certain events of default, including failure to make payments when due and failure to comply with covenants in the 2005 Senior Notes. The 5-year notes were issued at a price equal to 99.861% of the principal amount and the 10-year notes at a price equal to 99.505% of the principal amount for resale under Rule 144A and Regulation S. The Company also agreed for the benefit of the holders to register the 2005 Senior Notes under the Securities Act of 1933 pursuant to a registered exchange offer so that the 2005 Senior Notes may be sold in the public market. Because the Company did not meet certain deadlines for completion of the exchange offer, the interest rate on the 2005 Senior Notes increased by 25 basis points as of September 27, 2005 and increased by an additional 25 basis points as of December 26, 2005 since the delay was not cured prior to that date. After the delay is cured, such additional interest on the 2005 Senior Notes will no longer be payable. The Company expects to register the 2005 Senior Notes in the second quarter of fiscal year 2007. The Company used the net proceeds from this issuance to repay debt as described above.
 
1.625% Convertible Senior Notes
 
In fiscal year 2003, the Company issued $460 million of unsecured 1.625% Convertible Senior Notes (1.625% Notes), due December 15, 2009, in a transaction pursuant to Rule 144A. The 1.625% Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness. Concurrent with the issuance of the 1.625% Notes, we entered into call spread repurchase option transactions to partially mitigate potential dilution from conversion of the 1.625% Notes. For further information, refer to Note 6, “Debt”, of the Unaudited Consolidated Financial Statements.


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3% Concord Convertible Notes
 
In connection with our acquisition of Concord in June 2005, we assumed $86 million in 3% convertible senior notes due 2023. In accordance with the notes’ terms, we redeemed (for cash) the notes in full in July 2005.
 
International Line of Credit
 
An unsecured and uncommitted multi-currency line of credit is available to meet short-term working capital needs for our subsidiaries operating outside the United States. The line of credit is available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of March 31, 2006, this line totaled approximately $5 million and approximately $3 million was pledged in support of bank guarantees. Amounts drawn under these facilities as of March 31, 2006 were minimal.
 
In addition to the above facility, our foreign subsidiaries use guarantees issued by commercial banks to guarantee performance on certain contracts. At March 31, 2006 the aggregate amount of significant guarantees outstanding was approximately $5 million, none of which had been drawn down by third parties.
 
Share Repurchases, Stock Option Exercises and Dividends
 
We repurchased approximately $590 million of common stock in connection with our publicly announced corporate buyback program in fiscal year 2006 compared with $161 million in fiscal year 2005; we received approximately $97 million in proceeds resulting from the exercise of Company stock options in fiscal year 2006 compared with $73 million in fiscal year 2005; and we paid dividends of $93 million, $47 million and $47 million in each of the fiscal years 2006, 2005 and 2004, respectively.
 
As announced in April 2005, beginning in fiscal year 2006 we increased our annual cash dividend to $0.16 per share, which was paid out in quarterly installments of $0.04 per share as and when declared by the Board of Directors.
 
On June 26, 2006, the Board of Directors authorized a new $2 billion common stock repurchase plan for fiscal year 2007 which will replace the $600 million common stock repurchase plan announced in March 2006.
 
Effect of Exchange Rate Changes
 
There was a negative $63 million impact to our cash flows in fiscal year 2006 predominantly due to the weakening of the British pound and the euro against the dollar of approximately 8% and 6%, respectively. In fiscal year 2005, we had a $47 million favorable impact to our cash flows predominantly due to a strengthening of the pound and euro of approximately 3% and 5%, respectively.
 
Other Matters
 
As of June 2006, our senior unsecured notes are rated Ba1, BBB- and BBB- by Moody’s, S&P and Fitch, respectively, and are on negative outlook by all three agencies. Peak borrowings under all debt facilities during the fiscal year 2006 totaled approximately $2.64 billion, with a weighted average interest rate of 4.9%.
 
In March 2005, we pre-funded contributions to the CA Savings Harvest Plan, a 401(k) plan. The Company elected not to pre-fund its contribution in March 2006 as a result of IRS Treasury Regulations eliminating the tax benefit associated with the pre-funding of elective and matching contributions.
 
Capital resource requirements as of March 31, 2006 consisted of lease obligations for office space, equipment, mortgage and loan obligations, our ERP implementation, and amounts due as a result of product and company acquisitions. Refer to “Contractual Obligations and Commitments” for additional information.
 
It is expected that existing cash, cash equivalents, marketable securities, the availability of borrowings under existing and renewable credit lines and in the capital markets, and cash expected to be provided from operations will


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be sufficient to meet ongoing cash requirements. We expect our long-standing history of providing extended payment terms to our customers to continue.
 
We expect to use existing cash balances and future cash generated from operations to fund financing activities such as the repayment of our debt balances as they mature as well as the repurchase of shares of common stock and the payment of dividends as approved by our Board of Directors. Cash generated will also be used for investing activities such as future acquisitions as well as additional capital spending, including our continued investment in our ERP implementation.
 
Off-Balance Sheet Arrangements
 
We have commitments to invest approximately $3 million in connection with joint venture agreements.
 
Prior to fiscal year 2001, we sold individual accounts receivable under the prior business model to a third party subject to certain recourse provisions. The outstanding principal balance subject to recourse of these receivables approximated $146 million and $183 million as of March 31, 2006 and 2005, respectively. As of March 31, 2006, we have not incurred any losses related to these receivables. Other than the commitments and recourse provisions described above, we do not have any other off-balance sheet arrangements with unconsolidated entities or related parties and, accordingly, off-balance sheet risks to our liquidity and capital resources from unconsolidated entities are limited.
 
Contractual Obligations and Commitments
 
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with current accounting rules, the future rights and related obligations pertaining to such contractual arrangements are not reported as assets or liabilities on our Unaudited Consolidated Balance Sheets. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business.
 
The following table summarizes our contractual arrangements at March 31, 2006 and the timing and effect that such commitments are expected to have on our liquidity and cash flow in future periods. In addition, the table summarizes the timing of payments on our debt obligations as reported on our Unaudited Consolidated Balance Sheet as of March 31, 2006.
 
                                         
    Payments Due by Period  
          Less Than
    1-3
    3-5
    More than
 
    Total     1 Year     Years     Years     5 Years  
    (in millions)  
 
Contractual Obligations
                                       
Long-term debt obligations (inclusive of interest)
  $ 2,223     $ 85     $ 506     $ 1,048     $ 584  
Operating lease obligations(1)
    612       128       186       111       187  
Purchase obligations
    118       50       37       25       6  
Other long-term liabilities(2)
    78       17       25       14       22  
                                         
Total
  $ 3,031     $ 280     $ 754     $ 1,198     $ 799  
 
 
(1) The contractual obligations for noncurrent operating leases include sublease income totaling $93 million expected to be received in the following periods: $25 million (less than 1 year); $40 million (1-3 years); $18 million (3-5 years); and $10 million (more than 5 years).
 
(2) Other long-term liabilities primarily relate to operating expenses associated with operating lease obligations.
 
As of March 31, 2006, we have no material capital lease obligations, either individually or in the aggregate.


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Outlook for Fiscal Year 2007
 
This outlook contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by management, as well as information currently available to management. Should business conditions change or should our assumptions prove incorrect, actual results may vary materially from those described below. We do not intend to update these forward-looking statements.
 
The outlook for our fiscal year 2007 is based on the assumption that there will be limited-to-modest improvement in the current economic and IT environments. We also believe customers will continue to be cautious with their technology purchases.
 
Our preliminary outlook for fiscal year 2007 is to generate revenue of approximately $3.9 billion, earnings per share of approximately $0.44 as calculated on a GAAP (General Accepted Accounting Principles) basis, and cash generated from operations of $1.3 billion.
 
We expect that:
 
•  We will incur approximately $105 million (pre-tax) in non-cash stock-based compensation charges in connection with SFAS No. 123(R) (we incurred approximately $96 million of total stock-based compensation charges in fiscal year 2006);
 
•  Cash generated from operations will be negatively impacted by an additional $200 million in tax payments, higher disbursements due to a decline in the days payables cycle and lower collections from contracts with accelerated payment terms; and
 
•  Our effective tax rate should be 34% in fiscal year 2007.
 
The outlook has not been adjusted to reflect the $2 billion repurchase plan. This outlook also assumes that the Company will take steps to achieve certain cost savings. These steps may have related non-operating costs that would have a negative effect on GAAP earnings per share. The Company has not yet identified these savings or quantified their potential impact on GAAP earnings per share, and it is possible that GAAP earnings per share could be lower than the amount included in this outlook.
 
Critical Accounting Policies and Estimates
 
We review our financial reporting and disclosure practices and accounting policies quarterly to help ensure that they provide accurate and transparent information relative to the current economic and business environment. Note 1, “Significant Accounting Policies”, in the Notes to the Unaudited Consolidated Financial Statements contains a summary of the significant accounting policies that we use. Many of these accounting policies involve complex situations and require a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that impact our financial statements. On an ongoing basis, we evaluate our estimates and judgments based on historical experience as well as other factors that are believed to be reasonable under the circumstances. These estimates may change in the future if underlying assumptions or factors change.
 
We consider the following significant accounting polices to be critical because of their complexity and the high degree of judgment involved in implementing them.
 
Revenue Recognition
 
We generate revenue from the following primary sources: (1) licensing software products; (2) providing customer technical support (referred to as maintenance); and (3) providing professional services, such as consulting and education.
 
We recognize revenue pursuant to the requirements of Statement of Position 97-2 “Software Revenue Recognition” (SOP 97-2), issued by the American Institute of Certified Public Accountants, as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” In accordance with SOP 97-2, we begin to recognize revenue from licensing and supporting our software products when all of the following criteria are met: (1) we have evidence of an arrangement with a customer; (2) we deliver the products;


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(3) license agreement terms are deemed fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it may not be complete and final; and (4) collection is probable.
 
Our software licenses generally do not include acceptance provisions. An acceptance provision allows a customer to test the software for a defined period of time before committing to license the software. If a license agreement includes an acceptance provision, we do not record deferred subscription value or recognize revenue until the earlier of the receipt of a written customer acceptance or, if not notified by the customer to cancel the license agreement, the expiration of the acceptance period.
 
Under our business model, software license agreements include flexible contractual provisions that, among other things, allow customers to receive unspecified future software upgrades for no additional fee. These agreements combine the right to use the software product with maintenance for the term of the agreement. Under these agreements, we recognize revenue ratably over the term of the license agreement beginning upon completion of the four SOP 97-2 recognition criteria noted above. For license agreements signed prior to October 2000 (the prior business model), once all four of the above noted revenue recognition criteria were met, software license fees were recognized as revenue up-front, and the maintenance fees were deferred and subsequently recognized as revenue over the term of the license.
 
Maintenance revenue is derived from two primary sources: (1) combined license and maintenance agreements recorded under the prior business model; and (2) stand-alone maintenance agreements.
 
Under the prior business model, maintenance and license fees were generally combined into a single license agreement. The maintenance portion was deferred and amortized into revenue over the initial license agreement term. Some of these license agreements have not reached the end of their initial terms and, therefore, continue to amortize. This amortization is recorded on the “Maintenance” line item on the Unaudited Consolidated Statements of Operations. The deferred maintenance portion, which was optional to the customer, was determined using its fair value based on annual, fixed maintenance renewal rates stated in the agreement. For license agreements entered into under our current business model, maintenance and license fees continue to be combined; however, the maintenance is inclusive for the entire term. We report such combined fees on the “Subscription revenue” line item on the Unaudited Consolidated Statements of Operations.
 
We also record stand-alone maintenance revenue earned from customers who elect optional maintenance. Revenue from such renewals is recognized as maintenance revenue over the term of the renewal agreement.
 
The “Deferred maintenance revenue” line item on our Unaudited Consolidated Balance Sheets principally represents payments received in advance of maintenance services rendered.
 
Revenue from professional service arrangements is recognized pursuant to the provisions of SOP 97-2, which in most cases is as the services are performed. Revenues from professional services that are sold as part of a software transaction are deferred and recognized on a ratable basis over the life of the related software transaction. If it is not probable that a project will be completed or the payment will be received, revenue is deferred until the uncertainty is removed.
 
Revenue from sales to distributors, resellers, and VARs is recognized when all four of the SOP 97-2 revenue recognition criteria noted above are met and when these entities sell the software product to their customers. This is commonly referred to as the sell-through method. Beginning July 1, 2004, sales of our products made by distributors, resellers and VARs to their customers incorporate the right for the end-users to receive certain upgraded software products at no additional fee. Accordingly, revenue from those contracts is recognized on a ratable basis.
 
We have an established business practice of offering installment payment options to customers and have a history of successfully collecting substantially all amounts due under such agreements. We assess collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If, in our judgment, collection of a fee is not probable, we will not recognize revenue until the uncertainty is removed through the receipt of cash payment.


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Our standard licensing agreements include a product warranty provision for all products. Such warranties are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies.” The likelihood that we would be required to make refunds to customers under such provisions is considered remote.
 
Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and damages arising from claims against such customers based on, among other things, allegations that our software products infringe the intellectual property rights of a third party. In most cases, in the event of an infringement claim, we retain the right to (i) procure for the customer the right to continue using the software product; (ii) replace or modify the software product to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement and refund to the customer a pro-rata portion of the fees paid. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The likelihood that we would be required to make refunds to customers under such provisions is considered remote. In most cases and where legally enforceable, the indemnification is limited to the amount paid by the customer.
 
Accounts Receivable
 
The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts receivable on the balance sheet. In developing the estimate for the allowance for doubtful accounts, we rely on several factors, including:
 
•  Historical information, such as general collection history of multi-year software agreements;
 
•  Current customer information/events, such as extended delinquency, requests for restructuring, and filing for bankruptcy;
 
•  Results of analyzing historical and current data; and
 
•  The overall macroeconomic environment.
 
The allowance is comprised of two components: (a) specifically identified receivables that are reviewed for impairment when, based on current information, we do not expect to collect the full amount due from the customer; and (b) an allowance for losses inherent in the remaining receivable portfolio based on the analysis of the specifically reviewed receivables.
 
We expect the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the prior business model are billed and collected. Under our business model, amounts due from customers are offset by deferred subscription value (unearned revenue) related to these amounts, resulting in little or no carrying value on the balance sheet. Therefore, a smaller allowance for doubtful accounts is required.
 
Sales Commissions
 
We accrue sales commissions based on, among other things, estimates of how our sales personnel will perform against specified annual sales quotas. These estimates involve assumptions regarding the Company’s projected new product sales and billings. All of these assumptions reflect our best estimates, but these items involve uncertainties, and as a result, if other assumptions had been used in the period, sales commission expense could have been impacted for that period. Under our current sales compensation model, during periods of high growth and sales of new products relative to revenue in that period, the amount of sales commission expense attributable to the license agreement would be recognized fully in the year and could negatively impact income and earnings per share in that period, particularly in the second half of the fiscal year when new contract values are traditionally higher than in the first half.
 
Income Taxes
 
When we prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision for taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This process requires us to estimate our actual current tax liability in each jurisdiction; estimate differences resulting from differing treatment of items for financial statement purposes versus tax return purposes


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(known as “temporary differences”), which result in deferred tax assets and liabilities; and assess the likelihood that our deferred tax assets and net operating losses will be recovered from future taxable income. If we believe that recovery is not likely, we establish a valuation allowance. We have recognized as a deferred tax asset a portion of the tax benefits connected with losses related to operations. As of March 31, 2006, our gross deferred tax assets, net of a valuation allowance, totaled $609 million. Realization of these deferred tax assets assumes that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that we consider in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets.
 
Deferred tax assets result from acquisition expenses, such as duplicate facility costs, employee severance and other costs that are not deductible until paid, net operating losses (NOLs) and temporary differences between the taxable cash payments received from customers and the ratable recognition of revenue in accordance with GAAP. The NOLs expire between 2007 and 2026. Additionally, approximately $57 million and $28 million of the valuation allowance as of March 31, 2006 and March 31, 2005, respectively, is attributable to acquired NOLs which are subject to annual limitations under IRS Code Section 382. Future results may vary from these estimates. At this time it is not practicable to determine if we will need to increase the valuation allowance or if such future valuations will have a material impact on our financial statements.
 
Goodwill, Capitalized Software Products, and Other Intangible Assets
 
SFAS No. 142, “Goodwill and Other Intangible Assets,” requires an impairment-only approach to accounting for goodwill. Absent any prior indicators of impairment, we perform an annual impairment analysis during the fourth quarter of our fiscal year. We performed our annual assessment for fiscal year 2006 and concluded that there were no impairments to record.
 
The SFAS No. 142 goodwill impairment model is a two-step process. The first step is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
 
Determining the fair value of a reporting unit under the first step of the goodwill impairment test, and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test, is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flow and are based on our best estimate of future revenue and operating costs and general market conditions. These estimates are subject to review and approval by senior management. This approach uses significant assumptions, including projected future cash flow, the discount rate reflecting the risk inherent in future cash flow, and a terminal growth rate.
 
The carrying value of capitalized software products, both purchased software and internally developed software, and other intangible assets, are reviewed on a regular basis for the existence of internal and external facts or circumstances that may suggest impairment. The facts and circumstances considered include an assessment of the net realizable value for capitalized software products and the future recoverability of cost for other intangible assets as of the balance sheet date. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude thereof.


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Product Development and Enhancements
 
We account for product development and enhancements in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that reflect our best estimates. If other assumptions had been used in the current period to estimate technological feasibility, the reported product development and enhancement expense could have been impacted.
 
Accounting for Stock-Based Compensation
 
We currently maintain stock-based compensation plans. We use the Black-Scholes option-pricing model to compute the estimated fair value of certain stock-based awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially impacted. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in future years.
 
As described in Note 9, “Stock Plans,” in the Notes to the Unaudited Consolidated Financial Statements, performance share units are awards granted under the long-term incentive plan for senior executives where the number of shares or restricted shares as applicable, ultimately received by the employee depends on Company performance measured against specified targets and will be determined after a three-year or one-year period as applicable. The fair value of each award is estimated on the date that the performance targets are established based on the fair value of the Company’s stock and the Company’s estimate of the level of achievement of its performance targets. Each quarter, the Company compares the actual performance the Company expects to achieve with the performance targets.
 
Legal Contingencies
 
We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability of a loss and the determination as to whether an exposure is reasonably estimable. Due to the uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending litigation and claims, and may revise our estimates. Such revisions could have a material impact on our results of operations and financial condition. Refer to Note 7, “Commitments and Contingencies”, in the Notes to the Unaudited Consolidated Financial Statements for a description of our material legal proceedings.
 
New Accounting Pronouncements
 
In October 2004, the American Jobs Creation Act of 2004 was signed into law. This act introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria are met. In addition, on December 21, 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. The Company repatriated approximately $584 million of cash under the American Jobs Creation Act of 2004 during fiscal year 2006 at a total tax cost of approximately $55 million. Refer to the “Income Taxes” section of this MD&A for further details.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the


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scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Company’s second quarter of fiscal year 2006. The adoption of SFAS No. 153 did not have a material effect on our consolidated financial position, results of operations or cash flows.
 
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies the term “conditional asset retirement obligation,” as that term is used in FASB No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 also clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company was required to apply the provisions of FIN 47 in fiscal year 2006. The adoption of FIN 47 did not have a material effect on our consolidated financial position, results of operations or cash flows.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” or SFAS 154, a replacement of APB Opinion No. 20, “Accounting Changes,” and SFAS Statement 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principle required recognition via a cumulative effect adjustment within net income in the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005, however, the Statement does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS 154 did not have a material effect on our consolidated financial position, results of operations or cash flows.
 
In November 2005, the FASB issued Staff Position 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, or FSP 115-1, that addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. The final FSP nullifies certain requirements of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. The guidance in FSP 115-1 is effective for reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 did not have a material effect on our consolidated financial position, results of operations or cash flows.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.
 
Interest Rate Risk
 
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, debt, and installment accounts receivable. We have a prescribed methodology whereby we invest our excess cash in liquid investments that are comprised of money market funds and debt instruments of government agencies and high-quality corporate issuers (Standard & Poor’s single “A” rating and higher). To mitigate risk, many of the securities have a maturity date within one year, and holdings of any one issuer, excluding the U.S. government, do not exceed 10% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated.
 
As of March 31, 2006, our outstanding debt approximated $1.81 billion, most of which was in fixed rate obligations. If market rates were to decline, we could be required to make payments on the fixed rate debt that would exceed those based on current market rates. Each 25 basis point decrease in interest rates would have an associated annual opportunity cost of approximately $5 million. Each 25 basis point increase or decrease in interest rates would have no material annual effect on variable rate debt interest based on the balances of such debt as of March 31, 2006.


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As of March 31, 2006, we did not utilize derivative financial instruments to mitigate the above mentioned interest rate risks.
 
We offer financing arrangements with installment payment terms in connection with our software license agreements. The aggregate amounts due from customers include an imputed interest element, which can vary with the interest rate environment. Each 25 basis point increase in interest rates would have an associated annual opportunity cost of approximately $9 million.
 
Foreign Currency Exchange Risk
 
We conduct business on a worldwide basis through subsidiaries in 48 countries and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities. In October 2005, the Board of Directors adopted the Risk Management Policy and Procedures (the Policy), which authorizes us to manage, based on management’s assessment, our risks/exposures to foreign currency exchange rates through the use of derivative financial instruments (e.g., forward contracts, options, swaps) or other means. We have not historically used, and do not anticipate using, derivative financial instruments for speculative purposes.
 
Derivatives are accounted for in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and the Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). For the fiscal year ended March 31, 2006, we entered into derivative contracts with a total notional value of 280 million euros. Derivatives with a notional value of 80 million euros were entered into with the intent of mitigating a certain portion of our euro operating exposure and are part of the Company’s on-going risk management program. Derivatives with a notional value of 200 million euros were entered into during March 2006 with the intent of mitigating a certain portion of the foreign exchange variability associated with the Company’s repatriation of approximately $584 million from its foreign subsidiaries. Hedge accounting under SFAS 133 was not applied to any of the derivatives entered into during the fiscal year ended March 31, 2006. The resulting gain of approximately $1 million for the fiscal year ended March 31, 2006 is included in the “Other (gains) expenses, net” line on the Unaudited Consolidated Statement of Operations. As of March 31, 2006, there were no derivative contracts outstanding. In April 2006, the Company entered into similar derivative contracts as those entered during the quarter ended March 31, 2006 relating to the Company’s operating exposures.
 
Equity Price Risk
 
As of March 31, 2006, we had $22 million in investments in marketable equity securities of publicly traded companies. These securities were considered available-for-sale with any unrealized gains or temporary losses deferred as a component of stockholders’ equity.
 
Item 8.   Financial Statements and Supplementary Data.
 
Our Unaudited Consolidated Financial Statements are listed in the List of Unaudited Consolidated Financial Statements and Financial Statement Schedules filed as part of this Exhibit and are incorporated herein by reference.
 
The Supplementary Data specified by Item 302 of Regulation S-K as it relates to selected quarterly data is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information on the effects of changing prices is not required.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not applicable.


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Item 9A.  Controls and Procedures.
 
(a) Preliminary evaluation of disclosure controls and procedures
 
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with participation of the Company’s Chief Executive Officer and acting Chief Financial Officer, will complete its evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by its Annual Report on Form 10-K for the fiscal year ended March 31, 2006 when the Annual Report on Form 10-K is completed. To date, management has identified material weaknesses in the Company’s internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)), which are discussed in (b) below. The Company’s Chief Executive Officer and acting Chief Financial Officer have preliminarily concluded that when the Annual Report on Form 10-K is completed, the Company’s disclosure controls and procedures will be deemed to be ineffective as a result of these material weaknesses noted in (b) below as well as other potential material weaknesses that may be identified, including ineffective policies and procedures relating to the matters described in the Explanatory Note at the beginning of this Exhibit.
 
(b) Management’s preliminary report on internal control over financial reporting
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management has not yet completed its evaluation of the effectiveness of internal control over financial reporting as of March 31, 2006 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment shall include an evaluation of the design of the Company’s internal control over financial reporting and testing the effectiveness of the Company’s internal control over financial reporting. To date, management has identified material weaknesses in the Company’s internal control over financial reporting, as described below. To date, management has preliminarily concluded that as a result of these material weaknesses, as of March 31, 2006, the Company’s internal control over financial reporting was not effective based upon the criteria in Internal Control — Integrated Framework issued by COSO.


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A material weakness is a control deficiency, or a combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following material weaknesses as of March 31, 2006:
 
  (i)     The Company did not maintain an effective control environment due to a lack of effective communication policies and procedures. Specifically, (a) there was a lack of coordination and communication among certain of the Company’s senior executives with responsibility for the sales and finance functions and within the sales and finance functions regarding potentially significant financial information; and (b) there were communications by certain senior executives that failed to set a proper tone, which could have discouraged escalation of information of possible importance in clarifying or resolving financial issues. These deficiencies resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected and contributed to the material weaknesses in internal controls described in items (ii) and (iii) below.
 
  (ii)   The Company’s policies and procedures relating to controls over the accounting for sales commissions were not effective. Specifically, the Company did not effectively estimate, record and monitor its sales commissions and related accruals. The Company also did not reconcile its sales commission expense accrual to actual payments on a timely basis. These deficiencies resulted in a material error in the recognition of commission expense, which resulted in a restatement of the interim financial statements for the three and nine-month periods ended December 31, 2005.
 
  (iii)  The Company’s policies and procedures relating to the identification, analysis and documentation of non-routine tax matters were not effective. The Company’s tax function also did not provide timely communication to management of its assumptions regarding certain non-routine tax matters. This deficiency resulted in a material error in the recognition of taxes associated with the Company’s cash repatriation, which occurred in the fourth quarter of fiscal year 2006.
 
Each of the aforementioned material weaknesses in internal control over financial reporting individually resulted in more than a remote likelihood that a material misstatement of the Company’s interim or annual financial statements would not have been prevented or detected.
 
In conducting the Company’s evaluation of the effectiveness of its internal control over financial reporting, management has excluded the acquisition of Wily Technology, Inc., which was completed by the Company during the fourth quarter of fiscal year 2006. Wily Technology, Inc. represented approximately $431 million of the Company’s total assets as of March 31, 2006 and approximately $3 million of the Company’s total revenues for the year then ended. The assets of Wily Technology, Inc. included approximately $232 million of goodwill and $126 million of other intangibles as of March 31, 2006.
 
(c) Changes in internal control over financial reporting
 
During the fourth quarter of fiscal year 2006, the Company was engaged in an ongoing review of its internal control over financial reporting. Based on that review management believes that, during the fourth quarter of fiscal year 2006 there were changes in the Company’s internal control over financial reporting, as described below, that have materially affected, or are reasonably likely to materially affect, those controls.
 
During the fourth quarter of fiscal year 2006, the Company continued documenting, testing and making improvements to its internal control over financial reporting in light of findings made as a part of the annual assessment of such internal controls for fiscal year 2006. The process is ongoing and the Company will continue to address items that require remediation, work to improve internal controls, and educate and train employees on controls and procedures in order to establish and maintain effective internal control over financial reporting.
 
Changes under the DPA
 
As previously reported, and as described more fully in Note 7, “Commitments and Contingencies”, of the Notes to the Unaudited Consolidated Financial Statements in this Exhibit, in September 2004 the Company reached agreements with the USAO and SEC by entering into the DPA with the USAO and by consenting to the SEC’s filing of a Final Consent Judgment (Consent Judgment) in the United States District Court for the Eastern District of New


63


 

York. The DPA requires the Company to, among other things, undertake certain reforms that will affect its internal control over financial reporting. These include implementing a worldwide financial and enterprise resource planning (ERP) information technology system to improve internal controls, reorganizing and enhancing the Company’s Finance and Internal Audit Departments, and establishing new records management policies and procedures.
 
The Company believes that these and other reforms, such as procedures to assure proper recognition of revenue, should enhance its internal control over financial reporting. For more information regarding the DPA, refer to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2004 and the exhibits thereto, including the DPA. For more information regarding the Company’s compliance with the DPA and the Consent Judgment, refer to the information under the heading “Status of the Company’s Compliance with the Deferred Prosecution Agreement and Final Consent Judgment” in the Company’s definitive proxy materials filed on July 26, 2005 and Note 7, “Commitments and Contingencies — The Government Investigation”, in the Notes to the Unaudited Consolidated Financial Statements in this Exhibit.
 
Changes to remediate fiscal year 2005 material weaknesses
 
As previously reported in its amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, the Company determined that, as of the end of fiscal year 2005, there were material weaknesses in its internal control over financial reporting relating to (1) improper accounting of credits attributable to software contracts executed under the Company’s prior business model, which resulted in financial statement restatements of prior years, (2) an ineffective control environment associated with its Europe, Middle East and Africa (EMEA) region businesses and (3) improper accounting for recording revenue from renewals of certain prior business model license agreements, which resulted in financial statement restatements of prior years.
 
As reported in the amended Annual Report for fiscal year 2005, the Company began to make a number of changes in its internal control over financial reporting to remediate these material weaknesses. Many of these changes were made during the first quarter of fiscal year 2006 and continued through the fourth quarter of fiscal year 2006. The material weaknesses have been fully remediated by the end of fiscal year 2006.
 
Specific remediation actions taken by management regarding the material weakness in internal control over financial reporting related to improper accounting of credits attributable to software contracts executed under the Company’s prior business model include the following:
 
•  During the quarter ended June 30, 2005, the Company began maintaining a separate schedule of credits granted under software contracts executed under the Company’s prior business model;
 
•  During the quarter ended June 30, 2005, the financial reporting department began quarterly reviews of utilized credits to determine the proper accounting for utilized credits that were originally granted under software contracts executed under the Company’s prior business model; and
 
•  Beginning with the quarter ended June 30, 2005, management and internal audit began periodic testing of the completeness and accuracy of the credit schedule prepared by the sales accounting department and of all accounting entries related to the utilization of any such credits by the Company’s customers.
 
Specific remediation actions taken by management regarding the material weakness relating to the control environment associated with the EMEA region include the following:
 
•  Disciplinary proceedings against members of management and other employees in the EMEA region, leading to their resignation or termination subsequent to March 31, 2005;
 
•  The appointment of a new Head of Global Procurement in April 2005;
 
•  The appointment of a new Head of Procurement for the EMEA region in June 2005;
 
•  The appointment of a new General Manager for the EMEA region in June 2005;
 
•  The appointment of a new Head of Facilities for the EMEA region in July 2005;
 
•  The hiring of additional finance personnel, including a new controller for the UK in August 2005;


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•  The appointment of a new Chief Financial Officer for the EMEA region in January 2006;
 
•  The initiation of changes to the roles and responsibilities, as well as reporting lines, of executives in charge of the EMEA region for more effective segregation of duties throughout fiscal year 2006; and
 
•  Ongoing communications from senior management and provision of training to employees regarding the importance of the control environment, financial integrity, and the Company’s code of ethics.
 
Specific remediation actions taken by management during the third quarter of fiscal year 2006 regarding the material weakness relating to the accounting error in recording revenue from renewals of certain prior business model license agreements include the following:
 
  •  The Company completed an inventory of active prior business model contracts on a worldwide basis and established a central database to track such contracts;
 
  •  The Company revised its revenue recognition checklists to identify the renewal of any prior business model contracts for proper disposition; and
 
  •  The Company began monitoring the renewal of prior business model license agreements to ensure that any remaining deferred maintenance and unamortized discounts are recognized ratably over the life of the new subscription based license agreement.
 
Planned remediation of 2006 material weaknesses
 
Planned remediation efforts regarding the material weakness in internal control over financial reporting related to an ineffective control environment due to a lack of effective communication policies and procedures that include the following:
 
  •  Personnel and organizational changes:
 
  •  Appointment of a new Chief Operating Officer and conducting a search to hire a new Chief Financial Officer;
 
  •  Realignment of reporting of the Chief Financial Officer from Chief Operating Officer to the Chief Executive Officer;
 
  •  Reorganization of the Sales Function including:
 
  •  Elimination of the position, Executive Vice President Worldwide Sales, and establishment of direct reporting of the field sales organization to the Chief Operating Officer;
 
  •  Appointment of a Senior Vice President Sales Operations with direct reporting to the Chief Operating Officer;
 
  •  Implementation of recurring meetings with representation from key departments including legal, finance, operations and human resources to address operating and financial performance, as well as the identification, tracking and communication of information of potential significance to financial reporting and disclosure issues; and
 
  •  Provision of focused training relating to ethics, the Company’s Code of Conduct and its core values.
 
Planned remediation efforts regarding the material weakness in internal control over financial reporting related to sales commissions include the following:
 
  •  Review of commissions accounting procedures by the Internal Audit Department;
 
  •  Appointment of a quality review team to assess the adequacy and efficacy of the business processes, IT Systems and financial oversight for the administration of sales commissions;
 
  •  Formalization of policies and procedures including communication and reporting responsibilities among the Company’s sales, human resources and finance functions to ensure that the administration, payments of and accounting for commissions expense are coordinated;


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  •  Reconciliation of commission expense accruals to actual commission payments on a quarterly basis; and
 
  •  Monitoring of progress on remediation and to provide governance, including organizational alignment, by a cross functional review committee.
 
Planned remediation efforts regarding the material weakness in internal control over financial reporting related to non-routine tax matters include the following:
 
  •  Review of the tax department’s policies and procedures including its use of external advisors;
 
  •  Establishment of new documentation and analysis requirements for non-routine tax matters to ensure among other things, that accounting conclusions involving such matters are thoroughly documented and identify the critical factors that support the basis for such conclusions; and
 
  •  Formalization of communication and review of non-routine tax matters between the tax function and senior finance management.
 
Management is committed to the rigorous enforcement of an effective control environment. In addition, management will continue to monitor the results of the remediation activities and test the new controls as part of its review of its internal control over financial reporting for fiscal year 2007.
 
Other changes in internal control over financial reporting
 
In the first quarter of fiscal year 2007, the Company began migrating certain financial and sales processing systems to SAP, an enterprise resource planning (“ERP”) system, at its North American operations. This change in information system platform for the Company’s financial and operational systems is part of its on-going project to implement SAP at all of the Company’s facilities worldwide, which is expected to be completed over the next few years. In connection with the SAP implementation, the Company is updating its internal control over financial reporting, as necessary, to accommodate modifications to its business and accounting procedures. The Company believes it is taking the necessary precautions to ensure that the transition to the new ERP system will not have a negative impact on its internal control environment.
 
Item 9B.   Other Information.
 
Not applicable.
 
PART III
 
Item 10.   Directors and Executive Officers of the Registrant.
 
Reference is made to our definitive proxy statement, to be filed with the SEC, for information concerning our directors. This information is incorporated herein by reference. Also, refer to Part I of this Exhibit for information concerning executive officers under the caption “Executive Officers of the Registrant”.
 
Information about our compliance with Section 16(a) of the Exchange Act is incorporated herein by reference from the discussion that will appear under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed with the SEC.
 
Information about the Audit and Compliance Committee of our Board of Directors, including the members of the Committee and our Audit and Compliance Committee financial expert, is incorporated by reference from our definitive proxy statement to be filed with the SEC.
 
We maintain a Business Practices Standard of Excellence: Our Code of Conduct (Code of Conduct), which is applicable to all employees and directors, and is available on our website at ca.com. Any amendment or waiver to the Code of Conduct that applies to our directors or executive officers will be posted on our website or in a report filed with the SEC on Form 8-K. The Code of Conduct is available free of charge in print to any stockholder who requests one by writing to Kenneth V. Handal, our Executive Vice President, General Counsel and Corporate Secretary, at the Company’s world headquarters in Islandia, New York at the address listed on the cover of this Exhibit.


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Item 11.   Executive Compensation.
 
Reference is made to our definitive proxy statement, to be filed with the SEC, for information concerning executive compensation, which is incorporated herein by reference.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Reference is made to our definitive proxy statement, to be filed with the SEC, for information concerning security ownership of each person known by us to own beneficially more than 5% of our outstanding shares of common stock, of each of our directors, and all executive officers and directors as a group, and equity compensation plan information, which is incorporated herein by reference.
 
Item 13.   Certain Relationships and Related Transactions.
 
Reference is made to our definitive proxy statement, to be filed with the SEC, for information concerning certain relationships and related transactions, which is incorporated herein by reference.
 
Item 14.   Principal Accounting Fees and Services.
 
Reference is made to our definitive proxy statement, to be filed with the SEC, for information concerning our independent auditors’ fees and services as well as our Audit and Compliance Committee’s policy on pre-approval of audit and permissible non-audit services of our independent auditors, which is incorporated herein by reference.
 
CA, INC. AND SUBSIDIARIES
ISLANDIA, NEW YORK
 
 
 
 
EXHIBIT ITEM 8, ITEM 9A, ITEM 15(a)(1) AND (2), AND ITEM 15(c)
 
LIST OF UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
 
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
 
 
 
 
AS DESCRIBED IN THE EXPLANATORY NOTE AT THE BEGINNING OF THIS EXHIBIT, THE FOLLOWING UNAUDITED FINANCIAL STATEMENTS AND FOOTNOTES (PARTICULARLY WITH RESPECT TO REVENUE, TOTAL EXPENSE, NET INCOME, EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY) IS SUBJECT TO CHANGE DEPENDING ON THE FINDINGS OF OUR CURRENT REVIEW OF OPTION GRANT PRACTICES AND THE POTENTIAL RESTATEMENT OF OUR FINANCIAL STATEMENTS IN PRIOR PERIODS. REFER TO THE EXPLANATORY NOTE FOR IMPORTANT CAUTIONARY CONSIDERATIONS.
 
YEAR ENDED MARCH 31, 2006


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    Page
 
The following Unaudited Consolidated Financial Statements of CA, Inc. and subsidiaries are included in Items 8 and 9A:
   
Unaudited Consolidated Statements of Operations — Years Ended March 31, 2006, 2005, and 2004
  69
Unaudited Consolidated Balance Sheets — March 31, 2006 and 2005
  70
Unaudited Consolidated Statements of Stockholders’ Equity — Years Ended March 31, 2006, 2005, and 2004
  71
Unaudited Consolidated Statements of Cash Flows — Years Ended March 31, 2006, 2005, and 2004
  72
Notes to the Unaudited Consolidated Financial Statements
  73
The following Unaudited Consolidated Financial Statement Schedule of CA, Inc. and subsidiaries is included in Item 15(c):
   
Schedule II — Valuation and Qualifying Accounts
   
 
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.


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CA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
                         
    Year Ended March 31,  
    2006     2005     2004  
    (in millions, except
 
    per share amounts)  
 
Revenue:
                       
Subscription revenue
  $ 2,817     $ 2,544     $ 2,101  
Maintenance
    430       441       520  
Software fees and other
    163       254       331  
Financing fees
    45       77       134  
Professional services
    321       244       234  
                         
TOTAL REVENUE
    3,776       3,560       3,320  
Operating Expenses:
                       
Amortization of capitalized software costs
    449       447       463  
Cost of professional services
    272       229       224  
Selling, general, and administrative
    1,593       1,346       1,300  
Product development and enhancements
    696       704       693  
Commissions, royalties and bonuses
    387       339       267  
Depreciation and amortization of other intangible assets
    134       130       134  
Other (gains) expenses, net
    (15 )     (5 )     52  
Restructuring and other
    88       28        
Charge for in-process research and development costs
    18              
Shareholder litigation and government investigation settlements
          234       168  
                         
TOTAL EXPENSES BEFORE INTEREST AND TAXES
    3,622       3,452       3,301  
Income from continuing operations before interest and taxes
    154       108       19  
Interest expense, net
    41       106       117  
                         
Income (loss) from continuing operations before taxes
    113       2       (98 )
Tax (benefit) expense
    (23 )     4       (17 )
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS
    136       (2 )     (81 )
Income from discontinued operations, net of income taxes
    3             61  
Adjustment to gain on disposal of discontinued operations, net of income taxes
          (2 )      
                         
NET INCOME (LOSS)
  $ 139     $ (4 )   $ (20 )
                         
BASIC INCOME (LOSS) PER SHARE
                       
Income (loss) from continuing operations
  $ 0.23     $ (0.01 )   $ (0.14 )
Income from discontinued operations
    0.01       0.00       0.11  
                         
Net income (loss)
  $ 0.24     $ (0.01 )   $ (0.03 )
                         
Basic weighted average shares used in computation
    581       588       580  
DILUTED INCOME (LOSS) PER SHARE
                       
Income (loss) from continuing operations
  $ 0.23     $ (0.01 )   $ (0.14 )
Income from discontinued operations
    0.01       0.00       0.11  
                         
Net income (loss)
  $ 0.24     $ (0.01 )   $ (0.03 )
                         
Diluted weighted average shares used in computation
    608       588       580  
 
See Accompanying Notes to the Unaudited Consolidated Financial Statements.


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CA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    March 31,  
    2006     2005  
    (dollars in millions)  
ASSETS
CURRENT ASSETS
               
Cash and cash equivalents
  $ 1,831     $ 2,829  
Marketable securities
    34       296  
Trade and installment accounts receivable, net
    432       721  
Federal and state income taxes receivable
          55  
Deferred income taxes
    256       126  
Other current assets
    50       102  
                 
TOTAL CURRENT ASSETS
    2,603       4,129  
INSTALLMENT ACCOUNTS RECEIVABLE, due after one year, net
    449       595  
PROPERTY AND EQUIPMENT
               
Land and buildings
    488       594  
Equipment, furniture, and improvements
    1,066       917  
                 
      1,554       1,511  
Accumulated depreciation and amortization
    (920 )     (889 )
                 
TOTAL PROPERTY AND EQUIPMENT, net
    634       622  
PURCHASED SOFTWARE PRODUCTS, net of accumulated amortization of $4,299 and $3,899, respectively
    461       726  
GOODWILL, net of accumulated amortization of $1,409 and $1,416, respectively
    5,308       4,544  
DEFERRED INCOME TAXES
    130       130  
OTHER NONCURRENT ASSETS
    790       536  
                 
TOTAL ASSETS
  $ 10,375     $ 11,282  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
               
Current portion of long-term debt and loans payable
  $ 1     $ 826  
Government investigation settlement
    2       153  
Accounts payable
    411       177  
Salaries, wages, and commissions
    287       258  
Accrued expenses and other current liabilities
    373       370  
Deferred subscription revenue (collected) — current
    1,517       1,407  
Deferred maintenance revenue
    250       270  
Taxes payable, other than income taxes payable
    129       119  
Federal, state, and foreign income taxes payable
    372       342  
Deferred income taxes
    32       95  
                 
TOTAL CURRENT LIABILITIES
    3,374       4,017  
LONG-TERM DEBT, net of current portion
    1,810       1,810  
DEFERRED INCOME TAXES
    46       187  
DEFERRED SUBSCRIPTION REVENUE (COLLECTED) — NONCURRENT
    448       273  
OTHER NONCURRENT LIABILITIES
    77       53  
                 
TOTAL LIABILITIES
    5,755       6,340  
STOCKHOLDERS’ EQUITY
               
Preferred stock, no par value, 10,000,000 shares authorized, no shares issued
               
Common stock, $0.10 par value, 1,100,000,000 shares authorized, 630,920,596 shares issued
    63       63  
Additional paid-in capital
    4,302       4,191  
Retained earnings
    1,883       1,837  
Accumulated other comprehensive loss
    (134 )     (76 )
Unearned compensation
    (6 )     (11 )
Treasury stock, at cost, of 59,167,446 and 43,933,590 shares, respectively
    (1,488 )     (1,062 )
                 
TOTAL STOCKHOLDERS’ EQUITY
    4,620       4,942  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 10,375     $ 11,282  
                 
 
See Accompanying Notes to the Unaudited Consolidated Financial Statements.


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CA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
                                                         
                      Accumulated
                   
          Additional
          Other
                Total
 
    Common
    Paid-In
    Retained
    Comprehensive
    Unearned
    Treasury
    Stockholders’
 
    Stock     Capital     Earnings     Loss     Compensation     Stock     Equity  
    (in millions, except dividends declared per share)  
 
Balance as of March 31, 2003
  $ 63     $ 3,896     $ 1,955     $ (215 )   $     $ (1,222 )   $ 4,477  
Net loss
                    (20 )                             (20 )
Translation adjustment in 2004
                            104                       104  
Unrealized gain on marketable securities, net of taxes of $5
                            8                       8