Financial Statement analysis - Homework case number 4.

Accounting for Software Revenue Recognition Is Computer Associates Being Too Aggressive? Annual Revenues at Computer Associates (CA) dropped from $6.1 billion in 2000 to $4.2 billion in 2001. This case is designed to examine revenue recognition issues for software development firms. The case includes the following information: Background on Software Revenue Recognition (AICPA Statement of Positions 97-2 and 98-9) New York Times article describing CA's accounting practices (4/29/2001). CA's press release describing its 2001 results (5/22/2001) CA's 2001 financial statement footnotes You are asked to read the materials, and answer the following questions: 1. Describe briefly how CA used to record software licenses and maintenance under the \"Old Business Model.\" Assume that CA is selling a software package for $1,000 where 60% is the license fee and 40% is for future technical support. The support contract is for 10 years. What are the journal entries that CA is using to record software licenses and maintenance under the \"Old Business Model\"? Clearly state any assumptions you made. 2. Describe briefly how CA used to record software licenses and maintenance under the \"New Business Model.\" Assume that CA is still selling a software package for $1,000. What are the journal entries that CA is using to record software licenses and maintenance under the \"New Business Model\"? Clearly state any assumptions you made. 3. What differences, if any, exist in the timing of license and maintenance revenue recognition under the two business models? What is the effect on net income and cash flows? 4. The NYT article suggests that CA has been under pressure to buy new firms to maintain sales growth. Will CA be under the same pressure under the new business model? Provide a brief analysis of revenue growth for 2000-2001 based on the GAAP (as reported) figures and the 'Pro-Forma' reported figures. 5. CA argues that its pro-forma results allow an analyst to look at the income statement on a consistent basis over time and that the GAAP statements are misleading. Is this true? Software Revenue Recognition (AICPA Statement of Position (SOP) 97-2) In 1996, the AICPA issued Statement of Position (SOP) 97-2 to address the recognition of software revenue. The statement requires that a portion of software revenue be deferred when the software arrangement consists of \"multiple elements,\" such as upgrades, add-ons, and other software enhancements. The deferral is applicable even if the elements are only delivered on a \"when and if available basis.\" SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions In 1998, AICPA issued Statement of Position (SOP) 98-9 changing the methodology of attributing the fair value of undelivered elements. Document View Page 1 of 7 Databases selected: New York Times The Past May Haunt Computer Associates; [Chronology] Alex Berenson. New York Times. (Late Edition (East Coast)). New York, N.Y.: Apr 29, 2001. pg. 3.1 Abstract (Summary) Along the way, Computer Associates has become a financial giant and made Mr. [Charles B. Wang] very rich. In the fiscal year ended in March 2000, Computer Associates reported profits of $696 million on sales of $6.1 billion, five times the sales and profits it posted a decade earlier. It has a market value of $20.3 billion, more than Nike or Lockheed Martin. Mr. Wang, who came to the United States from China at the age of 8, owns shares and options worth almost $1.1 billion, according to the company's most recent proxy. Last year, Mr. Wang and Sanjay Kumar, the company's chief executive, bought the New York Islanders hockey team for $187.5 million. In fact, while Computer Associates sometimes issues news releases highlighting Unicenter clients, it is hard to find major companies using it. Those that Computer Associates has publicly identified include Bradlees, the discount chain that is now being liquidated, and the New Pig Corporation, in Tipton, Pa., which Computer Associates calls ''a leading provider of cleaning products and maintenance solutions for industrial facilities.'' Now Computer Associates has few targets left. Of remaining independent mainframe software companies, the only ones of any size are Compuware and BMC. Both are smaller than Computer Associates, and mainframe users, who say Computer Associates already has a monopoly in many products, would object if it tried to buy either one. Full Text (3450 words) Copyright New York Times Company Apr 29, 2001 LOOMING above the Long Island Expressway in Islandia, N.Y., the steel-and-glass headquarters of Computer Associates certainly looks solid. After all, since 1976, Computer Associates has grown from a three-person start-up into the world's fourth-largest independent software company. Led by Charles B. Wang, its chairman and founder, it has bought hundreds of smaller rivals, gaining a choke hold on an obscure but lucrative corner of the industry. Today, it has 18,000 employees and is the dominant supplier of mainframe utility software, the programs that help big computers run smoothly. Along the way, Computer Associates has become a financial giant and made Mr. Wang very rich. In the fiscal year ended in March 2000, Computer Associates reported profits of $696 million on sales of $6.1 billion, five times the sales and profits it posted a decade earlier. It has a market value of $20.3 billion, more than Nike or Lockheed Martin. Mr. Wang, who came to the United States from China at the age of 8, owns shares and options worth almost $1.1 billion, according to the company's most recent proxy. Last year, Mr. Wang and Sanjay Kumar, the company's chief executive, bought the New York Islanders hockey team for $187.5 million. But much of the growth that has enriched Mr. Wang was a mirage, according to more than a dozen former employees and independent industry analysts. Computer Associates, they say, has used accounting tricks to systematically overstate its revenue and profits for years. The practices were so widespread that employees joked that C.A. stood for ''Creative Accounting,'' and that March, June, September and December, when fiscal quarters end, had 35 days, giving the company extra time to close sales and book revenue. While reporting rising revenue and profits to Wall Street, Computer Associates has infuriated clients with high prices and poor technical support. Its heavily marketed efforts to diversify out of the mainframe business have been a painful failure, former employees and customers say. http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View Page 2 of 7 Over the years, it has gained a reputation as a callous employer that dismisses workers without warning while top executives take home eight- and sometimes nine-figure pay packages. And it has so angered I.B.M., which makes most of the mainframes that its software supports, that I.B.M. is accusing Computer Associates of charging too much for its products. I.B.M. is now developing its own rival software. Now, Computer Associates' past may have caught up with it. The company declined to make Mr. Wang or Mr. Kumar available for comment and asked that questions about its accounting practices be sent in writing. It then declined to answer more than a dozen questions sent by e-mail. Big acquisitions were key to the accounting maneuvers, employees and analysts say. And after two decades of buying competitors, Computer Associates has essentially exhausted the pool of takeover targets. As measured by standard accounting rules, Computer Associates' sales have fallen almost two-thirds over the last six months. To cover that, the company has begun presenting its financial results in a way that confuses even the Wall Street analysts who follow it. The company's stock has been strong this year. But within the information technology industry, its problems are no secret. ''C.A.'s got a particular challenge ahead of them,'' said William Snyder of the Meta Group, a 600-employee consulting company that advises companies about information technology. ''They have two to three years to turn it around.'' To be sure, complaints about Computer Associates' prices and customer support have been around almost as long as the company, and it has always outlasted its detractors. But if former employees' claims are accurate, the company faces a serious crisis. These employees declined to speak for the record. The company has a well-deserved reputation for having a fierce legal department. Since the beginning of 2000, it has been either a plaintiff or defendant in three dozen federal lawsuits, on issues ranging from commission disputes to discrimination claims. But, given anonymity, people who worked in sales, accounting and marketing units at Computer Associates explained how the company inflated its reported revenues in a way that made it look as if new products were selling better than they were. The company's public financial statements support their claims, they said. The proof, in other words, is in the numbers. ON April 16, Computer Associates reported another banner quarter. ''New Business Model Rules; Q4 Rocks,'' it said proudly in a news release outlining its results for the three months ended March 31. The company appeared untouched by the slowdown in technology spending that has hurt other big software companies like Oracle. Computer Associates said that on a ''pro forma, pro rata'' basis, its revenue had risen to $1.44 billion for the quarter, from $1.39 billion in the period a year earlier. Profits were 47 cents a share, it said, up from 39 cents a share. During a conference call later, Mr. Kumar, the chief executive, and Ira Zar, the chief financial officer, accepted analysts' congratulations. ''Today really is a great day for us at Computer Associates,'' Mr. Kumar said. He attributed the company's strong pro forma results to a new software licensing model that it unveiled with great fanfare on Oct. 25. The company promised that its ''new business model'' would allow it to offer customers more flexible contract terms, including month-to-month licenses. In addition, the new model would help Computer Associates by giving it a more predictable revenue stream, the company said. Previously, it struggled each quarter to close enough large deals to meet Wall Street's expectations and discounted its software heavily as the end of each quarter approached. http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View Page 3 of 7 ''The new business model turned out to be a competitive advantage for us,'' Mr. Kumar said in the conference call. Wall Street agreed. Over the next three days, the company's stock soared $7.41, to $37, a gain of 25 percent. After falling steeply from its January 2000 high of $75 to $18.13 in December, the stock has rebounded strongly this year, closing on Friday at $35.25. But the last line of the April 16 news release told a different story. There, Computer Associates reported its revenue and income according to ''generally accepted accounting principles,'' the standard that companies are required to use in filings with the Securities and Exchange Commission to calculate results. By those rules, revenue fell almost 60 percent, to $732 million, from $1.91 billion. After earning a profit of $1.13 a share, or about $700 million, last year, the company lost 29 cents a share, or about $175 million, this year. The divergence followed an equally big gap in the company's quarter ended Dec. 31. For that period, the company reported pro forma revenue of $1.4 billion and profits of $247 million, while by the stricter standards it had revenue of $783 million and a loss of $342 million. Computer Associates is not the only company to highlight pro forma results -- which offer investors an alternative, usually more favorable, way to look at results -- and to play down standard figures. Even so, its last two quarterly reports were extraordinary. Many companies that make use of pro forma accounting offer a detailed road map connecting those figures to standard results. Computer Associates did not. Nor have analysts been able to decipher how the company is reporting its numbers. ''The pro formas are very difficult to fathom,'' said Norma Schroder of Gartner Dataquest, a leading technology consulting firm. ''I've spent many hours with the financial statements, and I'm still having problems understanding it.'' The company says its pro forma numbers more accurately reflect its results now that it has changed its licensing terms. But customers and competitors say the company continues to use old sales tactics and to offer old contract terms. ''I have not heard anything that we would be paying monthly,'' said Andy Olivenbaum, who is negotiating a new license for Florida's Northeast Regional Data Center, which processes records for the state. ''Certainly out in the field they're still selling the way they always sold,'' said Bob Beauchamp, president and chief executive of BMC Software, a rival mainframe software company. ''To my knowledge, we have not run into this, quote, new model.'' Former employees and analysts have a very different explanation for the company's effort to focus Wall Street on its ''new business model.'' After years of inflating revenue and profits, Computer Associates has finally run out of accounting maneuvers, they say. Now, they add, it hopes to persuade analysts to ignore its standard accounting results while it unravels the mess it has created. UNDERSTANDING how Computer Associates is said to have pumped up its revenue requires a bit of background about the way software is sold. Big software companies usually offer clients software for a large initial fee that enables them to use it for a year, followed by annual fees to continue using it and receive product upgrades and technical support. The annual fees are usually 15 to 20 percent of the first year's fee. Customers can also sign a long-term contract and spread the initial fee, plus the annual fees, over the term of the contract. The fees increase along with the power of the computers used to run the software. For accounting purposes, the crucial issue that determines whether Computer Associates, or any software company, can immediately book the fees as revenue is whether the fees are classified as license or maintenance charges. (When the fees are supposed to be paid is nearly irrelevant, accounting experts say.) If the fees are called maintenance, then accounting rules require software companies to book them a little at a time over the life of the contract. But if they are considered license fees, then under some circumstances the companies can book them immediately, even if they are to be paid over a period of many years. By categorizing fees as related to licenses, instead of maintenance, Computer Associates could inflate its revenues in any given quarter, at the expense of future quarters. And, subject to outside auditors' approval, it had considerable discretion over whether to classify fees as license or maintenance. http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View Page 4 of 7 For at least a decade, the company has taken full advantage of that discretion, former employees say. When Computer Associates bought other software vendors, it would try to persuade their existing customers to ''reroll,'' or extend, their license and maintenance agreements for as long as 10 years. It then classified most of the fees from the extended agreements as new license revenue and booked it immediately. Other software companies are more conservative in the way they split license and maintenance fees. For example, BMC Software classifies all the fees it charges after the first year of long-term contracts as maintenance fees, and books them over time. ''There's a dirty little truth about the mainframe business,'' said a former Computer Associates executive who worked in its interBiz division. ''There's not a whole lot of new mainframes going in, so a lot of what's being booked as new revenue is taking an existing contract that's expiring and adding years on to it. It's rerolling a contract.'' More than a dozen other former employees confirmed that account. ''What C.A.'s going to do is say, 'We're going to give you a long-term deal here,' '' another former executive said. ''They hire young, cute girls to basically resell maintenance contracts.'' Sometimes, that tactic backfired. George Allen Papapetrou, a systems programmer for the school board of Alachua County, Fla., recalled that about six years ago, the company sent a saleswoman who was ''a very attractive young woman, but she knew nothing about mainframes.'' Mr. Papapetrou added, ''Most of us are geeky-type people, so we'll appreciate the looks, but we certainly don't appreciate the lack of knowledge. I felt sorry for her.'' REROLLS were not Computer Associates' only accounting maneuver, former employees and analysts say. Wall Street, which knew mainframes were steadily losing market share to ''client server'' systems made by companies like Sun Microsystems, wanted the company to prove it could compete in that arena. In that battle, Computer Associates' most important software product was Unicenter, later called Unicenter TNG, which in theory lets companies map and control their entire computer infrastructure. Computer Associates had difficulty winning clients for Unicenter. In part, its problems stemmed from its history of buying smaller companies, firing their support staffs and raising fees for customers who wanted to buy more powerful computers. Those moves increased revenue and profits but alienated customers. ''I don't think it's any secret that a lot of us, especially in mainframe stuff, are not C.A. fans,'' said Doug Fuerst, a software consultant in Brooklyn whose clients have included big financial services companies. At technology conferences, when people were asked if they were trying to drop ''one or more C.A. products, probably 95 percent of the hands go up in the room,'' he said. Mr. Papapetrou said the Alachua school board now uses nine Computer Associates programs, compared with 13 four years ago, paying about $20,000 a year, down from $30,000. ''We've been steadily trying to eliminate C.A. products,'' he said. Unicenter has another drawback. Its complexity makes it difficult to install, and most companies are not able to operate it successfully, said Donna Scott, a Gartner analyst. Both inside and outside Computer Associates, Unicenter is derisively called ''shelfware,'' or software that is bought but never used. In fact, while Computer Associates sometimes issues news releases highlighting Unicenter clients, it is hard to find major companies using it. Those that Computer Associates has publicly identified include Bradlees, the discount chain that is now being liquidated, and the New Pig Corporation, in Tipton, Pa., which Computer Associates calls ''a leading provider of cleaning products and maintenance solutions for industrial facilities.'' Unicenter and Jasmine ii, another product that Computer Associates has advertised heavily, ''are pretty hard to find in the wild,'' said Herbert VanHook, senior vice president at the Meta Group. Yet Computer Associates has steadily reported increases in its Unicenter revenue. In fiscal 1999, it said in an S.E.C. filing that Unicenter accounted for one-fourth of its overall revenue. By last year, Unicenter and other nonmainframe products accounted for half the company's overall contract revenue, it said. It may appear paradoxical that customers would pay for software that did not work. The explanation, former employees and analysts say, is that the company often offered Unicenter free in the maintenance rerolls it offered. In deals called ''wrap and rolls,'' it would then allocate a portion of the revenue to Unicenter, enabling it to show sales http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View Page 5 of 7 growth to Wall Street. ''Sometimes the deals that were made, if you're using these products, we're going to throw in this for free,'' Ms. Scott said. ''It doesn't mean it's going to get implemented.'' All of this explains a puzzling trend in Computer Associates' financial statements. At most big software companies, maintenance fees account for more than one-quarter of overall revenue. For example, SAP, which has just passed Computer Associates to become the third-largest independent software company, reported maintenance revenue of 485 million euros, or about $440 million, nearly one-third of its overall revenue, for the three months ended March 31. And, not surprisingly, maintenance fees generally rise along with license fees. Indeed, several years ago, Computer Associates' company results were in line with industry standards. In 1992, it reported maintenance fees of $585 million, about 39 percent of its overall revenue of $1.51 billion. The next year, overall revenue climbed 22 percent, to $1.84 billion, while maintenance revenue rose 15 percent, to $672 million. Then something changed. Over the next seven years, overall revenue skyrocketed, as the company made several major acquisitions. In fiscal 2000, its overall revenues reached $6.1 billion, more than triple the level seven years earlier. Yet over the same period, maintenance revenue grew only 30 percent, to $877 million. As a result, in fiscal 2000, maintenance accounted for only 14 percent of revenue. Put another way, Computer Associates' maintenance rose only $200 million in seven years, even though two companies it bought over that span -- Legent and Sterling Software -- had each reported more than $200 million in maintenance revenue in the last year they were independent. IT is not clear whether the way Computer Associates prepared its financial statements broke any accounting rules. Both Ernst & Young, which audited the company until 1999, and KPMG, its current auditor, declined comment on Computer Associates' practices. But there is no doubt that rerolls and wrap-and-rolls shifted future fees into current reported revenue, pumping up the present at the expense of the future. And once the company had rerolled an old contract, it could not reroll it again for several years. So to keep reporting growth, employees say, the company needed to find a steady supply of new contracts to turn over. So the company began buying ever-bigger companies. In 1995, it bought Legent for $1.8 billion in cash, at the time the largest takeover in the history of the software business. The next year, it acquired Cheyenne Software for $1.2 billion in cash. In July 1999, Computer Associates bought Platinum for $3.5 billion in cash. And last year, it picked up Sterling for $4 billion, its biggest acquisition yet. Now Computer Associates has few targets left. Of remaining independent mainframe software companies, the only ones of any size are Compuware and BMC. Both are smaller than Computer Associates, and mainframe users, who say Computer Associates already has a monopoly in many products, would object if it tried to buy either one. Its core franchise, meanwhile, faces a powerful challenge from I.B.M., which says Computer Associates is hurting its sales of new mainframes. Computer Associates' fees rise as its clients install faster computers, so a company that buys new I.B.M. hardware must also pay much higher fees for software that is sometimes decades old. Other software vendors also raise fees when clients install new hardware, but Computer Associates' price increases are excessive, I.B.M. asserts, especially since the company provides little support. After years of asking Computer Associates to cut prices, I.B.M. has decided to develop its own utilities and compete head to head. ''In the last three years we've been systematically upping our investments,'' said Steve Mills, head of I.B.M.'s software unit, which has annual sales of $13 billion. ''This is our business that they are damaging.'' JUST before midnight on Monday, July 3, 2000, as most Wall Street analysts were enjoying a four-day holiday weekend, Computer Associates announced that its revenues and profits would fall far short of expectations. On Wednesday, July 5, when stock markets reopened for trading, angry investors sent its stock down $21.63, or 42 percent, to $29.50. The sell-off shaved more than $12 billion from Computer Associates' market value. http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View Page 6 of 7 Three months later, the company announced plans to switch to its ''new business model'' and discouraged analysts from judging its results by standard accounting rules. So far, Wall Street has complied. But as other companies have found, investors are apt to punish companies if they learn that their results are not what they seem. [Photograph] Led by Sanjay Kumar, left, chief executive, and Charles Wang, chairman and founder, Computer Associates has grown enormously. (Kevin P. Coughlin for The New York Times)(pg. 1); Although they are hockey novices, Sanjay Kumar, left, and Charles Wang decided to buy the New York Islanders last year for $187.5 million. (Kevin P. Coughlin for The New York Times)(pg. 11) [Chart] ''Pay for Performance?'' Top executives at Computer Associates have been richly rewarded since 1995, although the company's stock has lagged behind other software companies and the broader market. Change in value since 1995 MAY 21, 1998 Three senior executives receive 20.25 million shares worth about $1.1 billion. The grant prompts shareholder lawsuits, which are settled when the executives return 4.5 million shares. JULY 22, 1998 The company warns of poor results. Analysts wonder whether it knew of the problem when the grant was awarded. JULY 5, 2000 Another warning prompts a second big sell-off. Graph shows S.& P. COMPUTER SOFTWARE AND SERVICES INDEX, COMPUTER ASSOCIATES, and the S.& P. 500 INDEX figures for those dates. (Source: Bloomberg Financial Markets)(pg. 11) [Chart] ''Mixed Signals'' Since 1992, revenue from licensing fees has grown sharply at Computer Associates, but maintenance fees have not kept pace. As a result, the company's share of revenue from maintenance fees is much lower than that of other big software companies. Former employees say that is because Computer Associates aggressively booked fees it would not receive for several years as soon as it signed contracts. MAINTENANCE FEES LICENSING FEES SERVICE FEES '92: 39% '93: 36% '94: 32% '95: 27% '96: 21% '97: 18% '98: 17% '99: 16% '00: 14% AT SIMILAR COMPANIES shows the fiscal year 2000. (SERVICE FEES NOT REPORTED SEPARATELY '92-'97) (Source: Company reports) (pg. 11) Indexing (document details) Subjects: Accounting procedures, Software industry, Corporate profiles People: Kumar, Sanjay, Wang, Charles B Companies: Computer Associates International Inc(Ticker:CA, NAICS: 511210, Duns:08-039-9256 ) Author(s): Alex Berenson Document types: Feature Column Name: A Software Company Runs Out of Tricks Section: 3 Publication title: New York Times. (Late Edition (East Coast)). New York, N.Y.: Apr 29, 2001. pg. 3.1 Source type: Newspaper http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Document View ISSN: Page 7 of 7 03624331 ProQuest document ID: 71933517 Text Word Count 3450 Document URL: http://proquest.umi.com/pqdweb?did=71933517&sid=2&Fmt=3&clie ntId=9269&RQT=309&VName=PQD Copyright 2007 ProQuest LLC. All rights reserved. http://proquest.umi.com/pqdweb?index=2&sid=2&srchmode=1&vinst=PROD&fmt=3&st... 9/14/2007 Computer Associates Investor Relations - News Release Page 1 of 7 NEWS RELEASE CA Confirms Positive Fourth Quarter Performance; Reports Fourth Quarter And Full Fiscal Year 2001 Results ISLANDIA, N.Y., May 22 /PRNewswire/ -- Computer Associates International, Inc. (NYSE: CA) today announced its final results for the fourth quarter and fiscal year ended March 31, 2001. Sanjay Kumar, President and CEO of Computer Associates, stated: "We are pleased with our overall performance in the fourth fiscal quarter despite a very challenging period for the high technology sector. Customers continued to embrace our technology, and our new Business Model is making a competitive difference." "CA continues to deliver solutions that allow customers to manage their businesses more efficiently and add value in an economic climate where assessment of worth happens very quickly. Our new Business Model places the technology risk on CA-clearly something our competitors will be challenged to match under their traditional method of selling enterprise software." "Moreover, we believe the new business model will help address shareholders' interest in a more visible and predictable revenue stream, and provide more visibility into the company's operations," said Kumar. Results on a Pro Forma Basis Contracts under the new Business Model require CA to recognize product revenue ratably over the term of the license agreement, whereas in prior periods CA recognized product revenue at the time of the transaction. To facilitate the comparison and evaluation of current and prior periods, CA is providing Pro Forma results. The Pro Forma results reflect CA's performance as if CA had been operating under the new Business Model in earlier periods, and had been recognizing product revenue ratably over the term of the signed contract during those periods. The annual Pro Forma results have been attested to by KPMG LLP, CA's independent auditors. SUMMARY PRO FORMA RESULTS (1) (in millions, except per share amounts) Product revenue Professional services Total revenue Net operating income Diluted operating earnings per share Q4 '01 $1,339 $102 $1,441 $274 Q4 '00 $1,209 $181 $1,390 $207 FY '01 $5,049 $517 $5,566 $951 FY '00 $4,492 $764 $5,256 $787 $0.47 $0.34 $1.61 $1.31 (1) See Footnotes to Table 1. Results On An As Reported Basis Since the new Business Model requires recognition of product revenue on a ratable basis, current As Reported revenue will be lower than revenues reported in quarters ended Sept. 30, 2000 and prior, while CA builds Residual Value on its balance sheet. Also known as Deferred Revenue, Residual Value reflects the value of contractual commitments not reported as revenue at the balance sheet date. Residual Value will be amortized into As Reported revenue in future reporting periods. Comparisons of As Reported revenue to revenue reported in the comparable quarters are therefore not meaningful because product revenue is recognized up front in one period, and ratably over time in another. SUMMARY AS REPORTED RESULTS (1) (in millions, except per share amounts) http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Page 2 of 7 Product revenue Professional services Total revenue Net (Loss)/Earnings Diluted (LPS)/EPS Q4 '01 $631 $102 $733 $(410) $(0.71) Q4 '00 $1,792 $115 $1,907 $392 $0.70 FY '01 $3,681 $517 $4,198 $(591) $(1.02) FY '00 $5,603 $500 $6,103 $696 $1.25 Diluted operating (LPS)/EPS2 $(0.29) $1.13 $0.16 $3.28 Residual Value recorded in the quarter ended March 31, 2001 Residual Value balance at fiscal year ended March 31, 2001 $1,305 $1,875 (1) See Footnotes to Table 2. (2) Exclusive of acquisition amortization effect and special items, which are detailed in Table 2. CA is providing additional disclosure in the form of a reconciliation of As Reported revenue to Pro Forma revenue in Table 3 below. (Additional information on CA's new Business Model and Residual Value is available at http://www.ca.com/invest). FY2001 in Review At year-end, CA had more than $800 million of cash and marketable securities on its balance sheet. CA also generated cash from operations of more than $1.38 billion, which exceeded expectations. In addition, CA balanced the use of cash generated between debt reduction of more than $900 million and share repurchases of approximately $450 million for the fiscal year. Furthermore, CA has repaid more than $200 million of debt in the first quarter of fiscal year 2002. An aggressive eBusiness marketing and branding campaign has strengthened the company's leadership position. The company's focus on six key areas -- enterprise management, security, storage, eBusiness transformation and integration, portal and knowledge management, and predictive analysis and visualization-defines the core strength of CA. Reflecting its new strategy to focus its services organization on the deployment of CA solutions, CA divested the Sterling Federal Systems Group in the third fiscal quarter. This strategy has resulted in a decline in Professional services. "Despite a difficult start to the fiscal year and the challenges presented in a changing business and economic climate over the past 12 months, we were able to build momentum by the end of the fiscal year," said Kumar. "The business and economic environment early in our fiscal year presented unique challenges, some of which specifically related to the mainframe and software upgrade cycle. As signs of a softening economy increased, corporations postponed IT investments, negatively affecting the entire software sector." "Throughout the fiscal year, we've heard our customers consistently ask for better ways to address their increasingly complex technology demands. CA responded with cutting-edge products and services, and the introduction of our new Business Model." Unlike traditional software licensing models, in which customer risk and value are measured solely by price, CA's new Business Model allows CA to engage customers in flexible partnerships that map the growth of their technology to the growth of their business. "CA has taken the lead among software companies by adopting a model that enhances visibility, and has seen validation of this approach as other software companies have announced their intention to move in this direction," said Kumar. http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Page 3 of 7 What Customers And Industry Analysts Are Saying About CA's New Business Model David Lauderdale, Senior Vice President, Worldwide Technical Operations, Worldspan, the leading processor of Internet travel bookings worldwide: "Doing business with CA has never been easier. Working closely together, we were able to craft an agreement that provides Worldspan with flexibility and predictable software costs tied to the growth of our business. Under this new transaction fee agreement, CA has aligned their success with the success of Worldspan. This is a great example of a true partnership." K. Wade Tolman, Executive Vice President, Key Technology Services, KeyCorp, one of the nation's largest multiline financial services companies: "We had been considering an 'exit-CA' strategy, but during this past year, we experienced first hand a significant improvement in CA's service and support. With CA's new business model offering us flexibility in both pricing and product selection, we are now allowing CA the opportunity to demonstrate that they can become an integral part of Key's long-term business strategy." Betsy Burton, Vice President and Research Area Director, Gartner Research: "Over the next 3 years, leading NSM vendors will be adding new rental pricing and software-as-a-service options in order to extend their reach and offer greater choice. CA clients should consider this new licensing model when their primary goal is to increase their flexibility in product selection and deployment. Users need to understand and plan ahead for product evolution or contract extension under this licensing model." Paul Mason, Group Vice President of Infrastructure Software Research, IDC: "CA is clearly trying to reinvent itself, and the new business model is an example of this. Customers are finding CA easier to work with and will be able to 'have it their way' when it comes to software licensing." About Computer Associates Computer Associates International, Inc. (NYSE: CA) delivers The Software That Manages eBusiness. CA's world-class solutions address all aspects of eBusiness process management, information management, and infrastructure management in six focus areas: enterprise management, security, storage, eBusiness transformation and integration, portal and knowledge management, and predictive analysis and visualization. Founded in 1976, CA serves organizations in more than 100 countries, including 99 percent of the Fortune 500 companies. For more information, please visit http://ca.com. All trademarks, trade names, service marks, and logos referenced herein belong to their respective companies. Table 1 COMPUTER ASSOCIATES INTERNATIONAL, INC. Pro Forma (1) Operating Earnings(2) (In millions, except per share data) (unaudited) Three Months Ended March 31, 2001 2000 Product and Other Professional Services Fiscal Year Ended March 31, 2001 2000 $1,339 102 $1,209 181 $5,049 517 $4,492 764 1,441 1,390 5,566 5,256 SG&A 616 R&D 174 Comm/Royalties 96 CA Depr/Amort 38 Interest Expense, net 79 Sterling/Platinum Expenses -- 513 155 99 33 95 164 2,534 695 334 137 344 -- 1,837 568 328 108 339 816 1,003 1,059 4,044 3,996 Pre Tax Profit 438 331 1,522 1,260 Tax Expense 164 124 571 473 Total Revenue Total Costs http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Net Operating Income Diluted Operating EPS Page 4 of 7 274 207 951 787 $0.47 $ 0.34 $ 1.61 $1.31 585 606 592 603 # Shares Used (1) Includes combined results of operations of CA, Platinum technology Int'l, Inc. and Sterling Software, Inc. (2) Excludes acquisition amortization and special items. Table 2 COMPUTER ASSOCIATES INTERNATIONAL, INC. As Reported Results (In millions, except per share data) Three Months Ended March 31, 2001 2000(1) Fiscal Year Ended March 31, 2001(2) 2000(3) $631 102 $ 1,792 115 $ 3,681 517 $ 5,603 500 Total Revenue 733 1,907(4) 4,198(5) 6,103(6) SG&A R&D Comm/Royalties CA Depr/Amort Acquisition Amort Interest Expense, net Special Items 616 174 96 38 241 79 -- 513 155 99 33 131 95 165 2,534 695 334 137 973 344 (153) 1,837 568 328 108 486 339 847 Total Costs 1,244 1,191 4,864 4,513 Pre Tax (Loss)/Profit (511) 716 (666) 1,590 Tax (Benefit)/Expense (101) 324 (75) 894 Net (Loss)/Income (410) 392 (591) 696 Basic (LPS)/EPS # Shares Used Diluted (LPS)/EPS # Shares Used $(0.71) 577 $(0.71) 577 $ 0.72 543 $0.70 561 $(1.02) 582 $(1.02) 582 $ 1.29 539 $ 1.25 557 Diluted Oper. (LPS)/ EPS(7) # Shares Used $(0.29) 577 $1.13 561 $0.16 592 $ 3.28 557 Product and Other Professional Services (1) Includes a $150 million charge for in-process R&D related to the acquisition of Sterling Software, Inc. and a $15 million non-cash charge associated with an investment in CHS Electronics, Inc. (2) Includes a special gain of $184 million associated with the 1995 Key Employee Stock Plan litigation and a $31 million write-off related to the bankruptcy filing of Inacom Corporation. http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Page 5 of 7 (3) Includes a $795 million charge for in-process R&D related to the acquisitions of Platinum technology International, inc. and Sterling Software, Inc., and a $52 million non-cash charge associated with an investment in CHS Electronics, Inc. (4) Total Contract Value was $2.127 billion for this period. (5) Total Contract Value was $4.475 billion for this period. (6) Total Contract Value was $6.766 billion for this period. (7) Excludes acquisition amortization and special items. Table 3 COMPUTER ASSOCIATES INTERNATIONAL, INC. Reconciliation of Reported Revenue to Pro Forma Revenue (In millions) Three Months Ended March 31, 2001 Fiscal Year Ended March 31, 2001 As Reported Revenue $733 $ 4,198 Current Year Activity: Up-Front License Fees (1) Amortization of License Fees (2) (21) 71 (1,429) 172 50 (1,257) 538 2,145 Amortization of Sterling Software's License Fees (4) 57 228 Amortization of Platinum technology's License Fees (5) 63 252 $ 1,441 $ 5,566 Prior Years' Activity: Amortization of Computer Associates' License fees (3) Pro Forma Revenue (1) Represents revenue recognized up-front pursuant to requirements of SOP 97-2 for the applicable period which should be eliminated for Pro Forma purposes. (2) Represents amortization of revenue related to contracts where the revenue was previously recognized up-front and eliminated pursuant to footnote 1, above. (3) Represents amortization of revenue previously recognized up-front for direct product sales in prior fiscal years had CA been under ratable recognition. The average life of such contracts is 5.5 years and is net, if applicable, of any associated expanded contract costs. http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Page 6 of 7 (4) Represents amortization of revenue previously recognized up-front for direct sales of Sterling Software (acquired March 31, 2000) had Sterling Software historically been part of CA and had CA been under ratable revenue recognition. The average life of such Sterling Software contracts is 4 years. (5) Represents amortization of revenue previously recognized up-front for direct sales of Platinum technology (acquired May 28, 1999) had Platinum technology historically been part of CA and had CA been under ratable revenue recognition. The average life of such Platinum technology contracts is 4.5 years. Table 4 COMPUTER ASSOCIATES INTERNATIONAL, INC. Consolidated Condensed Balance Sheets (In millions) March 31, 2001 March 31, 2000 Cash & Marketable Securities Accounts Receivable Residual Value (current) Other Current Assets $850 2,102 (480) 171 $1,387 2,175 -430 Total Current Assets 2,643 3,992 4,151 (1,395) 794 2,328 5,400 222 3,812 -829 2,598 6,032 230 14,143 17,493 Loans Payable & Current Portion of Long Term Debt Other Current Liabilities Long Term Debt Deferred Income Taxes Deferred Maintenance Stockholders' Equity 816 1,470 3,639 1,900 538 5,780 919 2,085 4,527 2,365 560 7,037 Total Liabilities & Equity $ 14,143 $ 17,493 Installment A/R Residual Value (non-current) Property and Equipment Purchased Software Goodwill Other Assets Total Assets Statements herein concerning Computer Associates' future prospects are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. There can be no assurances that future results will be achieved, and actual results could differ materially from forecasts and estimates. Important factors that could cause actual results to differ materially include: the risks associated with changes in the company's business model; the risks associated with changes in the way in which the company accounts for license revenue; the difficulties of compiling pro forma financial information, given acquisitions over time; the significant percentage of CA's quarterly sales consummated in the last few days of the quarter making financial predictions especially difficult and raising a substantial risk of variance in actual results; changes in industry accounting guidance; the emergence of new competitive initiatives resulting from rapid technological advances or changes in pricing in the market; the risks associated with new product introductions as well as the uncertainty of customer acceptance of these new or enhanced products from either CA or its competition; risks associated with the entry into new markets such as professional services; the risks associated with http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Computer Associates Investor Relations - News Release Page 7 of 7 integrating newly acquired businesses and technologies; dependency on large dollar licensing transactions; delays in product delivery; reliance on mainframe capacity growth; the ability to recruit and retain qualified personnel; business conditions in the distributed systems and mainframe software and hardware markets; uncertainty and volatility associated with Internet and eBusiness related activities; use of software patent rights to attempt to limit competition; fluctuations in foreign currency exchange rates and interest rates; the volatility of the international marketplace; uncertainties relative to global economic conditions; uncertainty in connection with litigation in which the company has been named as a defendant; changes in the sales compensation plan and its effects on the business; and other risks described in filings with the Securities and Exchange Commission. MAKE YOUR OPINION COUNT -- Click Here http://tbutton.prnewswire.com/prn/11690X73269299 SOURCE Computer Associates International, Inc. CONTACT: Lisa Savino, Investor Relations, 631-342-2788, lisa.savino@ca.com, or Bob Gordon, Public Relations, 631342-2391, bobg@ca.com, both of Computer Associates International, Inc./ http://investor.ca.com/phoenix.zhtml?c=83100&p=irol-newsArticle_print&ID=177743&hig... 9/6/2005 Notes to Consolidated Financial Statements \u0002 Note 1 Significant Accounting Policies Description of Business: Computer Associates International, Inc. and subsidiaries (the \"Company\") designs, develops, markets, licenses and supports a wide range of integrated eBusiness computer software solutions. Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and its majority owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Basis of Revenue Recognition: The Company derives revenue from licensing software products and providing post-contract customer support (hereafter referred to as \"maintenance\") and professional services, such as consulting and education services. The Company licenses its software products to end users primarily through the Company's direct sales force. The Company licenses to customers the right to use its enterprise software products pursuant to software license agreements (hereafter referred to as a \"license arrangement\"). The license arrangement generally restricts the customer's right to use the Company's enterprise software products as specified in the license arrangement. The license arrangements have original terms that generally range from one to six years. The timing and amount of license revenue recognized during an accounting period is determined by the nature of the contractual provisions included in the license arrangement with customers. Traditional Software License Arrangements: Prior to December 2000, the Company executed software license arrangements that included contractual provisions that resulted in the recognition of revenue attributable to the software products upon delivery of the software products, provided that the arrangement fee was fixed or determinable and collectibility of the fee was probable. The amount of revenue attributed to these arrangements for the fiscal years ended March 31, 2001, 2000 and 1999 was $1,897 million, $4,197 million and $3,228 million, respectively. Under these arrangements (referred to as the \"old Business Model\"), the Company recognizes revenue using the residual method pursuant to the requirements of AICPA Statement of Position No. 97-2 \"Software Revenue Recognition\" (\"SOP 97-2\"), as amended by AICPA Statement of Position No. 98-9, \"Software Revenue Recognition with Respect to Certain Arrangements.\" Under the residual method, revenue is recognized in a multiple element arrangement when company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (e.g., maintenance, consulting, education services) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (i.e., software product) when the criteria in SOP 97-2 have been met. Revenue attributable to a delivered element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. The Company has a standard business practice of entering into long-term installment contracts with customers. The Company has a history of enforcing the contract terms and successfully collecting under such arrangements, and therefore considers such fees fixed or determinable. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable or that collectibility is not probable, the Company defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable. Accounts receivable resulting from old Business Model product sales with extended payment terms are discounted to present value at prevailing market rates. In subsequent periods, the receivable is increased to the amount due and payable by the customer through the accretion of financing revenue on the unpaid receivables due in future years. The amount of discount credited to revenue (\"Financing Fees\") for the fiscal years ended March 31, 2001, 2000 and 1999 was $638 million, $529 million and $408 million, respectively. The Company also enters into license arrangements with distribution partners whereby revenue is recognized upon sell-through to the end user by the distribution partner. CA Annual Report 2001 29 Subscription-Based Software License Arrangements: Beginning in December 2000, the Company began executing software license arrangements that include flexible contractual provisions that, among other things, allow customers to receive unspecified future software products within designated product lines. Under these arrangements (referred to as the \"new Business Model\"), the Company recognizes revenue attributable to the software products ratably over the term of the license arrangement commencing upon delivery of the currently available software products. The amount of revenue attributable to these arrangements since the introduction of the new Business Model was $59 million for the fiscal year ended March 31, 2001. Maintenance Revenue: For arrangements executed under the old Business Model, maintenance was bundled for a portion of the term of the license arrangement. Under these arrangements, the fair value of the maintenance, which was based on optional annual renewal rates stated in the maintenance arrangement, initially was deferred and subsequently amortized into revenue over the initial contractual term of the maintenance arrangement. Maintenance renewals have been recognized ratably over the term of the renewal arrangement. The Company has recently experienced maintenance renewal rates on such contracts in excess of 80%. The amount of maintenance revenue attributable to these arrangements for the fiscal years ended March 31, 2001, 2000 and 1999 was $1,087 million, $877 million and $742 million, respectively. The Deferred Maintenance Revenue line item on the Company's Consolidated Balance Sheets principally represents payments received in advance of services rendered as of the balance sheet dates. For arrangements executed under the new Business Model, maintenance is bundled for the entire term of the license arrangement. Under these arrangements, maintenance revenue is recognized ratably over the term of the license arrangement, along with the license fee, commencing upon delivery of the currently available software products. Professional Services Revenue: Professional services revenue is derived from the Company's consulting services and educational programs. The fair value of the professional services, which is based on fees charged to customers when the related services are sold separately or under time and materials contracts, initially is deferred and subsequently recognized as revenue when the services are performed. For professional services rendered pursuant to a fixed-price contract, revenue is recognized on the percentage-ofcompletion method. 30 CA Annual Report 2001 Effective in the fourth quarter of fiscal 2001, the Company adopted Staff Accounting Bulletin No. 101, \"Revenue Recognition in Financial Statements\" (\"SAB 101\"). The adoption of SAB 101 did not have a material effect on the Company's consolidated financial position or results of operations. Marketable Securities: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company has evaluated its investment policies consistent with Statement of Financial Accounting Standards (\"SFAS\") No. 115 and determined that all of its investment securities are to be classified as available-for-sale. Availablefor-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption \"Accumulated Other Comprehensive Loss.\" The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in selling, general and administrative expenses. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of marketable securities and accounts receivable. The Company's marketable securities consist primarily of high-quality securities with limited exposure to any single instrument. The Company's accounts receivable balances have limited exposure to concentration of credit risk due to the diverse client base and geographic areas covered by operations. Fair Value of Financial Instruments: SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The fair value of the Company's cash and cash equivalents, trade and installment accounts receivable, accounts payable, accrued expenses, and deferred maintenance amounts approximate their carrying value. See Notes 3 and 6 for the fair value related to the Company's investments and debt payable, respectively. Property and Equipment: Land, buildings, equipment, furniture and improvements are stated at cost. Depreciation and amortization are provided over the estimated useful lives of the assets by the straight-line method. Building and WSJ.com - CA's Ex-CEO Pleads Guilty To Securities Fraud Page 1 of 3 April 25, 2006 CA's Ex-CEO Pleads Guilty To Securities Fraud Kumar, Onetime Highflier, Faces Long Prison Term; Earnings Were Inflated By WILLIAM M. BULKELEY and PAUL DAVIES April 25, 2006; Page A3 DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. See a sample reprint in PDF format. Order a reprint of this article now. Sanjay Kumar, the former chief executive of CA Inc., pleaded guilty to securities fraud and obstruction of justice charges stemming from a scheme that used backdated contracts to falsify the U.S. company's quarterly earnings reports. The plea ends the career of a Sri Lankan immigrant who climbed to the top of the corporate ladder and made a fortune in the U.S. high-technology boom. Mr. Kumar now faces a maximum 90 years in prison if the eight counts to which he pleaded result in consecutive sentences. However, lighter sentencing of 10 to 30 years might be dictated under federal guidelines. At the software company formerly known as Computer Associates, Mr. Kumar first gained note as the protg of company founder Charles Wang. Together, the two built a fast-growing enterprise adept at taking over smaller companies specializing in software for corporate back offices. But in 2000, when the company abruptly announced a change in auditors and accounting methodology, revenue started to plummet. The Securities and Exchange Commission began investigating in 2002 and eventually referred the case to the U.S. Justice Department, which has secured a number of guilty pleas of top CA executives. In September 2004, Mr. Kumar, 44 years old, was indicted with former sales chief Stephen Richards, 41, who also pleaded guilty yesterday. Mr. Kumar had left the company earlier in the year. The defense decision to plead guilty followed the Friday arrest of Tommy Bennett, a former CA executive who recently has been working for Mr. Kumar. Mr. Bennett was charged with conspiracy to obstruct justice. WALL STREET JOURNAL VIDEO CNBC's Bertha Coombs reports1 that former Computer Associates CEO Sanjay Kumar is expected to plead guilty to financial fraud According to Mr. Bennett's arrest warrant, Mr. Bennett, who was senior vice president in charge of business development and who worked at CA from 1988 to 2004, became involved after prosecutors told the court they planned to introduce evidence that Mr. Kumar had erased http://online.wsj.com/article_print/SB114589451796634184.html 4/25/2006 WSJ.com - CA's Ex-CEO Pleads Guilty To Securities Fraud Page 2 of 3 the hard drive on his personal computer in 2003 -- after CA had advised employees to preserve all evidence. Mr. Bennett was arrested for approaching a former CA technician, who allegedly had helped Mr. Kumar erase the drive. Reached at his home, Mr. Bennett declined to comment. charges. A person familiar with the situation said that prosecutors were surprised when the defendants informed them Sunday that they planned to change their pleas. These people said that Messrs. Kumar and Richards didn't make any agreement about cooperating with prosecutors in other cases. "Your honor, my conduct was wrong. I take responsibility for participating in this practice and I apologize for my actions," Mr. Kumar told Judge I. Leo Glasser in U.S. District Court in Brooklyn, N.Y., yesterday. Mr. Wang, 60, first spotted the younger Mr. Kumar when Mr. Kumar was a poor teenage immigrant. The two immigrants eventually became wealthy together, once sharing with another executive a $1 billion award of shares in the company. They are also co-owners of the New York Islanders professional hockey team. Mr. Wang hasn't been charged with any wrongdoing. Among the many top executives indicted in the wake of the 1990s bull market, Mr. Kumar was unusual in being charged directly with participating in a fraud and managing its coverup. At other companies, many top executives have been charged with countenancing or hiding frauds. Roslynn Mauskopf, U.S. attorney in Brooklyn, said the men involved had lied to shareholders, and "they then compounded their lies...by presiding over a massive coverup." The trial was slated to begin May 8. According to the government indictment and evidence submissions, Mr. Kumar personally made sales calls and signed back-dated contracts, ordered a $3.7 million no-work consulting job for a person who threatened to expose another questionable accounting deal, and destroyed evidence on his personal computer's hard drive by reformatting it to run Linux software. CA admitted in 2004 that it had improperly inflated quarterly revenue over several years. Four top officers and three financial officials of CA have pled guilty in connection with the case. CA itself was also charged, but it avoided an indictment by reaching a deferred prosecution agreement with the Justice Department. Under that agreement, CA has continued to cooperate with prosecutors, paid $225 million in restitution to shareholders and agreed to have a court-appointed independent examiner while restating some $2.2 billion in revenue, which was booked in the wrong periods. CA, Islandia, N.Y., specializes in back-office software used to manage computer centers, with revenue in fiscal 2005 of $3.54 billion. According to evidence presented by the government and described by CA in its restatements, much of the predictability of revenue was due to fraudulent accounting. According to the government, Mr. Kumar orchestrated "35-day months" at the end of each quarter, during which sales executives and Mr. Kumar himself frantically cut deals to persuade customers to sign needed contracts, which were then backdated to make it appear they had been signed in the previous quarter. Write to William M. Bulkeley at bill.bulkeley@wsj.com2 and Paul Davies at paul.davies@wsj.com3 http://online.wsj.com/article_print/SB114589451796634184.html 4/25/2006