Probationary Settlement

Forum Report: Significance of Deferred Prosecution Agreement

(September 30, 2004)

See also

Management Report of U.S. Attorney's Required Extension of Examination

(September 14, 2006)

September 22, 2004 Deferred Prosecution Agreement

(260 KB, in PDF format)

September 22, 2004 press releases

Computer Associates

Department of Justice

SEC

September 23, 2004 news reports

Financial Times

Newsday

The New York Times

TheStreet.com

The Wall Street Journal

History of Settlement

September 24, 2004 Wall Street Journal:

"In CA Probe: Recovered E-Mails, Surprise Cache of Documents"

"Moody's Investors Service has confirmed CA's Ba1 senior unsecured rating and assigned a negative rating outlook, concluding a review for possible downgrade initiated on June 30, 2006. The Ba1 rating confirmation reflects the company's completed accounting review and reestablishment of current filing of its 10-K and subsequent 10-Q's, including the company's filing of its 10-K for its March 2006 fiscal year on July 31, 2006.
"The negative outlook reflects challenges the company has to implement effective financial controls, remediate material weaknesses to its financial reporting, contain sales force compensation costs, and revive client billings performance. ...Moody's notes that for fiscal 2006, the company's former sales compensation plan resulted in an unexpected $75 million increase to commission expenses (2% of total expenses), while client billings declined slightly, excluding acquisition related products and accelerated customer payments. In Moody's opinion, current revisions to the former sales force compensation plan could negatively impact morale, the retention of key sales executives, and financial performance.
"...the rating also reflects the uncertainties surrounding the company's ineffective internal controls, subdued organic client billings performance, unsettled fulfillment of the terms of the Deferred Prosecution Agreement (DPA), modest returns on net assets, competition from integrated and non-integrated technology vendors, and exposure to mature mainframe and Unix markets, which drive the overall Ba1 rating."

"Standard & Poor's Rating Services said today that it lowered its corporate credit and senior unsecured debt ratings on Islandia, N.Y.-based CA Inc. to 'BB' from 'BBB-', and placed them on CreditWatch with negative implications.
"'The rating action follows the company's announcement that its board of directors authorized a $2 billion share repurchase that partly will be debt-financed," said Standard & Poor's credit analyst Philip Schrank. The rating downgrades reflect our assessment that CA no longer possesses an investment-grade financial policy in light of the announced share repurchases. ...Additionally, CA did not meet the deadline for filing its 10-K, and likely will need to restate previously reported results and report additional material weaknesses. The delay is from accounting issues surrounding its stock option grants and revenue recognition."

"The Negative Outlook and ratings concerns primarily center on CA's delayed earnings release for the fourth quarter and fiscal year ending March 31, 2006, due to additional accounting work necessary to accurately determine sales commission expense and income taxes. ...Fitch is concerned the material weaknesses in internal accounting controls identified by CA management and its auditor, KPMG, could lead to identification of further inaccuracies in the company's financial statements and additional restatements. Previous misstatements of CA's earnings in fiscal years 1999 and 2000 resulting from weaknesses in accounting controls were the subject of shareholder lawsuits, which have required significant litigation and settlement costs, and resulted in a Securities and Exchange Commission (SEC) investigation.
"The negative outlook also considers what Fitch believes are on-going risks for meeting corporate governance and internal controls initiatives to satisfy any additional recommendations by the government-appointed independent examiner as required under the company's September 2004 agreement with the Department of Justice (DOJ) and SEC. Although previously anticipated to conclude in September 2006, Fitch believes the independent examiner's report and presence at the company could be extended due to the aforementioned earnings delay and additional accounting challenges. A satisfactory and timely conclusion to the independent examiner's reports could stabilize the ratings.
"Also considered for the ratings are continued senior management changes..."

"The outlook revision to negative is prompted by the company's May 30th announcement that it will delay the release of its fourth quarter and fiscal year ended March 31, 2006 earnings report and has yet to conclude its review of forecasting, processing, and monitoring of sales commissions. The revision reflects challenges the company has to implement effective financial controls, the recent departure of key personnel, including the company's chief software architect, financial officer, and operating officer, as well as subdued billings performance, which the company announced on May 30 declined slightly in fiscal 2006, excluding acquisition related products and accelerated customer payments."

"The outlook revision reflects Computer Associates' recent announcement that it has identified apparent improper accounting practices related to transactions entered into between fiscals 1998 and 2001....  The company expects the impact of the adjustments to fiscal years 2002 through 2004 to be minor and not affect current or future cash flows. In addition, Computer Associates has determined that former members of senior management, who are no longer employed by the company, were involved in approving the transactions in question. Nevertheless, Standard & Poor's had assumed that Computer Associates' accounting issues were behind it."

"...while a legal agreement was reached with the Department of Justice (DOJ) and Securities & Exchange Commission (SEC) in September 2004, the credit ratings for CA assume that the company will improve its corporate governance and internal controls and satisfy any additional recommendations by the government-appointed independent examiner as required under the agreement."

"Moody's would view positively CA's fulfillment of the terms of the Deferred Prosecution Agreement (DPA) with the Department of Justice and the SEC regarding their investigation of CA's prior accounting mismanagement, recruitment of a permanent CEO and CFO, continued evidence that the company has not suffered a deterioration in bookings and billings due to adverse factors over the past two years, and the company's maintenance of financial flexibility from internal and external liquidity sources. Continued progress on these matters could lead to a positive outlook in the near term and a subsequent ratings upgrade."

See also

December 28, 2004

Moody's Liquidity Rating (SGL-1)