Computer Associates 2005 Annual Report Download - page 80

Table of Contents
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 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American Jobs Creation Act of 2004 (the Act) repealed the current tax treatment for ETI.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. Although the WTO has not challenged the Act, it remains possible that the WTO may once again
challenge the new tax benefits as being an illegal export subsidy.
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.
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 debt instruments of government agencies, such as
municipal bonds, 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. We do not utilize
derivative financial instruments to mitigate interest rate risk.
We have shifted from a blend of both fixed and floating rate debt instruments to substantially all fixed rate debt instruments to take
advantage of historically low interest rates. As of March 31, 2005, our outstanding debt approximated $2.6 billion, approximately all of
which is 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 $7 million. Each 25 basis point increase or decrease in interest rates would have an immaterial annual
effect on variable rate debt interest based on the balances of such debt as of March 31, 2005.
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 $12 million.
Foreign Currency Exchange Risk
We conduct business on a worldwide basis through branches and subsidiaries in 47 countries outside the United States. We are therefore
exposed to movement in currency exchange rates. As part of our risk management strategy and consistent with prior years, we did not
enter into any foreign exchange derivative transactions. In addition, we manage our level of exposure by denominating a majority of
international sales and payments of related expense in the local currencies of our subsidiaries. A 1% change in all foreign currencies
against the U.S. dollar would have an insignificant effect on our results from operations.
Equity Price Risk
As of March 31, 2005, we have minimal investments in marketable equity securities of publicly traded companies. These investments
were considered available-for-sale with any unrealized gains or temporary losses deferred as a component of stockholders’ equity. It is
not customary for us to make investments in equity securities as part of our investment strategy.
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