Accounting Problems Again Plague CA, Delay Earnings

During an audit, CA discovered that between fiscal years 1997 and 2001, stock options were approved by the board at a time when the value of the stock was different than when the stock option grants were exercised by the employees.

Dan Neel, Contributor

June 29, 2006

6 Min Read

Problems with stock option grants and subscription revenue accounting have prompted CA to delay filing its complete fourth quarter and full year fiscal 2006 results for the second time, the company said Thursday.

During an audit of fiscal 2006, CA, Islandia, N.Y., discovered that between fiscal years 1997 and 2001, stock options to mainly non-executive employees were approved by the board at a time when the value of the stock was different than when the stock option grants were exercised by the employees, according to CA.

"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," the software vendor said.

Correcting the stock option accounting problem will mean revising past earnings to recognize added stock compensation expenses, CA said. The expenses are expected to be under $20 million in fiscal 2005 and 2006, and between $40 million and $100 million, pre-tax, for each year between 2002 and 2004, according to CA.

During the audit, CA also discovered it understated subscription revenue recorded before fiscal 2006 to the tune of about $40 million. Adjusting this will drag down CA's subscription revenues "through approximately 2011," the vendor said.

"We are all disappointed," said John Swainson, president and CEO, who added that it was important to remember that the problems being discovered were part of CA's past, not its future.

In lieu of delivering its fiscal 2006 annual report on Form 10-K, CA did file Form 8-K containing preliminary unaudited fiscal year 2006 information.

For the fourth quarter, CA posted a loss of 6 cents per share on revenue of $947 million, compared to earnings of 3 cents per share on revenue of $917 million for the same quarter a year ago. For the year, CA reported earnings of 23 cents per share on revenue of $3.8 billion, compared to a loss of 1 cent per share on revenue of $3.6 billion for the year prior.

For fiscal 2007, CA expects total revenues of $3.9 billion, and earnings of 44 cents per share, said Michael Christenson, COO.

From here on out, CA will cease providing quarterly guidance and billing guidance, he said.

Accounting problems also caused the first delay in reporting CA's fourth quarter and full fiscal year 2006 earnings, which were originally scheduled to be released May 30. On that day, CA said the need to revamp its third-quarter fiscal 2006 earnings statement would push the year-end numbers out until mid- or late June. The reason was a discovery by CA that it paid about $70 million more in sales commissions for the year than it had expected to, the company said.

The excess commission payments were driven by a practice inside CA of awarding commissions for a single sale to more than one sales team. For example, CA would pay not only its own sales team, but also sales teams brought on through CA's acquisition of vendors such as Concord Communications and Niku Corporation, said Christenson.

As part of the third quarter 2006 restatement, CA added somewhere in the range of $26 million in additional commission expenses that should have already been there, according to CA. The change will take 3 cents per share away from third quarter earnings, and added the same to the fourth quarter, said Christenson.

The commission debacle was a clear disappointment, said Swainson.

NEXT: Another shareholder revolt looming Accounting problems are the last thing CA needs as it nears the fulfillment of a deferred prosecution agreement with federal prosecutors related to a $2.2 billion accounting scandal for which its former CEO Sanjay Kumar and several others have pled guilty.

The deferred prosecution agreement -- which included a $225 million restitution fund and the appointment of an independent examiner to CA -- was scheduled to be completed in September. However, CA said 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."

Six days after announcing the commission debacle, CA unveiled sweeping changes to its sales management team that included the removal of its head of worldwide sales Gregory Corgan, and the reappointment of Executive Vice President Gary Quinn to the role of head of CA's indirect business operations. Quinn is a 21-year CA veteran who for several years defined CA's channel strategy as executive vice president of partner advocacy before shifting a year or so ago to a position as head CA's SMB and consumer operations.

On the news that Quinn again had the helm of CA's channel program, CA COO Michael Christenson said in a statement that he expected to see CA's indirect sales grow from about 10 percent to around 20 percent to 30 percent over the next few years. Christenson said progress in increasing the percentage of indirect sales should become noticeable in the forth quarter.

In April 2004, Quinn made a similar statement, saying he expected to see CA's indirect sales grow to about 30 percent.

Meanwhile, many CA shareholders are unsettled. A group of CA investors tried again on May 13 to get a proposal on CA's upcoming proxy ballot to vote for the removal of two of the Islandia, N.Y. vendor's board members: Chairman Lewis Ranieri and former New York Senator Alfonse D'Amato.

The attempt, made in a letter to the SEC from Cornish Hitchcock, a lawyer representing Amalgamated Bank Long View Collective Investment Fund, New York, which holds some 245,530 shares of CA stock, charges that since the two board members were around during the time of CA's accounting scam, they should go.

It is "important to replace those directors who served during the period of misconduct, who continued on the board during the board's failure to effectively investigate accounting issues that were raised in 2001 newspaper reports and government investigations, and whose initial response was merely to demote the CEO and offer a $10 million payment to end the law enforcement inquiries," the letter reads.

"We believe (CA) stock will continue to trade lower in the near term as investors await better visibility into the company's operations and strategic direction," wrote John Rizzuto, and equity researcher with Lazzard Capital Markets, New York.

CA on Thursday also announced a stock repurchase plan that enables it to buy back $2 billion of its common stock in its current fiscal year ending March 31, 2007.

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