BEA Systems: An Outline of Options Exposure

| About: BEA Systems (BEAS)

Yesterday, software provider BEA Systems filed a nonreliance 8-K on its financial statements from fiscal 1998 through 1Q 2007. Its estimated pretax stock compensation expense to insert into that period: between $340 to $390 million. Most of the expense relates to option grants made during the 1999 to 2002 period. According to the financials found at 10-K Wizard ($ needed), the operating profits from 1999 to the present totaled $838 million.

The revised compensation to record could conceivably reduce previously-reported profits for the period by almost half. No tax effects mentioned, nor any specific amounts tied to specific years.

One item of interest:

“Approximately $270 million of the pre-tax expense results from correcting the accounting measurement dates for grants. The remainder of the pre-tax expense relates to employee severance arrangements that extended or altered option vesting and exercising privileges, which constitute modifications to the original option grants and results in compensation expense that should have been recorded.”

Regardless of whether the $340 million or the $390 million is the right amount, the lion’s share of the restatement belongs to the measurement date issues. Yet one wonders how those modifications to the original options - the “extended” and “altered option vesting and exercising privileges” - got missed the first time around. Their effects from mis-accounting are still not chump change. Those aspects of the restatement are a curiosity, because option repricing (a modification of original option terms) was a hot issue around the 1998-2000 period. Those modifications of options led the FASB to issue Interpretation No. 41 Tinkering with option terms became a trip wire that financial officers observed with care, because it could easily trigger recognition of option compensation. Apparently, someone at BEA didn’t get the memo.

Regardless, the size of the restatement to be carried out is pretty amazing. Maybe we’ll be hearing more specifics now as auditing season draws to a close (at least for the bigger firms.)

BEAS 1-yr chart