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Very interesting (if somewhat complicated) report Monday from Bear Stearns software analyst John DiFucci on the potential cash implications of the stock-option backdating scandals. The Street has become quite familiar with the giant-sized non-cash charges that many companies have been taking to adjust prior results for backdated options.

But DiFucci believes that investors haven’t completely considered the potential cash implications some companies face from the options saga.

DiFucci notes that there are a host of ways that the resolution of backdating issues will impact balance sheet cash:

  • reversal of Federal tax benefits from stock-based comp realized in prior periods.
    related interest and penalties.
  • reduction of those benefits in future periods.
  • reimbursement of unintended employee tax burden.
  • other related taxes such as state and Medicare taxes.
  • costs of internal investigations
  • legal expenses.
  • potential fines.
  • DiFucci notes that it is difficult to estimate some of these - like any future fines - but he thinks you can make some educated guesses on the others.

    DiFucci notes that five of the companies he covers have admitted to problems with the timing of option grants, including BEA Systems (BEAS), CA (CA), McAfee (MFE), Activision (ATVI) and Take Two (TTWO). He sees maximum potential payback of previously realized tax benefits plus interest for McAfee of $114 million, or about 9% of its cash balance; for BEA, $21 million or 2% of cash; and for Activision, $141 million, or 17% of cash. He notes that Take Two previously took a $4 million hit on the income tax issue; he says CA should feel minimum effects.

    Most of the stocks DiFucci looked at were lower Monday:

  • BEA was down 27 cents at $11.76.
  • McAfee was down 31 cents at $33.44.
  • Activision was down 56 cents at $19.01.
  • CA was down 32 cents at $27.69.
  • Take Two was down 53 cents at $19.12.

  • BEAS vs. TTWO vs. CA vs. ATVI vs. MFE 1-yr chart:

    software stocks

    Source: The Impact Of Stock Options Backdating On Corporate Cash