Accounting Problems Again Plague CA, Delay Earnings

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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.

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