McAfee Rectifies Past Stock Option Accounting Errors

The Santa Clara based security company announced Friday that it has completed the corrections of all of its required Securities and Exchange Commission statements related to past stock option granting practices. The filing ends an 18-month process that brings the company up to date on its financial restatements for all of 2006 and through the third quarter of 2007.

"For the better part of 18 months, we were in sort of a limbo status," said Michael Busselen, vice president of corporate communications for McAfee. "The biggest thing this does is give us one massive batch of documents that are completely caught up now. In doing so, it releases us to use stock for the purposes of doing business."

Upon repairing the accounting errors, the company will be free from some of the restrictions that previously prevented employees from accessing and fully benefitting from its stock options. McAfee execs said that there were no other additional financial penalties imposed for the accounting inaccuracies.

"It was just not having the flexibility to use our stock for the benefit of our employees. It just basically tied us up in a little bit of a knot until we got this figured out," said Busselen.

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The required filings included an annual report on its 10-K form for 2006, as well as quarterly reports on the 10-Q form for the second and third quarters of 2006 and first three quarters of 2007. Specifically, the recently filed 2006 10-K form restates previous financial reports covering fiscal years 2004 through 2005, as well as selected financial data for 2002 through 2005 and quarterly financial data for all of 2005 and the first quarter of 2006.

To correct accounting errors, which dated back more than a decade, the company recorded an additional $137.4 million of pre-tax, noncash stock based compensation charges for 1995 through 2005, which execs say did not affect the company's historical revenue or profitability numbers. These charges, most of which were recorded in 2004 and before, mainly stemmed from annual merit grants, modifications to worker agreements after termination of employment and grants made to new hires. The charges align with McAfee's past projections, which estimated that the amount of the pre-tax non-cash stock based compensation charges would likely fall between $100 million and $150 million.

However, the restatements also corrected other accounting errors that did impact the company's historical net income numbers. The additional errors, which were not related to stock options, led to a $12 million decrease of GAAP net income for periods before 2006.

The completion of McAfee's financial restatement process follows a review of historic stock option practices conducted by a special committee of independent directors, independent counsel and forensic accountants.

Company execs are considering the implementation of a share repurchase program, where everything acquired under a stock repurchase plan would be subjected to a review of circumstances in effect at the time. The board-approved plan will likely be initiated some time in 2008 after the company announces its fourth quarter results for this year. "It's the accounting implication," said Busselen. "It's just about getting our records accurate. It's really important to get this stuff 100 percent right."

In a related matter, the company has reached a tentative settlement in a pending lawsuit related to historical stock option practices, which will add $13.8 million to the company's second quarter 2006 financial statements upon completion of the expected settlement payments. The completion of related documents and required approvals is anticipated in late December or January.