BEA Systems will restate its financials for the 10-year period through fiscal 2007 and take a pre-tax charge of between $340 million and $390 million to reflect changes in measurement dates for previously granted stock options.
The maker of enterprise infrastructure software also announced that its senior managers and independent directors have agreed to have their outstanding options repriced, and that it would make certain changes to the structure of its management and board.
In a statement, BEA elaborated that most options granted between June 1997 and June 2006 were approved via “unanimous written consents” whose effective date became the grant date. For the exercise price, BEA used the closing price of the trading day immediately prior to the grant date.
However, continued the statement, since the majority of these grants were not final as of the effective date, the grant date recorded by BEA was not the appropriate accounting measurement date. In many cases, the result was compensation expense that was not recorded.
BEA also noted a number of other options-related errors:
• Prior to April 2003, administrative errors prevented some option grants from being approved in a timely fashion
• Upon being hired, some employees were permitted to begin a leave of absence, receive a stock option grant and specific exercise price, but not provide service during their leave; BEA conceded that “the company failed to record the required expense”
• For much of the period under investigation, departing employees frequently were given leaves of absence, separation agreements, or termination agreements in lieu of severance; in some of these cases, noted BEA, “it appears the purpose was to provide the employees extended option vesting and exercising privileges”
• Certain employees were granted options that were later cancelled, then reissued at a lower price; for some of these grants, the company acknowledged, “the purpose appears to have been to give the grantee a lower exercise price”
BEA stated that its audit committee did not find that chief executive officer Alfred Chuang was involved in the mispricing of options. Chuang, who realized a pre-tax gain of about $2.4 million on his partial exercise of grants made in 1998 and 1999, agreed to repay the after-tax gain from those mispriced options and to have his outstanding options repriced. William Coleman, who served as CEO from 1995 through October 2001, will repay the company about $260,000 in after-tax gains.
Mark Dentinger, executive vice president and chief financial officer since February 2005, agreed to have his outstanding options repriced. His predecessor, William Klein, now executive vice president of business planning and corporate development, agreed to repay about $34,000 in after-tax gains from mispriced options and to have his outstanding options repriced. BEA added that Klein will no longer serve as executive vice president but will remain a vice president.
The senior vice president of human resources — identified on the BEA website as Jeanne K. Wu — “will remain with the company as an employee through a mutually agreed upon transition period,” according to a company statement. Wu, and two other senior HR employees involved in the granting and administration of stock options, agreed to have their outstanding options repriced.
BEA noted that all of its current independent directors agreed to have their outstanding options repriced and that none realized any gain from exercising mispriced options.
The company also announced that its compensation committee will be reconstituted and will adopt a new charter and a new process for granting stock options; the human resources department will be restructured; and a new general counsel with “substantial experience” with compliance issues will report directly to the CEO, as well as to the board’s nominating and governance committee.