Computer Associates 2006 Annual Report Download - page 24

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1996 through 2001, the Company had delays of up to approximately two years from the date that employee stock
options were approved by the committee of the Company’s Board of Directors charged with such duties (the
“Committee”), to the date such stock option grants were communicated to individual employees.
Prior to fiscal year 2002, the Committee generally approved grants to executives and other employees receiving
options, the terms of which were generally set on the date that the Committee acted, including the exercise price,
vesting schedule and term. However, in a number of cases, these approvals involved pools of options that were not
allocated to specific individuals at the time of such approvals. It also appears that communication of these grants by
management to individual employees was not made until some time after the Committee acted, including in some
cases up to two years after such Committee action. In almost all cases, this earlier date had an exercise price that was
lower than the market price of the Company’s common stock on the date the award was formally communicated to
employees. The grants which were not communicated on a timely basis were made primarily to non-executive
employees and this grant practice was changed after fiscal year 2001. The current practice is that a grant is
communicated promptly after it is approved by the Committee.
The Company treated the date of the action by the Committee as the accounting measurement date for determining
stock-based compensation expense. However, the Company has determined that the proper accounting
measurement date for stock option awards that were not communicated timely to an employee, should have
been the date the grant was communicated to an employee, not the date the Committee approved the grant. As a
result, the Company should have recognized additional non-cash stock-based compensation expense, net of
forfeitures, over the vesting periods related to such grants in prior fiscal years as follows:
Fiscal Year
Additional
Pre-Tax Expense
Additional
After-Tax Expense
(in millions) (in millions)
Years prior to fiscal year 2002 .......................... $165 $ 78
2002 ............................................. 83 50
2003 ............................................. 50 30
2004 ............................................. 29 16
2005 ............................................. 12 —
2006 ............................................. 3 1
Total cost for all fiscal periods .......................... $342 $175
This restatement does not affect previously reported revenue or cash provided by operating activities. In addition,
the Company recorded an immaterial amount associated with its estimate of payroll taxes which may be owed in
relation to this issue.
Subscription Revenue:
Based upon the Company’s review of certain software license contract renewals principally in prior periods, the
Company has determined that it has understated subscription revenue recorded in prior periods and as a result will
restate its results for fiscal years 2005 and 2004 and for the interim periods of fiscal years 2006 and 2005. This
restatement reflects a further adjustment to subscription revenue amounts previously restated in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005 and filed with the Securities and Exchange
Commission (the “SEC”) on October 18, 2005.
As discussed further in this Form 10-K, the Company recognizes revenue ratably on a monthly basis over the term of
the respective subscription license agreements. When a contract is cancelled and renewed prior to the expiration of
its term, the Company recognizes all future revenue for the arrangement ratably over the new license term. The
Company determined that, beginning in fiscal year 2004, it had been systematically understating revenue for certain
license agreements which have been cancelled and renewed more than once prior to the expiration of each
successive license agreement. This restatement resulted in an increase in subscription revenue of approximately
$43 million and $12 million in fiscal years 2005 and 2004, respectively, and approximately $19 million in the first
three quarters of fiscal year 2006.
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