Novell initiates internal stock option investigation

Novell is conducting an internal investigation into its past stock option granting procedures and the review's findings may lead to it restating results.

Novell has begun an internal review to investigate how the company granted stock options to employees in recent years and to assess whether, in the light of the findings, Novell will need to restate any earnings.

The software vendor made the announcement Tuesday afternoon as it released third-quarter results for fiscal 2006. Novell cautioned that the results should be considered preliminary financials until it has concluded its voluntary stock options review. The company didn't provide a date as to when it expects those investigations to be complete and so it's possible Novell may need to delay the filing of its third-quarter Form 10-Q to the U.S. Securities & Exchange Commission (SEC).

On a conference call with analysts, Ronald Hovsepian, president and chief executive officer of Novell, said the review was "in no way a reflection on the quality of our business or the future growth prospects." Novell will report on the progress of the investigation as appropriate. "In the meantime, it's full speed ahead with building our business and executing on our strategy," he added.

Novell's move comes as the SEC continues to widen its probe into potentially fraudulent stock options practices occurring now or in the past at U.S. companies and related to the backdating of options. By timing the granting of options to a low point in a company's stock, an options recipient could buy shares cheaply and then resell them for a greater profit once the vendor's share price rose.

Already the SEC investigation has touched a number of IT companies including Sycamore Networks and the SEC has filed securities fraud charges against the former management heads of software vendor Comverse Technology and storage networking firm Brocade Communications Systems.

Other IT vendors including Apple Computer, CA, McAfee and Rambus have identified irregularities in their options accounting which, in some cases, led to the companies restating financial results dating back several years.

Novell's preliminary third-quarter results saw the company reporting net income of US$11.6 million on revenue of US$241.3 million and earnings per share (EPS) of US$0.03.

For the fourth financial quarter due to end Oct. 31, Dana Russell, Novell's interim chief financial officer, estimated the company's revenue will be between US$246 million and US$256 million with an EPS of US$0.04. Those predictions don't take account of the findings of the stock options review, he noted, with the likely impact of that investigation knocking EPS down to US$0.01.

Russell said Novell's leadership isn't happy with the company's current overall level of profitability, but believes it's on "the right track for the health of the business," expecting long-term profitability to improve.

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