A move earlier this year by

SiebelSystems

(SEBL)

to exchangeemployees' out-of-the-money stock options with cash and stock would result in a charge of up to $650 million if the company were required to expense the options.

In its quarterly filing with the

Securities andExchange Commission

Tuesday, San Mateo,Calif.-based Siebel said its stock option repurchaseprogram would lead to a charge of up to $650 millionbecause it accelerated compensation of unvestedoptions. Under the options buyback program, Siebelagreed this fall to pay employees whose stock optionshad a strike price of at least $40 -- several timesthe current value of Siebel stock -- $1.85 times thenumber of shares underlying the options.

Shares of Siebel rose 37 cents, or 5%, to closeTuesday at $7.71.

All told, Siebel ended up exchanging 28.1 millionoptions at a total cost of $51.9 million, comprised of$20.4 million in cash and shares worth $31.5 million.The company recorded a compensation charge of $54.9million related to the exchange program, which alsoincludes nearly $3 million in employee payroll taxesand other costs.

Ultimately, Siebel accomplished a few things through its option repurchase program. The company was able to cancel millions of options at a cost that was just a fraction of their estimated worth, according to one accounting model. That reduced the number of outstanding options and the company's exposure should it someday be required to expense the options on its income statement -- as is currently under debate. And the move also boosts morale of employees by giving them a bonus after they've watched their options become virtually worthless in the past year.

Generally accepted accounting principles do not require the $650 million charge, calculated under a formula called the Black-Scholes model, to appear on the company's income statement or balance sheet. But it will appear in Siebel's annual report in a footnote, which is required under Financial Accounting Standards Board rules to illustrate the effect on net income if the company expensed stock options.

Last year, Siebel's net income of $254.6 millionwould have swung to a loss of $467.2 million had thecompany had to expense its stock options, according toa footnote in the company's annual report.

As a result of the $650 million cost associatedwith the option repurchase program, that swing intothe red would be even larger this year if the companywere forced to expense options.

JMP Securities analyst Pat Walravens noted thatother technology companies, like Siebel, also offergenerous stock options. But "Siebel is probably themost egregious," he said. "If at the end of the daythe company is giving more value to employees than itis generating in operating income, then something isvery wrong, and one way or another that should beshowing up in your financial statements."

Walravens has a market underperform rating onSiebel and his firm has not done any investmentbanking in the software industry.

Siebel vice president and controller Paul Giffordsaid although the option repurchase program willresult in a larger charge disclosed in the annualreport footnote this year, it reduced the total numberof outstanding options held by employees andconsequently future potential dilution to existingshareholders. That bodes well for Siebel if companiesare ever forced to expense options on their incomestatements -- as is currently being proposed, headded.

"So from where I sit, if we ever do have toexpense options in the future ... 2003

charges willbe much smaller," Gifford said.

According to the company's SEC filing, the optionbuyback program led to the cancellation of stockoptions that represented net potential dilution toexisting stockholders of 5%. That estimate accountsfor additional stock issued in exchange for stockoptions. Siebel issued stock -- rather than cash -- toemployees who were due to receive more than $5,000from the repurchase program.

Potential stock-option dilution to existingstockholders also was reduced 3% as a result ofemployee layoffs at Siebel, the filing said. Thecustomer-relationship management software makerrecently laid off nearly 1,100 employees, or 15% ofits workforce, in response to declining sales. The 10Qdisclosed that those cuts included 250 employees inprofessional services and technical support, 500 insales and marketing and 100 general and administrativepersonnel.

Siebel recognized a charge of $109.4 million inthe third quarter for the restructuring and expects torecognize an additional charge of up to $165 millionin the fourth quarter. The company said it expects therestructuring to reduce the company's quarterlyoperating expenses from second-quarter levels of$243.7 million by approximately $30 million andremoving facilities from operations to result inadditional savings of $4 million quarterly.

However, those savings, likely to be achieved bythe end of the first quarter 2003, will be realizedbefore accounting for other expenses such as bonusesand advertising that may increase.