News: Apple will restate earnings

By Richard Koman - August 4, 2006

By Richard Koman for SiliconValleyWatcher.com

Restating earnings is never a good thing. Even worse when the SEC is investigating all of Silicon Valley and an internal investigation has already shown that improper options were offered to chief executive. Thus sits Apple Computer and CEO Steve Jobs as its stock plummets today, down 6.4% at the noontime bell.

Following up on an announcement in late June that internal investigators had uncovered "irregularities related to the issuance of certain stock option grants made between 1997 and 2001," Apple yestertoday dropped a bombshell:

[T]he Company will likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to past stock option grants. The Company has not determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement. Accordingly, the Company today filed a Form 8-K stating that the financial statements and all earnings and press releases and similar communications issued by the Company relating to periods commencing on September 29, 2002 should therefore not be relied upon.

Apple is delaying its quarterly 10-Q statement until it sorts out the proper accounting and has hired outside counsel to further investigate.

While the June announcement covered 1997 to 2001, yesterday's news broadens the investigation to include the iPod years: 2002 forward to the present. That means, points out BusinessWeek:

Some of the years when Apple showed lean profits—specifically its fiscal years 2002 and 2003—would appear to be at risk of becoming loss-making years. Apple had reported a $65 million profit on sales of $3.2 billion for fiscal 2002 and a $69 million profit on sales of $3.6 billion for 2003. Profits swelled to $276 million in 2004 and $1.3 billion in 2005, propelled by staggering iPod sales and a recovery of the market for its Macintosh personal computers.

All this in the context of a massive SEC sweep of the Valley, which Wednesday led to the arraignment of ex-Brocade CEO Greg Reyes. And Apple announced that a stock option grant of 27.5 million shares to Jobs was problematic, although Jobs later cancelled the deal. So is Steve Jobs liable for Apple's misfeasance here? Could he be forced from the company, or be following Reyes to prison?

Unlikely, says American Technology Research analyst Shaw Wu. As reported in AppleInsider, Wu pointed out to clients that Jobs wouldn't have been involved in the backdating decisions. "The reason being the compensation committee at Apple is run by an independent board that is not comprised of employees of Apple."

By contrast, Reyes, on the advice of Larry Sonsini (also an adviser to Apple), was set up as a "committee of one," which seems to have exposed him to his current criminal liability.

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Comments (3)

Ryan:

The WSJ's story puts more emphasis on Steve Jobs than other coverage:

"Apple said in June that 'one of the grants in question' was made to its chief executive, Steve Jobs, but that 'it was subsequently canceled and resulted in no financial gain.' But while the options were cancelled in 2003, Apple granted Mr. Jobs five million shares of restricted stock in exchange for them.

"Apple wouldn't say which grant to Mr. Jobs was at issue, though he received an option to purchase 10 million shares in January 2000 dated on the stock's lowest closing price of the month. Apple shares shot up in the following days. In yesterday's announcement, Apple didn't mention any grants to Mr. Jobs.

Posted: August 4, 2006 10:44 AM

Jason Wood:

Not sure why this is a surprise...where there's smoke, there's often fire.

http://woodrow.typepad.com/the_ponderings_of_woodrow/2006/06/et_tu_apple.html

Jason

Posted: August 4, 2006 12:16 PM

Richard Koman:

I agree that it's likely that some option grants to Jobs and other top execs are at issue. Really no way to do more than speculate until either Apple or the SEC reveals findings. The legal question isn't so much who got the options as to who at Apple decided to improperly account for them, and who failed to account for them on his/her personal taxes. If Jobs got 10-20 million backdated shares and didn't account properly, there could be hell to pay.

And if there are serious misstatements, it's quite likely it would open the company up to investor lawsuits. Apple has to perform like crazy - sell a bazillion more ipods - to overcome investor fear.

Posted: August 4, 2006 1:26 PM