Apple may need to restate historical financial statements

Apple Computer has discovered additional evidence of irregularities relating to past stock option grants and will likely need to restate its historical financial statements as a result, the company said on Thursday.

In late June, Apple proactively announced that an internal investigation discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001.

The company notified the SEC of the irregularities and a special committee of its outside directors immediately hired independent counsel to perform an internal investigation.

"Although the investigation is ongoing, the Company has discovered additional evidence of irregularities," Apple said in an updated statement on Thursday. "In light of this, management has concluded, and the audit committee of the board of directors agrees, that the Company will likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to past stock option grants."

Apple said it has not determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement. Accordingly, the company on Thursday filed a Form 8-K with the SEC, stating that its financial statements and all earnings and press releases and similar communications relating to periods commencing on September 29, 2002 should therefore not be relied upon.

As a result of the ongoing investigation, Apple said it will also delay the filing of its Form 10-Q for the quarter ended July 1, 2006.

"[Apple] is focused on resolving these issues as quickly as possible and plans to file its Form 10-Q and any required restated financial statements following completion of the investigation," the company added.

Last month, investors on behalf of the company filed two separate lawsuits in California courts charging current and former company executives and directors with colluding to backdate stock options in order to maximize their profits.

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10 Comments

kenaustus

said about 17 years ago

It's an accounting problem that Apple will have to work through. If they are the ones that discovered the problem then I see no real legal problems ahead.

Let's face it, there will be no changes in unit sales for anything - be it Macs, iPods, songs, you name it. The gross margins will be the same, as will the huge cash holdings. Well, the cash holdings may increase a bit - if net income goes down for some of the previous years then there will be tax refunds . . .

What this does bring forward is the need for Apple to deliver some very good product news at WWDC. Because of the similar pricing and socket compatibility of Core 2 I can see Apple shifting everything possible to Core 2 ASAP, with multiple announcements by Steve J.

To me, the smart investor will be more interested in where Apple is today and where they are going tomorrow. Core 2 at WWDC can impact the smart investor, as can a strong Leopard presentation with a lot of new features the average consumer will pay for. Follow up with new iPods in Paris and maybe even the iPhone and history will not be that important.

bommai

said about 17 years ago

Well, the stock market is mostly psychological. I hope nervous investors don't erase all the gains that AAPL (and I) have made in the past two weeks

mr. dirk

said about 17 years ago

Keep in mind that AH trading is light volume--it'll be interesting to see if the funds buy up shares before Monday's WWDC conference. The market's pretty good at pricing in liabilities from things like this, and the $4B in market cap that's been erased over the last few hours is evidence of that.

Oh, and the problem is, that while options backdating is not "illegal" if properly disclosed, it does has an effect on the calculation of compensation expenses for tax purposes. In fact, my understanding is that expenses related to backdating are not deductible, meaning that the tax-man could be angry at Apple. But hopefully, it won't be signficant; and as long as these are "non-cash" adjustments to net-income, I'm not really concerned.

melgross

said about 17 years ago

Quote:

Originally Posted by kenaustus

It's an accounting problem that Apple will have to work through. If they are the ones that discovered the problem then I see no real legal problems ahead.

That isn't necessally true. It depends on what was done. A hard line is being taken on backdating of options. How, and when it was done is crucial. The other problem hers is that taxes may be owed on those options. Criminal cases as well as civil ones have come about, and executives are going to jail over it.

I keep my fingers crossed.

The fact that Apple, and a whole bunch of other companies are doing this themselves is not surprising, but will have little effect on what the government does.

Quote:

Let's face it, there will be no changes in unit sales for anything - be it Macs, iPods, songs, you name it. The gross margins will be the same, as will the huge cash holdings. Well, the cash holdings may increase a bit - if net income goes down for some of the previous years then there will be tax refunds . . .

The gross margins will fall somewhat, as will the restated profits.
[/QUOTE]

melgross

said about 17 years ago

Quote:

Originally Posted by Mr. Dirk

Keep in mind that AH trading is light volume--it'll be interesting to see if the funds buy up shares before Monday's WWDC conference. The market's pretty good at pricing in liabilities from things like this, and the $4B in market cap that's been erased over the last few hours is evidence of that.

Oh, and the problem is, that while options backdating is not "illegal" if properly disclosed, it does has an effect on the calculation of compensation expenses for tax purposes. In fact, my understanding is that expenses related to backdating are not deductible, meaning that the tax-man could be angry at Apple. But hopefully, it won't be signficant; and as long as these are "non-cash" adjustments to net-income, I'm not really concerned.

"Properly disclosed" is one of the keys here. As is, as I mentioned, the tax situation.