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AP
Apple Warns Some Profits May Be Erased
Thursday August 3, 8:46 pm ET
By Michael Liedtke, AP Business Writer
Apple Warns Some Profits May Be Erased Because of Stock Option Trouble
SAN FRANCISCO (AP) -- Apple Computer Inc. warned Thursday that it probably will wipe out some of its profits recorded since 2002 after uncovering more evidence that it improperly accounted for employee stock options.
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Without providing specifics, the Cupertino, Calif.-based maker of Macintosh computer and iPod music players said it had found more stock option trouble since first announcing its internal investigation into "irregularities" in late June.
The new problems were serious enough to prompt the company to alert the Securities and Exchange Commission and hire an outside lawyer to take over the investigation.
Signaling that years of earnings may need to revised, Apple also advised investors to disregard financial statements dating back to September 2002 -- a period that covers one of the most prosperous stretches during the company's 30-year history.
Dozens of other companies across the country are grappling with similar stock option headaches, but Apple is by far the most prominent of the lot to acknowledge trouble so far.
While Apple hasn't explained exactly how it mishandled stock options, most of the problems so far have revolved around a practice known as "backdating."
Under this practice, insiders try to make the rewards more lucrative by retroactively setting the option's exercise price to a low point in the stock's value. Usually, a stock option's exercise price coincides with the market value at the time of a grant to give the recipient an incentive to drive the price higher.
If companies backdate options without accounting for the move, it can cause profits to be overstated and taxes to be underpaid.
