Apple 2006 Annual Report Download - page 86

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2—Restatement of Consolidated Financial Statements
The Company is restating its consolidated balance sheet as of September 24, 2005, and the related consolidated statements of operations,
shareholders’
equity, and cash flows for each of the fiscal years ended September 24, 2005 and September 25, 2004, and each of the quarters in
fiscal year 2005.
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the restatements have not been amended and
should not be relied on.
On June 29, 2006, the Company announced that an internal review had discovered irregularities related to the issuance of certain stock option
grants made between 1997 and 2001, including a grant to its Chief Executive Officer (“CEO”)
Steve Jobs. The Company also announced that a
Special Committee of outside directors (“Special Committee”) had been formed and had hired independent counsel to conduct a full
investigation of the Company’s past stock option granting practices.
As a result of the internal review and the independent investigation, management has concluded, and the Audit and Finance Committee of the
Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in
prior periods. Therefore, the Company has recorded additional non-cash stock-based compensation expense and related tax effects with regard
to past stock option grants, and the Company is restating previously filed financial statements in this Form 10-K. These adjustments, after tax,
amounted to $4 million, $7 million, and $10 million in fiscal years 2006, 2005 and 2004, respectively. The adjustment to 2006 was recorded in
the fourth quarter of fiscal year 2006 due to its insignificance.
The independent counsel and its forensic accountants (“Investigative Team”) reviewed the facts and circumstances surrounding stock option
grants made on 259 dates. Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by
current management. The Special Committee’s investigation identified a number of grants for which grant dates were intentionally selected in
order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally
assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants did
not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended
the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications.
The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection
with the accounting, recording and reporting of stock option grants.
Based on the evidence and findings from the Company’s internal review and the Special Committee’s independent investigation, an analysis
was performed of the measurement dates for the 42,077 stock option grants made on 259 dates between October 1996 and January 2003 (the
“relevant period”). The Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all grants made
during the relevant period, the Company sampled certain grants between 1994 and 1997 and found none that required accounting adjustments.
The first grants for which stock-based compensation expense is required are dated December 29, 1997. The Company also examined grants
made after the relevant period and found none that required accounting adjustments. Moreover, in the years after 2002, Apple made significant
changes in its stock option granting practices in response to evolving legal, regulatory and accounting requirements.
Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission (“SEC”), the grants during the
relevant period were organized into categories based on grant
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