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Apple May Revise Profits in Wake of Stock-Options Scandal

Apple Computer Inc. (AAPL) says it expects to restate some of its financial results as a probe into its granting of stock options widens, threatening years of profits.

The notice of further evidence of "irregularities" comes as Apple has been riding its wildly popular iPod digital music player to the most profitable period in its 30-year history.

Fueled largely by steadily rising iPod sales, Apple has reported $3.1 billion in profit during the past four years.

Without providing specifics, the computer and software maker said late Thursday it had uncovered enough evidence of mishandled stock options to raise doubts about the accuracy of its financial statements dating back to Sept. 29, 2002.

The developments threaten to rattle investors, based on how Wall Street has punished other companies that have recently disclosed potential accounting problems caused by stock option improprieties.

Apple shares fell $1.70, or 2.4 percent, to $67.89 in early trading Friday on the Nasdaq Stock Market, where they have traded in a 52-week range of $42.02 to $86.40.

The Cupertino, Calif.-based company's market value has increased by about $55 billion since September 2002.

Apple first raised a red flag about the way it accounted for stock options in late June when it announced an internal investigation into a series of "irregularities."

Some of the nettlesome stock options were given to Apple CEO Steve Jobs, but he voluntarily canceled those in 2003 before cashing them in.

After digging deeper, Apple uncovered enough new problems to prompt the company to hire an outside lawyer to take over the investigation and notify the Securities and Exchange Commission about its findings.

Apple hopes to complete its accounting review as quickly as possible, said company spokesman Steve Dowling. In the meantime, Apple may miss a deadline for filing its latest quarterly report with the SEC.

The company said it has hired an outside lawyer to lead the investigation.

More than 60 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 at other companies so far have revolved around "backdating."

Under this practice, insiders try to make the rewards more lucrative by retroactively pinning 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.

The financial manipulation also exposes companies to possible fraud charges.

The U.S. Justice Department has already brought criminal charges against Brocade Communications Systems Inc.'s (BRCD) former CEO, Gregory Reyes, and is actively investigating other cases. Reyes is free on a $2 million bond.

More than 20 of the companies entangled in the stock option imbroglio are in Silicon Valley, where the incentives first became a staple of compensation packages for rank-and-file employees as well as top executives.

As high-tech stocks soared during the dot-com boom of the 1990s, workers began to clamor for even better stock option packages in pursuit of a big jackpot.

That hunger for ever-more lucrative stock options is believed to have driven many Silicon Valley companies to resort to backdating as they tried to recruit and retain workers.

To properly account for backdated stock options, companies generally have to recognize more expenses than they originally recorded on their books. Making that adjustment can erase a substantial amount of profit.

In the past month, Mountain View, Calif.-based Mercury Interactive Corp. has erased more than $530 million of past earnings because of stock option backdating.