This excerpt taken from the ALTR 10-K filed Oct 24, 2006.
Background Findings and Restatement
On May 3, 2006, our Chief Executive Officer and General Counsel, on their own initiative, commenced a review of the companys historical stock option practices. This review was initiated in response to media attention about stock option practices at various other public companies. On May 6, 2006, the board of directors formed a special committee composed solely of independent directors and tasked the committee with the responsibility to conduct a review of the companys historical stock option practices and related accounting. The special committee, with the assistance of its independent legal counsel and forensic accountants, undertook a comprehensive internal review of the facts giving rise to the restatement described below. The investigation included an extensive review of our accounting policies, accounting records, supporting documentation, and e-mail communications, as well as interviews with numerous current and former employees and current and former members of our board of directors.
On June 21, 2006, we announced that our audit committee, after consultation with management and the special committee, determined that our prior consolidated financial statements and any related reports of our independent registered public accounting firm should no longer be relied upon and would be restated. Although we do not believe that the effects of the restatement are material to the results of operations for our fiscal years ended 2005, 2004, or 2003, we are restating prior financial statements because the alternative method of correcting the error, which is to record the cumulative impact of the corrections in the quarter ended March 31, 2006, would result in a material charge to that period and such a charge would likely have a material impact on our fiscal year ended December 29, 2006. The effects of this restatement on the fiscal year ended December 30, 2005 were negligible and therefore we did not restate any fiscal 2005 consolidated financial statements, except to reflect the cumulative restatement adjustments made to the consolidated balance sheet as of December 30, 2005 as well as a negligible change to fully diluted shares outstanding. We also are restating the pro forma disclosures for stock-based compensation expense required under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) included in Note 2 to the consolidated financial statements. The restatement adjustments total $47.6 million (pre-tax) and relate primarily to (1) stock option grant measurement date errors from 1996 through February 2001 ($17.8 million), (2) stock option grant agreement modifications from 1996 through 2002 made in connection with termination of certain employees employment ($24.3 million), and (3) other adjustments ($5.5 million).
Stock Option Grant Measurement Date Errors
Management concurs with the special committees conclusion that from December 1996 through February 2001 there were seven occasions on which the recorded grant dates for certain employee stock option grants differed from the actual grant dates. None of these employee stock option grants was made to our current CEO. The price of Alteras stock on the recorded grant dates was lower than the price on the actual grant date thus permitting recipients to exercise these options at a lower strike price. On six occasions, the grants had intrinsic value at the time of grant; that is, they were issued in-the-money. On the seventh occasion, the grants were repriced shortly after the grant date and did not result in a material charge. Under these circumstances, we should have amortized the in-the-money portion of the options over their vesting periods in our previously issued financial statements. To correct this error, we are recording $17.8 million of additional pre-tax, non-cash stock-based compensation expense in the restatement for the period 1996 to 2004.
Over 99 percent of this $17.8 million additional pre-tax, non-cash stock-based compensation expense relates to five grant dates in December in each of the years 1996 to 2000. During this time, the Company granted stock options in December of each year to senior management, including our former Chief Executive Officer and former General Counsel, as part of the annual performance and compensation review process (the December Focal). The compensation committee delegated authority to our former CEO to select the grant date for the grants to our former CEO and his staff so that it would coincide with the completion of the December Focal and the CEOs approval of stock option grants to members of senior management other than the CEO and executive officers. Instead of granting options on the date intended by the compensation committee, our former CEO and former General Counsel chose as the grant date the date with the lowest closing price in December. Minutes of the December compensation committee and board meetings were then prepared after the December Focal grant dates had been selected; the grant dates recorded in the minutes did not reflect the grant date intended by the compensation committee, but rather falsely indicated that the actual grant date was the date with the lowest December closing price in each of the years 1996 to 2000. The compensation committee and board minutes were prepared by our former General Counsel. Both the former CEO and former General Counsel received some of these in-the-money options in December of each year from 1996 to 2000.
Stock Option Grant Agreement Modifications
The special committee also concurred with managements conclusion that from 1996 to 2002, certain employees stock option agreements were modified in connection with the termination of their employment. Generally these modifications were made in the context of separation agreements that permitted additional vesting and/or additional time to exercise options after the employee had ceased performing services and beyond the periods originally specified in the stock option grant agreements. At the time these agreements were entered into, the Company, as described below, did not have sufficient controls in place to ensure that the accounting consequences of these transactions were properly identified, accounted for and reported in the proper period. As a result, we should have recorded additional stock-based compensation expense related to the modifications in our previously issued financial statements. To correct this error, we are recording $24.3 million of additional pre-tax, non-cash stock-based compensation expense in the restatement for the periods 1996 to 2002. The majority of this expense relates to only a limited number of modifications that provided an extension of the exercise period for options that were already vested at the time of the modification and approximately 75 percent of this additional expense is attributable to years 1996 and 1997.
We recorded a $12.5 million tax benefit on the cumulative pre-tax restatement adjustments of $47.6 million resulting in a cumulative net income restatement impact of $35.1 million.