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Thursday, October 26, 2006 - Page updated at 12:00 AM

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Internal review found options errors, F5 says

Seattle Times business reporter

F5 Networks said an internal review of its stock-option practices over the past nine years found errors in grant dates from 1999 through 2004. As a result, it may be required to record a compensation expense of $30 million.

The Seattle company, which makes hardware and software for managing Internet traffic, is one of dozens of companies under investigation by federal authorities for possible "backdating" of stock options.

Backdating, or retroactively changing the date of a grant, could allow executives and others to cash in on bigger profits.

F5 said it is cooperating with both the Department of Justice and Securities and Exchange Commission inquiries.

Separately, a committee of its board "has substantially completed" its internal review, F5 said. The company said it spent $7 million between May and September in legal and accounting fees related to the inquiry.

The company, scheduled to report its quarterly financial results Wednesday, did not report earnings because the investigation is not complete.

It expects to have to restate financial results from 1999 through 2005 and amend statements for the first two quarters of 2006.

F5 indicated it expects the restatements to be completed by the end of the year. The timing of the government investigations is unclear.

Despite the probe, F5 reported strong sales growth for 2006. For the fourth quarter, F5 Networks reported sales of $111 million, up 39 percent from $80.6 million a year earlier. For the full 2006 fiscal year, sales rose 40 percent to $394 million, up from $281 million in 2005.

Analysts had expected sales of $105 million for the quarter. F5 also increased its sales estimates for next quarter ending Dec. 31 to between $116 million and $118 million, up from a July projection of between $104 million and $106 million. F5's stock price jumped more than 10 percent to $64.15 in after-hours trading.

Chief Executive John McAdam said the company, which now has about 1,000 employees, plans to hire between 80 and 100 more people this quarter to strengthen research and development, sales and marketing.

"I don't think it's had any effect on their business," said Samuel Wilson, senior analyst at JMP Securities.

While executives at many companies implicated in the backdating scandal have resigned or been fired, the fallout from F5's stock-options problems is still uncertain.

"What isn't clear yet is how much of it was sloppy bookkeeping, how much of it was ignorance and how much of it was fraud," Wilson said. "In the end I think we're going to find out a lot less of it was fraud than we thought."

Asked on a conference call with analysts whether the investigation could result in any management changes, McAdam, who benefited from some of the grants, said he could not comment.

"The only thing that could be a real detriment going forward is if there is something that happens to management or a cash penalty," said Ehud Gelblum, analyst with JP Morgan Chase.

F5 also faces three shareholder lawsuits alleging its top executives and directors defrauded the company and its shareholders by improperly backdating stock options.

Kristi Heim: 206-464-2718 or kheim@seattletimes.com

Copyright © 2006 The Seattle Times Company

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