Thursday, November 9, 2006 - Page updated at 12:00 AM

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Corrected version

F5 exec resigns in probe of options

Seattle Times business reporter

F5 Networks said Wednesday it will restate seven years' worth of financial results and replace its chief legal officer after an internal probe into improper stock-options practices.

The Seattle company, which said it has completed its review, concluded it must record $22.9 million in additional expenses over those seven years.

A special committee found incorrect accounting used for the vesting of some stock options, and said the recorded grant dates for some stock options granted from 1999 through 2004 "should not be relied upon."

F5, 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 is changing the date when the stock price was supposedly issued — usually to one when the company's stock price was lower. That effectively made the options worth more to their holders — in at least some cases, locking in big profits with no risk.

Those options have to be counted as a compensation expense on a company's financial statements.

Many corporate-governance experts also say that, by removing the risk that the options wouldn't pay off, backdating erased the incentive aspect of options, turning them into another way to line executives' pockets.

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

The company said its general counsel, Joann M. Reiter, had resigned and will be replaced by an interim general counsel.

Reiter will continue with F5 "solely to assist in transition matters," the company said in a statement. Reiter, who has been F5's general counsel since April 1998, could not be reached for comment Wednesday.

F5 also said its board adopted "remedial measures" suggested by the special committee, including a policy requiring that "all equity compensation awards to board members, officers and employees be granted and priced according to a predetermined schedule."

It also recommended training for key employees regarding the accounting and legal implications of the company's stock-compensation programs.

After the conclusion of its internal review, F5 released its income statements for the third and fourth quarters and full fiscal year 2006. The company reported third quarter profit of $17 million, or 41 cents per share, on sales of $100 million.

It reported fourth quarter profit of $17.8 million, or 43 cents per share, on sales of $111.7 million. Full year profit was $66 million, or $1.59 per share, on sales of $394 million.

F5 said it spent $7 million in legal and accounting fees related to the stock-options inquiry. The company said it had $492 million in cash at the end of fiscal 2006.

Kristi Heim: 206-464-2718 or Drew DeSilver contributed to this report.

Information in this article, originally published November 9, 2006, was corrected November 9, 2006. A previous version of this story incorrectly stated that definition of stock-option backdating. Backdating is changing the date when a stock option was supposedly issued, not the stock price.

Copyright © 2006 The Seattle Times Company


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