Semtech Corp. announced that it will restate its historical financial statements. The company has been engaged in an internal review of its stock option practices in light of an informal SEC inquiry. On June 9, 2006, the Audit Committee, with the assistance of independent counsel and forensic accountants, commenced an internal investigation of the company's stock option practices and associated accounting. On July 12, 2006, the Board of Directors appointed a Special Committee to continue the Audit Committee investigation. The Special Committee is comprised of members who had not served the company or the Board in any capacity prior to December 2002. The Special Committee has not completed its work or reached final conclusions and is continuing its investigation.
The initial phase of the investigation has focused on the processes used to establish option exercise prices and obtain approvals of stock option grants, including procedures relating to initial stock option grants to newly-hired employees, and the related measurement dates used for financial reporting purposes. Although the investigation is ongoing, the Committee has concluded that, pursuant to the requirements of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), the accounting measurement dates for certain stock options granted primarily during fiscal years 1998 through 2003 (which roughly correspond to calendar years 1997 through 2002) differ from the measurement dates previously used for such awards. As a result, new accounting measurement dates will apply to the affected option grants.
Consequently, the company expects to record additional non-cash compensation expense and expects the amount of such additional expense to be material. The tax consequences that may result from these matters have not yet been determined. As a result of these adjustments, the company expects to restate its financial statements for fiscal years 2002 through 2006. The restatement will also affect financial statements for earlier fiscal years and adjustments for those earlier years will be reflected as part of the opening balances in the financial statements for the restatement period.
The company believes that the additional non-cash compensation expense under APB 25 will not affect its current cash position or previously reported revenues. Although future operating results are not expected to be significantly impacted by the adjustments related to past stock option practices, expenses arising from management's review, the Special Committee's investigation, related litigation and other associated activities will be recorded in the periods incurred and are expected to be significant.
Management, the Special Committee and the Audit Committee have discussed the above matters with Ernst & Young LLP, the company's independent registered public accounting firm.
On July 19, 2006 the Board of Directors, in consultation with management, the Audit Committee, and the Special Committee and with the concurrence of Ernst & Young LLP, determined that financial statements and the related reports of its independent public accountants, earnings press releases, and similar communications previously issued by the company should not be relied upon due to the pending restatement of its historical financial statements.
Because the review is still ongoing, the aggregate amount of additional non-cash stock-based compensation expense has not been determined, nor has the amount of such expense to be recorded in any specific period or in any future period been determined.
Management is evaluating the impact of this matter on its internal controls over financial reporting and its reports thereon for fiscal years 2005 and 2006. The company's disclosure controls and procedures are also being reevaluated.
