Apple comes clean on options

By BusinessWeek

On Oct. 4, Apple Computer ended months of near silence on what in June it called "irregularities" over stock options. But what it did say raised as many questions as it answered.

A special committee of Apple (AAPL, news, msgs) board members found several instances where options appeared to have grant dates before the grants were approved. That raises the concern that options were backdated, or granted on some earlier date when the stock was lower, to give the recipient a greater payday, at least on paper. What's more, in some cases, Chief Executive Steve Jobs was aware of the practice. The company also said that Director and former Chief Financial Officer Fred Anderson has resigned, effective immediately. Anderson had served as CFO from 1996 to 2004.

Apple went on to say that even though Jobs was aware "that favorable grant dates had been selected," he didn't benefit personally from it. Nor did he understand the accounting implications involved. Apple also said it would restate some financial results to accurately reflect noncash expenses.

Distance by design

In all, 15 options grants, occurring between 1997 and 2002 have grant dates that "appear to precede the approval of those grants." An Apple spokesman characterized the relevant grants as amounting to only 6% of all the options grants it made during the period.

The news came as the result of an internal investigation that Apple has been conducting since it first announced "irregularities" concerning employee stock options granted between 1997 and 2002. The company has since been careful to point out in public statements that it first brought the matter to the attention of regulators at the Securities and Exchange Commission.

Apple's statement appeared designed to distance Jobs from the controversy. "The one thing that investors were worried about was that Steve Jobs might have been forced out," says Charles Wolf, analyst with Needham & Co. in New York. "Everyone can now breathe a sigh of relief about that." He added: "Restatements are a concern, but they won't be material."

Another concern: "The investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording, and reporting of stock option grants," Apple said. The company plans to hand relevant information to the SEC. Executives at other companies, including former Brocade Communications Systems (BRCD, news, msgs) CEO Greg Reyes and former Comverse Technology (CMVT, news, msgs) CEO Kobi Alexander, have been accused of running afoul of the law over options backdating.

The timeline

Apple said that the most recent instance occurred in January, 2002. And the period covered appears to date back to the period immediately following Jobs' return to the company in late 1996, after an absence from Apple of some 11 years. Many options were granted to several executives—Anderson among them—on July 11, 1997, a day that happened to be a 10-year low point in Apple's trading history. The date was two days after the ouster of then-CEO Gilbert Amelio, and at the time, Apple's survival as an independent corporation was in doubt. It is not rare for incoming CEOs to grant options to encourage top executives to stay at a company.

Later that year, on Aug. 5, 1997, another block of options was granted to Anderson, then-VP Avie Tevanian, and several other executives. Jobs announced an investment of $150 million in Apple by Microsoft (MSFT, news, msgs) the next day, causing Apple's share price to surge nearly $10 over the next two days.

In a statement, Jobs apologized to investors, saying that what he termed "problems" had "occurred on my watch," and that the incidents were "completely out of character for Apple." He continued: "We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again."

Questions remain

Although Apple said that Jobs didn't personally benefit from the company’s options accounting tactics in recent years, that line didn't sit well with analyst Gene Munster of Piper Jaffray. "I would argue that he did benefit from it," Munster says. In one case, Jobs had received a large grant of options on Jan. 12, 2000, when the stock was trading at $87.19 a share. Within a week, shares were trading at $106.60. But a year later, the stock was at $17.19, in part because of a two-for-one stock split, leaving Jobs' options under water.

In time those options were canceled and replaced with grants of restricted stock. "The number of shares he was granted was related to the initial value of the stock options he was granted," Munster says. "Even if they were under water when they were canceled, they were less under water than they would have been had it not been for the backdating."

And while Apple spokesman Steve Dowling said Apple mentioned Jobs' role in the investigation because Jobs wants to be "totally transparent," there were other questions left unanswered. Among them: Who are the individuals whose actions raised concerns? Chief Counsel Nancy Heinen has left the company and hired legal counsel. Her attorney declined to comment. Was she one of the individuals in question? Was Fred Anderson, the former CFO who is leaving the board? Another question: How is Apple's handling of options sitting with the SEC and other government officials?

Names not named

Additionally, the company hasn't yet identified the periods for which it will have to restate results or the amount of the restatement. Nor has it specified what it expects to pay in back taxes, if any. The amount is unlikely to be material, and whatever taxes Apple may end up owing will be easily paid from its $9 billion reserve of cash and cash equivalents.

Finally, who are the members of the three-person special committee that oversaw the investigation? Did it include Jobs himself, or close friends of his? Who is acting as outside counsel? Is it Wilson Sonsini Goodrich & Rosati, which is run by long-time Jobs advisor Larry Sonsini, who also sat on the board of Jobs' other company, Pixar Animation, before it was purchased by Walt Disney (DIS, news, msgs)?

Here's hoping Apple's next stab at transparency offers up some answers.