Apple’s options imbroglio: Mac-maker granted options at or near key events in company’s history

“In 1997, Apple Computer was in turmoil. That year also happens to mark the beginning of a period during which the company says it found “irregularities” with the granting of stock options to executives. Since options values are so closely tied to stock movements, I thought it would be useful to look at that period to recall the events that appear to have whipsawed Apple’s shares that fateful year,” Arik Hesseldahl reports for BusinessWeek Online.

Hesseldahl reports, “Apple has disclosed that it has unearthed unspecified ‘irregularities’ with options granted starting in fiscal 1997 and ending in fiscal 2001. That corresponds to a calendar-year period beginning in late 1996 and ending in September, 2001. Apple has also said that it will have to restate earnings for somewhere in the range of fiscal years 2003 to 2005. Additionally, the company hasn’t filed its quarterly financial report to the Securities & Exchange Commission for its most recent quarter. We also know, as the Los Angeles Times reported last week, that Nancy Heinen, Apple’s former general counsel, has retained two defense attorneys in regard to this situation.”

“There’s a lot that remains unclear. First, Apple hasn’t disclosed the nature of the ‘irregularities’ that its independent counsel is investigating. Some companies are being probed for a practice called backdating, which can occur when the grant date of the options is set in such a way that the employee receives the grant at a low strike price. That means the recipient would make a bigger profit when the options are exercised, and backdating can result in the misstatement of employee compensation costs. In the most egregious cases, criminal charges against executives can result,” Hesseldahl reports. “Ideally, stock options are supposed to be granted at a strike price that is equal to the closing market price on the day the grant is approved.”

“The beginning of the period of Apple’s ‘irregularities’ coincides with the acquisition of software maker Next and the return of Steve Jobs to the firm in December, 1996. Apple was, you’ll remember, in pretty deep trouble in those days. We all know the story: Steve stepped in, replacing Gilbert Amelio; Microsoft invested $150 million; the iMac debuted. All this occurred within a dizzying 19 months,” Hesseldahl reports.

Hesseldahl report, “So far, investors and analysts aren’t having fits over Apple’s disclosure. And apart from some earnings restatements, it’s not clear there will be a major long-term impact from the review. Merrill Lynch analyst Richard Farmer tried to craft a back-of-the-envelope estimate of how much Apple might have to report as expenses by assuming that Apple should have granted all of its reported options grants at a higher price. He came up with a number of $442 million, or about $74 million on an annualized basis, which amounts to 2% of the $3 billion in profits he’s forecasting at Apple in fiscal 2008.”

Hesseldahl report, “And what about Jobs? What if this options kerfuffle somehow results in his departure? Farmer suggests that Apple’s fundamental strength doesn’t depend on “any single executive.” While the stock would likely drop in the unlikely event that this situation somehow results in Jobs stepping down, he says that consumers will continue to purchase iPods and Macs at roughly the same rate “regardless of who is in the executive suite.” Such a sudden drop, he said, would just be a buying opportunity.”

Much more in the full article  here.

Related articles:
Apple added to Nasdaq’s list of ‘delinquent companies’ – August 18, 2006
Apple unlikely to be delisted by NASDAQ – August 16, 2006
Apple CEO Steve Jobs drawn into stock options scandal – August 15, 2006
Apple announces update regarding stock option grants – August 11, 2006
As expected, Apple delays quarterly results due to stock-options grants review – August 11, 2006
Some stock options grant decisions were made by Apple board, and potentially, CEO Steve Jobs – August 10, 2006
Disney: no material impact from Pixar options – August 09, 2006
Pixar options draw scrutiny – August 08, 2006
Apple stock options scandal? What scandal? – August 07, 2006
Class action lawsuit over stock options filed against Apple Computer, Inc. – August 04, 2006
Wall Street forgiving of Apple’s stock option irregularities; CEO Jobs unlikely to be terminated – August 04, 2006
Apple’s stock option irregularities escalate into a scandal as world awaits Steve Jobs’ WWDC keynote – August 04, 2006
Apple warns of profit restatement dating back to 2002 – August 04, 2006
Apple loses 3.5% to $67.15 in premarket trading – August 04, 2006
Apple announces update regarding stock option grants – August 03, 2006
Shareholder’s options suit against Apple alleges ‘striking pattern that could not have been chance’ – July 11, 2006
Apple announces update regarding stock option grants – July 05, 2006
UBS: stock options probe unlikely to hurt Apple – June 30, 2006
Apple joins growing list of companies entangled in stock option ‘irregularities’ – June 29, 2006
Apple to investigate stock option grant ‘irregularities’ made between 1997 and 2001 – June 29, 2006

11 Comments

  1. Poppycock: “Restatement of options expenses is a near-routine experience these days.”

    So is going to jail, fines, and resignation of top officials in volved with stock option schemes.

Reader Feedback

This site uses Akismet to reduce spam. Learn how your comment data is processed.