Apple Tells of Problems on Options
By ERIC DASH
Published: June 30, 2006
Apple Computer said yesterday that it had uncovered irregularities related to stock options awarded between 1997 and 2001, a move that raises questions about whether a grant made to Steven P. Jobs, one of the largest ever, was properly disclosed.
The announcement, after the close of regular stock trading, makes Apple the latest company to acknowledge possible problems with option grants. More than 60 companies, from Silicon Valley start-ups to industry giants like Microsoft, have announced that their option practices are under review.
But with Apple's powerful brand image, the scrutiny of options granted to Mr. Jobs, its founder and chief executive, could produce the most closely watched case yet.
Apple said yesterday that the unspecified irregularities had been turned up in an internal review, and that the company's outside directors has hired an independent law firm to investigate. The company said it had notified the Securities and Exchange Commission.
"Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the S.E.C.," Mr. Jobs said in a statement. "We are focused on resolving these issues as quickly as possible."
Apple said one of the options grants being reviewed was made to Mr. Jobs. It did not elaborate but the grant appears to be one made in January 2000.
On Jan. 19, 2000, the company issued a news release announcing the stock option grant, for 10 million shares, effective Jan. 12. Those options would have carried a strike price of $87.19, the lowest closing price in the two months up to that date; by Jan. 19, the price had risen to $106.56.
"Steve's stock options were granted a week ago at the then-price, and will gain value only as Apple's stock price rises," said Jerome B. York, the former Chrysler executive and an Apple board member, in a regulatory filing dated Jan. 19.
At the time, it was not illegal or uncommon for companies to disclose stock option awards several days or even weeks after a grant was made. Since the corporate accountability law known as the Sarbanes-Oxley Act of 2002 went into effect, companies are required to report stock option grants within two days.
Still, compensation specialists say that bottom-of-the-trough pricing methods raise troubling questions about disclosure practices, including potential backdating.
"If the company actually granted the options on Jan. 12 as Apple disclosed, then it wouldn't appear to be problematic," said Lynn E. Turner, a former chief accountant at the S.E.C. and a managing director at Glass, Lewis & Company, which advises institutional investors on corporate governance. "However, if the options had actually been granted at a later date when the stock price was higher than the Jan. 12 date, so as to give an extra benefit, then that could well mean trouble is brewing."
Steve Dowling, an Apple spokesman, said the company would not comment on the dating discrepancy or respond to any other questions. "We refrain from commenting on this matter until an independent investigation is concluded," he said.
Issuing discounted options is not illegal, and in fact, was allowed at the time according to Apple's own stock-option plan rules. But the practice is problematic because it undermines the link between pay and performance. It can also lead to violations of securities, accounting and tax laws.
And Mr. Jobs's case is somewhat unusual. In March 2003, with a decline in Apple's stock price having rendered the January 2000 options worthless, Mr. Jobs "voluntarily canceled" virtually all his outstanding stock options. That same month, the company's board awarded Mr. Jobs five million shares of Apple restricted stock, worth almost $75 million at the time of grant, that would not fully vest until 2006.
In its statement yesterday, Apple pointed out that the option grant in question was "subsequently canceled and resulted in no financial gain" to Mr. Jobs. That would potentially alleviate many of the tax issues surrounding the grant. But if there is evidence of backdating, compensation specialists say accounting and disclosure issues could remain.
"It's a pretty big grant to have a pricing problem with," said Brian Foley, an independent compensation consultant based in White Plains. "You are talking about a $190 million charge if they in fact made the grant on Jan. 19 but reported it on Jan. 12."
"The proxy did not disclose this as having priced at a discount," he added. Mr. Jobs was made several grants during the 1997-2001 period, but the January 2000 grant seems to be the one most likely to reveal irregularities. Regulatory filings show at least three grants during the period, but Mr. Foley noted that the others were not made at the lowest point in the month and were of much smaller amounts.
Apple's stock subsequently split twice, in 2000 and 2005. It fell almost 3 percent yesterday in after-hours trading, to $57.31.
Like many companies during the 1990's, Apple liberally doled out options to its executives and rank-and-file, often at favorable terms. For example, its rules allowed the company to reset the exercise price at a lower value if the options became worthless. Regulatory filings also show that the company swapped worthless options for lower-priced ones or restricted stock.
Meanwhile, Mr. Jobs, who took a $1 salary and a ($43.5 million) Gulfstream V jet in 2000, became a symbol of super-sized stock option grants.
Apple's announcement came as several other major technology companies acknowledged potential stock options problems. Yesterday, CA Inc., formerly known as Computer Associates, said it was delaying filing an annual report with the S.E.C. while it examined grants made to executives, and Intuit disclosed that it had received a subpoena from the United States attorney in Northern California related to stock option grants.
Earlier this month, Microsoft acknowledged that it had a policy for several years, until 1999, under which it granted options at the lowest price in a 30-day period to its rank-and-file employees. Microsoft's top executives, Bill Gates and Steven A. Ballmer, did not receive options during that period.Shaw Wu, a financial analyst with American Technology Research in San Francisco, said yesterday that investors had been concerned in recent weeks that Apple would be drawn into the stock option controversy, given its widespread use of options.
"It's been a market concern for the last month or so, because of all the companies that have been charged with backdating," Mr. Wu said.
Laurie J. Flynn contributed reporting for this article.
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