Cupertino (CA) - A Securities and Exchange Commission investigation into the issuance of stock options to key executives of Apple Computer in early 2001 has revealed not exactly the irregularities that some were expecting, according to a Wall Street Journal report this morning, but instead some curious regularities of a bad kind. According to the WSJ, several Apple executives were issued stock options on 17 January of that year, just before issuing its fiscal first quarter 2001 report.
The news that month, back when the iPod was not yet a major revenue generator for the company, was that 659,000 Macintoshes were sold that quarter, reducing vendors’ inventory on-hand to five-and-one-half weeks - within the four- to six- week window that investors like to see. While the company had posted a loss of $195 million that quarter, Apple was in the midst of a turnaround period, and losses were expected.
The good news had boosted Apple’s stock trading value from a low of about $7.44 per share, to about $10.81. In a single day, the paper value of each executive’s grants had risen from the standard exercise price of zero to about $7.5 million, according to the WSJ. Chief executive Steve Jobs was not among the executives receiving grants at that time, the report said.
While the bad news triggered another selloff in Apple stock Monday morning, cooler and perhaps sharper heads started studying the meaning behind the meaning of the story, concluding things may not be so bad after all. Originally, Apple was under an SEC investigation for possibly backdating stock options to the 17 January price - in essence, granting options that pretended on paper as though they were issued back when Apple stock was trading for a low value. While that practice is not, in itself, illegal, not reporting the inflated price of those options as an expense, would be. But if Apple issued options to its executives on the exercise date, then that’s not backdating. By mid-day, Apple stock value rebounded and even gained some, trading at about $68.78 by 1:40 pm ET, up 48¢.
Still, some problems remain, and a few new ones emerge. If Apple didn’t report the grants issued as expenses in successive corporate filings, then that’s still as illegal as not having reported a backdated options grant. Then there’s the problem of issuing grants based on insider knowledge. At the time the options are dated - whether or not they were actually issued on that date - Apple executives, including Jobs, probably knew the quarterly report would be interpreted as good news, and positive analysts’ comments would re-energize stock trading. The issuance of those grants could have taken advantage of that knowledge.
But even then, the issuance might not be illegal - in fact, it’s probably extremely common. (Why would a company knowingly choose to issue options to its own executives at random dates ?) Assuming the options were actually validly issued on their exercise date, then the only problem that remains could be one of accounting. Apple may still have to restate its earnings for the past four years, but in the absence of backdating, the company could defend its accountants by simply stating they were in error, and paying a fine. In such an instance, the problem could go away rather quickly.
Jobs is making an appearance at the time of this writing at Apple’s annual Worldwide Developers’ Conference in San Francisco, where he’s introducing a new series of Intel Core 2 Duo-based Mac Pro computers to replace its old PowerMac G5 systems.