Looking Into Apple’s Past May Negatively Impact Its Future

The investigation into Apple’s options continues and will now delay its third quarter report. An announcement was initially made by Apple Computer Inc. April 29 that an investigation led by independent counsel would take place because of some blips on the stock option grant radar.

The irregularities were related to the issuance of certain stock option grants made between 1997 and 2001. According to a MacSimumNews.com report, the company has said it expects to make “significant changes” to results for its fiscal third quarter, including significant increases in revenue and expenses.

“In a filing with the Securities and Exchange Commission on Friday, Apple said it expects to have to restate past results in order to take non-cash charges for compensation costs related to stock option granting practices. Apple said it hasn’t yet determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement.”

Because of the ongoing investigation and its inevitable complications, Apple was unable to file its quarterly report for the third quarter ended July 1 by the required date. The company said it could not yet determine the extent of the charges or the tax implications. According to BusinessWeek Online, Apple advised investors not to rely on financial statements and earnings-related press releases going back to Sept. 29, 2002. Apple’s stock tumbled 7 percent in after-market trading, to $65 USD.

Depending on what the independent counsel finds and the restatements turn out to be serious, the giant successes of the iPod and the Apple comeback wouldn’t look so hot.

It seems a strange coincidence that the report cites 2002 as the date to remember: during that year the iPod was first made available to consumers using Windows.

“Some of the years when Apple showed lean profits—specifically its fiscal years 2002 and 2003—would appear to be at risk of becoming loss-making years. Apple had reported a $65 million profit on sales of $3.2 billion for fiscal 2002 and a $69 million profit on sales of $3.6 billion for 2003. Profits swelled to $276 million in 2004 and $1.3 billion in 2005, propelled by staggering iPod sales and a recovery of the market for its Macintosh personal computers.”

But Apple isn’t the only one facing these issues. BusinessWeek Online stated “the controversy over the backdating of stock options has spread rapidly in recent months.” It has touched more than 60 companies, including tech companies such as Broadcom, Cnet Networks, Juniper Networks, and McAfee. A commonality: a disclosure of options troubles has sent many of the companies’ stocks plummeting, and at least two of the companies involved, Mercury Interactive and M-Systems, agreed to be acquired after their disclosures.

A Silicon Valley task force has been formed by U.S. Attorney Kevin Ryan in San Francisco, and it is already investigating “several companies,” Ryan said at a press conference. He declined to say which companies were being probed or give other details about the group’s actions.

BusinessWeek defines backdating as when the company pushes back the grant date for the options to some time in the past, when the stock price is lower than the price on the true day of issue. “The practice can give executives immediate risk-free profits, undermining the argument that options provide an incentive for managers to turn in a strong performance. It can also result in the misstatement of employee compensation costs and company profits, and it may have tax implications.”

The company has not specified which of the stock options given to Jobs are in question. I reported that in one case in 2000, the chief executive was granted options on 20 million shares, Securities & Exchange Commission filings show. Then in 2003, he voluntarily canceled 27.5 million options as part of a company-wide effort to reduce the number of outstanding options, according to a press release at the time. The canceled options resulted in “no financial gain to the CEO,” Apple said.