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Apple's ‘irregular’ options

Apple is one of the biggest and most visible companies to disclose possible problems in the way it granted stock options.
/ Source: Business Week

Apple Computer uncovered what it called "irregularities" related to certain stock options, becoming one of the biggest and most visible companies coming under scrutiny for how it awarded securities as compensation for executives.

The option grants in question were issued between 1997 and 2001, and involve one grant to Chief Executive Steve Jobs, Apple said in a statement. The company has appointed an outside counsel to investigate the matter and has notified the Securities & Exchange Commission.

"Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC," Jobs said in the statement. "We are focused on resolving these issues as quickly as possible." The company said it would have no further comment on the matter. Apple stock slipped almost 3 percent, to $57.35, in extended trading, after the news was disclosed on June 29.

Not alone
Dozens of companies in recent months have owned up to troubles over options, which give the holder the right to purchase stock at a specified price for a certain period of time. The securities became a popular method of reimbursing employees at technology companies in the late 1990s, although they lost some appeal after the tech-stock wipeout of 2000-01.

Apple wasn't alone in disclosing options woes on June 29. CA said it won't be able to release certain financial results because of newly discovered problems with options reporting. Intuit said it received a subpoena from federal prosecutors over its stock option practices.

Options typically give employees the opportunity to buy a set number of shares at a price approved by the company's board of directors at the time of issue. Employees can realize gains from exercising their options at times when the strike price is lower than the market price. Problems have emerged surrounding a practice known as backdating, where the company pushes back the grant date to a day when the stock price is lower than the price on the 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.

Tech titans involved
Apple's statement doesn't refer to backdating, but says the questionable grant to CEO Jobs was later canceled. In 2000, Jobs was granted options on 20 million shares, SEC filings show. Three years later, he voluntarily canceled 27.5 million options as part of a companywide 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.

Questions about the timing of options grants have arisen for some of the biggest names in tech. Microsoft awarded options at monthly lows each July from 1992 to 1999, The Wall Street Journal reported on June 16. Rambus said this week that some of its previously reported profits might have to be restated because timing of grants wasn't recorded properly.

Apple hasn't given details on the options in question. But in at least one instance of grants in the period, options were dated immediately before an event that fueled a rally in the company's stock price. That was on Aug. 5, 1997, when Apple issued options on 162,357 shares. The following day Microsoft announced it would invest $150 million in Apple and said it would continue making software for the Macintosh computer platform. That day the companies also agreed to a broad patent cross-licensing agreement that ended years of expensive legal bickering between them. Over two days, Apple's stock gained nearly 48 percent amid enormous trading volume.

The disclosure of irregularities comes as Apple also investigates allegations that some of its iPod digital music players are being manufactured under unfavorable work conditions in a factory in China.