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Apple (Nasdaq: AAPL) became the latest high-tech company caught up in the controversy over the use of stock options, with the company saying Thursday it would continue an internal investigation that has already turned up "irregularities" in option grants.
Apple said the investigation turned up "irregularities related to the issuance of certain stock option grants made between 1997 and 2001." While one of the grants in question was to CEO Steve Jobs, those options were never exercised.
An outside lawyer has been brought in to work with a special committee of the company's directors, Apple said, adding that it had informed the Securities and Exchange Commission (SEC) of its findings.
"Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC," Jobs said. "We are focused on resolving these issues as quickly as possible."
Apple shares dropped on the news, losing nearly 3 percent of their value by midday Friday to US$57.26.
Ancient History?
The maker of Macs and iPods is just the latest technology firm to find itself in the midst of a swirling controversy around the use of options, with focus turning to whether companies intentionally misrepresented the granting dates of options in order to maximize their value.
In recent weeks, more than 50 companies have disclosed internal inquiries or acknowledged investigations from the SEC or other regulatory agencies. In addition, a slew of lawsuits has been filed against publicly traded companies over the issue of options. Also, Calpers, the largest pension fund in the U.S. and one of the largest holders of stocks, issued a letter to some 20 companies asking them to clarify their use of stock options.
In fact, Apple was joined Thursday in disclosing options issues by CA, the company formerly known as Computer Associates, which said it may take non-cash charges of $20 million per year for each of the past two years and $40 million to $100 million per year for the period of 2002 to 2004. CA found that before 2002, there were instances when it "did not communicate stock option grants to individual employees in a timely manner."
Among the companies that have disclosed stock options issues are American Tower, Juniper, PC security firm McAfee, chipmakers Broadcom (Nasdaq: BRCM) and Rambus (Nasdaq: RMBS), and Monster Worldwide, the parent of Monster.com.
Most of the attention has focused on the dating of options, with some companies known to have timed option grants to coincide with times when stock prices were sagging. That enhances the value of the options by widening the gap between the option price and the trading price when the options are converted to stock.
It's not known whether that's the issue being looked at in the case of Apple, however, since the company has not released any details of its investigations or the "irregularities" it found.
Some analysts say that working in Apple's favor is the timing of the options issues it disclosed, with the period from 1997 to 2001 representing ancient history in business terms. By contrast, some other companies are looking at option grants given during the past year or even more recently.
Bump in the Road
Tech companies have long embraced options as a way of rewarding employees and of leveling the playing field in terms of recruitment and retention -- especially at the executive level -- with more established companies.
For his part, Jobs has been working as CEO of Apple since his return for a token annual salary of $1, but reaping millions in income from stock grants.
Options became more difficult to use as salary replacement or augmentation after the stock market crashed in 2000 and into 2001, said Joseph Rich, president of executive compensation consulting firm Pearl Meyers & Associates. "Tech firms that had a great asset in the form of options suddenly lost that edge when the stock prices stopped going up exponentially," he added.
Most analysts seemed to think the options questions would be answered by Apple to the satisfaction of investors and regulators in time. However, some see other problems on the horizon that could dog the company in coming months.
Merrill Lynch (NYSE: MER) analyst Richard Farmer said in a research note Friday that his own review of stock grants shows 15 percent of those granted during the period in question were issued when the stock was within five percent of a yearly low, and another 24 percent were given out when the stock was within 10 percent of the low for the fiscal year. "Perhaps these are the grants that may have triggered the internal investigation," he wrote, adding that most recent grants to Jobs came at well above recent lows for the stock.
