December 29th, 2006

Apple: In Jobs we trust

Posted by Larry Dignan @ 6:44 am

Categories: Apple, General

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Apple Computer filed its tardy quarterly and annual statements with the Securities and Exchange Commission Friday and indicated that Steve Jobs was "aware or recommended" backdated options. However, Apple's board has "complete confidence in Steve Jobs and the senior management team."

In other words, anyone worried about Jobs' standing amid an options probe can relax.

Nevertheless, Jobs' image is tarnished a bit and the regulatory filings didn't address recent reports about falsified documents. The big takeaway, however, is that Jobs will continue to run Apple barring some yet-to-be-found smoking gun.

Among the excerpts in the SEC filings:

–Apple recognized total additional non-cash stock-based compensation expense of $84 million after tax, including $4 million and $7 million in fiscal years 2006 and 2005, respectively. The restatement arises solely from certain stock option grants made between 1997 and 2002; the investigation found no grants after December 31, 2002 that required accounting adjustments.

–Apple's independent counsel and forensic accountants (investigative team) "reviewed the facts and circumstances surrounding stock option grants made on 259 dates. The investigative team spent over 26,500 person-hours searching more than one million physical and electronic documents and interviewing more than 40 current and former directors, officers, employees, and advisors. Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by current management."

–The Special Committee’s investigation identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.

–While Apple believes it has made appropriate judgments in determining the correct measurement dates for its stock option grants, the SEC may disagree with the manner in which the company has accounted for and reported, or not reported, the financial impact. Accordingly, there is a risk the company may have to further restate its prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.

With the options probe out of the way there are some other annual report nuggets worth reporting. Here's a glimpse:

–Apple's research and development expenditures totaled $712 million, $535 million, and $491 million in 2006, 2005, and 2004, respectively. –As of September 30, 2006, Apple had 17,787 full-time equivalent employees and an additional 2,399 temporary employees and contractors.

–Most of the company’s products are manufactured in whole or in part by third-party manufacturers. In addition, the company has outsourced much of its transportation and logistics management.

–Apple's high profile stores such as the ones in New York City are pricey. "Because of their location and size, these high-profile stores also require the company to enter into substantially larger operating lease commitments compared to those required for its more typical stores. Current leases on such locations have terms ranging from 10 to 14 years with total remaining commitments per location ranging from $4 million to $33 million," Apple said.