Options Take Bigger Bite Out of Apple

Updated from 8:38 a.m. EDT

Options backdating at Apple Computer ( AAPL) was apparently much more prevalent than the company had led investors to believe.

And that's not good news for investors. Not only does it mean that investors will likely have to throw out Apple's past earnings reports, but also, it likely increases the possibility that Apple will draw the attention of federal regulators.

Even worse, the news also increases the odds -- however remote they still may be -- that CEO Steve Jobs may be forced to leave the company as a result.

In early Friday trading, amid a broad market surge, Apple's shares were off $1.48, or 2.1%, to $68.11.

The iPod maker warned investors late Thursday that its internal probe into its past options grants had uncovered evidence of additional instances of "irregularities."

As a result, the company plans to delay filing with the Securities and Exchange Commission its report for its just-completed quarter and said that it will likely have to restate some of its past financial reports.

The restated earnings would include options charges that the company hadn't previously accounted for, Apple said in a statement.

"The company has not determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement," Apple said. "Accordingly ... the financial statements and all earnings and press releases and similar communications issued by the company relating to periods commencing on September 29, 2002 should therefore not be relied upon."

Company spokesman Steve Dowling declined to say when the company expects to wrap up its investigation or what it had uncovered thus far.

"We're focused on resolving the matter as quickly as possible," he said.

Apple said late last month that it had found problems with options grants made between 1997 and 2001, including a one made to CEO Steve Jobs. The company said it had hired an outside counsel to investigate.

The company has not officially said -- and Dowling declined to comment on -- whether it is investigating or has found instances of options backdating. However, Dowling did say that the impetus for the company's initial examination of its past grants was in reaction to "general industry concerns about historical options" practices.

Those "concerns," of course, are almost entirely related to backdating allegations.

When Apple first announced its internal probe, most investors seemed to be willing to give the company the benefit of the doubt, particularly because Apple said it had already cancelled the grant it gave Jobs.

But the news of a wider investigation and delayed filings could prove more troubling to investors. Jobs is largely seen as almost single-handedly reviving Apple, and anything that could end his tenure at the company could rock its stock.

And that's now a distinct, if slim, possibility -- depending on what Apple and, potentially, federal regulators uncover. At several other companies, including Brocade ( BRCD) and Mercury Interactive ( MERQ), similar options probes have prompted the resignations of executives and board members.

Although Apple is the subject of several shareholder suits related to its options problems, the company has not said whether it is the subject of a regulatory probe. For his part, Dowling declined to say whether the company has been contacted by federal regulators.

However, when other companies have discovered problems with their grants, the SEC and other federal agencies have generally quickly followed with their own probes. A federal investigation, then, may be only a matter of time.

Though Jobs may have returned the options that are under investigation, he did receive something for them. In fiscal 2003, Apple replaced Jobs' cancelled options with 10 million shares of restricted stock worth $74.8 million at the time, which are now worth several times that amount.

And whether Jobs benefited from backdated options may be immaterial if federal regulators come calling. Regulators have indicated that they are focusing more on whether insiders defrauded investors in how they disclosed or accounted for backdated options than whether they profited from them.

For instance, the criminal charges federal officials recently filed against former executives at Brocade ( BRCD) came despite the fact that neither of the executives was accused of benefiting from the backdating that led to the charges.

The companies caught up in the backdating scandal are accused of issuing to insiders options to buy company stock at prices that were known weeks or months after the fact to be near-term lows.

Although backdating by itself isn't necessarily against the law, investigators are trying to determine whether companies defrauded investors either by not properly disclosing backdated grants or by not accounting for them properly.

Investors have blamed the recent selloff in technology stocks in part on the broader backdating probe and the constant trickle of new backdating allegations.

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