The cloud over Steve Jobs/ Up Close

January 10, 2007|By Hiawatha Bray | Hiawatha Bray,The Boston Globe

Apple Computer Inc.'s chief executive, Steven P. Jobs, captivated an audience of thousands at San Francisco's Moscone Convention Center yesterday as he unveiled Apple's newest products at the company's annual Macworld trade show.

But this year's show-and-tell is more keenly anticipated than most. Some industry-watchers think the appearance could be Jobs' last as Apple struggles to deal with the backdating of stock options.

Apple stock rose nearly 5 percent last month after the board issued a report from a panel led by former Vice President Al Gore that concluded Jobs had broken no laws.

Apple investors and the company's board want to shield Jobs from the effects of the options backdating that has already called into question the judgment of two Apple executives.

Lucian A. Bebchuk, director of the Program on Corporate Governance at Harvard Law School, says: "It's clear that the board very much wanted him to stay. The market likes an outcome under which he can stay."

Jobs is credited with Apple's triumphant resurrection. After he was ousted in a 1985 boardroom power play, Apple spent the next decade staggering toward bankruptcy.

Since his comeback in 1997, Apple's core personal computer business has been reborn, with elegant new Macintosh machines and a powerful upgrade of the Mac operating system software. And its iPod and associated spin-offs have proven revolutionary.

Apple, like many other technology firms, has often given stock options to key employees. Options give the holder the right to buy company stock at a predetermined price, say $10 a share. If the stock then rises to $20, the option holder can still buy the shares for just $10, even though they're worth twice as much.

But companies have gotten into hot water because of a practice called backdating. This involves issuing options but altering their issuance date to an earlier time when the share price was lower than the current price.

It only takes the stroke of a pen, but backdating can sharply increase the value of options. It's perfectly legal, too - so long as the company accurately records the true value of the options as a compensation expense.

However, federal securities investigators have found hundreds of instances in which backdated options weren't correctly accounted for, thus reducing the companies' expenses and artificially boosting earnings.

Allegations of backdating have ensnared executives at dozens of technology companies. Some, like George Samenuk, chief executive of the security software company McAfee Inc., and UnitedHealth Group Inc. Chairman and CEO William W. McGuire, have lost their posts as a result.

Apple is among the companies that engaged in this practice, and its own investigation found that Jobs agreed to backdating some option grants, including one to himself in 2001, for 7.5 million option shares.

Apple has since restated its 2001 earnings by $20 million to cover the extra value of Jobs' options. Overall, the company lowered its earnings by $84 million between 1998 and 2006 to account for the cost of backdated options.

According to the Apple investigation, Jobs never exercised the options; instead, he traded them for shares of restricted stock. As a result, Jobs didn't get a direct financial benefit from the backdating.

The report also found that Jobs did not realize that the backdating had resulted in accounting errors. Instead, the board said its investigation raised "serious concerns" about accounting practices approved by two former Apple executives.

The report does not name the two executives, but The Wall Street Journal said last month that they were former general counsel Nancy R. Heinen and one-time Chief Financial Officer Fred D. Anderson.

Attorneys for both executives said their clients did nothing wrong. Apple officials declined to comment.

David L. Yermack, professor of finance at New York University, noted that while Jobs did not cash in his options, he traded them for 5 million shares of Apple stock, thus giving him a hefty indirect benefit.

"I'm not sure how the directors can really differentiate between different forms of fraud and different forms of misleading investors. ... If he had knowledge and participation in events of this type, he needs to resign."

The Securities and Exchange Commission refused to confirm or deny that it's investigating the backdating at Apple.

Jobs may be under further scrutiny in an investigation of options backdating at Pixar Animation Studios, the computer animation company he once owned.

While Jobs himself never got Pixar options, the company used them to reward other top executives.

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