Gore Certifies Apple Board's Confidence in Steve Jobs

In a statement accompanying Apple's delayed filing of its annual 10-K report with the US Securities and Exchange Commission today, following an internal audit to discover stock options-based accounting irregularities, the senior members of the audit committee - former US Vice President Al Gore, and former IBM CFO Jerry York - announced that the company's board of directors "has complete confidence in Steve Jobs and the senior management team."

It is an important statement from an important source, especially in light of news that broke just after Christmas from a California legal journal stating that the committee discovered Jobs received a backdated stock options grant that was erroneously recorded as having been approved by the board of directors, and that Jobs may have known the board was unaware.

In a full report attached to the company's delayed 10-Q filing for its fiscal fourth quarter of 2006, which was also registered today before the SEC's final deadline, the audit committee reports that two questionable grants were made to the Apple CEO during the period when backdating seemed prevalent, but that Jobs cancelled both grants prior to their being exercised, trading them instead for five million shares of restricted stock. Thus the committee's findings coincide with some of Apple's previous statements that Jobs did not benefit from backdated grants.

Last Tuesday's legal journal report indicated that a 2001 grant of 7.5 million option shares was improperly recorded as having been approved by Apple's board of directors. As the 10-Q statement reads, "The approval for the grant was improperly recorded as occurring at a special Board meeting on October 19, 2001. Such a special Board meeting did not occur. There was no evidence, however, that any current member of management was aware of this irregularity."

The key phrase here is "current member of management." Elsewhere in the report, that phrase is given extra weight: "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."

Those officers are not named in the report, though all indications point to former vice president and general counsel Nancy Heinen - who departed quietly last May - and former CFO Fred Anderson, who retired in 2004 and resigned from the board of directors last October.

The second questionable grant turned out to be not so questionable after all: A grant of 15 million option shares to Jobs was authorized on December 2, 1999. The terms of the grant were later finalized on January 12, 2000, though the unanimous authorization of the board was recorded six days later. The question was whether the grant date had actually been backdated by six days, but the committee determined that it actually wasn't.

Of 27,096 stock options grants made to Apple employees over an eight-year period, a total of 5,595 - over 20% - have improper measurement and grant dates, differing by as much as a single day. This little practice was responsible for $29 million in unrealized expenses. An additional 3,892 grants were made to new hires under what the report calls "The Monday/Tuesday Plan," which might not require any further description than the name alone. This plan incurred another $6 million in expenses that were never recorded until now.

Over an eight-year period, the audit committee determined that the cumulative impact of improperly recorded stock options grants on Apple's balance sheet was $84 million after taxes.

What does this mean for the corporation's bottom line? Not very much at all, as investors realized right away this morning. For the last complete fiscal year ending last September, Apple's net sales totaled $19.3 billion - a gain of 38.6% over the company's restated 2005 earnings. More importantly, net income rose by a larger percentage: a tremendous 49.8%, to $1.99 billion, a clear indication that reduced production costs for iPod in the wake of Apple's multi-component deal with Samsung truly have paid off.

Earnings per share rose from $1.64 in fiscal 2005 (adjusted) to $2.36, the news of which led Apple shares to rise 5% by mid-day trading Friday, making up for losses in previous days.

Is Steve Jobs out of the woods? A public proclamation made by the popular vote winner for President of the United States in 2000 certainly clears away much of the brush. Whether Jobs is implicated in any further action taken by the State of California or the federal government may hinge upon facts revealed in actions which first implicate Heinen and Anderson, although both were considered close friends of Jobs. Meanwhile, the Financial Times revealed this morning that the SEC is currently investigating Pixar -also chaired by Steve Jobs - for possible stock options backdating irregularities there. But tens of millions of iPods may be sold in the intervening period between now and when that investigation turns up actionable evidence.