TMO Reports - Analyst: 'Options Backdating is in AAPL's Rearview Mirror, Jobs Will Remain CEO'

by , 1:45 PM EDT, October 18th, 2006

Piper Jaffray analyst Gene Munster on Wednesday took a look at the options backdating issues surrounding Apple and its CEO, Steve Jobs, concluding: "We believe the options backdating issue is in Apple's rearview mirror and Steve Jobs will remain Apple's CEO."

He acknowledged: "Although these issues tarnish Apple's squeaky clean image, they do not impact the company's underlying fundamentals. As a result, we expect investors to shift their focus to CPU market share gains and strong iPod sales through the upcoming holiday season."

So far, nine CEOs and at least 27 executives or directors have left the over 150 companies undergoing investigations into stock options backdating. While Mr. Jobs' involvement in Apple's own stock options backdating has been scrutinized, leading some to fear that he could be forced from the company, Mr. Munster observed: "We believe Jobs is in the clear, given Jobs was aware of these grant dates but was not aware of the accounting treatment and did not benefit from them. Apple concluded its internal options investigation and found no misconduct by any current members of the management team."

Mr. Munster also included a chart of the 15 irregular stock options issued by Apple between fiscal year 1997 and fiscal year 2002, which is included below. No stock options have been issued since then. One of the grants, the Jan. 12, 2000 entry, was issued to Mr. Jobs, but the analyst noted that it was cancelled in March 2003 and led to no financial gain for the CEO.

That same month, Mr. Jobs exchanged 27.5 million options that had been accumulated during previous grants for five million restricted shares, with a three-year cliff vesting. Mr. Munster wrote: "The value of the restricted stock was about US$75millionat the time. We estimate that in March of 2003thevalueof the27.5million options,basedontheBlack-Scholesoptionpricingmodel,wasaround$120million."

Apple's 15 irregular stock option grants

Apple is among the 54 companies whose stocks face delisting because of late filings caused by their stock options investigation. However, NASDAQ, where Apple shares are traded, has said it will give those companies extra time due to the current "unique circumstances," so Apple's stock is not in danger of being delisted either. Mr. Munster noted: "NASDAQ would rather these companies get the numbers correct than do a filing on time with incorrect financials."

The analyst retained his "Outperform" rating on Apple's stock, with a $99 price target. At 1:46 PM EDT on Wednesday, the company's shares were selling for $74.78, up 0.66% for the day despite a downturn in the NASDAQ.

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