Apple 2006 Annual Report Download - page 4

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.
Based on the evidence and findings from the Company’s internal review and the Special Committee’s independent investigation, an analysis
was performed of the measurement dates for the 42,077 stock option grants made on 259 dates between October 1996 and January 2003 (the
“relevant period”). The Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all grants made
during the relevant period, the Company sampled certain grants between 1994 and 1997 and found none that required accounting adjustments.
The first grants for which stock-based compensation expense is required are dated December 29, 1997. The Company also examined grants
made after the relevant period and found none that required accounting adjustments. Moreover, in the years after 2002, Apple made significant
changes in its stock option granting practices in response to evolving legal, regulatory and accounting requirements.
Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission (“SEC”), the grants during the
relevant period were organized into categories based on grant type and process by which the grant was finalized. The Company analyzed the
evidence related to each category of grants including, but not limited to, electronic and physical documents, document metadata, and witness
interviews. Based on the relevant facts and circumstances, the Company applied the controlling accounting standards to determine, for every
grant within each category, the proper measurement date. If the measurement date is not the originally assigned grant date, accounting
adjustments were made as required, resulting in stock-based compensation expense and related tax effects.
The 42,077 grants were classified as follows: (1) 17 grants to persons elected or appointed to the Board of Directors (“director grants”);
(2) 3,892 grants to employees under the Monday/Tuesday Plan described below (“Monday/Tuesday grants”); (3) 27,096 grants made in broad-
based awards to large numbers of employees, usually on an annual basis (“focal grants”); (4) 9,988 other grants ratified at meetings of the
Board or Compensation Committee (“meeting grants”); (5) 1,082 other grants ratified by unanimous written consent (“UWC”) of the Board or
Compensation Committee (“other UWC grants”); and (6) two grants to the CEO (“CEO grants”).
All references to the number of option shares,
option exercise prices, and share prices in this Explanatory Note have not been adjusted for any subsequent stock splits.
With the exception of director grants, all stock option grants were subject to ratification by the Board or Compensation Committee at a meeting
or by UWC. Following approval of the grants at a meeting or by UWC, the Company’s legal staff would prepare a Secretary’s Certificate
certifying the ratification of the grants. Based on the facts and circumstances described below, the Company has concluded that the recipients
and terms of certain grants were fixed for accounting purposes before ratification pursuant to parameters previously approved by the Board or
Compensation Committee through the Monday/Tuesday Plan and the focal process. As further discussed below, within these parameters,
management had the authority to determine the recipients and terms for each grant. Thus, the Company has concluded that the measurement
dates for these grants occurred when management’s process for allocating these grants was completed and the grants were ready for
ratification, which was considered perfunctory. With regard to all other grants, the Company has concluded that the grants were finalized and
the measurement dates occurred when the grants were ratified. For many grants, however, the dates of ratification cannot be established
because the dates the UWCs were executed by the Board or Compensation Committee members or received by the Company are not available.
For such grants, the Company has concluded that the date of the preparation of the Secretary’
s Certificate is the best alternative for determining
the actual date of ratification.
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