Apple: Justice Case Closed, iPhone Cracked Open

|
Includes: AAPL, IFNNY, INTC, QRVO, SWKS
by: Seth Gilbert

The iPhone is here and Apple (NASDAQ:AAPL) is making headlines around the world.  From the Applevine, there is more going on than just the debut of the anticipated phone. Thursday, it became apparent that the company is off the hook for any backdating of stock options.  Also, the iPhone 3G was cracked open and the App store went live.

Backdating Investigation Closed
While spokespeople for Apple and the San Francisco U.S. Attorney’s office have not commented, after two years, it appears the Justice Department has ended its criminal investigation of stock options back dating at Apple. They decided no charges will be filed.  Sources close to the case told the Wall Street Journal the inquiry is over.

At issue were practices dating back to the period between 1997 and 2001.

Back at that time, generosity in dating option agreements for employees was a relatively common practice around Silicon Valley law firms and corporations. Typically, such “back dating” occurred in private companies and for the most part the practice was a factor of administrative process. 

Illustrated by example: imagine a new employee accepts a job offer on June 1st and begins work on June 13th.   As part of the offer, he is promised a stock grant of 10,000 shares of stock subject to four year vesting.  Before that grant can be officially issued it has to be approved by the company’s board of directors (or compensation committee of the board).  No problem, it’s a rubber stamp, but what if the board only meets once every two months and doesn’t meet until July 15th, what date should the option grant be issued at? 

 In this kind of scenario, back before the Sarbanes Oxley Act of 2002 (aka Public Company Accounting Reform and Investor Protection Act) became law, sometimes the incentive option contract was dated to reflect the start date, rather than the date the board approved the grant.  The trouble with that was, over the course of that intermediate month, the underlying stock price (and the option strike price) would have changed if the granting company was publicly traded.    In consequence, if the stock had gone up prior to the board’s approval of the grant, in backdating, the grant, effectively, would have been issued at a more favorable valuation for the employee (and to the detriment of other shareholders).

More than two years ago Apple began looking into their past practices.  When the company released results form that internal probe, which reviewed option grants issued between 1997 and 2001 (pre-dating Sarbanes Oxley), they found there had been some “irregularities.”

At the time, Apple acknowledged that Steve Jobs had helped select some of the grant dates but the company argued he hadn’t done anything wrong given the securities laws at the time, and because he didn’t “ appreciate the accounting implications.”

The SEC had previously sued former Apple CFO Fred Anderson over the option dating practices.  Anderson settled his civil case last year without admitting any wrong doing.

The end of the Justice Department investigation should largely close the book on the practices employed at Apple prior to Sarbane Oxley.  A few private lawsuits are, however, still pending.

Inside the iPhone 3G: iFixit cracks the case
The international dateline brought the iPhone to New Zealand and Australia a little ahead of the rest of the world.  Friday at 12:01 am local time (5:01 am Thursday PST) the phones went on sale in New Zealand.  It only took a little time after that for the first person to break the phone open and catalog the innards. 

Aiming to satisfy tech-hungry curiosity, Apple repair shop iFixit sent a representative across the globe to buy the phone and dissect it.  Their findings (high resolution pictures at their site):

• The logic and communication boards, which were separate components stacked on top of each other in the first generation ,have been combined and spread the length of the phone.  This likely explains the slightly thinner profile.

•Unlike iPhone 1.0, where screen components were glued together, in version two the LCD display, and the glass covering are independent components.  Six screws allow them to be separated. The touch screen components are attached to the glass.  The independence of these parts will make for easier repairs in the event of breakage.

• The chips:  while several chips haven’t yet been identified (and a few days may lapse before they are), a few of the company’s winning the component lottery have been identified.  Intel (NASDAQ:INTC) NOR Flash,  Infineon (IFX) Wedge Baseband, Skyworks (NASDAQ:SWKS) power amplified, Infineon SM Power 3i, TriQuint (TQNT) Tritium PA duplexers, Infineon Tri Band HSDPA chip (model BGA736).  The processor shows Samsung memory markers.

•The Battery:  Unlike version 1.0, the battery is not soldered into the phone.  This should ease replacement costs and challenges down the road.

Detailed specs and price tallies for actual costs will be reported as the data becomes available.

Other Apple News:
The  App Store selling iPhone-specific programs is now open for business.  500 applications are available including offerings from companies like Facebook, eBay (NASDAQ:EBAY), Electronic Arts (ERTS), America Online (NYSE:TWX), Bloomberg and Sega. Approximately 125 of the applications will be free to download.  The majority of the rest will cost $10 or less.

Apple will earn 30% of the sales revenue generated from 3rd party applications sold.  Developers will receive the remaining 70%.   Somewhat like iTunes, Apple is viewing the App Store as a tool to support and sell phones first and foremost.  After the costs of running the store are deducted, it isn’t expected to be a significant earner. "I think it will generate a lot of revenue, but not much profit," Steve Jobs said.

About a third of the titles are expected to be game-related.  Gamers should be pleased by a number of titles being included in the store.

From EA games, they will find SCRABBLE (US and Canada only),EA Sudoku and Tetris initially. A native version of Spore(NYSE:TM) will be available to iPhone users in September when the game launches across all platforms.

Sega is offering a title called Super Monkey Ball.  It is a game that uses the phone’s built-in "accelerometer" to senses changes to the orientation of the phone. Players will  navigate mazes with a ball by tilting the phone.