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August 04, 2006

Apple Computer Inc In Options Trouble

posted by MR WAVETHEORY at 8/04/2006 02:47:00 AM
Options. Options. Options. They are the bane of the CEO's existence these days. What started out as a harmless one paragraph mention in Apple's Third Quarter Financial Statement has turned into a full-on fiasco for Apple.

Apple briefly mentioned the existence of a options probe gingerly in its earnings release on July 19th and the market seemingly shrugged it off because the company handily beat estimates by ten cents (54 c vs 44 c). Apple warned:


"As previously announced, an internal investigation discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001. A special committee of Appleā€™s outside directors has hired independent counsel to perform an investigation and the Company has informed the SEC. At this time, based upon the irregularities identified to date, management does not anticipate any material adjustment to the financial results included in this earnings release. However, if additional irregularities are identified by the independent investigation, a material adjustment to the financial information could be required. "

"Additional irregularities" apparently have indeed been found and the stock options ghost is back to haunt Apple. The company just announced that there will be material adjustments to its earnings due to irregularities in options accounting and delays in its quarterly filings and the stock is down.

If there is one lesson to be learned from recent events, avoid stocks with options irregularities. Apple is down a few points from its closing price, now trading at 65 (-4.59). Depending on the extent of the adjustment, it is quite possible that Apple will trade down into the low $60s or perhaps the mid $50s which is where it traded prior to earnings. After all, Apple ran up post earnings largely because it beat third quarter earnings estimates based on an earnings report which we now know may be flawed after all, while coming in lighter than expected on the top line.

Mr Wave Theory

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