Friday, August 04, 2006

Color on options backdating: Apple Computer (AAPL)

- Several firms are defending Apple Computer (NASDAQ:AAPL) as the co announced that it will delay the filing of its 10-Q for the June quarter as result of the company's ongoing internal options backdating investigation. Apple's management and the audit committee of the board of directors have agreed that the company will have to restate prior results to record non-cash charges for compensation expense related to options.

* JP Morgan notes that in other words, it appears the company's internal investigation found evidence of improper options backdating. This is clearly unwelcome news for the story.

Firm believes it is extremely unlikely that Steve Jobs' was responsible for any backdating irregularities. They believe this is the most important question for investors in this case. At Apple, all options grants are determined and approved by a compensation committee made up of independent members of the board of directors, and Steve Jobs has never had any official role in this process.

There is little data available to determine the likely financial consequence of the investigation, but in firm's opinion, the nature of the issue suggests it will be limitedt o a non-cash accounting charge on prior earning s. As a result, the key remaining uncertainty is when the company will complete the investigation and release its 10-Q.

Looking beyond the options investigation, they expect iPod business momentum to accelerate as we enter the seasonally stronger months with new products and we believe the company's Mac share gains are set to accelerate rapidly over the same time period.

Maintains Overweight.

* Morgan Stanley says that while the news may create stock volatility near-term, it's important to note: 1) the time period of the internal stock option grant investigation has not changed (1997-2001) from what was stated in the June 29 release; 2) FY05 and FY06 earnings are unlikely to change, in firm's opinion; 3) findings are a result of a company (not SEC) initiated investigation; and 4) Apple's management team and board of directors are intensely focused on finalizing the proactive investigation and restating financial statements as soon as possible.

With continued strength in MacBook demand and new product announcements over the next few months, they continue to view upward revisions as likely over the next two quarters.

Maintains Overweight.

Notablecalls: If you can catch AAPL down 5-6% on the news in the pre mkt, just take the chance and buy the stock.

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