Apple in Midst of Controversy

Apple Computer Inc., the technology giant and maker of iPod music players and Macintosh computers has run into rough weather due to some accounting irregularities in its stock options of 1997 through 2001.

Apple has filed a notification with the United States Securities and Exchange Commission SEC stating that Apple will be late in filing its Form 10-Q which essentially means that Apple won’t file its quarterly results on time, in this case quarter ended July 1, 2006. The notification of late filing said that Apple “anticipates that there will be significant changes in the results of operations for the quarter ended July 1, 2006 compared to the quarter ended June 25, 2005, including significant increases in the Company’s revenue and expenses.” However Apple has not stated the periods which may require restatement. Nor has Apple provided an estimate of those results. However, the impending restatements threaten to wipe out some of the profits generated during the past few years. In accounting parlance, companies that back date stock options, which is what Apple did, are required to restate results to reflect higher compensation expenses for the periods in which the options were granted,

Meanwhile Apple has received a NASDAQ Staff Determination Letter stating that Apple is not in compliance with the filing requirements for continued listing, as set forth by Marketplace Rule 4301(c) (14). This translates into a formal warning of a possible delisting because of the company’s delay in making its quarterly report to the Securities and Exchange Commission. It may be recalled, that Mercury Interactive Corp., another Silicon Valley company was delisted from the NASDAQ stock market after it delayed the filing of its quarterly reports. Incidentally, Mercury was also involved in a stock option imbroglio. Apple, on Friday, announced that it will request a hearing before the NASDAQ Listing Qualifications Panel.

In a shareholder lawsuit, CEO Steve Jobs, Tevanian, Rubenstein and 13 other Apple executives and corporate directors have been named and accused of siphoning hundreds of millions of dollars of corporate assets via the manipulation of option grants since 1994. Apple has acknowledged its stock-option inquiry involves some awards made to Steve Jobs, but at the same time claims that the grants were cancelled before the chief executive realized any gains. The said inquiry is being conducted by an independent counsel appointed by outside directors.

The impact of this scandal on the stock prices of Apple is worrisome for the shareholders. However, the bigger worry is that this scandal, in a worst case scenario, result in forcing out Steve Jobs, who has been instrumental in Apple’s continuing success.